U.S. District Court Rules Against IRS, Restoring Five Percent Safe Harbor for Wind and Solar Projects

For many years, to show eligibility for most federal (United States) solar and wind tax credits under Sections 45Y and 48E of the Internal Revenue Code (IRC), 26 U.S.C. §§ 45Y, 48E, the U.S. Internal Revenue Service (IRS) gave project developers two ways to show that they had begun project construction: (1) the “Five Percent Safe Harbor” (paying 5% or more of the total cost) or (2) the “Physical Work Test” (starting significant physical work).

On July 4, 2025, the President signed into law the One, Big, Beautiful Bill Act (commonly known as OBBBA), Public Law 119-21, 139 Stat. 72. Sections 70512 and 70513 of Public Law 119-21 moved up the expiration date of the credits, but it did not end them.

On July 7, 2025, the Administration issued Executive Order 14315, “Ending Market Distorting Subsidies for Unreliable, Foreign-Controlled Energy Sources”, 90 F.R. 30821, directing the IRS to revise the IRS’ guidance on the beginning of construction for wind and solar projects.

On August 15, 2025, the IRS issued Notice 2025-42 that eliminated the Five Percent Safe Harbor for wind and solar projects, except for solar projects with maximum net output of no more than 1.5 megawatts (MW).

On December 18, 2025, Plaintiffs the Oregon Environmental Council, Natural Resources Defense Council, Inc., Public Citizen, Hopi Utilities Corporation, Woven Energy, the City and County of San Francisco, and the Maryland Office of People’s Counsel filed a Complaint against the IRS, seeking to overturn IRS Notice 2025-42, claiming that the Notice constituted arbitrary, capricious, and unlawful Agency action under Section 706(2)(A) under the federal Administrative Procedures Act (APA), 5 U.S.C. § 706(2)(A). The Plaintiffs filed their Complaint in the United States District Court for the District of Columbia, thereby initiating Case No. 25-4400.

On June 6, 2026, the federal district court Judge granted most of the Plaintiffs’ motion for summary judgment and mostly denied the U.S. Government’s (USG) motion to dismiss or for summary judgment. More specifically, the Court ruled:

1. All the Plaintiffs have standing to sue, except for Plaintiff Maryland Office of People’s Counsel;

2. The USG’s defense under the Anti-Injunction Act, 26 U.S.C. § 7421(a), fails, except as to Plaintiff Hopi Utilities Corporation;

3. IRS Notice 2025-42 is arbitrary and capricious under the APA; and

4. The proper remedy is to vacate IRS Notice 2025-42 and to remand the Notice to the IRS.

The Plaintiffs’ motion for summary judgment also had been supported by sixteen U.S. States, Washington, D.C., and the Environmental Defense Fund.

The Court’s decision is subject to potential motions or an appeal.

Public Law 119-21 may be found here: https://www.congress.gov/119/plaws/publ21/PLAW-119publ21.pdf

Executive Order 14315 may be found here: https://www.federalregister.gov/documents/2025/07/10/2025-12961/ending-market-distorting-subsidies-for-unreliable-foreign-controlled-energy-sources

IRS Notice 2025-42 may be found here: https://www.irs.gov/pub/irs-drop/n-25-42.pdf

The U.S. District Court’s Memorandum Opinion may be found here: https://ecf.dcd.uscourts.gov/cgi-bin/show_public_doc?2025cv4400-50