Federal judge vacates IRS notice that blocked wind and solar tax credit safe harbor

U.S. District Judge Colleen Kollar-Kotelly vacated IRS Notice 2025-42 on June 6, 2026, restoring the five-percent safe harbor as a valid method for wind and solar developers to establish 'beginning of construction' and qualify for federal clean-energy tax creditsTax CreditsDollar-for-dollar reductions in taxes owed.Key ConceptTax CreditsDollar-for-dollar reductions in taxes owed.Open conceptBookmark. The full ruling is publicly available through the U.S. District Court for the District of Columbia.

IRS Notice 2025-42, issued in August 2025, had eliminated the five-percent safe harbor for all wind projects and for solar projects exceeding 1.5 megawatts. Projects smaller than 1.5 megawatts remained eligible under the prior standard.

The five-percent safe harbor lets developers establish beginning of construction by incurring at least five percent of a project's total cost before a statutory deadline. Under the Inflation Reduction Act, projects must begin construction by July 4, 2026, or enter service by December 31, 2027, to qualify for the full 48E investment tax credit or 45Y production tax credit.

Judge Kollar-Kotelly found IRS Notice 2025-42 arbitrary and capricious on three grounds: the IRS provided inadequate reasoning for removing the safe harbor only from wind and solar, failed to explain how projects using the safe harbor were 'circumventing' statutory deadlines, and did not meaningfully address concerns about artificial manipulation of eligibility. The court remanded the matter to the IRS for further proceedings, according to Gibson Dunn's analysis.

The plaintiffs included the City and County of San Francisco, Oregon Environmental Council, Natural Resources Defense Council, Public Citizen, Hopi Utilities Corporation, Woven Energy LLC, and the Maryland Office of People's Counsel. San Francisco City Attorney David Chiu praised the ruling and said the city would continue fighting for market fairness, according to Reuters.

The ruling arrived less than one month before the July 4, 2026 statutory construction deadline for wind and solar projects. Developers who had already incurred five percent of costs under the old safe harbor, then faced uncertainty under Notice 2025-42, now had a restored legal path to qualify, according to Holland and Knight's analysis.

The IRS can respond to the ruling in three ways: issue revised guidance consistent with the court's reasoning, appeal the decision to the D.C. Circuit Court of Appeals, or decline to act, leaving the restored safe harbor in place. The Wall Street Journal reported the ruling could still be appealed or superseded by later regulatory action.

Utility Dive reported that the ruling resolved a period of significant financing uncertainty for large wind and solar projects. Lenders and equity investors had paused commitments on projects that relied on the five-percent safe harbor after Notice 2025-42 removed it, creating pipeline delays across the renewable energy sector.

The National Resources Defense Council issued a press release calling the ruling a victory, stating that Judge Halts IRS Rules that Punish Solar and Wind. The NRDC was a named plaintiff in the case.

McGuireWoods noted in a client alert that the decision restores the safe harbor unless and until the IRS issues revised guidance or a court overturns it on appeal. McGuireWoods advised developers to act quickly given the July 4, 2026 construction deadline.

Foley Hoag noted that Congress created the clean-energy tax credits through the Inflation Reduction Act, but Treasury and the IRS write the administrative rules that determine which projects can actually use them. Foley Hoag's alert described the ruling as illustrating the Administrative Procedure ActAdministrative Procedure Act1946 law governing how federal agencies develop regulations and make decisions through rulemaking and adjudication.Key ConceptAdministrative Procedure Act1946 law governing how federal agencies develop regulations and make decisions through rulemaking and adjudication.Open conceptBookmark's role as a check on agency discretion in rulemaking.