5% Safe Harbor Resurrected for Wind and Solar (At Least for Now)

On Saturday, June 6, 2026, the U.S. District Court for the District of Columbia (the “District Court”) vacated Internal Revenue Service (“IRS”) Notice 2025-42 (the “Notice”) in its entirety in Oregon Environmental Council et al. v. IRS et al., No. 25-4400 (the “Case”). As background, the Notice eliminated the availability of the “5% Safe Harbor” for wind and most solar projects seeking to begin construction on or before July 4, 2026.¹

The decision spends a significant portion discussing the standing of the various plaintiffs and whether other procedural limits are applicable, and then ultimately decides that the Notice is “arbitrary and capricious” and must be vacated in full and remanded to the Department of Treasury (“Treasury”) for further consideration.

The government is virtually certain to appeal and may seek a stay, which could reinstate the Notice before the deadline — a mere 28 days from the date the Case was published. Furthermore, it is uncertain how Treasury will respond to the Case. Given this uncertainty and the impending deadline, it would not be prudent to put too much reliance on this Case.

What the Court Held

Plaintiff in the Case argued that the Notice was “arbitrary and capricious” under the Administrative Procedure Act on three grounds: First, the Notice’s single-paragraph rationale failed to “articulate a reasoned basis for the major policy change reflected in the Notice.”  Second, wind and certain solar projects were “arbitrarily” singled out “for disfavored treatment without justification.”  And, third, the IRS “entirely failed to consider serious reliance interests or evaluate alternative policy options when adopting the Notice.” 

The District Court sided with the Plaintiffs and determined that the IRS failed to meet the standard of “showing that its decisions are the ‘product of reasoned decision making’” and “failed to justify its decision to change course” despite receiving clear warnings about taxpayers’ reliance interests given that the “5% Safe Harbor” is an “established, defined concept in tax law.”

The Case determined that the appropriate remedy is full vacatur and remand to Treasury. Importantly, this decision was not limited to named plaintiffs and is instead applicable to all taxpayers.

Key Takeaways

• Don’t abandon “Physical Work Test” progress. If a stay is granted or the United States Court of Appeals for the District of Columbia Circuit (the “D.C. Circuit”) reverses, the “physical work test” will be the only available pathway for wind and most solar facilities to establish beginning of construction before July 5, 2026. Taxpayers should continue physical work to the best of their ability.
• Preserve and document “5% Safe Harbor” positions. Projects that have already met the five percent threshold should document all costs paid or incurred and confirm continuous efforts. In the event the Case survives appeal, this can be used to further bolster beginning of construction strategies.
• Monitor for a stay motion and response from Treasury. The government may seek emergency relief from the District Court or D.C. Circuit before July 5, 2026. Any stay would reinstate the Notice on an interim basis.

The V&E Renewables Tax & Tax Equity team is tracking this litigation closely and will provide further updates as the matter progresses. For questions, please reach out to Sean Moran, Lauren Collins, Jorge Medina, Jenny Speck, or Ben Livni.

¹See prior coverage of the Notice at: https://www.velaw.com/insights/beginning-of-construction-guidance-eliminates-5-safe-harbor-for-wind-and-solar-but-physical-work-test-survives/.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.