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June 17, 2026
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On June 6, 2026, a federal district court in Washington, D.C. struck down an IRS notice that limited how wind and large-scale solar developers could preserve valuable federal tax credits after Congress accelerated their phaseout timetable in the One Big Beautiful Bill Act (OBBBA). In Oregon Environmental Council, et al. v. Internal Revenue Service, et al., the U.S. District Court for the District of Columbia vacated IRS Notice 2025-42 and sent the matter back to the agency, concluding that the IRS had not adequately justified its decision to eliminate its longstanding 5% Safe Harbor to establish that construction of a wind or solar facility has begun for the purpose of qualifying for investment and production tax credits.
The court found that the 5% Safe Harbor had existed for over a decade and had been repeatedly reaffirmed by the IRS without exception, creating a serious reliance interest for developers which the agency did not adequately consider when evaluating policy options and adopting the Safe Harbor elimination rule in IRS Notice 2025-42.
Overview of Court Decision
Before Notice 2025-42, developers had two paths to establish that a renewable energy project had “begun construction” to qualify for federal tax credits. The first was the Physical Work Test. Under the IRS’s guidance, that test turns on whether “physical work of a significant nature” has started before the tax credit qualification deadline. The second path was the 5% Safe Harbor, which allowed developers to qualify by paying or incurring at least 5% of the total project cost before the deadline, so long as the project then moved forward with sufficient continuity. The Safe Harbor path gave developers a more objective and often more financeable path to preserve credit eligibility compared to the Physical Work Test. The IRS had repeatedly reaffirmed both approaches since 2013, and it applied that framework into the newer, technology-neutral Section 45Y and 48E credits created by the Inflation Reduction Act.
However, OBBBA altered the beginning of construction timelines for clean energy tax credits. For wind and solar projects, the law now generally requires developers either to begin construction by July 4, 2026, or else place the project in service by December 31, 2027, to receive investment and production tax credits. In August 2025, however, the IRS issued Notice 2025-42, which eliminated the 5% Safe Harbor for wind projects and for solar projects above 1.5 megawatts, leaving the Physical Work Test as the only path for those projects to establish timely “beginning of construction.” The IRS stated the change was needed to prevent circumvention of the deadline and artificial manipulation of eligibility.
The notice was challenged in Oregon Environmental Council v. IRS, where the plaintiffs – a mix of environmental and consumer advocates – argued the IRS had changed course without taking into account serious reliance interests engendered by its prior policy and providing a reasoned explanation for departing from that prior policy as required by the Administrative Procedure Act (APA).
The D.C. district court agreed, finding that the IRS violated the APA because Notice 2025-42 was “arbitrary and capricious,” and vacated the notice in full. The court stated that the IRS provided an inadequate explanation for the rule: it did not provide a reasoned explanation for how projects using the 5% Safe Harbor were circumventing the rule, did not meaningfully address narrower anti-abuse alternatives proposed by commenters to address that issue, and did not justify singling out wind and large-scale solar while retaining the Safe Harbor for other technologies under otherwise technology-neutral credits.
The pre-notice framework, including the 5% Safe Harbor, is now back in place unless and until the case is appealed to the D.C. Circuit and the court stays the district court’s ruling or the IRS issues revised guidance that satisfies the APA.
Takeaways
The decision reopens a familiar path to tax credit eligibility for wind and solar projects. It also reinforces an administrative-law principle: agencies cannot discard prior guidance that has shaped market behavior without confronting the consequences of that choice and explaining their guidance in a meaningful way.
For now, wind and solar project developers again have an argument that the 5% Safe Harbor is available to qualify for clean energy investment and production tax credits under OBBBA until the July 4, 2026 statutory beginning of construction deadline.
The ruling, however, does not eliminate uncertainty; the government may appeal and could seek a stay order from the D.C. Circuit. The decision also may not provide developers with enough time to Safe Harbor projects before the quickly approaching July 4 statutory beginning of construction deadline. Whether the IRS attempts to revise its guidance to adequately explain its elimination of the 5% Safe Harbor or appeal the decision will determine the long-term impact of this ruling.
