An insurance company is entitled to generous tax credits even if the carrier did not invest directly in renewable energy projects, a North Carolina court has decided, striking down a $24 million tax assessment by the state’s Department of Revenue that had baffled many in the industry.

North Carolina Farm Bureau Insurance, ranked as the third-largest property/casualty insurer in the state, had invested millions of dollars in a multi-layered partnership program that sold tax credits. But the Department of Revenue objected, contending that Farm Bureau had taken advantage of state tax laws and had not actually risked any real capital on the solar projects.

An administrative law judge agreed, but a Superior Court, acting as an appeals court on business issues, overruled the ALJ in an opinion posted early this week.

“The transactions at issue were real, not fictitious, and they involved exactly the kind of economic activity that the General Assembly deemed socially desirable and sought to encourage with tax credits,” wrote Adam Conrad, special Superior Court judge for complex business cases. “Farm Bureau contributed millions of dollars to support renewable energy properties—properties that were, in fact, placed in service and that did, in fact, qualify to receive tax credits.”

Farm Bureau’s lead attorney in the case, Christopher Smith, applauded the ruling and released a statement from the insurer.

“Farm Bureau always believed that in making these investments that helped build solar facilities in North Carolina, that Farm Bureau was doing exactly as the North Carolina General Assembly intended, and is gratified that this ruling confirms that,” the statement noted.

The case has been closely watched by insurance companies, which make millions of dollars in investments and have enjoyed similar tax breaks in other states. Eleven insurers, including Nationwide, Liberty Mutual and The Hartford Group, along with the American Property Casualty Insurance Association, filed amicus briefs in the case, urging the court to find against the Department of Revenue.

“The DOR is impermissibly attempting to use its executive power to eliminate what North Carolina’s legislative branch offered to insurance companies in return for their investments,” reads one of the amicus briefs. “This position unabashedly violates the very purpose of the relevant statutes and should be rejected.”

The North Carolina Chamber of Commerce and others have called the revenue department’s stance “bewildering,” in light of the fact that the state tax credits have helped North Carolina become one of the top five states for solar energy production. The state’s Democratic governor had appointed the revenue secretary, adding to the confusion over why the DOR would pursue a policy that appeared to penalize green energy investment.

Some have speculated that the department, foreseeing tax cuts by the Republican supermajority in the legislature, took steps to bolster the state’s coffers by trimming some tax breaks.

Whatever the reason behind the DOR’s controversial stand, business interests hailed Judge Conrad’s opinion as a major victory.

“We’re very excited about this. It’s been a long time coming,” said the Chamber’s general counsel, Ray Starling.

The April 3 court opinion explained that in 1999, state lawmakers adopted a tax code that grants 35 percent credits for renewable energy projects. But few taxpayers took advantage of it because enterprises that built or utilized green energy sites were limited liability corporations or partnerships, which did not pay taxes, anyway, and passed the obligations through to the partners.

In 2009, the General Assembly amended the tax law, allowing insurers to apply the tax credit against their gross premium taxes. “This amendment gave insurance companies, health maintenance organizations, and similar entities—all of which pay gross premiums tax and are exempt from income tax—the same incentive to invest in renewable energy property as other companies and individuals,” the court noted.

Syndicators, including Monarch Tax Credits, began setting up partnerships that routed funds from investors to the operators of renewable energy projects, then allocated tax credits generated by the projects back to the investors, the judge wrote. That wasn’t quite enough for some insurers, though. Farm Bureau’s “investment czar,” Allen Houck, felt the investments were too risky, partly because the state law dictated that green energy projects take the tax credit in installments over five years.

Investments, in other words, had five-year investment horizons. But many green energy projects would not show a profit that quickly. Tying up an insurer’s money for that long could hinder its ability to pay claims, Houck worried, according to the court opinion.

In 2014, Monarch Tax Credits and other syndicators changed the game, essentially, by offering one-year investment structures, with credits provided each year. The credits were sold at 75 cents per dollar of tax credit. Farm Bureau and other insurers welcomed the plan, noting that the investment and credit could be recognized in the same year.

Within a few years, Farm Bureau had invested in Monarch’s tax-credit funds and had received allocations of almost $38 million to offset its gross premiums tax liability, the judge explained.

But after an audit in 2018, the Department of Revenue disallowed the tax credits and socked Farm Bureau with a back-tax bill of $24 million. The DOR held that the federal tax code barred the credits: If an entity did not qualify as a partner under the federal law, then it should not qualify for the state tax credit. The state officials argued that the insurer had not expected to reap rewards from the renewable energy investment other than the tax break.

Farm Bureau’s brief and the amicus briefs in the case argued that North Carolina’s tax law does not incorporate that section of the federal tax code. The Superior Court agreed, noting that there was no indication that lawmakers had intended that.

“The Court concludes that Farm Bureau need not show that it is a bona fide partner under federal law,” Judge Conrad wrote in the opinion. “North Carolina law alone governs partnership status in this context, and as a member of a limited liability company, Farm Bureau is indisputably a partner for purposes of section 105-269.15.”

The partnership, which sold the tax credits, must have engaged in the construction of or lease of a renewable energy project, but the partners themselves are not required to actually build or operate the facility, the court found.

In another opinion handed down the same day, involving individual investors in solar projects, the judge reached the same conclusion. Other cases have settled in recent years.

It’s possible the Department of Revenue will now appeal. North Carolina law allows tax questions to be appealed directly to the state Supreme Court. Incidentally, after the administrative law judge upheld the DOR’s assessment, Farm Bureau paid it before filing its appeal. If the insurer prevails in the end, it could be due the $24 million assessment plus 8 percent interest, the Chamber’s Starling said.

“Maybe that will help offset their legal fees,” he added.