SECTION 5. EXAMPLES

.01 Example 1 . The following is an example of a valid wind energy limited liability company that is classified as a partnership for federal tax purposes. Developer is a C corporation that owns and manages wind-based generation projects. Project Company is a limited liability company (LLC) that has been formed by Developer to develop, own and manage a renewable energy project that utilizes wind turbines to produce electricity from wind (the Project). Investor is a C corporation that invests in renewable energy projects primarily to benefit from § 45 credits. Developer has caused LLC to enter into, or has assigned to LLC, a number a contracts or agreements relating to the development of the Project.

Developer will own all of LLC during construction of the Project. Construction of the Project will be financed with $100x of construction financing. When

construction of the Project is substantially complete, pursuant to a Membership Interest Purchase and Equity Capital Contribution Agreement, (1) Developer will contribute $15x to LLC, and (2) Investor will acquire newly issued membership interests from LLC in exchange for an upfront cash capital contribution in the amount of $10x which is 20% of Investor’s total agreed capital contributions to LLC of $50x. Developer, as the developer of the Project, has not provided a guarantee to LLC or Investor regarding the level of the available wind resource at the Project or the amount of § 45 credits.

Pursuant to the limited liability company operating agreement (the “Operating Agreement”), Developer will have the right to manage LLC, subject to the right of Investor to consent to certain activities. Below is a chart and explanation that generally describes the distribution and allocation provisions applicable to Developer and Investor over various time periods.

Gross Income/Loss and Section 45 Credits

Cash

Developer Investor

Gross Income/Loss and Section 45 Credits Cash

Period 1 100% 1% 0% 99%

Period 2 0% 1% 100% 99%

Period 3 95% 95% 5% 5%

During Period 1, 99% of LLC’s gross income or loss and the § 45 credits will be allocated to Investor, and 100% of LLC’s cash flows will be distributed to Developer. Period 1 will continue until the earlier of (i) such time that Developer has received aggregate cash distributions in an amount equal to the aggregate contributions made by Developer ( i.e ., $15x) and (ii) a fixed outside date. Period 1 is expected to last four to six years. When Period 1 ends, Period 2 will begin.

During Period 2, 99% of LLC’s gross income or loss and the § 45 credits will be allocated to, and 100% of LLC’s cash flows will be distributed to Investor. Period 2 will continue until Investor has achieved an agreed after-tax internal rate of return (the “Flip Point”). Although the Flip Point might occur sooner, it is expected that the Flip Point will not occur until after the end of year 10 of the Project, at which time § 45 credits will no longer be available for the production and sale of electricity from the Project. Period 2 is expected to last four to six years. When Period 2 ends, Period 3 will begin. Moreover, upon the tenth anniversary of Investor’s investment, Developer will have the option to purchase Investor’s interest for its then-appraised fair market value. Assuming that option is not exercised, during Period 3, 5% of LLC’s gross income or loss and § 45 credits will be allocated to, and 5% of LLC’s cash flows will

be distributed to, Investor; and 95% of LLC’s gross income or loss and § 45 credits will be allocated to, and 95% of LLC’s cash flows will be distributed to, Developer. Period 3 will continue for the remaining life of the Project.

.02 Example 2 . The facts are the same as in Ex- ample 1, except Investor is initially allocated 99.5% of LLC’s gross income or loss and § 45 credits. Under these facts, the wind energy limited liability company’s classification as a valid partnership would be closely scrutinized by the Service. Likewise, if any other provision of this safe harbor is not followed for any wind energy partnerships, the Service will closely scrutinize the validity of such purported partnerships.