A US federal district court has vacated a controversial IRS notice that had restricted how wind and solar developers could qualify for key clean energy tax credits.
The US District Court for the District of Columbia issued its ruling on June 6, 2026, in the case of Oregon Environmental Council v. Internal Revenue Service, Case No. 25-4400.
The court vacated IRS Notice 2025-42 in full, finding it arbitrary and capricious under the Administrative Procedure Act, and remanded the matter to the IRS for further administrative proceedings.
Notice 2025-42 had eliminated the long-standing Five Percent Safe Harbor Test, which renewable energy developers had relied upon for more than a decade to establish the beginning of construction.
The notice was issued in August 2025 implementing Executive Order 14315, making the Physical Work Test the exclusive method for establishing beginning of construction on most wind and solar facilities.
The dispute centres on provisions of Public Law 119-21, commonly known as the One Big Beautiful Bill Act, which accelerated the phaseout of clean electricity production and investment tax credits under IRC sections 45Y and 48E.
Under that legislation, wind and solar projects must either begin construction before July 4, 2026, or be placed in service by December 31, 2027, to remain eligible for the credits.
The court held on three independent grounds that the IRS had failed to articulate a reasoned explanation for its change in longstanding policy, and had not adequately considered the reliance interests affected by the notice.
The court described the IRS’s stated justification for eliminating the Five Percent Safe Harbor as a “cursory explanation” that was insufficient to show the “path” that led the IRS to its decision.
The court declined to limit its vacating order to the specific plaintiffs before it, finding that universal vacatur was necessary to fully redress the plaintiffs’ injuries, which flow from the Notice’s effects on the broader market for clean energy development.
With Notice 2025-42 vacated, the pre-notice beginning-of-construction guidance, including the Five Percent Safe Harbor, again governs wind and large solar projects, while small solar facilities of 1.5 MW or less were never affected.
Developers can now revert to historical guidance including Notice 2013-29 and Notice 2018-59, both of which permit a project to begin construction via physical work of significant nature or by meeting the five percent safe harbour test.
However, analysts caution that the practical impact of the ruling may be limited, given that most solar and wind projects had already planned to meet the construction deadline using the Physical Work Test.
The government is widely expected to seek a stay of the vacatur pending appeal, and the court itself acknowledged that the appellate timeline almost certainly extends past the July 4, 2026 deadline.
Because a reversal of the court’s holding could carry retroactive effect, market participants are advised not to treat the decision as final when planning their project timelines.
On remand, the IRS remains free to issue new beginning-of-construction guidance that addresses the procedural deficiencies identified by the court, potentially reinstating limitations on the Five Percent Safe Harbor going forward.
The ruling may also carry broader significance beyond sections 45Y and 48E, potentially influencing how future Treasury and IRS guidance affecting other energy tax credit programmes is challenged and reviewed.