D.C. District Court Vacates IRS Notice Limiting Test for Clean Energy Credit (6/18/26)

In Oregon Env. Council v. IRS, ___ F.Supp.3d ___ (D. D.C. 6/6/26), CL here and GS here, the Court rejected the IRS attempt to eliminate one of the tests the IRS had used to satisfy the “beginning of construction” dates for clean energy tax credits. For a long time, the IRS had Notices permitting “beginning of construction” to be tested under the “Physical Work Test” and the ”Five Percent Test” (or “Safe Harbor”). By Notice 2025-42, 2025-36, IRB 351 (2025), the IRS eliminated the Five Percent Test.

The Notice was based on the President’s Executive Order No. 14,315, titled  "Ending Market Distorting Subsidies for Unreliable, Foreign Controlled Energy Sources," directing the IRS to "take all action as the [Secretary] deems necessary and appropriate to strictly enforce the termination of the clean electricity production and investment tax credits under sections 45Y and 48E of the Internal Revenue Code for wind and solar facilities." Soon after the Executive Order but before Notice 2025-42, reacting to the Executive Order, “multiple interested parties,” filed comments. Some commenters urged the IRS to retain the existing tests, called the “Physical Work Test” and the ”Five Percent Test” (or “Safe Harbor”) or make any new test only prospective. Prominent Congressmen offered comments, some supporting the existing Tests. The IRS then issued Notice 2025-42, 2025-36, IRB 351 (2025) providing that the “beginning of construction” requirement will be based only on the Physical Work Test, thus eliminating the “Five Percent Test.”

The Plaintiffs (“a collection of governmental and private organizations”) sued alleging “that the Notice is harming them” in specific ways outlined in the opinion (but not relevant to this blog entry). Among the claims made was that the Notice violated the APA reasoned decisionmaking requirement for valid agency rules. See Motor Vehicle Manufacturers Ass'n of the United States, Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 52 (1983).

After extensive analysis, the Court held (Slip Op. 49):

Notice 2025-42 falls short of these standards. The Notice’s elimination of the Five Percent Safe Harbor is a significant change in the IRS’s position on what it means to “begin construction” for purposes of clean energy tax credits. This changed position implicates “serious reliance interests,” which the agency actively invited by repeatedly restating its prior approach. See Encino Motorcars, 579 U.S. at 221–22. Although the record shows that the Defendants received clear warnings about those reliance interests before adopting the Notice, the agency failed to justify its decision to change course. Because neither the Notice nor the administrative record provides an explanation from which “the agency’s path may reasonably be discerned” in light of all the facts and circumstances, the Notice is arbitrary and capricious. See State Farm, 463 U.S. at 43.

The Court then addressed the proper remedy. The usual remedy is vacatur, saying. (Slip Op. 54):

Here, the relevant factors support vacatur. The Plaintiffs are entitled to relief in this case because the record does not show that Notice 2025-42 was, as the APA requires, a “product of reasoned decisionmaking.” See State Farm, 463 U.S. at 52. That defect calls into question “whether the agency chose correctly” because it indicates that the Defendants did not fully consider all the relevant interests and alternatives before acting. See Allied-Signal, 988 F.2d at 150. Accordingly, the first factor—the “seriousness” of the Notice’s “deficiencies”—weighs in favor of vacatur. See id. Meanwhile, the second factor—“the disruptive consequences of an interim change that may itself be changed”—is in equipoise because, under the circumstances, a significant amount of uncertainty and disruption are inevitable. See id.

As to the proper scope of the vacatur remedy (e.g., as to only the plaintiffs in the case or universal vacatur), the Court said (Slip Op, 56):

Turning to the question of the proper scope of vacatur, the Defendants argue that any remedy in this case should be “limited to the Plaintiffs and their members,” meaning that Notice 2025-42 should be allowed to continue in effect with respect to others. Defs.' Mem. at 44. The Court declines to limit the relief granted in this manner. As the Defendants acknowledge, binding precedent in this Circuit recognizes that universal vacatur of unlawful agency actions is an available remedy under the APA. Id.; Nat'l Min. Ass'n v. U.S. Army Corps of Eng'rs, 145 F.3d 1399, 1409 (D.C. Cir. 1998); see also Corner Post, Inc. v. Bd. of Governors of Fed. Rsrv. Sys., 603 U.S. 799, 829–37 (2024) (Kavanaugh, J., concurring) (explaining that “longstanding and settled precedent adhering to [the APA's] text and history” show that vacatur that “acts directly on” agency action is an available remedy). That remedy is especially appropriate where, as here, only universal vacatur would afford complete relief to the injured parties with standing who are before the Court and a narrower remedy risks causing confusion or other harms. See Trump v. CASA, Inc., 606 U.S. 831, 851–52 (2025) (recognizing that, even outside the APA context, courts may award equitable remedies that “incidentally” benefit nonparties if doing so is necessary “to afford the plaintiff complete relief”). Because the prevailing Plaintiffs' injuries flow not from their own tax treatment but from readily foreseeable economic consequences of the Notice's treatment of others, it is not possible to redress their injuries with a vacatur that is “limited to” them and their members. Cf. Defs.' Mem. at 44. Accordingly, the correct remedy is the one most commonly awarded in this Circuit: vacatur of the Notice in full. See Nat'l Min. Ass'n, 145 F.3d at 1409.

JAT Comment: None.

1. Added 6/18/26 2pm: After originally stating no comment, actually, I will state one. Trump issued Executive Order 14192, titled “Unleashing Prosperity Through Deregulation” (1/31/25) § 3(a), requiring that agencies identify regulations for repeal, citing Loper Bright partially as the justification. The Executive Order uses the term "regulations" defined to include not only notice and comment regulations but also “rules, memoranda, administrative orders, guidance documents, policy statements, and interagency agreements, regardless of whether the same were enacted through the processes in the Administrative Procedure Act.” The Executive Order thus would cover the Notice addressed in the blog above.

Recall that Loper Bright required courts to interpret text de novo with any deference for agency interpretations (although courts may continue to consider Skidmore respect (called deference but not deference) and, presumably, interpretations that might qualify for statutory stare decisis. Trump did not indicate how agencies would determine agency guidance as against the law for repeal. Presumably, they can proceed with a unilateral administrative determination that courts would not sustain the interpretations they repeal. If, however, the agency wants to repeal notice and comment regulations, it should do so by notice and comment regulation with a delayed effective date without a "Good Cause" statement. As to Notices, following that logic, the prior Notice can be repealed by Notice of equal dignity. But, the repeal Notice, as held in Oregon Env. Council must  still reflect reasoned decisionmaking.

As to the effectiveness of any such repeal, retroactivity could be an issue particularly for regulations but also for any other guidance if the repeal interpretation properly interprets the statute text. If the repeal interpretation is the "best interpretation," it will (or should) apply from the effective date of the statutory text.