UPDATE 2-US Treasury watchdog probes solar tax grant program

(Adds statement from inspector general, IRS declines comment,bylines)

By Roberta Rampton and Nichola Groom

WASHINGTON/LOS ANGELES, Oct 9 (Reuters) - The TreasuryDepartment's inspector general is investigating a popularstimulus program that allowed rooftop solar panel projects toturn tax credits into cash grants.

The Treasury's internal watchdog is looking at how thedepartment managed the program and is searching for "possiblemisrepresentations" about the fair market value of solar systemsthat received grants, one large installer of solar panelsdisclosed in a filing with U.S. regulators.

The inspector general issued subpoenas to SolarCity Corp andother big players in the market, working with the JusticeDepartment's civil division, San Mateo, California-basedSolarCity said in a filing late last week.

SolarCity did not say who else received subpoenas, and thereason for the probe was not immediately clear.

The Treasury Department's inspector general would notcomment on the scope of the probe.

"We do not discuss pending audits and investigations indetail," Rich Delmar, counsel to the inspector general, said inan e-mail. "But generally speaking, we are carrying out ourInspector General Act-mandated duties to monitor the process bywhich public funds are distributed, to be sure that they aregranted properly and used properly, consistent with applicablelaw, and intended use."

The watchdog has asked for documents dating back to 2007,including communications with other solar development companiesand firms that appraised solar energy property for the grants,SolarCity said. A company spokesman was not immediatelyavailable for further comment.

44,000 PROJECTS, $2.7 BLN IN FUNDING

The program, known as Section 1603, allowed renewable energyproject owners to recover 30 percent of their construction costsin cash. It has been credited with helping boost the solarindustry in the aftermath of the financial crisis, when it wasdifficult to find financing.

As of July 20, the program had helped fund more than 44,000solar projects and the solar industry had received more than$2.7 billion of the program's $13 billion in funding, accordingto the Treasury. The 1603 program also extended to biomass, windand other renewable energy projects.

The cash grant program reverted to a tax credit at the endof last year. Renewable energy project developers have been ableto sell such incentives to investors who finance the projects.

SolarCity said it did not know of specific allegations ofmisrepresentation. If any were found, the company could facedamages, penalties and tax liabilities, it said.

"We anticipate that at least six months will be required togather all of the requested documents and provide them to theInspector General, and at least another year following that forthe Inspector General to conclude its review of the materials,"the company said in its filing.

The disclosure was made in SolarCity's U.S. Securities andExchange Commission filing for an initial public offering. Itwants to raise up to $201 million.

SolarCity has expanded rapidly thanks to a business modelthat allows residential customers to lease solar panels fortheir roofs. Rather than paying the large upfront costs requiredfor a solar installation, customers pay a monthly fee.

The company faces stiff competition in the solar leasebusiness from start-ups that include SunRun, Clean Power Financeand Sungevity, as well as solar stalwarts like SunPower.

"It's our policy to keep all communications with theTreasury confidential," a SunRun spokeswoman said in an e-mail.

Clean Power Finance did not receive a subpoena, nor is theIRS auditing any of its funds, a spokeswoman said.

SolarCity said in its filing that the Internal RevenueService is also auditing two of SolarCity's investment funds andis reviewing the fair market value of the solar power systemsreceiving grants. The IRS declined to comment.

Companies that have provided funds to finance SolarCity'sprojects include Google Inc , U.S. Bancorp ,Rabobank and Credit Suisse . Such investorsuse the 30 percent federal tax credit for solar energy systemsto reduce their tax liabilities.

Google, U.S. Bank and Credit Suisse were not immediatelyavailable for comment. A Rabobank spokeswoman declined tocomment.

(Reporting by Roberta Rampton, Rachelle Younglai, PatrickTemple-West and Ayesha Rascoe in Washington and Nichola Groom inLos Angeles; Editing by Dan Grebler)

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Keywords: USA SOLAR/INVESTIGATION