UPDATE 3-US Treasury watchdog probes solar tax grant program

(Adds context about stimulus program)

By Nichola Groom and Roberta Rampton

LOS ANGELES/WASHINGTON, Oct 9 (Reuters) - The Treasury Department's inspector general is investigating a popular stimulus program that allowed rooftop solar panel projects to turn tax credits into cash grants, according to a regulatory filing.

The Treasury's internal watchdog is looking at how the department managed the program and is searching for "possible misrepresentations" about the fair market value of solar systems that received grants, one large installer of solar panels said in its filing with the U.S. Securities and Exchange Commission.

The inspector general issued subpoenas to SolarCity Corp and other big players in the market, working with the Justice Department's civil division, San Mateo, California-based SolarCity said in its initial public offering (IPO) filing last week.

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

The probe could fuel further criticism of President Barack Obama's clean energy initiatives that have come under fire for spending taxpayer money on unproven companies, including Solyndra, a solar panel maker that went bankrupt last year after receiving more than $527 million under a separate government program.

The Solyndra failure has become a stock part of stump speeches leading up the Nov. 6 U.S. elections, including those of Republican presidential candidate Mitt Romney, who argues that the government should not be in the business of picking winners and losers.

The Treasury Department's inspector general would not comment on the scope of the probe.

"We do not discuss pending audits and investigations in detail," Rich Delmar, counsel to the inspector general, said in an e-mail. "But generally speaking, we are carrying out our Inspector General Act-mandated duties to monitor the process by which public funds are distributed, to be sure that they are granted properly and used properly, consistent with applicable law, and intended use."

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


The program, known as Section 1603, allowed renewable energy project owners to recover 30 percent of their construction costs in cash. It has been credited with helping boost the solar industry in the aftermath of the financial crisis, when it was difficult to find financing.

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

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

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

"We anticipate that at least six months will be required to gather all of the requested documents and provide them to the Inspector General, and at least another year following that for the 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 and Exchange Commission IPO filing. It wants to raise up to $201 million.

SolarCity has expanded rapidly thanks to a business model that allows residential customers to lease solar panels for their roofs. Rather than paying the large upfront costs required for a solar installation, customers pay a monthly fee.

The company faces competition in the solar lease business from start-ups that include: SunRun, Clean Power Finance and Sungevity, as well as solar stalwarts like SunPower .

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

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

SolarCity said in its filing that the Internal Revenue Service is also auditing two of SolarCity's investment funds and is reviewing the fair market value of the solar power systems receiving grants. The IRS declined to comment.

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

Google, U.S. Bank and Credit Suisse were not immediately available for comment. A Rabobank spokeswoman declined to comment.

(Reporting by Roberta Rampton, Rachelle Younglai, Patrick Temple-West and Ayesha Rascoe in Washington and Nichola Groom in Los Angeles; Editing by Dan Grebler and Leslie Gevirtz)


@robertarampton)(+202 898 8390))