Tax & Regulatory Brief: Infrastructure Auctions, New Power Plants and Trust-Owned Investments

Hook: Trustees face a new, fast-moving risk as AI fuels demand for power

Trustees and small business owners are already juggling compliance, tax complexity and liquidity needs. The rapid rise of artificial intelligence workloads has created a new investment class: emergency and corporate-funded power plants procured through auction mechanisms such as the recent PJM proposals. If your trust is asked to buy, hold or co-invest in these projects, the tax and regulatory stakes are high and immediate.

Why this matters now in 2026

In late 2025 and early 2026, federal and state actors pushed PJM to run emergency auctions to secure capacity for hyperscale AI data centers. Major tech firms signalled willingness to fund new generation under public private arrangements to ensure reliability. Those developments mean trustees will increasingly see offers to invest in project companies, partnership interests or special purpose vehicles that own or operate new gas-fired peakers, battery storage and hybrid plants built to serve AI load.

These investments are attractive: they can generate durable cash flows, long-term contracts and placement in essential infrastructure. But they also introduce layered tax rules, partnership audit exposure, state nexus, energy regulation and public policy risk that trustees must navigate. This brief focuses on practical tax and regulatory implications for trust-owned investments in these power projects, with step-by-step compliance actions.

Quick summary for trustees

• Tax classification matters: whether the trust is grantor, non-grantor, charitable or an IRA affects tax treatment, reporting and exposure to unrelated business taxable income.
• Entity and finance structure changes outcomes: investing through a C corporation, partnership, REIT or LLC alters tax distributions, audit risk and state filing obligations.
• Regulatory risk is real: PJM, FERC and state public utility commissions may impose conditions or change market rules; capacity payments and interconnection terms are subject to regulatory review.
• Fiduciary duties require documented diligence: trustees must document risk assessment, diversification and conflicts to satisfy fiduciary standards.

How trustees typically encounter these offers

Trustees will most often see opportunities in three forms

1. Direct purchase of equity in a project company via a private placement.
2. Purchase of a partnership interest in an LLC that owns the plant and enters a PJM capacity agreement or PPA with data center customers.
3. Debt financing or mezzanine loans secured by the plant or guaranteed by sponsors.

Tax implications by trust type

1. Grantor trusts

If the trust is a grantor trust, income and tax consequences flow to the grantor. That simplifies trust tax filings but does not eliminate regulatory issues. The grantor will receive K-1 income and face ordinary income tax on operating business income. Grantor trusts are insulated from certain trust-level surtaxes, but trustees must still ensure the grantor understands risks.

2. Non-grantor (taxable) trusts

Non-grantor trusts are subject to compressed tax brackets and trust-level taxation. Fund investments in active energy projects via a partnership produce K-1 information. Trustees must plan for:

• High trust tax rates on retained income.
• Distribution deduction mechanics when K-1 income is distributed to beneficiaries.
• Partnership audit exposure under the centralized partnership audit rules that remained in force through 2026. Assessments for underreported tax at the partnership or adjusted rates can be pushed to reviewed year partners or handled at the partnership level depending on elections.

3. Charitable trusts and private foundations

Charitable trusts and foundations face the greatest risk from operating business activities. Two potential traps:

• Unrelated business taxable income (UBTI): If the trust holds an active business through a partnership, income can be UBTI. Energy projects with contracts tied to operations often generate UBTI for tax-exempt trusts unless carefully structured.
• Debt financed income: If acquisition or operation is financed, a portion of income may be treated as unrelated debt financed income and taxed under Internal Revenue Code rules applicable to exempt organizations.

4. Retirement accounts and IRAs

IRAs are tax-advantaged but subject to unrelated business taxable income rules and prohibited transaction rules. Two immediate issues:

• UBTI and taxable income: If an IRA owns an operating partnership interest, and the partnership has debt or conducts an active trade, the IRA can incur UBTI and pay taxes at trust rates through Form 990-T.
• Prohibited transactions: Investment arrangements that benefit disqualified persons can trigger penalties under IRC 4975. Trustees or custodians must avoid self-dealing or indirect benefits to plan fiduciaries and related parties.

Regulatory landscape and what changes in 2026

The PJM emergency auction proposals accelerated in late 2025 created an atypical procurement environment. Regulators are reacting in 2026 with a mix of clarifications and new conditions.

• PJM and FERC oversight: New auction designs and private funding arrangements may face FERC review for market design and anti-competitive concerns. Trustees must confirm that project agreements comply with PJM market rules and any FERC orders.
• State public utility commissions: State PUCs will condition approvals on community and environmental commitments, interconnection sequencing and capacity performance standards. That affects revenue certainty and project viability.
• Permitting and environmental law: Projects built quickly to meet AI demand may still need air permits, water permits, and NEPA-like reviews where federal involvement exists. Permitting risk can delay cash flows and create liability for investors.

Practical tax structuring options and implications

Trustees and their advisors commonly consider four structural approaches when investing in energy infrastructure. Each has tradeoffs for taxation, reporting and regulatory exposure.

Option A: Direct partnership investment (pass-through)

Most common for project finance. Taxable income, losses and credits flow through to partners. Considerations:

• Trust receives schedule K-1; tax impact depends on trust type.
• Partnership audit rules can create retroactive tax assessments.
• Energy tax credits such as production tax credits or investment tax credits may be available but require compliance with prevailing wage and apprenticeship rules to access bonus credits established by recent energy legislation.

Option B: C corporation subsidiary

Investing through a C corporation can shield the trust from pass-through UBTI and complicated K-1s, but at the cost of double taxation when dividends are distributed. This structure may be preferred for tax-exempt trusts seeking to avoid UBTI or for trustees prioritizing simplicity and insulation from partnership audit risk.

Option C: Blocker entities and special purpose vehicles

Blocker corporations or LLCs taxed as corporations are often used to prevent UBTI for exempt investors. They add costs and governance complexity but can be essential for charitable trusts or foreign beneficiaries.

Option D: Tax credit monetization

Under policies enacted in recent years, some clean energy tax credits are transferable or can be monetized through monetization markets. Trustees should verify eligibility criteria and recent Treasury guidance issued through 2025 that tightened certain transferability and wage certification rules. Structuring for credit capture often requires early-stage documentation and sponsor representation.

Regulatory and commercial due diligence checklist for trustees

Use this checklist before voting to invest or holding any interest

1. Confirm trust instrument permits the investment and document investment authority.
2. Obtain project corporate documents, partnership agreement and investor rights agreement.
3. Review PJM capacity agreement, term sheets, PPA terms and interconnection agreements.
4. Verify regulatory approvals from PJM, FERC filings and state PUC orders related to the auction.
5. Assess permitting status and outstanding contingencies for environmental and land use permits.
6. Perform tax due diligence: confirm entity classification, expected K-1 items, anticipated tax credits and implications for trust tax returns.
7. Model cash flow sensitivity to capacity market rule changes, curtailment and fuel price risk.
8. Review financing structure: recourse vs nonrecourse debt, debt service coverage ratios, and potential debt-financed income tax for exempt trusts.
9. Check for related party or conflict issues to avoid prohibited transactions.
10. Insist on investor protections: key person clauses, step-in rights, dispute resolution and exit mechanics.

Case study: Hypothetical trustee decision

Scenario

A trustee for a family trust is offered a 15 percent limited partner interest in a newly formed LLC that will own a gas-peaker plant in PJM. The plant has a 10 year capacity contract with a tech consortium secured via an emergency PJM auction. Financing includes nonrecourse project debt and a sponsor equity tranche. The family trust is a non-grantor trust taxed at trust rates.

Key tax and regulatory findings the trustee should document

• The LLC is a partnership for tax purposes; the trust will receive K-1 allocations of ordinary income and potential tax credits.
• Because the trust is taxable, it will pay tax on K-1 income. If cash distributions are insufficient to cover tax, the trustee must consider liquidity or the need to sell assets to cover taxes.
• Partnership audit rules could allocate additional tax burden to the trust for prior years if the partnership is audited. The trustee should review the partnership agreement for indemnity and push-out mechanisms.
• Regulatory approval status: PJM cleared the capacity agreement, but state PUC conditional approval remains pending; this is a material contingency.
• Environmental permits are in process and could delay COD by 9 to 12 months, increasing risk.

Action taken by prudent trustee

• Obtain a written opinion from tax counsel on UBTI exposure, partnership audit rules and tax credit eligibility.
• Negotiate a capital call schedule that aligns tax cash flow to income distributions.
• Require sponsor to post completion guaranty or enhanced step-in rights until permits are final.
• Document trustee analysis and board minutes showing reasoned exercise of discretion and diversification considerations.

Advanced compliance strategies and risk mitigations

Trustees can use a combination of legal, tax and commercial tools to mitigate downside.

• Use blocker corporations for tax-exempt trusts to avoid UBTI and DFI. Accept lower after-tax returns in exchange for predictable taxable treatment.
• Negotiate K-1 delivery and tax info covenants so the partnership provides timely, accurate tax reporting and an indemnity for misstatements.
• Secure robust sponsor representations and warranties on regulatory approvals, interconnection status and compliance with award conditions in the PJM auction.
• Consider short-term liquidity reserves within the trust to meet immediate tax liabilities created by partnership flow-through.
• Purchase political and regulatory risk insurance where available, or require escrow holdbacks tied to permit milestones.

Recordkeeping and trustee governance checklist

1. Prepare a trustee decision memo summarizing facts, taxes, risks, alternatives and minority protections considered.
2. Attach counsel and CPA opinions to the trust file.
3. Set a calendar for tax filing deadlines, estimated payments, and K-1 receipt.
4. Establish a trustee monitoring protocol for regulatory filings at PJM and FERC.
5. Document beneficiary communications about risk, liquidity and expected timelines.

Key tax forms and regulatory filings trustees will encounter

• Form 1041 for trust income tax returns
• Schedule K-1 (Form 1065) from partnerships
• Form 990-T for exempt trusts and IRAs when UBTI arises
• Partnership representative notifications under the centralized partnership audit rules and potential Form 8975 for BEPS-related items where applicable
• PJM market filings and public FERC dockets for market rule changes or challenges

Future trends and predictions for 2026 and beyond

As of early 2026 we are seeing several durable trends

• More corporate-backed generation will be developed via targeted auctions and bilateral procurement to secure AI workloads. Trustees will see more offers linked to corporate PPAs and capacity agreements.
• Regulatory scrutiny will increase on market design and long-term contracts to prevent undue market concentration. That will raise conditionality and compliance requirements for project investors.
• Tax policy and guidance will continue to evolve. Treasury guidance issued in 2024 and 2025 tightened eligibility for bonus clean energy credits. Trustees must track Treasury updates that may affect credit monetization or transferability.
• Financial structuring innovation will create new blocker and pass-through hybrids to satisfy exempt investors while preserving tax efficiency. Expect higher legal costs and longer closing timelines.

Practical 30-60-90 day action plan for trustees

1. Day 1-30: Verify trust authority and liquidity. Require full deal materials and appoint tax counsel to do a preliminary tax memorandum.
2. Day 30-60: Complete regulatory and environmental due diligence. Negotiate investor protections and tax reporting covenants. Determine entity structure and finalize capital commitments aligned with tax timing.
3. Day 60-90: Close with documentation of trustee discretion. File any required tax elections. Establish monitoring dashboards for PJM and permit milestones.

Final recommendations for trustees

Investing in infrastructure built in response to AI demand is an attractive opportunity, but it is not a standard passive buy. Trustees must combine tax planning, regulatory diligence and rigorous documentation to meet fiduciary duties and protect beneficiaries. Where tax-exempt status is involved, err on the side of blocker entities or alternative structures rather than risking UBTI. For taxable trusts, ensure liquidity to meet tax obligations and obtain K-1 covenants.

Bottom line: Do not accept headline yields. Require detailed tax and regulatory analysis, documented governance, and explicit sponsor commitments before a trust becomes a long-term investor in AI-driven energy infrastructure.

Call to action

Trustees.online helps fiduciaries evaluate and execute on complex trust-owned energy investments. If you are considering an offer tied to PJM auctions or corporate-funded power plants, start with our trust-specific due diligence checklist and a vetted list of tax and regulatory advisors. Contact our team to get a tailored trustee decision template and schedule a consultation with an energy tax specialist.

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