CLIENT A LERT December 2009 Contacts IRS Issues Section 45 Guidance Regarding Refined Coal Facilities David S. Lowman, Jr. 1900 K Street, NW On December 7, 2009, the Internal 2009, the inflation adjustment factor is Washington, DC 20006-1109 Revenue Service (“IRS”) issued Notice 1.4171 and the resulting credit amount (202) 419-2070 [email protected] 2009-90 (the “Notice”), providing guid- is $6.20 per ton for calendar year 2009. ance relating to the tax credit under Laura Ellen Jones Section 45 of the Internal Revenue Code Section 4.01 of the Notice refers to Riverfront Plaza, East Tower (“Code”) for refined coal. Section 45 of this credit amount as the “tentative 951 East Byrd Street the Code provides a tax credit for the credit” and provides rules for a taxable Richmond, Virginia 23219-4074 production of refined coal at a refined year that is a calendar year and for a (804) 788-8746 taxable year that includes parts of two [email protected] coal production facility during the 10-year period beginning on the date the facility calendar years. In the former case, the Timothy L. Jacobs was originally placed in service, and tentative credit for the taxable year is 1900 K Street, NW sold by the taxpayer to an unrelated the tentative credit for the calendar year. Washington, DC 20006-1109 person (defined in the same manner In the latter case, the tentative credit (202) 955-1669 as with respect to other Section 45 for the taxable year is the sum of the [email protected] facilities) during such 10-year period. tentative credits for each partial calendar year included in the taxable year. Computation of Credit The tentative credit is reduced by an Under Section 45(e)(8)(A) of the Code, amount that bears the same ratio to the refined coal production credit is equal the tentative credit as the “excess to $4.375 per ton (or, in the case of reference price” for the calendar year steel industry fuel, $2.00 per barrel-of-oil bears to $8.75. The “excess reference equivalent) of qualified refined coal price” is the amount by which (a) the (i) produced by the taxpayer at a refined reference price for the calendar year coal production facility during the 10-year of fuel used as a feedstock exceeds period beginning on the date the facility (b) an amount equal to 1.7 multiplied was originally placed in service, and by $31.90 and further multiplied by (ii) sold by the taxpayer (I) to an unre- the inflation adjustment factor for the lated person and (II) during the 10-year calendar year. For 2009, the excess period and the tax year. The $4.375 per reference price is $39.72 per ton and ton amount is multiplied by the inflation no phaseout of the credit is applicable. adjustment factor for the calendar year In the case of a facility producing steel to adjust for inflation since 1992. The industry fuel, the references to the inflation adjustment factor and excess 10-year period in Section 45(e)(8)(A) are reference price (discussed below) are changed to refer to the period beginning provided by the IRS by notice published on the later of the date such facility in the Internal Revenue Bulletin. For was originally placed in service, the Hunton & Williams LLP date that modifications were made a taxpayer that leases or operates a the definition of “coal.” Section 3.02 to an existing facility to allow such facility owned by another person may of the Notice provides as examples facility to produce steel industry fuel, claim the credit for refined coal that of waste coal: fine coal of any of or October 1, 2008, and ending on the taxpayer produces in the facility. the listed ranks, coal of any of the the later of December 31, 2009, or the listed ranks obtained from a refuse date that is one year after the date Refined Coal bank or slurry dam, anthracite culm, such facility or such modifications bituminous gob and lignite waste. The term “refined coal” means fuel were placed in service. No phaseout Special rules apply for waste coal in that (a) is a liquid, gaseous or solid of the credit applies in the case of a mining processes (discussed below). fuel produced from coal (including facility producing steel industry fuel. lignite) or high carbon fly ash, including Qualified Emission Reduction The tentative credit is reduced by a such fuel used as a feedstock; (b) is prescribed percentage if the project sold by the taxpayer (producer), to an The definition of a “qualified emis- received government grants, subsidies unrelated person, with the reasonable sion reduction” differs depending on or other credits. The reduction expectation that it will be used for whether a refined coal facility was percentage for a tax year is the lesser the purpose of producing steam; and placed in service before or after of 50 percent or the percentage that (c) is certified by the taxpayer as December 31, 2008. In the case of is determined by dividing the sum for resulting (when used in the production refined coal produced at a facility the taxable year and all earlier taxable of steam) in a qualified emission placed in service after December 31, years of the following items listed reduction (defined below). Refined 2008, the term “qualified emission below by the aggregate additions coal includes steel industry fuel (as reduction” means a reduction of at to the capital account attributable defined in Section 45(c)(7)(C)) that is least 20 percent of the emissions to the project for the taxable year produced and sold after September of nitrogen oxide (NO) and at least and all earlier taxable years: 30, 2008. Refined coal does not 40 percent of the emissions of either include fuel (other than steel industry sulfur dioxide (SO2) or mercury (Hg) (1) governmental grants fuel) that is produced and sold from released when burning the refined received for the project; a facility placed in service before coal (excluding any dilution caused January 1, 2009, unless such fuel by materials combined or added (2) proceeds from tax-exempt state is produced in such a manner as during the production process), as or local government bonds to result in an increase of at least compared to the emissions released used to finance the project; 50 percent in the market value of the when burning the feedstock coal (3) directly and indirectly provided fuel (excluding any increase caused by or comparable coal predominantly subsidized energy financing materials combined or added during available in the marketplace as of under a federal, state or the production process) as compared January 1, 2003. In the case of pro- local program in connec- to the feedstock coal. This market duction at a facility placed in service tion with the project and value test was eliminated by the before January 1, 2009, a reduction Energy Improvement and Extension of only 20 percent is required for (4) any other credit allowable Act of 2008 for facilities placed in emissions of SO2 or Hg. The Energy with respect to any property service after December 1, 2008. Improvement and Extension Act of that is part of the project. 2008 raised this reduction requirement Coal and Waste Coal to 40 percent for facilities placed in Producer Entitled to Credit service after December 31, 2008. Section 3.02 of the Notice defines Under Section 45(e)(8)(A), the pro- “coal” for purposes of Section 45 Section 3.03 of the Notice defines ducer of the refined coal is entitled to as anthracite, bituminous coal, “comparable coal” as, with respect the refined coal credit. Section 5.01 of subbituminous coal and lignite. The to any feedstock coal, coal that is the Notice clarifies that the producer is Notice specifically includes “waste of the same rank as the feedstock entitled to the credit without regard to coal (that is, usable material that is coal and that has an emissions whether the producer owns the refined a byproduct of the previous process- profile comparable to the emissions coal production facility in which the ing of anthracite, bituminous coal, profile of the feedstock coal. refined coal is produced. Accordingly, subbituminous coal or lignite)” in 2 Client Alert Section 6.02 of the Notice sets ÆÆ Emissions of Hg are measured emissions reduction that would forth the testing procedures for upstream of any SO2 scrubber be achieved in a coal-fired and determining emission reductions. or Hg control device (such as steam-producing boiler of a size The Notice provides that emission activated carbon injection). and type commonly used in com- reductions are determined by compar- mercial operations and a qualified ÆÆ ing the emissions that result when Emissions of NO are measured individual (as defined above) veri- feedstock coal and refined coal are upstream of any NO controls. fies the test results (in the same used to produce the same amounts manner described above). A verification of the CEMS test results of useful thermal energy. In other must be provided by a “qualified ÆÆ words, the comparison between Laboratory analysis of the individual”: (i) someone who is not the coal feedstock and the refined feedstock coal and the refined related (within the meaning of Section coal is made on an MMBtu basis. coal. The laboratory analysis must 45(e)(4)) to the taxpayer claiming comply with a currently applicable Section 6.03 of the Notice describes the refined coal credit, (ii) is properly EPA or ASTM standard and may two categories of testing methods: licensed as a professional engineer be used only for purposes of and (iii) has the requisite qualifications determining the emissions reduc- CEMS Field Testing.