PLR 200844008: Landfill gas project remained eligible for clean energy bonds

Plain-English summary

A tax-exempt finance cooperative received an allocation of clean renewable energy bond authority for an electric cooperative’s landfill gas generation project. The project added generating units to an existing facility, while an unrelated owner operated the landfill and gas collection system and had claimed nonconventional-fuel credits in earlier years. Section 54 defined a qualified project by referring specifically to the facilities listed in § 45(d). The IRS concluded that this targeted reference did not import the separate § 45(e)(9)(A) restriction for landfill gas associated with prior § 45K credits. The project could therefore be tested for clean renewable energy bond eligibility without applying that restriction. The ruling did not decide the project’s eligibility for credits under § 45 or § 45K.

Ruling snapshot

• Question: Did § 45(e)(9)(A)’s landfill gas restriction apply when determining whether the project qualified under § 54(d)(2)(A)?
• Outcome: Approved. The § 54 qualified-project test used § 45(d) without applying § 45(e)(9)(A).
• Key authorities: IRC §§ 45(d)(6), 45(e)(9)(A), 45K, 54(d)(2)(A), 54(j)(5); American Jobs Creation Act of 2004 § 710; Energy Tax Incentives Act of 2005 §§ 1301, 1303, 1322

Full text (IRS public release)

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Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 200844008 [Third Party Communication:
Release Date: 10/31/2008 Date of Communication: Month DD, YYYY]
Index Number: 54.00-00
Person To Contact:
------------------------------------------------------------ -----------------------, ID No. -------------
---------------- Telephone Number:
----------------------------- ---------------------
------------------------------------- Refer Reply To:
------------------------------- CC:FIP:BRANCH 5
---------------------------------------- PLR-120316-08
Date:
June 25, 2008

Legend

Issuer = ---------------------------------------------------------------------------------

Borrower = -----------------------------------------

State = ----------------------

Landfill = ------------------------------------------------------------

County = -------------------------------

a = -------

b = ----

c = --------------

d = --

Date 1 = --------------------------

Date 2 = ----------------------

Dear -----------------:
PLR-120316-08 2

This letter is in response to your ruling request concerning the treatment of the Project
(as described below) as a qualified project under § 54(d)(2)(A) of the Internal Revenue
Code (the Code).

FACTS AND REPRESENTATIONS

You make the following representations. The Issuer is a not-for-profit member-owned
finance cooperative organization exempt from the payment of Federal income taxes
under § 501(c)(4) of the Code. The principal purpose of the Issuer is to provide its
members with a source of financing to supplement the loan programs offered by the
Rural Utilities Service of the United States Department of Agriculture. The Issuer
makes loans to its rural utility system members to enable them to acquire, construct,
and operate electric generation, distribution, transmission and related facilities. The
Issuer also provides its members with credit enhancements in the form of letters of
credit and guarantees of debt obligations. The Issuer has a members which include
consumer-owned electric cooperatives (including generation and distribution systems),
telecommunication members, service members, and associates.

The Borrower is a not-for-profit member-owned cooperative electric company described
in § 501(c)(12) of the Code organized under the laws of the State. The Borrower has b
members, each of which is a not-for-profit member-owned retail distribution electric
cooperative.

On Date 1, the Internal Revenue Service made an allocation of the national clean
renewable energy bond (CREB) limitation in the amount of $c under § 54(f)(2) of the
Code to the Issuer for the Project to be owned by the Borrower. The Project consists of
the addition of d engine-generator units to an existing facility producing electricity from
gas derived from the biodegradation of municipal solid waste and upgrades to the
existing facility necessary to accommodate the expansion. The Project was placed in
service on or after Date 2. The Project and the existing generation facility are owned
and operated by the Borrower.

The Project is located adjacent to the Landfill, a municipal solid waste depository in
County, in the State. No part of, or interest in, the Landfill or the Landfill gas collection
and supply system is owned or operated by the Borrower. The Landfill and the Landfill
gas collection and supply system are independently owned and operated. The owner of
the Landfill claimed tax credits under §§ 29 and 45K in the respective tax years prior to
the year in which the Project was placed in service.

The Issuer plans to issue CREBs a portion of the proceeds of which will be loaned to
the Borrower to reimburse the costs incurred in constructing the Project. The Issuer
requests a ruling that, in determining whether the Project constitutes a qualified project
for purposes of § 54(d)(2)(A) of the Code, the reference in § 54(d)(2)(A) to § 45(d) is
construed without taking into account the rules set forth in § 45(e)(9)(A).
PLR-120316-08 3

LAW AND ANALYSIS

Section 54(a) provides that a taxpayer that holds a clean renewable energy bond
(CREB) on one or more credit allowance dates of the bond occurring during any taxable
year is allowed as a nonrefundable credit against Federal income tax for the taxable
year an amount equal to the sum of the credits determined under § 54(b) with respect to
such dates.

Section 54(d) provides that a CREB means any bond issued as part of an issue if,
among other requirements, 95 percent or more of the proceeds of the issue are to be
used for capital expenditures incurred by qualified borrowers for one or more qualified
projects. Section 54(d)(2)(A) defines the term “qualified project” as any qualified facility
(as determined under § 45(d) without regard to paragraph (10) (relating to Indian coal
production facilities) and to any placed in service date) owned by a qualified borrower.
Section 45(d)(6) provides that in the case of a facility producing electricity from gas
derived from the biodegradation of municipal solid waste, the term “qualified facility”
means any facility owned by the taxpayer which is originally placed in service after the
date of the enactment of § 45(d)(6) and before January 1, 2009. Section 54(j)(5)
provides that a “qualified borrower” is: (1) a mutual or cooperative electric company
described in § 501(c)(12) or 1381(a)(2)(C); or (2) a governmental body.

Section 710 of the American Jobs Creation Act of 2004, Pub. L. No. 108-357, 118 Stat.
1418 (2004) (the “2004 Act”) expanded the types of facilities that qualified for the tax
credit under § 45. Landfill gas facilities were part of the list of added facilities. Section
710(d) of the 2004 Act added § 45(e)(9), which coordinates § 45 tax credits with those
under § 29 (subsequently renumbered as § 45K) by excluding from the term “qualified
facility” any facility the production from which is allowed as a credit under § 29 for any
current and past taxable year. Section 1301(f)(4) of the Energy Tax Incentives Act of
2005, Pub. L. No. 109-58, 119 Stat. 594 (2005) (the “2005 Act”) amended § 45(e)(9) of
the Code to include § 45(e)(9)(A). Section 1322(a)(3) of the 2005 Act renumbered § 29
as § 45K of the Code. Section 1303 of the 2005 Act added § 54 to the Code.

Section 45(e)(9)(A) provides that in general the tem “qualified facility” shall not include
any facility which produces electricity from gas derived from the biodegradation of
municipal solid waste if such biodegradation occurred in a facility (within the meaning of
§ 45K) the production from which is allowed as a credit under § 45K for the taxable year
or any prior taxable year. Generally, § 45K provides a tax credit for the production and
sale of fuel from nonconventional sources, including the sale of gas derived from
biodegradation of municipal solid waste.

The issue presented here is whether § 45(e)(9)(A) modifies the definition of a “qualified
project” for purposes of § 54(d)(2)(A) as it relates to landfill gas facilities described in
§ 45(d)(6). If § 45(e)(9)(A) modifies the meaning of the term “qualified project” under
§ 54(d)(2)(A), then the Project would not meet the definition of “qualified project”
PLR-120316-08 4

because the landfill gas used for the production of power at the Project was derived
from biodegradation of municipal solid waste from a facility the production from which
was allowed as a credit under § 45K. For the reasons set forth below, we think that
Congress intended that the limitation on landfill gas facilities under § 45(e)(9)(A) did not
apply for purposes of the definition of “qualified project” under § 54(d)(2)(A).

Section 54(d)(2)(A) defines the term “qualified project” for purposes of § 54 by specific
reference to § 45(d), a subsection of § 45, instead of the entire § 45. Thus, Congress
expressly limited the universe of rules defining the term “qualified project” to those in
§ 45(d). Had Congress intended to apply all the limitations of § 45, it could have merely
referenced § 45.

In addition, § 54(d)(2)(A) expressly specifies the extent of application of § 45(d) for
purposes of § 54 by excising Indian coal production facilities and the placement in
service date for purposes of the meaning of the term “qualified project” under § 54. If
Congress intended that § 45(e)(9)(A) modify the meaning of the term “qualified project”
for purposes of § 54(d)(2)(A), it could have made a similarly specific reference.

Section 710(d) of the 2004 Act imposed the restriction on the § 45 credit for taxpayers
who took credit under § 45K (formerly § 29) by limiting the definition of the term
“qualified facility” under § 45(d)(6) to those facilities the production from which has not
been claimed as a credit under § 45K. Legislative history to § 710(d) states that no
facility that previously claimed or currently claims credit under § 29 (redesignated as
§ 45K) of the Code is a qualifying facility for purposes of § 45, thus limiting the scope of
the limitation to § 45 credit takers. See H.R. Conf. Rep. 108-755, 512 (2004) (emphasis
added).

CONCLUSION

Accordingly, we conclude that in determining whether the Project constitutes a qualified
project for purposes of § 54(d)(2)(A) of the Code, the reference in § 54(d)(2)(A) to
§ 45(d) is construed without applying § 45(e)(9)(A).

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter, including for purposes of determining the credits under §§ 45 or 45K of the
Code.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.
PLR-120316-08 5

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.

                                 Sincerely,



                                 Timothy L. Jones
                                 Senior Counsel, Branch 5
                                 (Financial Institutions & Products)

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