PLR 1322004: IRS approves refined-coal treatment for a leased facility and blended coal

Plain-English summary

The IRS ruled on a taxpayer's use of chemical reagents at a leased facility to produce refined coal for a power plant. The process and reagents qualified for refined-coal treatment under section 45, provided the fuel was sold to an unrelated person and met the required emissions-reduction test. The IRS also ruled that increasing the reagent application rate would not, by itself, be a change in the production process for the applicable redetermination rule. Leasing the facility after its placed-in-service date would not change that date, and later modification or relocation would not create a new date if the original property remained more than 20 percent of the facility's value. The IRS further approved treating blended feedstock within five percentage points of the tested blend as the same source and rank for the specified redetermination rule, while reserving other issues including producer status and the actual placed-in-service date.

Ruling snapshot

• Question: Would the taxpayer's process, testing, lease, relocation, and blended-feedstock arrangements qualify for the requested section 45 refined-coal treatment?
• Outcome: Approved
• Key authorities: IRC §§ 45 and 613; Notice 2010-54; Treas. Reg. § 1.46-3(d); IRC § 6110(k)(3).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201322004 Third Party Communication: None
Release Date: 5/31/2013 Date of Communication: Not Applicable
Index Number: 45.00-00
Person To Contact:
------------------------------- ------------------------, ID No. --------------
-------------------------------------------- Telephone Number:
---------------------- ----------------------
---------------------------------- Refer Reply To:
CC:PSI:B6
PLR-116599-12
Date:
February 20, 2013

LEGEND:

Taxpayer: -----------------------------
Company A: --------------------------
Company B: ------------------------------------------------------

Company C: ---------------------------------------------
Company D: ----------------
Company E: -------------------
Company F: --------------------------------------
City a: ------------
City b: -----------
State a: --------------
State b: ----------
Date a: -----------------------
Date b: -------
Date c : -----------------------
Process: -------------
Location a: ----------------------------
Location b: ------------------
Coal Seam Area: --------------------------
Facility: ----------------------------------------------
Power Plant: ----------------------------
Generator: ----------------------------------------------------
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PLR-116599-12

Dear ---------------:

   This is in response to your request for rulings, submitted by your authorized

representative, concerning the federal income tax consequences of the transaction
described below:

   FACTS

           A.       Taxpayer Information

     Taxpayer is a State a limited liability company that is a wholly owned subsidiary

of Company A. Taxpayer was formed to lease and operate two refined coal production
facilities, including Facility. Because Taxpayer has not elected to be a classified as an
association taxable as a corporation for federal income tax purposes, it is disregarded
as an entity separate from Company A for such purposes. Company A is a State a
corporation that is wholly owned by Company B. Company B, a State a corporation, is
the common parent of a consolidated group of companies whose members include
Company A.

           B.       The Refined Coal Production Process

                    1.    The Facility

    Taxpayer has leased the refined coal production facility (Facility) from Company

D for a term ending on Date a. Company D is wholly owned by Company C. Facility was
designed and constructed by Company C to produce a refined coal product that
reduces emissions of nitrous oxide (NOx) and mercury (Hg) when burned as a fuel in a
coal-fired power plant.

     Facility was placed in service in Date b, and is currently located at Power Plant

located in City a, State b on land licensed to Taxpayer pursuant to an agreement with
Generator, the owner of Power Plant. Power Plant is a coal-fired steam-producing
power plant in regular commercial operation. Taxpayer has entered into a contract with
Utility for the sale of refined coal produced by Facility to Utility for use as feedstock in
Power Plant. Facility can be moved and reassembled at other power plant locations.

                    2.    The Process

   The technology employed to produce the refined coal in Facility is known as

Process. It is a proprietary process which is designed to reduce NOx and Hg emissions
in cyclone coal-fired boilers. The rights to the technology are licensed by Company E to
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Company C, and have been sublicensed from Company C to Taxpayer for the full term
of the lease of Facility. Company E and Company F formed company C to develop
refined coal facilities. Company A then acquired an interest in Company C as a limited
partner.

   Process involves the use of two separate inorganic chemicals (Chemical

Reagents) which are applied to the coal feedstock. The first Chemical Reagent is a
solid material. It mixes evenly with the coal’s native ash in power plant boilers and
affects the melting properties of the coal’s native ash during combustion in power plant
boilers. This allows adjustment of the air-fuel ratio in the boiler which reduces oxygen in
the boiler and provides more favorable conditions for reduction of NOx emissions.

   The second Chemical Reagent is an inorganic liquid solution which reacts with

the mercury in coal, resulting in changes to the chemical form of the mercury, oxidizing
more of it. As a result, more of the mercury is captured with the fly-ash in the particulate
control equipment, resulting in a higher degree of removal.

   Facility’s equipment transports the Chemical Reagents to a coal conveyor belt,

where they are applied evenly to the coal feedstock. The Chemical Reagents are
combined with the coal at a rate proportional to the coal flow rate. The application of
each Chemical Reagent is controlled separately by computer equipment which
determines the rate of application based on the flow rate of the coal on the conveyor
belt. The proportion of each Chemical Reagent to be applied per ton of coal is set
based on previously verified emissions test results.

                 3.     Use of Blended Coal Feedstock

   The Power Plant currently burns a blend of sub-bituminous coal and bituminous

coal (Blended Coal). The sub-bituminous coal burned in the Power Plant is obtained
from mines in various located in Location a. The bituminous coal burned in the Power
Plant is obtained from various coal seams located in Location b. For the reasons
described below, the exact ratio of Location a coal to Location b coal in the Blended
Coal may vary on a day-to-day basis. The Power Plant typically burns coal in its boilers
with a target blend of ----% Location a coal and ----% Location b (the Regular Blend).
However, the Power Plant on occasion may need to burn Blended Coal using a ratio of
Location a coal to Location b coal that is different from the ratio used in the Regular
Blend, generally in order to satisfy load requirements or to clean slag buildup in the
boilers.

   In order to deliver refined coal which satisfies the Power Plant’s specifications,

Taxpayer intends to produce refined coal using Blended Coal composed of Location a
coal and Location b coal obtained from the same sources that the Utility currently uses
to obtain its coal. The ratio of Location a coal to Location b coal in the Blended Coal will
vary as a result of two factors. First, although Taxpayer will most often produce refined
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coal using Regular Blend feedstock, it may vary the ratio to satisfy the differing needs of
the Power Plant. Second, while the coal feeders will be set to feed Location a coal and
Location b coal at a predetermined ratio, the feeders are not precision instruments and
there will be some variation in the ratio of Location a coal to Location b coal in the short
term. Nevertheless, the ratio of Location a coal to Location b coal in the Blended Coal
used by taxpayer as feedstock coal for the Facility will remain within a pre-determined,
specified range (Blend Range). It is anticipated that the upper boundary of the Blend
Range will be a Blended Coal containing ----% Location a coal and ----% Location b coal
and that the lower boundary of the Blend Range will be a Blended Coal containing ----%
Location a coal and ----% Location b coal.

                 4.     Emissions Testing

                        a.     Prior CEMS Field Testing

    On Date c Company C conducted full-scale emissions tests, using continuous

emission monitoring systems (CEMS) field testing conducted at Power Plant in
accordance with the requirements of section 6.03(1) of Notice 2010-54 using the
Regular Blend, which is the blend most commonly burned at Power Plant and refined
coal produced at Facility from the Regular Blend. The emissions tests were conducted
in the following manner: To establish a baseline for NOx and mercury emissions, one
unit of Power Plant was operated for a three-hour period at or above ----% of full load
using Location coal feedstock. The same Power Plant unit was operated for a second
three-hour period under the same operating conditions (except for adjustments to
primary or secondary air in accordance with good air pollution control practices), using
refined coal produced in the Facility using the process from the Regular Blend and the
Chemical Reagents, applied at a predetermined proportion.

   During both the baseline test and the test using refined coal, NOx and mercury

emissions were measured using CEMS equipment that conforms to applicable United
States EPA standards. The NOx CEMS device was located upstream of the scrubber
and the electrostatic precipitator, which controls particulate emissions. No post-
combustion NOx emission controls were operational at the Power Plant during the
testing period. The mercury CEMS device was located in the stack downstream of the
particulate control equipment and the scrubber, which were operated under the same
conditions throughout the testing period. The CEMS field testing demonstrated a
reduction in excess of ----% of NOx released and a reduction in excess of ----% of
mercury released when burning refined coal produced in the Facility from the Regular
Blend compared to the emissions when burning the Regular Blend to produce the same
amount of useful thermal energy.
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    The emission reductions demonstrated in each CEMS field test have been

verified by an independent licensed professional engineer experienced in combustion
and environmental engineering, as required by Notice 2010-54.

                        b.     Emission Testing to Establish a Blend Range

   Taxpayer anticipates that it will continue to use CEMS field testing to determine

and redetermine the qualified emission reduction from burning refined coal produced in
the Facility. In general, Taxpayer anticipates that it will conduct a single CEMS field test
every six months using refined coal produced from Blended Coal (Test Blend)
containing ----% Location a coal and --% Location b coal. However, it may decide to
conduct emissions testing using refined coal produced from Blended Coal with a lower
percentage of Location a coal. Taxpayer will treat Blended Coals as comparable coal if
the percentage of Location a coal in the Blended Coal is within 5 percentage points of
the percentage of Location a coal in the Test Blend (Test Blend Range). For example, if
Taxpayer conducts emissions testing using a Set Blend containing ----% Location a coal
and --% location b coal, Blended Coals containing between ----% Location a coal and ---
---% Location b coal will be treated as comparable coals. If Taxpayer decides to begin
producing refined coal from Blended Coal that is outside the Test Blend Range,
Taxpayer will conduct additional CEMS field testing.

    In determining whether the percentage of Location a coal and Location b coal in

the Blended Coal is within 5 percentage points of the percentage in the Test Blend,
Taxpayer will determine the average blend range of Blended Coal used to produce
refined coal over a period of up to six months since the most recent determination test
or redetermination test. If the percentage of Location a coal and the percentage of
Location b coal in the average blend over that period does not vary by more than 5
percentage points up or down (for a total of 10 percentage points) from the percentage
of Location a coal and the percentage of Location b coal in the Test Blend, Taxpayer
will treat the Blended Coals as comparable coals, and no redetermination testing will be
required under the end of the six-month period

                        c.     Redetermination Testing

   Taxpayer will conduct redetermination testing using CEMS field testing or

another method permitted by Notice 2010-54 on or before the first to occur of: (i) the
expiration of six months since the last determination or redetermination testing
conducted using a Test Blend; or (ii) if the Process is changed; however, it does not
intend to conduct redetermination testing before increasing the Chemical Reagent
application rate. In addition, Taxpayer will conduct redetermination testing in the event
of a change in the source or rank of the coal used to produce refined coal at the Facility,
including a change in the source of either the sub-bituminous coal or the bituminous
coal comprising the Blended Coal or a change in the desired Blend Range. For
example, if then-effective emissions testing conforming to the requirements of Notice
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2010-54 was conducted using a Set Blend consisting of 95% Location a coal and 5%
Location b coal, Taxpayer will conduct additional emissions testing if it decides to
produce refined coal using Blended Coal containing less than 90% Location a coal.

RULINGS REQUESTED

Based on the foregoing, Taxpayer has requested that we rule as follows:

(1) Refined coal produced at the Facility using the Process and the Chemical Reagents
is “refined coal” within the meaning of § 45(c)(7) of the Internal Revenue Code, provided
the refined coal (i) is sold to an unrelated person within the meaning of § 45(c)(7) and
(ii) meets the emission reduction requirement of § 45(c)(7)(B).

(2) An increase in the rate of application of a Chemical Reagent per ton of feedstock
coal refined is not considered a “change in the process of producing refined coal from
feedstock coal” for purposes of section 6.04 of Notice 2010-54.

(3) The lease of the Facility subsequent to its placed-in-service date will not affect the
placed-in-service date of the Facility for purposes of § 45 of the Code and will not affect
the determination of whether the lessee is eligible for production tax credits for refined
coal produced at the Facility.

(4) If the Facility was “placed in service” prior to January 1, 2012 within the meaning of §
45(d)(8)(B) of the Code, a subsequent modification or relocation of the Facility will not
result in a new placed-in-service date for that Facility for purposes of § 45, provided the
fair market value of the original property of the Facility is more than 20 percent of the
Facility’s total fair market value at that time.

(5) All feedstock coals that are Blended Coals with a Location a coal content of +/-5% of
the Location a coal content of a Test Blend shall be treated as feedstock coal of the
same source and rank as the Test Blend for purposes of section 6.04 of Notice 2010-54
regardless of the mine from which such feedstock coal is purchased.

   LAW AND ANALYSIS

    Section 45(a) of the Code generally provides a credit against federal income tax

for the use of renewable or alternative resources to produce electricity or fuel for the
generation of steam. Section 45(e)(8) of the Code provides that, in the case of a
producer of “refined coal”, the credit available under § 45(a) of the Code for any taxable
year shall be increased by an amount equal to $4.375 per ton of qualified “refined coal”
(i) produced by the taxpayer at a “refined coal production facility” during the 10-year
period beginning on the date that the facility was originally placed in service, and which
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is (ii) sold by the taxpayer to an unrelated person during such 10-year period and such
taxable year.

    For purposes of § 45 of the Code, section 3.01 of the Notice provides that the

term "refined coal" means a fuel which -- (i) is a liquid, gaseous, or solid fuel (including
feedstock coal mixed with an additive or additives) produced from coal (including lignite)
or high carbon fly ash, including such fuel used as a feedstock, (ii) is sold by the
taxpayer with the reasonable expectation that it will be used for purpose of producing
steam, and (iii) is certified by the taxpayer as resulting (when used in the production of
steam) in a qualified emission reduction. Section 45(c)(7) and section 3.04 of the Notice
provide that the term "qualified emission reduction" means (1) in the case of refined coal
produced at a facility placed in service after December 31, 2008, a reduction of at least
twenty percent (20%) of the emissions of nitrogen oxide and at least 40% of the
emissions of either sulfur dioxide or mercury released when burning the refined coal
(excluding any dilution caused by materials combined or added during the production
process), as compared to the emissions released when burning the feedstock coal or
comparable coal predominantly available in the marketplace as of January 1, 2003; in
the case of production at a facility placed in service before January 1, 2009, a reduction
of at least 20 percent of the emissions of NOx and at least 20 percent of the emissions
of either SO2 or Hg released when burning the refined coal (excluding any dilution
caused by materials combined or added during the production process), as compared to
the emissions released when burning the feedstock coal or comparable coal
predominantly available in the marketplace as of January 1, 2003.

     Section 45(d)(8) of the Code generally provides that the term "refined coal

production facility" means a facility which is placed in service after October 22, 2004
and before January 1, 2012. Sections 4.07 and 5.02 of the Notice provide that when a
facility is placed in service is determined in accordance with § 1.46-3(d) of the
regulations.

    Section 5.01 of the Notice provides that the refined coal credit is allowed for

qualified refined coal produced and sold to an unrelated person by the taxpayer, without
regard to whether the taxpayer owns the refined coal production facility in which the
refined coal is produced. Accordingly, a taxpayer that leases or operates a facility
owned by another person may claim the credit for refined coal that the taxpayer
produces in the facility.

   Section 5.02 of the Notice provides that a refined coal production facility will not

be considered to have been placed in service after October 22, 2004, if more than 20
percent of the total fair market value of the facility (the cost of the new property plus the
value of the used property) is attributable to property that was placed in service on or
before October 22, 2004.
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    Section 6.01 of the Notice generally provides that a qualified emissions reduction

does not include any reduction attributable to mining processes or processes that would
be treated as mining (as defined in § 613(c)(2), (3), (4)(A), (4)(C), or (4)(I) of the Code)
if performed by the mine owner or operator. Accordingly, in determining whether a
qualified emission reduction has been achieved, the emissions released when burning
the refined coal must be compared to the emissions that would be released when
burning the feedstock coal. Feedstock coal is the product resulting from processes that
are treated as mining and are actually applied by a taxpayer in any part of the
taxpayer's process of producing refined coal from coal.

    Section 613(c)(5) of the Code describes treatment processes that are not

considered as mining unless they are provided for in § 613(c)(4) or any necessary or
incidental to a process provided for in § 613(c)(4). Any cleaning process, such as a
process that uses ash separation, dewatering, scrubbing though a centrifugal pump,
spiral concentration, gravity concentration, flotation, application of liquid hydrocarbons
or alcohol to the surface of the fuel particles or to the feed slurry provided such cleaning
does not change the physical or chemical structure of the coal, and drying to removed
free water, provided such drying does not change the physical or chemical identity of
the coal, will be considered as mining.

    Section 6.03(1) of the Notice provides, in part, that emissions reduction may be

determined using continuous emission monitoring system (CEMS) field testing. Section
6.03(1)(a) provides, in part, that CEMS field testing is testing that meets all the following
requirements: (i) The boiler used to conduct the test is coal-fired and steam-producing
and is of a size and type commonly used in commercial operations. (ii) Emissions are
measured using a CEMS. (iii) If EPA has promulgated a performance standard that
applies at the time of the test to the pollutant emission being measured, the CEMS must
conform to that standard. (iv) Emissions for both the feedstock coal and the refined coal
are measured at the same operating conditions and over a period of at least 3 hours
during which the boiler is operating at a steady state at least 90 percent of full load. (v) a
qualified individual verifies the test results in a manner that satisfies the requirement of
section 6.03(1)(b).

     Section 6.03(2) of the Notice provides that methods other than CEMS field

testing may be used to determine the emissions reduction. If a method other than
CEMS field testing is used, the Service may require the taxpayer to provide additional
proof that the emission reduction has been achieved. The permissible methods include
(a) testing using a demonstration pilot-scale combustion furnace if it established that the
method accurately measures the emission reduction that would be achieved in a boiler
described in section 6.03(a)(a)(i) and a qualified individual verifies the test results in a
manner that satisfies the requirements of section 6.03(1)(c)(i), (ii), (v), and (vi); (b) a
laboratory analysis of the feedstock coal and the refined coal that complies with a
currently applicable EPA or ASTM standard and is permitted under section 6.03(2)(b)(i)
or (ii).
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     Section 6.04(1) of the Notice provides that a taxpayer may establish that a

qualified emission reduction determined under section 6.03 applies to production from a
facility by a determination or redetermination that is valid at the time the production
occurs. A determination or redetermination is valid for the period beginning on the date
of the determination or redetermination and ending with the occurrence of the earliest of
the following events: (i) the lapse of six months from the date of such determination or
redetermination; (ii) a change in the source or rank of feedstock coal that occurs after
the date of such determination or (iii) a change in the process of producing refined coal
from the feedstock coal that occurs after the date of such determination or
redetermination.

   Section 6.04(2) of the Notice provides that in the case of a redetermination

required because of a change in the process of producing refined coal from the
feedstock coal, the redetermination required under section 6.04 must use a method that
meets the requirements of section 6.03. In any other case, the redetermination
requirement may be satisfied by laboratory analysis establishing that – (a) the sulfur (S)
or Hg content of the amount of refined coal necessary to produce an amount of useful
energy has been reduced by at least 20 percent (40 percent, in the case of facilities
placed in service after December 31, 2008) in comparison to the S or Hg content of the
amount of feedstock coal necessary to produce the same amount of useful energy,
excluding any dilution caused by materials combined or added during the production
process; (b) the S or Hg content of both the feedstock coal and the refined coal do not
vary by more than 10 percent from the S and Hg content of the feedstock coal and
refined coal used in the most recent determination that meets the requirements of the
Notice.

    Finally, section 6.05 of the Notice provides that the certification requirement of

section 3.01(1)(c) is satisfied with respect to fuel for which the refined coal credit is
claimed only if the taxpayer attached to its tax return on which the credit is claimed a
certification that contains the following: (a) a statement that the fuel will result in a
qualified emissions reduction when used in the production of steam; (b) a statement
indicating whether CEMS field testing was used to determine the emissions reduction;
(3) if CEMS field testing was not used to determine the emissions reduction, a
description of the method used; (4) a statement that the emissions reduction was
determined or redetermined within the six months preceding the production of the fuel
and that there have been no changes in the source or rank of feedstock coal used or in
the process of producing refined coal from the feedstock coal since the emissions
reduction was determined or was most recently determined; and (5) a declaration
signed by the taxpayer in the following form: “Under penalties of perjury, I declare that I
have examined this certification and to the best of my knowledge and belief, it is true,
correct, and complete.”
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   With respect to the first two issues, the Process involves blending coal with the

Chemical Reagents in a cyclone coal-fired boiler. Section 6.01 of the Notice provides
generally that a qualified emission reduction does not include any reduction attributable
to mining processes or processes that would be treated as mining, as further defined in
the Code, if performed by the mine owner or operator. Section 613(c)(5) of the Code
describes certain treatment processes that are not considered as mining unless they
are provided for in § 613(c)(4) or are necessary or incidental to a process provide for in
§ 613(c)(4). For example, § 6.01(2) provides, in part, that any cleaning process such as
the application of liquid hydrocarbons or alcohol to the surface of the fuel particle or to
the feed slurry, provided such cleaning does not change the physical or chemical
structure of the coal, will be considered mining. In the instant case, Process is not a
mining process. Further, section 3.01 clarifies § 45(c)(7) and specifically provides that
refined coal includes feedstock coal mixed with an additive or additives. Thus, additive
processes which mix certain chemicals or other additives with the coal in order to
achieve emission reductions may qualify for the production tax credit for refined coal.
Accordingly, we conclude that (a) refined coal produced at the Facility using the
Process and the Chemical Reagents is “refined coal” within the meaning of § 45(c)(7),
provided the refined coal (i) is sold to an unrelated person within the meaning of §
45(c)(7) and (ii) meets the emission reduction requirement of § 45(c)(7)(B); and (b) an
increase in the rate of application of a Chemical Reagent per ton of feedstock coal
refined is not considered a “change in the process of producing refined coal from
feedstock coal” for purposes of section 6.04 of Notice 2010-54

    With respect to the third issue, the placed-in-service language in

§ 45(d)(8) focuses on the facility, and does not, by its terms, require the facility to have
been placed in service by the taxpayer claiming the credit. Section 5.01 of the Notice
provides that the refined coal credit is allowed for qualified refined coal produced and
sold to an unrelated person by the taxpayer, without regard to whether the taxpayer
owns the refined coal production facility in which the refined coal is produced.
Therefore, a taxpayer that leases or operates a facility owned by another person may
claim the credit for refined coal that the taxpayer produces in the facility. Accordingly,
we conclude that the lease of the Facility subsequent to its placed-in-service date will
not affect the placed-in-service date of the Facility for purposes of § 45 and will not
affect the determination of whether the lessee is eligible for production tax credits for
refined coal produced at the Facility.

   With respect to the fourth issue, § 45(d)(8) generally provides that a “refined coal

production facility” means a facility for the production of refined coal that was placed in
service after October 22, 2004, and before January 1, 2012. Section 5.02 of the Notice
2010-54 provides that when a facility is placed in service is determined in accordance
with § 1.46-3(d) of the regulations. In addition, section 5.02 provides that a refined coal
production facility will not be considered to have been placed in service after October
22, 2004 if more than 20 percent of the total fair market value of the facility (the cost of
the new property plus the value of the used property) is attributable to property that was
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placed in service on or before October 22, 2004. This rule provides a test for
determining whether modifications to a facility will result in a new placed in service date.
Accordingly, we conclude that If the Facility was “placed in service” prior to January 1,
2012 within the meaning of § 45(d)(8)(B) of the Code, any subsequent modification or
relocation of the Facility will not result in a new placed-in-service date for that Facility for
purposes of § 45, provided the fair market value of the original property of the Facility is
more than 20 percent of the Facility’s total fair market value at that time.

   With respect to the fifth issue, Taxpayer anticipates that it will continue to use

CEMS field testing to determine and redetermine the qualified emission reduction from
burning refined coal produced in the Facility. In general, Taxpayer anticipates that it will
conduct a single CEMS field test every six months using refined coal produced from
Blended Coal (Test Blend) containing 95% Location a coal and 5% Location b coal.
However, it may decide to conduct emissions testing using refined coal produced from
Blended Coal with a lower percentage of Location a coal. Taxpayer will treat Blended
Coals as comparable coal if the percentage of Location a coal in the Blended Coal is
within 5 percentage points of the percentage of Location a coal in the Test Blend (Test
Blend Range). For example, if Taxpayer conducts emissions testing using a Set Blend
containing 95% Location a coal and 5% location b coal, Blended Coals containing
between 90% Location a coal and 100% Location b coal will be treated as comparable
coals. If Taxpayer decides to begin producing refined coal from Blended Coal that is
outside the Test Blend Range, Taxpayer will conduct additional CEMS field testing.

   Thus, provided that the average of the Location a coal content and the Location b

content of the Blended Coal used to produce refined coal at the Facility remains within 5
percentage points above or below the percentage of Location a coal in a Test Blend
over a period of up to six months since the most recent determination test or
redetermination test, Taxpayer should not be required to conduct redetermination
testing based on a change in the source or rank of the feedstock coal. In other words, if
Taxpayer conducts CEMS field testing using refined coal produced from Blended Coal
containing 95% Location a coal, it should not be required to conduct redetermination
testing before the expiration of six months unless the Location a coal content of the
Blended Coal is reduced below 90%. Accordingly, we conclude that all feedstock coals
that are Blended Coals with a Location a content of +/-5% of the Location a coal content
of a Test Blend shall be treated as feedstock coals of the same source and rank as the
Test Blend for purposes of section 6.04 of Notice 2010-54 regardless of the mine from
which such feedstock is purchased.
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    This ruling expresses no opinion about any issue not specifically addressed in

this ruling letter, including (1) whether any person has sold refined coal to an unrelated
person, or (2) when the facility was “placed in service.” In particular, we express or
imply no opinion that the Taxpayer has sufficient risks and rewards of the production
activity to qualify as the producer of the refined coal. The Service may challenge an
attempt to transfer the credit to a taxpayer who does not qualify as a producer, including
transfers structured as partnerships, sales or leases that do not also transfer sufficient
risks and rewards of the production activity.

    In accordance with the Power of Attorney on file with this office, we are sending a

copy of this letter to your authorized representatives. A copy of this ruling must be
attached to any income tax return to which it is relevant. Alternatively, taxpayers filing
their returns electronically may satisfy this requirement by attaching a statement to their
return that provides the date and control number of the letter ruling.

    This ruling is directed only to the Taxpayer who requested it. Section 6110(k)(3)

of the Code provides it may not be used or cited as precedent. We are sending a copy
of this letter ruling to the Industry Director.

                                  Sincerely,



                                  Peter C. Friedman
                                  Senior Technician Reviewer, Branch 6
                                  Office of Associate Chief Counsel (Passthroughs
                                  & Special Industries)