Refined coal process and testing qualify for production credit rules

Plain-English summary

A company leased and operated a facility that applied two chemical reagents to coal to reduce nitrogen oxide and mercury emissions. The IRS ruled that coal produced through the described process could qualify as refined coal under IRC § 45 if it was sold to an unrelated person and met the required emissions reductions. Increasing the reagent application rate would not count as changing the production process, and leasing the facility after its original placed-in-service date would not reset that date. Later relocation or modification also would not create a new placed-in-service date if original property remained more than 20 percent of the facility's value. The IRS approved the proposed range for treating blended feedstocks as coal of the same source and rank and allowed specified laboratory analysis for redetermination testing. It did not rule on the facility's actual placed-in-service date, whether any sale was to an unrelated person, or whether the taxpayer bore enough production risk to claim the credit.

Ruling snapshot

• Question: Did the refined coal process, facility changes, blend range, and emissions testing receive the requested treatment under the § 45 credit rules?
• Outcome: Approved, subject to the stated sales, emissions, value, and testing conditions
• Key authorities: IRC §§ 45 and 613; Notice 2010-54

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201503002 Third Party Communication: None
Release Date: 1/16/2015 Date of Communication: Not Applicable
Index Number: 45.00-00
Person To Contact:
------------------------------- --------------------------, ID No. ----------------
--------------------------- -----------------
--------------------------------------------- Telephone Number:
---------------------- ----------------------
---------------------------------- Refer Reply To:

                                                          PLR-114638-14
                                                          Date:
                                                          September 16, 2014

LEGEND:
Taxpayer = -----------------------------------------------
Parent = -----------------------------------------------------------
------------------------
Corp A = ----------------------------------------------------------------
Corp B = ------------------------------
Corp C = ----------------------------------------------
Corp D = --------------------------------------------------------------------------------------

Corp E = ---------------------------------------------------------------
Corp F = ------------
State = --------------
Facility = ------------------------------------------
Power Plant 1 = -----------------------------------
Power Plant 2 = ---------------------------
Location 1 = ----------------------
Location 2 = -------------------------------
Location 3 = ------------------------------
Location 4 = -------------------------
Mine 1 = ---------------------
Mine 2 = --------------------
Date 1 = ------------------------
Date 2 = ------------------
Date 3 = ----------------
Date 4 = --------------------
Date 5 = ------------------------
Date 6 = -----------------------
Date 7 = ------------------
Date 8 = ------------------------
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Date 9 = ---------------------------
Year = -------
A = ------------------
B = ----------------------
C = -------
D = ---------
E = -----------------------------------------
a = -----
b = ----
c = --
d = ----
e = ----
f = ----
g = ----
h = --
i = ----
j = ----
Process = -------------
Process A = ---------------
Process B = ----------------

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

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

representative on Date 7, concerning the federal income tax consequences of the
transaction described below.

FACTS

Taxpayer Information

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

Corp A. Taxpayer was formed to lease and operate the 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 Corp A for such
purposes. Corp A, a State corporation, is wholly owned by Parent, a State corporation
that is the common parent of a consolidated group of companies whose members
include Corp A. Parent uses the accrual method of accounting and has adopted the
calendar year as its annual accounting period.

The Refined Coal Production Process

A. The Facility
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 Taxpayer has entered into an agreement to lease the Facility from Corp B for an

initial term beginning on Date 5, and ending on Date 8, with an option to renew for one
year terms with a final term ending on Date 9. Corp B is wholly owned by Corp C. The
Facility was designed and constructed by Corp 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.

The Facility was placed in service in Year at the Power Plant 1 in Location 1, and

owned by Corp D. After a period of negotiation, Corp D decided not to use refined coal
at the Power Plant 1 and the Facility was relocated in Date 2 to the Power Plant 2 in
Location 2. Except for the A, which had been configured to the specific requirements of
the Power Plant 1 site, all of the major components of the Facility were removed from
the Power Plant 1 site and installed at the Power Plant 2 site. The reassembly work at
the Power Plant 2 site included a new A, new B and work on the C. The Power Plant 2,
which is owned by Corp E, is a coal-fired and steam-producing power plant in regular
commercial operation.

B. The Process

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

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 Corp F to
Corp C, and have been sublicensed from Corp C to Taxpayer for the full term of the
lease of Facility from Corp B.

The Process involves the use of two separate inorganic chemicals (Chemical

Reagents) which are applied to locally mined D coal or a combination of D coal and E
coal (coal feedstock). The first Chemical Reagent, referred to as Process A, is a solid
material that 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, referred to as Process B, 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.

The 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 minimum proportion of each Chemical Reagent to be applied per ton of
feedstock coal is set based on previously verified emissions test results. The amount of
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each Chemical Reagent applied per ton of feedstock coal may be increased above, but
will not be decreased below, the per-ton amounts of such Chemical Reagents used to
produce the refined coal used in the most recent determination or redetermination
emissions testing.

C. Use of Blended Coal Feedstock

A majority of the coal burned in the Power Plant 2 is a percent D coal. However, the

Power Plant 2 also burns blended coal feedstocks consisting of D coal and E coal
(Blended Coal), generally in order to manage the sulfur dioxide (SO2) emissions and the
sodium content of the fuel burned in the Power Plant 2. The D coal burned in the Power
Plant 2 is obtained from the Mine 1 in Location 3, and the E coal is obtained from the
Mine 2 in Location 4. For the reasons described below, the percentage of D coal and
the percentage of E coal in the Blended Coal may vary on a day-to-day basis.

In order to deliver refined coal which satisfies the Power Plant 2’s specifications,

Taxpayer intends to produce refined coal using both a percent D coal and Blended Coal
composed of D coal and E coal obtained from the same mines that Corp E uses to
obtain its coal. The percentage of D coal and E coal in the coal used as a feedstock at
the Facility will vary as a result of two factors. First, Taxpayer may vary the composition
of the coal feedstock to satisfy the differing needs of the Power Plant 2. Second, while
the coal feeders will be set to feed D coal and E coal at a predetermined ratio, the
feeders are not precision instruments and there will be some variation in the percentage
of D coal and E coal in the Blended Coal in the short term. Nevertheless, the
percentage of D coal and E coal in the coal feedstock used by Taxpayer to produce
refined coal at the Facility will generally remain within a pre-determined range (Blend
Range), but may vary outside the range for short periods of time due to coal availability
and the operational requirements of the Power Plant 2.

Emissions Testing

A. Prior Emissions Testing

In Date 1, Corp C conducted full-scale emissions tests, using continuous emission

monitoring system (CEMS) field testing at the Power Plant 1, using E coal feedstock
and refined coal produced at the Facility from the E coal. Since the relocation of the
Facility to Power Plant 2 in Date 2, three additional sets of full-scale emissions tests
using CEMS field testing have been conducted. The first test, conducted in Date 3, was
conducted using coal feedstock consisting of b percent D coal and c percent E coal, and
refined coal produced at the Facility using the Process from the same coal feedstock.
The second test, conducted in Date 4, was conducted using coal feedstock consisting of
a percent D coal and refined coal produced at the Facility using the Process from the D
coal feedstock. The third test, conducted in Date 6, was conducted using coal
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feedstock consisting of d percent D coal and e percent E coal, and refined coal
produced at the Facility using the Process from the same coal feedstock.

Each emissions test were conducted in the following manner: To establish a

baseline for NOx and mercury emissions, one unit of the Power Plant 1 or the Power
Plant 2 was operated for a three-hour period at or above d percent of full load using coal
feedstock. The same 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 coal feedstock and the Chemical Reagents, applied at a
predetermined proportion.

During each baseline test and each test using refined coal, NOx and mercury

emissions were measured using CEMS equipment that conforms to applicable United
States EPA standards. The NOx CEMS devices were located upstream of post-
combustion NOx emissions controls. The mercury CEMS devices were located
downstream of any SO2 scrubber or mercury control device and downstream of the
electrostatic precipitator (ESP), which controls particulate emissions. Each CEMS field
test demonstrated a reduction in excess of f percent NOx emissions and a reduction in
excess of g percent of mercury emissions when burning refined coal produced in the
Facility (excluding dilution caused by materials combined or added during the
production process) when compared to emissions resulting from burning feedstock coal
to produce the same amount of useful thermal energy.

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, 2010-40 I.R.B. 403 (Notice),
including verification that the post-combustion NOx controls, the scrubber, and the ESP,
if any, were operated under the same conditions throughout the test period.

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. Taxpayer will treat Blended Coals and a percent D coal it uses to produce
refined coal as comparable coal of the same source and rank as the feedstock coal
(either a percent D coal or a Blended Coal) used to conduct the most recent
Determination Test (Test Coal) if the average percentage of D coal in the Blended Coal
is within 5 percentage points of the percentage of D coal in the Test Coal (Blend
Range). For example, if Taxpayer conducts emissions testing using Blended Coal
consisting of b percent D coal and c percent E coal, feedstock coals containing between
d percent and a percent D coal and between h percent and e percent E coal will be
treated as comparable coals. Taxpayer anticipates that the coal feedstock it uses to
produce refined coal will contain between h percent and i percent E coal. Therefore,
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Taxpayer expects to conduct two CEMS field tests every six months, one using Blended
Coals containing d percent D coal and e percent E coal, and the other using either a
percent D coal or Blended Coal containing c percent E coal, to establish a Blend Range
of coals containing h percent to i percent E coal and a percent to j percent D coal. If
Taxpayer decides to begin producing refined coal from Blended Coal that is outside the
Blend Range, Taxpayer will conduct additional CEMS field testing.

In determining whether the percentage of D coal and E coal in the Blended Coal it

uses to produce refined coal is within the Blend Range, Taxpayer will determine the
average blend of the coal feedstock it uses to produce refined coal over a period of up
to six months since the most recent determination tests or redetermination tests. If the
percentage of D coal and E 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 D coal and E coal in the Test Coal (either Test Coal if two tests were
conducted), Taxpayer will treat the coal feedstock used during that period as coals of
the same source and rank, and no redetermination testing will be required under the
end of the six-month period. If Taxpayer conducts two determination tests, one
determination test using a percent D coal (or Blended Coal containing b percent D coal
and c percent E coal) and a second determination test consisting of d percent D coal
and e percent E coal, the six-month average blend will be treated as comparable coal if
it contains between h percent to i percent E coal and between a percent to j percent D
coal.

C. Redetermination Testing

Taxpayer will conduct additional emissions tests using CEMS field testing or another

method permitted by Notice 2010-54 or any subsequent applicable IRS guidance 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 Coal; 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 or a change in the desired Blend Range.

RULINGS REQUESTED

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

1) Refined coal produced at the Facility using the Process (as defined below) and
the Chemical Reagents (as defined below) is “refined coal” within the meaning of
section 45(c)(7) of the Internal Revenue Code of 1986, as amended (the “Code”),
provided the refined coal (i) is sold to an unrelated person within the meaning of
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   section 45(c)(7) and (ii) meets the emission reduction requirement of section
   45(c)(7)(B).

2) An increase in the rate of application of a Chemical Reagent (as defined below)
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, 2010-40 I.R.B. 403.

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 section 45 and will not
affect the determination of whether the producer of refined coal is eligible for
production tax credits (“PTCs”) for refined coal produced at the Facility.

4) If the Facility was “placed in service” prior to January 1, 2012, within the meaning
of section 45(d)(8)(B), a subsequent relocation and replacement of certain parts
of the Facility in 2013, and any subsequent relocation or modification of the
Facility, will not result in a new placed-in-service date for that Facility for
purposes of section 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 with an average D coal content and E coal content of +/- 5
percentage points of the D coal content and E coal content of the Test Coal (as
defined below) shall be treated as feedstock coals of the same source and rank
as the Test Coal for purposes of section 6.04 of Notice 2010-54.

6) The redetermination requirement of section 6.04 of Notice 2010-54 may be
satisfied by laboratory analysis establishing that the sulfur and mercury content
of both the feedstock coal and the refined coal, on average, do not vary by more
than 10 percent below the bottom, or by more than 10 percent above the top, of
the range of the sulfur content and range of the mercury content of the feedstock
coal and the refined coal used in the most recent determination test or tests (as
defined below) conducted pursuant to section 6.03 of Notice 2010-54.

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) provides that, in the case of a producer of
“refined coal”, the credit available under § 45(a) 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 is (ii) sold by the
taxpayer to an unrelated person during such 10-year period and such taxable year.
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For purposes of § 45, 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; and
(2) 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) 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.

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.

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)) 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
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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) 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 requirements 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) of the
Notice; and (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) of the Notice.

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
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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 mercury (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; or (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 section 6.03 the
Notice.

 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: (1) a statement that the fuel will result in a qualified emissions
reduction when used in the production of steam; (2) 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.”

Finally, § 45(d)(8) provides that a refined coal production facility must be placed in

service within certain timeframes. For purposes of the refined coal credit allowable with
respect to refined coal other than steel industry fuel, the facility must be placed in
service after October 22, 2004 and before January 1, 2012. Section 3.07 of the Notice
provides that the year in which property is placed in service is determined under the
principles of § 1.46-3(d) of the regulations (i.e., when the property is placed in a
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condition or state of readiness and availability for a specifically assigned function).
Section 5.02 of the Notice provides that a refined coal production facility will not be
treated a placed in service after October 22, 2004 if more than 20 percent of the
facility's total value (the cost of the new property plus the value of the used property) is
attributable to property placed in service on or before October 22, 2004. The Notice
also states that the IRS will not issue private letter rulings relating to when a refined coal
production facility has been placed in service.

With respect to the first two rulings requested, 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) 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, the
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 the Notice.

With respect to the third ruling requested, 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 producer of refined coal is eligible for production
tax credits for refined coal produced at the Facility.
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With respect to the fourth ruling requested, § 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 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 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), 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 ruling requested, 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. Taxpayer expects to conduct two
CEMS field tests every six months, one using Blended Coals containing d percent D
coal and e percent E coal, and the other using either a percent D coal or Blended Coal
containing c percent E coal, to establish a Blend Range of coals containing h percent to
i percent E coal and a percent to j percent D coal. Taxpayer will treat Blended Coals
and a percent D coal it uses to produce refined coal as comparable coal of the same
source and rank as the feedstock coal (either a percent D coal or a Blended Coal) used
to conduct the most recent determination test if the percentage of D coal in the Blended
Coal is within 5 percentage points of the percentage of D coal in the Test Blend (Blend
Range). For example, if Taxpayer conducts emissions testing using Blended Coal
containing b percent D coal and feedstock coals containing between d percent and a
percent D coal and between h percent and e percent E 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 D coal content and the E coal content of the

Blended Coal used to produce refined coal at the Facility remains within 5 percentage
points above or below the percentage of D 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 b percent D coal, it
should not be required to conduct redetermination testing before the expiration of six
months unless the D coal content of the Blended Coal is reduced below d percent.
Accordingly, we conclude that all feedstock coals that are Blended Coals with a D coal
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content of +/-5% of the D 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 the
Notice regardless of the mine from which such feedstock is purchased.

With respect to the sixth ruling requested, section 6.04(2) of the Notice provides, in

part, 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 the sulfur and mercury content of both the feedstock coal and the
refined coal do not vary by more than 10 percent from the sulfur and mercury content of
the feedstock coal and refined coal used in the most recent redetermination that meets
the requirements of the Notice. Accordingly, we conclude the redetermination
requirement of section 6.04 of the Notice may be satisfied by laboratory analysis
establishing that the sulfur and mercury content of both the feedstock coal and the
refined coal, on average, do not vary by more than 10 percent below the bottom of (nor
more than ten percent above the top of) the range of the sulfur and mercury content of
the feedstock coal and refined coal used in the most recent determination that meets
the requirements of section 6.03 of the Notice.

This ruling expresses no opinion regarding 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 Taxpayer has sufficient risk or 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 representative. 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.
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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)