Refined coal process, testing, and facility changes qualify for credit treatment

Plain-English summary

A refined-coal business mixed proprietary additives into utility feedstock coal to reduce nitrogen oxide and mercury emissions during electricity generation. University pilot-scale tests reported reductions meeting the credit's thresholds of at least 20 percent for nitrogen oxide and 40 percent for mercury. The IRS ruled that the additive-treated product qualified as refined coal when the feedstock matched the tested source or rank and the emissions requirements continued to be met. It also approved treating coal from different mines as the same source and rank when it came from the tested source regions and ranks, along with the proposed pilot testing and laboratory redetermination methods. Test results could support production from the testing date even when the written report arrived after six months, provided the taxpayer received it within 90 days. A replacement facility using less than 20 percent equipment from an earlier facility had an independent placed-in-service date, while later relocation or replacement would not reset the date when used property exceeded 20 percent of total value. The IRS did not decide the facility's actual placed-in-service date or whether the taxpayer bore enough production risk to claim the credit.

Ruling snapshot

• Question: Do the taxpayer's additive process, emissions tests, coal-source rules, redeterminations, and facility modifications satisfy the refined coal credit rules?
• Outcome: Approved
• Key authorities: IRC §§ 45(a), 45(c)(7), 45(d)(8), 45(e)(8), 613(c); Treas. Reg. § 1.46-3(d); Notice 2010-54

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201528032                                              [Third Party Communication:
Release Date: 7/10/2015                                        Date of Communication: Month DD, YYYY]
Index Number: 45.00-00
                                                               Person To Contact:
-----------------------                                        ----------------------, ID No. -----------
--------------------------                                     Telephone Number:
-----------------------------------                            --------------------
------------                                                   Refer Reply To:
-----------------------------------                            CC:PSI:B06
                                                               PLR-143252-14
                                                               Date:
                                                               March 30, 2015




LEGEND:

Taxpayer          =        --------------------------
                  ----------------------
Company A         =        -------------------------------------------
Company B         =        ----------------------------------------------
Company C         =        ------------------------------------
Company D         =        -------------
Company E         =        -------------------------------------------
Company F         =        ------------------------------
Business A        =        --------------------------------------------------
Individual A      =        ------------------
Individual B      =        ----------------------
Individual C      =        -----------------
Individual D      =        ----------------------
Utility           =        -------------------------------------------------
Licensor          =        ----------------------
State A           =        ------------
State B           =        -----------------
State C           =        -----------
State D           =        ------------
State E           =        -----------------
Plant             =        ---------------------------
Date 1            =        ------
Date 2            =        ------
Date 3            =        ---------------------
Date 4            =        ------------------------
Date 5            =        ------------------
Date 6            =        -----------------
Date 7            =        ----------------------
PLR-143252-14                                           2

Date 8          =        ------------------------
Date 9          =        -----------------
Date 10         =        -----------------------
Date 11         =        ------------------------
Date 12         =        ------------------
Date 13         =        ---------------------------
Date 14         =        ----------------
Date 15         =        -----------------------
Date 16         =        ------------------
Date 17         =        -----------------------
Additive 1      =        --------------------
Additive 2      =        ----------------------
Center          =        ------------------------------------------------------------------------------------------
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Test Rep 1      =        ------------------------------------------------------------------------------------------
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Test Rep 2      =        ------------------------------------------------------------------------------------------
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Test Rep 3      =        ------------------------------------------------------------------------------------------
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Test Rep 4      =        ------------------------------------------------------------------------------------------
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Test Rep 5      =        ------------------------------------------------------------------------------------------
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Test Rep 6      =        ------------------------------------------------------------------------------------------
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Test Rep 7      =        ------------------------------------------------------------------------------------------
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Test Rep 8      =        ------------------------------------------------------------------------------------------
                         ------------------
Test Rep 9      =        ------------------------------------------------------------------------------------------
                         -----------
source region A          =         ----------------------------



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.

Background
PLR-143252-14                                 3

       Taxpayer, a State A limited liability company, is a calendar year taxpayer and
employs the accrual method of accounting for both book and tax purposes. The
members of Taxpayer are Company A, and Company B, each of which is a State A
limited liability company. The ultimate principal owners of Company A are Individual A,
Individual B, Individual C and Individual D. Those individuals have worked and invested
together in various projects since at least Date 1. Some of their prior projects included
the development, construction and operation of synthetic fuel production facilities and
waste coal processing facilities. Commencing in Date 2, the principals agreed to
develop a new refined coal business, including that conducted by Taxpayer.

        Company B is wholly owned by Company C, which is a State B corporation and
wholly owned, indirect subsidiary of Company D, a publicly traded State E corporation
that is primarily engaged through its subsidiaries in Business A. Company B is
disregarded as a separate entity from Company C for U.S. federal tax purposes.

        Taxpayer was organized on Date 3 to construct a facility for the production of
refined coal that was placed in service at a mine site in State C on or about Date 4 and
produced and sold refined coal with the expectation that it would be burned to produce
steam. However, due to unforeseen difficulties in identifying customers willing to enter
into long-term contracts to purchase refined coal, Taxpayer did not continue producing
refined coal after Date 5.

        Subsequently, on Date 6, Taxpayer entered into contracts with Utility to locate a
refined coal production facility on a site adjacent to Plant in State B, and to sell refined
coal produced in that facility to Utility. Because its existing facility did not meet the
functional requirements for producing refined coal at this new location, Taxpayer
constructed a new refined coal production facility. Less than twenty percent of the
equipment from Taxpayer’s original facility was incorporated into the new facility. That
is, after Date 6, the fair market value of the used components in the new facility were
less than twenty percent of the facility’s total value (the cost of the new property plus the
fair market value of the used property).

       In anticipation of the transaction with Company B described below, Taxpayer was
reorganized in Date 7. Pursuant to that reorganization, the membership interests in
Taxpayer were recapitalized into class A and class B interests. The class A interests
were contributed to Company A and the class B interests were contributed to Company
E. Each of Company A and Company E are classified as partnerships for U.S. federal
tax purposes.

       On Date 8, Company B acquired all of the class B membership interests in
Taxpayer from Company E in a transaction treated as a taxable sale or exchange of an
interest in a partnership for U.S. federal income tax purposes. Simultaneously,
Company A and Company B entered into a limited liability agreement with respect to
Taxpayer, setting forth their agreement regarding the respective rights and obligations
PLR-143252-14                                 4

of the class A and class B interest in Taxpayer, the management and related decision-
making of Taxpayer, and certain related matters.

         Pursuant to its agreements with Utility, Taxpayer purchases coal feedstock from
Utility. The coal supply agreement does not prohibit Taxpayer from purchasing coal
feedstock from third parties, and does not prohibit Taxpayer from purchasing more
feedstock coal than Utility would expect to buy from Taxpayer in the form of refined
coal.

         The feedstock coal purchased by Taxpayer typically is coal that Utility itself
purchased from third party vendors, consistent with its coal specifications. Taxpayer
uses the Process (as described below) to produce refined coal that it sells to Utility
pursuant to a refined coal sales agreement. All of the refined coal produced in the
facility is expected to be used as a fuel at Plant to produce steam for the generation of
electricity. However, any refined coal not purchased by Utility can be sold to one or
more third parties.

         Taxpayer has no employees. Rather, it entered into an operations and
maintenance agreement with Company F, a State A limited liability company and
affiliate of Company A. Pursuant to that agreement, Company F will operate, repair and
maintain the facility in accordance with an agreed operating plan, will make
arrangements to coordinate delivery of spare parts and supplies, will coordinate
deliveries of coal feedstock purchases and sales of refined coal, and will perform certain
administrative functions in support thereof. In addition, Company F will arrange for
testing of refined coal as described below.

Description of the Process

         The process at issue for production of refined coal currently employed at the
facility involves the mixing of proprietary chemicals (additives) with feedstock coal prior
to combustion (the Process). The patent for the Process is licensed by Licensor to
Taxpayer. Licensor is entitled to certain per ton royalties based on production for the
use of the technology. Test results have shown that when mixed with coal, the
proprietary additives result in reduced NOx, SO2 and mercury emissions during
combustion. Different chemicals are targeted at specific pollutants. Based on the
characteristics of the feedstock coal burned at the Plant, Taxpayer has chosen a
combination of additives that target the reduction of NOx and mercury. In the case of
NOx, Taxpayer understands that Additive 1 is believed to cause a portion of the NOx to
adhere to, or react with, the additive so that it can be captured and is not emitted. In the
case of mercury, Taxpayer understands that Additive 2 is believed to react with the
elemental mercury in the feedstock coal so that it is converted into a chemical species
of mercury (mercury oxide) that can be effectively captured by particulate control
devices.

Emissions Reduction Testing
PLR-143252-14                                 5

        For purposes of determining emissions reductions under § 45, Taxpayer will
arrange for pilot-scale combustion testing (and laboratory analysis for redetermination
purposes), and will not rely on any continuous emissions monitoring system or other
field testing. Taxpayer engaged the research center of a prominent university (the
Center) to conduct tests on behalf of Taxpayer at its pilot-scale combustion test facility
(CTF) to determine the emission reductions associated with burning the refined coal
compared to the feedstock coal. Center reports described below state:

       The CTF has been extensively used to research and investigate SOx and
       NOx emissions and the transformation of toxic trace metals (Hg [mercury],
       As, and Pb) during the combustion of coal and other fuels or waste
       materials. The CTF is capable of producing gas and particulate samples
       that are representative of those produced in industrial- and full-scale
       pulverized coal (pc)-fired boilers.

The CTF is capable of producing gas and particulate samples that are representative of
those produced in industrial and full-scale pulverized coal boilers, and has several
pollution control devices that may be used to reduce emissions, including an
electrostatic precipitator or fabric filter baghouse for particulate control, a selective
catalytic reduction column for NOx control, and a wet scrubber for control of sulfur
emissions. For purposes of qualifying the refined coal produced at the facility, Center
conducted pilot-scale combustion tests at its CTF on Dates 9, 10, 11, 12, 13, 14, 15, 16
and 17 on feedstock coal of the type typically burned at Plant. Center issued reports
with respect to each of those tests, which are referred to as Test Rep 1, Test Rep 2,
Test Rep 3, Test Rep 4, Test Rep 5, Test Rep 6, Test Rep 7, Test Rep 8 and Test Rep
9 (collectively, the “Test Reports”).

       Each Test Report explains that combustion gas analysis is provided by
continuous emissions monitors (CEMs) at two locations: the furnace exit, which is used
to monitor and maintain a specified excess air level for all test periods, and the outlet of
the particulate control device, which is used to assess any air inleakage that may have
occurred so that emissions of interest sampled at the back end of the system can be
corrected for the dilution caused by the inleakage. Flue gas analyses were obtained
from the duct at the outlet of the wet scrubber. Flue gas mercury measurements were
obtained separately by a continuous mercury monitor located at the flue gas ducting at
the exit of the wet scrubber. Center conducted a series of tests on the feedstock and
refined coal blend, measuring the emissions with these devices.

       Each Test Report states that the test results indicate that the blend of coal and
additives achieved the required reductions in both NOx and total mercury emissions
(both determined on a lb/Btu basis) to satisfy the requirements of at least 20% NOx
reduction and at least 40% mercury reduction. Each Test Report also states that it is
expected the emissions reduction reported would be achieved at full scale using the
additive levels tested.
PLR-143252-14                                6

Tested Coal

        The Plant currently burns coal obtained from various mines located in States B,
D and E, within source region A. Taxpayer produces refined coal using this coal and
sells that refined coal to Utility which burns it in the Plant to generate electricity from
steam. The rank of the coal burned at the Plant is classified by the American Society of
Testing Materials (ASTM) as bituminous coal.

      Taxpayer requested that Center test a blend of coal that represents the coal to
be used at the Plant (“Tested Coal”). The reports issued by Center state that the
emission reduction requirements outlined in § 45 for NOx and mercury were satisfied
when comparing the results of burning the endpoint fuel to the results of burning the
feedstock coal.

       Taxpayer expects to continue to operate with the blend and additive levels
discussed in the Center reports, which would be consistent with long-term patterns for
coal consumed at the Plant. To that end, samples will be taken for redetermination
testing within six months after the last emissions test satisfying the qualified emission
reduction requirement. Thereafter, within six months after such date, another set of
samples will be taken for redetermination testing. In each case, samples will be
collected and prepared in accordance with sampling and testing procedures set forth in
Taxpayer’s operating protocols. Although testing and preliminary reporting is done
timely, the Center often is not able to issue the final report until after the six-month
period.

        Although Taxpayer does not currently anticipate making changes to its coal
feedstock or additive levels, or using other coal sources or ranks, additional testing will
be conducted prior to acquiring coal feedstock from a different coal source region or of a
different ranks than reflected in the Tested Coal. In the case of a change in the additive
levels, tests will also be run at the new minimum levels of additive as the qualified
expert advises is necessary to conclude that a qualified emissions reduction will be
expected for the new levels of additive.

RULINGS REQUESTED

       Based on the foregoing, you have requested that we rule as follows:

        1. The refined coal produced by using the Process constitutes “refined coal”
within the meaning of §45(c)(7) of the Code, provided that such refined coal is produced
from feedstock coal that is the same source or rank as the “Tested Coal” and provided
further that the refined coal satisfies the qualified emission reduction test stated in
§45(c)(7)(B) of the Code.

      2. Provided that the feedstock coals used to produce refined coal during any
determination period are from the same coal source regions and of the same ranks as
PLR-143252-14                                 7

the Tested Coal, all feedstock coal that satisfies that criteria shall be treated as
feedstock coal of the same source and rank for purposes of section 6.04 of Notice
2010-54, regardless of the mines from which such feedstock coal is purchased.

       3. Testing by Center for qualified emissions reduction as set forth in its test
reports satisfies the requirements of Notice 2010-54. Pilot scale testing conducted at
Center (and subsequent permitted laboratory testing as required for a redetermination
described in section 6.04(2)(a) or (b) of Notice 2010-54) may be relied upon to satisfy
the qualified emission reduction test of §45(c)(7)(B) of the Code.

       4. Pursuant to section 6.04(2)(b) of Notice 2010-54, 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 ten percent below the bottom of (nor
more than ten percent above the top of) the range of sulfur content and the range of
mercury content of the feedstock coal and the refined coal used in the most recent
determination that meets the requirements of section 6.03 of Notice 2010-54.

       5. The results set forth by the Center in a redetermination test report for
production may be relied upon after the date of the testing even if the report is not
received until after the six month period specified in section 6.04(1)(i) of Notice 2010-54.

       6. The placed-in-service date for Taxpayer’s current facility will not be
determined by reference to the placed-in-service date for Taxpayer’s original facility,
provided that the fair market value of the property from the original facility incorporated
into the current facility was less than twenty percent of the current facility’s total value
(the cost of the new property plus the value of the used property) at the time it was
placed in service.

       7. Provided the facility was “placed in service” prior to January 1, 2012, within
the meaning of §45(d)(8), relocation of the facility to a different location after December
31, 2011, or replacement of part of a facility after that date, will not result in a new
placed in service date for the facility for purposes of §45 provided the fair market value
of the used property is more than twenty percent of the facility’s total value (the cost of
the new property plus the value of the used property) at the time of relocation or
replacement.

LAW AND RATIONALE

        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
PLR-143252-14                                  8

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.

       For purposes of §45 of the Code, section 3.01 of Notice 2010-54 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 the 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 3.04 of the Notice
provides that the term “qualified emission reduction” means, 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 forty percent (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.

      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.

        Section 6.01 of Notice 2010-54 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 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 are 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 through 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 remove
free water, provided such drying does not change the physical or chemical identity of
the coal, will be considered as mining.
PLR-143252-14                                 9

       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(a)(1) 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; and
(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 emission reduction. The permissible methods
include (a) testing using a demonstration pilot-scale combustion furnace if it establishes
that the method accurately measures the emission reduction that would be achieved in
a boiler described in section 6.03(1)(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).

         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 the feedstock coal that occurs
after the date of such determination or redetermination; 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 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 mercury
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 mercury content of both the feedstock coal and the
PLR-143252-14                                  10

refined coal do not vary by more than 10 percent from the S and mercury content of the
feedstock coal and refined coal used in the most recent determination that meets the
requirements of the Notice.

        Section 6.05 of the Notice provides that the certification requirement of section
3.01(1)(c) of the Notice is satisfied with respect to fuel for which the refined coal credit is
claimed only if the taxpayer attaches 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 the feedstock coal used in
the process of producing refined coal from feedstock coal since the emissions reduction
was most recently determined or redetermined; 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) of the Code 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
Notice 2010-54 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 condition or state of readiness and availability for a specifically assigned
function. Section 5.02 of Notice 2010-54 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. Notice 2010-
54 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 issue, the Process starts with several chemical additives
being added to the feedstock coal prior to its combustion in a furnace. The additives
provide the chemical structure that results in the reduction of emissions of nitrogen
oxide and mercury during combustion. Section 6.01 of the Notice provides generally
that a qualified emissions reduction does not include any reduction attributable to
mining processes or processes that would be treated as mining if performed by the
mine owner or operator. In the instant case, the Process is not a mining process.
Further, section 3.01 of the Notice clarifies §45(c)(7) of the Code and specifically
provides that refined coal includes feedstock coal mixed with additives. Thus, additive
processes that mix certain chemicals or other additives with the coal in order to achieve
emissions reductions may qualify for the refined coal production tax credit. Additionally,
PLR-143252-14                                11

section 3.03 defines comparable coal as coal that is of the same rank as the feedstock
coal and that has an emissions profile comparable to the emissions profile of the
feedstock coal. Accordingly, we conclude that the coal produced by using the Process
constitutes a “refined coal” within the meaning of §45(c)(7) of the Code, provided that
the refined coal (i) is produced from feedstock coal that is the same source or rank as
the “Tested Coal” and (ii) satisfies the qualified emission reduction test stated in
§45(c)(7)(B) of the Code.

        With respect to the second issue, the emissions profile of the refined coal product
is compared to the emissions profile of either the feedstock coal or a comparable coal
predominantly available in the marketplace as of January 1, 2003. Section 3.03 of the
Notice provides that a “comparable coal” is defined as coal that is of the same rank as
the feedstock coal and that has an emissions profile comparable to the emissions profile
of the feedstock coal. Section 6.04 of provides that a determination or redetermination
of a qualified emissions reduction is valid until 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 the feedstock coal that occurs
after the date of such determination or redetermination; 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. Accordingly, we conclude that provided that the
feedstock coals during any determination period are from the same coal source regions
and of the same ranks as the Tested Coal, all feedstock coal that satisfies that criteria
shall be treated as feedstock coal of the same source and rank for purposes of section
6.04 of Notice 2010-54, regardless of the mines from which such feedstock coal is
purchased.

         With respect to the third issue, section 6.03(3) of the Notice provides that any
permissible testing method provided for in the Notice can be used in emission testing for
any pollutant. That is, a taxpayer can use different testing methods for each of nitrogen
oxide, sulfur dioxide or mercury, provided the method used for any pollutant is a
permissible method. Section 6.04(1) provides that an emission test establishing a
“qualified emission reduction” qualifies the refined coal for a six-month period provided
there is no change in the process for producing the refined coal or in the source or rank
of the feedstock coal. Therefore, a taxpayer must “redetermine” the emission
reductions to qualify for the succeeding six-month period using one or more approved
methods. In the instant case, Taxpayer will arrange for pilot-scale combustion testing,
and will not rely on any continuous emissions monitoring system or other field testing,
which is permitted under section 6.03 of the Notice. Specifically, Taxpayer will arrange
with the Center to conduct testing (including redetermination testing) at its CTF to
determine the emissions reductions associated with burning the refined coal product
compared to the feedstock. For purposes of qualifying the refined coal produced at the
facility, the Center has conducted pilot-scale combustion tests at its CTF as
documented in the Test Reports. In conducting such tests, the Center conducted tests
on the feedstock, and then mixed a separate sample of the feedstock with the additives
PLR-143252-14                                 12

so that it could conduct tests on the refined coal product. In each of its reports, the
Center reported that the test results indicated that the blend of coal and additives
achieved the required emissions reductions. Based on the foregoing, we conclude that
testing by the Center for qualified emissions reductions as set forth in its test reports
(including interim reports) satisfies the requirements of Notice 2010-54. Qualified
emissions reduction through testing by the Center at its combustion research facility or
similar pilot-scale combustion testing facilities under Notice 2010-54 may be relied
upon.

        With respect to the fourth issue, section 6.04(2) of Notice 2010-54 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 that 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 ten percent below the bottom of (nor
more than ten percent above the top of) the range of sulfur content and the range of
mercury content of the feedstock coal and the refined coal used in the most recent
determination that meets the requirements of section 6.03 of Notice 2010-54.

        With respect to the fifth issue, it is intended that Taxpayer will engage in
redetermination testing every six months, or more frequently if required pursuant to
Notice 2010-54. However, the Center is not always able to issue the written report
required by section 6.03(2)(a) of Notice 2010-54 within the six month period. Thus,
although redetermination testing is completed within the six month period, the report
may be received after the six month period. Nonetheless, the Center informed
Taxpayer of the results of the test on the day of the tests so that it was able to take into
account the results of the redetermination within the six month period. Nevertheless,
the delay by the Center in issuing its report cannot be indefinite. Accordingly, we
conclude that the results set forth by the Center in a redetermination test report for
production may be relied upon after the date of testing even if the report is not received
until after the six-month period specified in section 6.04(1)(i) of Notice 2010-54, so long
as Taxpayer receives the written report within 90 days from the date of testing.
However, the redetermination of qualified emissions reduction must occur during the
earliest of the events described in section 6.04 of Notice 2010-54.

       With respect to the sixth issue, 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 twenty 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
PLR-143252-14                                 13

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. In this case, Taxpayer represents that when it constructed its current
facility at the Plant after Date 6, less than twenty percent of the equipment from
Taxpayer’s original facility was incorporated into the new facility. Accordingly, we
conclude that the placed-in-service date for Taxpayer’s current facility will not be
determined by reference to the placed-in-service date for Taxpayer’s original facility,
provided that the fair market value of the property from the original facility incorporated
into the current facility was less than twenty percent of the current facility’s total value
(the cost of the new property plus the value of the used property) at the time it was
placed in service.

       With respect to the seventh issue, during the life of the facility, Taxpayer may
decide to relocate the facility, and it may be necessary to replace certain major
components. In the event of relocation or replacement of a component, there should be
no change in the placed in service date of the facility as long as the test described in
section 5.02 of Notice 2010-54 has been met. Based on the foregoing, we conclude
that provided the facility was “placed in service” prior to January 1, 2012, within the
meaning of §45(d)(8), relocation of the facility to a different location after December 31,
2011, or replacement of part of the facility after that date, will not result in a new placed
in service date for the facility for purposes of §45 provided the fair market value of the
used property is more than twenty percent of the facility’s total value (the cost of the
new property plus the value of the used property) at the time of relocation or
replacement.

        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 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.
PLR-143252-14                               14



      This ruling is directed only to the taxpayer who requested it. Section 6110(k)3) of
the Code provides that 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)