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Audit Technique Guide for Sections 48A and 48B - Advanced Coal and Gasification Project Credits

LMSB-4-0209-005

NOTE: This document is not an official pronouncement of the law or the position of the Service and can not be used, cited, or relied upon as such. This guide is current through the publication date. Since changes may have occurred after the publication date that would affect the accuracy of this document, no guarantees are made concerning the technical accuracy after the publication date.

Table of Contents:

Chapter 1

Section 48A & 48B Introduction & Background
Section 48 A & B Application Process
UIL and SAIN Numbers Assigned:

Chapter 2

Section 48A & 48B Risk Analysis

Chapter 3

Determination and Reporting of Section 48 Credits
Qualified Investment Property Basis – Additional Guidance for §48A
Definition of Eligible Property for IGCC Projects
Placed in Service Requirement
Option to Elect Qualified Progress Expenditures
Application of Recapture Rules
Audit Technique Recommendations

Chapter 4

Section 48 Closing Agreements & MOU’s
Audit Techniques Recommendations

Chapter 5

Section 48 Qualified Progress Expenditures
Election in General
Time and Manner of Election
Qualified Progress Expenditures -Defined
Determination of Percentage of Completion
Application of Economic Performance Rules Under §461
Application of Recapture Rules
Audit Technique Recommendations

Chapter 6

Application of Recapture Rules
Successors in Interest 
Audit Techniques Recommendations
 

 


Chapter 1

Section 48A & 48B Introduction & Background

Section 46 provides that the amount of investment credit for purposes of § 38 for any taxable year is the sum of the credits listed in § 46. Section 1307(a) of the Energy Tax Incentives Act of 2005, Pub. L. 109-58, 119 Stat. 594 (August 8, 2005), (more commonly referred to as the Energy Policy Act of 2005 or EPA 2005), amended § 46 to add two new credits to that list:

  • The qualifying advanced coal project credit, (section 48A) and

  • The qualifying gasification project credit, (section 48B).

Section 48A Credit

For purposes of § 46, § 48A(a) provides that the qualifying advanced coal project credit for any taxable year is an amount equal to (1) 20 percent of the qualified investment for that taxable year in the case of any qualifying advanced coal project using an integrated gasification combined cycle, and (2) 15 percent of the qualified investment for that taxable year in the case of any other qualifying advanced coal project. The total amount of § 48A project credit available for award is $1.3 billion, of which $800 million will be allocated to integrated gasification combined cycle projects and $500 million will be allocated to other advanced coal projects, (2006 allocation figures).

Section 48B Credit

For purposes of § 46, § 48B(a) provides that the qualifying gasification project credit for any taxable year is an amount equal to 20 percent of the qualified investment for that taxable year in the case of any qualifying gasification project. The total amount of the §48B gasification project credit available for award is $350 million, (2006 allocation figure).

Gasification is any process that converts a solid or liquid product from coal, petroleum residue, biomass, or other materials that are recovered for their energy or feedstock value into a synthesis gas composed primarily of carbon monoxide and hydrogen for direct use or subsequent chemical or physical conversion.

Section 48 A & B Application Process

Taxpayer claims for the §§48A&B credits are subject to a competitive application and allocation process. Taxpayers are awarded an amount of credit based upon their qualified project application and a Department of Energy project feasibility certification and ranking of the application. An award acceptance letter is issued by IRS to all section 48 “award winner” applicants. Award winners must submit closing agreements in a format substantially similar to the closing agreements attached to the § 48A and § 48B notices referenced below.  The IRS will execute proper closing agreements (that provide for recapture and forfeiture of credits) with award winners.[1]   Section 48A projects require an additional project certification letter from IRS.  The §48A IRS certification (note that this is a separate and distinct certification from the Department of Energy project feasibility certification) must be applied for by the taxpayer within 2 years of the award acceptance letter. 

 


Footnote 1:  Beginning with the 2007 allocation round, the Internal Revenue Service issued Memorandum(s) of Understanding (MOU) regarding the taxpayer credit awards and project requirements. The MOUs effectively replace the closing agreements for this allocation round.  The MOUs are subject to amendment, provided the modification is in writing and the modification is agreed to and signed by all parties.  Subsequent allocation rounds returned to the use of closing agreements.  Thus all reference, discussion and instruction related to closing agreements also applies to MOUs. 

 


The following published IRS Notices provide the application and allocation procedures for the §§ 48A & B credits, for the Phase I allocation rounds.[2]

2008 Application & Allocation Procedures
   Section 48A – Notice 2008-96
   Section 48B – Notice 2008-97

2008 Special Allocation Procedures
   Section 48A – Notice 2008-26

2007 Application & Allocation Procedures:
   Section 48A – Notice 2007-52
   Section 48B -- Notice 2007-53

2006 Application & Allocation Procedures:
   Section 48A -- Notice 2006-24
   Section 48B – Notice 2006-25


Footnote 2:  This audit technique guide covers the Phase I allocation rounds conducted through Notices 2008-96 and 2008-97.  Future updates will incorporate the establishment of the Phase II allocation rounds and legislative changes enacted under Energy Improvement and Extension Act of 2008, Pub. L. 110-343, 122 Stat. 3765.

 


Caution!

The Energy Improvement Extension Act of 2008, Pub. L. 110-343, 122 Stat. 3765, was enacted on October 3, 2008. This legislation included various provisions that modified IRC Sections 48A and 48B.  These modifications will be incorporated in future Phase II allocation rounds.  Some significant items are summarized as follows:

  • Addition of $1,250,000,000 for new advanced coal project allocations under Section 48A and $250,000,000 for Section 48B.

  • Change from 15 to 20% investment tax credits to a new flat rate of 30%.

  • New provisions for carbon capture and sequestration equipment and priority allocations for plants that employ this technology.

  • Recapture provisions for failure to sequester carbon dioxide.

  • Priorities for research partnerships.

  • Requirements for IRS to disclose the identity of allocation applicants and amounts awarded upon certification.

Tax return claims for §§48A&B credits are based upon the cost basis of qualified property and limited to the taxpayer’s awarded credit amount.  All §48A projects must be placed into service for tax purposes within 5 years from the date of the IRS issued project certification letter.  All §48B projects must be placed into service for tax purposes within 7 years of the date of the IRS award acceptance letter.  Subject to an election under §46, taxpayers may claim §48 credits on Qualified Progress Expenditures.   

UIL and SAIN Numbers Assigned:

The following UIL and SAIN codes are to be used for §§48 A&B:

  • UIL Code:   48A-00-00,   SAIN Code: 604-06

  • UIL Code:   48B-00-00,   SAIN Code: 604-06

Chapter 2

Section 48A & 48B Risk Analysis

Risk assessment is an essential component of an effective issue management strategy. It should engage managers, examiners, and taxpayers at the earliest stage of the examination to determine the appropriate scope and duration of the examination. It should be used for all LMSB tax returns, Coordinated Industry Cases (CIC) and Industry Cases (IC), although the detail and depth of the process will vary according to the complexity of the tax return.  Reference IRM  4.46.3.

In conducting a risk analysis and evaluation of audit potential for taxpayers claiming the sections 48A & B credits, field examiners should keep in mind that this is an NRC National Program issue with high visibility and, (in addition to ensuring tax law compliance), correct tax administration is a key component of National Energy Policy. 

Application Files Available

All taxpayer credit allocation application files are maintained at NRC Headquarters in Houston, TX.  These files are extensive and can assist in risk assessment, issue examination and development.  Access to taxpayer applications can be obtained by contacting Marc Bernabo, Section 48 Program Manager, at 713-209-3958.

Section 48A Risk Analysis

The section 48A credit is equal to 20% of the qualified investment for integrated gasification combined cycle projects, (IGCC) and 15% of the qualified investment for projects which use other advanced coal-based generation technologies.  These investment credit rates apply to the Phase I allocation periods covered through Notices 2008-96 and 2008-97. 

Taxpayers claiming the section 48A credit must have the following:

  • An executed closing agreement  or MOU with the IRS stating the specifics of credit award

  • A certification letter from the IRS stating the taxpayer has met the provisions of §48A(e)(2).

Claims for the section 48A credit by taxpayers without these documents should be considered high risk and the issue should be included in the examination audit plan.  Only credit allocation award winners are entitled to claim the section 48A & B credit.

For taxpayers with proper documentation establishing the credit award, risk analysis considerations should include the following:

  1. Determine the total amount of credit awarded (see closing agreement or MOU). 

  2. Determine the amount of credit claimed in the current periods and consider materiality.

  3. Determine if any portion of the project was subsidized by financing provided under a Federal, State, or local program, a principal purpose of which is to provide subsidized financing for projects designed to conserve or produce energy.

  4. Estimate/determine the total qualified property basis claimed by the taxpayer.

  5. Has the taxpayer placed the property in service?  Consider issues and impact of placed in service rules under §§46 & 167.  If the project placed in service is an Other Advanced Coal-Based Technology, consider the impact of the performance requirements of §48A(f)(1)(B). 

  6. Has the taxpayer claimed Qualified Progress Expenditures?  (i.e., claimed the credit prior to placing the qualified property in service). Consider the issues and impact of the economic performance rules under § 461 and Qualified Progress Expenditure rules under former § 46.

  7. Consider the recapture provisions of §50(a) for any early disposition of qualified investment property, i.e. a disposition within 5 years of the placed in service date.

  8. Consider how much excess qualified investment property is available to the taxpayer, (i.e. qualified property basis in excess of basis necessary to support the awarded credit amount).  Large amounts of excess qualified property basis will tend to mitigate issue risk.

    For example, a taxpayer is awarded a section 48A credit allocation of $100 million for a qualified IGCC project.  Total qualified property basis necessary to support this credit allocation is $500 million, (20% x $500 = $100 million).  Pre-examination research and discussions with the taxpayer indicate that the entire project will have $1 billion in total qualified investment property.  In this instance, the excess qualified investment property basis is $500 million.   Consider that an audit adjustment re-classifying claimed qualified investment property to non- qualified property of at least $500 million would be required to impact the allocated $100 million credit. 

On the contrary, consider for example, a taxpayer with a $20 million credit allocation award for a $100 million IGCC project.   Taxpayer claims 100% of the $100 million project is qualified investment property.  The amount of excess qualified investment property is zero.  Any reclassification of claimed qualified property to non qualified investment property will impact the allocated $20 million credit.

Section 48B Risk Analysis

The section 48B credit is equal to 20% of the qualified investment for a qualifying gasification project.   This investment credit rates apply to the Phase I allocation periods covered through Notices 2008-96 and 2008-97.[3]

Taxpayers claiming the section 48B credit must have the following:

  • An executed closing agreement or a memorandum of understanding with the IRS stating the specifics of credit award

Claims for the section 48B credit by taxpayers without this document should be considered high risk and the issue should be included in the examination audit plan.  Only credit allocation award winners are entitled to claim the section 48A & B credit.

For taxpayers with proper documentation establishing the credit award, risk analysis considerations should include items 1 through 7 as listed for the §48A Credit Risk Analysis and a similar item 8 consideration using qualified investment in the gasification property to determine any excess qualified property basis.


Footnote 3:  This audit technique guide covers the Phase I allocation rounds conducted through Notices 2008-96 and 2008-97.  Future updates will incorporate the establishment of the Phase II allocation rounds and legislative changes enacted under Energy Improvement and Extension Act of 2008, Pub. L. 110-343, 122 Stat. 3765.  The qualified investment credit rate increased to 30% in the Phase II application periods.

 


Chapter 3

Determination and Reporting of Section 48 Credits

§§48 A & B credits are determined and reported on Form 3468 as part of the Investment Credit. 

Lines 3a and 3b of Form 3468 relate to the determination of §48A credits.  Line 4 of Form 3468 relates to the determination of §48B credit. 

The section 48A credit for advanced coal based generation projects that employ Integrated Gasification Combined Cycle (IGCC) technology is 20% of the basis in qualified property.  Reference §48A(c)(7) for the definition of Integrated Gasification Combined Cycle technology.  The section 48A credit for advanced coal projects that do not employ IGCC is 15% of the basis in qualified property.  Reference §48A(f) for the definition of advanced coal based generation technology. 

Qualified Investment Property Basis – Additional Guidance for §48A

In a generic legal advice memorandum, AM-2008-004 the Service provided additional guidance for determining eligible investment property for advanced coal project credits under §48A. 

The advice memorandum set forth the following four conclusions related to qualified property.

  1. For qualifying advanced coal projects using an integrated gasification combined cycle (IGCC), the “eligible property” under § 48A(c)(3)(A) means any property that is a part of the qualifying project and is necessary for the gasification of coal. 

  2. For qualified advanced coal projects using advanced coal technologies other than IGCC, the “eligible property” under § 48A(c)(3)(B) means any property that is a part of the qualifying project.  The eligible property includes steam turbines, generators, foundations for generators, foundations for the power trains, silos for storage of coal, blending facilities for coal, control boards for the plant, assets necessary for steam generation, and assets necessary for emission control.

  3. The amounts incurred in the qualifying advanced coal project generally must be capitalized under §§ 263 and 263A.  Please note that the treatment of costs incurred to acquire tangible property is the subject of a pending guidance project.  Proposed regulations under § 263 concerning the treatment of tangible assets were published on August 21, 2006.  Any change in these regulations when they are finalized might affect our analysis and conclusions.

  4. The qualified progress expenditures provisions of former § 46(d) only apply to expenditures that are for eligible property.  Thus, to the extent an expenditure is for an item of eligible property or for a cost that is capitalized into the basis of eligible property under §§ 263 and 263A, the expenditure qualifies for treatment as a qualified progress expenditure if the conditions of former § 46(d) are met.  The amounts treated as a qualified progress expenditure in a particular year are described in former § 46(d)(3)(A), in the case of self constructed property, and in former § 46(d)(3)(B), in the case of non self constructed property.

Definition of Eligible Property for IGCC Projects

Although not all inclusive, the advice provides the following:

For IGCC projects, only the property, (including any coal handling and gas separation equipment) that is a part of qualifying IGCC project and that is necessary for the gasification of coal, is eligible property.  Therefore, any property that is used in the qualifying IGCC project after the gasification of coal is completed is not an eligible property.  Furthermore, any property that is used prior to the completion of the coal gasification must be necessary for the gasification in order to be an eligible property. 

Accordingly, the assets that are necessary for the gasification train (including any necessary gas separation equipments to clean, and to separate out components of, the synthesis gas prior to combustion of the gas in the gas turbine) are part of qualifying IGCC project.   These assets are eligible property.  The blending facilities for coal and the silos for storage of coal may qualify as eligible property but only to the extent that such blending and storing of coal at the project site are necessary for the gasification of coal.  

Any transportation facilities that are used to transport the coal to the project site from another location are neither part of the project nor necessary for the gasification of coal.  Therefore, such transportation facilities are not eligible properties.  However, the coal handling facilities directly necessary for the IGCC projects such as facilities for feeding coal into the gasifier may qualify as eligible property. 

Other properties such as the steam turbine and generators that are part of the qualifying IGCC project do not qualify as eligible properties because they are not necessary to the gasification of coal.  The transmission lines also are not eligible properties because they are not part of a qualifying advanced coal project, as explained further below.

Other than IGCC Projects
 
For advanced coal projects other than IGCC, the statute provides a broader definition of eligible property.  Under § 48A(c)(3)(B), the eligible property is any property that is a part of qualifying advanced coal project.  Section 48A(c)(1) defines the term “qualifying advanced coal project” as a project that meets the requirements of § 48A(e).  Section 48A(e)(1)(C) describes a qualifying project as consisting of one or more electric generation units.  Under § 48A(e)(1)(D), the applicant must provide evidence that a majority of the output of the project is reasonably expected to be acquired or utilized.  Thus the qualifying project is the project for the production of electricity.  The qualifying project does not encompass the transmission of the electricity produced by the project.  Therefore, any property used beyond the property used for generation of electricity is not eligible property for purposes of § 48A(c)(3).  For example, transmission lines and rights of way or easements for transmission lines are not eligible property. 

As explained earlier, any transportation facilities that are used to transport the coal to the project site from another location are not eligible properties because transporting coal to the project site is not part of a qualifying project.  However, any part of the transportation facilities that is used directly for purposes of meeting the requirements of § 48A(e) may qualify as eligible property.  
 
Consequently, the eligible property for other than IGCC projects includes the following:

  • Steam turbine;

  • Generators and foundations for generators;

  • Foundations for the power train;

  • Assets that are necessary for the power train;

  • Silos for storage of coal;

  • Blending facilities for coal;

  • Control panels related to the qualified project:

  • Assets necessary for steam generation: and

  • Assets necessary for emission control.

Placed in Service Requirement

The credits are determined on the qualified basis of advance coal and gasification projects placed in service during the taxable year.  All §48A projects must be placed into service for tax purposes within 5 years from the date of the IRS issued project certification letter.  All §48B projects must be placed into service for tax purposes within 7 years of the date of IRS award acceptance letter. 

Option to Elect Qualified Progress Expenditures

Sections 48A(b)(3) and 48B(b)(3) provide that rules similar to the rules of former §§46(c)(4) and (d) to claim the investment credit on qualified progress expenditures (as defined in former §46(d)(3)) made by a taxpayer during the taxable year for the construction of progress expenditure property (as defined in former §46(d)(2)).  The credit on qualified progress expenditures is also determined and reported on Form 3468.

To claim the §48A or §48B project credit on qualified progress expenditures paid or incurred by a taxpayer during the taxable year for construction of a qualifying advanced coal or gasification project, the taxpayer must make an election under the rules set forth in §1.46-5(o) of the Income Tax Regulations.  A taxpayer may not make the qualified progress expenditures election until the taxpayer has received an acceptance letter for the project. 

See Chapter 5 for a full explanation of Qualified Progress Expenditures.

Application of Recapture Rules

If a taxpayer makes the qualified progress expenditures election, rules similar to the recapture rules in §50(a)(2)(A)-(D) apply.

For section 48A, in addition to the cessation events listed in §50(a)(2)(A), examples of other events that will cause the project to cease being a qualifying advanced coal project are:

(1) Failure to satisfy any of the certification requirements in § 48A(e)(2) within 2 years from the date that the Service accepted the taxpayer’s application for §48A certification for the project;

(2) Failure to receive a certification for the project;

(3) Failure to place the project in service within 5 years from the date of issuance of the certification letter; or

(4) In the case of an IGCC project that was entitled to priority under §48A(e)(3)(B), failure to provide the priority benefit on the date the project is placed in service.

For section 48B, in addition to the cessation events listed in §50(a)(2)(A), examples of other events that will cause the project to cease being a qualifying gasification project are:

(1) Failure to place the project in service within 7 years from the date of the acceptance letter; or

(2) In the case of a project that was entitled to priority for carbon capture capability, failure to provide that priority benefit on the date the project is placed in service.

Audit Technique Recommendations

  1. Obtain and review Form 3468.

  2. Ensure the basis claimed for the qualified project is reported on the correct line using the correct investment credit percentage.

  3. Determine if the project has met the placed in service date requirements.  See the discussion paper on Section 48 A & B Placed in Service, noting that §48B facilities will not have the added requirement of “synchronization to the grid” to be placed in service.

  4. Determine if the taxpayer has elected to claim the credit on Qualified Progress Expenditures (QPEs).  If so request a copy of the project acceptance letter and see Chapter 5 of this ATG relating to Qualified Progress Expenditures.

  5. Request a detailed itemized break down of the claimed qualified basis.

  6. For §48A claims, reference Generic Legal Advice Memorandum (GLAM) AM 2008-004 regarding guidance on the definitions of qualified §48A property.  Review and compare the taxpayers claimed qualified property expenditures to the guidance provided in GLAM 2008-004.

  7. For Other Advanced Coal Based Generation Technology, (non IGCC), §48A facilities that are already  placed in service, you may want to request the taxpayer’s current Design Net Heat Rate computations to ensure the facility has a net heat rate of 8530 BTU/kWh (40% efficiency).   See §48A(f)(1)(A)(ii) and §48A(f)(2).  (Note that these computations are dependent upon the input coal BTU value use to fuel the facility.)  Consider requesting an Engineer to verify these computations. 

  8. For Other Advanced Coal Based Generation Technology, (non IGCC), §48A facilities that are already placed in service, you may want to request the taxpayer’s documentation substantiating that the performance requirements of §48A(f)(1)(B) have been met and ensure the measurement criteria used for determining the performance standards are in accordance with current industry practices.  Note that many facilities have continuous emission monitoring systems (CEMS) installed to collect emission data for environmental reporting purposes.   Consider requesting an Engineer to verify this data.

  9. Determine if any of the recapture rules or events under in §50(a)(2)(A)-(D) apply.

Exhibit 1:  Section 48 A&B Placed in Service Guidance

Chapter 4

Section 48 Closing Agreements & MOU’s

Each §§48 A and B credit award winner is required to execute a closing agreement with the Service.  The closing agreement applies only to the accepted taxpayer.  Any successor in interest must execute a new closing agreement with the Service no later than the due date of the successor in interest’s Federal income tax return for the taxable year in which the transfer occurs.  If a successor in interest does not execute a new closing agreement the following rules apply:

a) In the case of an interest acquired at or before the time the qualifying advanced coal or qualifying gasification  project is placed in service, any credit allocated to the project will be fully forfeited (and rules similar to the recapture rules of § 50(a) apply with respect to qualified progress expenditures); and

(b) In the case of an interest acquired after the qualifying advanced coal or qualifying gasification project is placed in service, the project ceases to be investment credit property and the recapture rules of § 50(a) (and similar rules with respect to qualified progress expenditures) apply.

Caution!

Beginning with the 2007 allocation round, the Internal Revenue Service issued Memorandum(s) of Understanding (MOU) regarding the taxpayer credit awards and project requirements. The MOUs effectively replace the closing agreements for this allocation round.  The MOUs are subject to amendment, provided the modification is in writing and the modification is agreed to and signed by all parties.  Subsequent allocation rounds returned to the use of closing agreements.  Thus all reference, discussion and instruction related to closing agreements also applies to MOUs. 

Caution!

The Food, Conservation, and Energy Act of 2008, (also referred to as the 2008 Farm Bill) (Pub. L.110-246 H.R. 6124), was enacted May 22, 2008.  This legislation included provision 15346 - Competitive Certification Awards modification authority relating to qualified advanced coal project credit.

The provision gives the Secretary the authority to modify certification awards and closing agreements related to section 48 A&B credits.  As a consequence, examiners should be aware that any closing agreements entered into during the allocation process are subject to modification pursuant to the circumstances defined below:

  • The changes to the certification awards and closing agreements must be consistent with objectives of the section(s) and

  • The change is requested by the recipient of the competitive certification award, and

  • The change request involves the moving of the project site to:


    1. improve potential to capture and sequester carbon dioxide,

    2. reduce costs of feedstock transportation, and

    3. serve a broader customer base

  • Any Modification is prohibited


    1. If the dollar amount of tax credits would increase as a result of the modification, or

    2. Where such modification would result in the project not originally being certified.

  • The effective date of the provision is the date of enactment and the provision applies to all §§48A & 48B certifications and closing agreements.

Audit Techniques Recommendations

  1. Request and review a copy of the executed closing agreement/MOU.

  2. Ensure any successor in interest (if any) has executed a new closing agreement/MOU.

  3. Audit the closing agreement or MOU:

a. Each closing agreement/MOU will have numerous determinations, agreements and performance requirement items.  These closing agreement items will have specific requirements such as placed in service dates, emission, fuel input, name plate and design capacity, and carbon capture requirements, etc., that if not met, will trigger credit forfeiture and recapture under §50(a) or proportionate reductions to the allocated credit amount.

b. Applicable items of the closing agreement/MOU should be reviewed and checked for compliance.  Because of the long time frames for project construction, not all items of the closing agreement will be applicable to the current audit.  For example, each section 48A closing agreement will have a certification requirement under §48A(e)(2) and a beginning date that starts the certification period.  Examiners should ensure that if the certification deadline has passed, a certification letter was issued by the Service.  In contrast, emission and performance requirements referenced in a closing agreement for a facility not yet placed in service would not be an applicable item for the current audit.

Chapter 5

Section 48 Qualified Progress Expenditures

Sections 48A(b)(3) and 48B(b)(3) provide that rules similar to the rules of former §§46(c)(4) and (d) to claim the investment credit on qualified progress expenditures made by a taxpayer during the taxable year for the construction of progress expenditure property (as defined in former §46(d)(2)) apply for purposes of these sections.

To claim the §48A or §48B project credit on qualified progress expenditures paid or incurred by a taxpayer during the taxable year for construction of a qualifying advanced coal or gasification project, the taxpayer must make an election under the rules set forth in §1.46-5(o) of the Income Tax Regulations.  A taxpayer may not make the qualified progress expenditures election until the taxpayer has received an acceptance letter for the project. 

Election in General

Treasury Regulation § 1.46-5(o)(1) provides in part that the election under section 46(d)(6) to increase qualified investment by qualified progress expenditures may be made for any taxable year ending after December 31, 1974. Except as provided in paragraph (o)(2) of this section, the election is effective for the first taxable year for which it is made and for all taxable years thereafter unless it is revoked with the consent of the Commissioner. Except as provided in paragraphs (o)(2) and (3) of this section, the election applies to all qualified progress expenditures made by the taxpayer during the taxable year for construction of any progress expenditure property. Thus, the taxpayer may not make the election for one item of progress expenditure property and not for other items. If progress expenditure property is being constructed by or for a partnership, S corporation (as defined in section 1361(a)), trust, or estate, an election under section 46(d)(6) must be made separately by each partner or shareholder, or each beneficiary if the beneficiary, in determining his tax liability, would be allowed investment credit under section 38 for property subject to the election.

Time and Manner of Election

Treasury Regulation § 1.46-5(o)(2) provides in part that an election under §46(d)(6) must be made on Form 3468 and filed with the original income tax return for the first taxable year ending after December 31, 1974 to which the election will apply.  In addition, the election may not be made on an amended return filed after the time prescribed for filing the original return (including extensions) for that taxable year.

Qualified Progress Expenditures -Defined

For purposes of §46, qualified progress expenditures are defined as –

(A) Self-constructed property.--In the case of any self-constructed property, the term "qualified progress expenditures" means the amount which is properly chargeable (during such taxable year) to a capital account with respect to such property.

And

(B) Non-self-constructed property.--In the case of non-self-constructed property, the term "qualified progress expenditures" means the lesser of—

(i) the amount paid during the taxable year to another person for the construction of such property,

or

(ii) the amount which represents that proportion of the overall cost to the taxpayer of the construction by such other person which is properly attributable to that portion of such construction which is completed during such taxable year.

Excess amounts paid for non-self-constructed property can be carried over into the succeeding taxable year.  §46(d)(4)(C).

The term "self-constructed property" means property more than half of the construction expenditures for which it is reasonable to believe will be made directly by the taxpayer.

The term "non-self-constructed property" means property which is not self-constructed property.

The term "construction" includes reconstruction and erection, and the term "constructed" includes reconstructed and erected.

Determination of Percentage of Completion

In the case of non-self-constructed property, the determination of the proportion of the overall cost to the taxpayer of the construction of any property which is properly attributable to construction completed during any taxable year shall be made on the basis of engineering or architectural estimates or on the basis of cost accounting records. Unless the taxpayer establishes otherwise by clear and convincing evidence, the construction shall be deemed to be completed not more rapidly than ratably over the normal construction period.  §46(d)(4)(D).

Application of Economic Performance Rules Under §461

In the case of self-constructed property, former §46(d)(3)(A) defined qualified progress expenditures to mean the amount that is properly chargeable (during the taxable year) to the capital account with respect to that property.  With respect to a qualifying advanced coal project that is self-constructed property, amounts paid or incurred are chargeable to the capital account at the time and to the extent they are properly includible in computing basis under the taxpayer’s method of accounting (for example, after applying the requirements of §461, including the economic performance requirement of §461(h)).

Component Parts

Property which is to be a component part of, or is otherwise to be included in, any progress expenditure property shall be taken into account--

(i) at a time not earlier than the time at which it becomes irrevocably devoted to use in the progress expenditure property, and

(ii) as if (at the time referred to in clause (i)) the taxpayer had expended an amount equal to that portion of the cost to the taxpayer of such component or other property which, for purposes of this subpart, is properly chargeable (during such taxable year) to the capital account with respect to such property. §46(d)(4)(A).

Certain Borrowings Disregarded

Any amount borrowed directly or indirectly by the taxpayer from the person constructing the property for him shall not be treated as an amount expended for such construction.  §46(d)(4)(B).

Application of Recapture Rules

If a taxpayer makes the qualified progress expenditures election, rules similar to the recapture rules in §50(a)(2)(A)-(D) apply.
For Section 48A, in addition to the cessation events listed in §50(a)(2)(A), examples of other events that will cause the project to cease being a qualifying advanced coal project are:

(1) Failure to satisfy any of the certification requirements in §48A(e)(2) within 2 years from the date that the Service accepted the taxpayer’s application for §48A certification for the project;

(2) Failure to receive a certification for the project;

(3) Failure to place the project in service within 5 years from the date of issuance of the certification letter; or

(4) In the case of an IGCC project that was entitled to priority under §48A(e)(3)(B), failure to provide the priority benefit on the date the project is placed in service.

For Section 48B, in addition to the cessation events listed in §50(a)(2)(A), examples of other events that will cause the project to cease being a qualifying gasification project are:

(1) Failure to place the project in service within 7 years from the date of the acceptance letter; or

(2) In the case of a project that was entitled to priority for carbon capture capability, failure to provide that priority benefit on the date the project is placed in service.

Caution!

The recapture provisions cited above apply to the Phase I allocation periods covered through Notices 2008-96 and 2008-97.  Additional recapture provisions apply to allocations made during the Phase II periods established under the Energy Improvement Extension Act of 2008, Pub. L. 110-343, 122 Stat. 3765.  These additional recapture provisions will be included in future updates to this ATG.

Audit Technique Recommendations

  1. Access and review former code section 46(d) related to Qualified Progress Expenditures.  Treasury Regulation §1.46-5 provides guidance on the definition and determination of qualified progress expenditures.

  2. If the taxpayer has elected to claim the credit on Qualified Progress Expenditures, request the work papers used to determine the amount qualified progress expenditures claimed for the taxable year.  This should include a detailed itemized breakdown of claimed qualified expenditures and whether the expenditures were for self-constructed or non-self-constructed property.

  3. For §48A claims, reference Generic Legal Advice Memorandum (GLAM) AM-2008-004 regarding guidance on the definitions of qualified §48A property.  Review and compare the taxpayers claimed qualified property expenditures to the guidance provided in GLAM AM 2008-004.

  4. Categorize the expenditures between Self- Constructed and Non- Self- Constructed property. 

  5. Determine the total amounts paid for non- self- constructed property.  Determine percentage of construction completed for non- self- constructed property.  The qualified progress expenditure is equal to the lesser of the amounts paid or the pro rata (percent complete) portion attributable to construction completed in the taxable year. 

    For example a taxpayer enters a $500,000 contract for the construction of qualified §48 property.  The construction period is 5 years.  Construction progress is assumed to occur ratably over the 5 years which is 20% per year.  In year one the taxpayer makes a $200,000 payment to the contractor.  Because the $200,000 is greater than the percentage of completion limitation of $100,000 (20% of $500,000), the taxpayer is limited to $100,000 as a qualified progress expenditure.  The excess $100,000 paid in year 1 is carried over into the year 2 determination of qualified progress expenditures.

    If the taxpayer incurred $100,000 costs for self- constructed property in year 1 in addition to the $500,000 contract for non-self- constructed property, then the taxpayer’s qualified progress expenditure would be $200,000 in year 1, ($100,000 paid for self- constructed property plus $100,000 attributed to the percentage of completion limitation paid for non- self- constructed property).

  6. Depending upon the results of your risk analysis (See Chapter 2), you may want further documentation of claimed qualified property to ensure the economic performance rules under IRC §461 have been met.

Chapter 6

Application of Recapture Rules

The at-risk rules in §49 and the recapture and other special rules in §50 apply to the qualifying advanced coal and gasification project credits.

§50 provides for recapture in the case of dispositions, etc.
 
§50(a)(1)(A) GENERAL RULE. —If, during any taxable year, investment credit property is disposed of, or otherwise ceases to be investment credit property with respect to the taxpayer, before the close of the recapture period, then the tax under this chapter for such taxable year shall be increased by the recapture percentage of the aggregate decrease in the credits allowed under section 38 for all prior taxable years which would have resulted solely from reducing to zero any credit determined under this subpart with respect to such property.

If a taxpayer makes the qualified progress expenditures election, rules similar to the recapture rules in §50(a)(2)(A)-(D) apply.

For section 48A, in addition to the cessation events listed in §50(a)(2)(A), examples of other events that will cause the project to cease being a qualifying advanced coal project are:

(1) Failure to satisfy any of the certification requirements in § 48A(e)(2) within 2 years from the date that the Service accepted the taxpayer’s application for §48A certification for the project;

(2) Failure to receive a certification for the project;

(3) Failure to place the project in service within 5 years from the date of issuance of the certification letter; or

(4) In the case of an IGCC project that was entitled to priority under §48A(e)(3)(B), failure to provide the priority benefit on the date the project is placed in service.

For section 48B, in addition to the cessation events listed in §50(a)(2)(A), examples of other events that will cause the project to cease being a qualifying gasification project are:

(1) Failure to place the project in service within 7 years from the date of the acceptance letter; or

 (2) In the case of a project that was entitled to priority for carbon capture capability, failure to provide that priority benefit on the date the project is placed in service.

Caution!
The recapture provisions cited above apply to the Phase I allocation periods covered through Notices 2008-96 and 2008-97.  Additional recapture provisions apply to allocations made during the Phase II periods established under the Energy Improvement and Extension Act of 2008, Pub. L. 110-343, 122 Stat. 3765.[4]

 


Footnote 4:  This audit technique guide covers the Phase I allocation rounds conducted through Notices 2008-96 and 2008-97.  Future updates will incorporate the establishment of the Phase II allocation rounds and legislative changes enacted under Energy Improvement and Extension Act of 2008, Pub. L. 110-343, 122 Stat. 3765.

 


 

Successors in Interest

Any successor in interest in project with a previously awarded §48A or §48B credit must execute a new closing agreement or MOU with the Service no later than the due date (including extensions) of the successor in interest’s Federal income tax return for the taxable year in which the transfer occurs. If the successor in interest does not execute a new closing agreement or MOU, the following rules apply:

(a) In the case of an interest acquired at or before the time the qualifying advanced coal project is placed in service, any credit allocated to the project will be fully forfeited (and rules similar to the recapture rules of § 50(a) apply with respect to qualified progress expenditures); and

(b) In the case of an interest acquired after the qualifying advanced coal project is placed in service, the project ceases to be investment credit property and the recapture rules of § 50(a) (and similar rules with respect to qualified progress expenditures) apply.

Audit Techniques Recommendations

  1. Determine if any of the recapture rules or events under §50 apply.

  2. Notify the section 48 project manager, of any §48A or §48B recapture or forfeiture amounts.  All recaptured credits are to be returned to the Treasury for future allocations.  The section 48 project manager is Marc Bernabo and can be reached at 713-209-3958.

 


Exhibit I

Section 48 A & B Placed in Service Guidance

In general, property is placed in service in the taxable year the property is placed in a condition or state of readiness and availability for a specifically designed function. See Treas. Reg. §§ 1.46-3(d) 1) (ii) and 1.167(a)-11(e)(1) (i). Placed in service has the same meaning for sections 48A & B as it does for purposes of the investment tax credit under section 46 and depreciation under section 167. Treas. Reg. § 1.46-3(d)2) provides examples of when property is in a condition of readiness and availability. One example relates to equipment acquired for a specifically assigned function and is operational but undergoing tests to eliminate defects. See also Rev. Rul. 79-40, 1979-1 C.B. 13 (machinery and equipment were placed in service in the year critical tests with appropriate materials and operational tests were completed).

Several Tax Court cases have addressed placed in service questions in the context of electric power plants. Oglethorpe Power Corp. v. Commissioner, T.C. Memo. 1990-505 and Consumers Power Co. v. Commissioner, 89 T.C. 710 (1987) are clear that facilities can be deemed placed in service upon sustained power generation near rated capacity. A facility may still be considered placed in service if it operates on a regular basis but does not produce the projected output. Sealy Power, Ltd v. Commissioner, 46 F.3d 382 (5th Cir.1995), nonacq. 1996-1 C.B. 6. In the Action on Decision for Sealy Power, the Service stated its position that to be considered placed in service the property at a minimum needs to have been in a state of readiness sufficient to produce electricity on a sustained and reliable basis in commercial quantities. AOD 1995-10. In Rev. Rul. 84-85, 1984-1 C.B. 10, a solid waste facility that was experiencing operational problems of such magnitude that it was unable to operate at its rated capacity was nevertheless considered to have been placed in service since it was being operated on a regular basis and saleable steam was being produced. However, if a facility is operating merely on a test basis, it is not placed in service until it is available for service on a regular basis. Consumers Power, 89 T.C. at 710.

The following factors are applicable to electric generating power plants in determining placed in service:

(1) Approval of required licenses and permits;

(2) Passage of control of the facility to taxpayer;

(3) Completion of critical tests;

(4) Commencement of daily or regular operation; and

(5) Synchronization to the grid.

See, generally, Rev. Rul. 76-256, 1976-2 C.B. 46; Rev. Rul. 76-428, 1976-2 C.B. 47. In Rev. Rul. 84-85, 1984-1 C.B. 10, the Service found that reaching the design capacity was not a prerequisite to a determination that a facility was placed in service. The Service looked to daily operation of the facility to determine the placed in service date.

In Valley Natural Fuels v. Commissioner, T.C. Memo. 1991-341, aff'd in an unpublished opinion, 990 F.2d 1266 (9th Cir. 1993), the Court required an ethanol plant to be producing ethanol of the quality for which the plant was designed prior to being placed in service. In Noell v. Commissioner, 66 T.C. 718 (1976), the rock base of an airplane runway was laid and used prior to the installation of the pavement atop the base in a subsequent tax year. The Court held that the runway was not in a condition or state of readiness until it was paved, explaining that the rock surface was only a stage of construction which could not be used on a permanent basis.

If the facility is composed of several component parts that are functionally
interdependent, the component parts will be treated as one unit of property and they will not be treated as placed in service until the date that the last component is installed and the facility becomes operational. See, e.g., Valley Natural Fuels, supra; Armstrong World Industries, Inc. v. Commissioner, 974 F.2d 422 (3rd Cir. 1992).

It is axiomatic that property cannot be “placed in service” in a trade or business until the underlying trade or business begins. Wall v. Commissioner, T.C. Memo. 1992-321 (no depreciation and no energy credit allowable in a year in which no active trade or business is undertaken). See Piggly Wiggly Southern, Inc. v. Commissioner, 84 T.C. 739, 748 (1985), nonacq. on another issue, 1988-2 C.B. 1, aff’d on another issue, 803 F.2d 1572 (11th Cir. 1986) (assets may be "placed in service" even though not yet in actual use if in a state of readiness and available for a specifically assigned function in an established trade or business).

Page Last Reviewed or Updated: 30-Jan-2014