n-06-88.pdf

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Part III - Administrative, Procedural, and Miscellaneous

Section 45.--Electricity Produced from Open-loop-Biomass

Notice 2006-88

SECTION 1. PURPOSE

This notice sets forth interim guidance, pending the issuance of
regulations, regarding the tax credit under ' 45 of the Internal Revenue Code for
electricity produced from open-loop biomass.
SECTION 2. BACKGROUND
.01 In General
. Section 710 of the American Jobs Creation Act of 2004
(P.L. 108-357) amended ' 45 to add open-loop biomass to the definition of
qualified energy resources and to add open-loop biomass facilities to the
definition of qualified facilities. Section 1301 of the Energy Tax Incentives Act of
2005 (P.L. 109-58) added “any nonhazardous lignin waste material” to the
definition of open-loop biomass and extended the deadline for placing open-loop
biomass facilities in service to December 31, 2007. Section 402(b) of the Gulf
Opportunity Zone Act of 2005 (P.L. 109-135) amended the definition of open-loop
biomass to include “any lignin material.” As a result of these recent
amendments, the Internal Revenue Service has received requests for guidance
on the § 45 tax credit for electricity produced from open-loop biomass.

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Section 38(a) provides for a general business tax credit that includes the
amount of the current year business credit. Section 38(b)(8) provides that the
amount of the current year business credit includes the renewable electricity
production credit under ' 45(a).
Section 45(a) provides that the renewable electricity production credit for a
taxable year is 1.5 cents (adjusted for inflation) for each kilowatt hour of
electricity that the taxpayer (1) produces from qualified energy resources at a
qualified facility during the 10-year period beginning on the date the facility was
originally placed in service, and (2) sells to an unrelated person during the
taxable year.
.02 Open-Loop Biomass. (1) In General. Section 45(c)(1)(C) provides
that the term qualified energy resources includes open-loop biomass.
Section 45(c)(3)(A) defines the term “open-loop biomass” to mean:
(a) any agricultural livestock (including bovine, swine, poultry, and sheep)
manure and litter, including wood shavings, straw, rice hulls, and other bedding
material for the disposition of manure (agricultural livestock waste nutrients); or
(b) any solid, nonhazardous, cellulosic waste material or any lignin
material which is segregated from other waste materials and which is derived
from--
(i) any of the following forest-related resources: mill and harvesting
residues, precommercial thinnings, slash, and brush;

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(ii) solid wood waste materials, including waste pallets, crates, dunnage,
manufacturing and construction wood wastes, and landscape or right-of-way tree
trimmings; or
(iii) agricultural sources, including orchard tree crops, vineyards, grain,
legumes, sugar, and other crop by-products or residues.
(2) Exclusions. The term “open-loop biomass” does not include the
following:
(a) manufacturing or construction wood waste that has been pressure
treated, chemically treated, or painted;
(b) municipal solid waste as defined in ' 45(c)(6);
(c) gas derived from the biodegradation of solid waste;
(d) paper products that are commonly recycled (for example, office paper,
newspaper, paperboard, and cardboard);
(e) closed-loop biomass as defined in ' 45(c)(2); or
(f) biomass cofired with fossil fuel in excess of the minimum amount of
fossil fuel necessary for startup and flame stabilization.
.03 Qualified Open-Loop Biomass Facilities
. Section 45(d)(3)(A) provides,
in the case of a facility using open-loop biomass to produce electricity (an open-
loop biomass facility), that a qualified facility (a qualified open-loop biomass
facility) is any facility that is owned by the taxpayer and that--
(i) in the case of a facility using agricultural livestock waste nutrients, is
originally placed in service after October 22, 2004, and before January 1, 2008,
and has a nameplate capacity rating of not less than 150 kilowatts, or

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(ii) in the case of other facility, is originally placed in service before
January 1, 2008.
.04 Credit Rate
. Section 45(b)(4)(A) provides that the credit rate for
electricity produced at a qualified open-loop biomass facility is one-half the
amount in effect under ' 45(a)(1) for the calendar year in which the electricity is
sold.
.05 Credit Period
. (1) Facilities placed in service after August 8, 2005.
For qualified open-loop biomass facilities placed in service after August 8, 2005,
§ 45(b)(4)(B)(iii) provides that the 10-year credit period in § 45(a)(2)(A)(ii)
applies.
(2) Facilities placed in service after October 21, 2004, and on or before
August 8, 2005. For qualified open-loop biomass facilities placed in service after
October 21, 2004, and on or before August 8, 2005, ' 45(b)(4)(B)(i) provides that
the § 45 credit is determined by substituting the 5-year period beginning on the
date the facility was originally placed in service for the 10-year credit period in
' 45(a)(2)(A)(ii).
(3) Facilities placed in service before October 22, 2004
. For facilities
placed in service before October 22, 2004, § 45(b)(4)(B)(ii) provides that the § 45
credit is determined by substituting the 5-year period beginning on January 1,
2005, for the 10-year credit period in ' 45(a)(2)(A)(ii).
.06 Credit Eligibility
. If the owner of a qualified open-loop biomass facility
is not the producer of the electricity, § 45(d)(3)(B) provides that the person

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eligible for the credit allowable under ' 45(a) is the lessee or the operator of such
facility.
SECTION 3. RULES RELATING TO OPEN-LOOP BIOMASS
.01 Components of Facility. (1) In general. For purposes of ' 45(d)(3), an
open-loop biomass facility is a power plant consisting of all components
necessary for the production of electricity from open-loop biomass (and, if
applicable, other energy sources). Thus, a qualified open-loop biomass facility
includes all burners and boilers (whether or not burning open-loop biomass), any
handling and delivery equipment that supplies fuel directly to and is integrated
with such burners and boilers, steam headers, turbines, generators, and all other
depreciable property necessary to the production of electricity. The facility does
not include (i) property used for the collection, processing, or storage of open-
loop biomass before its use in the production of electricity, (ii) transformers or
other property used in the transmission of electricity after its production, or (iii)
ancillary site improvements, such as roadways and fencing, that are not
necessary to the production of electricity. Each power plant that is operated as a
separate integrated unit is treated as a separate facility for purposes of
§ 45(d)(3).
(2) Cogeneration
. A facility using open-loop biomass to produce both
electric energy and useful thermal energy, such as heat or steam, through the
sequential use of energy (cogeneration) may be a qualified open-loop biomass
facility.

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(3) Addition or improvement to an existing facility
. An open-loop biomass
facility will not be treated as originally 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. Similarly, an open-loop biomass facility will not be
treated as originally placed in service after August 8, 2005, 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
August 8, 2005.
(4) Example
. The following example illustrates the application of section
3.01 of this notice:
Example
. A power plant using fossil fuel was originally placed in service
before October 22, 2004. The power plant consists of a burner, a boiler, a steam
header, a turbine, and a generator. After October 22, 2004, one new burner and
boiler using open-loop biomass are added to the power plant. The new burner
and boiler are connected to the existing steam header, turbine, and generator in
the power plant. Under section 3.01(1) of this notice, the open-loop biomass
facility consists of the entire power plant that is operated as a separate integrated
unit and includes both the existing power plant and the new burner and boiler.
The fair market value of the existing power plant on the date the new burner and
boiler are placed in service exceeds 20 percent of the facility’s total value (the
cost of the new burner and boiler plus the value of the used property). Under
section 3.01(3) of this notice, the facility will not be treated as originally placed in

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service after October 22, 2004. Accordingly, ' 45(b)(4)(B)(ii) applies and the
credit period for the facility is the 5-year period beginning on January 1, 2005.
.02 Cofiring. (1) In general. Electricity produced from open-loop biomass
that is cofired with fuels other than fossil fuels may qualify for the ' 45 credit.
Electricity produced from the other fuel may separately qualify for the ' 45 credit
if the other fuel meets the definition of a qualified energy resource under ' 45(c)
and the facility is placed in service during the period specified in ' 45(d) for that
qualified energy resource.
(2) Cofiring with agricultural livestock waste nutrients
. If open-loop
biomass other than agricultural livestock waste nutrients is cofired with
agricultural livestock waste nutrients at a facility placed in service on or before
October 22, 2004, electricity produced from the open-loop biomass other than
agricultural livestock waste nutrients may qualify for the § 45 credit because the
facility is placed in service before January 1, 2008 (the generally applicable
placed-in-service deadline for purposes of determining whether electricity
produced from open-loop biomass qualifies for the § 45 credit). The electricity
produced from agricultural livestock waste nutrients does not qualify for the § 45
credit because the facility is not placed in service after October 22, 2004, and
before January 1, 2008 (the placed-in-service period for purposes of determining
whether electricity produced from agricultural livestock waste nutrients qualifies
for the § 45 credit).
(3) Cofiring with fossil fuel for startup and flame stabilization
. Electricity
produced from open-loop biomass that is cofired with fossil fuel may qualify for

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the ' 45 credit, but biomass will qualify as open-loop biomass only if the amount
of fossil fuel used is the minimum necessary for startup and flame stabilization.
See § 45(c)(3)(A) and section 2.02(2)(f) of this notice. If open-loop biomass is
cofired with the minimum amount of fossil fuel necessary for startup and flame
stabilization, only the electricity produced from the open-loop biomass can qualify
for the credit. The electricity produced from the fossil fuel used for startup and
flame stabilization does not qualify for the credit. In addition, if biomass (other
than closed-loop biomass) is cofired with fossil fuel in excess of the minimum
amount of fossil fuel necessary for startup and flame stabilization, the biomass is
not open-loop biomass and the electricity produced from the biomass does not
qualify for the ' 45 credit.
.03 Rules Relating To Sales
. (1) Simultaneous sale and purchase of
electricity. If electricity produced from open-loop biomass at any location is sold
by a taxpayer to an unrelated person and either the taxpayer or a related person
simultaneously purchases electricity from an unrelated person for use at the
same location, the sale of the electricity will be treated as a sale to an unrelated
person only to the extent the amount of electricity sold exceeds the amount of
electricity purchased.
(2) Sales of commingled electricity
. If a taxpayer produces electricity from
both open-loop biomass and other fuels and sells part or all of the electricity
produced to an unrelated party, only the applicable percentage of the electricity
sold to the unrelated party is treated as electricity produced from open-loop
biomass. The applicable percentage for this purpose is the percentage of the

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thermal content of all fuels used to produce the electricity that is thermal content
from open-loop biomass. Electricity is treated as produced from both open-loop
biomass and other fuels to the extent (i) open-loop biomass and other fuels are
commingled during combustion, (ii) steam produced from the combustion of
open-loop biomass and from the combustion of other fuels is commingled before
or during the production of the electricity, and (iii) electricity produced from open-
loop biomass and from other fuels is commingled before transmission to the
purchaser.
(3) Examples
. The following examples illustrate the application of section
3.03 of this notice:
Example 1. A qualified facility at a paper mill produces 100 kilowatt hours
of electricity per day. At all times, 25 percent of the thermal content of the fuels
used in the facility is from open-loop biomass and the remainder is from other
fuels. The facility uses separate boilers for the combustion of the open-loop
biomass and the combustion of other fuels, but the steam from both boilers is
commingled during the production of electricity. The entire electric output of the
facility is sold to a public utility. Each day, simultaneously with the sales, 60
kilowatt hours of electricity are purchased from a public utility to operate the
facility and the paper mill. Only 40 kilowatt hours of electricity per day (100
kilowatt hours sold minus 60 kilowatt hours purchased) will be treated as sold to
an unrelated party. In addition, only 10 kilowatt hours (25 percent of 40 kilowatt
hours) per day of the electricity sold to the unrelated party will be treated as
electricity produced from open-loop biomass.

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Example 2
. A qualified facility at a paper mill produces 100 kilowatt hours
of electricity per day. The entire electric output of the facility is sold to a public
utility. Each day, simultaneously with the sales, 120 kilowatt hours of electricity
are purchased from a public utility to operate the facility and the paper mill.
Because the amount of electricity sold is less than the amount of electricity
simultaneously purchased, none of the electricity will be treated as sold to an
unrelated party.
.04 Wood Bark And Lignin
. Open-loop biomass includes wood bark and
lignin material recovered from spent pulping liquors.
.05 No Rule Area. The Service will not issue private letter rulings
regarding ' 45 as it relates to open-loop biomass. In addition, the Service will
not rule on any issues under Subchapter K for partnerships claiming the credit
under ' 45.
SECTION 4. EFFECTIVE DATE
The Internal Revenue Service and Treasury Department are developing
regulations regarding the tax credit under § 45 of the Internal Revenue Code for
electricity produced from open-loop biomass. This notice provides interim
guidance on which taxpayers may rely until the regulations are issued. The
Service and Treasury Department expect that the regulations will incorporate the
rules set forth in this notice and will be effective for electricity produced after the
date of publication of this notice in the Internal Revenue Bulletin.

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SECTION 5. DRAFTING INFORMATION
The principal authors of this notice are David Selig and David McDonnell
of the Office of Associate Chief Counsel (Passthroughs and Special Industries).
However, other personnel from the IRS and Treasury participated in its
development. For further information regarding this notice, contact Mr. Selig or
Mr. McDonnell at (202) 622-3040 (not a toll-free call).