Originally published June 26, 2008
On June 25, 2008, the Internal Revenue Service ("IRS") released Notice 2008-60 to provide interim guidance, pending the issuance of Treasury regulations, regarding the tax credit available under Section 45 of the Internal Revenue Code for electricity produced from open-loop biomass. Notice 2008-60 supersedes and modifies prior guidance issued by the IRS in Notice 2006-88 but is effective as of the date of the publication of Notice 2006-88 – i.e., as of October 16, 2006. Notice 2008-60 makes two significant changes to the guidance previously provided in Notice 2006-88.
1. Sale to Unrelated Persons Requirement
The Section 45 tax credit is available only for electricity produced by a taxpayer and sold to an "unrelated person." Notice 2008-60 states that this requirement is satisfied if the ultimate purchaser of the electricity is not related to the producer of the electricity. For example, the unrelated person requirement will be satisfied if electricity is sold by a limited liability company ("LLC") that produces electricity from open-loop biomass to one of the LLC's members for resale by that member to a person that is not related to the LLC.
2. Electricity Netting Rule
The Section 45 tax credit is calculated by reference to the amount of electricity produced at a qualifying facility, including an open-loop biomass facility. Notice 2006-88 addressed situations in which an open-loop biomass facility both (i) produced electricity that was sold to an unrelated person and (ii) utilized electricity purchased from unrelated persons. The earlier notice provided that if electricity is produced by a taxpayer at an open-loop biomass facility, and the taxpayer or a related person simultaneously purchases electricity from an unrelated person for use at the same facility, the Section 45 tax credit will be available only with respect to the net amount of electricity produced – i.e., the difference between the amount produced at the facility and the amount purchased for use at the facility. Notice 2008-60 eliminates this netting rule so that the Section 45 tax credit is now available for electricity produced at a facility without regard to the amount of electricity purchased from an unrelated person for use at the facility.
In addition, the IRS states in Notice 2008-60 that it will continue its existing policy of not issuing private letter rulings under Section 45 related to open-loop biomass facilities or to partnership issues arising under Subchapter K of the Internal Revenue Code.
© 2008 Sutherland Asbill & Brennan LLP. All Rights Reserved.
This article is for informational purposes and is not intended to constitute legal advice.
