SECTION 3. RULES RELATING TO

OPEN-LOOP BIOMASS

.01 Components of Facility . (1) In gen- eral . For purposes of § 45(d)(3), an openloop biomass facility is a power plant consisting of all components necessary for the production of electricity from openloop biomass (and, if applicable, other energy sources). Thus, a qualified openloop biomass facility includes all burners and boilers (whether or not burning openloop biomass), any handling and delivery

2006–42 I.R.B. 686 October 16, 2006

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.

(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 openloop 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 service after October 22, 2004. Ac

cordingly, § 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 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) Si- multaneous sale and purchase of electric- ity . 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 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

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Chief Counsel (International). For further information regarding this notice, contact Ms. Huynh at (202) 622–3880 (not a tollfree call).

Extension of Replacement Period for Livestock Sold on Account of Drought in Specified Counties

Notice 2006–91