SECTION 2. BACKGROUND

.01 Section 46 provides that the amount of the investment credit for any taxable year is the sum of the credits listed in § 46. That list includes the qualifying gasification project credit under § 48B.

.02 Section 48B(d)(1) provides that the Secretary, in consultation with the Secretary of Energy, shall establish a qualifying

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gasification project program to consider and award certifications for qualified investment eligible for credits to qualifying gasification project sponsors under § 48B. The Treasury Department and the Service, in consultation with the Secretary of Energy, established the § 48B Phase I program in Notice 2006–25, 2006–1 C.B. 609, as modified and updated by Notice 2007–53, 2007–1 C.B. 1474. .03 Under the § 48B Phase I program, the qualifying gasification project credit for a taxable year was an amount equal to 20 percent of the qualified investment (as defined in § 48B(b)) for that taxable year in qualifying gasification projects (as defined in § 48B(c)(1)) for which the credit was allocated under § 48B(d)(1)(A).

.04 The term “qualified investment” is defined in § 48B(b) as the basis of eligible property placed in service by the taxpayer during such taxable year which is part of a qualifying gasification project (A) the construction, reconstruction, or erection of which is completed by the taxpayer, or which is acquired by the taxpayer if the original use of such property commences with the taxpayer, and (B) with respect to which depreciation (or amortization in lieu of depreciation) is allowable. Pursuant to § 48B(b)(2) and (3), rules regarding certain subsidized property similar to § 48(a)(4) (without regard to § 48(a)(4)(D)) and rules regarding certain qualified progress expenditures similar to § 46(c)(4) and (d) (as in effect on the day before the enactment of the Revenue Reconciliation Act of 1990) apply for purposes of § 48B. .05 The term “qualifying gasification project” is defined in § 48B(c)(1) as any project that (A) employs gasification technology, (B) will be carried out by an eligible entity (as defined in section 3.02 of this notice), and (C) includes a qualified investment of which an amount not to exceed $650 million is certified under the qualifying gasification program as eligible for credit under § 48B. Pursuant to § 48B(c)(2), gasification technology is any process that converts a solid or liquid product from coal (as defined in section 3.01 of this notice), petroleum residue (as defined in § 48B(c)(8)), biomass (as defined in § 48B(c)(4)), or other materials that are recovered for their energy or feedstock value into a synthesis gas composed primarily of carbon monoxide and hydro

gen for direct use or subsequent chemical or physical conversion.

.06 Pursuant to § 48B(d)(1)(A), the § 48B Phase I program provided for $350 million of credits to be allocated to qualifying gasification projects. The § 48B Phase I program under Notice 2006–25 and Notice 2007–53 provided for annual allocation rounds. The initial allocation round was conducted in 2006. An additional allocation round was conducted in 2007–08. The entire § 48B Phase I credit amount of $350 million was allocated in these two allocation rounds.

.07 Under the § 48B Phase II program, the qualifying gasification project credit for a taxable year was an amount equal to 30 percent of the qualified investment (as defined in § 48B(b)) for that taxable year in qualifying gasification projects (as defined in § 48B(c)(1)) for which the credit is allocated under § 48B(d)(1)(B).

.08 Pursuant to § 48B(d)(1)(B), the § 48B Phase II program provided for $250 million of credits to be allocated to qualifying gasification projects that include equipment which separates and sequesters at least 75 percent of such project’s total carbon dioxide (CO2) emissions. The Service established the § 48B Phase II program in Notice 2009–23, 2009–1 C.B. 802, which provided for an allocation round in 2009–2010. The entire § 48B Phase II credit amount of $250 million was allocated in this allocation round.

.09 As originally enacted by the Energy Policy Act of 2005, § 48B(d)(1) directed the Secretary to carry out a certification program for the allocation of § 48B credits and authorized the Secretary to establish additional programs to reallocate § 48B credits by providing that allocations were to be made “under rules similar to the rules of section 48A(d)(4).” Although the Energy Improvement and Extension Act of 2008 amended § 48B(d)(1) and removed the cross-reference to § 48A(d)(4), the effective date provision of the 2008 amendment states that it “appl[ies] to credits described in Code section 48B(d)(1)(B) . . . which are allocated or reallocated after the date of enactment

[October 3, 2008].” Thus, by its terms, the 2008 amendment was not intended to impact the program for the credits initially allocated as § 48B Phase I credits, and which pursuant to the statute as revised by

the 2008 amendment are described in § 48B(d)(1)(A). Accordingly, the authority to reallocate § 48B Phase I credits remains effective, and the Service may review prior § 48B Phase I allocations and conduct an additional certification program for any § 48B Phase I credits that are available for reallocation. Moreover, by referring to § 48(d)(1)(B) credits that are “allocated or reallocated” after the October 3, 2008, date of enactment, the effective date provision of the 2008 amendment indicates congressional support for reallocation of § 48B credits. The Service has completed its review of the prior § 48B Phase I allocations and has determined that § 48B Phase I credits in the total amount of $ 309,337,000 are available for reallocation under the § 48B Phase III program.

.10 Pursuant to § 48B(d)(2), certificates of eligibility may be issued under the § 48B program only during the 10year period beginning on October 1, 2005. As a result, the Service may only reallocate any available § 48B credits prior to October 1, 2015.

.11 Under the § 48B Phase III credit program, the qualifying gasification project credit for a taxable year is an amount equal to 20 percent of the qualified investment (as defined in § 48B(b)) for that taxable year in qualifying gasification projects (as defined in § 48B(c)(1)) for which the credit is allocated under § 48B(d)(1)(A).

.12 Section 48B(d)(4) provides that (A) highest priority is given to projects with the greatest separation and sequestration percentage of total CO2 emissions, and (B) high priority is given to applicant participants who have a research partnership with an eligible educational institution (as defined in § 529(e)(5)). While the capability of a qualifying project to separate and sequester CO2 emissions is considered in ranking projects, the § 48B Phase III program will not require a qualifying project to include equipment that separates and sequesters CO2 emissions.

.13 Section 48A(d)(5) provides that the Secretary shall, upon making a certification under § 48B(d), publicly disclose the identity of the applicant and the amount of the credit certified with respect to such applicant.

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.14 Section 48A(h) directs the Secretary to modify the terms of any competitive certification award under § 48B and any associated closing agreement where such modification (i) is consistent with the objectives of § 48B, (ii) is requested by the recipient, and (iii) involves moving the project site to improve the potential to capture and sequester CO2 emissions, reduce costs of transporting feedstock, and serve a broader customer base. This directive does not apply if the Secretary determines that the dollar amount of tax credits available to the taxpayer under § 48B would increase as a result of the modification or such modification would result in such project not being originally certified. In addition, the Secretary is required to consult with other relevant Federal agencies, including the Department of Energy, in considering any modification under § 48A(h).

.15 The at-risk rules in § 49 and the recapture and other special rules in § 50 apply to the § 48B Phase III credit. Generally, section 49 provides that the investment credit is limited to the extent that the taxpayer is at risk with respect to the investment credit property. Section 50(a) provides for pro rata recapture of the investment tax credit if the investment credit property is disposed of, or otherwise ceases to be investment credit property, within five years after the property is placed in service.