Tax Credits

Tax Credits

July 10, 2010

TAX CREDITS that reward companies for producing landfill gas, refined coal or electricity from renewable energy sources risk being denied unless the gas, coal or electricity is put to a beneficial use, an internal IRS memo suggests.

The memo addressed a landfill gas project. The US government used to allow owners of gas collection equipment at landfills to claim tax credits of more than $1 an mmBtu for collecting methane gas from the decomposing rubbish, provided the gas was “sold” to an unrelated party. In the case addressed in the memo, company X, which owned the gas collection equipment, agreed to  convey all the gas it collected to company Y, the holder of the rights to remove gas from the landfill, in exchange for temporary use of the gas rights. Company Y simply flared the gas.

The IRS said no credits were allowed. The particular tax credits were enacted after the Arab oil embargo in the 1970’s with the aim of inducing US companies to look in unconventional places for fuel in the hope that this would help reduce US demand for Middle Eastern oil. The gas in this case was not of sufficient purity to be burned to generate electricity or heat or to put into a natural gas pipeline, the IRS said. 

Therefore, no unconventional “fuel” was produced as required by the statute. The tax credits could only be claimed if the fuel was “sold” to an unrelated party. Congress wanted a paper trail where a third party vouches for the quantity of fuel on which a taxpayer claims tax credits. In this case, the fuel was exchanged for gas rights with the result that nothing was paid for it in cash. The IRS said that was fine: “any transfer to an unrelated person . . . qualifies as a sale.”

The memo is Chief Counsel Advice 201017043. The IRS released a redacted version under a standing Freedom of Information Act order in May.