IRS ASKS FOR COMMENTS ON TAX CONSEQUENCES OF EMISSION ALLOWANCES.

Announcement 92-50

[4830-01]

                       DEPARTMENT OF TREASURY

AGENCY: Internal Revenue Service, Treasury.

ACTION: Notice; Solicitation for comments.

SUMMARY: This notice solicits public comments on the federal income tax consequences of the sulfur dioxide emission allowances program of Title IV of the Clean Air Act of 1990.

DATES: Written comments must be delivered or mailed by [Insert date that is 30 days after the publication of this document in the Federal Register].

ADDRESSES: Written comments should be addressed to Internal Revenue Service, P.O. Box 7604, Benjamin Franklin Station, Attn: CC:CORP:T:R (IA-Branch 5), Room 5228, Washington, D.c. 20044.

FOR FURTHER INFORMATION CONTACT: Kathryn K. Nunzio, (202) 377- 9589 (not a toll-free number).

SUPPLEMENTARY INFORMATION: Title IV of the Clean Air Act can be found at 42 U.S.C. section 7651 et seq. The Environmental Protection Agency's proposed regulations concerning this act can be found at 56 FR 63001, December 3, 1991.

The Service is currently studying the tax consequences of the emission allowances program of Title IV of the Clean Air Act of 1990.

The Service requests comments on certain tax issues arising from the program which have been identified for study. The Service is particularly interested in the views of the utilities that will be affected by the program. The specific issues are:

(1) How are the costs of acquiring emission allowances treated for Federal tax purposes?

(2) What costs, if any, are included in the tax basis of an allowance?

(3) Is the cost of acquiring emission allowances an indirect cost of producing property under section 263A?

(4) Can allowances be depreciated under section 167?

(5) When and how would a taxpayer recover its basis in an emission allowance in each of the following circumstances:

(a) a utility uses an emission allowance during a year;

(b) a utility sells or exchanges an emission allowance;

(c) a purchaser of an emission allowance which is not a utility sells or exchanges the allowance; and

(d) an emission allowance becomes worthless?

(6) What is the character of any gain or loss realized in situations (b) - (d) set forth in paragraph 5 above?

(7) Is an exchange of emission allowances a taxable event? If so, are allowances issued in different years like kind property under section 1031?

(8) Is a penalty paid to the Environmental Protection Agency for emissions in excess of allowances deductible under section 162(a)?

(9) Will a secondary market be established for trading forward or futures contracts on emission allowances?

(10) What is the likely accounting treatment of emission allowances? For example, will separate accounts be established for allowances held for use in electricity production and for allowances held for investment?

(11) What are the tax consequences of participation in the Environmental Protection Agency's emission allowance program by taxpayers that are eligible to opt into the program pursuant to 42 U.S.C. section 7651i?

The Service invites interested parties to comment on any or all of these issues, and to identify other related issues that should be considered as part of this project. In order to provide timely guidance about these issues, the Service requests responses from interested parties within 30 days of the date of this notice.

                                   Glenn A. Carrington