Company Proposes Guidance on Carbon Sequestration Credit

February 13, 2019

Honorable David Kautter
Assistant Secretary (Tax Policy)
Department of the Treasury
1500 Pennsylvania Ave., N.W.
Washington, DC 20220
david.kautter@treasury.gov

William M. Paul
Acting Chief Counsel
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20224
william.m.paul@irscounsel.treas.gov

RE: IRS Code Section 45Q — Adopting the 80/20 Rule for When Carbon Capture Equipment is “Originally Placed in Service”

Dear Messrs. Kautter and Paul:

We understand the Service intends to issue revised Guidance regarding Section 45Q, as a result of Congress expanding and extending the § 45Q credit in § 41119(a) of the Bipartisan Budget Act of 2018, P.L. 115-123 (Feb. 9, 2018) (“BBA”). We propose that the Service issue guidance addressing when retrofit or replacement carbon capture equipment is “originally placed in service” and adapting the 80/20 Rule from the wind and solar tax credit guidance.

Background and Explanation

Section 45Q(a) provides different values of tax credit based in part upon the date “carbon capture equipment” (CCE) is “originally placed in service at a qualified facility”. However, in the context of retrofit or replacement CCE, there could be different interpretations and understandings of when CCE is “originally placed in service”. For example, there could be instances in which old, existing CCE at an industrial facility may be decommissioned and dismantled, but a different taxpayer may want to place into service new CCE at substantially the same location. In other instances, old CCE may be retrofitted with new, state-of-the-art and more energy-efficient components of CCE to prolong the life of the carbon capture activity and reduce operating expenses such as electricity costs. The Service should take these scenarios into account when developing its revised guidance for 45Q, and contemplate how to treat retrofit and replacement CCE.

Section 45Q is a tax credit with some similarities to the § 45 and § 48 wind and solar tax credits. For the wind and solar tax credits, the Service issued numerous notices addressing beginning of construction issues, including adopting a Physical Work Test, a Five Percent Safe Harbor, and a Continuity Requirement. In particular, Notice 2018-59 Section 7.05 (solar) and Notice 2016-31 Section 6 (as revised by Notice 2017-04 Section 5) (wind) established the 80/20 rule under the Physical Work Test or Five Percent Safe Harbor methods of establishing beginning of construction. The 80/20 Rule provides that a facility may qualify as originally placed in service even though it contains some used property, provided the fair market value of the used property is not more than 20 percent of the facility's total value (the cost of the new property plus the value of the used property). We propose that this 80/20 rule be extended to replacement and retrofit CCE under Section 45Q (and that a similar Physical Work Test, Five Percent Safe Harbor, and Continuity Requirement be adopted by the Service for Section 45Q).

Applying the 80/20 Rule to replacing or retrofitting CCE is very similar to a wind or solar power project that applied the 80/20 Rule to retrofit the equipment. In the wind and solar context, retrofitting aging assets created an opportunity to increase annual energy production while deploying significantly less capital than would be required for a new project. In the same way, retrofitting aging CCE creates an opportunity to capture and store increased volumes of COx (and replacing aging CCE creates an opportunity to more economically and efficiently capture and store essentially the same volumes of COx), while deploying significantly less capital than would be required for new carbon capture equipment.

Sample Guidance Language

We propose the Service adopt a Physical Work Test, a Five Percent Safe Harbor, a Continuity Requirement, and the following sample Guidance language to provide for a 80/20 Rule with respect to carbon capture equipment under Section 45Q. This sample Guidance language is based on Section 7.05 of Notice 2018-59.

We would welcome the opportunity meet with you, explain more details about our suggestions, and answer any questions you may have regarding our proposal.

Sincerely yours,

Keith Tracy
President
Cornerpost CO2 LLC
901 N Creek Drive
Edmond, Oklahoma 73034
keith@keithtracy.com
(405) 308-7289

cc by mail and email:

David A. Selig, Senior Counsel, Branch 6
Office of Chief Counsel (Passthroughs and Special Industries)
Internal Revenue Service
1111 Constitution Avenue, NW, Room 5105
Washington, D.C. 20224
(202) 317-5105
david.a.selig@irscounsel.treas.gov

cc by email only:

Krishna Vallabhaneni, Acting Tax Legislative Counsel, Department of Treasury, krishna.vallabhaneni@treasury.gov

Hannah Hawkins, Attorney Advisor, Office of Tax Policy (Legislative Counsel), Department of Treasury, hannah.hawkins@treasury.gov

Holly Porter, Associate Chief Counsel (Passthroughs and Special Industries), Internal Revenue Service, holly.porter@irscounsel.treas.gov

Peter C. Friedman, Senior Technician Reviewer, Branch 6, Office of Chief Counsel (Passthroughs and Special Industries), Internal Revenue Service, peter.c.friedman@irscounsel.treas.gov