IRS Revises Interim Guidance on Production Tax Credit for Refined Coal

By Andrew J. Miller, CPA, St. Louis, MO, and Noah S. Baer, J.D., L.L.M. Taxation, Washington, DC

Editor: Michael Dell, CPA

Credits Against Tax

In Notice 2010-54, the IRS revises guidance on the Sec. 45 refined coal tax credit, pending issuance of regulations. The notice modifies the definition of refined coal, allows certain processing of utility-grade coal to be taken into account for determining emissions reductions, and revises testing protocols.


The definitions and rules governing refined coal appearing in Secs. 45(c)(7), (d)(8), and (e)(8) were originally added to the Code by the American Jobs Creation Act of 2004, P.L. 108-357, and were amended by subsequent legislation. Generally, the credit is allowed for qualified refined coal that:

  • Is produced by the taxpayer at a refined coal production facility during the 10-year period beginning on the date the facility is originally placed in service;
  • Meets certain qualified emission reductions; and
  • Is sold by the taxpayer to an unrelated person during that 10-year period.

Facilities placed in service before January 1, 2009, have to meet an additional test related to increases in coal fair market value. The IRS issued Notice 2009-90 to offer guidance regarding the Sec. 45 refined coal tax credit. Notice 2010-54 supersedes Notice 2009-90.

Notice 2010-54

Notice 2010-54 modifies the definition of “refined coal” to include feedstock coal mixed with an additive or additives. It allows certain processing of utility-grade coal to be ignored when determining whether a qualified emission reduction has been achieved. Generally, a qualified emission reduction does not include any reduction attributable to mining processes, as defined (e.g., coal preparation plant cleaning is a mining process and is not considered when assessing emission reductions). The notice provides that mining processes do not include certain modifications related to utility-grade coal. The permitted processing (1) modifies utility-grade coal, (2) consists primarily of operations that are not ordinarily performed on similar coal by a mine owner or operator, and (3) goes beyond those operations necessary for the production of utility-grade coal from similar coal.

The notice also makes related changes in emission control testing. Generally, both feedstock coal and refined coal are measured under the same operating conditions. Notice 2010-54 provides that operating changes to power plant components that are directly attributable to changing from feedstock coal to refined coal—such as adjustment to primary and secondary air—are not treated as a change in operating conditions for this purpose. However, when changes to components are due to a shift in coal type, a disclosure statement must be attached with the verification of test results.

The notice defines utility-grade coal as coal that satisfies commonly applicable utility specifications for similar coal without further processing. It also defines similar coals as those of the same rank, extracted in the same geographic area, and customarily sold in the same geographic area.

Finally, Notice 2010-54 makes several changes in testing requirements. It allows continuous emission monitoring system testing downstream of a scrubber and specifies how that testing is to be conducted, including comparison to emissions during the prior five-year “base” period. The notice also provides for laboratory testing to establish the required emission reductions, as long as the testing complies with current Environmental Protection Agency or American Society for Testing and Materials requirements.


Notice 2010-54 clarifies that the processing of utility-grade coal into refined coal to reduce emissions is not a mining process and that the coal is eligible for the credit. This clarification makes sense in that the IRS is establishing the point at which the coal is measured for compliance with the emission requirements. Some of the processes to refine the coal from utility grade could be considered mining processes and are thereby excluded. This clarifies the point at which the taxpayer should measure compliance.

The notice also liberalizes emission testing requirements to provide for downstream testing and laboratory testing. This change is beneficial to taxpayers in that many continuous emission monitoring systems are applied after scrubbers. This allows the taxpayers to utilize those systems for the tests.

It is not clear why the IRS decided to make these changes at this time, but presumably it has responded to several issues raised by taxpayers either in requests for rulings or in informal calls. However, the IRS’s decision to expand the acceptable criteria for getting the credit is a taxpayer-friendly change, since it makes it easier to claim the credit.

While this notice is meant to provide guidance until regulations are issued, it is uncertain whether the IRS will ever issue such regulations. Therefore, taxpayers and practitioners must anticipate that any future guidance will be presented in the same manner as expansions of the current notice. Sec. 45(d)(8)(B) requires a refined coal facility to have been placed in service after the enactment of the American Jobs Creation Act of 2004 and before January 1, 2010. However, some recent legislative proposals regarding the extension of expiring provisions include an extension for refined coal facilities.


Michael Dell is a partner at Ernst & Young LLP in Washington, DC.

For additional information about these items, contact Mr. Dell at 202-327-8788 or

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