Rev. Rul. 83-6

1983-1 C.B. 8, 1983-2 I.R.B. 5.

                       Internal Revenue Service
                                 Revenue Ruling

        ENERGY CREDIT EXTENSION;  LONG-TERM PROJECT;  MINE AND PROCESSING
                                   FACILITIES

                          Published: January 10, 1983

SECTION 46. - -AMOUNT OF CREDIT

  Energy credit extension;  long-term project;  mine and processing facilities.  A mine and two processing facilities being developed over an estimated four year period as three separate integrated facilities under one building project qualify for the energy credit extension under section 46(a)(2)(C)(iii)(l) of the Code, even though the developer will not have applied for all permits with regard to the processing facilities by December 31, 1982, but will have indicated a commitment to the project by meeting certain other criteria.

ISSUE

  Whether the conditions of section 46(a)(2)(C)(iii)(I) of the Internal Revenue Code necessary to extend the energy investment credit from December 31, 1982 to December 31, 1990, have been met under the following circumstances.

FACTS

  Company A is developing and building a project that will consist of a mine and two processing facilities.  The mine and the facilities are interdependent parts of an integrated whole and no single part of the project has any economic viability without the other.  The equipment to be placed in service in the project will be "energy property" within the meaning of sections 46(a)(2)(C)(i)(I) and 48(1) of the Code, and will not qualify as energy property under any other subclause of section 46(a)(2)(C)(i).

  A has made engineering studies that identify the processes, site, and equipment for all three facilities.  In addition, Company A has completed a financial feasibility study of the project that includes the estimated cost and times when funds will need to be available.

  The Company has reviewed all the regulatory requirements at the Federal, state, and local levels.  The Company reasonably believes that by December 31, 1982, it will have properly applied for the environmental and construction permits necessary for development of the mine, the first facility of the project on which physical work is to begin.  However, Company A will not, as of December 31, 1982, have applied for all permits with regard to the two other facilities of the project.  It is estimated that it will take four years from the time physical work on the mine has begun until the last part of the project is available to be placed in service.

  The question of whether, by January 1, 1986, Company A will have entered into binding contracts for at least 50 percent of the estimated cost of the project, as required by section 46(a)(2)(C)(iii)(II) of the Code, is not at issue here.

LAW AND ANALYSIS

  Section 46(a)(2)(C)(i)(I) of the Code provides that the energy percentage for property not described in any other subclause of this clause shall be 10 percent for the period beginning on October 1, 1978, and ending on December 31, 1982.

  Section 46(a)(2)(C)(iii) of the Code provides that for the purpose of applying the energy percentage contained in subclause (I) of clause (i) with respect to property that is part of a project with a normal construction period of two years or more (within the meaning of section 46(d)(2)(A)(i)), "December 31, 1990" shall be substituted for "December 31, 1982" if:

  (I) before January 1, 1983, the taxpayer has completed all engineering studies in connection with the commencement of the construction of the project, and has applied for all environmental and construction permits required under Federal, state, or local law in connection with the commencement of the construction of the project, and

  (II) before January 1, 1986, the taxpayer has entered into binding contracts for the acquisition, construction, reconstruction, or erection of equipment specially designed for the project and the aggregate cost of the taxpayer of that equipment is at least 50 percent of the reasonably estimated cost for all such equipment which is to be placed in service as part of the project upon its completion.

  Section 46(d)(2)(B) of the Code provides that the term "normal construction period" means the period reasonably expected to be required for the construction of the property, beginning with the date on which physical work on the construction begins and ending on the date on which it is expected that the property will be available for placing in service.

  Section 221 of the Crude Oil Windfall Profit Tax Act of 1980, (Pub.L. 96- 223), amended subparagraph (C) of section 46(a)(2) to read, in part, as indicated above.  The Senate Finance Committee report that accompanied the passage of this Act states that the committee has noted that a number of categories of energy property investments under both the 1978 legislation (The Energy Tax Act of 1978, Pub.L. 95-618, 1978-3 C.B. (Vol. 2) 1,) and the committee substitute involve complicated licensing procedures, lengthy design and construction periods, and corresponding long-term commitments of funds. The Senate Finance Committee Report continues:

    "Because under present law there is a period of only slightly more than three years before some of these credits expire on December 31, 1982, the bill sets forth a rule under which energy credits which otherwise expire in 1982 may be claimed for qualifying investments which occur after that date and before January 1, 1991, where certain tests are satisfied to manifest an affirmative commitment to acquire or construct qualifying energy property which involves long-term projects.  ...  Under these rules, an energy credit will be allowed  ...  where (1) the taxpayer has, before January 1, 1983, both completed engineering studies sufficient to identify the site, processes, and equipment required in connection with a qualifying facility, and has applied for all environmental and construction permits necessary for the construction of the facility;  and (2) has entered into binding contracts  ..."

S.Rep.No. 96-394, 96th Cong., 1st Sess. 85 (1979), 1980-3 C.B. 131, 203.

  The Code allows an extension of the energy investment credit for certain long-term projects if an affirmative commitment to the project has been made. This commitment is evidenced when certain criteria have been met.

  All engineering studies in connection with the commencement of construction of the project must have been made.  These engineering studies must have identified the processes, site, and equipment for the entire project (in this ruling the three separate facilities) not just for the first phase.  These studies must be complete enough so that it would be possible as the next logical step to start engineering designs, write specifications, or request bids on the first phase of the project.  The engineering studies must include not only the technical but also the financial feasibility of the entire project.

  All environmental and construction permits in connection with the commencement of the project must have been applied for.  The environmental and construction permits are all those required under federal, state, and local law.  If a project is to be constructed in distinct phases (as shown by an engineering study), the only permits needed to commence construction of the project are those needed under applicable requirements to commence construction of the first phase (the development of the mine in this ruling).  Company A must make a good faith effort to evaluate all regulatory requirements affecting operation of the project and apply for all permits that are necessary for the commencement of the project.  Later discovery that a necessary permit not of a major consequence was overlooked or an applied for permit was returned for a minor technicality will not negate this requirement if the original good faith effort was made.  A good faith effort in both evaluating the types of permits necessary and the amount of information to be supplied with the applied for permits is that which reflects the standard in normal industry practice.  In addition, if Company A were to sell or otherwise transfer its project to Company B before placing it in service, and Company B were to complete the project essentially as planned by A, for purposes of determining whether Company B fulfilled the requirements of section 46(a)(2)(C)(iii), the engineering studies made by, and environmental and construction permits applied for by, Company A will be treated as if they were made or applied for by Company B.

  For separate facilities to be considered part of the same project, each separate facility must be an interdependent unit of a single integrated project on one site, none of the separate facilities may have any economic viability without the others, and the operation of each of these separate facilities must be essential to the performance of the function to which the single integrated project is assigned.  The normal construction period of a project that consists of separate facilities is measured from the first day physical work begins on any part of the project that will be new section 38 property to the day when all new section 38 property in all integrated units that are part of the project is available to be placed in service.

  If any property qualifies as energy property under any of the subclauses II- VI of section 46(a)(2)(C)(i), it is not energy property described in subclause I and, therefore, section 46(a)(2)(C)(iii) cannot apply.

HOLDING

  Company A's project is a long-term project as defined in this ruling.  Its three separate integrated facilities qualify as one project.  It has made all engineering studies and has applied for all environmental and construction permits in connection with the commencement of the project and thus has shown an affirmative commitment to the project.  Company A has met the requirements of section 46(a)(2)(C)(iii)(I) of the Code.

Rev. Rul. 83-6, 1983-1 C.B. 8, 1983-2 I.R.B. 5.