Rev. Rul. 85-81

1985-1 C.B. 18, 1985-25 I.R.B. 5.

INVESTMENT CREDIT; ENERGY PROPERTY; STOVE BURNERS; BLAST FURNACE GAS

Published: June 24, 1985

Section 48.-Definitions; Special Rules, 26 CFR 1.48-9: Definition of energy property.

  Investment credit; energy property; stove burners; blast furnace gas. Stove burners that use blast furnace gas as a fuel to preheat the air blast for a blast furnace are not alternative energy property.

ISSUE

  Whether stove burners that use blast furnace gas as a fuel to preheat the air blast for a blast furnace are alternative energy property.

FACTS

  In 1981, taxpayer placed in service new burners for three stoves that are used to preheat the air blast for a blast furnace. The fuel for the burners is blast furnace gas. The burners are recovery property under section 168(c)(1) of the Internal Revenue Code.

  Blast furnace gas is a by-product gas produced by the reaction of coke with other materials charged into the blast furnace and used in the production of iron. The blast furnace gas produced by the taxpayer is cleaned and then burned in stoves to heat the air for maintaining combustion in the blast furnace.

  The coke used in the blast furnace is the residue from the destructive distillation of coal in the taxpayer's coke ovens and has a chemical composition different than coal. The coke serves as a fuel and reducing agent in the blast furnace and is the principal source of blast furnace gas.

LAW AND ANALYSIS

  Section 46(b)(2)(A) of the Internal Revenue Code provides the periods for which the energy investment tax credit is available for energy property. The general rule that applies to alternative energy property and certain other categories of energy property is that the energy credit is available for the period beginning on October 1, 1978 and ending on December 31, 1982. However, for certain long-term projects the energy credit is available until December 31, 1990.

  Section 48(1)(3)(A)(ii) of the Code defines alternative energy property to include a burner (including necessary on-site equipment to bring the alternate substance to the burner) for a combustor other than a boiler if the primary fuel for such burner will be an alternative substance.

  Section 48(l)(3)(B) of the Code defines the term 'alternative substance' to mean any substance other than oil and natural gas and any product of oil and natural gas.

  Section 1.48-9(c)(2) of the regulations provides that an alternate substance is any substance or combination of substances other than an oil or gas substance, and includes coal. However, alternate substances do not include synthetic fuels or other products that are produced from an alternate substance and that have undergone a chemical change as described in paragraph (c)(5)(ii) of this section.

  Section 1.48-9(c)(5)(ii) of the regulations defines a fuel as a material that produces usable heat upon combustion. To be 'synthetic,' the fuel must differ significantly in chemical composition, as opposed to physical composition, from the alternate substance used to produce it.

  For taxpayer's burners to qualify as alternative energy property, section 48(l)(3)(A) of the Code requires that the primary fuel for such burners, the blast furnace gas, must be an alternate substance. Section 1.48- 9(c)(2) of the regulations states that alternate substances do not include synthetic fuels or other products that are produced from an alternate substance and that have undergone a chemical change. Coal is listed in this section as an alternate substance. In taxpayer's manufacturing process, coal is used to produce the coke that is charged into the blast furnace along with the iron ore, flux and hot air blast. Coke differs significantly in chemical composition from the alternate substance (coal) from which it is produced and is a synthetic fuel within the meaning of section 1.48-9(c)(5)(ii) of the regulations. The coke produced by the taxpayer is a principal ingredient in the production process, neither the products produced from an alternative substance that have undergone a chemical change nor the products of additional processing of such products can qualify as alternate substances. The by-product blast furnace gas is a derivative of a synthetic fuel (coke) and does not qualify as an alternate substance.

HOLDING

  The stove burners that use blast furnace gas as a fuel to preheat the air blast for a blast furnace are not alternative energy property. This ruling is applicable to property placed in service during the period that the energy investment tax credit is available under section 46(b)(2)(A) of the Code for alternative energy property.

Rev. Rul. 85-81, 1985-1 C.B. 18, 1985-25 I.R.B. 5.