Notice 2006-40

Part III. Administrative, Procedural, and Miscellaneous
Nonconventional Source Fuel
Credit, Section 29 Inflation
Adjustment Factor, and
Section 29 Reference Price
Notice 2006–37
This notice publishes the nonconventional source fuel credit, inflation adjustment factor, and reference price under § 29
of the Internal Revenue Code for calendar year 2005. These are used to determine the credit allowable on fuel produced
from a nonconventional source under § 29.
The calendar year 2005 inflation-adjusted
credit applies to the sales of barrel-of-oil
equivalent of qualified fuels sold by a taxpayer to an unrelated person during the
2005 calendar year, the domestic production of which is attributable to the taxpayer.
BACKGROUND
Section 29(a) provides for a credit for
producing fuel from a nonconventional
source, measured in barrel-of-oil equivalent of qualified fuels, the production of
which is attributable to the taxpayer and
sold by the taxpayer to an unrelated person
during the tax year. The credit is equal to
the product of $3.00 and the appropriate
inflation adjustment factor.
Section 29(b)(1) and (2) provides for
a phaseout of the credit. The credit allowable under § 29(a) must be reduced by
an amount which bears the same ratio to
the amount of the credit (determined without regard to § 29(b)(1)) as the amount
by which the reference price for the calendar year in which the sale occurs exceeds
$23.50 bears to $6.00. The $3.00 in § 29(a)
and the $23.50 and $6.00 must each be adjusted by multiplying these amounts by the
2005 inflation adjustment factor.
Section 29(c)(1), in part, defines the
term “qualified fuels” to include gas produced from biomass and liquid, gaseous,
or solid synthetic fuels produced from coal
(including lignite), including such fuels
when used as feedstocks.
Section 29(d)(1) provides that the credit
is to be applied only for sale of qualified
fuels the production of which is within
the United States (within the meaning of
§ 638(1)) or a possession of the United
States (within the meaning of § 638(2)).

2006–18 I.R.B.

Section 29(d)(2)(A) requires that the
Secretary, not later than April 1 of each calendar year, determine and publish in the
Federal Register the inflation adjustment
factor and the reference price for the preceding calendar year.
Section 29(d)(2)(B) defines “inflation
adjustment factor” for a calendar year as
the fraction the numerator of which is the
GNP implicit price deflator for the calendar year and the denominator of which is
the GNP implicit price deflator for calendar year 1979. The term “GNP implicit
price deflator” means the first revision of
the implicit price deflator for the gross national product as computed and published
by the Department of Commerce.
Section 29(d)(2)(C) defines “reference
price” to mean with respect to a calendar
year the Secretary’s estimate of the annual
average wellhead price per barrel for all
domestic crude oil the price of which is not
subject to regulation by the United States.
Section 29(d)(5) provides that the term
“barrel-of-oil equivalent” with respect to
any fuel generally means that amount of
the fuel which has a Btu content of 5.8
million.
INFLATION ADJUSTMENT FACTOR
AND REFERENCE PRICE
The inflation adjustment factor for calendar year 2005 is 2.2640. The reference
price for calendar year 2005 is $50.26.
These amounts were published in the Federal Register on April 10, 2006.

DRAFTING INFORMATION
CONTACT
The principal author of this notice is
Jaime C. Park of the Office of Associate
Chief Counsel (Passthroughs and Special
Industries). For further information regarding this notice, contact Ms. Park at
(202) 622–3120 (not a toll-free call).

Credit for Production From
Advanced Nuclear Facilities
Notice 2006–40
SECTION 1. PURPOSE
This notice sets forth interim guidance,
pending the issuance of regulations, relating to the credit under § 45J of the Internal Revenue Code for production of electricity at advanced nuclear power facilities. Specifically, this notice specifies the
method that will be used to allocate the
national megawatt capacity limitation that
limits the allowable credit and prescribes
the application process by which taxpayers
may request an allocation of the national
megawatt capacity limitation. This notice
also provides guidance on the requirement
that the electricity be sold to an unrelated
person and on the effect of grants, tax-exempt bonds, subsidized energy financing,
and other credits. The Internal Revenue
Service and the Treasury Department expect that the regulations will incorporate
the rules set forth in this notice.

PHASEOUT CALCULATION
SECTION 2. BACKGROUND
Because the calendar year 2005 reference price does not exceed $23.50 multiplied by the inflation adjustment factor,
the phaseout of the credit provided for in
§ 29(b)(1) does not occur for any qualified
fuel sold in calendar year 2005.
CREDIT AMOUNT
The nonconventional source fuel credit
under § 29(a) is $6.79 per barrel-of-oil
equivalent of qualified fuels ($3.00 x
2.2640). This amount was published in
the Federal Register on April 10, 2006.

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.01 Section 45J was enacted by section 1306 of the Energy Policy Act of
2005, Public Law 109–58 (119 Stat. 594).
Section 45J permits a taxpayer to claim a
credit for electricity that the taxpayer (1)
produces at an advanced nuclear power facility during the eight-year period beginning when the facility is placed in service
and (2) sells to an unrelated person (qualifying electricity).
.02 Under § 45J(d), an advanced nuclear power facility is a nuclear facility that
meets all of the following requirements:
(1) The facility consists of a nuclear
power reactor that uses nuclear energy to
produce electricity. For purposes of this

May 1, 2006

notice, each nuclear power reactor located
on a multi-reactor site is a separate facility.
(2) The facility is owned by the taxpayer.
(3) The reactor design for the facility
is approved by the Nuclear Regulatory
Commission after December 31, 1993
(and such design or a substantially similar
design of comparable capacity was not
approved on or before that date).
(4) The facility is placed in service before January 1, 2021.
.03 Under § 45J(b)(1), a taxpayer may
claim a credit for qualifying electricity
produced at an advanced nuclear power facility only if part of the national megawatt
capacity limitation has been allocated to
the facility.
.04 Under § 45J(b)(1) and (c), the credit
allowed for a taxable year with respect to
the qualified electricity produced at an advanced nuclear power facility is computed
under the following rules:
(1) A tentative credit for the taxable
year is computed for the facility. The
facility’s tentative credit for the taxable
year is equal to 1.8 cents multiplied by the
kilowatt hours of qualified electricity produced at the facility and sold during the
taxable year to an unrelated person.
(2) The credit percentage is computed
for the facility. If the nameplate capacity of
the facility exceeds the national megawatt
capacity limitation allocated to the facility, the credit percentage for the facility is
determined by dividing the national capacity limitation allocated to the facility by its
nameplate capacity. If the nameplate capacity of the facility does not exceed the
national megawatt capacity limitation allocated to the facility, the credit percentage
for the facility is 100 percent.
(3) The credit allowed is the lesser
of (a) the tentative credit for the facility
multiplied by the credit percentage for
the facility, or (b) $125,000,000 per 1000
megawatts of national megawatt capacity
limitation allocated to the facility.
.05 Section 45J(b)(2) provides that
the national megawatt capacity limitation
is 6,000 megawatts. Section 45J(b)(3)
requires the Secretary to allocate this
national megawatt capacity limitation.
Section 45J(b)(4) requires the Secretary
to provide a certification process under
which the Secretary, after consultation
with the Secretary of Energy, shall ap-

May 1, 2006

prove and allocate the national megawatt
capacity limitation.
SECTION 3. ALLOCATION OF
NATIONAL MEGAWATT CAPACITY
LIMITATION
.01 Allocation Limited to Qualifying
Facilities. The Service will allocate the
national megawatt capacity limitation only
to advanced nuclear facilities (within the
meaning of § 45J(d)(2)) that satisfy the requirements of this section 3.01 (qualifying
facilities). An advanced nuclear facility
is a qualifying facility only if each of the
following requirements is satisfied:
(1) An application for a construction/operating license for the facility is
filed with the Nuclear Regulatory Commission on or before the later of (i) December 31, 2008, or (ii) the date on which the
aggregate nameplate capacity of advanced
nuclear facilities for which applications
for a construction/operating license have
been filed with the Nuclear Regulatory
Commission first equals or exceeds 6,000
megawatts.
(2) Construction on the facility begins
before January 1, 2014. For this purpose,
construction begins when a person who
has applied for or been granted a combined license for an advanced nuclear facility initiates the pouring of safety-related
concrete for the reactor building.
(3) The U.S. Department of Energy
(DOE) provides a certification that the
facility qualifies as an advanced nuclear
facility, that the requirements of section
3.01(1) and (2) are satisfied, and that it is
feasible for the facility to placed in service
prior to January 1, 2021 (“DOE certification”).
.02 Application Required.
The Service will allocate the national
megawatt capacity limitation only to qualifying facilities for which the applications
are submitted in accordance with section 4
of this notice.
.03 Allocation Method.
The national megawatt capacity limitation will be allocated as follows:
(1) If the total nameplate capacity of all
qualifying facilities for which applications
are submitted does not exceed the national
megawatt capacity limitation, each of
those facilities will be allocated an amount
of national megawatt capacity limitation
equal to its nameplate capacity.

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(2) If the total nameplate capacity of
all qualifying facilities for which applications are submitted exceeds the national
megawatt capacity limitation, the national
megawatt capacity limitation will be allocated among the facilities in proportion to
their nameplate capacities.
.04 Service Action.
On or before December 31, 2014, the
Service will accept or reject the taxpayer’s
application and will notify the taxpayer, by
letter, of its decision. If the taxpayer’s application is accepted, the acceptance letter will state the amount of the national
megawatt capacity limitation allocated to
the facility.
SECTION 4. APPLICATIONS FOR
ALLOCATION OF NATIONAL
MEGAWATT CAPACITY LIMITATION
.01 A taxpayer must submit, for each
facility for which an allocation of the national megawatt capacity limitation is requested (1) an application to the Service
for an allocation under § 45J(b) (“application for § 45J allocation”) and (2) an application to DOE for a DOE certification
(“application for DOE certification”).
.02 Applications for § 45J allocation
and applications for DOE certification
must be submitted before January 31,
2014. For purposes of this notice, an application that is submitted by U.S. mail
will be treated as received by the Service
on the date of the postmark and an application submitted by a private delivery service
will be treated as received by the Service
on the date recorded or the date marked in
accordance with § 7502(f)(2)(C).
.03 The application for § 45J allocation
must include all of the following:
(1) The name and taxpayer identification number of the taxpayer who will place
the facility in service;
(2) The name and location of the facility;
(3) The nameplate capacity of the facility;
(4) The date on which the application
for a construction/operating license for the
facility was filed with the Nuclear Regulatory Commission;
(5) The date on which construction on
the facility began;
(6) Documentation establishing that the
facility is expected to be placed in service
prior to January 1, 2021; and

2006–18 I.R.B.

(7) A copy of the application for DOE
certification for the facility.
.04 Applications for § 45J allocation
should be marked: SECTION 45J APPLICATION FOR ALLOCATION. There is
not any user fee for these applications.
(1) These applications should be sent to
the following address:
Internal Revenue Service
Attn: CC:PSI:6, Room 5114
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044
If a private delivery service is used, the
address is:
Internal Revenue Service
Attn: CC:PSI:6, Room 5114
1111 Constitution Ave., N.W.
Washington, DC 20224
(2) Applications for certification may
also be hand delivered Monday through
Friday between the hours of 8 a.m. and
4 p.m. to:
Courier’s Desk
Internal Revenue Service
Attn: CC:PSI:6, Room 5114
1111 Constitution Avenue, N.W.
Washington, DC 20224

.05 The application for DOE certification must be submitted to DOE in such
manner and contain such information as
DOE may require. If DOE determines that
the conditions for certification are satisfied (see section 3.01 of this notice), it will
provide the DOE certification to the Service. The DOE certification will be subject
to such requirements and conditions as the
Secretary of Energy may prescribe.
SECTION 5. REALLOCATION OF
NATIONAL MEGAWATT CAPACITY
LIMITATION IN CERTAIN CASES
If an amount of national megawatt capacity limitation is allocated to a facility
and the facility is not placed in service before January 1, 2021, or the DOE informs
the Service that the DOE certification
for the facility has been withdrawn, the
amount of the national megawatt capacity
limitation allocated to that facility will
be withdrawn and the national megawatt

2006–18 I.R.B.

capacity limitation will be reallocated under the rules of section 3.03 of this notice
among the remaining qualifying facilities.
SECTION 6. ADDITIONAL ISSUES
.01 Sale to Unrelated Person. The
credit under § 45J is allowed only for electricity that the taxpayer produces and sells
to an unrelated person. Electricity will be
treated as sold to an unrelated person for
this purpose if the ultimate purchaser of the
electricity is not related to the person that
produces the electricity. The requirement
of a sale to an unrelated person will be
treated as satisfied in these circumstances
even if the producer sells the electricity to
a related person for resale by the related
person to a person that is not related to
the producer. For rules for determining
whether a person is related to the producer
of the electricity, see § 45(e)(4).
.02 Effect of Grants, Tax-Exempt
Bonds, Subsidized Energy Financing, and
Other Credits. The amount of the credit
under § 45J is not reduced on account
of any grants, tax-exempt bonds, subsidized energy financing, or other credits
described in § 45(b)(3).
SECTION 7. PAPERWORK
REDUCTION ACT
The collection of information contained
in this notice has been reviewed and approved by the Office of Management and
Budget in accordance with the Paperwork
Reduction Act (44 U.S.C. 3507) under
control number 1545–2000.
An agency may not conduct or sponsor,
and a person is not required to respond
to, a collection of information unless the
collection of information displays a valid
OMB control number.
The collections of information in this
notice are in section 3. This information is required to be collected and retained in order for taxpayers to claim the
new credit for the production of electricity from advanced nuclear power facilities
under § 45J. The information will be used
to determine the portion of the national
megawatt capacity limitation to which a
taxpayer’s facility is entitled. The collection of information is required to obtain a
benefit. The likely respondents are corporations and partnerships.
The estimated total annual reporting
burden is 600 hours.

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The estimated annual burden per respondent varies from 10 to 60 hours, depending on individual circumstances, with
an estimated average of 40 hours. The estimated number of respondents is 15.
The estimated annual frequency of responses is on occasion.
Books or records relating to a collection
of information must be retained as long
as their contents may become material in
the administration of any internal revenue
law. Generally, tax returns and tax return
information are confidential, as required
by 26 U.S.C. 6103.
SECTION 8. DRAFTING
INFORMATION
The principal author of this notice is
Patrick S. Kirwan of the Office of Associate Chief Counsel (Passthroughs & Special Industries). For further information
regarding this notice, contact Mr. Kirwan
at (202) 622–3110 (not a toll-free call).

Gulf Opportunity Zone
Bonds, Gulf Opportunity
Zone Advance Refunding
Bonds, and Gulf Tax Credit
Bonds
Notice 2006–41
SECTION 1. PURPOSE
This notice provides guidance with
respect to the information reporting requirements applicable to Gulf Opportunity Zone Bonds, Gulf Opportunity Zone
Advance Refunding Bonds, and Gulf Tax
Credit Bonds issued pursuant to § 1400N
of the Internal Revenue Code. This notice
also provides additional guidance with
respect to the credit rate and arbitrage requirements applicable to Gulf Tax Credit
Bonds and with respect to the treatment of
the credit by holders of Gulf Tax Credit
Bonds.
SECTION 2. INTRODUCTION
Section 101 of the Gulf Opportunity
Zone Act of 2005, Pub. L. No. 109–135
(the Act), added §§ 1400M and 1400N
to the Internal Revenue Code. Section
1400M(1) defines the term Gulf Opportunity Zone (“GO Zone”) as that portion

May 1, 2006