structural components of buildings and property used in lodging facilities (to the extent qualified, e.g., solar or geothermal equipment) are treated as section 38 property. However, since this type of property, in general, is not otherwise section 38 property, the property does not qualify for the regular credit. Public utility property generally does not qualify as energy property. To be eligible, the original use of acquired property must begin after September 30, 1978, and before January 1, 1983. Property constructed by the taxpayer is eligible only to the extent of basis attributable to construction for the period beginning on October 1, 1978, and ending on December 31, 1982 RECAPTURE If energy property is sold or otherwise disposed of, the recapture rules of section 47 apply to both regular credit and energy credit. In response to public comments, the application of the section 47 recapture rules to the energy credit was clarified to emphasize that the recapture determination is based upon the estimated useful life of the property which was taken into account in computing qualified investment. Thus, the principles of recapture for the energy credit are the same as for the regular credit. ALTERNATIVE ENERGY PROPERTY Alternative energy property includes (1) equipment which uses an alternate substance as a fuel, and (2) equipment which produces a synthetic fuel from an alternate substance. An alternate substance is a substance other than oil or natural gas or any product of oil or natural gas. Various comments suggested that the definition of alternate substance in the proposed regulations should be expanded to include the synthetic fuels produced from an alternate substance, oil shale, and tar sands. These suggestions were not adopted. Congress provided a subsidy for direct use of alternative substances as a fuel as well as for producing synthetic fuels from the alternate substance. The commentators would disregard the word "synthetic" and would treat it as the equivalent of alternate substance, the very product from which the synthetic fuel is produced. Congress did not intend, however, to subsidize the use of synthetic fuel. Such a subsidy is unnecessary because synthetic fuel in most cases is a close substitute for conventional fuel and does not require specialized equipment. For example, a credit is provided for equipment used to produce methane from landfill, but, since such methane is a close substitute for pipeline quality natural gas, no credit is provided for equipment which uses such methane as a fuel and which is indistinguishable from equipment using natural gas. The suggestion that shale oil and tar sands be considered alternate substances was not adopted because those are oil substances although in a form which makes their recovery more difficult. Of course, in the case of oil shale property, Congress provided a credit for such equipment in section 48(1) (7). The Senate had adopted a $3 per barrel credit for production of oil from tar sands. See H.R. 5263, section 1044, as passed by the Senate on October 31, 1977. However, that provision was rejected in Conference. Such a credit was adopted as section 44D of the Code by Congress in the Crude Oil Windfall Profit Tax of 1980 (Pub. L. 96-223, 94 Stat. 268 [1980-3 C.B. 2, 40]). There were some suggestions that synthetic fuel production equipment be expanded to include an oxygen plant. Under section 48(1) (3) (iii), synthetic fuel equipment is "equipment for converting an alternate substance into a synthetic liquid, gaseous, or solid fuel." An oxygen plant does not convert the alternate substance into a synthetic fuel but merely supplies the catalyst used in the conversion process. If the statutory language meant to incorporate equipment not directly involved in the conversion process, language such as "used in connection with the conversion" would have been used instead. For this reason, oxygen plants are not synthetic fuel equipment under the regulations. In response to comments, the definition of synthetic fuel has been changed. to state that fuel derived from biomass which undergoes the process of defiberization is a synthetic fuel. This change is consistent with the "chemical change" requirement since biomass is changed into a refuse derived fuel through a series of chemical and heat treatments which break down the structural fibers of the substance. POLLUTION CONTROL EQUIPMENT Under the proposed regulations, pollution control equipment was eligible for the energy credit only if installed on or in connection with eligible alternative energy property. Pollution control equipment required by Federal, State, or local government regulation in effect on October 1, 1978, with respect to property burning coal on that date was excluded. Any order permitting delayed compliance was to be disregarded in determining whether property was required to be installed on October 1, 1978. Several comments took issue with the requirement in § 1.48-9 (c) (8) (iii) that in order for pollution control equipment to qualify as alternative energy property, it must be installed in connection with eligible alternative energy property. These comments were not adopted. The inclusion of certain pollution control equipment under the energy credit was not intended to provide a general subsidy for pollution control equipment, but rather was intended to provide an incentive for the installation of new property using alternate substances. A credit was provided for pollution control equipment only to the extent that such equipment was required for the installation of the alternative energy property. Therefore, this limitation remains in the final rules. Comments also suggested that orders which permit delayed compliance should be considered in determining what pollution control equipment was required on October 1, 1978. The statutory language in section 48(1) (3) (C) indicates an intention to determine what equipment was required by reference to rules of general application. The law clearly denies the credit to taxpayers who installed such equipment prior to October 1, 1978. Taxpayers, required to install pollution control equipment on that date, who arranged to delay compliance should not be given preferential treat ment. GEOTHERMAL EQUIPMENT Under section 48(1) (3) (A) (viii), alternative energy property includes "equipment used to produce, distribute, or use energy derived from a geothermal deposit (within the meaning of section 613(e) (3)) . . . ." The proposed regulations defined geothermal deposit by cross-reference to section 1.44C-2(h), which requires a wellhead temperature exceeding 50°C. The proposed regulations also provided that, to qualify, geothermal equipment (1) must be specially adapted to use geothermal energy and (2) must be used exclusively with energy derived from a geothermal deposit. Under the statute, production and distribution equipment qualifies while exploration and development equipment does not. Comments suggested elimination of the "dual function rule." The dual function rule prevents unnecessary ad ministrative burdens and reflects Congressional intent to limit the subsidy to equipment exclusively used for geothermal energy. Without such a rule, it frequently would be impossible to determine when energy from a geothermal deposit is being used. Further, property which uses energy from a con ventional source in addition to geothermal energy is indistinguishable from property that performs the same function without the use of geothermal energy. Congress did not intend to provide a credit for property that would be purchased for conventional heating or cooling uses. However, as noted below, the rule is clarified to indicate that dual use is determined by reference to the particular application, and not by reference to any uses for any equipment. In response to comments, the final regulations do not contain the specially adapted equipment rule. The comments noted that, in general, geothermal equipment is not specially designed for geothermal use. Consequently, adoption of this rule would have disqualified most geothermal equipment. In response to requests by commentators, the regulations also make it clear that "downhole" equipment necessary to produce geothermal energy (e.g., screening or slotted liners, tubing and downhole pumps), and reinjection well property are production equipment. (emphasis Finally, comments have criticized the § 1.44C-2 (h) requirement adopted by cross reference that the wellhead temperature exceed 50°C for an energy source to be considered to be a geothermal deposit. The statutory language "energy derived from a geothermal deposit (within the meaning of section 613(e) (3)) (emphasis added)" indicates a clear Congressional intent to limit the credit to property utilizing geothermal energy contained in a distinct, specific, and identifiable reservoir. Reference to the depletion provisions contemplates a depletable energy source, and not an aquifer whose water is being constantly replenished. The intent to thus restrict the term geothermal is also reflected in the description of geothermal energy in the Ways and Means committee print, Energy Program, Number 11, "Geothermal Tax Provisions and Minimum Tax Treatment of Intangible Drilling Costs for Oil and Gas," prepared by the staff of the Joint Committee on Taxation, June 11, 1977. In the committee print, which provided the technical background material for the legislation which ultimately became the Energy Tax Act of 1978 [Pub. L. 95618, 1978-3 C.B. (Vol. 2) 1], geothermal energy is described by reference as definable deposits of steam, hot water and hot, dry rocks. The lowest temperature mentioned is 60°C, the highest, 1500°C. The technology described involved direct use of the heat from such resources. Recognizing the difficulty taxpayers would otherwise face in demonstrating that energy was derived from a sufficiently identifiable and depletable deposit, the proposed regulations provide a 50°C rule as a safe-harbor rule. The final regulations retain this liberal rule. SOLAR ENERGY PROPERTY In response to comments, the definition of solar energy property was expanded to make it clear that it includes storage devices, power conditioning equipment, transfer equipment, and property solely related to the functioning of those items. However, such equipment does not include transmission equipment. WIND ENERGY PROPERTY A number of comments cited specific legislative history to the effect that wind energy property includes "transfer equipment." See, H. Rep. No. 95496, Part III, 95th Cong., 1st Sess., p. 121 [1978-3 C.B. (Vol. 2) 71, 183]; S. Rep. No. 95-1324, 95th Cong., 2d Sess., p. 62 [Conf. Rept.) 1978-3 C.B. (Vol. 2) 334]). Accordingly, transfer equipment is specifically added to the definition of wind energy property. Transfer equipment includes equipment which permits the aggregation of electricity generated by several windmills and equipment which alters voltage in order to permit transfer to a transmission line. However, transfer equipment does not include transmission lines, a distinction based upon the technical definition of the terms transfer and transmission, and on specific references to transmission in the Act (both including and excluding such equipment) indicating Congressional cognizance of the differences between the two functions. SPECIALLY DEFINED Section 48(1) (5) lists items of specially defined energy property, which qualify for the energy credit if installed. in an existing industrial or commercial process. The proposed regulations provided descriptions of the items listed. The proposed regulations also excluded equipment used in connection with general office, retail, and similar activities as not involving industrial or commercial processes. A large number of comments suggested that the term "industrial or commercial process" should include office, retail, and similar activities. Specifically, many commentators argued that automatic energy control systems even when installed in retail stores, office buildings, or multi-family dwellings should qualify for the energy credit as specially defined energy property. The commentators relied primarily on the fact that the administration had proposed a business energy conservation credit which applied to all business buildings and on the appearance of the term "automatic energy control systems" in the statute. These comments were rejected as being inconsistent with the statute and the legislative history of the provision. The Administration 1977 energy tax proposals contained a general business energy conservation credit which combined both industrial and commercial conservation property under one category. See the Treasury Department's Technical Explanation A-7, published May 16, 1977. Thus, automatic energy control systems, recuperators, and heat wheels (presently eligible for a credit as specially defined energy property) were on a list with insulation, double glazing, and other business insulation property. The House generally adopted the Administration proposal with respect to the business energy credits. However, the House distinguished between those items that were specially designed to achieve conservation in existing industrial processes and items for general business conservation uses. Property identified as qualifying for the conservation credit, in addition to insulation, included items to be designated by the Secretary as being designed to reduce the heat loss or gain of an existing commercial or industrial building or facility. In contrast to "specifically" defined energy property the class of property described in the conservation credit was not limited by reference to recovery of waste heat or gas, nor was it required that it be installed in connection with an existing process. (See, section 2061 (b) & (c) of H.R. 8444 as passed by the House on August 5, 1977; The Ways and Means Committee report (H. Rep. No. 95-496, Part III, 95th Cong., 1st Sess., p. 121 [1978-3 C.B. (Vol. 2) 71, 183].) The Senate bill expanded the definition of specially defined energy property, and retained the House conservation provision. Under the Senate bill, the requirement of use with an existing process was eliminated because the Senate had expanded the qualifying category of items to include non-process items. Thus, under the Senate bill the result called for in these comments would have been correct. (See, section 1031 of H.R. 5263 as passed by the Senate October 31, 1977.) However, in Conference, the conferees adopted the House specially defined energy tax credit provision, reinserting the existing industrial or commercial process limitation which the Senate had deleted. The position taken in the comments would require interpreting "in connection with an not existing industrial or commercial process," which Congress specifically reinserted, in a way which would cause it to have no meaning. The insulation and conservation credit was adopted because of budgetary constraints. (See, S. Rep. No. 95-1324) (Conference Report), 95th Cong., 2d Sess., p. 64-67 [1978-3 C.B. (Vol. 2) 309, 336-339].) In response to a number of comments, several technical changes were made in the definition of the listed items. RECYCLING EQUIPMENT Under section 48(1) (6), recycling equipment is equipment that sorts or prepares solid waste for recycling or that recycles solid waste, as well as equipment that converts solid waste into useful energy. The proposed regulations defined solid waste by reference to the definition in the regulations under section 103(b) (4) (E), which permits tax-exempt financing of "solid waste disposal facilities." Under the proposed rules, the recycling process for recovering raw materials from solid. waste is limited to one in which raw materials are recovered which may be used in fabricating an end product in the same way as materials from a virgin substance. A number of comments suggested including "reconstituted products for commercial purposes" in the definition of recycling. Thus, equipment used to remanufacture used industrial and automotive parts, such as valves, gaskets, carburetors, and distributors or to retread tires would be eligible for the credit. These suggestions were not adopted. Permitting equipment used in these processes to qualify would be inconsistent with the Senate Report which requires that recycling equipment (other than conversion equipment) be designed to recover raw materials. (See, S. Rep. No. 95-529, 95th Cong., 1st Sess., at 82 [1978-3 C.B. (Vol. 2) 199, 274].) Thus, no change is made in the proposed rules in response to these comments. In response to a request for clarification, the final rules specify that equipment that processes animal waste is not recycling equipment. Some comments suggested that the regulations incorporate by reference the definition of solid waste under 42 U.S.C. § 6903, the Solid Waste Disposal Act, as amended (which treats e.g., liquid and gaseous wastes as "solid waste") rather than the definition of solid waste in the regulations under section 103(b) (4). It is not appropriate to adopt this suggestion. There is no indication that Congress intended to alter the tax definition of solid waste (except to the extent described below). The legislative history of section 103(b) (4) (E) incorporates by reference, and specifically cites, the definition of solid waste in the Solid Waste Disposal Act in effect at that time. (See, H. Rep. No. 1533, 90th Cong., 2d Sess., p. 38 [1968-2 C.B. 801, 810]) When that definition in that Act was subsequently amended, Congress did not conform the tax law to the new definition. Furthermore, the legislative history of the Energy Tax Act of 1978 [Pub. L. 95-618, 1978-3 C.B. (Vol. 2) 1] contains no crossreference to the Solid Waste Disposal Act, as amended, thereby impliedly accepting the existing tax definition. As a general rule, Congress is presumed to intend terms to have the same meaning for tax purposes when used in more than one Code section. Therefore, under the final rules, the term continues to have the same meaning for purposes of the energy credit as under the regulations under section 103(b) (4) (E). However, Congress clearly intended certain changes be made in the tax definition of solid waste for purposes of the energy credit. The section 103 regulation excludes from the definition of solid waste any substance that may be sold (i.e., for value) to an unrelated third party. Under this rule, vir tually none of the items identified in the Senate Report, such as scrap metal, newsprint, and fibers, would be considered solid waste, since all of these items have a market value at least equal to the price a recycler would pay for the material. See, Senate Report, at 83 [1978-3 C.B. (Vol. 2) 199, 275]. Therefore, the proposed regulation defined solid waste by beginning with the section 103 definition but has modified it by deleting an irrelevant reference to the date of issue of obligations, by adding a provision which in dicates that if the market value of material is attributable only to its re cycling use the material is not considered to have a market value, and by permitting the recycled material to inmaterial during a taxable year. clude not more than 10 percent virgin SHALE OIL EQUIPMENT In response to comments, the distinction in the proposed regulations between surface mining equipment and equipment used in in situ technology is eliminated in the final rules. The distinction appeared in the Senate Report at page 83 [supra], although it was not made in the Conference Report. It was decided that, consistent with the legislative intent to encourage shale oil development, the final rules should not favor any particular shale oil recovery technology. In addition, the rules are clarified to indicate that retorting includes direct cooling and condensing and that water supply and treatment equipment and handling equipment for spent shale qualifies. However, under the statute equipment which is used for hydrogenation, refining, or other process subsequent to retorting does not qualify. Consequently, gas cleanup equipment has not been included within the qualified category of equipment. Several comments took issue with the incremental cost rule in the proposed regulations. Incremental cost is the excess of the total cost of equipment over the amount that would have been expended for the equipment if the equipment were not used for a qualifying purpose. One item of property in many instances can be used in part for a qualifying energy purpose and in part for non-qualifying functions. The approach in this situation is to give no energy credit for the property, partial credit or full credit. Denying the credit entirely would discourage energy property investments. On the other hand, property which incidentally serves an energy saving function should not receive the subsidy of a full energy credit. The fairer approach adopted in this regulation is the incremental cost rule. DRAFTING INFORMATION The principal author of these regulations is Mary Frances Pearson of the Legislation and Regulations Division of the Office of Chief Counsel, Internal Revenue Service. However, personnel from other offices of the Internal Revenue Service and Treasury Department participated in developing the regulations, both on matters of substance and style. Adoption of Amendments to the Accordingly, the following amendments are hereby adopted: Paragraph 1. Section 1.47-1 is amended by adding at the end thereof "For rules applicable to energy property, see paragraph (h) of this sec tion." 2. A new paragraph (h) is added to read as set forth below: § 1.47-1 Recomputation of credit allowed by section 38. (h) Special rules for energy property (1) In general. A recapture determination is required for the investment credit attributable to the energy percentage (energy credit) if property is (i) disposed of or (ii) otherwise ceases to be energy property (as defined in section 48(1)) with regard to the taxpayer before the close of the estimated useful life (as determined under paragraph (a) (2) (i) of this section) which was taken into account in computing qualified investment. (2) Dispositions. The term "disposition" is described in § 1.47-2(a) (1). A transfer of energy property that is a "disposition" requiring a recapture determination for the investment credit attributable to the regular percentage (regular credit) and the ESOP percentage (ESOP credit) will also be a "disposition" requiring a recapture determination for the energy credit. (3) Cessation. The term "cessation" is described in § 1.47-2(a) (2). For energy property, a cessation occurs during a taxable year if, by reason of a change in use or otherwise, the property would not have qualified for an energy credit if placed in service during that year. A change in use will not require a recapture determination for the regular or ESOP credit unless, by reason of the change, the property would not have qualified for the regular or ESOP credit if placed in service during that year. (4) Recordkeeping requirement. For recordkeeping requirements with respect to dispositions or cessations, the rules of paragraph (e) (1) of this section apply. For example, the taxpayer must maintain records for each recycling facility indicating the percentage of virgin materials used each year. See, 1.48-9 (g) (5) (ii). (5) Examples. The following examples illustrate this paragraph (h). Example (1). (a) In 1980, corporation X, a calendar year taxpayer, acquires and places in service a computer that will perform solely energy conserving functions in connection with an existing industrial process. Assume the computer has a 10 year useful life and qualifies for both the regular and energy credits. In 1981, a change is made in the industrial proc ess (within the meaning of § 1.48-9 (1) (2)). However, for 1981 the computer continues to perform solely energy conserving functions. In 1982, the computer ceases to perform energy conserving functions and begins to perform a production related function. (b) For 1981, a recapture determination is not required. For 1982, the entire energy credit must be recaptured, although none of the regular credit is recaptured. If in 1989 the computer first ceased to perform an energy conserving function, no part of the energy credit would be recaptured. Example (2). Assume the same facts and conclusion as in example (1). Assume further that X sells the computer in 1985. A recapture determination is required for the regular credit. Example (3). In 1981, corporation Y, a calendar year taxpayer, acquires and places in service recycling equipment. Assume the equipment has a 7year useful life and qualifies for both the regular credit and energy credit. During the course of 1982, more than 10 percent of the material recycled is virgin material. The energy credit is recaptured in its entirety, although none of the regular credit is recaptured. See § 1.48-9 (g) (5) (B) (ii). Example (4). In 1980, corporation Z, a calendar year taxpayer, acquires and places in service a boiler the primary fuel for which is an alternate substance. The boiler has a 7-year useful life. Assume the boiler is a structural component of a building within the meaning of § 1.48-1 (e) (2). Assume further that the boiler is not a part of a qualified rehabilitated building (as defined in section 48 (g) (1)) or a single purpose agricultural or horticultural structure (as defined in section 48(p)). Z is allowed only an energy credit since the boiler is a structural component of a building. In 1984, Z modifies the boiler to use oil as the primary fuel. A recapture determination is required for the energy credit. See § 1.48-9 (c) (3). Par. 2. A new § 1.48-9 is added to read as set forth below: § 1.48-9 Definition of energy prop erty. (a) General rule-(1) In general. Under section 48(1) (2), energy prop erty means property that is described in at least one of 6 categories of energy property and that meets the other requirements of this section. If property is described in more than one of these categories, or is described more than once in a single category, only a single energy investment credit is allowed. In that case, the energy investment credit will be allowed under the category the taxpayer chooses by indicating the chosen category on Form 3468, Schedule B. The 6 categories of energy property are: (i) alternative energy property, (ii) solar or wind energy property, (iii) specially defined energy property, (iv) recycling equipment, (v) shale oil equipment, and (vi) equipment for producing natural gas from geopressured brine. (2) Depreciable property with 3year useful life. Property is not energy property unless depreciation (or amortization in lieu of depreciation) is allowable and the property has an estimated useful life (determined at the time when the property is placed in service) of 3 years or more. (3) Effective date rules. To be energy property (i) If property is constructed, reconstructed, or erected by the taxpayer, the construction, reconstruction, or erection must be completed after September 30, 1978, or (ii) If the property is acquired, the original use of the property must (A) commence with the taxpayer and (B) commence after September 30, 1978, and before January 1, 1983. For transitional rules, see section 48 (m). (4) Cross references. (i) To deter |