LPDD Model Law: Removal of Favorable Tax Treatment for Coal

The attached model bill and supporting memorandum propose amendments to the Internal Revenue Code to eliminate favorable treatment of coal mining and production, as recommended in Chapter 4 of the LPDD text.

In sum, the changes proposed by this model law include:

• Persons recording income from coal royalty contracts will be required to pay ordinary income tax rates thereon, rather than allowing them to pay reduced taxes by classifying such income as a capital gain.
• Coal-related expenses should not be eligible for a tax deduction under Section 617.
• Certain expenditures relating to the development of mines or other natural deposits with commercially marketable quantities of ores or minerals will no longer be treated as deductible against taxable income under Section 616.
• Removes coal investments as eligible for an allowance for a 10 percent depletion deduction under Section 613.
• Removes Section 48A, which provides a “qualifying advanced coal project credit” for some projects using “advanced coal-based general technology” in which the fuel input for the project is at least 75 percent coal.
• Excludes coal from the “gasification technologies” that are eligible for the “qualifying gasification project credit” under Section 48B.
• Removing refined coal production facilities, Indian coal production facilities, and biomass that is co-fired with coal from eligibility for the Section 45 renewable energy production tax credit.

This contribution to the LPDD database was drafted by Nick Ognibene, Brendan Holman, Felise Cooper, Jake Ely, John Hibbard, Gada Al Herz, and Ken Rivlin, all of Allen and Overy. Peer reviewing was contributed by Janet Milne, Professor of Law and Director of Environmental Tax Policy at the University of Vermont Law School, and by Doug Koplow, Founder of Earth Track, Inc., who has written extensively on natural resource tax subsidies.