### APPENDIX 13C. FEDERAL PRODUCTION TAX CREDIT

TABLE OF CONTENTS

13C.1 INTRODUCTION .......................................................................................................13C-1 13C.2 ELIGIBILITY REQUIREMENTS ..............................................................................13C-1 13C.3 ELIGIBLE CCW PRODUCTS ...................................................................................13C-2 13C.4 ESTIMATED LVM FEDERAL TAX CREDIT BENEFITS......................................13C-3 13C.5 SHIPMENTS PROJECTIONS ....................................................................................13C-3 13C.6 ESTIMATED LVM TAX CREDIT ............................................................................13C-4 13C.7 TAX CREDIT SENSITIVITY ANALYSIS................................................................13C-5 13C.8 IMPACTS ON INDUSTRY NET PRESENT VALUE...............................................13C-5

LIST OF TABLES
Table 13C.2-1 CCW Tax Credit Eligibility Requirements......................................................13C-2 Table 13C.4-1 Federal Production Tax Benefit to the LVM for 2007 – 2009 ........................13C-3 Table 13C.5-1 Estimated Total CCW Shipments by Equipment Class for the LVM by Year..................................................................................................................13C-4 Table 13C.6-1 Estimated Tax Credit for the LVM for Eligible Years ....................................13C-4 Table 13C.8-1 Changes in Industry Net Present Value for Top-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Base Case Shipments)......................................................................................13C-6 Table 13C.8-2 Changes in Industry Net Present Value for Top-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Price Elasticity of Demand Shipments) ...........................................................13C-6 Table 13C.8-3 Changes in Industry Net Present Value for Front-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Base Case Shipments)......................................................................................13C-6 Table 13C.8-4 Changes in Industry Net Present Value for Front-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Price Elasticity of Demand Shipments) ...........................................................13C-6Table 13C.8-5 Changes in Industry Net Present Value for Top-Loading and FrontLoading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Base Case Shipments)...................................................13C-7Table 13C.8-6 Changes in Industry Net Present Value for Top-Loading and FrontLoading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Price Elasticity of Demand Shipments)........................13C-7

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### APPENDIX 13C. FEDERAL PRODUCTION TAX CREDIT

13C.1 INTRODUCTION
The purpose of this appendix is to clarify how the Department of Energy (DOE) made its estimates of the Federal production tax credits (“tax credits”) that would benefit commercial clothes washer (CCW) manufacturers. These tax credits have been made available to CCW manufacturers by the enactment of the Energy Improvement and Extension Act of 2008 (EIEA 2008; Pub. L. 110-343). To make its estimates, DOE relied primarily on market research, the audited annual and quarterly reports of the low-volume manufacturer (LVM) filed with the U.S. Securities and Exchange Commission (SEC), and information provided by manufacturers.
13C.2 ELIGIBILITY REQUIREMENTS
Multiple tax credit programs have been enacted in order to stimulate the adoption of higher efficiency products and equipment. The first to impact the CCW industry was the Energy Policy Act of 2005 (EPACT 2005), followed by EIEA 2008. Both programs share some eligibility requirements:

� EPACT 2005 included a $75 million cap on the total tax credit that any one manufacturer can receive across all eligible products and equipment it manufactures during the effective dates of the program. EIEA 2008 also has a $75 million limit per taxpayer for all taxable years beginning after December 31, 2007, though the washers qualifying for the highest tier are not counted towards the cap.

� Appliances or equipment that meet the efficiency requirements must be manufactured in the United States. The tax credit only applies to the original equipment manufacturer; i.e. tax-credits for private-labeled goods sourced from other domestic manufacturers accrue to the source, not the reseller.

� Tax credits accrue on the basis of how many additional eligible appliances the manufacturer has sold than in years past. The calculation is based on a rolling average of qualifying shipments, the length of which varies by the tax credit program.

� Title I section 1334 (c)(1)(B) of EPACT 2005 amended section 45M of the U.S. tax code. This section in EPACT 2005 was amended by EIEA 2008 Title III section 305 (b)(2) on October 3, 2008. Both EPACT 2005 and EIEA 2008 amend Title 26 of the United States Code (U.S.C) 45M.

� Products or equipment must meet certain efficiency metrics that vary by program. For CCWs, targets were set for minimum modified energy factors (MEF) and maximum water factors (WF), as defined by the DOE clothes washer test procedure (10 CFR 430, subpart B, appendix J1).

Some differences between the tax credits in EPACT 2005 and EIEA 2008 are shown in Table.13C.2.1. Principal differences include the effective dates, the length of the rolling average

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### period over which marginal qualifying units are calculated, the number of tiers that each program has, the minimum efficiency requirements, and the per-un it tax credits that accrue to the original equipment manufacturer.
Table. 13C.2.1 RCW and CCW Tax Credit Eligibility Requirements

Tax Credit Effective Date Rolling Average Tier Efficiency Requirements Tax Credit

per unit Program Start End Basis min. MEF max. WF EPACT

2005 2006 2007 3 years N/A 1.72 8.0 $100

2008 2008 1 (toploading) 1.72 8.0 $150

Residential EIEA 2008 2009 2 years 2 (toploading) 1.8 7.5 $250

2008 2008 2010 2 years 1 (all washers) 2.0 8.0 $150

2008 2010 2 years 2 (all washers) 2.2 4.5 $250

EPACT

2005 2006 2007 3 years N/A 1.72 8.0 $100

Commercial EIEA 2008 2008 2010 2 years 1 (all washers) 2.0 8.0 $150

2 (all washers) 2.2 4.5 $250



### 13C.3 ELIGIBLE CCW EQUIPMENT
DOE research suggests that no currently available, top-loading CCW meets any of the tax credit energy efficiency eligibility requirements. Of the three major suppliers of front-loading washers to the CCW market, only one makes equipment that meets the efficiency and othereligibility requirements. Unlike its two principal competitors, the LVM produces its frontloading equipment in its own factory in the United States.
The two other major suppliers to the U.S. CCW industry produce some clothes washer products domestically, though none of these domestic-made CCWs meet the energy efficiency eligibility requirements. CCWs sold by these manufacturers that are eligible on the basis of energy efficiency metrics are either produced in wholly owned facilities abroad or sourced from another domestic manufacturer.
Hence, DOE research suggests that the tax credits associated with the CCW industry are accruing solely to the LVM on the basis of increased front-loading CCW shipments. Using audited financial statements from the LVM in conjunction with previously submitted data, DOE research suggests that LVM shipments of front-loading washers have increased almost 50 percent since 2006.

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### 13C.4 ESTIMATED LVM FEDERAL TAX CREDIT BENEFITS
DOE used Form 10-Ks and Form 10-Qs submitted by the LVM to the SEC to calculate the benefit the LVM received from the tax credit programs from 2007 through 2009. 1 

### DOE research suggests that the LVM is not eligible for any other tax credit programs; therefore, DOE attributed all tax credit benefits to the sale of eligible front-loading CCWs for the years 2007– 2010.

� Note 16 of the LVM’s 2007 Form 10-K shows that the LVM’s effective tax rate for 2007 was reduced by 7.8 percent due to the Federal tax credit. 2



### � In its 2008 10-K, the LVM recorded a $2.4 million credit from the program which reduced its effective Federal tax rate by 11.2 percent. 3 

### DOE assigned this tax credit benefit to the LVM’s 2008 fiscal year.

� The LVM’s Form 10-Q filed on May 11, 2009, stated that the LVM expects its effective Federal tax rate will be lowered by 2.7 percent in 2009. 4 

### DOE annualized the expected earnings before taxes to estimate the total benefit the LVM is likely to receive for all of 2009. Table 13C.4.1 shows the total benefit for the LVM for 2007 through 2009.

Table 13C.4.1 Federal Production Tax Benefit to the LVM for 2007–2009 2007 2008 Q1 2009 2009 (estimate) Earnings before Taxes ($ millions) 16.754 21.992 3.356 14.224


### Federal Production Tax Credit ($ millions) 1.31 2.4 0.02 0.39



### 13C.5 SHIPMENTS PROJECTIONS
To estimate the tax credit the LVM will receive in 2010, DOE used revenues posted in LVM SEC filings and previously collected data as shown in appendix 13A of the technical support document (TSD) accompanying today’s supplemental notice of proposed rulemaking (SNOPR). To calculate annual front-loading and top-loading shipments over the period, DOE estimated annual revenues for each washer segment and divided those revenues by an estimated average manufacturing production cost (MPC) for each platform. The average manufacturing cost was derived using extrapolated historical data.
For 2009, DOE used the reported projections of tax credit for 2009 by the LVM’s first quarter 10-Q report to estimate front-loading shipments for 2009. For 2010 segment revenues, DOE estimated an increase of revenues from 2009 to 2010 of 1 percent. The projected revenues for 2009 and 2010 were disaggregated by equipment class using the same process used for 2004 through 2008 revenues to estimate future shipments. Table 13C.5.1 shows DOE’s estimates of the total CCW shipments for the LVM in the years used for the tax credit calculations.

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### Table 13C.5.1 Estimated Total CCW Shipments by Equipment Class for the LVM by Year Type of Washer Year

2004 2005 2006 2007 2008 2009 2010TopLoading* 86,800 89,800 101,100 119.600 115,600 112,800 112,100FrontLoading* 17,700 18,700 22,900 32,900 43,600 40,200 40,600

* Total shipments are rounded to the nearest hundred


### For the LVM’s 2007 fiscal year, DOE estimated the number of washers eligible for a tax credit on the basis of a 3-calendar year period per the EPACT 2005 benefits (title I section 1334 (c)(1)(B) of EPACT 2005). As noted in Table.13C.2.1, the EIEA 2008 legislation changed multiple eligibility requirements. For the 2008, 2009, and 2010 tax credit benefits, DOE used the EIEA 2008 eligibility requirements. For all years, DOE assumed that every front-loading washer sold by the LVM qualified for the Federal production tax credit.

13C.6 ESTIMATED LVM TAX CREDIT
To calculate the eligible tax credit amounts for each calendar year, DOE multiplied the estimated qualifying total clothes washer shipments by a corresponding credit per unit. EPACT 2005 allows a $100 credit per qualifying washer for 2007. Therefore, DOE multiplied $100 by the qualifying shipments for 2007 to calculate the eligible tax credit for that year. For 2008, the LVM reported a $2.4MM tax credit in its SEC Form 10-K. 5 

### DOE estimated additional eligible front-loading unit shipments on the basis of the total tax credit and an estimated individual unit shipment credit of $150 per front-loading washer. For 2009, and 2010, EIEA 2008 allows either a $150 or $250 tax credit depending on the energy conservation characteristics of the washer. According to the ENERGY STAR website, the LVM introduced new washers in 2008 that qualify for the higher-tier tax credit. 6 

### DOE estimated an average tax credit of $200 per frontloading washer for the 2009 and 2010 LVM fiscal year. The average credit was used because DOE could not determine the number of shipments of each type of qualifying washers with certainty.
Table 13C.6.1 shows DOE’s estimates of the tax credit for each eligible year.
Table 13C.6.1 Estimated Tax Credit for the LVM for Eligible Years Year Category 2007 2008 2009 2010 Tax Credit using $100 per qualifying unit
Tax Credit using $150 per qualifying unit
Tax Credit using $200 per qualifying unit $1.3 million

$2.4 million

$385,000 $0

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### DOE estimates that, in total, the LVM is eligible to receive approximately $4.1 million in tax credits from the EPACT 2005 and EIEA 2008 legislation from 2007 to 2010. DOE used a 1­ percent CCW revenue growth from 2009 to 2010 to determine the 2010 qualifying front-loading shipments. DOE estimates the LVM will not have a sufficient increase in shipments of qualifying washers to obtain any tax credit in 2010.

13C.7 TAX CREDIT SENSITIVITY ANALYSIS
DOE also developed different scenarios for 2010 to estimate a range of tax credit impacts based on different macro-economic factors.

� For the first scenario, DOE estimated the necessary increase in CCW revenue for the LVM to receive any benefit from the Federal production tax credits in 2010. DOE estimated that the LVM would have to increase its CCW revenues by 2.6 percent in 2010 in order to receive any benefit from the tax credit program. The reasonable increase in revenues corresponds to an approximately 4-percent increase in total front-loading washers from 2009 to 2010.

� For the second scenario, DOE estimated the necessary increase in CCW revenue for 2010 that would approximately double the total calculated tax credit benefit of EPACT 2005 and EIEA 2008 tax credits from 2007 to 2010. For this scenario, DOE estimated that increase in CCW revenue that would be required from 2009 to 2010 to increase the total benefit from approximately $4.1 million to $8.0 million from 2007 to 2010. DOE estimated that the LVM would need to increase its CCW revenue by approximately 24 percent in 2010 to receive an estimated $3.9 million in that year, which would bring its total benefit from 2007 to 2010 to approximately $8.0 million.

13C.8 IMPACTS ON INDUSTRY NET PRESENT VALUE
To determine the impacts of the tax credit on the industry net present value (INPV), DOE implemented the tax credit in the Government Regulatory Impact Model (GRIM). The calculated tax credit was added as a cash flow item in the base case and standards case. Table 13C.8.1 through Table 13C.8.6 provide the INPV estimates for the CCW industry under the two shipment scenarios analyzed with incorporation of tax credits. In all the results, DOE added the entire benefit to the CCW industry in the base case and standards case. Therefore, the impacts on INPV in the results for just top-loading or front-loading are optimistic because the entire Federal production tax credit estimates for the CCW industry are added to INPV in the base and standards cases while only part of the total CCW industry is evaluated.

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### Table 13C.8.1 Changes in Industry Net Present Value for Top-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Base-Case Shipments) Preservation of Gross Margin Percentage Markup with Base-Case Shipments

Units Base Case Trial Standard Level 1 2 3 4 5

INPV (2008 $ millions) 33 37 37 30 30 30

Change in INPV (2008 $ millions) - 4 4 (4) (4) (4) (%)

- 11.02% 11.02% -10.79 % -10.79% -10.79%


### Table 13C.8.2 Changes in Industry Net Present Value for Top-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Price Elasticity of Demand Shipments) Preservation of Gross Margin Percentage Markup with Price Elasticity of Demand Shipments

Units Base Case Trial Standard Level 1 2 3 4 5

INPV (2008 $ millions) 33 36 36 28 28 28

Change in INPV (2008 $ millions) - 3 3 (6) (6) (6) (%)

- 8.30% 8.30% -17.28% -17.28% -17.28%


### Table 13C.8.3 Changes in Industry Net Present Value for Front-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Base-Case Shipments) Preservation of Gross Margin Percentage Markup with Base-Case Shipments

Units Base Case Trial Standard Level 1 2 3 4 5

INPV (2008 $ millions) 29 29 27 27 25 12

Change in

INPV (2008 $ millions) - 0 (2) (2) (5) (17) (%)

- 0.00% -7.90% -7.9 0% -15.62% -57.82%


### Table 13C.8.4 Changes in Industry Net Present Value for Front-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Price Elasticity of Demand Shipments) Preservation of Gross Margin Percentage Markup with Price Elasticity of Demand Shipments

Units Base Case Trial Standard Level 1 2 3 4 5

INPV (2008 $ millions) 29 29 27 27 24 12

Change in

INPV (2008 $ millions) - 0 (2) (2) (5) (17) (%)

- 0.00% -7.92% -7.9 2% -16.15% -59.12%

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### Table 13C.8.5 Changes in Industry Net Present Value for Top-Loading and Front-LoadingCommercial Clothes Washers (Preservation of Gross Margin Percentage Markup – BaseCase Shipments) Preservation of Gross Margin Percentage Markup with Base-Case Shipments

Units Base Case Trial Standard Level 1 2 3 4 5

INPV (2008 $ millions) 62 66 63 57 54 42

Change in INPV (2008 $ millions) - 4 1 (5) (8) (20) (%)

- 5.93% 2.23% -7.7 6% -12.65% -32.88%


### Table 13C.8.6 Changes in Industry Net Present Value for Top-Loading and Front-Loading Commercial Clothes Washers (Preservation of Gross Margin Percentage Markup – Price Elasticity of Demand Shipments) Preservation of Gross Margin Percentage Markup with Price Elasticity of Demand Shipments

Units Base Case Trial Standard Level 1 2 3 4 5

INPV (2008 $ millions) 62 65 62 55 52 39

Change in INPV (2008 $ millions) - 3 0 (7) (10) (23) (%)

- 4.47% 0.76% -11.25% -16.39% -36.98%


### The results from the GRIM show that the estimated tax credit has minimal impact on CCW INPV. Depending on the shipment scenario and equipment class analyzed, the tax credit lowers the impacts of energy conservation standards by up to 1 percent. This small decrease is not enough to mitigate all of the impacts on the CCW industry due to energy conservation standards.

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### REFERENCES

1 

### SEC documents for the LVM are available online at: http://www.sec.gov/cgi-bin/browseidea?action=getcompany&CIK=0001063697&owner=exclude&count=40

2 

### Alliance Laundry Systems Form 10-K for 2007, p. 103. Available online at: http://www.sec.gov/Archives/edgar/data/1063697/000119312508053028/d10k.htm

3 

### Alliance Laundry Systems, Form 10-K for 2008, p. 96. Available online at: http://www.sec.gov/Archives/edgar/data/1063697/000119312509048716/d10k.htm

4 

### Alliance Laundry Systems, Form 10-Q for the quarterly period ending March 31, 2009, p. 15. Available online at http://sec.gov/Archives/edgar/data/1063697/000119312509107306/d10q.htm

5 

### Alliance Laundry Systems, Form 10-K for 2008. Op. cit., p. 91.

6 

### ENERGY STAR-Qualified Commercial Clothes Washers. Available online at: www.energystar.gov/index.cfm?fuseaction=clotheswash.display_commercial_cw

.

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