OWNERS OF SYNCOAL PLANTS may have won a major battle but the war is not over.  The IRS is finding ways to undermine a political settlement.

The US government allows a tax credit of $1.059 an mmBtu for producing “synthetic fuel from coal.” The IRS stopped ruling last fall that coal agglomeration facilities — or facilities that add chemical binders to coal fines or whole coal — are producing synthetic fuel.  Owners of the plants complained to Congress.  Earlier this year, synfuel producers negotiated a compromise with the Treasury Department, and the rulings window reopened in late April.

However, only one minor ruling has been issued since then.  Meanwhile, the IRS now says that anyone receiving a ruling must agree to a cap on the amount of output on which he will claim tax credits.  The caps under discussion are somewhere between one and two times the “contract capacity” of the plant, or the amount that the manufacturer said the plant was capable of producing when the plant originally went into service.  Many synfuel plants are producing at multiples of at least three and four times this amount.

The IRS is also starting to probe on audit whether synfuel plants were in operation in time to qualify for tax credits.  Projects had to be placed in service for tax purposes by June 1998.

One industry participant describes the situation with the IRS as a roller coaster on which there will be many more ups and downs before the track levels off.  Many transactions to buy or sell syncoal plants appear in the meantime to have been put on hold.

Keith Martin