Synfuel plant owners are breathing more easily after ruling that the projects qualify for section 29 tax credits | Norton Rose Fulbright
The US government offers a tax credit of $1.059 an mmBtu for producing “synthetic fuel from coal.” The agency stopped ruling in the late summer 2000 that coal agglomeration facilities that add chemicals to coal particles qualify for the credits. It reopened the rulings window in theory in late April, but no rulings were issued in practice while the IRS tried to get plant owners to agree to low limits on output in exchange for future rulings.
The IRS backed off this effort on October 9.
Most projects were originally designed to glue together coal fines to form briquettes or pellets. However, a majority of facilities have dispensed with making pellets. The IRS takes the position that projects that omit this step must be able to show that the omission did not result in a significant increase in output. The agency said on October 9 that it would resume ruling that the projects qualify for tax credits and essentially defer any argument with taxpayers about whether output increased until audit.
The IRS had a backlog of some 25 ruling requests. By early December as the NewsWire was going to press, seven rulings had been issued, and the agency had worked through ruling requests filed by September 2000.
The IRS will be on the lookout on audit for projects that are not making pellets. Joseph Makurath, the IRS official who signs section 29 rulings, said the IRS will not bother such projects on audit if the taxpayer voluntarily limits his output to the “contract capacity” of his facility. Contract capacity means 50 tons an hour for Startec plants, 70 tons an hour for Covol plants, and 150 tons an hour for Earthco plants.
Taxpayers who do not do this should expect to be asked on audit to prove the plant did not significantly increase output by failing to make pellets. Makurath said the IRS will accept as proof the fact that annual output at the taxpayer’s plant did not exceed the actual output at which the taxpayer’s plant or a “comparable” facility operated for a full year while making pellets.
Many tax counsel question whether the IRS has authority to enforce production limits. Meanwhile, most projects are debating at what level to operate.