Six synfuel projects are under audit by IRS | Norton Rose Fulbright
At issue is whether the projects qualify for section 29 tax credits. The US government offers a tax credit of $1.083 an mmBtu for making “synthetic fuel from coal.” All of the projects mix chemical reagents with crushed coal. All have private letter rulings from the IRS national office confirming that the processes in use at the facilities qualify for tax credits. These rulings were issued on the basis of studies that the owners of the projects submitted with their ruling requests from outside chemistry labs showing that the output from the plants differs significantly in chemical composition from the raw coal used to produce it. Nevertheless, IRS agents in the field are taking a hard look at this type of facility.
One of the audits is expected to close without any adjustment. The oldest of the remaining audits started 15 months ago. The IRS field staff is trying to coordinate its approach to the audits and is reportedly planning to hire an outside expert, possibly from one of the chemistry labs that the syncoal plants have been using, to advise it on the audits.
Meanwhile, the IRS tightened its ruling policy further in early August. The agency said last year that it will continue to rule that the use of chemical reagents to make synfuel qualifies for tax credits as long as the chemical reagent falls into one of four categories the IRS had approved for use by the end of 1999. However, Joseph Makurath, the IRS official who signs rulings, said in early August that the agency will only approve for use in the future the specific reagents that it had approved earlier. It will not approve any new reagent, even though it fits in one of the four broad categories. Makurath said the IRS views the tax credits as encouraging innovation only during a window period that has already closed.
Taxpayers with ruling requests pending are being asked by the IRS to prove that the reagents they propose to use were covered by earlier rulings.