Synfuel audits may start to wrap up this fall

Synfuel audits may start to wrap up this fall | Norton Rose Fulbright

April 01, 2003 | By Keith Martin in Washington, DC
SYNFUEL audits may start to wrap up this fall.

A growing number of projects that make synthetic fuel from coal are under audit by the IRS.  The agency is looking at whether the projects qualify for section 29 tax credits.  The credits on output at a single synthetic fuel plant can run $50 to $75 million a year.

The IRS will not say how many projects it has under audit currently, but a key member of the team that is coordinating the audits said that the agency expects to get to all projects eventually.  At last count, 73 “coal agglomeration facilities” – or plants that make synthetic fuel by applying chemical reagents to raw coal – claim to have been put into service in time to qualify for tax credits.  The deadline to be put into service was June 1998.

The IRS is focusing on three issues in the audits, the source said.  One is chemical change, or the question whether the output from the projects is different enough from raw coal to qualify as a synthetic fuel.  The IRS has not drawn any informal line in the sand.  For example, there is no rule of thumb that there must be at least a 15% chemical change in order to qualify as a synthetic fuel.  The agency is still formulating its position with the help of Dr. James Speight, an expert in coal chemistry at the University of Wyoming.

The other two issues are what had to have occurred by June 1998 for a plant to be in service and what is the “facility” in cases where a plant has been moved or sold to a new owner and its configuration or conveyor belts, motors and other equipment changed.  The audit team has been getting guidance from the IRS national office on these issues.

The source was reluctant to commit to when the first audit will be completed.  One taxpayer was told last year that its audit would be closed without any adjustment, but then the audit was reopened at the direction of the coordinating team.  The source said he hopes the first audit will close by September this year, and then the others will begin move in quick succession.

Six projects triggered their own audits by applying for “pre-filing agreements” under a program the IRS instituted in 2001.  These six have now “leapfrogged” to the front of the queue, according to the source.

Meanwhile, the IRS announced on April 10 that section 29 tax credits were $1.095 an mmBtu for output during calendar year 2002.

Keith Martin