Synfuel projects received good news from the IRS in late October, but are not yet in the clear - IRS Announcement 2003-70

Synfuel projects received good news from the IRS- IRS Announcement 2003-70 | Norton Rose Fulbright

December 01, 2003 | By Keith Martin in Washington, DC
SYNFUEL projects received good news from the IRS in late October, but are not yet in the clear.

The IRS said that even though it does not believe “coal agglomeration plants” are making a synthetic fuel from coal — as required to qualify for a federal tax credit of $1.095 an mmBtu on their output — it nevertheless will not challenge project owners who claim the tax credits on grounds of failure to make synfuel.  A coal agglomeration plant is a plant that adds chemical reagents to crushed coal.  The IRS made the announcement in Announcement 2003-70.  The agency has issued more than 80 private letter rulings to owners of the projects confirming that they are making synfuel.  Senior IRS officials felt it was too late to change course.  The tax credits only run through 2007.

However, many synfuel projects remain under IRS audit.  The IRS commissioner promised several key members of Congress that the first audit will be concluded by December or January.  An issue in the audits is whether the plants were placed in service in time to qualify for tax credits.  Plants had to be operating by June 30, 1998 to qualify.  The plant owners are waiting to see what position the IRS takes on this issue in the first audit.

The IRS tightened its rulings policy in late November.  It will not issue rulings confirming that a plant qualifies for tax credits in the future unless an earlier ruling was issued with respect to that specific plant.  It will not be enough to show that the plant is using a chemical reagent on which the IRS ruled earlier.  A few exceptions may be made.  However, even then, the plant owner will have to get a “determination letter” from the local IRS district director confirming that his plant was put into service by June 1998 before the IRS national office will issue a ruling that the plant is making synfuel.

Meanwhile, the IRS released an internal legal memorandum in late November that shot down a theory that IRS agents who are conducting the audits would like to use to deny tax credits to synfuel plants that have been moved to new locations.  More than half the plants have been moved.  The issue when a plant is moved is whether it is still the same plant that had to have been put into service by June 1998 to qualify for tax credits.  The memorandum reaffirms that most plants that have been moved remain the same plants.  It also addressed what equipment had to have been installed and have been operating at the original site.  The “facility” that the tax law requires have been in service by June 1998 excludes feedstock “preparation equipment, feedstock and product conveyors, and storage tanks” for the chemical reagent, the IRS said.  The memorandum is ILM 200334024.

A Senate subcommittee has launched an investigation into the synfuel industry.  The subcommittee — called the Senate permanent subcommittee on investigations — has a broad mandate to shine a spotlight into dark recesses of the federal government.  The subcommittee has subpoena power.  It does not ordinarily legislate, but brings its findings to the attention of the public through public hearings.  It is the same subcommittee that conducted the Army-McCarthy hearings in the 1950’s and that forced executives of the major oil companies to testify about high gasoline prices under the glare of television cameras during the Arab oil embargo in the 1970’s.  The staff director said it is still too early in the investigation to predict in what direction it might be headed.

The energy bill currently stalled in Congress would allow new synfuel plants to be built in the future and qualify for tax credits.  However, the tax credit would be only 51.7¢ an mmBtu and would be capped at $37,760 a year per project.  In addition, the bill would define synfuel more narrowly for future projects.  Output from a future plant could only qualify as synfuel if it has a market value at least 50% more than the value the raw coal used to produce it and if there is at least a 20% reduction in the amount of nitrogen oxide and either sulfur dioxide or mercury released from burning it.

Keith Martin