A Synfuel Plant

A Synfuel Plant

June 30, 2011

A synfuel plant was in service for tax purposes even though it produced little output and sat idle for four years while the developer tried to find a buyer.

The IRS reached that conclusion in a “technical advice memorandum” or ruling by the national office to settle a dispute between a taxpayer and an IRS agent in the field. The agency made the contents public in April.

The synfuel plant was built with the aim of supplying synfuel to a company that went bankrupt. The plant had to be moved into storage shortly after producing a limited amount of synfuel.

The US government offered tax credits for producing synthetic fuel from coal and other substances starting in 1980 after the Arab oil embargo. The credits could be claimed through 2007. However, a plant had to be placed in service by June 30, 1998 to qualify.

Roughly 53 small facilities were built before the deadline that made synfuel by spraying chemicals on raw coal. The IRS challenged whether the output from many of the plants was different enough from the raw coal to qualify as synfuel. It also challenged whether some of the plants made it into service in time to qualify for tax credits, since most were rushed into service close to the deadline and produced synfuel only sporadically for months or years after the deadline, in some cases while continuing to tinker with the equipment.

The new ruling is interesting because it is now years after most of the plants were audited.

The IRS national office said, in siding with the taxpayer, that a plant does not have to reach its design capacity to be in service, but it must be “ready and available to produce on a sustained and reliable basis in commercial quantities.” The owner must also have its doors open for business. In this case, the facility was dismantled and stored, but the IRS said that it remained in service because the owner showed no intention to abandon it.

The IRS said the main issue in the case was whether the facility was able to produce the intended product before the owner dismantled it. The plant was tested using three different feedstocks.

The plant barely produced any synfuel before July 1998 using the feedstock it planned ultimately to use, but the IRS said the plant had shown it could produce synfuel using one of the other feedstocks and no changes were needed in the equipment to produce the final product.

Keith Martin