IRS Stops Ruling On Syncoal Projects

IRS Stops Ruling On Syncoal Projects

December 01, 2000

The Internal Revenue Service said in late October that it has decided to stop issuing rulings in syncoal projects on the question whether the output qualifies as a “synthetic fuel from coal.”

However, it made two exceptions. It will continue to rule on whether output qualifies for tax credits at facilities that make synthetic fuel from coke or “waste coal.”

At issue is whether owners of syncoal projects qualify for a federal tax credit of $1.035 an mmBtu. The tax credit – found in section 29 of the US tax code – is supposed to induce Americans to look in unusual places for fuel. Anyone producing “synthetic fuel from coal” qualifies potentially for tax credits as long as the facility he uses to produce the fuel was placed in service by June 1998. Tax credits run potentially through 2007.

The IRS moratorium applies to all ruling requests, including ones that are already at the agency awaiting action. The announcement is Revenue Procedure 2000-47.

The agency also put out a list of questions on which it is seeking public comment.

Syncoal facilities have come under fire after the Kentucky governor and three congressmen sent the Treasury Department letters in July complaining that some syncoal plants were doing little more than spraying a chemical on coal that would have been burned anyway in utility boilers and claiming they had effected enough chemical change in the coal to turn it into a synthetic fuel.

According to a study last summer by RDI Consulting in Boulder, Colorado, 52 syncoal plants that use chemical binders to bind together coal fines were reportedly put into service in time to qualify for tax credits. Many of the original developers of these projects are too small to have much appetite for tax benefits. Consequently, many projects have been sold to institutional equity participants. The equity usually seek a ruling from the IRS.

Rulings in this area typically cover at least three issues. One is whether the output from the project is a “synthetic fuel from coal.” Another is whether the deal with the developer has been structured properly to transfer tax credits. Another – in projects that went into service after 1996 – is whether the project was under “binding written contract” by December 1996 to be built. The deadline for putting syncoal plants into commercial operation to qualify for tax credits was originally December 1996, but Congress extended it to June 1998 for projects to which the developer was irrevocably committed by the end of 1996.

The IRS announcement in late October said the agency has stopped ruling only on the first issue – whether output from the project is a “synthetic fuel.” The IRS publishes a list at the start of each year of areas in which it will not rule because the area is under “extensive study.” The IRS said it is adding the following item to this list:

“Whether a solid fuel other than coke or a fuel produced from waste coal is a qualified fuel under § 29(c)(1)(C). Waste coal for this purpose is limited to waste coal fines from normal mining and crushing operations and does not include fines produced (for example, by crushing run-of-mine coal) for the purpose of claiming the credit.”

It asked for public comment on five questions. Comments were due by November 27.

The first question is whether the test of whether output is a “synthetic fuel from coal” should remain simply whether it is significantly different chemically from the coal used to produce it and, if so, how to measure chemical change. The next question is whether “additional or alternative tests are needed.” The third question is whether tax credits should only be allowed in cases “where domestic energy production is increased.” The fourth question is in what circumstances credits should be allowed on output produced from waste coal or coal fines. The last question is whether the IRS should require that the synthetic fuel have a market value significantly greater than the cost of the coal and binder used to produce it. Most projects buy raw coal at a higher price than they can sell the output, but still profit from turning coal into synfuel because of the large tax subsidy. The subsidy amounts to about $25 a ton of coal.

IRS officials have tentatively taken the position that they will only rule – while the moratorium remains in place – on projects that make synfuel entirely out of waste coal. The industry is arguing that it should be enough to make synfuel “primarily” from waste coal. This issue remains under debate.

by Keith Martin, in Washington