SYNFUEL PROJECTS hit more turbulence

SYNFUEL PROJECTS hit more turbulence

August 01, 2003
SYNFUEL PROJECTS hit more turbulence.

The IRS has scheduled a meeting with tax counsel who have been working on synfuel projects for August 14 in Houston. At last count, 15 such projects are under audit by the IRS, and there are indications the agency is considering disallowing tax credits that the owners of the projects have claimed as far back as 1998.

The US government allows a tax credit of $1.095 an mmBtu for making synthetic fuel from coal.  The IRS has issued more than 80 private rulings confirming that coal agglomeration facilities — plants that add chemical reagents to coal — make synthetic fuel. However, in late April, it stopped issuing any further rulings. In late June, it announced that it has “reason to question the scientific validity of the test procedures and results” that the companies that own these plants submitted when they applied for rulings. The agency is considering whether to revoke some or all of the rulings.

At the meeting in Houston in mid-August, Bobby Scott — the head of the IRS audit team — is expected to explain what the agency is attempting to verify in the audits and answer questions. He has set aside two hours for the meeting. The agency hopes to start wrapping up the audits this fall.

The government is concerned about the potential impact on the utility industry if tax credits are disallowed. DTE said in a press release that 70% of earnings from its unregulated business unit are linked to nine synfuel plants. Progress Energy said in a press release that it has claimed $447 million in tax credits on its five synfuel plants and is carrying forward approximately another $500 million in unused credits.

A showdown meeting between the industry and top Treasury and IRS officials in July has not yet produced the result the industry wanted. Treasury officials continue to insist that this is strictly an audit issue. The industry argues that it is unfair, after taxpayers relied on so many rulings to make large investments, for the government suddenly to reverse course.

Keith Martin