PLR 200216002: Synthetic fuel credit rulings reconfirmed after ownership changes

Plain-English summary

A partnership asked the IRS to reconfirm earlier rulings that its coal processing facility produced qualified fuel eligible for the section 29 credit. Since the earlier ruling, the partnership had new owners, changed its chemical reagent, and moved the facility. The IRS found those changes did not affect the earlier conclusions because the facility and process continued to meet the requirements of Rev. Proc. 2001-34, and the original property remained more than 20 percent of the facility's value. The IRS reconfirmed the credit, allocation, binding contract, partnership termination, and relocation rulings under the stated facts.

Ruling snapshot

• Question: Do ownership, reagent, and facility location changes affect earlier section 29 rulings?
• Outcome: Approved: the earlier rulings were reissued
• Key authorities: IRC §§ 29, 708(b)(1)(B); Rev. Proc. 2001-34

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Number: 200216002
Washington, DC 20224
Release Date: 4/19/2002
Index Number: 29.00-00
Person to Contact:

Telephone Number:

Refer Reply To:
CC:P&SI:7-PLR-116281-00
Date:
January 3, 2002

Re: Section 29 Request for a Ruling: Credit for Producing Fuel from a
Nonconventional Source

LEGEND:

P
=
X
=
Y
=
A
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B
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C
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D
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E
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F
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Location 1 =
State 1 =
Date 1 =
Date 2 =
Date 3 =
Date 4 =
Date 5 =
Date 6 =
Date 7 =

Dear
:

This letter responds to a letter dated August 16, 2000, and subsequent correspondence, submitted on behalf of P by its authorized representative, requesting rulings under section 29 of the Internal Revenue Code.

The facts as represented by P and P’s authorized representative are as follows:

On Date 1, P received PLR 9832021, which rules on similar issues addressed by this letter. P seeks a confirmation of the rulings in light of the purchase of the interests in P by X and Y, a change in the chemical reagent used to produce synthetic fuel and relocation of P’s synthetic fuel facility (the Facility) to E’s site in Location 1 (the Site) as

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described in the ruling request and subsequent correspondence from P’s authorized representative.

P is a Delaware limited liability company, taxable as a partnership. P constructed, owns and operates the Facility for producing a solid synthetic fuel from coal (the Product) using the process described below. The Facility is a Secondary Coal Recovery System
#2000 designed by A. The Facility consists of three production lines each of which consists of a briquetter which is fed by its associated mixer and each of which is capable of being operated independently. Because each production line is capable of being operated independently and can independently produce synthetic fuel, each independent production line may be treated as a separate facility.

The Facility was constructed pursuant to a written contract entered into by A and B on Date 2. A assigned to P all of its rights and obligations under the construction contract with respect to one facility. On Date 3, B subcontracted with C to perform the procurement, assembly and installation services under the construction contract. P provided an opinion of counsel that the construction contract constituted a binding written contract under applicable state laws prior to January 1, 1997, and at all times thereafter through completion of the contract.

On Date 4, P received a Determination Letter from the District Director for the State 1 District that the Facility was placed in service prior to July 1, 1998.

On Date 5, X purchased an interest in P from D pursuant to a Purchase Agreement, as amended on Date 6. Y purchased the remaining interest in P from A on Date 7 pursuant to a Purchase Agreement.

P relocated the Facility to the Site. P has represented that following the relocation the fair market value of the original property is more than 20 percent of the Facility’s total value (the cost of the new property plus the value of the original property).

P has entered into a Sales Agency Agreement for Synthetic Fuel with F, an affiliate of E, for the sale of the Product to unrelated purchasers. P has represented that all sales of synthetic fuel will be to unrelated persons.

P has supplied a detailed description of the process employed at the Facility. As described in P’s letter ruling request, the Facility and the process implemented in the Facility, including the chemical reagent used to produce the synthetic fuel, meet the requirements of Rev. Proc. 2001-34, 2001-22 I.R.B. 1293.

A recognized expert in coal combustion chemistry has performed numerous tests on the coal used at the Facility and the Product produced at the Facility including the changed reagent and has submitted reports in which the expert concludes that significant chemical changes take place with the application of the process to the coal.

The rulings issued in PLR 9832021, which you wish to be reconfirmed in this private

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letter ruling, are as follows:

1. P, with use of the process, will produce a “qualified fuel” within the meaning of
   section 29(c)(1)(C).

2. The production of qualified fuel from the Facility will be attributable solely to P,
   entitling P to the section 29 credit for qualified fuel sold to unrelated persons.

3. The contract for the construction of the Facility constitutes a “binding written
   contract” within the meaning of section 29(g)(1)(A).

4. The section 29 credit attributable to P may be allocated to the members of P in
   accordance with the members’ interests in P when the credit arises. For the section 29 credit, a member’s interest in P is determined based on a valid allocation of the receipts from the sale of the section 29 qualified fuel.

5. A termination of P under section 708(b)(1)(B) will not preclude the reconstituted
   partnership from claiming the section 29 credit on the production and sale of synthetic fuel to unrelated persons.

6. Because the Facility was “placed in service” prior to July 1, 1998 within the meaning
   of section 29(g)(1), relocation of the Facility to a different location after June 30, 1998, will not result in a new placed in service date for the Facility for purposes section 29 provided the fair market value of the original property is more than 20 percent of the Facility’s total fair market value at the time of relocation.

The changes in facts since the issuance of PLR 9832021 are the purchase of interests in P by X and Y, the change in chemical reagent used to produce the synthetic fuel, and relocation of the Facility as described in the ruling request and subsequent correspondence by P’s authorized representative.

The above rulings are not affected by the purchase of interests in P by X and Y, the change in chemical reagent used to produce the synthetic fuel, or relocation of the Facility as described in the ruling request and subsequent correspondence by P’s authorized representative.

Accordingly, we re-issue the rulings given in PLR 9832021. Thus in summary:

1. P, with use of the process, will produce a “qualified fuel” within the meaning of
   section 29(c)(1)(C).

2. The production of qualified fuel from the Facility will be attributable solely to P,
   entitling P to the section 29 credit for qualified fuel sold to unrelated persons.

3. The contract for the construction of the Facility constitutes a “binding written contract”
   within the meaning of section 29(g)(1)(A).

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4. The section 29 credit attributable to P may be allocated to the members of P in
   accordance with the members’ interests in P when the credit arises. For the section 29 credit, a member’s interest in P is determined based on a valid allocation of the receipts from the sale of the section 29 qualified fuel.

5. A termination of P under section 708(b)(1)(B) will not preclude the reconstituted
   partnership from claiming the section 29 credit on the production and sale of synthetic fuel to unrelated persons.

6. Because the Facility was “placed in service” prior to July 1, 1998 within the meaning
   of section 29(g)(1), relocation of the Facility to a different location after June 30, 1998, or replacement of part of the Facility after that date, will not result in a new placed in service date for the Facility for purposes section 29 provided the fair market value of the original property is more than 20 percent of the Facility’s total fair market value at the time of relocation or replacement.

Except as specifically ruled upon above, we express no opinion concerning the federal income tax consequences of the transaction described above.

This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3) provides that it may not be used or cited as precedent. Temporary or final regulations pertaining to one or more of the issues addressed in this ruling have not yet been adopted. Therefore, this ruling may be modified or revoked by the adoption of temporary or final regulations to the extent the regulations are inconsistent with any conclusion in this ruling. See section 12.04 of Rev. Proc. 2001-1, 2001-1 I.R.B. 1, 46.

However, when the criteria in section 12.05 of Rev. Proc. 2001-1 are satisfied, a ruling is not revoked or modified retroactively, except in rare or unusual circumstances.

Sincerely yours,
Joseph H. Makurath
Senior Technician Reviewer, Branch 7
Office of Assistant Chief Counsel
(Passthroughs and Special Industries)
Enclosure:
Copy for section 6110 purposes

cc: