PLR 200241027: Synthetic fuel credit rulings reissued after interest sale

Plain-English summary

A buyer acquired an interest in a partnership that produced synthetic fuel from coal. The partnership also considered an alternative chemical reagent for its production process. The IRS found that the ownership change and possible reagent change did not affect six earlier rulings and reissued them. Those rulings covered the fuel's qualification for the former § 29 credit, allocation of the credit among members, and the treatment of the facility after relocation or replacement. The ruling on relocation or replacement depended on original property retaining more than 20 percent of the facility's total fair market value.

Ruling snapshot

• Question: Do the ownership and reagent changes affect prior § 29 synthetic fuel credit rulings?
• Outcome: Approved; six earlier rulings reissued.
• Key authorities: IRC §§ 29(a)(2)(B), 29(c)(1)(C), 29(g)(1), 708(b)(1)(B); Rev. Proc. 2001-34.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Number: 200241027
Washington, DC 20224
Release Date: 10/11/2002
Index Number: 29.00-00 Person to Contact:

Telephone Number:

Refer Reply To:
CC:PSI:B07-PLR-125232-02
Date:
July 8, 2002

LEGEND:

P=
X=
Y=
Z=
A=
B=
C=
D=
E=
F=
x% =
y% =
Location 1 =
State 1 =
Date 1 =
Date 2 =
Date 3 =
Date 4 =
Date 5 =
Date 6 =
Date 7 =
Date 8 =

Dear
:

This letter responds to a letter dated May 1, 2002, submitted on behalf of Z by its authorized representative, requesting rulings under section 29 of the Internal Revenue Code.

You have represented the facts to be as follows:

On Date 1, P received PLR 200216002, which rules on similar issues addressed by this letter. P seeks a confirmation of the rulings in light of the purchase of a x% interest in P by Z and the potential use of an alternative chemical reagent used to produce synthetic fuel in P’s synthetic fuel facility (the Facility) located at E’s site in Location 1 (the Site) 2 PLR-125232-02

as described in the ruling request 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 production lines each of which consists of a 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 a x% interest in P from D pursuant to a Purchase Agreement, as amended on Date 6. Y purchased the remaining y% 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.

On Date 8, X sold its x% interest in P to Z pursuant to an Agreement for Purchase of Membership Interest. In exchange for the x% interest in P, Z paid to X an amount of cash at closing and Z is obligated to make certain fixed and variable payments to X. Following the sale, Z owns x% of the interests in P and Y continues to own the remaining y% interest in P.

On Date 8, Y and Z also entered into an Amended and Restated Limited Liability Company Agreement. Y remains the manager of P.

P has supplied a detailed description of the process employed at the Facility. As described, the Facility and the process implemented in the Facility, including the alternative chemical reagents used to produce the synthetic fuel, meet the requirements of Rev. Proc. 2001-34, 2001-22 I.R.B. 1293. 3 PLR-125232-02

A recognized expert in combustion, coal, and chemical analysis has performed numerous tests on the coal used at the Facility and the Product produced at the Facility 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 200216002, which you wish to be reconfirmed in this private 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
   within the meaning of section 29(a)(2)(B) of the Code, 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) of the Code.

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
   allocation of 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
   qualified 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.

The changes in facts since the issuance of PLR 200216002 are the purchase of a x% interest in P by Z and the potential use of an alternative chemical reagent to produce the synthetic fuel in the Facility as described in the ruling request by P’s authorized representative.

The above rulings are not affected by the purchase of a x% interest in P by Z and the potential use of an alternative chemical reagent to produce the synthetic fuel in the Facility as described in the ruling request by P’s authorized representative.

Accordingly, we re-issue the rulings given in PLR 200216002. Thus in summary:

1. P, with use of the process, will produce a “qualified fuel” within the meaning of
    4
   PLR-125232-02

   section 29(c)(1)(C).

2. The production of qualified fuel from the Facility will be attributable solely to P
   within the meaning of section 29(a)(2)(B) of the Code, 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) of the Code.

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
   allocation of 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
   qualified 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(s) requesting it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.

Sincerely,

Joseph H. Makurath

Senior Technician Reviewer

Office of Associate Chief Counsel

(Passthroughs and Special Industries)