PLR 200316022: Relocated synthetic fuel plant retains section 29 credit treatment

Plain-English summary

A partnership asked the IRS to reconfirm earlier rulings for a coal-based synthetic fuel plant after ownership, reagent, and location changes. The IRS reissued the rulings that the described process produces qualified fuel and that the partnership may claim the section 29 credit on sales to unrelated buyers, with valid allocations to its members. It also ruled that relocation or partial replacement would not reset the plant's placed-in-service date if original production property exceeded 20 percent of the facility's total value. The IRS did not determine the actual fair market values of the equipment.

Ruling snapshot

• Question: Did the changes affect the plant's section 29 credit rulings or its placed-in-service date?
• Outcome: Approved: six prior rulings reissued, subject to the stated process and value conditions.
• Key authorities: IRC §§ 29(a), 29(c), 29(g), 708(b)(1)(B); Rev. Rul. 94-31.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury

Number: 200316022
Washington, DC 20224
Release Date: 4/18/2003
Index Number: 29.00-00 Person to Contact:

Telephone Number:

Refer Reply To:
CC:PSI:B07-PLR-138082-02
Date:
Janurary 7, 2003

:

LEGEND:
P=
X=
Y=
A=
B=
C=
D=
E=
Location 1 =
State 1 =
Date 1 =
Date 2 =
Date 3 =
Date 4 =
Date 5 =
Date 6 =
Date 7 =
Amount 1 =
Percentage 1 =

:

This letter responds to a letter dated July 11, 2002, 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:
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On Date 1, P received PLR 9832014, which ruled 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, the change in the chemical reagents used to produce synthetic fuel, and the relocation of P’s synthetic fuel facility (the Facility) to E’s site in Location 1 (the Site) as described in the ruling request.

P is a Delaware limited liability company, taxable as a partnership. P owns and operates the Facility for producing a solid synthetic fuel from coal (the Product) using the process described below. The Facility was constructed by P. The Facility is a Secondary Coal Recovery System #2000 facility 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 favorable determination 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. X and Y have made (and are expected to continue to make) periodic capital contributions to P to enable it to pay its operating costs and other obligations. A proforma attached to the ruling request demonstrates that project expenses are projected to exceed revenues.

P has relocated the Facility to the Site. In connection with the relocation of the Facility, most major components of the Facility directly necessary to produce a qualified fuel were relocated to the Site. Certain equipment included in the original construction was scrapped or sold and not relocated. In connection with the relocation, P also installed certain equipment that is not directly necessary for the production of qualified fuel such as coal and material handling equipment, a building, office trailers and other improvements to coal conveying systems at the Site. Following the relocation, the fair market value of the original property included in the Facility is more than 20 percent of the Facility’s total value (the cost of the new equipment included in the Facility plus the value of the original property).
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P has entered into a Synthetic Fuel and Coal Supply Agreement with E under which E agreed to purchase the lesser of Amount 1 or Percentage 1 of the fuel consumed by E’s electric generating facility. If E does not satisfy its purchase obligation or the production of synthetic fuel exceeds E’s requirements, P can sell synthetic fuel to third parties. 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. P also has proposed that, from time to time, one of four alternative chemical reagents may be used in the process for the production of Product. As described, the Facility and the process implemented in the Facility, including the chemical reagents, meet the requirements of Rev. Proc. 2001-34, 2001-22 I.R.B. 1293.

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, including the alternative chemical reagents. P, with use of the process, expects to maintain a level of chemical change in the production of synthetic fuel that is determined through similar analysis by experts to be a significant chemical change.

The rulings issued in PLR 9832014, which you wish to be reconfirmed in this private letter ruling, are as follows:

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

2. The contract for the construction of the Facility constitutes a “binding written contract in effect before January 1, 1997” within the meaning of section 29(g)(1)(A).

3. Production from the Facility will be attributable solely to P within the meaning of section 29(a)(2)(B), entitling P to the section 29 credit for qualified fuel from the Facility that is sold to an unrelated person.

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 4
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after June 30, 1998, will not result in a new placed in service date for the Facility for purposes of 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.

ANALYSIS

The changes in facts since the issuance of PLR 9832014 are the purchase of interests in P by X and Y, the change in chemical reagents used to produce the synthetic fuel, and the relocation of the Facility as described in the ruling request.

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

RULING REQUEST #6

To qualify for the section 29 credit, P’s facility must be placed in service before July 1, 1998, pursuant to a binding written contract in effect before January 1, 1997. P received a favorable determination from the District Director for the State 1 District that the Facility was placed in service prior to July 1, 1998.

Rev. Rul. 94-31, 1994-1 C.B. 16, concerns section 45, which provides a credit for electricity produced from certain renewable resources, including wind. The credit is based on the amount of electricity produced by the taxpayer at a qualified facility during the 10-year period beginning on the date the facility was originally placed in service, and sold by the taxpayer to an unrelated person during the taxable year. Rev. Rul. 94- 31 holds that, for purposes of section 45, a facility qualifies as originally placed in service even though it contains some used property, provided the fair market value of the used property is not more than 20 percent of the facility’s total value (the cost of the new property included in the Facility plus the value of the used property).

Rev. Rul. 94-31 concerns a factual context similar to the present situation. Consistent with the holding in Rev. Rul. 94-31, the 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 property used at the original facility is more than 20 percent of the Facility’s total fair market value at the time of relocation or replacement (the cost of the new equipment included in the Facility plus the value of the property used at the original facility).

Rev. Rul. 94-31 describes a windfarm that consists of an “array of wind turbines, towers, pads, transformers, roadways, fencing, on-site power collection systems, and monitoring and meteorological equipment.” Notwithstanding that the windfarm consisted of all of these items, the ruling concludes that the “facility” for purposes of 5
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section 45 is confined to “the property on the windfarm necessary for the production of electricity from wind energy.” (emphasis added.) The present situation is similar to Rev. Rul. 94-31. Thus, for purposes of determining the Facility’s total fair market value at the time of relocation or replacement, the Facility consists of the process equipment directly necessary for the production of the qualified fuel, starting at the immediate input of the coal and chemical reagents to the pug mills or mixers (including any coal hoppers and reagent tanks directly feeding the pug mills or mixers) through the output from the briquetters or other forming equipment (including output hoppers, if any). Hence, the Facility’s total fair market value includes the process equipment such as pugmills or mixers, the briquetters or other forming equipment, the equipment necessary to interconnect such equipment, the electrical, instrumentation, control systems and auxiliaries related to such equipment (including the structures that house such electrical, instrumentation and control systems), the foundation platform(s) for the above-referenced equipment, and an appropriate allocation of the engineering, project management, overhead, and other costs assignable to the relocation of such equipment and construction. The Facility’s total fair market value does not include costs associated with the purchase and installation of equipment that supports the operation of the Facility but is not directly necessary for the production of the qualified fuel, such as coal beneficiation, or preparation equipment (e.g., crushers, screens, dryers, or scales), other material handling or conveying equipment (e.g., stacking tubes, transfer towers, storage bunkers, mobile equipment, or conveyors), certain site improvements (e.g., fencing, lighting, earthwork, paving), separate office and bathhouse trailers for facility personnel, and buildings (if a “building” for purposes of section 168 of the Code).

Sampling and quality control are necessary for operational control of a production facility. However, a particular type of sampling equipment generally is not necessary for the production of qualified fuel. Thus, the costs of sampling equipment are excluded from the Facility’s total fair market value unless the particular sampling equipment is necessary for operational control of the facility.

Accordingly, we re-issue the rulings given in PLR 9832014. Thus in summary:

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

2. The contract for the construction of the Facility constitutes a “binding written contract in effect before January 1, 1997” within the meaning of section 29(g)(1)(A).

3. Production from the Facility will be attributable solely to P within the meaning of section 29(a)(2)(B), and P will be entitled to the section 29 credit for qualified fuel from the Facility that is sold to an unrelated person.

4. The section 29 credit attributable to P may be allocated to the members of P 6
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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 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 of 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. We also express no opinion on the determination of fair market value of either the property constituting the Facility or the used property transferred from the original facility.

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. 2002-1, 2002-1 I.R.B. 1, 50. However, when the criteria in section 12.05 of Rev. Proc. 2002-1 are satisfied, a ruling is not revoked or modified retroactively, except in rare or unusual circumstances.

Sincerely,

/s/

Joseph H. Makurat

Senior Technician Reviewer

Office ofAssociate Chief Counsel

(Passthroughs and Special Industries)