On Friday, we informed you about the IRS announcement that it will resume
issuing private letter rulings on whether synthetic fuels produced from coal
qualify for a tax credit under tax code Section 29. Following is additional
information from BNA.
Section 29 provides a credit for the production and sale of "qualified fuels"
produced from a nonconventional source, IRS said, including liquid, gaseous,
or solid synthetic fuels produced from coal or lignite. In Rev. Proc. 2000-47
(209 DTR G-1, L-1, 10/27/00), IRS stopped issuing rulings under Section 29
because it said it was concerned that taxpayers claiming the credit were not
processing the coal in the manner intended by Congress.
IRS asked for information on the processes used to produce solid fuel for
which taxpayers claimed the credit. It received numerous comment letters,
many urging it to resume issuing rulings, others agreeing that some processes
should not qualify for the credit. In Rev. Proc. 2001-30, IRS said it will
issue a ruling on processes it had approved prior to 2000. The production
process must meet the following requirements, IRS said:

substantially all of the coal used as feedstock must undergo a significant
chemical change;
the feedstock coal must consist entirely of coal fines or crushed coal
comprised of particles no larger than 1/8 inch;
the feedstock coal must be thoroughly mixed: (a) with styrene or other
monomers following an acid bath, (b) with quinoline or other organic resin
and left to cure for several days, © with ultra heavy hydrocarbons, or (d)
with an aluminum and/or magnesium silicate binder after being heated to a
minimum temperature of 500 degrees Fahrenheit; and
the treatment method must involve elevated temperature and pressure that
results in briquettes, pellets, or an extruded fuel product or the taxpayer
may represent that the omission of these procedures will not significantly
increase the production output of the facility.

The revenue procedure applies to both pending and future ruling requests.
Rev. Proc. 2001-30 will be published in Internal Revenue Bulletin 2001-19,
dated May 7. See text below.
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No. 78
Monday April 23, 2001 Page L-1
ISSN 1523-567X
Tax, Budget & Accounting Text

EnergyIRS Revenue Procedure 2001-30 Announcing Decision to Issue Letter
Rulings
On Whether Solid Fuel Produced From Coal Qualifies Under I.R.C. Section 29

Rev. Proc. 2001-30 is scheduled to appear in Internal Revenue Bulletin
2001-19, dated May 7, 2001.

Part III
Administrative, Procedural, and Miscellaneous
26 CFR 601.201: Rulings and determination letters.
(Also Part I, o29.)
Rev. Proc. 2001-30

SECTION 1. PURPOSE
This revenue procedure informs the public of the Internal Revenue Service's
decision to issue private letter rulings regarding whether a solid fuel
produced from coal is a qualified fuel under o29©(1)(C) of the Internal
Revenue Code under the circumstances described in section 3 of this revenue
procedure.
SECTION 2. BACKGROUND
Section 2.01 of Rev. Proc. 2001-3, 2001-1 I.R.B. 111, provides that whenever
appropriate in the interest of sound tax administration, it is the policy of
the Service to answer inquiries of individuals and organizations regarding
their status for tax purposes and the tax effects of their acts or
transactions, prior to the filing of returns or reports that are required by
the revenue laws. There are, however, certain areas in which, because of the
inherently factual nature of the problems involved, or for other reasons, the
Service will not issue rulings or determinations letters.
Section 4 of Rev. Proc. 2001-3 sets forth those areas in which rulings or
determination letters will not ordinarily be issued. "Not ordinarily" means
that unique and compelling reasons must be demonstrated to justify the
issuance of a ruling or determination letter. Section 2.01 of Rev. Proc.
2001-3.
Section 4.02(1) of Rev. Proc. 2001-3 provides that the Service will not
ordinarily issue rulings or determination letters regarding any matter in
which the determination requested is primarily one of fact, for example,
market value of property, or whether an interest in a corporation is to be
treated as stock or indebtedness.
Section 5 of Rev. Proc. 2001-3 sets forth those areas under extensive study
in which rulings or determination letters will not be issued until the
Service resolves the issue through publication of a revenue ruling, revenue
procedure, regulations, or otherwise.
Section 5.01 of Rev. Proc. 2001-3 provides that the Service will not issue
rulings or determination letters on whether a solid fuel other than coke or a
fuel produced from waste coal is a qualified fuel under o29©(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.
Section 5.01 of Rev. Proc. 2001-3 supersedes Rev. Proc. 2000-47, 2000-46
I.R.B. 482. Rev. Proc. 2000-47 was published because concern had been raised
that taxpayers were claiming the o29 credit for processing coal in ways that
may not have been intended by the Congress. Rev. Proc. 2000-47 requested
comments concerning the standard to be applied in determining whether fuel
produced from coal is a solid synthetic fuel. The Service received extensive
comments.
Section 29 provides a credit against income tax for the production and sale
of "qualified fuels" produced from a nonconventional source. Section
29©(1)(C) provides that qualified fuels include liquid, gaseous, or solid
synthetic fuels produced from coal (including lignite).
Rev. Rul. 86-100, 1986-2 C.B. 3, adopts for purposes of o29©(1)(C) the
definition of synthetic fuel in o 1.48-9©(5) of the Income Tax Regulations.
Section 1.489©(5)(ii) provides that, to be "synthetic," a fuel must differ
significantly in chemical composition, as opposed to physical composition,
from the substance used to produce it. Rev. Rul. 86-100 describes favorably
processes such as gasification, liquefaction, and production of solvent
refined coal that result in substantial chemical changes to the entire coal
feedstock rather than changes that affect only the surface of the coal.
Section 29(f) provides that o29 applies to qualified fuels that are produced
in a facility placed in service after December 31, 1979, and before January
1, 1993, and that are sold before January 1, 2003. Section 29(g)(1)(A)
provides that a facility for producing qualified fuels described in o29©
(1)(C) is treated for this purpose as being placed in service before January
1, 1993, if the facility is placed in service before July 1, 1998, pursuant
to a binding written contract in effect before January 1, 1997. For a
facility that meets this condition and is originally placed in service after
December 31, 1992, o29(g)(1)(B) provides that the o29 credit applies to
qualified fuels that are sold before January 1, 2008.
Property is "placed in service" in the taxable year the property is placed in
a condition or state of readiness and availability for a specifically
assigned function. See, for example, o 1.167(a)11(e)(1)(i). Thus, the o29
credit is not allowed for fuel produced in a facility that was originally
placed in service for a function other than producing qualified fuel under
o29©(1)(C) and was not converted into a facility for producing qualified
fuel until after June 30, 1998.
The Service interprets o29(f) and (g) to allow the o29 credit for qualified
fuel produced in a facility after its modification only if the modification
was placed in service before July 1, 1998, or does not significantly increase
the production capacity of the facility or significantly extend the life of
the facility. For example, a facility (including one of multiple facilities
located at the same site) may be relocated without affecting the availability
of the credit if all essential components of the facility are retained and
the production capacity of the relocated facility is not significantly
increased at the new location. If, however, the essential components of a
single facility are combined after June 30, 1998, with other components that
were not part of the facility on June 30, 1998, to create multiple facilities
or significantly increase production capacity, the credit will not be allowed
for fuel produced at any of those facilities.
After reviewing the comments received in response to Rev. Proc. 2000-47 and
reconsidering its interpretation of o29©(1)(C), the Service has decided
that the significant chemical change standard of Rev. Rul. 86-100 is the
correct standard. The Service has also decided to resume the issuance of
rulings under o29©(1)(C), but only in the circumstances described below.
The Service is willing to issue rulings that do not go beyond the processes
approved in the rulings issued prior to 2000. One procedure common to all of
those processes (other than processes for the production of coke and similar
products) is the use of elevated temperature and pressure to produce
briquettes, pellets, or an extruded fuel product. The Service is also willing
to rule with respect to a process that omits this procedure if the process is
otherwise consistent with a process approved in a pre-2000 ruling and the
omission of the procedure will not significantly increase the production
output of the facility. Accordingly, the Service will issue rulings regarding
whether a solid fuel (other than coke) is a qualified fuel under o29©(1)(C)
under the circumstances described in section 3 of this revenue procedure.
SECTION 3. PROCEDURE
The Service will issue rulings that a solid fuel (other than coke) produced
from coal is a qualified fuel under o29©(1)(C) if the conditions set forth
below are satisfied and evidence is presented that all, or substantially all,
of the coal used as feedstock undergoes a significant chemical change. The
conditions are that:
1. The feedstock coal consists entirely of coal fines or crushed coal
comprised of particles no larger than 1/8 inch;
2. The feedstock coal is thoroughly mixed in a mixer: (a) with styrene or
other monomers following an acid bath, (b) with quinoline (C9H7N) or other
organic resin and left to cure for several days, © with ultra heavy
hydrocarbons, or (d) with an aluminum and/or magnesium silicate binder
following heating to a minimum temperature of 500 degrees Fahrenheit; and
3. The treated feedstock is subjected to elevated temperature and pressure
that results in briquettes, pellets, or an extruded fuel product, or the
taxpayer represents that the omission of this procedure will not
significantly increase the production output of the facility over the
remainder of the period during which the o29 credit is allowable.
SECTION 4. EFFECTIVE DATE
This revenue procedure applies to all ruling requests, including any pending
in the national office and any submitted after the date of publication of
this revenue procedure.
SECTION 5. EFFECT ON OTHER DOCUMENTS
Section 5.01 of Rev. Proc. 2001-3 is revoked.
DRAFTING INFORMATION
The principal author of this revenue procedure is David McDonnell of the
Office of Associate Chief Counsel (Passthroughs and Special Industries).
Other personnel from the IRS and Treasury participated in its development.
For further information regarding this revenue procedure contact Mr.
McDonnell on (202) 622-3120 (not a toll-free call).

Copyright , 2001 by The Bureau of National Affairs, Inc., Washington D.C.