(7 of 9)
Another company that licenses its technology, Headwaters Inc. of Salt Lake City, Utah, was the only company willing to discuss the business in general terms with TIME. So exactly what kind of synthetic fuel is produced? The kind that meets the IRS definition of changing coal's chemical composition. "The tax code does not require you to show a change in the coal's performance," says Headwaters spokesman John Ward, whose company's processes are in use in 20 synfuel operations in nine states. "For the tax credit, you just need to show there has been a substantial chemical change." Ward said that Headwaters' latex reagents produce a "chemical change that is verified by a number of different laboratory tests." Ward said that "tests show that not only are the molecules different but that the coal also behaves differently. Coal products treated with our reagent show an increased level of combustion efficiency, which translates into reduced environmental impact."
THE WASHINGTON CONNECTION
Whenever there's a billion dollars to hand out to special interests, influential members of Congress--Democrats and Republicans--are always lurking in the background. After the IRS decided in June to take a closer look at the coal that is being called synthetic fuel, the synfuels industry turned to its old friends on Capitol Hill. In a rare public display of congressional meddling in a tax investigation, industry supporters persuaded a House Appropriations subcommittee to introduce a bill to call off the industrywide audit. It failed to pass in an 8-to-8 vote. Since then, the campaign has moved behind the scenes. The IRS has questioned the legitimacy of the synfuels in the past and then backed off after lawmakers intervened. In many ways, the IRS has created the dilemma. Some years ago, it ruled that any significant change in the chemical makeup of the coal would be sufficient to qualify for the credit. The agency then promptly issued to all the synthetic-fuel facilities so-called private-letter rulings stating that they qualified for the credit. Now it is debating whether to revise its standard.
Kenneth Kies, a Washington lawyer who represents the Council for Energy Independence, a synfuel coalition, said the group is "outraged" by the IRS review. On three previous occasions, Kies said, the IRS has reviewed the program and set rules for claiming the credit. "How many times do you get to do this?" Kies asks. "Good tax administration says that if the service has set up a series of rules and taxpayers adhere to them, they ought to be able to rely on that. And Congress, if they don't like what is happening, should come back and amend the statute." At the same time, Kies acknowledges the importance of the tax break. "People only do this because of the tax credit." In short, when it ends, so does the synfuel industry.
The credit is so generous that some investors can't take full advantage of it each year because they don't pay enough taxes on their other income. Rather than let the credit go to waste, they sell a portion of their synfuel operations to another group of investors who are looking for ways to reduce their taxes--a sort of perpetual tax-avoidance machine that never stops giving.