Refined Coal Transaction Lands in Court

Publication February 8, 2016

A refinded coal transaction has landed in court after the IRS disallowed all the tax credits.

Ecotec Coal, LLC filed suit in the US Tax Court in November to reverse an IRS disallowance of refined coal credits that the company has been carrying forward since 2006 and claiming a little at a time on its annual tax returns. The IRS disallowed $14.6 million in credits claimed in 2011. The company filed suit in 2013 to restore tax credits that were disallowed on its 2008, 2009 and 2010 tax returns. The 2013 case is still pending. The latest suit focuses on 2011.

The company says in the latest suit that the government should have the burden of proving that it is not entitled to the tax credits after FBI and IRS agents raided the company offices in October 2012 and took all the company records as part of a criminal investigation that led to a plea deal by the CEO in May 2015. The CEO, Stephen Parks, pled guilty to a charge of selling fictitious refined coal credits though a separate company called Global Coal, LLC. Parks was sentenced to 27 months in federal prison, to be followed by three years of supervised release, and ordered to pay $845,000 in restitution to the IRS (the amount of the tax credits he admitted having fraudulently sold) and forfeit approximately $7.5 million in property.

Ecotec Coal says it produced enough refined coal in 2006 to claim $118.6 million in tax credits initially using a prototype “bio-refinery machine” mounted on a three-axle trailer that applied water and a protein enzyme to coal to make it less polluting. The prototype had capacity to treat two tons an hour. The company says it eventually also used a larger machine with a nameplate capacity of 70 tons an hour, but an actual output of 40 to 50 tons an hour, in December 2006. It says it treated 20.9 million tons of coal that were sold to an affiliated company.

The US government allows tax credits of $6.71 a ton to be claimed by anyone who modifies coal to make it less polluting and then sells the coal to a third party for use in a power plant or factory to make steam. (The figure $6.71 is the tax credit for 2015. The amount is adjusted each year for inflation.) The tax credits can be claimed for 10 years after the machinery used to treat the coal is first put in service. Such machinery had to be in service by December 2011 for the output to qualify.

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