Marriott International Inc. said yesterday that Internal Revenue Service auditors are again questioning whether it qualified for approximately $300 million worth of tax credits it has taken in recent years for its investments in synthetic fuel production.
It is the second time the IRS has had questions about the Bethesda hotel giant's fuel plants, which treat coal to make it a cleaner-burning fuel. The process makes companies eligible for tax credits that, in Marriott's case, helped boost its profit significantly in the past three years, when hotel revenues were down because of the economic downturn.
In the second quarter of last year -- when hotel profits were still in a slump -- Marriott said its synthetic fuel operations contributed about $26 million of its $125 million profit. In the quarter ended March 26, in which its hotel business was stronger, synthetic fuels accounted for about 10 percent of profit.
Last year, the IRS questioned whether the processes used by Marriott's plants and others changed the chemical makeup of the coal, as required to qualify for the tax credits. After reviewing the issue for several months, the IRS said in a November ruling that while it still had concerns about the processes, it would not change its policy on allowing the credits for existing users.
This time, the IRS is questioning whether three of Marriott's plants were placed in service before July 1, 1998, as they must have been to qualify for the tax credits.
Marriott paid $46 million in October 2001 for four synthetic fuel machines owned by PacifiCorp Financial Services at two coal mines in Alabama and Illinois. According to Marriott, the IRS, in an audit of PacifiCorp, challenged the dates that three of the machines were placed in service. PacifiCorp then notified Marriott about the IRS action. Marriott has not had direct communication with the IRS, company spokesman Tom Marder said.
Marriott executives, who considered the November IRS ruling a victory, said they are confident that they will again get IRS approval for the credits.
"We believe strongly that the facilities meet the requirements," Marder said. "We're confident that these issues will be resolved in [our] favor."
Nancy Mathis, an IRS spokesman, said she could not talk about the case because it is considered private taxpayer information.
Marriott sold a 50 percent stake in its synthetic fuel business to an unnamed buyer in June 2003. As part of the deal, the buyer paid Marriott $25 million in cash, and Marriott will get additional profit based on the amount of tax credits that the fuel operations earn. The tax credits expire in 2007, at which point, Marriott said, it plans to get out of the synthetic fuel business.
The tax credits were created after the energy shortages of the 1970s. They were meant to give companies incentives to make the large investments necessary to create new supplies of energy. One goal was to encourage processes that could turn coal dust, or other byproducts that would otherwise be wasted, into usable fuel.