Alt. Carbon Res., LLC v. United States, No. 15-155T

CourtCourt of Federal Claims
Writing for the CourtSWEENEY, Judge
Docket NumberNo. 15-155T
Decision Date22 March 2018


No. 15-155T

United States Court of Federal Claims

March 22, 2018

Cross-Motions for Summary Judgment; RCFC 56; I.R.C. §§ 6426, 6427, 6675; Alternative Fuel Mixture Credit; Alternative Fuel; Sale; Use as a Fuel; Substance-Over-Form Doctrine; Economic Substance Doctrine; Excessive Claim Penalty

William Sidney Smith, Des Moines, IA, for plaintiff.

Miranda Bureau, United States Department of Justice, Washington, DC, for defendant.



The parties in this case dispute the propriety of nearly $20 million in refundable alternative fuel mixture credits that plaintiff Alternative Carbon Resources, LLC claimed in 2011 pursuant to section 6426(e) of the Internal Revenue Code ("I.R.C."). After plaintiff claimed the credits, the Internal Revenue Service ("IRS") determined that plaintiff did not quality for them and thus sought to recover the payments it made to plaintiff, along with various penalties and interest. Currently before the court are the parties' cross-motions for summary judgment pursuant to Rule 56 of the Rules of the United States Court of Federal Claims ("RCFC"). As explained below, plaintiff was not entitled to the alternative fuel mixture credits, but is liable for one of the penalties assessed by the IRS. Accordingly, the court grants in part and denies in part plaintiff's motion for summary judgment and grants defendant's cross-motion for summary judgment.

A. Statutory and Regulatory Context

Congress enacted the initial version of I.R.C. § 6426 in 2004. See American Jobs Creation Act of 2004, Pub. L. No. 108-357, § 301(a), 118 Stat. 1418, 1459-61 (codified as amended at I.R.C. § 6426 (2006)). The statute initially provided credits for the production of alcohol fuel mixtures and biodiesel mixtures. Id. The credits for alternative fuels and alternative

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fuel mixtures were added the following year. See Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users, Pub. L. No. 109-59, § 11113(b)(2), 119 Stat. 1144, 1947-48 (2005). With exceptions not relevant here, the new credits were available from October 1, 2006, through September 30, 2009. Id. § 11113(b)(2), (d). At the time, the alternative fuel credits were expected to cost approximately $265 million over five years. Joint Comm. on Taxation, Description of Revenue Provisions Contained in the President's Fiscal Year 2010 Budget Proposal (Sept. 2009), JCS-3-09 No. 3 ("Revenue Raising Proposals"), at 30. I.R.C. § 6426 was further amended multiple times over the ensuing years. Relevant to the instant dispute are the 2008 and 2010 amendments.

In 2008, Congress extended the sunset date for the alternative fuel and alternative fuel mixture credits to December 31, 2009. Emergency Economic Stabilization Act of 2008, Pub. L. No. 110-343, § 204(a), 122 Stat. 3765, 3834. Despite the initial budget projections, over $2.5 billion in cash payments was claimed in the first six months of 2009 for "liquid fuel derived from biomass"—one of several types of eligible substances. Revenue Raising Proposals 30. The "bulk" of the $2.5 billion was paid to paper manufacturers using a substance known as "black liquor" as a fuel source for paper mills, which had been a "decades-long practice" in the industry. Id. Due to what was perceived by many as a "windfall" to paper manufacturers "for simply continuing a practice they have engaged in for more than 70 years," the President's budget for the 2010 fiscal year proposed to make black liquor mixtures ineligible for the alternative fuel mixture credit. Id. at 29-30.

On March 12, 2010—prior to the 2010 amendment to I.R.C. § 6426—the IRS Office of Chief Counsel released a memorandum discussing the application of the alternative fuel mixture credit in I.R.C. § 6426(e) to black liquor. See generally App. Supp. Pl.'s Mot. Summ. J. ("Pl.'s App.") 490-94 (containing IRS Chief Counsel Memorandum AM2010-001 (Mar. 12, 2010), 2010 WL 890956).1 Black liquor is "a byproduct of the paper milling process in kraft mills."2 Id. at 490. It is an "aqueous solution" composed of wood chips (which consist of water and wood), process water, and dissolved inorganic solids. Id. at 490-92. The wood chips are biomass—i.e., "any organic material other than (A) oil and natural gas (or any product thereof), and (B) coal (including lignite) or any product thereof," I.R.C. § 45K(c)(3)—but the process water and inorganic solids are not. Pl.'s App. 492. Black liquor is converted to heavy black liquor by removing much of the chip water and process water, resulting in a mixture that is a "molasses-like consistency" comprised of "approximately 60 percent dissolved solids and 40 percent water, by volume." Id. at 491. The heavy black liquor is then mixed with diesel fuel and

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fed into a recovery boiler, where steam is generated that is used to produce electricity and the inorganic solids are converted into smelt. Id. Although the chemical transformation of the inorganic solids into smelt "consumes energy in the recovery boiler," the entire process "results in a net production of energy." Id. Therefore, the author of the memorandum concluded, "the entire volume of the heavy black liquor is a liquid fuel that is 'derived from' biomass" because (1) the processing of black liquor into heavy black liquor "significantly reduces the amount of water in the liquid fuel" and (2) if heavy black liquor were a taxable fuel its entire volume would be taxable "without taking into account its component parts." Id. at 493 (emphasis added).

The 2010 amendments to I.R.C. § 6426, which were approved on December 17, 2010, revived the alternative fuel and alternative fuel mixture credits through December 31, 2011, provided a one-time opportunity to retroactively claim the credits for the 2010 calendar year, and specifically excluded black liquor—defined as "any fuel (including lignin, wood residues, or spent pulping liquors) derived from the production of paper or pulp"—from the definition of alternative fuel. Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 ("Act of 2010"), Pub. L. No. 111-312, § 704, 124 Stat. 3296, 3311.

Thus, in 2011, the credits were available as follows:

(d) Alternative fuel credit.

(1) In general.—For purposes of this section, the alternative fuel credit is the product of 50 cents and the number of gallons of an alternative fuel . . . sold by the taxpayer for use as a fuel in a motor vehicle or motorboat, sold by the taxpayer for use as a fuel in aviation, or so used by the taxpayer.

. . . .

(5) Termination.—This subsection shall not apply to any sale or use for any period after December 31, 2011 . . . .

(e) Alternative fuel mixture credit.

(1) In general.—For purposes of this section, the alternative fuel mixture credit is the product of 50 cents and the number of gallons of alternative fuel used by the taxpayer in producing any alternative fuel mixture for sale or use in a trade or business of the taxpayer.

(2) Alternative fuel mixture.—For purposes of this section, the term "alternative fuel mixture" means a mixture of alternative fuel and taxable fuel . . . which—

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(A) is sold by the taxpayer producing such mixture to any person for use as a fuel, or

(B) is used as a fuel by the taxpayer producing such mixture.

(3) Termination.—This subsection shall not apply to any sale or use for any period after December 31, 2011 . . . .

I.R.C. § 6426. Many of the terms used in the statute had specific meanings. As relevant here, "alternative fuel" was "liquid fuel derived from biomass." Id. § 6426(d)(2). "Liquid fuel" was not defined in the I.R.C., but was defined by the United States Energy Information Administration as "combustible or energy-generating molecules that can be harnessed to create mechanical energy, usually producing kinetic energy[, and that] must take the shape of their container."3 Def.'s App. 226.4 "Taxable fuel" included gasoline, diesel fuel, or kerosene. I.R.C. § 4083(a)(1). An "alternative fuel mixture" required "at least 0.1 percent (by volume) of taxable fuel" to be mixed with an alternative fuel. IRS Notice 2006-92, § 2(b), 2006-2 C.B. 774. An alternative fuel mixture was "used as a fuel when . . . consumed in the production of energy," but not when "destroyed in a fire or other casualty loss." Id. § 2(f)(1). An alternative fuel mixture was "sold . . . for use as a fuel" when the producer selling the mixture "ha[d] reason to believe that the mixture [would] be used as a fuel either by the person buying the mixture from the producer or by any later buyer of the mixture." Id. § 2(f)(2). Further, with respect to excise taxes, a "sale" was "an agreement whereby the seller transfers the property (that is, the title or the substantial incidents of ownership) in goods to the buyer for a consideration called the price, which may consist of money, services, or other things." Treas. Reg. § 48.0-2(a)(5) (2010); accord Sale, Black's Law Dictionary (10th ed. 2014) (defining "sale" as the "transfer of property or title for a price"). Finally, a taxpayer was required to register with the IRS to be eligible for the credits. I.R.C. § 6426(a); IRS Notice 2006-92, § 4(b).

In short, a taxpayer could qualify for the alternative fuel mixture credit in 2011 by blending liquid fuel derived from biomass and at least 0.1% diesel fuel into a mixture that was used or sold for use as a fuel, provided that the taxpayer was properly registered. See IRS Notice 2006-92, § 4(b); Pl.'s App. 86. Taxpayers satisfying all of the requirements for claiming the alternative fuel mixture credit could receive the credit as either (1) a credit against excise tax liability by filing Form 720, Quarterly Federal Excise Tax Return, (2) a payment by filing Form

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8849, Claim for Refund of Excise Taxes, or (3) a credit against income tax liability by filing Form 4136, Credit for Federal Tax Paid on Fuels.5 ...

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