Alt. Carbon Res., LLC v. United States

• Decision Date: 02 July 2018
• Docket Number: No. 15-155T,15-155T
• Parties: ALTERNATIVE CARBON RESOURCES, LLC, Plaintiff, v. THE UNITED STATES, Defendant.
• Court: U.S. Claims Court

ALTERNATIVE CARBON RESOURCES, LLC, Plaintiff, v. THE UNITED STATES, Defendant.

No. 15-155T

United States Court of Federal Claims

July 2, 2018

Motion to Stay Execution of Judgment Pending Appeal; Hilton; Standard Havens; Dillon; Likelihood of Success on the Merits; Substantial Case; Balance of Harms

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

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

OPINION AND ORDER

SWEENEY, Judge

The parties in this case dispute the propriety of refundable alternative fuel mixture credits that plaintiff Alternative Carbon Resources, LLC claimed for 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 qualify for them and thus sought to recover the payments it made to plaintiff, along with various penalties and interest. On March 22, 2018, the court determined that plaintiff was "not entitled to the alternative fuel mixture credits that it claimed" and was "not entitled to abatement of the excessive claim penalties assessed by the IRS." Alt. Carbon Res., LLC v. United States, 137 Fed. Cl. 1, 37 (2018), appeal docketed, No. 2018-1948 (Fed. Cir. May 10, 2018). Judgment was entered in favor of defendant in the amount of $59,320,179 on March 28, 2018. Am. J., ECF No. 47.

Currently before the court is plaintiff's motion to stay execution of the judgment pending the outcome of its appeal. As explained below, plaintiff has failed to demonstrate a likelihood of success on the merits or even a substantial case. Therefore, its motion must be denied.

I. BACKGROUND

A detailed description of the statutory and regular context, factual background, and procedural history of this case is included in the court's summary judgment ruling and need not be repeated herein. See Alt. Carbon, 137 Fed. Cl. at 4-21. Only a brief summary is necessary here.

In 2011, the alternative fuel mixture credit was available to taxpayers that blended liquid fuel derived from biomass and at least 0.1% diesel fuel into a mixture that was used as a fuel or sold for use as a fuel, provided that the taxpayer was properly registered. The credit could be received as either a credit (against excise tax or income tax liability) or as a payment. Payments were treated as overpayments of tax for all purposes, including examination authority and assessment of penalties and interest. Claims that exceeded the allowable amount were subject to a 200% excessive claims penalty unless the taxpayer could demonstrate reasonable cause for making the claims.

Prior to forming plaintiff as an entity, two of plaintiff's principals investigated the feasibility of using waste byproducts from ethanol and food plants, particularly corn syrup, as an alternative fuel in anaerobic digesters. Anaerobic digesters are used to produce methane gas, which is then used in generators to produce electricity, used in boilers to produce heat, sold, or flared (i.e., burned off).¹ Plaintiff's principals contacted Greg Sanderson, a nationally recognized attorney specializing in energy tax credits, who indicated that their idea had merit.

Plaintiff continued to work with Mr. Sanderson and ultimately developed a business model that involved three main steps. First, plaintiff would purchase feedstock from a supplier. Next, the requisite amount of diesel fuel was added to create an alternative fuel mixture. Finally, the mixture was delivered to the anaerobic digester customers. Plaintiff applied for, and received, an IRS registration designating plaintiff as a producer of an alternative fuel mixture that was sold for use. As part of the application process, plaintiff emphasized to the IRS that it planned to blend the liquid fuel from biomass with taxable fuel and sell the mixture to a third party to use as a fuel in a process to manufacture methane gas.

Plaintiff charged its customers various nominal amounts for the alternative fuel mixture. In turn, the digester customers charged plaintiff a "tipping fee" to take the fuel based on the quantity delivered. The nominal amounts charged were typically one-time, flat fees for the total quantity of alternative fuel mixtures that plaintiff would deliver over the course of the year. For example, plaintiff charged its main customer, the Des Moines Wastewater Reclamation Authority ("WRA"), a one-time fee of $950 for the entire amount of the alternative fuel mixtures it would deliver during 2011, limited to 50,000 gallons per day, while plaintiff simultaneously paid the WRA a disposal (i.e., "tipping") fee of $0.02634 per gallon plus sales tax. Plaintiff also paid the WRA a $950 administrative fee specifically to offset the $950 charge for the alternative fuel mixtures. Altogether, plaintiff received $8,950 of income for the purchase of its alternative fuel mixtures (on which it did not charge sales tax) and paid its customers approximately $1.7million in disposal fees. The tax credit incentives—approximately $19.8 million altogether—allowed plaintiff's business to be profitable while plaintiff built demand for its alternative fuel mixtures.

Mr. Sanderson had advised plaintiff that IRS private letter rulings indicated that tipping-fee transactions qualified as sales, but cautioned that private letter rulings could not technically be cited as precedent, reminded plaintiff that it would be audited and would need to prove its eligibility for the credits it claimed, and remarked that plaintiff would be in a better position if it charged its customers a sales price based on the fuel value rather than a flat amount. He also emphasized that plaintiff should seek out customers that would be generating heat and electricity because the alternative fuel mixture credit was designed to promote energy generation; although Mr. Sanderson was informed that plaintiff's customers would be using the alternative fuel mixtures accordingly, he lacked any further knowledge of the customers' operations.

After plaintiff began operations, it worked to develop its own alternative fuel, named BioBeast. In May 2011, after being asked by plaintiff whether BioBeast would qualify for the alternative fuel mixture credit, Mr. Sanderson simply listed the requirements for the alternative fuel mixture credit and indicated that he did not have enough facts or understand plaintiff's operations well enough to give any more specific advice. In July 2011, Mr. Sanderson assisted plaintiff in responding to an IRS questionnaire. Mr. Sanderson suggested that more details were needed in several sections of plaintiff's response, expressed confusion regarding which alternative energy credit plaintiff was attempting to claim, and asked how plaintiff's alternative fuel mixture was used as a fuel by its customers. In August 2011, the IRS issued a Chief Counsel Advisory in which the author opined that use of an alternative fuel mixture in the anaerobic digestion process does not constitute use as a fuel because the digester itself does not produce energy. Mr. Sanderson asserts that an official in the IRS excise tax division orally advised him that plaintiff should continue to claim the credits unless its registration had been revoked because the IRS would be collecting questionnaires and conducting audits. Mr. Sanderson then advised plaintiff that it might "have a fight" regarding the credits but that he continued to believe plaintiff qualified. Ultimately, Mr. Sanderson was the primary expert that plaintiff relied on related to qualifying for the alternative fuel mixture credit. However, although Mr. Sanderson offered to provide a formal tax opinion regarding plaintiff's eligibility for the credits, no such opinion was ever requested.

In March 2012, the IRS conducted an initial audit of plaintiff's claims for the alternative fuel mixture credit. As relevant to the instant motion, the IRS eventually determined that plaintiff was not entitled to the alternative fuel mixture credits that it had received as payments. On April 18, 2014, the IRS assessed a total of $19,773,393 as tax to recoup the payments made to plaintiff for 2011 and $39,546,786 in excessive claim penalties. In June 2014, plaintiff made directed payments for portions of the tax and penalty assessments and filed claims for refund of its directed payments and abatement of the remaining portions of the assessments.

After receiving no response from the IRS regarding its claims for refund, plaintiff filed suit in this court on February 18, 2015, arguing generally that it was entitled to the alternative fuel mixture credits and that, even if it did not qualify for the credits, it was not liable for theexcessive claim penalties because it reasonably relied on the advice of Mr. Sanderson and others. Defendant then asserted counterclaims for the tax and excessive claim penalty assessments. The parties conducted discovery and filed cross-motions for summary judgment.

In their cross-motions, the parties did not dispute that plaintiff was properly registered, plaintiff's mixtures were derived from biomass, and plaintiff's mixtures contained the requisite 0.1% diesel fuel. With respect to the disputed aspects of plaintiff's entitlement to the alternative fuel mixture credits, the court concluded that (1) plaintiff's mixtures were both liquid and capable of being used as a fuel, and thus constituted liquid fuels and, because they were derived from biomass, alternative fuel mixtures; (2) plaintiff could not prove that its alternative fuel mixtures were actually used as a fuel; and (3) although it was permissible for the alternative fuel mixture credit to supply the profit motive for plaintiff's business model, plaintiff's transactions were not bona fide sales. The court further concluded that plaintiff did not reasonably rely on advice pertaining to whether its mixtures were actually sold or used as a fuel; because the court had concluded that plaintiff's products were...