Ampersand Chowchilla Biomass, LLC v. United States

• Decision Date: 24 February 2022
• Docket Number: 2021-1385
• Citation: 26 F.4th 1306
• Parties: AMPERSAND CHOWCHILLA BIOMASS, LLC, Merced Power, LLC, Plaintiffs-Appellants v. UNITED STATES, Defendant-Appellee
• Court: U.S. Court of Appeals — Federal Circuit

26 F.4th 1306

AMPERSAND CHOWCHILLA BIOMASS, LLC, Merced Power, LLC, Plaintiffs-Appellants

v.UNITED STATES, Defendant-Appellee

2021-1385

United States Court of Appeals, Federal Circuit.

Decided: February 24, 2022

Stephen G. Leatham, Heurlin, Potter, Jahn, Leatham, Holtmann & Stoker, P.S., Vancouver, WA, argued for plaintiffs-appellants.

Clint A. Carpenter, Appellate Section, Tax Division, United States Department of Justice, Washington, DC, argued for defendant-appellee. Also represented by Bruce R. Ellisen, David A. Hubbert.

Before Newman, Hughes, and Stoll, Circuit Judges.

Hughes, Circuit Judge.

This is a tax case. Ampersand Chowchilla Biomass, LLC and Merced Power, LLC appeal a decision of the Court of Federal Claims denying their request for additional payments of Section 1603 grants under the American Recovery and Reinvestment Act of 2009. Because we agree with the Court of Federal Claims that the relevant power facilities did not meet the requirements of the statute, we affirm.

I

A

In 2007, California Biomass Fund I, LLC (CalBio) acquired two defunct facilities and began restoring them and upgrading them to biomass facilities, expecting the facilities to be operational in 2008.

Before CalBio acquired the facilities, Pacific Gas & Electric Company had entered into power-purchase agreements with the facilities' previous owner. PG&E had agreed to purchase electricity when (1) the facilities achieved commercial operations and passed initial capacity tests, (2) PG&E received performance-assurance payments, and (3) the facilities received approval from the California Public Utilities Commission. CalBio assumed these power-purchase agreements, and CalBio and PG&E later amended the agreements to loosen their requirements. CalBio and PG&E also entered into interconnection agreements that required the facilities to pass pre-parallel testing, which ensures that the facilities can operate at the same frequency and in the same phase as the transmission grid so that the facilities do not damage the grid.

While renovating in 2007, CalBio secured Authority to Construct permits for the facilities. These permits allowed construction on the facilities and allowed the facilities to generate and sell electricity. The Authority to Construct permits could be converted into Permits to Operate after the facilities met certain conditions, like emissions tests. Biomass facilities, though, often have some difficulty passing environmental tests. So instead of shutting down biomass facilities at the first sign of noncompliance—which could lead to agricultural waste being burned in open fields, causing more environmental pollution—the San Joaquin Valley Air Pollution Control District has a Notice of Violation process in which the District fines and oversees noncompliant facilities until they are brought back into compliance.

The Chowchilla and Merced facilities had their "initial fires" in April and July 2008, respectively. CalBio labeled the facilities "in operation" as of May 15, 2008 and August 23, 2008. And the facilities passed pre-parallel testing under the PG&E interconnection agreements on June 17, 2008 and August 24, 2008.

Following these events, the facilities began selling electricity on the spot market. On December 12, 2008, Chowchilla met the requirements under its power-purchase agreement and accordingly started selling its electricity exclusively to PG&E. Although Merced did not start selling its electricity exclusively to PG&E until February 21, 2009, the parties recognized that Merced had met the requirements under its power-purchase agreement based on data from the third and fourth quarters of 2008.

From May 15, 2008 until the end of that year, the Chowchilla facility operated at 34.1% of its rated capacity, generating 20,553 MWh of electricity and $1,408,941 in revenue. And from August 23, 2008 through the end of 2008, the Merced facility operated at 42.1% capacity, generating 14,306 MWh of electricity and $851,152 in revenue. The facilities operated fairly continuously throughout 2009, during which the Chowchilla facility operated at 53.9% capacity and the Merced facility operated at 51.2% capacity. The facilities occasionally were noncompliant with emissions regulations, but the District allowed the facilities to continue operating and never revoked their Authority to Construct permits.

B

In 2009, Congress passed the American Recovery and Reinvestment Act "[t]o assist those most impacted by the [2008] recession." American Recovery and Reinvestment Act of 2009 (ARRA), Pub. L. No. 111-5, § 3(a), 123 Stat. 115, 115–16. Stated purposes of this statute were "[t]o provide investments needed to increase economic efficiency" and invest in "environmental protection[ ] and other infrastructure that will provide long-term economic benefits." Id. One provision allowed entities to receive federal grants if they "placed in service" a renewable energy facility during 2009 or 2010 or if they began constructing property in 2009 or 2010 that they later placed in service before the relevant credit-termination date. Id. § 1603(a)(1)–(2), 123 Stat. at 364–66. The government intended that these "Section 1603" grants would "increase investment in domestic clean energy production" by "reimburs[ing] eligible applicants for a portion of the cost of installing the specified energy property." See U.S. Dep't of Treas., 1603 Program: Payments for Specified Energy Property in Lieu of Tax Credits , https://home.treasury.gov/policy-issues/financial-markets-financial-institutions-and-fiscal-service/1603-program-payments-for-specified-energy-property-in-lieu-of-tax-credits (last visited Jan. 18, 2022).

CalBio was experiencing financial difficulties at that time, so it investigated whether it could apply for Section 1603 grants for the Chowchilla and Merced facilities. CalBio ultimately concluded that it could not apply for Section 1603 grants because its facilities had been placed in service in 2008, outside of the statute's required period. Finding no resolution to its continuing financial problems, CalBio suspended operations in June 2010 and decided to sell the facilities.

On December 28, 2010, Akeida Environmental Fund LP acquired the facilities.

Akeida spent nearly $15 million improving the facilities, which passed emissions tests in August 2011. In October 2011, Akeida applied for Section 1603 grants, claiming that the facilities were placed in service when Akeida's emissions improvements were certified on August 11, 2011.

Akeida requested a $12 million grant for each facility. The United States Department of Treasury largely rejected Akeida's claims because, according to Treasury, most of the property had been placed in service in 2008. Instead, Treasury granted only $1.1 million for each facility, awarded for the additional property that was eligible based on the date Akeida placed it in service.

Appellants, the direct owners of the two facilities and subsidiaries of Akeida, sued in the Court of Federal Claims for the remainder. The Court of Federal Claims held for the government, agreeing that the facilities were placed in service in 2008.

In its two-part analysis, the Court of Federal Claims applied Treasury's regulatory definition of "placed in service," which required it to determine the "taxable year in which the property is ... availabil[e] for a specifically assigned function." Treas. Reg. § 1.46-3(d)(1)(ii). First, the Court of Federal Claims ascertained the facilities' "specifically assigned function." Appellants asserted that the facilities' specifically assigned function is "to produce electricity on a baseload basis for sale to PG&E at the quantities required under the [power-purchase agreements], reliably, and in compliance with applicable law." Ampersand Chowchilla Biomass, LLC v. United States , 150 Fed. Cl. 620, 643–44 (2020). The Court of Federal Claims disagreed and found that the facilities' specifically assigned function is simply "to produce and sell electricity." Id. at 644.

Second, the Court of Federal Claims evaluated five factors—drawn from the IRS's published revenue rulings and formally established in Oglethorpe Power Corp. v. Comm'r , 60 T.C.M. (CCH) 850 (1990) —to determine when the facilities achieved their specifically assigned function and were therefore "placed in service." The Court of Federal Claims found that all five factors indicated that the facilities were placed in service in 2008. Therefore, the Court of Federal Claims concluded that Akeida was not owed the money that it claimed because its property was placed in service outside of the statute's designated time period.

Chowchilla and Merced appeal. We have jurisdiction under 28 U.S.C. § 1295(a)(3).

II

We review the Court of Federal Claims' conclusions of law, including statutory interpretations, de novo and its findings of fact for clear error. Bd. of Cnty. Supervisors v. United States , 276 F.3d 1359, 1363 (Fed. Cir. 2002) ; WestRock Va. Corp. v. United States , 941 F.3d 1315, 1318 (Fed. Cir. 2019). The Court of Federal Claims' conclusions about the facilities' specifically assigned function and the year they were placed in service are questions of fact. See Armstrong World Indus., Inc. v. Comm'r , 974 F.2d 422, 429–30 (3d Cir. 1992).

A

We review de novo the Court of Federal Claims' conclusion that the applicable statute and corresponding regulation do not require facilities to produce power at ideal or near-ideal production levels to be placed in service. In making this determination, the Court of Federal Claims relied largely on Sealy Power Ltd. v. Commissioner , 46 F.3d 382 (5th Cir. 1995). Appellants request that we reject the Fifth Circuit's analysis in Sealy , labeling it an "outlier" and asserting that "courts have consistently rejected this standard for power plants and repeatedly required a far higher standard" than merely "generating and selling power." Appellant's Br. 22, 29.

We agree with the trial court's decision and the Fifth Circuit's Sealy opinion:...