Green Gas Del. Statutory Trust, Methane Bio, LLC v. Comm'r, 147 T.C. No. 1
| Decision Date | 14 July 2016 |
| Docket Number | Docket No. 14409-10.,Docket No. 13698-10,Docket No. 26965-09,147 T.C. No. 1 |
| Parties | GREEN GAS DELAWARE STATUTORY TRUST, METHANE BIO, LLC, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
GREEN GAS DELAWARE STATUTORY TRUST, METHANE BIO, LLC,
TAX MATTERS PARTNER, Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent1
147 T.C. No. 1
Docket No. 26965-09
Docket No. 13698-10
Docket No. 14409-10.
UNITED STATES TAX COURT
July 14, 2016
Ps are the tax matters partners for G and N, Delaware statutory trusts that were purportedly involved in the production and sales of landfill gas to RTC, which had entered into landfill license agreements with the owners and operators of 24 landfills. G claimed credits for producing fuel from a nonconventional source under I.R.C. sec. 45K (and its predecessor, I.R.C. sec. 29) with respect to landfill gas asserted to have been produced from 23 landfills in 2005, 2006, and 2007. N claimed such credits for one landfill for 2006 and 2007. The 24 landfills had varying degrees of equipment, monitoring, and production, from the nonexistent to the substantive, depending on the
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respective landfill and time period in question. The levels of documentation of the gas rights, gas sales, and operation and maintenance agreements between RTC and G and N were variable. So too was the documentation of actual landfill gas production and the documentation of various expenses for which G and N claimed deductions.
Held: Untreated landfill gas is "qualified fuel" within the meaning of I.R.C. sec. 45K.
Held, further, in the landfill gas industry, to qualify as a "facility for producing qualified fuels" under I.R.C. sec. 45K(f)(1), a system of wells, pipes, blowers, and equipment for pretreatment and measuring production of gas, if necessary, must be connected to either a gas-to-energy system or a system that allows for storage and treatment of landfill gas before it is routed to gas pipelines or otherwise prepared for delivery to a customer.
Held, further, for a landfill gas production facility, the "placed in service" date within the meaning of I.R.C. sec. 45K is the date when a gas-to-energy system becomes available for its specific function on a regular basis, not the date the first well is drilled.
Held, further, G and N are not entitled to credits under I.R.C. sec. 45K because of inadequate substantiation of their alleged production and sale of landfill gas, except as to one landfill each and only for the time period during which gas-to-electricity equipment was running at those landfills.
Held, further, G and N are not entitled to business expense deductions for 2006 and 2007, except to the extent they have been able to adequately corroborate those deductions as stated in this Opinion.
Held, further, R's determination of the distributive share of each G partner is sustained.
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Held, further, G and N are liable for accuracy-related penalties under I.R.C. sec. 6662 for the 2006 and 2007 tax years.
Robert J. Kovacev, Lisa M. Zarlenga, and Dianna Muth Mullis, for petitioners.
Stephen A. Haller, Karen O. Myrick, David L. Zoss, Michael T. Shelton, and John Schmittdiel, for respondent.
LARO, Judge: These cases are partnership-level proceedings subject to the unified audit and litigation procedures of the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. No. 97-248, sec. 402(a), 96 Stat. at 648, and are before the Court consolidated for purposes of trial, briefing, and opinion.
In 2005, 2006, and 2007 (years at issue) Green Gas Delaware Statutory Trust (Green Gas) and Pontiac Statutory Trust (Pontiac Trust) were involved in the purported production and sales of landfill gas (LFG) to Resource Technology Corp. (RTC). Green Gas claimed nonconventional source fuel credits with respect to LFG allegedly produced from 23 landfills (landfills at issue) under section 45K2
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and section 29, the predecessor of section 45K (FNS credits),3 for 2005, 2006, and 2007. Pontiac Trust claimed FNS credits for 2006 and 2007 for LFG allegedly produced at one landfill.
After conducting an audit, respondent disallowed Green Gas' and Pontiac Trust's FNS credits with respect to some landfills and reduced the amount of FNS credits with respect to other landfills. Respondent issued a notice of final partnership administrative adjustment (FPAA) to Green Gas for 2005 on August 20, 2009, and for 2006 and 2007 on March 26, 2010. Respondent issued separate FPAAs to Pontiac Trust for 2006 and 2007 on March 17, 2010. In addition, respondent disallowed certain business expense deductions for 2006 and 2007 for both Green Gas and Pontiac Trust and imposed accuracy-related penalties under section 6662(a). Green Gas and Pontiac Trust (partnerships) now seek
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redetermination of their Federal income tax deficiencies and accuracy-related penalties.
We decide the following issues:
1. whether the partnerships are entitled to FNS credits in excess of the amounts, if any, allowed by respondent. We hold that they are not except as set forth in this opinion with respect to certain landfills;4
2. whether the partnerships are entitled to disallowed business expense deductions for 2006 and 2007. We hold that they are, to the extent stated in this opinion;
3. whether respondent correctly determined Green Gas' distributive share. We hold that he did;
4. whether the partnerships are liable for the accuracy-related penalty under section 6662(a) for 2006 and 2007. We hold that they are.
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I. Overview of Entities Involved in the Alleged Production and Sales of Landfill Gas
A. RTC
1. In General
RTC was incorporated under the laws of the State of Delaware. During the years at issue RTC was in the business of producing electricity from LFG as well as controlling and disposing of methane gas produced as a result of landfill operations.
In 2005-07 RTC was a wholly owned subsidiary of Rumpelstiltskin Corp. (Rumpelstiltskin), a company owned by Andrew Jahelka (30%), Leon Greenblatt (50%), and ROLJFLP Inc. (20%), a corporation owned by members of Richard Nichols' family.
From its inception in 1993 until 2001, George Calvert5 was the president of RTC. Mr. Calvert was a former partner at Arthur Andersen, a major accounting and consulting firm. Starting in 2001, John Connolly became the president of RTC. Mr. Connolly had a college degree in mechanical engineering and had prior
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experience in solid waste management before joining RTC. In 1999, RTC's board of directors consisted of Mr. Calvert, Mr. Greenblatt, Mr. Jahelka, and Mr. Nichols.6 During 2005-07, RTC's board of directors consisted of Mr. Nichols and Mr. Connolly.
RTC started out as a business investing in production of energy from nonconventional sources. At some point RTC implemented a successful project in Shelton, Connecticut, converting LFG into electricity. RTC, upon consultation with its tax attorneys at that time, Freeborn & Peters, developed a framework that allowed RTC to benefit from tax credits for production of qualified fuel under section 45K. RTC later used the same framework with certain modifications in its dealings with Green Gas and Pontiac Trust without receiving a separate opinion of a tax counsel on the proper tax treatment of such transactions.
2. RTC's Bankruptcy
By 1999 RTC became financially distressed. On or about November 15, 1999, three creditors filed an involuntary bankruptcy petition against RTC in the U. S. Bankruptcy Court for the Northern District of Illinois, Eastern Division
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under chapter 7 of the Bankruptcy Code. After RTC consented, the case was converted to a voluntary reorganization proceeding under chapter 11 of the Bankruptcy Code on January 18, 2000, effective on February 1, 2000. RTC was the debtor-in-possession (DIP) in the bankruptcy proceeding until the appointment of Gregg E. Szilagyi as chapter 11 trustee (chapter 11 trustee) on August 26, 2003.
On September 21, 2005, the bankruptcy court converted the RTC bankruptcy case to a chapter 7 liquidation proceeding, and appointed Jay A. Steinberg as the trustee for the RTC bankruptcy estate (chapter 7 trustee). Both the chapter 7 and the chapter 11 trustees kept Mr. Connolly and other RTC employees on the payroll as employees or independent contractors of the estate. Both the chapter 7 and the chapter 11 trustees reimbursed expenses for site visits of RTC employees.
3. Financing Arrangements During Bankruptcy
On February 3, 2000, the bankruptcy court entered an order authorizing RTC to obtain interim financing from Mr. Greenblatt, as agent for and on behalf of himself, Banco Panamericano, Inc. (Banco Panamericano), and Chiplease, Inc. (Chiplease) (collectively, DIP lenders). On February 29, 2000, RTC entered into a first amended DIP secured loan agreement and revolving note (DIP loan). By order dated March 2, 2000, the bankruptcy court authorized the DIP loan.
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Pursuant to that order, the bankruptcy court authorized the DIP lenders to either claim money at the source or collect from RTC when it received payments for services or similar proceeds.
On December 19, 2001, the bankruptcy court entered an order authorizing RTC to borrow funds from Aquila Energy Capital Corp. (Aquila). The bankruptcy court directed that RTC remit all payments from account debtors to Aquila. RTC entered into a financing arrangement with Aquila (Aquila DIP loan) to refinance the LFG collection facility and upgrade the gas-to-electricity facility to a solar turbine plant at the Pontiac landfill. Effective December 28, 2005, Aquila's rights under the Aquila DIP loan were acquired by RTC's successor in interest, Scattered Corp. (Scattered).
4. Greenblatt Entities Settlement
On March 16, 2006, the bankruptcy court entered an order approving a settlement between the RTC estate on one hand and Mr. Greenblatt, Banco Panamericano, Chiplease, and Scattered (collectively, Greenblatt entities) on the other. Among other things, the settlement conveyed the RTC estate's interest in various agreements with landfill owners to the Greenblatt entities.
On August 15, 2006, the bankruptcy court entered an order assigning the executory contracts between the partnerships and RTC pertaining to...
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