from the United States Court of Federal Claims in No.
1:15-cv-00155-MMS, Chief Judge Margaret M. Sweeney.
D. Hoard, Taylor English Duma LLP, Atlanta, GA, argued for
plaintiff-appellant. Also represented by Brian Gardner, Kelly
Mullally; William Sidney Smith, Smith & Kramer, PC, Des
Carpenter, Tax Division, United States Department of Justice,
Washington, DC, argued for defendant-appellee. Also
represented by Teresa E. McLaughlin, Richard E. Zuckerman.
O'Malley, Reyna, and Chen, Circuit Judges.
O'Malley, Circuit Judge.
Alternative Carbon Resources, LLC claimed nearly $20 million
in energy tax credits meant for taxpayers who sell
alternative fuel mixtures. The Internal Revenue Service
("IRS") later determined that Alternative Carbon
should not have claimed these credits and it demanded
repayment (along with interest and penalties). Alternative
Carbon paid back the government, in part, and then filed this
refund suit in the United States Court of Federal Claims
the parties filed cross-motions for summary judgment, the
Claims Court decided that Alternative Carbon failed to
establish that it properly claimed the credits or that it had
reasonable cause to do so. Alternative Carbon Res., LLC
v. United States, 137 Fed.Cl. 1 (2018). The Claims Court
therefore granted summary judgment for the government.
Carbon appeals, arguing that it is entitled to claim the
credits or that it at least had reasonable cause for claiming
them and so it should not have to pay any penalties. Because
we conclude that Alternative Carbon cannot show it is
entitled to the credits or that it had reasonable cause for
claiming them, we affirm.
Alternative Fuel Mixture Credits
begin with a brief overview of the tax credits that
Alternative Carbon claimed. Section 6426(e) allows taxpayers
to obtain a credit for "producing any alternative fuel
mixture for sale or use in a trade or business of the
taxpayer." 26 U.S.C. § 6426(e)(1). The statute then
defines an "alternative fuel mixture" as "a
mixture of alternative fuel and taxable fuel" that is
either "sold by the taxpayer . . . for use as fuel"
or "used as a fuel by the taxpayer producing such
mixture." Id. at §
typical in tax law, this definition of alternative fuel
mixture incorporates other parts of the Internal Revenue Code
by reference. For example, the statute relies on subsections
(A), (B), and (C) of § 4083(a)(1) to supply a definition
for "taxable fuel." See id. As relevant
here, that definition includes "diesel fuel."
Id. at § 4083(a)(1)(B). The statute also
defines "alternative fuel" based on a list of
examples that includes "liquid fuel derived from biomass
(as defined in section 45K(c)(3))." Id. at
§ 6426(d)(2)(G); see also id. at §
45K(c)(3) (broadly defining biomass as "any organic
material" besides oil, natural gas, and coal). The
statute does not, however, define what it means for a mixture
to be "sold by the taxpayer." Id. at
2006, the IRS issued a "notice" regarding §
6426. See I.R.S. Notice 2006-92, 2006-2 C. B. 774.
Among other things, the IRS interpreted alternative fuel
mixture to "mean a mixture of alternative fuel and
taxable fuel that contains at least 0.1 percent (by volume)
of taxable fuel (as defined in § 4083(a)(1))."
Id. at § 2(b). It also explained that "[a]
mixture producer sells a mixture for use as a fuel
if the producer has reason to believe that the mixture will
be used as a fuel." Id. § 2(f)(2). The
notice does not address what it means for an alternative fuel
mixture to be sold in the first place.
all of this in plain English, a taxpayer can claim the
alternative fuel mixture credit under § 6426 by selling
a mixture of alternative fuel, e.g., liquid fuel
derived from biomass, and taxable fuel, e.g., diesel
fuel, so long as the mixture is ultimately sold for use as
fuel. The issues in this appeal are, thus,
whether the taxpayer actually sold the fuel mixture here and,
if so, whether any such sale was "for use as fuel."
Alternative Carbon's Business
Carbon argues that it is entitled to claim this alternative
fuel mixture credit because it sold an alternative fuel
mixture to third parties who, in turn, used the mixture as
fuel in anaerobic digestion tanks. Before addressing this
argument, we briefly discuss anaerobic digestion and
Alternative Carbon's business model. See also
Alternative Carbon, 137 Fed.Cl. at 7–12,
microorganisms produce methane when they digest organic
matter. The input for this process of anaerobic digestion,
i.e., the organic material that the microorganisms
digest, consists of organic solids called feedstock mixed in
a sludge with water. Id. at 8; see also J.A.
550 ("[The] microbes basically eat the organics, and a
by-product of that is methane gas."). Anaerobic digester
tanks provide a place for the microorganisms to digest the
feedstock. J.A. 872–73. Entities that operate these
digester tanks then use the resulting methane to generate
electricity (among other things). See, e.g., J.A.
Carbon began operating in 2011. Its business generally
involved a few basic steps. First, Alternative Carbon bought
feedstock from ethanol production plants. Next, it paid a
trucking company to transport the feedstock. Along the way,
the trucking company added diesel fuel to the feedstock. The
trucking company then delivered this feedstock/diesel mixture
to entities that operated anaerobic digestion
tanks. The digester operators ultimately fed the
mixture to methane-producing microorganisms. Each step is
discussed in more detail below.
Alternative Carbon purchased feedstock from its suppliers,
the feedstock consisted of organic material that might
otherwise be considered waste. For example, the process of
distilling ethanol produces water and corn solids
("stillage") as a by-product. J.A. 1718. This solid
stillage is then further distilled through a centrifuge to
separate liquid ("thin-stillage") from other
solids. Id. Alternative Carbon paid ethanol
producers to acquire this thin-stillage. Id. In
addition to thin-stillage, Alternative Carbon used other
organic materials as feedstock. J.A. 1718–20.
purchasing the feedstock, Alternative Carbon paid a trucking
company to mix enough diesel fuel with the feedstock so that
the resulting mixture could qualify as an alternative fuel
mixture under § 6426. Alternative Carbon, 137
Fed.Cl. at 9; see also J.A. 814 ("[Y]ou got to
put a splash of diesel fuel in it, and here's why . . .
it has a splash of diesel fuel in it before so we can
generate tax credits."). Alternative Carbon's expert
conceded that adding the diesel fuel "did not measurably
change the methane production" of the microorganisms.
J.A. 616; see also J.A. 1026 ("Q. And, in fact,
you wouldn't recommend putting diesel in an anaerobic
digester [tank]; is that right? A. Typically, no. I
wouldn't recommend it.").
made the feedstock/diesel mixture, the trucking company
delivered the mixture to digester operators. Alternative
Carbon paid a fee to the operators based on how much
feedstock/diesel mixture they accepted. See, e.g.,
J.A. 794. In Alternative Carbon's contract with the Des
Moines Wastewater Reclamation Authority ("WRA"),
this "disposal fee" was "$0.02634 per
delivered gallon" plus applicable taxes. Id. In
its contract with Amana Farms, the "handling fee"
was twenty-five dollars per ton. J.A. 1054. There are no
contracts between Alternative Carbon and other digester
operators in the record.
operators like WRA and Amana Farms also paid an annual fixed
fee to Alternative Carbon. See J.A. 795; J.A. 1054.
But the fees Alternative Carbon paid digester operators far
surpassed the annual fees it collected from them.
Alternative Carbon, 137 Fed.Cl. at 18
("Throughout 2011, plaintiff received $8, 950.00 of
income for the purchase of its alternative fuel mixtures and
paid its customers a total of $1, 678, 029.07 in
'disposal fees.'"). There is also no evidence in
the record that the fees paid by WRA or Amana were based on
the value of the feedstock/diesel mixture. See,
e.g., Oral Arg. at 2:24–40 ("Q. And what do
you say the value of the goods transferred was? A. The value
of . . . the goods transferred to the digester companies is
not quantified in the record . . . ."),
J.A. 861 ("This is for their tax credit stuff. A once a
year charge of $950 for us to 'buy' product (AD
the feedstock/diesel mixture was delivered, it was fed into
digester tanks along with other feedstocks. See,
e.g., J.A. 878–79. Some of the resulting methane
was flared, i.e., burned off as excess, and some was
used to generate electricity. Alternative Carbon,
137 Fed.Cl. at 8; J.A. 1475.
Alternative Carbon's Tax Planning
the outset, Alternative Carbon and its business plan were
designed in view of the alternative fuel mixture tax credit.
For example, James Huyser, one of Alternative Carbon's
We understood that if the tax credits . . . w[ere] going to
be approved in 2011, we needed to have a vehicle whereby we
could have a company that we could operate through that would
be able to purchase waste products, transport waste products,
and sell waste products as fuel for anaerobic digesters. And
so there needed to be some sort of company structure in order
to do all this and also be considered an entity for the tax
credits that were a part of our business plan.
J.A. 851; see also J.A. 527–28.
ensure that Alternative Carbon could obtain the credits, its
founders consulted with a tax attorney named Greg Sanderson.
Initially, Sanderson sent them information about energy tax
credits and advised them to register their company with the
IRS. See, e.g., J.A. 528–29. Partners at
Alternative Carbon also reached out to Sanderson with
specific questions about their business.
January 21, 2011, Huyser emailed Sanderson about an agreement
between Alternative Carbon and WRA that was signed the same
day. J.A. 1083; see also J.A. 794. The agreement
stated that WRA would charge a "disposal fee" for
accepting the feedstock/diesel mixture, but it did not
mention any money flowing from WRA to Alternative Carbon.
J.A. 794. In his email, Huyser asked Sanderson whether the
transaction between Alternative Carbon and WRA, in which
Alternative Carbon paid WRA to accept the feedstock/diesel
mixture, counted as a sale of the mixture for purposes of
obtaining the tax credits. J.A. 1083 ("We are basing
[the] 'sale' and its consideration on the service
provided by the WRA in disposing of the
'non-combustible' materials."). Sanderson
replied that Alternative Carbon would have "a better
case if you charge the user of the mixture for the fuel
value, and they charge you a disposal fee." J.A. 1082.
But Sanderson added that he "d[id] not have a full
understanding of the economics" of Alternative
Carbon's business. Id. For example, Sanderson
asked "[h]ow do you make money from this business if you
pay the digester company to take the liquid" and
"[d]oes this business cash flow without the 50 cent per
gallon credit?" Id. He also cautioned that
while "[t]wo private letter rulings [from the IRS]
indicate that the IRS may consider the transfer as a
'sale' even if you do not receive payment for the
fuel . . . [these private letter rulings] may not be
technically cited as precedent by other taxpayers."
2011, Alternative Carbon received a questionnaire from the
IRS asking for additional information about its business.
J.A. 1522–33; see also J.A. 399. Huyser
drafted an initial response and then sent it to Sanderson.
J.A. 1522. Sanderson ...