The United States Court of Federal Claims on January 12 rendered an opinion in W.E. Partners II, LLC v. U.S. sustaining the Treasury Department’s reduction by approximately two-thirds of a Cash Grant1 for a cogeneration open-loop biomass facility that sells steam to a Perdue chicken-rendering plant.
To challenge Treasury’s award, the Cash Grant applicant’s only option was the Court of Federal Claims, since the Tucker Act provides the court with exclusive jurisdiction to hear claims for money damages against the federal government that arise under a federal statute.2 The case is relevant to taxpayers and their advisors because the Cash Grant rules “mimic” the investment tax credit (ITC) rules; thus, the principles of the case are likely to be applicable to ITC matters.3
The facility burns forest product waste to produce steam and electricity.4 The facility has three boilers, each with a capacity of 29.4 million Btu. All of the steam passes through each boiler; the steam then passes through a turbine with a nameplate capacity of 495 Kw, which then (i) releases the steam at a reduced pressure sufficient for use in the chicken-rendering plant and (ii) generates electricity.
The plaintiff’s affiliate W.E. Partners, LLC (WEP I) submitted a Cash Grant application for a similar facility, and Treasury paid its Cash Grant in full. However, when W.E. Partners II, LLC (WEP II) submitted its application, the National Renewable Energy Laboratory (NREL), a division of the Department of Energy, concluded that one of the facility’s three boilers was more than sufficient to power the 495 Kw turbine. Thus, NREL advised Treasury that the Cash Grant eligible costs for the facility should include only the cost of the turbine and the cost of one of the three boilers.
WEP II had claimed an eligible basis of $9,037,769 in the biomass facility, with a resulting 30 percent Cash Grant of $2,711,330, while Treasury, based on NREL’s analysis, awarded a Cash Grant of only $943,754. Treasury’s award determination reflected Cash Grant eligibility for the entire basis of the turbine and one-third of the basis attributable to all of the other costs, including the boilers.
WEP II asserted that, since all of the steam that resulted in the electricity passed through all three boilers, under the statutory definition of “open-loop biomass” of a “facility using open-loop biomass to produce electricity,”5 the full costs related to the facility and its three boilers should qualify. However, Treasury’s Cash Grant Guidance included an example that suggests that, to determine eligible basis for a biomass plant producing steam and electricity, “the costs must be reasonably allocated between nonqualifying and qualifying activities.”6
In this instance, the sale of the steam to Perdue was nonqualifying because creation of steam usable in an industrial process is not an element of the definition of an “open-loop biomass” facility. Commercial steam is an element of the definition of a “combined heat and power” facility. As a combined heat and power facility, WEP II’s project is likely to have had most of its basis qualify as eligible for a Cash Grant; however, the Cash Grant percentage for a combined heat and power facility is only 10 percent.7 Therefore, characterization as a combined heat and power facility would have resulted in an award that was even less than Treasury’s reduced award for WEP II’s facility under the biomass rules: $943,754 versus $903,776.
The court concluded that Treasury’s “interpretation of Section 1603 is entitled to considerable weight as a reasonable interpretation of the statute and a reasonable limitation consistent with the intent of Congress. The Treasury Guidance properly restrains the broad language of Section 1603.” Thus, the Cash Grant award was appropriately reduced by Treasury from the amount submitted in the application.
The case demonstrates that the Court of Federal Claims is prepared to give Treasury and the Internal Revenue Service (IRS) a considerable amount of deference with regard to the Cash Grant. The holding also suggests that the Court of Federal Claims and the other federal courts are likely to give ITC administrative guidance similar deference, since the Cash Grant rules were intended to mimic the ITC rules.8 Thus, taxpayers and their advisors would be imprudent to cling to statutory language when there is administrative guidance clarifying how the statutory provisions should be applied.
Further, the case demonstrates how archaic the energy tax credit rules are. Many of them were enacted several technological generations ago and did not contemplate the aspects of renewable energy technology we have today. Thus, tax advisors often find themselves trying to squeeze a square peg into a round hole. This problem would be eliminated if former Senator Baucus’ (D-MT) proposal to reform energy tax credits were enacted. Senator Baucus proposed providing tax credits based on the amount of carbon dioxide released per KwH generated, thus eliminating the need to interpret statutory definitions of tax credit qualifying property.9
In addition, it will be interesting to see if Treasury or the Department of Justice (“Justice”) seeks to recover the unreduced Cash Grant paid to WEP I before NREL unearthed this steam issue. The court’s opinion provides “the Government now regards the full reimbursement to WEP I as an agency mistake, and asks the court to give that decision no weight in determining the applicable law.” If Treasury and Justice do not, or are unable to, recover the funds, will the IRS assert that the excess amount of the Cash Grant is gross income, as it asserted in a 2011 internal memorandum?10
Finally, the court determined the standard under which Treasury’s Cash Grant Guidance would be reviewed for compliance with Section 1603 of ARRA. This standard will likely be relevant to the other Cash Grant disputes pending in the Court of Federal Claims.
Because the court determined “that Congressional intent regarding the eligible cost basis for reimbursement lacks precision,” the Treasury Guidance should not be afforded Chevron deference, which requires that the administrative rules merely be “based on a permissible construction of the statute.”11 Rather, the court applied the standard from Skidmore v. Swift & Co., which affords deference to agency guidance if (i) the agency conducted a careful analysis of the statutory issue, (ii) the agency maintained a consistent, agency wide policy, and (iii) the position constitutes a reasonable conclusion of the proper construction of the statute, even if the court might not have adopted that construction itself.12
Under the foregoing three-factor standard, the court found that Treasury conducted a careful analysis and adopted a reasonable position, but that it did not maintain a consistent, agency wide policy due to paying the requested biomass Cash Grant to WEP I but not to WEP II. Nonetheless, the court found on balance that Treasury’s interpretation of Section 1603 is “entitled to considerable weight” under the Skidmore standard.
The case’s conclusion as to the deference afforded the Treasury Guidance is a mixed bag for the other Cash Grant litigants: it is helpful in that Treasury’s Guidance was not afforded lenient Chevron deference, but it was something of a victory for Treasury in that its Guidance was “entitled to considerable weight.” Although the primary Cash Treasury Guidance met this standard, the case did not consider Treasury’s memorandum of June 30, 2011, regarding the calculation of the eligible basis of solar projects for Cash Grant purposes.13 That Treasury memorandum may not merit such deference. For instance, it relied “on information from . . . confidential sources” and provided that its benchmarks for California solar projects are “continuously updated,” but, almost four years later, and despite major economic events and shifts in the solar-panel market, Treasury has yet to publish updated benchmarks.
1 The cash grant is provided for in Section 1603 of division B of the American Recovery and Reinvestment Act, as amended (Cash Grant) (ARRA).
2 28 U.S.C. § 1491(a).
3 Joint Explanatory Statement of the Committee Conference, to ARRA, at 115.
4 If the facility had burned waste from the chicken-rendering plant, it would have been a “closed-loop biomass” plant. Both open and closed-loop plants were eligible for a 30 percent Cash Grant; however, under the Section 45 rules, a closed-loop plant is currently eligible for a 2.3 cent per KwH production tax credit (PTC), while an open-loop plant is eligible for only a 1.1 cent per KwH PTC. The policy rationale for closed-loop plants garnering a larger PTC is that they are more environmentally friendly, since they avoid the disposal of the waste generated by the factory served by the biomass facility and avoid trucking forest and agricultural waste to the biomass facility.
5 I.R.C. § 45(d)(3)(A) (referenced by ARRA § 1603(d)(1)).
7 ARRA § 1603(b)(2)(B), (d)(7) (referencing I.R.C. § 48(c)(3)).
8 Joint Explanatory Statement of the Committee Conference, to ARRA, at 115.
10 IRS AM 2011-004 (Sep. 30, 2011).
11 Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 843 (1984).
12 323 U.S. 134 (1944); Cathedral Candle Co. v. U.S. Int’l Trade Comm’n, 400 F.3d 1352, 1365-66 (Fed. Cir. 2005).
13 U.S. Treasury, Evaluating Cost Basis for Solar Photovoltaic Properties (Jun. 30, 2011). Available at http://www.treasury.gov/initiatives/recovery/Documents/N%20Evaluating_Cost_Basis_for_Solar_PV_Properties%20final.pdf
