# In the United States Court of Federal Claims

No. 13-54

(Filed: January 12, 2015)

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American Recovery and Reinvestment Act, Section 1603; Open-Loop Biomass Facility; Reimbursement Grant; Eligible Cost Basis; I.R.C. Sections 45, 48. *
W.E. PARTNERS II, LLC, *

* Plaintiff, *

*

v. *

* THE UNITED STATES, *

*

Defendant. *

*

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Stephen G. Leatham , Heurlin, Potter, Jahn, Leatha m, Holtmann & Stoker, P.S., Vancouver, Washington , for Plaintiff.

Shelley d.A. Leonard , with whom were Tamara W. Ashford , Acting Assistant Attorney General, David I. Pincus , Chief, G. Robson Stewart , Assistant Chief, U.S. Department of Justice, Tax Division, Court of Federal Claims Section, Wa shington, D.C., for Defendant.

OPINION AND ORDER

WHEELER, Judge.

This case arises under Sec tion 1603 of the American Re covery and Reinvestment Act of 2009, Pub. L. No. 111-5 , 123 Stat. 115, 364 (“Secti on 1603”). Plaintiff W.E. Partners II, LLC (“WEP II”) funded the constr uction of an open-loop biomass facility in Lewiston, North Carolina next to a Perdue ch icken rendering plant to which it provides steam. The facility was designe d and now operates to meet Perdue’s steam needs for the chicken rendering processes. The facility in cludes a steam-turbine generator to produce electricity from the steam before it passes through to process th e chicken. The electricity generation allows the plant to qualify for state and federal re newable energy incentives. Section 1603 provides for reim bursement of a portion of the costs incurred for “a facility using open-loop biomass to produce electric ity.” Internal Revenue Code (“I.R.C.”) § 45(d)(3) (2012). The question presented is whether WEP II is entitled to reimbursement2 of a percentage of the total cost of the faci lity ($9,037,769), or on ly of the lesser costs associated with the po rtion of the facility necessary to produce electricity. At the prescribed 30 percent reimbursement rate , WEP II claims entitlem ent to $2,711,331, whereas the Department of Treasury has allowed only $943,754. The difference, $1,767,577, is in dispute. The issue is be fore the Court on cro ss-motions for summary judgment.

The question to be resolved is primarily one of statutor y interpretation. While the language of the statute, if read without co ntext or reference to agency guidance, might suggest that reimbursement based on total co st is mandatory when ever a facility uses open-loop biomass to generate electricity , the Court does not agree with such an outcome. When read in conjunction with the applicable Internal Revenue Service (“IRS”) Notice and Treasury Department Guid ance, the Court finds that Section 1603 requires only reimbursement for the portion of th e cost that is fair ly allocable to the production of electricity. Accordingly, the Court grants summary judgment in favor of

Defendant.

Background 1

A. W.E. Partners II and the Biomass Facility

Plaintiff WEP II is a single-purpose lim ited liability company fo rmed in 2010 to design, construct, and operat e a biomass boiler facility at a Perdue chicken rendering plant in North Carolina. This biomass facil ity burns forest products waste (e.g., limbs, bark, sawdust, shavings) and agricultural re sidue (e.g., peanut and soybean hulls, cotton gin residue) to produce steam. The steam is then used for industrial manufacturing processes, to produce electricity, or both . Boiler facilities that produce steam for industrial processes are known as process st eam plants, and boilers used for electrical generation are known as power generation plants. Boilers that utilize steam for both industrial processes and energy generation ar e known as cogenerati on plants. The WEP II biomass facility is a cogeneration plant. In this cogeneration plant, the steam from a biomass boiler is routed through an electric ity generating turbine before being used for other industrial processes, such as for th e chicken rendering plant. The amount of electricity generated is a function of the st eam flow, temperature, and pressure of the steam passing through th e turbine. Pressure and temper ature drop while passing through the turbine, while the steam fl ow remains constant. Increas ed steam flow or drops in temperature or pressure across the turbine incr eases the amount of electricity generated.

1 The facts are drawn from the parties’ briefs and are not in dispute. At oral argument on December 15, 2014, counsel for both parties agreed that the material facts are not contested, and that the Court may

decide the matter on the cross- motions for summary judgment.3 The WEP II facility uses three boilers, eac h with a heat input of 29.4 million Btu (mmBtu), a steam flow of 20, 700 pounds per hour (pph), an d a pressure of 325 pounds per square inch (psi). All steam produced by the boilers passes through a 495 kilowatt (kW) turbine that generates electricity and rel eases the steam at a pressure of 135 psi. This lower pressure steam can th en be used in the chicken re ndering plant. In total, 2.2 percent of the useful energy that the WEP II facility produ ces is electrical energy, and 97.8 percent is thermal energy.

B. Section 1603 of the American Recove ry and Reinvestment Act of 2009

President Obama signed the Recovery Ac t into law on Febr uary 17, 2009. Although a detailed discussion of the statute is not necessary here, the purpose of the Act was to create jobs and promote economic rec overy, in part by spurring investments in specified technologies. § 3, 123 Stat. at 116.

Section 1603 of the Recovery Act perm its investors in qualifying renewable energy property to apply for a reimbursement of costs in lieu of a tax credit. 123 Stat. at 364. Section 1603(a) provides that the Secretary of the Treasury “shall, subject to the requirements of this section, provide a grant to each pers on who places in service specified energy property to re imburse such person for a por tion of the expense of such property as provided in subsection (b).” Id. at 364. Section 1603(b) provides that “[t]he amount of the grant . . . shall be the applicable percentage of the basis of such property.” Id. The applicable percentage is contingent on the type of energy property placed into

service. Id. at 364-65. Sec tion 1603(d)(1), which is applic able here, includes “[a]ny qualified property (as defined in section 48(a)(5)(D) of the Internal Revenue Code of 1986) which is part of a qualified facility (w ithin the meaning of section 45 of such Code).” Id. at 365. Section 1603(d)(1) allows a cost reimbursement of 30 percent. Id. at

364-65. Secti on 1603 uses the definiti ons of “qualified property ” and “qualified facility”

from Sections 45 and 48 of the Internal Reve nue Code to describe the energy properties eligible for a 30 percent reimbursement. Id. at 365; see also I.R.C. § 45, 48. Section 1603 also gives the Treasury Department the authority to “recaptu re [] the appropriate percentage of the grant . . . as the Secretary of the Treasury determin es appropriate” if the property “ceases to be a specified en ergy property.” 123 Stat. at 365.

I.R.C. Section 48 prov ides that “the term ‘qualified property’ [includes] . . . (I) tangible personal property, or (II) other tangible property (not including a building or its structural components), but only if such prope rty is used as an integral part of the qualified investment credit facility.” I.R.C. § 48(a)(5)(D). As provi ded in Section 1603, qualified property under I.R.C. Se ction 48 must also be part of a qualified facility under

I.R.C. Section 45. 123 Stat. at 365. For the facility at issue here, Section 45 provides that a qualified facility is “a facility using open-loop biomass to prod uce electricity . . .4 the construction of which begi ns before January 1, 2014.” I.R.C. § 45(d)(3)(a). Qualified property of an open-loop biomass facility under Section 45 is further defined by I.R.S.

Notice 2008-60:

(1) In general . For the purposes of § 45( d)(3), an open-loop biomass facility is a power plant consis ting of all components necessary for the production of electricity from open-loop biomass (and, if applicable, other energy source s). Thus, a qualified open-loop biomass facility includes all burners and boilers (whether or not burning open-loop biomass), any handling and delivery equipment that supplies fuel direc tly to and is integrated with such burners and boilers, steam h eaders, turbines, generators, and all other depreciable property necessary to the production of electricity . . . .

I.R.S. Notice 2008-60 § 3.01(1), 2008-30 I.R.B. 178.

The Treasury Department also pr omulgated guidance for Section 1603 applications, explaining that “Q ualified Facility Property is prop erty that is an integral part of a qualified facility described in IRC section 45(d) . . . (1) . . . [and for open loop biomass facilities] uses open-loop biomass to produce electricity .” U.S. Treasury Dep’t, Payments for Specified Energy Property in Lieu of Tax Cr edits under the ARRA of 2009 12-13 (rev. April 2011). The Treasury Guid ance further explains the appropriate cost basis for components of a qualifying facility that are not attributable to a qualifying activity and costs that are attributable to both nonqualifying a nd qualifying activities:

The eligible basis of a qualified facility does not include the portion of the cost of the facility that is attributable to a nonqualifying activity. For example, fo r a biomass facility th at burns fuel other than open-loop biomass or closed-loop biomass, the eligible cost basis is the percentage of the total eligible costs that is equal to the percentage of the electricity pr oduced at the fa cility that is attributable to the open-loop biomas s and closed-loop biomass. In

the case of costs that relate to both a nonqualifying activity and a qualifying activity, the costs must be reasonably allocated between the nonqualifying and qualifying ac tivities. For example, if combustion equipment burns both qua lifying biomass and other fuel, the equipment’s eligible cost basis is limited to the percentage of its otherwise eligible cost correspon ding to the percentage of the equipment’s electricity production that is attributable to the qualifying biomass.5 Id. at 17.

C. The Treasury Department’s Review of the WEP II Section 1603 Application

The National Renewable Energy Laboratory (NREL), a Department of Energy laboratory, assists the Treasury Department in reviewing Section 1603 applications for

reimbursement. In its assessment of WEP II’s Section 1603 app lication, the NREL

calculated that a biomass boiler with a heat input of 8.4 to 11.2 mmBtu would be sufficient to power a 495 kW turbine. Th us, one of WEP II’s three 29.4 mmBtu boilers

would be more than sufficient to power the facility’s 495 kW turbine. Accordingly, the

NREL determined that one-third of the WEP II facility’s costs could be attributed to electrical production and it recommended an elig ible cost basis that included all costs

associated with the tu rbine and one third of all other co sts. The revised calculations indicated an eligible cost basis of $3,1 45,847 and a Section 1603 reimbursement of $943,754.

D. History of Proceedings

On June 25, 2012, WEP II submitted a Se ction 1603 reimbursement application for the biomass facility. WE P II claimed an eligible cost basis of $9,037,769 and requested reimbursement of $2,711,331 (30 perc ent of the cost basi s). On December 9, 2012, the Treasury Department issued an awar d letter approving a reimbursement of only $943,754, which represented th e cost of the turbine and on e-third of all other costs, including the boilers. On December 21, 2012, WEP II sent a protest email to the Treasury Department program indicating its disagreement with the reduced award.

WEP II filed its complaint in this Court on January 22, 2013, asserting that the Government violated its mandatory obligati on to award reimbursement grants in the amount of 30 percent of the eligible cost basis of a biomass facility. WEP II further asserted that the Treasury’s evaluation of its application and failure to provide the 30 percent reimbursement were arbitrary and capricious. The Government answered that WEP II is not entitled to any further rec overy because the reduced reimbursement correctly reflects a commensurate reduction in the facility’s eligible cost basis under

Section 1603. With the issu es joined, WEP II filed a moti on for summary judgment on June 13, 2014, and the Government filed a cross-motion for summar y judgment on July 28, 2014. Both motions have been fully br iefed, and the Court held oral argument on December 15, 2014.6 Discussion

A. Subject Matter Jurisdiction

The Court has jurisdiction ove r this action pursuant to the Tucker Act, 28 U.S.C. § 1491 (2012). The Tucker act establishes Court of Federal Cl aims jurisdiction and waives sovereign immunity over cert ain claims against the Unite d States, including those founded upon federal statutes and regulations. Id. The Tu cker Act “does not create a substantive cause of action; in order to co me within the jurisdictional reach and the waiver of the Tucker Act, a plaintiff must identify a separate source of substantive law that creates the right to money damages.” Fisher v. United States , 402 F.3d 1167, 1172 (Fed. Cir. 2005) (citing United States v. Mitchell, 463 U. S. 206, 216 (1983) and United States v. Testan, 424 U.S. 392, 398 (1976)). “In the parlance of Tucker Act cases, that source must be ‘money-mandating.’” Id. (c iting Mitchell, 463 U.S. at 217 and Testan, 424 U.S. at 398). This Court previously has held that Section 1603 is “money mandating,” and that it has jurisdiction over Section 1603 disputes. LCM Energy Solutions v. United States, 107 Fed. Cl. 77 0, 772 (2012); ARRA Energy Co. v. United States, 97 Fed. Cl. 12, 19-20 (2011).

B. Standard of Review

Section 1603 provides “grant s for specified energy proper ty in lieu of tax credits” and explicitly adopts the meanin g of terms used in I.R.C. Se ctions 45 and 48. § 1603, 123 Stat. 115, 364, 366. When an applicant pursues a Se ction 45 or 48 tax credit instead

of a Section 1603 reimbursement and receives an unfavorable determination by the IRS, the applicant may file a tax refund suit. In tax refund suits, the Court reviews claims de

novo , and the plaintiff bears the burden of proo f for each claim. D’Avanzo v. United States, 54 Fed. Cl. 183, 186 (2 002). Similarly, Section 1603 claimants may file suit after

an unfavorable determinati on by the Treasury Departme nt regarding property that otherwise qualifies for a Section 45 or 48 tax credit. There is no indication in Section 1603 that Congress intended a different st andard of review based on Section 1603’s provision of direct reimbursement in lieu of tax credits. Accordingly, the Court reviews

WEP II’s claim de novo

.

C. Analysis of the Merits

The question presented is whether the phrase “a fac ility using open-loop biomass to produce electricity,” contained in I.R.C . Section 45 and appl ied to Section 1603, necessarily includes the entire cost basis of facilities that use open-loop biomass and produce electricity, regardless of other purpose s and capabilities, or whether the phrase7 implicitly contains limitations to the eligible cost basis of the grant. Based on the subsequent IRS notice and Treas ury Guidance, the Court finds that Section 1603 grants are properly restrained by the limitations on e ligible cost basis fo und in the Treasury

Guidance.

1. Interpretation of I.R.C. Section 45 as applied to Section 1603

WEP II contends that under Sections 1603, I.R.C. Sections 45 and 48, the Treasury Guidance, and all ot her related authorities, WEP II is entitled to the full reimbursement amount of its original Sec tion 1603 application. In response, the Government argues that the applicable aut horities, and specifically the IRS Notice and Treasury Guidance, limit the elig ible basis of Section 1603 grants to the components necessary for electricity production, and re quire the eligible costs to be reasonably allocated between qualifying and non-qualifyi ng activities. As a threshold matter, although neither the Government nor WEP II challenges the validity of the agency’s interpretation of I.R.C. Section 45, the Cour t must determine whether the IRS Notice and the Treasury Guidance demand deference as ag ency interpretations of Section 1603.

The Supreme Court has articulated two diff erent standards of de ference to agency interpretations of statutes. Chevron, U.S.A. , Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984); Skidmore v. Swif t & Co., 323 U.S. 134 (1944); see United States v. Mead Corp., 533 U.S. 218, 221 (2 001); Cathedral Candle Co. v. United States Int’l Trade Comm’n, 400 F.3d 1352, 1365 (Fed. Cir. 200 5). In Chevron, the Supreme Court established the primary test for determining wh ether to afford defere nce to an agency’s interpretation of a law which th e agency administers. See Ch evron, 467 U.S. at 842-43. The first step under Chevron is to determine if Congress has directly spoken to the precise question at issue. If so, the Court should give effect to any unambiguously expressed intent of Congress. Id. However, if Congress is silent or ambiguous as to a given issue, the Court must determine whethe r the agency’s interpretation is based on a permissible construction of the statute. Id. at 843. Here, the Court finds that Congressional intent regarding the eligible co st basis for reimbursement lacks precision.

The Court cannot ascribe a clea r meaning to an “integral pa rt of the facility” in IRC Section 48 and “using open-loop biomass to produce electricity” in IRC Section 45, as well as the complex interplay between the Internal Revenue Code, the Recovery Act, and the Treasury’s administration of reimbursement s. Therefore, the Court may examine the agency’s interpretation of the law.

However, the Federal Circuit has held that the Chevron standard applies when “Congress either leaves a gap in the constr uction of the statute th at the administrative agency is explicitly authorized to fill, or implicitly delega tes legislative authority, as evidenced by ‘the agency’s generally conferred authority and other statutory8 circumstances.’” Cathedral Ca ndle, 400 F.3d at 1361 (quotin g Mead, 533 U.S. at 229). Although Chevron deference does not require “notice and comment rulemaking or formal adjudication, . . . the Court ha s looked for indications that Congress meant to delegate to the agency the authority to make determinations having the force of law.” Cathedral Candle, 400 F.3d at 1361 (citing Barnhart v. Walton, 535 U.S. 212, 219-22 (2002) (applying Chevron deference to an administ rative interpretation w ith a “longstanding” duration dating to the 1960’s)).

Here, the IRS Notice and the Treasury Gu idance should not be afforded Chevron deference. First, the Trea sury Guidance and IRS Notice were not created through a formal rulemaking process, but instead re flect only guidance for Section 1603 and Section 45, respectively. See I.R.S. Notice 2008-60 § 1 (“[t]his notice sets forth interim guidance, pending the issuance of regula tions”); Treasury Guid ance at 2 (“[t]his Guidance . . . is intended to clarify the e ligibility requirements under [Section 1603]”). Moreover, unlike in Barnhart, neither the 2008 Notice nor the 2009 Treasury Guidance can be appropriately considered “longstand ing.” Although Section 1603 provides the Treasury Department some authority to recapture grant funds in certain limited circumstances, there is no indication that Congress explicitly or implicitly delegated broad interpretive authority to the agency. Accordingly, the IRS Notice and Treasury

Guidance should not be affo rded Chevron deference.

When Chevron deference does not apply, the ag ency’s interpretation may still be subject to a lesser standard of deference artic ulated in Skidmore v. Swift & Co., 323 U.S. 134 (1944). The application of Skidmore de ference depends upon the circumstances of the case and requires courts to give “some defe rence to informal agency interpretations of ambiguous statutory dictates.” Cathedral Candle, 400 F.3d at 1365. Courts have evaluated “the degree of the agency’s ca re, its consistency, formality, [] relative expertness, and [] persuasiveness of the agency’s position.” Mead, 533 U.S. at 228 (footnotes omitted) (citing Skidmore, 323 U.S. at 139-40). Overall, the level of deference depends “‘upon the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade , if lacking power to contro l.’” Id (quoting Skidmore, 323 U.S. at 140). Skidmore deference has “produced a spectrum of judicial responses, from great respect . . . to near indifference.” Id.; see Wos v. E.M.A. ex rel. Johnson, 133 S.Ct. 1391, 1402 (2013) (quot ing Christensen v. Harris Cn ty., 529 U.S. 576, 587 (2000) (quoting Skidmore, 323 U.S. at 140) (“‘[i]nterpretations such as those in opinion letters’” . . . are “‘entitled to respect’” in proportion to their “‘power to persuade”’”))); Metro. Stevedore Co. v. Rambo, 521 U.S. 121, 136 (1997) (“Direct or’s reasonable interpretation . . . brings at least some added persuasive for ce”); Reno v. Koray, 515 U.S. 50, 61 (1995) (internal agency guidelines “s till entitled to some deference”); Martin v. Occupational9 Safety and Health Review Co mm’n, 499 U.S. 144, 157 (1991 ) (“informal interpretations are still entitled to some weight on judicial re view”). On balance, the Court will defer to an agency’s interpretation if th e agency has conducted a “careful analysis of the statutory issue,” maintained a “consistent and [] ag ency-wide policy,” and the position “constitutes a reasonable conclusion to the proper construc tion of the statute, even if [the Court] might not have adopted the construction withou t the benefit of the ag ency’s analysis.” Cathedral Candle, 400 F.3d at 1366.

The I.R.S. Notice and the Tr easury Guidance me rit deference for at least four reasons. First, as in Cathedral Candle, the IRS Notice and the Treasury Guidance here represent agency-wide policy, and not a low-level determina tion. Second, the IRS Notice was published in 2008, prior to the enactment of the Recovery Act, and the Treasury Guidance was published only five months after the signing of the Recovery Act. Neither source was “formulated belatedly in response to litigation in this case or others.” Cathedral Candle, 400 F.3d at 1367. Instead, the Guidance was published to “[establish] the procedures for applying for payments under the Section 1603 program” and to “clarify the eligibility requirements under the pr ogram.” Treasury Guidance at 2. Third, the reasons for the policies are clear, which include limiti ng the reimbursements granted to the costs attributable to producing elect ricity from open-loop biomass, the primary

incentive established in Sectio n 1603. Lastly, the Treasury Department is explicitly granted recapture authority for any grants to pr operty that ceases to be “specified energy property” in “such manner as the Secretary of the Treasury determin es appropriate.” § 1603(f), 123 Stat. at 365. The recapture au thority and accompanyi ng discretion afforded to the Treasury Department suggest Congress’ s intent to defer to the agency with the administration of this law, much like the Intern ational Trade Commission in Cathedral

Candle. 400 F.3d at 1367.

The one limiting factor for the Treasury Department here is the inconsistency of its interpretation as applied to past reimbursements. The Treasury Department fully reimbursed another W.E. Partners energy fa cility, WEP I, which c ontained two boilers and the same size electric turbine, suggesti ng that the agency has previously approved grants where the boilers prod uce more steam than necessary for the turbine. However, 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. As “the manifest weight of precedent rejects a ‘l east common denominato r’ notion of federal taxation,” the Court is persuade d that a prior favorable reim bursement is not binding for future Treasury interpretations of Section 1603. See Vons Cos., Inc. v. United States, 51 Fed. Cl. 1, 10 n.10 (2001).

Accordingly, the Court finds that the Treasury Department’s interpretation of

Section 1603 is entitled to co nsiderable weight as a reas onable interpretation of the10 statute and a reasonable limitation consistent with the intent of Congress. The Treasury Guidance properly restrains the broad language of Section 1603. Thus, under Section 1603 and the applicable guidance, the C ourt must determine (1) whether the WEP II facility is a “qualified facility” for Section 1603 reimbursement, (2) if the WEP II facility is a qualified facility, what property is qualif ying, and (3) of the qu alifying property, what costs are eligible for reimbursement.

2. Qualifying Facilities

To qualify for a Section 1603 reimbursement, a facility must be a “qualifying facility” as defined in I.R.C. Section 45. § 1603(d)(1), 123 Stat. at 365. Qualifying open-loop biomass facilities include “a fac ility using open-loop bi omass to produce electricity . . . the construc tion of which begins before January 1, 2014.” I.R.C. § 45(d)(3)(A). The WEP II facility began cons truction prior to January 1, 2014 and burns biomass to produce electricity. Although there is some ambiguity as to whether Section 1603 applies to cogeneration facilities that do not qualify as comb ined heat and power facilities under Section 1603(d)( 7), the Government does not se riously contest this issue. See 123 Stat. at 365. Thus, WEP II is a qualifying facility under Section 45.

3. Qualifying Property

Within a qualified facility , only qualified prope rty is eligible for Section 1603 reimbursement. Section 1603(d)(1) uses the de finition of qualified pr operty contained in I.R.C. Section 48. § 1603(d)(1 ), 123 Stat. at 365. The prov ision at issue here provides that qualified property means “tangible pers onal property” or “tangible property (not including a building or its struct ural components), but only if su ch property is used as an integral part of the qualified investment cr edit facility.” I.R.C. § 48(a)(5)(D). I.R.S. Notice 2008-60 further defines qualifying pr operty as all “components necessary for the production of electricity from open-loop bi omass.” § 3.01(1). Finally, the Treasury Guidance defines qualifying property as “propert y that is an integral part of a qualified facility.” Treasury Guidance at 12-13.

WEP II asserts there is no evidence that “the facility must be one whose ‘primary function’ is to produce electricity.” Pl.’s Mo t. Summ. J. 5. However, as clarified by Notice 2008-60, only those co mponents necessary for the production of electricity are qualified property. Moreover, the Treasury Guid ance provides that qualifying property is property that is an integral part of a qua lified facility, here being a facility using openloop biomass to produce electricit y. In each provision, the eligibility of pr operty within a facility requires both the use of open-loop biomass and the production of electricity.11 The Government contends that not a ll components of the WEP II facility are qualifying property because WEP II is primarily a steam facility and in cludes boilers that are not necessary for the production of electricity. The Government bases this conclusion

on its calculation that 495 kW of electricity could be produc ed with a heat input of 8.4 to 11.2 mmBtu, or approximately one-third of the heat prod uced by WEP II’s three-boiler

system. The Government does not, however, iden tify any property in the WEP II facility that remains unused in the produ ction of electricity, but instead refers to property that is used for both the production of electricity and other nonqualifying activities. More specifically, although the WEP II facility’s boilers produce both nonqualifying thermal energy and qualifying electrical energy, all steam produced by the boilers and passing through the turbine contributes to the generati on of electricity. Therefore, every part of the facility is qualifying proper ty necessary to the production of that electricity. Neither

the Guidance nor the statute re quire the facility to be desi gned purely for electrical production, and neither define s qualifying property “nece ssary for the production of electricity” as meaning “only for the producti on of electricity” or “only as much as necessary to generate the amount of electric ity actually generated.” Instead, the Court finds that property “necessary for the produc tion of electricity” includes the property that is actually involved in maki ng electricity, and without whic h the electrical production would be reduced. Thus, the Government’s hypothetical fa cility that maximizes the efficiency of electrical productio n is irrelevant to the determ ination of qualifying property

in this case. All three boilers send steam th rough the turbine, and thus all three boilers are necessary to the production of electricity generated therefrom.

The Government further explains that the facility includes a pressure-reducing valve (PRV) that can bypass the electricity-g enerating turbine. The PRV was used by WEP II on twelve to fifteen percen t of the facility’s operating days. Although use of the PRV undoubtedly reduces the amount of electri city generated, the fact that steam may occasionally bypass the turbine through th e PRV does not alone disqualify WEP II’s otherwise qualifying property. The Government also contends that Congress could not have intended any de minimis electricity production to qualify property otherwise ineligible for Section 1603 reimbursement, but does no t identify any statutory provision that supports that limitation. To the c ontrary, the Treasury Guidance specifically contemplates property relati ng to both nonqualifying and qualifying activity. Treasury Guidance at 17. Thus, all of the WEP II property is qualifyi ng property. Nonetheless, as described below, only a portion of the qualifying property’s costs are eligible for Section

1603 reimbursement.

4. Eligible Cost Basis

Regarding costs associated with both qualifyi ng and nonqualifyi ng activities, the Treasury Guidance provides that “the costs must be reasonably allocated between the12 nonqualifying and qualif ying activities,” and illustrates this allocation with a hypothetical facility burning both biomass and another nonqu alifying fuel. Treasury Guidance at 17.

WEP II contends that it is entitle d to the full reimbursement re quested because “[t]here is nothing in Section 1603 or the related authorities that supports Treasury’s arbitrary decision to cut the requested grant amount by two-thirds.” Pl.’s Reply Supp. Mot. Summ. J. 8. In response to the Treasury Gu idance, WEP II asserts th at the Guidance “has nothing to do with the issue before the Court” because it relates only to the type of fuel used at a qualified facility. Id

. at 5. Although the Trea sury Guidance illustrates the eligible cost basis of a facility using qualif ying and nonqualifying fuel as an example,

there is no indication that the Guidance applied exclusively to fuel type. To the contrary, the Treasury Guidance’s use of the phras e “for example” while introducing the hypothetical facility indicates that there are other, different scenarios where costs must be allocated between nonqualifying a nd qualifying activities. In th is case, the el igible cost basis of qualifying property must be reas onably allocated between the nonqualifying chicken rendering processes and the qualifying electricity generation. WEP II further contends that its facility was the only econom ically viable design that suited the needs of the chicken rendering plant. WEP II does not, however, cite any auth ority indicating that economic viability is a factor in determining wh at constitutes an eligible cost basis for a section 1603 reimbursement. Instead, qualifyi ng property and elig ible cost basis are defined by I.R.C. Section 48 and the relevant portions of the subsequent IRS Notice and Treasury Guidance.

This Court previously held that the govern ment “may decide . . . that an applicant has miscalculated or misrepresented the basis of its property, [but] it has no discretion to reimburse an applicant for less than, or more than, thirty percent of the correct basis of that property.” ARRA Energy, 97 Fed. Cl. at 21. Pursuant to the Treasury Guidance, the Treasury Department determined that 8.4 an d 11.2 mmBtu of steam would be sufficient to generate 495 kW, the amou nt produced by WEP II’s turbine. Thus , one of WEP II’s

three 29.4 mmBtu boilers reas onably could be allocated to the qualifying activity of generating electricity. Based on these calc ulations, the Treasury Department awarded WEP II a 30 percent reimbursement for the full cost of the turbine and one-third of all other costs. In light of the WEP II facility ’s substantial thermal energy production and comparatively small electrical generation, the Court concludes that the Treasury Department’s determination of the WEP II fac ility’s eligible cost basis is a reasonable allocation of the costs between the generati on of qualifying electrical energy and nonqualifying thermal energy.13 Conclusion

For the reasons set forth above, the Cour t finds in favor of the Defendant. Plaintiff’s motion for summary judgment is DENIED, and Defendant’s cross-motion for summary judgment is GRANTED. Plainti ff’s complaint shall be dismissed with prejudice. No costs.

IT IS SO ORDERED.

s/ Thomas C. Wheeler

THOMAS C. WHEELER Judge