Court Opinion

ID: 6317188
Source: CourtListenerOpinion
Date Created: 2022-02-24 17:00:45.625117+00
Date Added: 2024-06-11T09:00:34.081206
License: Public Domain

Case: 21-1385    Document: 41    Page: 1   Filed: 02/24/2022

   United States Court of Appeals
       for the Federal Circuit
                 ______________________

    AMPERSAND CHOWCHILLA BIOMASS, LLC,
           MERCED POWER, LLC,
             Plaintiffs-Appellants

                            v.

                   UNITED STATES,
                   Defendant-Appellee
                 ______________________

                       2021-1385
                 ______________________

     Appeal from the United States Court of Federal Claims
 in No. 1:14-cv-00841-MCW, Senior Judge Mary Ellen Cos-
 ter Williams.
                  ______________________

                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, ar-
 gued for defendant-appellee. Also represented by BRUCE R.
 ELLISEN, DAVID A. HUBBERT.
                  ______________________

   Before NEWMAN, HUGHES, and STOLL, Circuit Judges.
Case: 21-1385    Document: 41      Page: 2    Filed: 02/24/2022

 2                     AMPERSAND CHOWCHILLA BIOMASS      v. US

 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 pay-
 ments 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) ac-
 quired two defunct facilities and began restoring them and
 upgrading them to biomass facilities, expecting the facili-
 ties to be operational in 2008.
     Before CalBio acquired the facilities, Pacific Gas &
 Electric Company had entered into power-purchase agree-
 ments 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 pay-
 ments, and (3) the facilities received approval from the Cal-
 ifornia 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 agree-
 ments that required the facilities to pass pre-parallel test-
 ing, 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.
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 AMPERSAND CHOWCHILLA BIOMASS      v. US                      3

 Biomass facilities, though, often have some difficulty pass-
 ing environmental tests. So instead of shutting down bio-
 mass 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 un-
 der the PG&E interconnection agreements on June 17,
 2008 and August 24, 2008.
      Following these events, the facilities began selling elec-
 tricity on the spot market. On December 12, 2008,
 Chowchilla met the requirements under its power-pur-
 chase agreement and accordingly started selling its elec-
 tricity 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, gen-
 erating 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
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 4                      AMPERSAND CHOWCHILLA BIOMASS      v. US

 facilities to continue operating and never revoked their Au-
 thority 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 infrastruc-
 ture 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 prop-
 erty.” 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. Cal-
 Bio 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 sus-
 pended operations in June 2010 and decided to sell the fa-
 cilities.
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 AMPERSAND CHOWCHILLA BIOMASS       v. US                      5

     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 ser-
 vice 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 ser-
 vice in 2008.
      In its two-part analysis, the Court of Federal Claims
 applied Treasury’s regulatory definition of “placed in ser-
 vice,” which required it to determine the “taxable year in
 which the property is . . . availabil[e] for a specifically as-
 signed function.” Treas. Reg. § 1.46-3(d)(1)(ii). First, the
 Court of Federal Claims ascertained the facilities’ “specifi-
 cally assigned function.” Appellants asserted that the facil-
 ities’ specifically assigned function is “to produce electricity
 on a baseload basis for sale to PG&E at the quantities re-
 quired 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 fac-
 tors—drawn from the IRS’s published revenue rulings and
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 6                      AMPERSAND CHOWCHILLA BIOMASS      v. US

 formally established in Oglethorpe Power Corp. v. Comm’r,
 60 T.C.M. (CCH) 850 (1990)—to determine when the facil-
 ities 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’ conclu-
 sion that the applicable statute and corresponding regula-
 tion do not require facilities to produce power at ideal or
 near-ideal production levels to be placed in service. In mak-
 ing 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 as-
 serting that “courts have consistently rejected this stand-
 ard for power plants and repeatedly required a far higher
 standard” than merely “generating and selling power.” Ap-
 pellant’s Br. 22, 29.
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 AMPERSAND CHOWCHILLA BIOMASS       v. US                        7

     We agree with the trial court’s decision and the Fifth
 Circuit’s Sealy opinion: to be placed in service, a facility
 need not achieve ideal or near-ideal production levels.
     The statute at issue here states in relevant part:
     [T]he Secretary of the Treasury shall . . . provide a
     grant to each person who places in service specified
     energy property to reimburse such person for a por-
     tion of the expense of such property . . . .
 ARRA, Pub. L. No. 111-5, § 1603, 123 Stat. 115, 364–66
 (adding a note to 26 U.S.C. § 48) (now expired). Treasury
 defines “placed in service”—as used in a separate but re-
 lated statute 1—via regulation:
     [P]roperty shall be considered placed in service
     in . . . [t]he taxable year in which the property is
     placed in a condition or state of readiness and
     availability for a specifically assigned function . . . .
 Treas. Reg. § 1.46-3(d)(1)(ii). Based on their plain lan-
 guage, we conclude that neither the statute nor the regula-
 tion “states []or implies that the property must produce an
 anticipated or projected amount before it may be consid-
 ered ready and available for a specifically assigned func-
 tion.” Sealy, 46 F.3d at 394.

     1   This regulation limits itself to “purposes of the
 credit allowed by” 26 U.S.C. § 38. Treas. Reg. § 1.46-3(d)(1).
 But “[g]enerally, ‘identical words used in different parts of
 the same statute are . . . presumed to have the same mean-
 ing.’” Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit,
 547 U.S. 71, 86 (2006) (quoting IBP, Inc. v. Alvarez, 546
 U.S. 21, 34 (2005)). And the Court of Federal Claims’ deci-
 sion and the parties’ briefs invoke this regulation, so we
 apply it here. Even if it were not applicable, our conclusion
 would be the same.
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 8                      AMPERSAND CHOWCHILLA BIOMASS        v. US

      In fact, the regulations’ examples of property that is
 placed in service suggest the opposite. One example con-
 cerns operational farm equipment that is impracticable to
 use, and therefore is not used, in the year it is purchased.
 Treas. Reg. § 1.46-3(d)(2)(ii). Despite the farm equipment’s
 non-use, it is still “placed in service” in the year of pur-
 chase. Id. This example implies that the farm does not need
 to produce crops near its expected levels (i.e., the levels
 that the farm would achieve if it used its new equipment)
 for the equipment to be placed in service. See Sealy, 46 F.3d
 at 394.
     A second example explicitly acknowledges deficient
 performance, classifying equipment that “is operational
 but is undergoing testing to eliminate any defects” as
 “placed in service.” Treas. Reg. § 1.46-3(d)(2)(iii); see Sealy,
 46 F.3d at 394.
      And although we do not rely on legislative history to
 reach our conclusion, we note that Congress enacted the
 legislation to “promote economic recovery” in light of the
 2008 recession and “[t]o invest in . . . infrastructure that
 will provide long-term economic benefits.” ARRA, Pub. L.
 No. 111-5, § 3(a), 123 Stat. 115, 115–16. Like the tax cred-
 its in Sealy, Section 1603 grants “provide[d] an incentive to
 acquire property such as machinery and equipment by low-
 ering the effective after-tax acquisition cost of the qualified
 property,” “lower[ing] the profit risk that these firms faced
 in starting out a new venture and therefore [facilitating]
 their investment decisions.” 46 F.3d at 393–94. By incen-
 tivizing this “initial investment decision,” the statute sug-
 gests that the placed-in-service inquiry is primarily focused
 on getting a facility online. Reading the statute to strictly
 require “achieving ideal or near ideal production lev-
 els . . . demands a hindsight approach to the success of a
 taxpayer’s investment expenditures which undermines the
 very focus of” this objective. Id. at 394.
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 AMPERSAND CHOWCHILLA BIOMASS      v. US                     9

     The statute and regulation simply do not require the
 strict construction for which Appellants ask. Therefore, we
 agree with the Court of Federal Claims’ statutory interpre-
 tation and hold that a specifically assigned function need
 not require ideal or near-ideal production levels.
                               B
     Next, we review for clear error the Court of Federal
 Claims’ finding that the facilities’ specifically assigned
 function is to produce and sell electricity.
      The Court of Federal Claims considered Appellants’ as-
 sertion 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, 150 Fed. Cl. at 643–44. The Court of Fed-
 eral Claims recognized that the power-purchase agree-
 ments “were the cornerstone of the Facilities’ functioning”
 but also found them “not as rigid or inflexible as [Appel-
 lants] portray[ed] them to be.” Id. at 644. In fact, PG&E
 had amended the power-purchase agreements several
 times, and “Akeida was aware . . . that PG&E was not de-
 manding performance at the stated capacity levels and was
 willing to waive or reduce performance penalties.” Id. at
 645. The Court of Federal Claims concluded that “the par-
 ties’ course of dealing under the [power-purchase agree-
 ments] evinces a flexible contractual relationship
 permitting less than consistent baseload production.” Id.
     The Court of Federal Claims also rejected Appellants’
 suggestion that the facilities had to operate in accordance
 with environmental laws and regulations. Id. The trial
 court determined that “[a]chieving compliance with envi-
 ronmental law was not part and parcel of the Facilities’
 function to produce electricity using biomass.” Id. And the
 trial court further found that even when the facilities did
 not comply with environmental laws, their continued oper-
 ation still prevented “burning waste in open fields—a
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 10                     AMPERSAND CHOWCHILLA BIOMASS       v. US

 circumstance local environmental authorities viewed as
 more problematic than operating with emissions viola-
 tions.” Id. at 646. These findings were not clearly errone-
 ous.
      On appeal, Appellants make largely the same argu-
 ments, asserting that the trial court chose to overlook
 whether the facilities were operating in compliance with
 applicable law and that the original power-purchase agree-
 ments, not the amended versions, should dictate the facili-
 ties’ specifically assigned function. The trial court’s finding
 that the facilities’ intended use did not include operating
 at 90 to 95% capacity or any of the other stringent require-
 ments for which Appellants advocate is not clearly errone-
 ous. Evidence in the record supports the trial court’s
 conclusion. A December 2007 contract specified that the
 contractor was to refurbish the facilities “so as to return
 their respective 12.5 MW units to full service for the pur-
 pose of generating electricity for sale.” Id. at 625 (emphasis
 added) (quoting Appx5748). The Court of Federal Claims
 did not clearly err in rejecting Appellants’ arguments or
 finding that the facilities’ specifically assigned function is
 to produce and sell electricity, so we affirm its finding.
                               C
     Finally, we review for clear error the Court of Federal
 Claims’ factual findings as to the five-factor test used to
 determine when a facility achieves its specifically assigned
 function and is therefore placed in service. The five factors
 the court weighs are
        1. “whether the necessary permits . . . for oper-
           ation have been obtained,”
        2. “whether critical preoperational testing has
           been completed,”
        3. “whether the taxpayer has control of the fa-
           cility,”
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 AMPERSAND CHOWCHILLA BIOMASS      v. US                    11

        4. “whether the unit has been synchronized
           with the transmission grid,” and
        5. “whether daily or regular operation has be-
           gun.”
 Sealy, 46 F.3d at 395; Ampersand, 150 Fed. Cl. at 646 (cit-
 ing Oglethorpe Power Corp. v. Comm’r, 60 T.C.M. (CCH)
 850 (1990)).
     Appellants contest the trial court’s findings only for
 factors one, two, and five.
     At factor one, the Court of Federal Claims found that
 “the only permit necessary to begin generating power was
 an” Authority to Construct permit. Ampersand, 150 Fed.
 Cl. at 647. The Court of Federal Claims further found that
 the Authority to Construct permits “were the only permits
 necessary for the Facilities to begin producing electricity
 under the” power-purchase agreements. Id. Because the
 Chowchilla facility received its Authority to Construct per-
 mit on April 19, 2007 and Merced received its Authority to
 Construct permit on February 3, 2007, the Court of Federal
 Claims concluded that the facilities had obtained their nec-
 essary permits for operation by 2008. Id.
     Appellants dispute that conclusion, asserting that, in
 2008, their facilities often did not comply with the local and
 federal environmental requirements in the Authority to
 Construct permits. The Court of Federal Claims rejected
 this argument, finding that “violations were a fact of life
 for biomass plants at that time.” Id. The trial court also
 emphasized that the District never revoked Appellants’
 Authority to Construct permits, “permitting them to oper-
 ate in the face of” Notices of Violation because continued
 operations were “environmentally preferable to shutting
 down the Facilities and having agricultural and wood
 waste burned in open fields.” Id.
    The Court of Federal Claims did not clearly err in its
 analysis of factor one. Appellants’ Authority to Construct
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 12                     AMPERSAND CHOWCHILLA BIOMASS      v. US

 permits allowed them to operate the facilities by producing
 and selling electricity. While the facilities occasionally
 went out of compliance, the District never revoked Appel-
 lants’ permits and allowed the facilities to continue operat-
 ing.
      At factor two, the Court of Federal Claims first deter-
 mined what constituted “critical testing.” Id. at 647–48.
 Appellants argued that environmental tests were critical,
 but the Court of Federal Claims disagreed, finding that Ap-
 pellants had “overstate[d] the role that environmental com-
 pliance and testing have in the placed-in-service analysis.”
 Id. at 648. Especially because “in California, a biomass fa-
 cility’s noncompliance with emissions requirements d[oes]
 not prevent that facility from being ready and available to
 perform its specifically assigned function of generating and
 selling electricity.” Id. The Court of Federal Claims also re-
 lied on the government’s expert in engineering, plant oper-
 ations, and testing, Mr. Filsinger, to find that
 “environmental tests required by the [Authority to Con-
 struct permits] were not critical, given that environmental
 compliance for a biomass facility was always ‘difficult.’” Id.
      The Court of Federal Claims therefore concluded that
 the critical tests were (1) pre-parallel testing and (2) test-
 ing required under the power-purchase agreements. Id.
 And because the facilities passed these tests by 2008, the
 trial court concluded that the facilities had passed the crit-
 ical tests necessary for proper operations by 2008. Id.
     The Court of Federal Claims did not clearly err in its
 analysis of factor two. The facilities could and did operate
 without passing environmental tests, and the facilities
 passed all pre-parallel testing and the testing required by
 the power-purchase agreements by 2008, allowing them to
 generate and sell electricity starting that year.
     At factor five, the Court of Federal Claims pointed out
 “that the Facilities were generating and selling electricity
 in 2008, and that they generated revenue of $2,260,093
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 AMPERSAND CHOWCHILLA BIOMASS         v. US                    13

 that year.” Id. And although the facilities operated below
 the capacity required by the original power-purchase
 agreements, “PG&E accepted this level of performance,
 amend[ing] the [power-purchase agreements] to waive or
 reduce performance penalties, and continued to work with
 CalBio to keep the Facilities operational.” Id. at 649.
      The Court of Federal Claims did not clearly err in its
 analysis of factor five. The facilities were generating and
 selling a substantial amount of electricity in 2008. While
 the facilities occasionally shut down, the Court of Federal
 Claims did not clearly err in finding that they nonetheless
 operated regularly.
      Therefore, the Court of Federal Claims did not clearly
 err in finding that all five factors indicate that the facilities
 were placed in service in 2008. We accordingly affirm.
                                III
      We have considered Appellants’ other arguments but
 find them unpersuasive or unnecessary to reach. For the
 reasons above, we affirm the Court of Federal Claims’ de-
 cision.
                          AFFIRMED