Landfill tax equity deal dinged
Tax equity investors did not qualify for most of the tax credits they claimed on 24 landfill gas projects, the US Tax Court said.
Two trusts formed to own the projects had very poor records.
The US government allowed 10 years of production tax credits to be claimed under section 29 — and later section 45K — of the US tax code for producing “gas from biomass.” Landfill gas qualified. The gas had to be sold to a third party. The facility for collecting the gas had to be in service by December 1997 or by June 30, 1998 if installed under a binding contract in place by the end of 1997.
Resource Technology Corp. developed the projects. It went bankrupt in 1999 and transferred the gas rights to affiliates who provided debtor-in-possession financing. The Tax Court did not try to sort out who owned the gas rights during 2005, 2006 and 2007, the tax years at issue in an IRS audit of the tax credits.
The landfills were divided into “venting/flaring” landfills that either vented the landfill gas into the atmosphere or flared it after collection, and non-venting landfills.
A Chicago law firm found the tax equity investors and deducted its fees from the amounts paid by the investors “for tax credits.” Resource Technology Corp. acted as the trustee of the trusts in which the investors invested.
There were serious questions about whether the gas collection facilities were in service in time to qualify for tax credits. The trusts argued that all it had to do by the deadline was put in one or more vertical wells but not the entire collection system. The Tax Court rejected this. An integrated facility is not in service until all parts of it are working. The IRS said it was not enough for a collection system to be connected to a flare; the system had to be connected to a diesel generator, gas cleaning facility or equipment capable of storing gas until it can be delivered to a customer to be considered ready for its intended use.
The government ended up stipulating that six of the collection facilities were in service in time.
The investors argued that they should be allowed to claim tax credits on gas that was vented or flared. They argued that the purpose of the tax credit changed over time from production and sale of landfill gas to merely avoiding unsafe build ups of landfill gas underground. The Tax Court said there was no evidence of this.
The IRS argued that it was not enough to produce and sell raw gas, but the gas also had to be cleaned up for use as fuel. The court rejected this view. It said the credit amount was self-adjusting since it was tied to the energy content in mmBtus of gas sold.
In the end, the Tax Court denied tax credits on gas from the facilities that were not in service in time or whose gas was flared or vented. It allowed credits on gas that was used to generate electricity that was sold to utilities, and allowed one of the trusts to back into the amount of gas produced from logs showing the amount of electricity sold “increased by the amount of parasitic load” by the generators.
The case is Green Gas Statutory Trust, et al. v. Commissioner. The Tax Court decision was released in mid-July.