[00:00:28] Speaker 04:
Okay, the next case before the court is case number 1-8-1948, alternative carbon resources versus the United States on appeal from the court of federal claims.

[00:00:48] Speaker 04:
Ms.

[00:00:48] Speaker 04:
Hoard, you want four minutes for everybody?

[00:00:52] Speaker 04:
Yes, Your Honor.

[00:00:53] Speaker 04:
All right.

[00:00:55] Speaker 02:
You may begin.

[00:00:57] Speaker 02:
May it please the court?

[00:00:58] Speaker 02:
We've asked the court to review the claims court's erroneous interpretation of an alternative fuel mixture tax credit that was in effect for the tax year ending 2011 under section 6426E2A.

[00:01:11] Speaker 02:
For a producer like ACR, the credit was available if they sold the fuel mixtures for use as a fuel.

[00:01:18] Speaker 02:
Unless the court prefers otherwise, I'd like to address the sale element first.

[00:01:22] Speaker 04:
Well, just to confirm, if

[00:01:25] Speaker 04:
There is no sale.

[00:01:26] Speaker 04:
That's the end of the inquiry, right?

[00:01:28] Speaker 04:
Yes, Your Honor.

[00:01:28] Speaker 04:
Okay.

[00:01:29] Speaker 04:
So probably you should address that first.

[00:01:31] Speaker 02:
Yes, Your Honor.

[00:01:32] Speaker 02:
I think the parties agree that the definition of sale contained in the fuel excise tax provisions is the definition that governs in the transaction.

[00:01:41] Speaker 02:
And that definition has two components.

[00:01:43] Speaker 02:
There must be a transfer of title to the goods in exchange for consideration.

[00:01:48] Speaker 02:
Here, ACR transferred the fuel mixtures to the anaerobic digester companies, and in exchange, the anaerobic digester companies paid for the fuel, but they also provided the additional consideration of assuming the liability of disposing of the byproducts.

[00:02:08] Speaker 02:
The sale price included a small purchase price.

[00:02:12] Speaker 03:
What was that purchase price?

[00:02:15] Speaker 02:
It depended on the contract.

[00:02:17] Speaker 02:
For the wastewater treatment plant in Des Moines, I believe it was $950 annually.

[00:02:22] Speaker 02:
For the Amana Farms, it was $1,000.

[00:02:24] Speaker 04:
And what do you say the value of the goods transferred?

[00:02:29] Speaker 02:
The value of the goods transferred to the digester companies is not quantified in the record.

[00:02:40] Speaker 02:
However, what I think the claims court has overlooked is that the fuel mixtures did provide a benefit to the buyer.

[00:02:48] Speaker 03:
I just want to understand in terms of the sale price.

[00:02:51] Speaker 03:
Am I understanding the record right?

[00:02:55] Speaker 03:
The anaerobic digester companies gave you $10,000 approximately for in exchange of something like 10 or 11 million barrels of this stuff?

[00:03:07] Speaker 02:
It depended on, I think there were close to 40 million barrels all total.

[00:03:13] Speaker 02:
Wait, 40 million gallons all total of the fuel.

[00:03:15] Speaker 03:
40 million gallons of this corn stillage, right?

[00:03:22] Speaker 03:
Yes, your honor.

[00:03:24] Speaker 03:
I don't know.

[00:03:25] Speaker 03:
I don't know what that breaks down to per gallon, but maybe it's far less than a penny per gallon for this stuff.

[00:03:32] Speaker 02:
But the other form of consideration, Your Honor, and I think this is what's been left out of the discussion.

[00:03:37] Speaker 02:
The other form of consideration is the digester companies could use part of the byproducts of the corn stillage.

[00:03:43] Speaker 02:
They could use the methane.

[00:03:45] Speaker 02:
And they did use the methane, and the fuel products increased the methane production, and they were able to use the methane then to create electricity.

[00:03:56] Speaker 02:
The other thing that they did for the companies was they disposed of the final byproduct, because one of the byproducts they couldn't use, and they had the obligation to dispose of those byproducts.

[00:04:06] Speaker 02:
And this court said in Coltech,

[00:04:08] Speaker 02:
that if the purchaser assumes the liability, assumes contingent liabilities and their liabilities associated with disposal of these byproducts, that constitutes part of the purchase price.

[00:04:19] Speaker 04:
Even if you meet the technical definition of there being some kind of consideration for the transfer of the goods, don't we have to assess whether or not the economic substance of that is truly a sale?

[00:04:38] Speaker 02:
First of all, we don't believe the economic substance doctrine applies to this type of tax credit.

[00:04:45] Speaker 02:
Why?

[00:04:46] Speaker 02:
Well, this is an incentive tax credit, like the tax credit in the Ninth Circuit opinion of Sachs, which this court cited in Salem Financial.

[00:04:54] Speaker 02:
In Salem Financial, the court noted that we don't expect companies like this to make a profit when they're dealing with nascent technologies.

[00:05:02] Speaker 02:
So first of all, if you look at the footnote to the House budget report contained within the 2010

[00:05:08] Speaker 02:
legislation on economic substance, it makes clear that they don't intend for the new codified economic substance doctrine to apply to a transaction like this.

[00:05:19] Speaker 04:
So whenever it's a tax credit, then economic substance never applies?

[00:05:25] Speaker 02:
No, Your Honor.

[00:05:26] Speaker 02:
I think economic substance would apply to a foreign tax credit that's offsetting a tax.

[00:05:32] Speaker 02:
But this is an incentive tax credit involving alternative fuels.

[00:05:35] Speaker 02:
Congress was trying to incentivize innovators in taking waste products and figuring out how to use those waste products as a renewable energy source

[00:05:45] Speaker 02:
to create new fuel resources.

[00:05:48] Speaker 02:
So here, we don't think the economic substance doctrine applies, and this court in Salem Financial agreed, when you have a nascent technology such as this.

[00:05:58] Speaker 00:
We have to have a cell involved.

[00:06:00] Speaker 00:
Yes, Your Honor.

[00:06:01] Speaker 00:
We have to have a cell.

[00:06:03] Speaker 00:
And I invite you to look at Appendix 861.

[00:06:07] Speaker 00:
It's one of the exhibits that is in the record.

[00:06:11] Speaker 00:
And it's an email from Larry, Larry Hare, to Royce Hammett.

[00:06:17] Speaker 00:
Just tell us real quickly who those two individuals are.

[00:06:22] Speaker 02:
Well, I know Mr. Hare was the operations manager.

[00:06:25] Speaker 02:
And who did you say the email was to, Your Honor?

[00:06:29] Speaker 00:
Well, look at the exhibit.

[00:06:31] Speaker 00:
It's on 861, appendix 861.

[00:06:36] Speaker 02:
Oh, to Royce Hammett.

[00:06:38] Speaker 02:
They both worked for the Des Moines Wastewater Treatment Plant.

[00:06:43] Speaker 00:
The customer.

[00:06:44] Speaker 02:
The customer, yes, Your Honor.

[00:06:45] Speaker 00:
And look at what they say.

[00:06:46] Speaker 00:
This is for their tax credit stuff.

[00:06:50] Speaker 00:
A once a year charge of $950 for us to, quote, buy the qualified buy product, the feedstock, then we turn around and charge them $950 for the administration fees so it's a wash.

[00:07:05] Speaker 00:
Is that a sale?

[00:07:07] Speaker 02:
Your Honor, that was not the entire consideration for the sale.

[00:07:10] Speaker 00:
And this court said in Coltek you have to look... Let's say, just looking at this right now, what they're saying.

[00:07:16] Speaker 02:
Yes, Your Honor.

[00:07:17] Speaker 00:
Okay, because he does refer to this as buying, that we're buying.

[00:07:21] Speaker 00:
So this isn't a context of a sale.

[00:07:24] Speaker 00:
Is this a sale under the statute where one party gives $950 to another one and the other one just simply returns the money to them?

[00:07:33] Speaker 02:
If you exclude the contingent liabilities, then yes, I would argue it's still a sale under the only case that's dealt with the sale of a fuel tax, the excise tax, is a case called Bass Station.

[00:07:48] Speaker 00:
And while I realize it's not present... Just under basic contract law, is that consideration?

[00:07:55] Speaker 02:
You have to look at all the forms of consideration, Your Honor.

[00:07:58] Speaker 00:
And in fact, in the Supreme Court case of Frank Lyon... Just looking at the $950 exchange here, is that consideration?

[00:08:06] Speaker 00:
Is that a sell?

[00:08:13] Speaker 02:
Well, if you're only giving that as example, perhaps someone could argue it's not a sale.

[00:08:20] Speaker 02:
However, I'd like to point out the Bass Station case because it's instructive on how the government generally views a sale under the fuel excise tax regulations.

[00:08:30] Speaker 02:
If you look at Bass Station, there was no profit involved in that transaction whatsoever.

[00:08:37] Speaker 02:
What happened in Bass Station was that Bass Station purchased the entire shipment of fuel from Texaco.

[00:08:46] Speaker 02:
And Transport Petroleum transported, provided services to them of transporting the fuel.

[00:08:52] Speaker 02:
Transport Petroleum couldn't meet the minimum purchase requirements to buy fuel from Texaco.

[00:08:57] Speaker 02:
So what would happen is in exchange for performing those services and paying for the gas that they got,

[00:09:04] Speaker 02:
where there was no profit.

[00:09:07] Speaker 02:
They just paid that cost, the gas they got.

[00:09:10] Speaker 02:
The Ninth Circuit said, yet, that was a sale because... Well, first of all, A, it's Ninth Circuit.

[00:09:15] Speaker 04:
B, it is non-preq.

[00:09:16] Speaker 04:
But putting even all that aside, there was actually money moving around because you're not talking about a transfer from A to C. You're talking about a transfer from B to C where B is an agent of A, right?

[00:09:29] Speaker 04:
Yes, Your Honor.

[00:09:29] Speaker 04:
Right.

[00:09:30] Speaker 04:
So there was actual transfers of cash, right?

[00:09:35] Speaker 02:
Yes, Your Honor.

[00:09:36] Speaker 02:
But if you look at the regulation, and I don't mean to interrupt, but if you look at the regulation, the regulation says money, services, or other things.

[00:09:46] Speaker 02:
And here we have services.

[00:09:47] Speaker 04:
Well, the services were flowing to you.

[00:09:49] Speaker 02:
That's right, Your Honor.

[00:09:52] Speaker 02:
We provided title to the goods.

[00:09:54] Speaker 02:
We had title to the alternative fuel mixture.

[00:09:56] Speaker 04:
But then you paid for those services.

[00:09:59] Speaker 04:
Did you or did you not?

[00:10:01] Speaker 02:
We paid a tipping fee, which is standard in the industry at that time.

[00:10:05] Speaker 03:
1.7 million tip?

[00:10:08] Speaker 02:
Yes, Your Honor.

[00:10:09] Speaker 02:
OK.

[00:10:09] Speaker 02:
Yes, Your Honor.

[00:10:10] Speaker 03:
So that's a lot more than $9,000 going the other way, right?

[00:10:14] Speaker 02:
Yes, your honor, but still there was a disposal obligation at the end of the processing that had to be complied with.

[00:10:22] Speaker 02:
And what I want to do is step back a little bit and look at the economic substance cases and Frank Lyon, the Supreme Court case.

[00:10:29] Speaker 02:
All of those cases say you have to look at the market realities in existence at the time.

[00:10:36] Speaker 04:
Well, isn't that what the Court of Federal Claims did?

[00:10:39] Speaker 02:
No, Your Honor, we don't think they did, because there were only 800 digesters in the United States that were producing their own energy out of 3,450 digesters in the United States.

[00:10:52] Speaker 02:
So there wasn't a market for this fuel.

[00:10:55] Speaker 02:
The tax credit was to incentivize people to learn how to do this, because sometimes people get stuck in a rut, and they go, well, we've never done that before.

[00:11:02] Speaker 02:
We don't want to think about it.

[00:11:04] Speaker 02:
This tax credit incentivized these individuals to go out and try to sell these alternative fuels to the anaerobic digesters because they were creating methane.

[00:11:15] Speaker 02:
They could create methane that could then produce electricity and then if they produced enough electricity they could sell that electricity to local power companies.

[00:11:23] Speaker 02:
I've had clients who've done that in the past.

[00:11:26] Speaker 02:
So this was

[00:11:28] Speaker 02:
an industry that Congress was trying to spur with this tax incentive.

[00:11:33] Speaker 02:
Even if you think the economic substance doctrine applies, this transaction had economic substance.

[00:11:39] Speaker 02:
This wasn't a paper transaction.

[00:11:41] Speaker 02:
It wasn't a structured transaction in an accounting firm or a law firm with a bunch of paper that generated a high basis and then a loss.

[00:11:50] Speaker 02:
They went out and they incurred economic risks in pursuing this.

[00:11:59] Speaker 02:
In pursuing this, they had to pay for transport, they had to pay for insurance to cover any liability.

[00:12:06] Speaker 02:
In the record, they had to deal with problems at their fuels.

[00:12:09] Speaker 04:
You're in your rebuttal, but I have another question before you sit down.

[00:12:14] Speaker 04:
And so what was the expectation of pre-tax profit here?

[00:12:19] Speaker 02:
The pre-tax profit, the tax credit serves the purpose of pre-tax profit.

[00:12:26] Speaker 02:
But what we also do under the Economic Substance Doctrine.

[00:12:29] Speaker 04:
It says there has to be an expectation of pre-tax profit.

[00:12:34] Speaker 02:
No, Your Honor.

[00:12:36] Speaker 04:
We said it doesn't have to be substantial profit, but under the Economic Substance Doctrine as codified,

[00:12:43] Speaker 04:
there must be some expectation of pre-tax profit.

[00:12:46] Speaker 02:
There was.

[00:12:47] Speaker 02:
But what they had to do is once they got the digester company creating excess methane, what our clients were trying to do was we were going to go to the facilities and establish stations that could clean the methane, compress the methane, and convert the methane into compressed natural gas.

[00:13:05] Speaker 00:
That's speculative.

[00:13:06] Speaker 00:
That's speculative.

[00:13:07] Speaker 00:
That's not the expectation of the pre-tax profit.

[00:13:10] Speaker 02:
But Your Honor, that's what industries are doing now, is they're using compressed natural gas to fuel municipal vehicles.

[00:13:17] Speaker 03:
How would you have title to the resulting methane?

[00:13:20] Speaker 03:
You transferred all title to the underlying corn stillage waste.

[00:13:25] Speaker 02:
Well, the goal would be to create the facilities that help the digester companies clean and compress the methane.

[00:13:32] Speaker 03:
So would you buy back the methane from them?

[00:13:35] Speaker 02:
No, they would pay for the services of processing and compressing the methane.

[00:13:38] Speaker 04:
But you never even had any of that up and running?

[00:13:42] Speaker 02:
No, it wasn't up and running yet.

[00:13:43] Speaker 02:
But the parties, even after the credit expired in 2011, the parties were still negotiating through 2013 to set up the facilities to clean.

[00:13:54] Speaker 02:
OK.

[00:13:54] Speaker 02:
You've got two minutes left.

[00:13:55] Speaker 04:
Why don't you save it?

[00:13:56] Speaker 02:
Thank you.

[00:14:09] Speaker 04:
You would agree that there was at least on its face some consideration, right?

[00:14:20] Speaker 04:
Whether it was meaningful consideration or not is really the question.

[00:14:25] Speaker 01:
No, no, I wouldn't agree with that So we would agree that there was that some of the digester operators gave them some money It was eight thousand nine hundred and fifty dollars total for this forty million gallons of mixtures but but that was

[00:14:46] Speaker 01:
That wasn't consideration for anything.

[00:14:48] Speaker 01:
It was window dressing for tax credits to try to give it the appearance of a sale.

[00:14:55] Speaker 01:
The economic reality of these exchanges was that

[00:15:01] Speaker 01:
ACR did not transfer its mixtures to the operators for a price.

[00:15:07] Speaker 01:
It paid a price to the operators.

[00:15:08] Speaker 01:
It paid them $1.7 million in order to get them to take those mixtures off their hands.

[00:15:17] Speaker 01:
The reality is that ACR was not selling mixtures.

[00:15:21] Speaker 01:
It was buying disposal services.

[00:15:24] Speaker 04:
What was the $8,000?

[00:15:26] Speaker 01:
$8,000 was that window dressing was to sort of make it look like sales, just like in the email that was discussed.

[00:15:34] Speaker 01:
This is for ACR's tax credit stuff.

[00:15:38] Speaker 04:
It was to... But that email was talking about a $950 administrative fee that was then offset.

[00:15:45] Speaker 04:
But what about the $8,000?

[00:15:48] Speaker 01:
Oh, so the remaining $8,000, I think it doesn't change the economic reality that ACR was paying them to take the mixtures instead of

[00:16:08] Speaker 01:
instead of receiving a price from the operators.

[00:16:12] Speaker 01:
It reduced to the 1.7 million that they paid out.

[00:16:16] Speaker 01:
Well, they got $8,000 of that back.

[00:16:18] Speaker 01:
But the economic reality is that they were paying the operators to take these mixtures.

[00:16:25] Speaker 01:
My friend on the other side talked about the Basque station.

[00:16:30] Speaker 01:
But what was dispositive there was that the transfer, it wasn't a gratuitous transfer.

[00:16:36] Speaker 01:
It was that the other person paid something.

[00:16:38] Speaker 01:
It didn't matter that they sold it to them at cost, but the other person paid something.

[00:16:43] Speaker 01:
They weren't just giving it away.

[00:16:45] Speaker 01:
But in this case,

[00:16:46] Speaker 01:
ACR couldn't, they couldn't give away their mixtures.

[00:16:49] Speaker 01:
No one would even take them for free.

[00:16:51] Speaker 01:
They had to pay $1.7 million in order to get these people to take them off their hands.

[00:16:57] Speaker 01:
So that's, that's not sale.

[00:16:58] Speaker 04:
Does the economic substance doctrine turn on the intent of the taxpayer?

[00:17:06] Speaker 01:
Well, it turns in part on whether there was a non-tax purpose.

[00:17:12] Speaker 01:
And so, the taxpayer's purpose, their subjective intent, I guess to the extent by intent, we're talking about purpose.

[00:17:20] Speaker 04:
But we don't have findings on subjective intent, do we, from the Court of Federal Claims?

[00:17:26] Speaker 03:
I thought it was more about just looking at the objective economic realities of this transaction.

[00:17:31] Speaker 03:
Yeah, yeah, I think I think that's right.

[00:17:33] Speaker 03:
It's one point seven million going one way and eight thousand going the other way.

[00:17:40] Speaker 03:
It makes the eight thousand look like the tiniest of fig leaves.

[00:17:43] Speaker 01:
Yeah, that's exactly right.

[00:17:45] Speaker 01:
I mean, it's a 200% difference.

[00:17:49] Speaker 04:
So if Congress's purpose in credits like this is to incentivize nascent technologies, I mean, Congress would recognize that those companies wouldn't be profitable or certainly wouldn't be profitable for some period of time.

[00:18:06] Speaker 01:
Yeah, that's right.

[00:18:07] Speaker 01:
That's right.

[00:18:08] Speaker 01:
And it's not our position that they had to make a profit on the sales of this.

[00:18:13] Speaker 01:
But Congress did put limits on the credit.

[00:18:15] Speaker 01:
And one of the limits it put was that you actually have to sell the mixture.

[00:18:19] Speaker 01:
And these transactions, they're not sales.

[00:18:25] Speaker 01:
There was no transfer of property in exchange for a price.

[00:18:29] Speaker 01:
There was a receipt of services in exchange for a price.

[00:18:35] Speaker 00:
Can you address the issue of, under the regulation, the requirement that is used as a fuel, that requirement?

[00:18:46] Speaker 00:
It seems to me that the government requires the, here, the appellant to prove something that they cannot prove.

[00:18:58] Speaker 00:
At a certain time, these goods become fungible, correct?

[00:19:01] Speaker 00:
A certain time, I'm sorry, what becomes fungible?

[00:19:03] Speaker 00:
In a certain time, these elements become fungible.

[00:19:07] Speaker 00:
I mean, once you start the digesting process, you can't tell the difference of whether this percentage belongs to ACR or that percentage belongs to somebody else.

[00:19:18] Speaker 01:
Yeah, that's right.

[00:19:19] Speaker 00:
At least... I'm thinking as an example, a grain silo.

[00:19:22] Speaker 00:
You have farmers that come in and dump off grain.

[00:19:26] Speaker 00:
Well, the sign will understand that Farmer Joe has 25% of the grain here is Farmer Joe's.

[00:19:34] Speaker 00:
Farmer Joe doesn't have to show that that grain has been sold or that that particular grain has been sold.

[00:19:42] Speaker 00:
All they have to show is that you sold off grain at a certain price, 25% of that belongs to me.

[00:19:50] Speaker 00:
Why shouldn't something like that work here?

[00:19:53] Speaker 01:
Well, because here, in this situation, they're not relieved of their duty to substantiate their claims, and part of the claim you're talking about is not the sale, but it's that the sale was for use as fuel.

[00:20:11] Speaker 01:
And so what we talked about on substantiation is that partly because those mixtures are all put together, and you're right, it is in the way that at least the WRA

[00:20:23] Speaker 01:
did their operations, it would be impossible to know how much of their product was actually resulted in it.

[00:20:31] Speaker 00:
So how can you say that their product was never resulted in methane gas and was used for energy purposes?

[00:20:38] Speaker 01:
Well, our position isn't that it never did.

[00:20:42] Speaker 01:
Our position is that they can't substantiate the amount that was.

[00:20:47] Speaker 01:
And that's their burden.

[00:20:48] Speaker 01:
They have the burden of proof on all of the issues.

[00:20:51] Speaker 04:
But does that prong require substantiating the amount rather than just the fact that it was sold for purposes of use as a fuel?

[00:21:03] Speaker 01:
Well, yes.

[00:21:04] Speaker 01:
We would say that it does.

[00:21:08] Speaker 01:
be because the credit is based on the amount.

[00:21:13] Speaker 01:
And so they put in 40 gallons of substance, but we don't know how much, if any, actual electricity or useful heat was generated.

[00:21:27] Speaker 03:
Hypothetically, we knew, and I don't know if maybe it's already in the record, that ARC is

[00:21:37] Speaker 03:
giving these anaerobic digesters maybe 25% of all of the different corn stillage it's throwing into its anaerobic digesters.

[00:21:50] Speaker 03:
And then a lot of that's getting flared off, but a good amount of the resulting methane is getting captured and then ultimately used for some form of energy.

[00:21:59] Speaker 03:
If it's 25% of the input is credited to ARC, why wouldn't it just be logical to say, OK, 25% of the resulting methane that gets used as energy is credited to ARC as well?

[00:22:16] Speaker 01:
Well, that might be reasonable if we had evidence to support a particular number, as you're suggesting.

[00:22:25] Speaker 01:
But also, ARC never asked for that.

[00:22:30] Speaker 01:
They never asked the court to...

[00:22:32] Speaker 01:
They made an alternative argument that they're entitled to some lesser amount of the credit.

[00:22:37] Speaker 01:
Their position is that all 40 million gallons were entitled to a 50 cent per gallon credit and so that they were entitled to all 20 million based on all 40 million gallons being sold for use as fuel.

[00:22:49] Speaker 01:
And so, on the substantiation issue, our position is they can't support that.

[00:22:54] Speaker 01:
But even more broadly, we've also argued that using their substances in anaerobic digesters is just, as a matter of law, is not a useless fuel.

[00:23:05] Speaker 04:
But the IRS has said all they need, all the taxpayer needs, is a reasonable belief that it's going to be used as a fuel.

[00:23:13] Speaker 01:
Yes, that's right, that's in the IRS guidance.

[00:23:17] Speaker 04:
So how does that guidance then translate to saying that they had to have a reasonable belief that the amount of fuel created was going to correspond in any meaningful way to the amount transferred?

[00:23:39] Speaker 01:
On the question of substantiation, it's still, it's an issue of, well, what was the basis for saying that they reasonably believed that it was going to be, that all 40 million gallons were going to be used as fuel?

[00:23:51] Speaker 01:
And the evidence shows that they didn't have any basis for that.

[00:23:53] Speaker 00:
In fact, even of all of the biogas that... Well, they sold everything, or rather they transferred everything to the code digesters.

[00:24:02] Speaker 00:
What should that be enough?

[00:24:04] Speaker 00:
They're in the business of doing that, of making methane fuel.

[00:24:09] Speaker 01:
Yeah, well, yes, that was their business.

[00:24:13] Speaker 00:
But apparently, it's the government.

[00:24:18] Speaker 00:
It's you that requires companies like ACR to prove that all of the material transferred was used ultimately to create energy.

[00:24:32] Speaker 01:
Well, no, I think even if you take the reasonable belief standard, they have to prove that they had a reasonable belief that the amount for which they claimed credits, which was all 40 million, that they had a reasonable belief that that amount would be used as fuel.

[00:24:47] Speaker 01:
And there's no basis on the record for them to say that.

[00:24:52] Speaker 01:
Even if you count all of the substances from different suppliers that the WRA brought in, basically about half of it was ultimately used to generate electricity.

[00:25:04] Speaker 01:
About half of the biogas they got from those was used to generate electricity.

[00:25:09] Speaker 01:
But even if they could substantiate that they had a reasonable belief in terms of the numbers, there's still that question of law whether

[00:25:22] Speaker 01:
whether using these substances in an anaerobic digester is actually a use as fuel.

[00:25:28] Speaker 01:
And it isn't for a number of reasons, but the most significant is that

[00:25:36] Speaker 01:
is that it didn't use the taxable fuel that made it a mixture.

[00:25:43] Speaker 01:
So an alternative fuel mixture consists of alternative fuel mixed with taxable fuel, which in this case was diesel.

[00:25:52] Speaker 01:
And when Congress created that credit, it simultaneously created a credit, same 50 cents per gallon, for using alternative fuel that's not mixed.

[00:26:05] Speaker 01:
in doing it that well, but the alternative fuel credit, however, is limited strictly to uses for vehicles.

[00:26:13] Speaker 01:
So if you're using alternative fuel by itself, then you can claim a credit only if it's being used as a vehicle fuel for like a car or a boat or an airplane.

[00:26:25] Speaker 04:
And is that in the statute?

[00:26:26] Speaker 01:
That is in the statute, yes.

[00:26:27] Speaker 01:
It's subsection D. It's in the statute.

[00:26:30] Speaker 01:
So if you're using just plain alternative fuel,

[00:26:34] Speaker 01:
ACR knew that the government would pay them nothing to use 40 million gallons of these corn stillage and so forth in an anaerobic digester, because that isn't a vehicle use.

[00:26:48] Speaker 01:
And so one of their principals admitted that the only reason they added this tiny percentage of diesel fuel was to generate tax credits.

[00:26:57] Speaker 01:
And he said, quote, it has a splash of diesel fuel in it, so we can generate tax credits.

[00:27:05] Speaker 01:
They added the diesel fuel to get out of that alternative fuel credit regime and get into the alternative fuel mixture regime.

[00:27:12] Speaker 01:
But Congress would not have set up the statute that way where a mixture can claim the credit for any use as fuel, but pure alternative fuel only gets a credit, only qualifies if it's used as vehicle fuel.

[00:27:29] Speaker 01:
They wouldn't have set up that regime unless they intended that

[00:27:33] Speaker 01:
the whole mixture would be used as fuel, the taxable fuel and the alternative fuel that are in the mixture.

[00:27:40] Speaker 01:
And in this case, it is undisputed that the diesel fuel in their mixtures did nothing in the anaerobic digestion process.

[00:27:48] Speaker 01:
You put their mixtures with diesel fuel in there, and you get out some biogas and digestate, and you get out the diesel fuel.

[00:27:55] Speaker 01:
It passes through unaltered.

[00:27:56] Speaker 01:
It contributes nothing to the production of energy.

[00:28:00] Speaker 01:
It was totally superfluous.

[00:28:04] Speaker 01:
So what really then, as applied by ACR, what the incentive is was for them to waste 40,000 gallons of diesel fuel.

[00:28:15] Speaker 01:
Because that's the only difference that between they couldn't have gotten the credit without the diesel fuel, and they added the diesel fuel, but it was totally superfluous.

[00:28:25] Speaker 04:
And so for that reason... But the statute doesn't say that you have to use taxable fuel in the alternative energy, right?

[00:28:34] Speaker 01:
It does.

[00:28:35] Speaker 01:
So to qualify for the... Where does it say that in the statute?

[00:28:38] Speaker 01:
It's in subsection E. An alternative fuel mixture consists of alternative fuel mixed with taxable fuel.

[00:28:49] Speaker 01:
And I appreciate sort of your confusion because why Congress set it up that way is not clear.

[00:28:58] Speaker 01:
But they definitely did set it up that way.

[00:29:02] Speaker 01:
And so to be able to claim a credit for a use of alternative fuel that's not in a vehicle, it has to be mixed with alternative fuel.

[00:29:13] Speaker 01:
It has to be mixed with taxable fuel.

[00:29:15] Speaker 04:
There's a difference between mixing it with taxable fuel and burning off taxable fuel, right?

[00:29:22] Speaker 01:
Are you referring to the biogas being burned off?

[00:29:25] Speaker 01:
Yeah.

[00:29:26] Speaker 01:
Well, biogas isn't taxable fuel.

[00:29:28] Speaker 01:
Taxable fuel is diesel or gasoline.

[00:29:31] Speaker 01:
To claim the alternative fuel mixture credit, you have to mix your alternative fuel, whether in this case it's biomass or whether it's other kinds, like certain types of natural gas and so forth.

[00:29:47] Speaker 01:
But you have to mix the alternative fuel with taxable fuel.

[00:29:50] Speaker 01:
The example in the legislative history... You're out of time.

[00:29:54] Speaker 01:
Oh, I'm sorry.

[00:29:56] Speaker 01:
Thank you.

[00:29:56] Speaker 04:
You have two minutes for the bottle.

[00:29:58] Speaker 02:
Thank you, Your Honor.

[00:30:02] Speaker 02:
The one thing I want to mention is this is a volumetric credit.

[00:30:06] Speaker 02:
It's based on the number of gallons of alternative fuels that are then mixed and sold.

[00:30:13] Speaker 02:
The government's net energy requirement would require that we calculate the output, and that's not what's required by the code.

[00:30:22] Speaker 02:
It's a volumetric credit based on the alternative fuels.

[00:30:26] Speaker 02:
If the Congress had wanted to make it a net production of energy

[00:30:31] Speaker 02:
measure, they would have done so.

[00:30:33] Speaker 04:
Under 64... What the government's argument here is that even if you had a reasonable belief that some of this might be used in the production of fuel, did you really have a reasonable belief that the entirety of what you transferred would ever be used for that purpose?

[00:30:48] Speaker 02:
And that's not required.

[00:30:50] Speaker 02:
If you read the code section 6426E2A, what is required?

[00:30:56] Speaker 02:
The credit is calculated on the gallons of alternative fuel.

[00:31:01] Speaker 04:
So you're saying, if you had a reasonable belief that five gallons would be used,

[00:31:05] Speaker 04:
you could transfer 400 gallons and take a tax credit for all of that?

[00:31:10] Speaker 02:
Yes, Your Honor.

[00:31:11] Speaker 02:
Okay.

[00:31:12] Speaker 02:
Because the statute specifically says it's based on gallons of alternative fuel sold.

[00:31:17] Speaker 02:
It's 50 cents times a gallon.

[00:31:19] Speaker 02:
If the Congress had wanted to make it on energy output, then they know how to do that.

[00:31:25] Speaker 02:
Even in section 6426 for the alternative fuels provision for fuels that are used in automobiles, they measure the credit by the BTU content.

[00:31:35] Speaker 02:
It's in the statute, in the same exact statute, 6426.

[00:31:39] Speaker 02:
They know how to measure a credit by energy output, and they didn't choose to measure the credit here by energy output.

[00:31:47] Speaker 02:
So, Your Honor, all we have to know is have a reason to believe that the fuels are being used to produce energy.

[00:31:56] Speaker 02:
However, we can show that these fuels were consumed in the production of energy, and we believe the record shows that.

[00:32:05] Speaker 02:
Okay.