[00:00:00] Speaker 04:
Okay, if everyone's ready, the next argued case is appeal number 21, 1385, Ampersand Chowchilla biomass against the United States.

[00:00:10] Speaker 04:
Mr. Latham.

[00:00:15] Speaker 03:
Good morning, Your Honor.

[00:00:16] Speaker 03:
Thank you, May it please the court.

[00:00:18] Speaker 03:
My name is Steve Latham and I am representing the two plaintiffs and appellants in this case, which we've been referring to as Chowchilla and Merced.

[00:00:28] Speaker 03:
This is a place in service case.

[00:00:30] Speaker 03:
Place in service cases are not uncommon, but the decision from the district court was very uncommon.

[00:00:36] Speaker 03:
The trial court concluded... Let me re-say that.

[00:00:42] Speaker 03:
No other place in service case that we have found has reached a conclusion like the trial court did.

[00:00:47] Speaker 03:
Number one, that simply connecting to the grid and selling some electricity is enough to be placed in service.

[00:00:54] Speaker 03:
Number two, where required testing has not been passed or waived.

[00:01:00] Speaker 03:
And number three, where the facility's operations are illegal.

[00:01:05] Speaker 00:
What about the Sealy case?

[00:01:07] Speaker 00:
I mean, I read the Sealy case and I thought that

[00:01:10] Speaker 00:
The facts there seem fairly analogous.

[00:01:13] Speaker 03:
Well, the Sealy case, their environmental testing was waived.

[00:01:18] Speaker 03:
It was a prefab facility that did not require construction.

[00:01:22] Speaker 03:
And there they were focused on the quantity of power being produced.

[00:01:26] Speaker 03:
And here we're focused on very different things than the amount of power being produced, although that's part of it.

[00:01:33] Speaker 03:
The Sealy case is important for one reason, in our view.

[00:01:39] Speaker 03:
We think that the comment from Sealy where it found that the tax court erred in interpreting the legal standards of defining when an asset is placed in service led the circuit to review the tax court's decision de novo.

[00:01:54] Speaker 03:
And there are several aspects of this case that we believe this court should also renew de novo, because the court erred on qualitative questions of law.

[00:02:04] Speaker 03:
And there are four of those.

[00:02:06] Speaker 03:
Number one, the trial court did not accept the taxpayer's definition or statement of what the specifically assigned function of the facilities was.

[00:02:16] Speaker 03:
The case law makes clear that it's for the taxpayer to decide what that function is.

[00:02:22] Speaker 03:
Here, the stated function was to produce baseload power legally and reliably.

[00:02:27] Speaker 03:
The court declared in no uncertain terms that the function of these facilities was simply to produce and sell some electricity.

[00:02:35] Speaker 03:
In other words, to connect to the grid.

[00:02:38] Speaker 03:
Every facility has to connect to the grid in order to conduct any testing that generates power.

[00:02:43] Speaker 00:
Do you view that that is not a factual question, that it's a legal question?

[00:02:48] Speaker 03:
I think that is a legal question.

[00:02:50] Speaker 00:
Why?

[00:02:51] Speaker 00:
Because I'm pretty sure it's a factual question.

[00:02:57] Speaker 03:
In our view, it becomes a legal question because the court simply rejected the taxpayer's determination of what the function was.

[00:03:05] Speaker 03:
And the case law is that the taxpayer gets to make that determination.

[00:03:09] Speaker 03:
So we view that as a legal error.

[00:03:12] Speaker 00:
And do I understand maybe you're saying that the court should have applied the wrong law?

[00:03:21] Speaker 00:
And it's still a factual question, but they have to apply the correct law.

[00:03:25] Speaker 03:
Yes, that's a fair way to put it.

[00:03:30] Speaker 03:
Saying that connecting to the grid and producing some power is sufficient replacement service was specifically rejected in the Oglethorpe and Consumers case.

[00:03:40] Speaker 03:
And they noted that the IRS has never even gone so far as to say that connecting and producing power equals place in service.

[00:03:50] Speaker 03:
This court went where other courts have specifically refused to go.

[00:03:56] Speaker 03:
The next thing that we believe mayors de novo review is the court erred in determining what permits are necessary.

[00:04:02] Speaker 03:
That would be a factual question as to, did you obtain permit X?

[00:04:06] Speaker 03:
Did you comply with condition one on your permit?

[00:04:10] Speaker 03:
But as to what is a necessary permit?

[00:04:12] Speaker 02:
You're talking about a lot of things being de novo legal issues that sound to me like an intensive fact-based situation for each case.

[00:04:20] Speaker 02:
Where are you drawing the notion that these are legal questions from?

[00:04:24] Speaker 02:
I mean, what permits are necessary for a power plant is going to vary from state to state, county to county type of power plant to power plant, right?

[00:04:38] Speaker 03:
It seems so that when you're making the qualitative determination of what's necessary and what's not,

[00:04:44] Speaker 03:
That seems to be getting into the realm of illegal determination.

[00:04:49] Speaker 03:
Why?

[00:04:50] Speaker 03:
Because it's making a broader judgment of what is necessary, what tests are critical.

[00:04:56] Speaker 02:
There are factual questions in there, but like in Sealy... Why is whether something's critical or not, isn't that going to be a fact-to-fact dependent issue?

[00:05:07] Speaker 02:
So you're talking about all these as de novo questions.

[00:05:11] Speaker 02:
Where in statute or case law does it set out a legal standard for us to determine what are, for across the boards, not fact-dependent, critical tests?

[00:05:24] Speaker 03:
What we've seen is the statement in the Sealy case.

[00:05:28] Speaker 03:
They found the court misapplied the factors.

[00:05:33] Speaker 03:
the legal standards as to when a NASA is placed in service so they went to no vote.

[00:05:38] Speaker 02:
That doesn't answer my question.

[00:05:40] Speaker 02:
You were talking about that whether or not certain tests are critical is a legal question.

[00:05:47] Speaker 02:
Is there anything in any statute or regulation that defines what's a critical test or not that we would have to interpret as a matter of law?

[00:05:56] Speaker 02:
Not more than what I've stated, not that I know of.

[00:05:59] Speaker 02:
So is there anything in case law that says, here's a legal standard for determining what test is critical or not?

[00:06:07] Speaker 03:
Nothing beyond Sealy.

[00:06:09] Speaker 02:
But Sealy didn't say a legal test overall for determining what test.

[00:06:15] Speaker 02:
It's found as maybe as a matter of law there, the place in service.

[00:06:19] Speaker 02:
Decision was wrong, but you're trying to go down another level to all these subsidiary factual questions I don't understand what law we're being asked just to say that the trial court Misinterpreted that we get a review de novo rather than looking at the law and saying did the trial court?

[00:06:39] Speaker 02:
make clearly erroneous factual findings.

[00:06:42] Speaker 03:
I think that this court could also find that there was clear error on the determinations if you disagree that there's an over review in what's necessary.

[00:06:50] Speaker 02:
Well, I don't understand what you're asking us to do when you say it's an over review.

[00:06:55] Speaker 03:
We think, let's talk about the permits.

[00:06:59] Speaker 03:
The trial court found that the only necessary permit was the authority to construct.

[00:07:04] Speaker 03:
An authority to construct gives the owner a right to construct a facility.

[00:07:09] Speaker 03:
And the court found that that's all that was required here.

[00:07:14] Speaker 03:
But the evidence was clear that these facilities could not comply with the conditions in this conditional permit.

[00:07:21] Speaker 03:
And in our view, where they're still constructing,

[00:07:26] Speaker 03:
and not complying with conditions, they could not operate.

[00:07:30] Speaker 03:
That's not a permit at all.

[00:07:31] Speaker 03:
If you have a permit that's subject to conditions, and you can't meet any of the conditions in your permit, you're not allowed to operate.

[00:07:38] Speaker 03:
That's flat out illegal operations.

[00:07:41] Speaker 03:
And she elevated on the testing.

[00:07:43] Speaker 03:
She elevated the interconnection tests over the testing that were required in the ATCs and by the district, which was environmental testing.

[00:07:53] Speaker 04:
Let's look at the statute.

[00:07:56] Speaker 04:
1603 says that it's in lieu of production tax credits, and the government makes much of the fact that production tax credits were claimed, and they say that ends it.

[00:08:10] Speaker 04:
If you claim the tax credits, you aren't entitled to 1603.

[00:08:16] Speaker 04:
Is there an easy answer to that?

[00:08:18] Speaker 03:
There is a different taxpayer took those production tax credits in a prior year.

[00:08:24] Speaker 03:
Calbio took the PTCs, and Acata, who Calbio sold the facilities to, has never taken PTCs.

[00:08:33] Speaker 03:
The trial court properly found that Calbio, that the actions of a different taxpayer, Calbio, are not binding on Acata.

[00:08:41] Speaker 03:
Although they took production tax credits, Acata did not.

[00:08:47] Speaker 03:
There's not a cicada ever took any PTCs, so it would not be disqualified.

[00:08:53] Speaker 03:
I think that is an easy answer.

[00:08:56] Speaker 03:
Two different taxpayers.

[00:08:58] Speaker 02:
So a particular facility is eligible for competing tax credits that are internally inconsistent.

[00:09:09] Speaker 02:
I mean, the premise of your argument is that Calbile wasn't eligible for those credits, right?

[00:09:14] Speaker 03:
Right.

[00:09:16] Speaker 03:
We think the IRS should have acted to recapture those tax credits.

[00:09:21] Speaker 03:
They didn't.

[00:09:23] Speaker 03:
But CalBios actions don't disqualify the possibility of a 1603 grant going forward, even by the statutes in the year they were taken, rather than

[00:09:35] Speaker 02:
Once we've moved into the future path to the extent that cal-bio was eligible for those production credits Is there a different test that would have applied when they asked them or was it the same kind of in-service test?

[00:09:48] Speaker 03:
It would have been the same basically the same place in service test Except cal-bio made this determination.

[00:09:54] Speaker 02:
They were placed in service back in 08 And the IRS accepted that determination apparently they didn't challenge it and

[00:10:03] Speaker 03:
We think they should have since but they did not Let me jump back to the standard review real quick if you get if you go with clear error that you find all these are factual questions It's still clear error to find

[00:10:23] Speaker 03:
That facility that is violating the Clean Air Act constantly that can never comply with its obligations under the district permits and rules and the sole function of that district is to limit air pollution that didn't install the equipment that was required to be installed by the district under their permits and that wound up getting sued by the state and federal government to shut down until they complied can be placed in service at a time when they're operating so

[00:10:52] Speaker 03:
rampantly illegally as Calbio was prior to Acata coming on board.

[00:10:56] Speaker 00:
One of the problems and difficulties I'm having with your argument is that when I look at the Treasury regulation defining place and service and other sources of law for understanding what that means in the statute, it's not as rigid as what you're asking for here.

[00:11:16] Speaker 00:
You're asking for a more strict

[00:11:19] Speaker 00:
review of what is required when you say, you know, that there's clear error in finding that all it has to be is capable of generating electricity for sale.

[00:11:31] Speaker 00:
I don't see anything in the law that puts the kind of limitations on this that you're putting in with respect to having to comply with the Clean Air Act and such.

[00:11:40] Speaker 03:
Well, the Clean Air Act itself... I mean in terms of tax credit.

[00:11:45] Speaker 03:
Okay.

[00:11:46] Speaker 03:
Okay.

[00:11:47] Speaker 03:
I guess what we would say is

[00:11:50] Speaker 03:
two things.

[00:11:51] Speaker 03:
One, no one's gone as far as this trial court did.

[00:11:54] Speaker 03:
You connect and you make some power your place in service.

[00:11:57] Speaker 03:
That's been rejected by a number of decisions.

[00:12:00] Speaker 03:
And then when they do find place in service, the courts have put weight on

[00:12:05] Speaker 03:
What has the taxpayer done and not done?

[00:12:07] Speaker 03:
And these are all cited, so this is on shorthand.

[00:12:11] Speaker 03:
In Brown's case, it wasn't placed in service until a conference table had been installed on an airplane.

[00:12:16] Speaker 00:
In Noel... Isn't the dispute here between the parties about what is the specifically assigned function, isn't that the key issue in the case?

[00:12:28] Speaker 03:
That is very much one of the key issues in the case, because the court found it was simply to produce and sell electricity, and no court has ever done that.

[00:12:36] Speaker 03:
The IRS has never done that.

[00:12:38] Speaker 03:
No one has ever taken that limited view of what place and service is.

[00:12:43] Speaker 04:
Are you still pressing that there should be a line drawn between the entitlements of Chowchilla and Merced as to when they went into service?

[00:12:56] Speaker 03:
There was a clear line between Chowchilla and Merced.

[00:12:59] Speaker 03:
Merced was

[00:13:01] Speaker 03:
There's no way to conclude that Merced was placed in service prior to 2009.

[00:13:05] Speaker 03:
It didn't even interconnect, even in the trial court's view of what's placed in service.

[00:13:13] Speaker 03:
It didn't interconnect until March 2009.

[00:13:16] Speaker 03:
So yes, we think at a minimum, the trial court should have awarded the grant for Merced.

[00:13:22] Speaker 02:
But if we accept the trial court's reasoning and push it to 2009, it still went into,

[00:13:28] Speaker 02:
operation in 2009.

[00:13:31] Speaker 02:
Setting aside your other views, how do you claim for 2009 when you weren't the taxpayer in 2009?

[00:13:39] Speaker 03:
The proper applicants under guidance in under 1603 are the disregarded entities, which our children were sent.

[00:13:46] Speaker 03:
They're the proper applicants.

[00:13:48] Speaker 03:
Per the guidance, the applicant is not the ultimate taxpayer.

[00:13:52] Speaker 03:
It only matters that the property qualifies.

[00:13:54] Speaker 03:
And this was specified energy property, and nothing ever happened to change that.

[00:13:59] Speaker 03:
The only thing that happened was that Calbino sold to Acata, but there's nothing in 1603 that precludes that.

[00:14:05] Speaker 03:
In fact, it allows you to assign your right to payment if you want to.

[00:14:10] Speaker 03:
Here, the use of the property didn't change.

[00:14:13] Speaker 03:
The transfer of the property was not to a user who was not qualified.

[00:14:16] Speaker 03:
And I think significantly, these facilities did get partial grants.

[00:14:22] Speaker 02:
And let me ask you this, you said that the reason that the prior credits didn't matter is because the current taxpayer wasn't the taxpayer then.

[00:14:33] Speaker 02:
Who got the, were there credits given in 2009?

[00:14:40] Speaker 03:
If there were, it would have been to Calbio, because they still own the facility then.

[00:14:44] Speaker 02:
Yeah, but they would have been.

[00:14:46] Speaker 02:
I mean, under your logic that the credits go back to who the, I'm not a tax lawyer.

[00:14:52] Speaker 02:
I don't remember that term you just used.

[00:14:54] Speaker 03:
We think the credits should start in 2011.

[00:14:57] Speaker 02:
No, I know.

[00:14:58] Speaker 02:
But let's just assume you've lost on that argument.

[00:15:01] Speaker 02:
We're now down to arguing about, and that you're out on Chalchilla, but we have a question about Merced in 2009 versus 2008.

[00:15:09] Speaker 02:
You said the tax credits in terms of your argument should go with the discredited entity.

[00:15:24] Speaker 02:
That's why you can still gain them for 2009.

[00:15:29] Speaker 02:
Didn't the discredited entity get tax credits for 2009 already?

[00:15:35] Speaker 02:
No, the ultimate taxpayer would have gotten those.

[00:15:38] Speaker 02:
I don't understand the logic of ignoring it, the discredited entity, for the purposes of you getting them.

[00:15:43] Speaker 02:
Not only ignoring it for purposes of the credits already given they're all based on the same facility aren't they yes?

[00:15:50] Speaker 03:
And they're all based because it's the same applicants and by the guidance in the statute we look to the applicants That's chow schlummer said it doesn't matter who owns them.

[00:15:59] Speaker 03:
They own the facility then they're the original user They're still the owner owner user now so it if it's the original facility we're looking at for purposes of

[00:16:08] Speaker 02:
the tax credit or grant, then Merced already got a credit for 2009.

[00:16:15] Speaker 03:
Merced did not, because it went to Calbile.

[00:16:21] Speaker 03:
Okay.

[00:16:21] Speaker 03:
I better stop, I'm moving.

[00:16:22] Speaker 04:
Okay, thank you.

[00:16:23] Speaker 04:
We'll save your rebuttal time, and let's hear from the government.

[00:16:31] Speaker 04:
Mr. Carpenter.

[00:16:34] Speaker 01:
Good morning, your honors.

[00:16:34] Speaker 01:
May it please the court, my name is Clint Carpenter.

[00:16:37] Speaker 01:
I represent the United States in this case.

[00:16:41] Speaker 01:
Why don't I start with the production tax credit issue that came up sort of earlier and then again right at the end.

[00:16:48] Speaker 02:
Can you pull back actually?

[00:16:49] Speaker 02:
I'm really confused about what we're even being asked to answer here and what the standards of review are and whether the Sealy case applies and how it applies.

[00:17:00] Speaker 02:
Does the government agree Sealy is the applicable test here?

[00:17:03] Speaker 02:
Certainly the Fifth Circuit has adopted it.

[00:17:05] Speaker 02:
We haven't adopted it yet, and we get some tax cases.

[00:17:09] Speaker 02:
So do you think we should adopt it for purposes of our law?

[00:17:13] Speaker 01:
Yes.

[00:17:14] Speaker 01:
Yes, I think that's appropriate.

[00:17:17] Speaker 01:
In terms of the detest, the five factors, they're not exclusive factors, but in terms of sort of guidance and focusing on whether the facilities were operational, absolutely, yes.

[00:17:27] Speaker 02:
So then your friend wants to argue that the intended purpose of the facility is a legal question.

[00:17:35] Speaker 02:
I'm a little bit baffled as how that is a legal question.

[00:17:39] Speaker 02:
And if it is, what the legal test is for us to review that is.

[00:17:45] Speaker 02:
Do you think it's a legal question, or do you think it's a factual question?

[00:17:48] Speaker 01:
No, we think it's a factual question.

[00:17:51] Speaker 01:
It's a question of fact as to what the purpose of the facility was.

[00:17:57] Speaker 01:
And in fact, in 2008, the owners of the facility treated its purpose as being just what the claims court found.

[00:18:06] Speaker 01:
That with its purpose was to generate and sell electricity in commercial quantities.

[00:18:11] Speaker 01:
And CalBio, they treated that as the purpose because they claimed production tax credits that were premised on that.

[00:18:19] Speaker 02:
So here's my issue is there's got to be some kind of line somewhere about the intended purpose and a changeover from preoperational testing where you may be doing some of this stuff and may even be able to sell it on the market at a minimal level and operating at its intended purpose.

[00:18:40] Speaker 02:
And I don't want to use words like full production or anything like that because it doesn't seem like that's in any of your regulations or the statute.

[00:18:47] Speaker 02:
It's a very amorphous line.

[00:18:49] Speaker 02:
But is there some way that we have that's kind of an objective way to look at when it's operating for its intended purpose and not testing, or is it really just going to be a case by case basis?

[00:19:02] Speaker 01:
I think it's largely case by case.

[00:19:05] Speaker 01:
It's a fact-intensive issue for the finder of fact to determine based on all the evidence.

[00:19:10] Speaker 01:
There could be cases where, and there have been cases, where the court sort of felt that it fell short of the line because of testing that still needed to be completed.

[00:19:21] Speaker 01:
And then there's other cases where the court found that that was OK.

[00:19:25] Speaker 01:
And there's a lot of factors going into play here.

[00:19:28] Speaker 02:
So if we get there, why?

[00:19:31] Speaker 02:
Because it does seem like there was an awful lot of testing that still needed to be done here and a lot of things to be even equipment to be provided before it was actually compliant with all of the state and local and federal regulations.

[00:19:44] Speaker 02:
Why wasn't it clear air to find that this had met sufficient testing requirements?

[00:19:51] Speaker 01:
Well, because the

[00:19:53] Speaker 01:
The issue isn't environmental compliance.

[00:19:57] Speaker 01:
The issue is whether it was placed in service.

[00:20:00] Speaker 01:
And the court found, based on expert testimony and other evidence in the record, that... OK, I understand.

[00:20:09] Speaker 02:
This is where I get a little caught up.

[00:20:12] Speaker 02:
It seems this argument's a little bit circular to me, because at least if testing is one of the ceiling factors, then I assume the point of that is to demarcate some kind of line

[00:20:23] Speaker 02:
between kind of, you know, just a testing phase and operational phase.

[00:20:29] Speaker 02:
And so how do we determine when there's still a lot of testing to be done, what testing is still is not required before you go into the operational phase and what, you know, you know, testing

[00:20:45] Speaker 02:
is sufficient and what can be done later.

[00:20:48] Speaker 02:
I'm sorry, that was a little convoluted itself, but I hope you got that.

[00:20:51] Speaker 01:
I think I did.

[00:20:53] Speaker 01:
I think you have to look to sort of what's the broader purpose of the test.

[00:20:57] Speaker 01:
These are factors that are intended to sort of illuminate this bigger concept of place of service.

[00:21:03] Speaker 01:
If you look at the regulations, the overarching factor, the recurring theme in each subsection of the regulations is whether the facility is operational.

[00:21:15] Speaker 01:
You can look at testing in terms of, well, was more testing required before the facility could operate, or was it not?

[00:21:25] Speaker 01:
And if this were a case where more testing was required before the facility could operate, then that might be a situation where you would say it wasn't placed in service.

[00:21:33] Speaker 01:
But the evidence here shows that the facility was fully operating with the knowledge and consent of the regulators.

[00:21:44] Speaker 01:
Before it finished that testing in fact that that was the California regulators sort of preferred approach.

[00:21:50] Speaker 01:
They recognize that these types of facilities in particular have difficulties with Clean Air Act compliance and things like that.

[00:21:59] Speaker 02:
Let me ask you a hypothetical suppose and I know this is not based in the back sir.

[00:22:04] Speaker 02:
But suppose California had a rule that for these types of facilities, they want them to be up and running for two weeks at whatever capacity they can muster before they allow them to engage in commercial operations.

[00:22:23] Speaker 02:
But that electricity can somehow be stored and sold.

[00:22:28] Speaker 02:
So if they're allowed to just open up for that two-week period and they run it and they produce an amount of electricity that has a value and gets sold, but that's still just this initial two-week test, would that be qualifying as in service under this regulation?

[00:22:50] Speaker 00:
What I think that would at least be a lot closer question What about factor five which is daily or regular operation has begun wouldn't two weeks not be daily or regular operation under?

[00:23:02] Speaker 01:
Oglethorpe and silly yes, no I think I think that's if it's two weeks, and then you didn't

[00:23:09] Speaker 01:
the test you failed the testing and so you have to shut down if that were the law in California then yes you would then you would probably fail the operational the daily operation factor as well are you relying on I'm going to a different point for a minute but are you in Sealy one of the components with the respect or one of the factors with respect to permits and licenses is not whether you're complying with them

[00:23:35] Speaker 00:
But it's whether the permits and licenses for operation have been obtained.

[00:23:40] Speaker 00:
Wasn't that satisfied here?

[00:23:41] Speaker 01:
Yes.

[00:23:42] Speaker 01:
Yes.

[00:23:42] Speaker 01:
And it was satisfied here.

[00:23:44] Speaker 01:
They had the authority to construct permit, which I recognize it sounds like, and it just gives you permission to construct.

[00:23:50] Speaker 01:
But that isn't, in fact, what it gives permission to do.

[00:23:53] Speaker 01:
And the claims court found, and I don't think there's really any dispute,

[00:23:56] Speaker 01:
that it authorized facilities to begin generating and selling electricity in addition to constructing the facilities.

[00:24:06] Speaker 01:
Eventually that permit could be transformed into a different permit, a permit to operate, I believe, or something like that.

[00:24:15] Speaker 01:
But the facilities could operate

[00:24:18] Speaker 01:
in the meantime, under their authority to construct.

[00:24:21] Speaker 01:
And that's how it works in California, as the claims court found.

[00:24:28] Speaker 01:
So yes, they had all the permits that were necessary to operate.

[00:24:32] Speaker 01:
I think it's important to remember that this is not a case

[00:24:35] Speaker 01:
even like Sealy, where it was a really small amount of electricity that was generated, and certainly there could be some disagreement over whether it was enough in Sealy.

[00:24:46] Speaker 01:
But in this case, we're talking about

[00:24:50] Speaker 01:
They generated enough electricity to power about 5,800 homes for a year in California, which was a little less than half of the maximum power that facilities were even rated to generate during that time period.

[00:25:09] Speaker 01:
So they were operating at a high capacity, generating a lot of electricity and selling it for millions of dollars.

[00:25:15] Speaker 01:
So this wasn't sort of a de minimis generation situation.

[00:25:20] Speaker 01:
So, yes, so far it's a standard of review.

[00:25:27] Speaker 01:
In our view, it's clear error.

[00:25:29] Speaker 01:
These are issues of fact.

[00:25:32] Speaker 02:
Could you address the MRSA facility particularly and the questions we were, because there is some, and you addressed it in your brief too, but I know the trial court found that it was sufficiently operational in 2008 to place it there.

[00:25:48] Speaker 02:
But there is a key factor, and I forget what, but something happened in 2009 that makes it a little bit closer of a question.

[00:25:56] Speaker 01:
Yeah, the one difference with

[00:25:59] Speaker 01:
with Merced was that it wasn't until February 2009 that Merced achieved its commercial operation date under the interconnection agreements with PG&E, which is sort of a technical requirement before.

[00:26:15] Speaker 01:
You can sell electricity before that, but you're not selling it under the agreement to PG&E at the specified rates under the agreement.

[00:26:23] Speaker 01:
So they didn't achieve that until February 2009.

[00:26:28] Speaker 01:
However, in the process of sort of negotiating that with PG&E, it was agreed that the basis for that commercial operation date would be based on their Merced's generation in the third and fourth quarters of 2008.

[00:26:47] Speaker 01:
So essentially they qualified for the commercial operation date in 2008, but they didn't, you know, it wasn't signed in the, it wasn't signed off on until 2009.

[00:26:58] Speaker 01:
In terms of what actually occurred at the facility, it was the same.

[00:27:03] Speaker 01:
They were generating as much as they possibly could, as often as they possibly could for, essentially from the date they started running in 2008, which was in August through the end of the year.

[00:27:15] Speaker 01:
And it continued into 2009.

[00:27:17] Speaker 01:
so Yeah, I think

[00:27:26] Speaker 01:
In terms of the environmental issues, again, the noncompliance, they were, in fact, allowed to operate despite this noncompliance.

[00:27:37] Speaker 01:
They sold millions of dollars of electricity during that time.

[00:27:42] Speaker 01:
The regulators who were charged with enforcing the environmental policies were OK with that and allowed it to continue until later on they eventually said there was the consent decree and so forth.

[00:27:56] Speaker 01:
Yeah, the trial court didn't clearly err in finding Fiddle is replaced in service in 2008.

[00:28:05] Speaker 01:
They were operating.

[00:28:06] Speaker 01:
They had the permits to do so.

[00:28:08] Speaker 01:
The preoperational testing was completed.

[00:28:12] Speaker 01:
And the other two factors, it's conceded that they favored to test.

[00:28:15] Speaker 02:
What about your friend's argument that no court ever has set such a low burden for in-service as just generating and selling electricity?

[00:28:24] Speaker 01:
Yeah, I don't think that's correct.

[00:28:27] Speaker 01:
That was what the standard was in Sealy.

[00:28:32] Speaker 01:
Certainly courts have said, you know, they've looked to the other factors, and it's not just a factor of did you generate or sell any amount of electricity.

[00:28:41] Speaker 01:
You know my friend on the other side sort of said that's what the trial court did here, but that's not correct it Again this wasn't just a de minimis amount of electricity there this wasn't sort of a two-week We turned it on for two weeks, and then we shut down this was we're running full full bore in fact the you know the

[00:29:00] Speaker 01:
Chowchilla was restarted in April 2008, Merced was restarted in July 2008, and it wasn't until a month later when CalBio started treating them as being quote-unquote in operation.

[00:29:14] Speaker 01:
So there was this sort of month beforehand between when they restarted the facilities and when the owners treated them as sort of running full power.

[00:29:25] Speaker 04:
Let's go back a little bit.

[00:29:27] Speaker 04:
I'm still troubled.

[00:29:30] Speaker 04:
by this tax credit issue.

[00:29:32] Speaker 04:
I know the government says that because they obtained tax credits, that's evidence that the plant was in service, even though it wasn't certified and it had all sorts of problems.

[00:29:45] Speaker 04:
But what about the corollary of that?

[00:29:48] Speaker 04:
If tax credits were not obtained, it's clear that the plants were not fully certified for use, that they had all sorts of problems.

[00:29:59] Speaker 04:
How much, in trying to figure out where the lines should be drawn, how much weight should be given to whether they did or didn't obtain tax credits?

[00:30:14] Speaker 01:
It's a piece of evidence on the place and service date because it shows that what the owners at the time believed that it was placed in service in 2008 because they claimed the credits.

[00:30:27] Speaker 01:
You can't claim the credits if it hasn't been placed in service.

[00:30:31] Speaker 01:
And so it's a little bit of evidence in terms of the place and service date, just it shows that their owners at the time believed that it was placed in service in 2008 and claimed credits accordingly.

[00:30:43] Speaker 01:
The credits also separate from that.

[00:30:47] Speaker 01:
The court can avoid getting into the whole factual issue because the credits also separately under the statutes preclude any claim for section 1603 grants.

[00:30:58] Speaker 01:
If a facility has received

[00:31:02] Speaker 01:
If production tax credits have been received for a facility previously, then the facility is not eligible at all for Section 1603 grants.

[00:31:11] Speaker 01:
And so our position is that because the facilities received production tax credits in 2008, that

[00:31:20] Speaker 01:
As a result of that, they are not qualified property under Section 48, and in turn, they're not specified energy property under Section 1603.

[00:31:31] Speaker 01:
So these are sort of definitional issues.

[00:31:34] Speaker 01:
But for a facility to qualify for a Section 1603 grant,

[00:31:38] Speaker 01:
It has to be a certain type of property under Section 48, and to be that certain type of property, it cannot have received, production tax credits cannot have been allowed for that facility.

[00:31:51] Speaker 01:
In this case, they had been allowed, and so that precludes any Section 1603 grant.

[00:31:58] Speaker 00:
Just to clarify, the Court of Federal Claims decision below really does not rely on that.

[00:32:05] Speaker 00:
That's correct.

[00:32:06] Speaker 00:
That's correct.

[00:32:07] Speaker 01:
Yes.

[00:32:08] Speaker 01:
On that issue, the court seemed to reject our position, although it didn't really directly address it.

[00:32:14] Speaker 01:
But it certainly did not rely on it.

[00:32:15] Speaker 01:
That's right.

[00:32:16] Speaker 00:
Right.

[00:32:16] Speaker 00:
So in response to Judge Newman's question about how important it is, at least to the court below, it wasn't important at all, right?

[00:32:23] Speaker 01:
That's right.

[00:32:23] Speaker 01:
I don't think the court relied on it at all.

[00:32:25] Speaker 01:
That's correct.

[00:32:25] Speaker 01:
Thank you.

[00:32:26] Speaker 01:
Yes.

[00:32:27] Speaker 01:
Thank you.

[00:32:28] Speaker 04:
Any more questions, Mr. Carpenter?

[00:32:30] Speaker 04:
Thank you.

[00:32:31] Speaker 04:
Thank you.

[00:32:32] Speaker 04:
Mr. Leatham, we have your rebuttal time.

[00:32:36] Speaker 03:
Thank you, Your Honors.

[00:32:37] Speaker 03:
I'll try to get this quickly.

[00:32:40] Speaker 03:
This is really coming down to a case of legality in environmental considerations versus production.

[00:32:46] Speaker 03:
The trial court below just rejected environmental considerations.

[00:32:52] Speaker 03:
Environmental testing doesn't matter.

[00:32:54] Speaker 03:
Pollution control equipment doesn't matter.

[00:32:55] Speaker 03:
All that matters is that you produce.

[00:32:58] Speaker 03:
And we think that's clear.

[00:32:59] Speaker 02:
Didn't California also reject environmental considerations by allowing this facility

[00:33:05] Speaker 02:
to operate and sell electricity on the commercial market without compliance?

[00:33:10] Speaker 03:
What they did was allow Chowchilla to have a variance so that they could continue testing, which was going to result in some exceedances while testing.

[00:33:18] Speaker 03:
But if you generate power, it's got to go somewhere, and it gets sold.

[00:33:23] Speaker 03:
But they did not go along with it.

[00:33:25] Speaker 02:
Well, let's just assume this isn't just power produced for purpose of testing.

[00:33:29] Speaker 02:
This was a lot more power at a large dollar volume.

[00:33:33] Speaker 02:
I know it's not huge, but it does not seem to be the de minimis type of testing that wouldn't qualify as in service.

[00:33:42] Speaker 03:
Yeah, and we don't argue that it was that type of de minimis.

[00:33:45] Speaker 03:
What we argue is that the environmental considerations are just as important.

[00:33:49] Speaker 03:
It's a non-attainment district where pollution is a problem, and it needs to be prevented.

[00:33:53] Speaker 03:
And these things should not have been operating as the district said in its letter.

[00:33:58] Speaker 02:
But I don't understand how that has anything to do with the tax law and the tax credits.

[00:34:04] Speaker 02:
If the federal or the California EPA had wanted to shut these facilities down, they could have, but they didn't do it.

[00:34:11] Speaker 02:
Well, they didn't sue them and get consent decrees.

[00:34:13] Speaker 02:
Yeah, but later, after they'd already been in service producing

[00:34:18] Speaker 02:
producing electricity that was sold on the commercial market.

[00:34:21] Speaker 03:
They made the decision to try to accommodate them and try to let them get there.

[00:34:25] Speaker 02:
So why isn't the environmental question distilled?

[00:34:28] Speaker 02:
independent of whether they were producing electricity.

[00:34:31] Speaker 02:
Why is there anything in a tax statute that says you only qualify for credit if you're in service in compliance with environmental regulations?

[00:34:41] Speaker 03:
Because the Clean Air Act itself just qualifies violators for receiving federal benefits.

[00:34:47] Speaker 03:
You have to be in compliance with the Clean Air Act or you can't get federal grants, contracts, et cetera.

[00:34:53] Speaker 03:
That's in the Clean Air Act itself.

[00:34:56] Speaker 03:
They shouldn't have been entitled to get anything back.

[00:34:57] Speaker 02:
Well, that seems like something that's the government's, you know, right to assert, not your right to assert as some kind of, you know, circuitous way to get a grant after the fact.

[00:35:08] Speaker 03:
But they did, finally.

[00:35:10] Speaker 03:
They sued to either comply with these environmental requirements or get shut down.

[00:35:14] Speaker 03:
They got fined hundreds of thousands of dollars.

[00:35:18] Speaker 03:
Quickly.

[00:35:19] Speaker 03:
Production tax credit runner.

[00:35:22] Speaker 03:
That would preclude that they can't be taken in the year the grant is obtained.

[00:35:26] Speaker 03:
Here they try to get the grant in 2011.

[00:35:28] Speaker 03:
VTCs were back in 2008.

[00:35:31] Speaker 03:
It does not disqualify them in future years.

[00:35:34] Speaker 03:
So in addition to being separate taxpayers.

[00:35:38] Speaker 03:
And lastly, the IRS, remember, did not acquiesce sincerely and found that production has to be sustained, reliable, in a commercial quality.

[00:35:47] Speaker 02:
It sounds like they acquiesced here today, though.

[00:35:51] Speaker 03:
That's a good point.

[00:35:52] Speaker 03:
They tend to acquiesce whenever it's against the taxpayer's best interest.

[00:35:57] Speaker 02:
Well, I mean, sometimes Sealy is in the taxpayer's interest and not the government's interest.

[00:36:02] Speaker 02:
I heard them say today that they thought it was OK for us to adopt Sealy as federal circuit president.

[00:36:09] Speaker 02:
Right.

[00:36:09] Speaker 02:
And perhaps if they didn't mean that, they should tell us that.

[00:36:13] Speaker 03:
I agree.

[00:36:13] Speaker 03:
If the position is taken by the government, these cases are very interesting because they are always anti-tax payer.

[00:36:20] Speaker 03:
Thank you, Your Honor.

[00:36:24] Speaker 04:
Thank you.

[00:36:25] Speaker 04:
Thanks to both counsels.

[00:36:26] Speaker 04:
The case is taken under submission.