Only Substantiated Landfill Gas Production and Sales Qualified for Nonconventional Fuel Source Credit (Green Gas Delaware Statutory Trust, TC)

CCH Tax Day Report

Two partnerships were not entitled to credits for producing fuel from a nonconventional source with respect to landfill gas allegedly produced from various venting and flaring municipal landfills because there was inadequate substantiation of the alleged production and sale of the gas. The court noted that it was unclear whether gas from venting and flaring landfills even has a commercial market. Adequate substantiation was only deemed provided for production from certain nonventing landfills for periods when gas-to-electricity equipment was running and electricity was sold to utility companies.

As a preliminary matter, the Court ruled that untreated landfill gas is a gas produced from biomass and, therefore, constitutes a qualified fuel for purposes of the credit. The statutory requirement that the gas be “produced” from biomass was satisfied by reason of the natural process of municipal waste decomposition through chemical reactions. Contrary to the IRS’s contention, production does not require processing or transformation of the gas.

The court rejected the taxpayer’s contention that vertical wells that passively vented landfill gas into the atmosphere or wells connected to a passive or active flare constituted a “facility for producing qualified fuels” within the meaning of the statute and that a facility is placed in service when the wells and header pipe are put in place. A facility for producing qualified fuels, according to the court, requires that a system of wells, pipes, blowers, and equipment for measuring production of the landfill gas, if necessary, must be connected to either a gas-to-energy system or a system that allows storing and/or treating the landfill gas before routing it to gas pipelines or otherwise preparing it for delivery to customers. The placed-in-service date occurs when these system are available for functioning on a regular basis. Applying these guidelines, gas produced from any of the taxpayers’ facilities that were not placed in service before the July 1, 1998, deadline for gas produced from biomass were not eligible for the credit whether or not the production and sale of gas was adequately substantiated.

Deductions claimed for operation and maintenance expenses, consulting fees, legal and professional fees, and other expenses were disallowed for lack of substantiation.

A negligence penalty was imposed on account of the failure to adequately substantiate the disallowed nonconventional fuel credits and business deductions.

Green Gas Delaware Statutory Trust, Dec. 60,645

Other References:

Code Sec. 45K

CCH Reference – 2016FED ¶4500H.45

CCH Reference – 2016FED ¶4500H.60

Code Sec. 162

CCH Reference – 2016FED ¶8520.591

Code Sec. 6662

CCH Reference – 2016FED ¶39,651G.305

Tax Research Consultant

CCH Reference – TRC BUSRXP: 54,502

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CCHTaxGroup

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