     United States Court of Federal Claims
                                      No. 14-250 C
                                  Filed: April 24, 2019
                                (Reissued: June 20, 2019)

___________________________________

CALIFORNIA RIDGE WIND
ENERGY, LLC, and
INVENERGY WIND, LLC,

             Plaintiffs,

v.

UNITED STATES OF AMERICA,

           Defendant.
___________________________________

        John Carney Hayes, Jr., Esquire, Nixon Peabody LLP, Washington, D.C., for
plaintiffs.

     Miranda Bureau, Esquire, United States Department of Justice, Tax Division,
Washington, D.C., for defendant.

                        POST-TRIAL ORDER AND OPINION

Hodges, Senior Judge.

        Plaintiff California Ridge Wind Energy, LLC, filed a complaint alleging that the
Department of Treasury reduced a Section 1603 cash grant improperly and that it is
entitled to $9,158,983 for the shortfall. Defendant contends that a sham transaction
inflated the amount claimed in plaintiff’s application and subsequently filed a
counterclaim to recover an overpayment of $5,635,537. We consolidated the cases and
conducted trial from July 23 to July 26, 2018, in Washington, D.C.1

1
 California Ridge Wind Energy, LLC v. United States, C/A 1:14-cv-00250-RHH; and
Bishop Hill Energy, LLC v. United States, C/A 1:14-cv-00251-RHH. Plaintiffs California
Ridge Wind Energy, LLC, and Bishop Hill Energy, LLC, are entities owned by a parent
company, Invenergy Wind, LLC. The facts, with slight variations in dates and dollar
amounts, the law, and the reasoning in this Opinion are the same in both cases.

                                           -1-
        We made the following relevant conclusions during the course of trial: (1) Section
1603 permits an applicant to include a “Development Fee” 2 as a part of a wind energy
project’s cost basis; (2) Development Fees may increase the cash grant awarded by
Treasury; (3) however, plaintiff did not substantiate the $50 million Development Fee; and
(4) plaintiff is not entitled to the claimed $9,158,983 cash grant.

                                    BACKGROUND

        Congress enacted the American Recovery and Reinvestment Act of 2009 to
stimulate the struggling economy. 3 Section 1603 of the Recovery Act is a program that
offers cash grants in lieu of tax credits to developers of alternative energy production
facilities. Applicants “who place in service specified energy property” are eligible for
payments from the Department of the Treasury, “provided certain conditions are met.”

       In October 2012, California Ridge placed a qualified wind facility into service at a
cost of $456,196,599 and applied for a Section 1603 cash grant totaling $136,858,980.
Plaintiff submitted a three-page development agreement and a document purportedly
showing a “proof of payment” in support of the $50 million Development Fee. Treasury
awarded plaintiff $127,699,997 and explained why it granted some, but not all, of the
claimed amount:

             [T]he presented cost basis was higher than open market
             expectations for projects of this size and in this location and
             the transaction involved related parties and/or related
             transactions.

             The cost basis has been adjusted to allow for base costs plus an
             appropriate markup (to include reasonable overhead, profit,
             and, if appropriate, development fees) resulting in a total that
             more closely reflects the amount that would have been paid in
             an arms’ length transaction between parties with adverse
             interests.

      Testimony and evidence presented at trial shows that plaintiff is not entitled to a
$9,158,983 shortfall, and that the Government may recover the $5,635,537 overpayment.




2
  Cases arising under Section 1603 tend to focus on one element of the cost basis. This
dispute arose over plaintiff’s calculation of a fee for development services. The term
“Development Fee(s)” is capitalized in this Opinion hereinafter.
3
  Pub. L. No. 111-5, 123 Stat. 115, 364–66 (Feb. 17, 2009).

                                            -2-
                                  LEGAL STANDARDS

        We have jurisdiction over this action pursuant to the Tucker Act, 28 U.S.C. § 1491
(2012). The Tucker Act establishes our jurisdiction and waives sovereign immunity over
certain claims against the United States, including those founded upon the Constitution and
federal statutes and regulations. Id. The Tucker Act “does not create a substantive cause of
action; in order to come within the jurisdictional reach and the waiver of the Tucker Act, a
plaintiff must identify a separate source of substantive law that creates the right to money
damages.” Fisher v. United States, 402 F.3d 1167, 1172 (Fed. Cir. 2005) (citing United
States v. Mitchell, 463 U.S. 206, 216 (1983); United States v. Testan, 424 U.S. 392, 398
(1976)). “In the parlance of Tucker Act cases, that source of law must be ‘money-
mandating.’” Id.

       This court has held that Section 1603 of the Recovery Act is money-mandating and
that we have jurisdiction over such disputes. ARRA Energy Co. v. United States, 97 Fed.
Cl. 12, 19–20 (2011). The Recovery Act compels a payment by Treasury and does not
provide the Government with discretion to refuse payments when the requirements of the
statue are met. Id. at 22. That is, “while the government may decide . . . that an applicant
has miscalculated or misrepresented the basis of its property, it has no discretion to
reimburse an applicant for less than, or more than, thirty percent of the correct basis of the
property.” Id. at 21.

       Section 1603 provides “grants for specified energy property in lieu of tax credits”
and explicitly adopts the meaning of terms used in the Internal Revenue Code. When an
applicant pursues an Section 45 renewable electricity production tax credit or Section 48
energy tax credit instead of a Section 1603 reimbursement and receives an unfavorable
determination by the Internal Revenue Service, the applicant may file a tax refund suit.

        Congress did not intend a different standard of review based on Section 1603's
provision of direct reimbursement in lieu of tax credits. Accordingly, the court reviews
plaintiff’s claim de novo. W.E. Partners II, LLC v. United States, 119 Fed. Cl. 684, 690
(2015), aff'd, 636 F. App'x 796 (Fed. Cir. 2016).

                                       DISCUSSION

       The issue is whether plaintiff can include a Development Fee as a separate, indirect
cost in its cost basis calculation. That is, whether California Ridge’s $50 million
Development Fee, paid to its parent company, Invenergy, LLC, 4 is an eligible cost for


4
  See the parties’ Stipulation of Facts: C/A No. 14-250, Dkt. 98; C/A No. 14-251, Dkt. 196
(explaining differences between the closely-named entities of Invenergy, LLC; Invenergy
Wind North America (“IWNA”) at ¶¶ 39, 41; and Invenergy Wind Development North

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developing the wind energy facility. It is plaintiff’s burden to show that it is entitled to an
additional Section 1603 cash grant.

      Treasury receives Section 1603 applications seeking cash grants and, when the
markup is supported by relevant facts and figures, adds the eligible costs to the applicants’
award. The process is limited in time, generally 60 days, and limited in scope, relying on
only documents submitted by an applicant.

       The developers “elected to monetize their extensive work” on the wind energy
projects “by charging a Development Fee to the . . . project company,” and the
Development Fee calculation incorporated variables such as knowledge, skill, time, effort,
and other services, according to plaintiff.

       Section 1603 reimburses an applicant for costs, not value, and an applicant is
required to show real costs, defendant claims. Discovery resulting from plaintiff’s lawsuit
revealed information regarding the “proof of payment”, which Treasury did not have when
it awarded the cash grant. Defendant contends that the transaction is a sham.

       The sham transaction doctrine applies “if a transaction either lacks objective
economic substance or if it is subjectively shaped solely by tax avoidance motivations.”
Stobie Creek Invs., LLC v. United States, 82 Fed. Cl. 636, 697 (2008), aff’d, 608 F.3d 1366
(Fed. Cir. 2010). “[A] taxpayer must prove that its transaction was both purposeful and
substantive . . . if proof in either regard is lacking, the transaction is a sham.” H.J. Heinz
Co. & Subsidiaries v. United States, 76 Fed. Cl. 570, 584 (2007).

       The economic substance of a transaction “must be viewed objectively rather than
subjectively.” Coltec Indus., Inc. v. United States, 454 F.3d 1340, 1356 (2006).
Additionally, “the transaction to be analyzed is the one that gave rise to the alleged tax
benefit . . . there is a material difference between structuring a real transaction in a
particular way to provide a tax benefit (which is legitimate), and creating a transaction
without a business purpose, in order to create a tax benefit (which is illegitimate).” Id. at
1356-57. The test is “used to deny effect to transactions designed to manufacture benefits
without affecting the economic circumstances of the parties involved. It looks through the
form of a transaction to its substance to determine if a real transaction has occurred.”
Johnson v. United States, 11 Cl. Ct. 17, 25 (1986).

       Bank records presented at trial showed that money passed through bank accounts of
several entities related to plaintiff by wire transfer and then back into the account from
which it originated. These transactions raised suspicion at the Department of Justice, and
in the court’s mind as well. Plaintiff claims that the wire transfers represent a legitimate

America (“IWDNA”) at ¶¶ 70, 71). (ECF No. [x] (Order amending the opinion issued on
January 7, 2019).)

                                             -4-
business method that served to memorialize the value of the development agreement.

        However, plaintiff failed to show the business purpose or the economic substance
of the Development Fee. Bryan Schueler, the chief development officer for Invenergy LLC,
testified about Invenergy’s experience developing renewable energy projects. He testified
about development fees for wind energy projects in general, but did not give testimony
specific related to the development services outlined in the three-page development
agreement; 5 in fact, he appeared unaware of the agreement entirely:

      Q: Can you identify this document for me on the screen?

      A: Facility management agreement by and between Bishop Hill Energy LLC,
      as owner, and Invenergy Services, LLC, as manager, for the Bishop Hill
      Energy Project, dated November 15, 2011.

      Q: Did you have any role in drafting this facility management agreement?

      A: I don’t believe I did.

(Tr. 146:2-147:4)

      Q: The development team that writes the scope of work for the balance of
      plant contract, they do that for all wind projects. Is that correct?

      A: The same team wouldn’t do it for every wind projects, but it’s the
      development team that is going to be participating in writing those scopes of
      work, yes.

(Tr. 160:6-11)

      David Yankee, an employee of Deloitte Tax LLP, testified that the development
agreement contained no quantifiable services.

      Q: And the development agreement provides a definition of development
      services, correct?

      A: Yes.

      Q: And there’s a list of things under the definition of the development
      services that include negotiating construction, financing terms, negotiating

5
 See page 151 of the trial transcript, Tr. 151:3-20. (ECF No. 211 (Order amending the
opinion filed on January 7, 2019).)

                                           -5-
      project and operational documents related to the project.

      A: Yes.

      Q: Okay. And Invenergy didn’t quantify each of these activities described in
      the development agreement individually, did they?

      A: Correct. They did not.

(Tr. 696:24- 697:7)

       Plaintiff’s claim regarding the independent certification of the Development Fee is
also unpersuasive. Mr. Yankee’s testimony disclosed that Invenergy management provided
the information that Deloitte relied on to certify the eligible cost basis:

      Q: And Deloitte relied on Invenergy to provide assurance that all of the
      accounting records supporting the eligible costs were valid, accurate, and
      complete. Is that right?

      A: Yes.

      Q: And it also relied on Invenergy management to assure them that the costs
      included in the eligible cost basis were determined in accordance with
      Section 1603. Is that right?

      A: Yes.

      Q: And Invenergy did the initial determination about how costs would be
      categorized. Is that right?

      A: Yes.

      Q: And then Deloitte & Touche tested that categorization by sampling certain
      costs. Is that right?

      A: Yes.

      Q: And so, as part of the [audit] examination, Deloitte & Touche didn’t verify
      all costs.

      A: Correct.

(Tr. 692:13-693:19)


                                           -6-
        Jonathan Malacarne, director of accounting at Invenergy, testified about
Invenergy’s accounting practices associated with the wind energy facilities. He described
accounting journal entries that show business purposes for the transactions. However,
plaintiff did not show the journal entries and, therefore, the court must rely on Mr.
Malacarne’s self-serving testimony alone.

       In sum, plaintiff proffered: an independent certification of the Development Fee that
is based on information from Invenergy management; a development agreement without
quantifiable services; and a round-trip wire transfer that began and ended in the same bank
account, on the same day, none of which were corroborated by independent testimony. This
falls well short of the burden under the sham transaction doctrine.

       What remains is the uncontested fact that plaintiff benefitted from the round-trip
transaction; a higher cost basis results in an increased Section 1603 payment. The sham
transaction on which the $50 million Development Fee is based lack a business purpose or
economic substance. Therefore, defendant is entitled to recapture the amount of the
counterclaim.

                                     CONCLUSION

        We have seen no basis on which to award plaintiff an additional cash grant. Plaintiff
did not quantify the development services and insufficient objective evidence to show the
transaction is not a sham. Plaintiff also claims that a cash grant is due because Treasury
approved full payments to other related entities. Not only is this a weak argument logically,
plaintiff sued for additional money in this case and the court reviews these actions de novo.
The lawsuit resulted in the discovery process that revealed the questionable origin of
plaintiff’s claimed Development Fee. Therefore, plaintiff’s claim for reimbursement of an
additional $9,158,983 cash grant is without merit.

      Plaintiff California Ridge’s complaint is DISMISSED; Defendant’s counterclaim
is GRANTED. The Clerk of Court will enter judgment for defendant in the amount of
$5,635,537. No costs.

       IT IS SO ORDERED.

                                                  s/Robert H. Hodges, Jr.
                                                  Robert H. Hodges, Jr.
                                                  Judge




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