       In the United States Court of Federal Claims
                                        No. 13-54

                                (Filed: January 12, 2015)

*************************************
                                    *
W.E. PARTNERS II, LLC,              *
                                    *
                    Plaintiff,      *
                                               American Recovery and Reinvestment
                                    *
                                               Act, Section 1603; Open-Loop Biomass
v.                                  *
                                               Facility; Reimbursement Grant; Eligible
                                    *
                                               Cost Basis; I.R.C. Sections 45, 48.
THE UNITED STATES,                  *
                                    *
                    Defendant.      *
                                    *
*************************************

Stephen G. Leatham, Heurlin, Potter, Jahn, Leatham, Holtmann & Stoker, P.S.,
Vancouver, Washington, for Plaintiff.

Shelley d.A. Leonard, with whom were Tamara W. Ashford, Acting Assistant Attorney
General, David I. Pincus, Chief, G. Robson Stewart, Assistant Chief, U.S. Department of
Justice, Tax Division, Court of Federal Claims Section, Washington, D.C., for Defendant.

                                OPINION AND ORDER

WHEELER, Judge.

        This case arises under Section 1603 of the American Recovery and Reinvestment
Act of 2009, Pub. L. No. 111-5, 123 Stat. 115, 364 (“Section 1603”). Plaintiff W.E.
Partners II, LLC (“WEP II”) funded the construction of an open-loop biomass facility in
Lewiston, North Carolina next to a Perdue chicken rendering plant to which it provides
steam. The facility was designed and now operates to meet Perdue’s steam needs for the
chicken rendering processes. The facility includes a steam-turbine generator to produce
electricity from the steam before it passes through to process the chicken. The electricity
generation allows the plant to qualify for state and federal renewable energy incentives.
Section 1603 provides for reimbursement of a portion of the costs incurred for “a facility
using open-loop biomass to produce electricity.” Internal Revenue Code (“I.R.C.”) §
45(d)(3) (2012). The question presented is whether WEP II is entitled to reimbursement
of a percentage of the total cost of the facility ($9,037,769), or only of the lesser costs
associated with the portion of the facility necessary to produce electricity. At the
prescribed 30 percent reimbursement rate, WEP II claims entitlement to $2,711,331,
whereas the Department of Treasury has allowed only $943,754. The difference,
$1,767,577, is in dispute. The issue is before the Court on cross-motions for summary
judgment.

       The question to be resolved is primarily one of statutory interpretation. While the
language of the statute, if read without context or reference to agency guidance, might
suggest that reimbursement based on total cost is mandatory whenever a facility uses
open-loop biomass to generate electricity, the Court does not agree with such an
outcome. When read in conjunction with the applicable Internal Revenue Service
(“IRS”) Notice and Treasury Department Guidance, the Court finds that Section 1603
requires only reimbursement for the portion of the cost that is fairly allocable to the
production of electricity. Accordingly, the Court grants summary judgment in favor of
Defendant.

                                            Background1

       A. W.E. Partners II and the Biomass Facility

        Plaintiff WEP II is a single-purpose limited liability company formed in 2010 to
design, construct, and operate a biomass boiler facility at a Perdue chicken rendering
plant in North Carolina. This biomass facility burns forest products waste (e.g., limbs,
bark, sawdust, shavings) and agricultural residue (e.g., peanut and soybean hulls, cotton
gin residue) to produce steam. The steam is then used for industrial manufacturing
processes, to produce electricity, or both. Boiler facilities that produce steam for
industrial processes are known as process steam plants, and boilers used for electrical
generation are known as power generation plants. Boilers that utilize steam for both
industrial processes and energy generation are known as cogeneration plants. The WEP
II biomass facility is a cogeneration plant. In this cogeneration plant, the steam from a
biomass boiler is routed through an electricity generating turbine before being used for
other industrial processes, such as for the chicken rendering plant. The amount of
electricity generated is a function of the steam flow, temperature, and pressure of the
steam passing through the turbine. Pressure and temperature drop while passing through
the turbine, while the steam flow remains constant. Increased steam flow or drops in
temperature or pressure across the turbine increases the amount of electricity generated.

1
  The facts are drawn from the parties’ briefs and are not in dispute. At oral argument on December 15,
2014, counsel for both parties agreed that the material facts are not contested, and that the Court may
decide the matter on the cross-motions for summary judgment.

                                                  2
       The WEP II facility uses three boilers, each with a heat input of 29.4 million Btu
(mmBtu), a steam flow of 20,700 pounds per hour (pph), and a pressure of 325 pounds
per square inch (psi). All steam produced by the boilers passes through a 495 kilowatt
(kW) turbine that generates electricity and releases the steam at a pressure of 135 psi.
This lower pressure steam can then be used in the chicken rendering plant. In total, 2.2
percent of the useful energy that the WEP II facility produces is electrical energy, and
97.8 percent is thermal energy.

       B. Section 1603 of the American Recovery and Reinvestment Act of 2009

       President Obama signed the Recovery Act into law on February 17, 2009.
Although a detailed discussion of the statute is not necessary here, the purpose of the Act
was to create jobs and promote economic recovery, in part by spurring investments in
specified technologies. § 3, 123 Stat. at 116.

       Section 1603 of the Recovery Act permits investors in qualifying renewable
energy property to apply for a reimbursement of costs in lieu of a tax credit. 123 Stat. at
364. Section 1603(a) provides that the Secretary of the Treasury “shall, subject to the
requirements of this section, provide a grant to each person who places in service
specified energy property to reimburse such person for a portion of the expense of such
property as provided in subsection (b).” Id. at 364. Section 1603(b) provides that “[t]he
amount of the grant . . . shall be the applicable percentage of the basis of such property.”
Id. The applicable percentage is contingent on the type of energy property placed into
service. Id. at 364-65. Section 1603(d)(1), which is applicable here, includes “[a]ny
qualified property (as defined in section 48(a)(5)(D) of the Internal Revenue Code of
1986) which is part of a qualified facility (within the meaning of section 45 of such
Code).” Id. at 365. Section 1603(d)(1) allows a cost reimbursement of 30 percent. Id. at
364-65. Section 1603 uses the definitions of “qualified property” and “qualified facility”
from Sections 45 and 48 of the Internal Revenue Code to describe the energy properties
eligible for a 30 percent reimbursement. Id. at 365; see also I.R.C. § 45, 48. Section
1603 also gives the Treasury Department the authority to “recapture [] the appropriate
percentage of the grant . . . as the Secretary of the Treasury determines appropriate” if the
property “ceases to be a specified energy property.” 123 Stat. at 365.

       I.R.C. Section 48 provides that “the term ‘qualified property’ [includes] . . . (I)
tangible personal property, or (II) other tangible property (not including a building or its
structural components), but only if such property is used as an integral part of the
qualified investment credit facility.” I.R.C. § 48(a)(5)(D). As provided in Section 1603,
qualified property under I.R.C. Section 48 must also be part of a qualified facility under
I.R.C. Section 45. 123 Stat. at 365. For the facility at issue here, Section 45 provides
that a qualified facility is “a facility using open-loop biomass to produce electricity . . .

                                             3
the construction of which begins before January 1, 2014.” I.R.C. § 45(d)(3)(a). Qualified
property of an open-loop biomass facility under Section 45 is further defined by I.R.S.
Notice 2008-60:

       (1) In general. For the purposes of § 45(d)(3), an open-loop biomass
           facility is a power plant consisting of all components necessary
           for the production of electricity from open-loop biomass (and, if
           applicable, other energy sources). Thus, a qualified open-loop
           biomass facility includes all burners and boilers (whether or not
           burning open-loop biomass), any handling and delivery
           equipment that supplies fuel directly to and is integrated with
           such burners and boilers, steam headers, turbines, generators, and
           all other depreciable property necessary to the production of
           electricity . . . .

I.R.S. Notice 2008-60 § 3.01(1), 2008-30 I.R.B. 178.

        The Treasury Department also promulgated guidance for Section 1603
applications, explaining that “Qualified Facility Property is property that is an integral
part of a qualified facility described in IRC section 45(d) . . . (1) . . . [and for open loop
biomass facilities] uses open-loop biomass to produce electricity.” U.S. Treasury Dep’t,
Payments for Specified Energy Property in Lieu of Tax Credits under the ARRA of 2009
12-13 (rev. April 2011). The Treasury Guidance further explains the appropriate cost
basis for components of a qualifying facility that are not attributable to a qualifying
activity and costs that are attributable to both nonqualifying and qualifying activities:

        The eligible basis of a qualified facility does not include the portion
       of the cost of the facility that is attributable to a nonqualifying
       activity. For example, for a biomass facility that burns fuel other
       than open-loop biomass or closed-loop biomass, the eligible cost
       basis is the percentage of the total eligible costs that is equal to the
       percentage of the electricity produced at the facility that is
       attributable to the open-loop biomass and closed-loop biomass. In
       the case of costs that relate to both a nonqualifying activity and a
       qualifying activity, the costs must be reasonably allocated between
       the nonqualifying and qualifying activities. For example, if
       combustion equipment burns both qualifying biomass and other fuel,
       the equipment’s eligible cost basis is limited to the percentage of its
       otherwise eligible cost corresponding to the percentage of the
       equipment’s electricity production that is attributable to the
       qualifying biomass.

                                              4
Id. at 17.

       C. The Treasury Department’s Review of the WEP II Section 1603 Application

        The National Renewable Energy Laboratory (NREL), a Department of Energy
laboratory, assists the Treasury Department in reviewing Section 1603 applications for
reimbursement. In its assessment of WEP II’s Section 1603 application, the NREL
calculated that a biomass boiler with a heat input of 8.4 to 11.2 mmBtu would be
sufficient to power a 495 kW turbine. Thus, one of WEP II’s three 29.4 mmBtu boilers
would be more than sufficient to power the facility’s 495 kW turbine. Accordingly, the
NREL determined that one-third of the WEP II facility’s costs could be attributed to
electrical production and it recommended an eligible cost basis that included all costs
associated with the turbine and one third of all other costs. The revised calculations
indicated an eligible cost basis of $3,145,847 and a Section 1603 reimbursement of
$943,754.

       D. History of Proceedings

       On June 25, 2012, WEP II submitted a Section 1603 reimbursement application
for the biomass facility. WEP II claimed an eligible cost basis of $9,037,769 and
requested reimbursement of $2,711,331 (30 percent of the cost basis). On December 9,
2012, the Treasury Department issued an award letter approving a reimbursement of only
$943,754, which represented the cost of the turbine and one-third of all other costs,
including the boilers. On December 21, 2012, WEP II sent a protest email to the
Treasury Department program indicating its disagreement with the reduced award.

       WEP II filed its complaint in this Court on January 22, 2013, asserting that the
Government violated its mandatory obligation to award reimbursement grants in the
amount of 30 percent of the eligible cost basis of a biomass facility. WEP II further
asserted that the Treasury’s evaluation of its application and failure to provide the 30
percent reimbursement were arbitrary and capricious. The Government answered that
WEP II is not entitled to any further recovery because the reduced reimbursement
correctly reflects a commensurate reduction in the facility’s eligible cost basis under
Section 1603. With the issues joined, WEP II filed a motion for summary judgment on
June 13, 2014, and the Government filed a cross-motion for summary judgment on July
28, 2014. Both motions have been fully briefed, and the Court held oral argument on
December 15, 2014.




                                           5
                                       Discussion

      A. Subject Matter Jurisdiction

        The Court has jurisdiction over this action pursuant to the Tucker Act, 28 U.S.C. §
1491 (2012). The Tucker act establishes Court of Federal Claims jurisdiction and waives
sovereign immunity over certain claims against the United States, including those
founded upon 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) and United
States v. Testan, 424 U.S. 392, 398 (1976)). “In the parlance of Tucker Act cases, that
source must be ‘money-mandating.’” Id. (citing Mitchell, 463 U.S. at 217 and Testan,
424 U.S. at 398). This Court previously has held that Section 1603 is “money
mandating,” and that it has jurisdiction over Section 1603 disputes. LCM Energy
Solutions v. United States, 107 Fed. Cl. 770, 772 (2012); ARRA Energy Co. v. United
States, 97 Fed. Cl. 12, 19-20 (2011).

      B. Standard of Review

       Section 1603 provides “grants for specified energy property in lieu of tax credits”
and explicitly adopts the meaning of terms used in I.R.C. Sections 45 and 48. § 1603,
123 Stat. 115, 364, 366. When an applicant pursues a Section 45 or 48 tax credit instead
of a Section 1603 reimbursement and receives an unfavorable determination by the IRS,
the applicant may file a tax refund suit. In tax refund suits, the Court reviews claims de
novo, and the plaintiff bears the burden of proof for each claim. D’Avanzo v. United
States, 54 Fed. Cl. 183, 186 (2002). Similarly, Section 1603 claimants may file suit after
an unfavorable determination by the Treasury Department regarding property that
otherwise qualifies for a Section 45 or 48 tax credit. There is no indication in Section
1603 that Congress intended a different standard of review based on Section 1603’s
provision of direct reimbursement in lieu of tax credits. Accordingly, the Court reviews
WEP II’s claim de novo.

      C. Analysis of the Merits

      The question presented is whether the phrase “a facility using open-loop biomass
to produce electricity,” contained in I.R.C. Section 45 and applied to Section 1603,
necessarily includes the entire cost basis of facilities that use open-loop biomass and
produce electricity, regardless of other purposes and capabilities, or whether the phrase

                                            6
implicitly contains limitations to the eligible cost basis of the grant. Based on the
subsequent IRS notice and Treasury Guidance, the Court finds that Section 1603 grants
are properly restrained by the limitations on eligible cost basis found in the Treasury
Guidance.

          1. Interpretation of I.R.C. Section 45 as applied to Section 1603

       WEP II contends that under Sections 1603, I.R.C. Sections 45 and 48, the
Treasury Guidance, and all other related authorities, WEP II is entitled to the full
reimbursement amount of its original Section 1603 application. In response, the
Government argues that the applicable authorities, and specifically the IRS Notice and
Treasury Guidance, limit the eligible basis of Section 1603 grants to the components
necessary for electricity production, and require the eligible costs to be reasonably
allocated between qualifying and non-qualifying activities. As a threshold matter,
although neither the Government nor WEP II challenges the validity of the agency’s
interpretation of I.R.C. Section 45, the Court must determine whether the IRS Notice and
the Treasury Guidance demand deference as agency interpretations of Section 1603.

       The Supreme Court has articulated two different standards of deference to agency
interpretations of statutes. Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467
U.S. 837 (1984); Skidmore v. Swift & Co., 323 U.S. 134 (1944); see United States v.
Mead Corp., 533 U.S. 218, 221 (2001); Cathedral Candle Co. v. United States Int’l Trade
Comm’n, 400 F.3d 1352, 1365 (Fed. Cir. 2005). In Chevron, the Supreme Court
established the primary test for determining whether to afford deference to an agency’s
interpretation of a law which the agency administers. See Chevron, 467 U.S. at 842-43.
The first step under Chevron is to determine if Congress has directly spoken to the
precise question at issue. If so, the Court should give effect to any unambiguously
expressed intent of Congress. Id. However, if Congress is silent or ambiguous as to a
given issue, the Court must determine whether the agency’s interpretation is based on a
permissible construction of the statute. Id. at 843. Here, the Court finds that
Congressional intent regarding the eligible cost basis for reimbursement lacks precision.
The Court cannot ascribe a clear meaning to an “integral part of the facility” in IRC
Section 48 and “using open-loop biomass to produce electricity” in IRC Section 45, as
well as the complex interplay between the Internal Revenue Code, the Recovery Act, and
the Treasury’s administration of reimbursements. Therefore, the Court may examine the
agency’s interpretation of the law.

      However, the Federal Circuit has held that the Chevron standard applies when
“Congress either leaves a gap in the construction of the statute that the administrative
agency is explicitly authorized to fill, or implicitly delegates legislative authority, as
evidenced by ‘the agency’s generally conferred authority and other statutory

                                            7
circumstances.’” Cathedral Candle, 400 F.3d at 1361 (quoting Mead, 533 U.S. at 229).
Although Chevron deference does not require “notice and comment rulemaking or formal
adjudication, . . . the Court has looked for indications that Congress meant to delegate to
the agency the authority to make determinations having the force of law.” Cathedral
Candle, 400 F.3d at 1361 (citing Barnhart v. Walton, 535 U.S. 212, 219-22 (2002)
(applying Chevron deference to an administrative interpretation with a “longstanding”
duration dating to the 1960’s)).

       Here, the IRS Notice and the Treasury Guidance should not be afforded Chevron
deference. First, the Treasury Guidance and IRS Notice were not created through a
formal rulemaking process, but instead reflect only guidance for Section 1603 and
Section 45, respectively. See I.R.S. Notice 2008-60 § 1 (“[t]his notice sets forth interim
guidance, pending the issuance of regulations”); Treasury Guidance at 2 (“[t]his
Guidance . . . is intended to clarify the eligibility requirements under [Section 1603]”).
Moreover, unlike in Barnhart, neither the 2008 Notice nor the 2009 Treasury Guidance
can be appropriately considered “longstanding.” Although Section 1603 provides the
Treasury Department some authority to recapture grant funds in certain limited
circumstances, there is no indication that Congress explicitly or implicitly delegated
broad interpretive authority to the agency. Accordingly, the IRS Notice and Treasury
Guidance should not be afforded Chevron deference.

         When Chevron deference does not apply, the agency’s interpretation may still be
subject to a lesser standard of deference articulated in Skidmore v. Swift & Co., 323 U.S.
134 (1944). The application of Skidmore deference depends upon the circumstances of
the case and requires courts to give “some deference to informal agency interpretations of
ambiguous statutory dictates.” Cathedral Candle, 400 F.3d at 1365. Courts have
evaluated “the degree of the agency’s care, its consistency, formality, [] relative
expertness, and [] persuasiveness of the agency’s position.” Mead, 533 U.S. at 228
(footnotes omitted) (citing Skidmore, 323 U.S. at 139-40). Overall, the level of deference
depends “‘upon the thoroughness evident in its consideration, the validity of its
reasoning, its consistency with earlier and later pronouncements, and all those factors
which give it power to persuade, if lacking power to control.’” Id (quoting Skidmore,
323 U.S. at 140). Skidmore deference has “produced a spectrum of judicial responses,
from great respect . . . to near indifference.” Id.; see Wos v. E.M.A. ex rel. Johnson, 133
S.Ct. 1391, 1402 (2013) (quoting Christensen v. Harris Cnty., 529 U.S. 576, 587 (2000)
(quoting Skidmore, 323 U.S. at 140) (“‘[i]nterpretations such as those in opinion letters’”
. . . are “‘entitled to respect’” in proportion to their “‘power to persuade”’”))); Metro.
Stevedore Co. v. Rambo, 521 U.S. 121, 136 (1997) (“Director’s reasonable interpretation
. . . brings at least some added persuasive force”); Reno v. Koray, 515 U.S. 50, 61 (1995)
(internal agency guidelines “still entitled to some deference”); Martin v. Occupational


                                            8
Safety and Health Review Comm’n, 499 U.S. 144, 157 (1991) (“informal interpretations
are still entitled to some weight on judicial review”). On balance, the Court will defer to
an agency’s interpretation if the agency has conducted a “careful analysis of the statutory
issue,” maintained a “consistent and [] agency-wide policy,” and the position “constitutes
a reasonable conclusion to the proper construction of the statute, even if [the Court]
might not have adopted the construction without the benefit of the agency’s analysis.”
Cathedral Candle, 400 F.3d at 1366.

       The I.R.S. Notice and the Treasury Guidance merit deference for at least four
reasons. First, as in Cathedral Candle, the IRS Notice and the Treasury Guidance here
represent agency-wide policy, and not a low-level determination. Second, the IRS Notice
was published in 2008, prior to the enactment of the Recovery Act, and the Treasury
Guidance was published only five months after the signing of the Recovery Act. Neither
source was “formulated belatedly in response to litigation in this case or others.”
Cathedral Candle, 400 F.3d at 1367. Instead, the Guidance was published to “[establish]
the procedures for applying for payments under the Section 1603 program” and to
“clarify the eligibility requirements under the program.” Treasury Guidance at 2. Third,
the reasons for the policies are clear, which include limiting the reimbursements granted
to the costs attributable to producing electricity from open-loop biomass, the primary
incentive established in Section 1603. Lastly, the Treasury Department is explicitly
granted recapture authority for any grants to property that ceases to be “specified energy
property” in “such manner as the Secretary of the Treasury determines appropriate.” §
1603(f), 123 Stat. at 365. The recapture authority and accompanying discretion afforded
to the Treasury Department suggest Congress’s intent to defer to the agency with the
administration of this law, much like the International Trade Commission in Cathedral
Candle. 400 F.3d at 1367.

        The one limiting factor for the Treasury Department here is the inconsistency of
its interpretation as applied to past reimbursements. The Treasury Department fully
reimbursed another W.E. Partners energy facility, WEP I, which contained two boilers
and the same size electric turbine, suggesting that the agency has previously approved
grants where the boilers produce more steam than necessary for the turbine. However,
the Government now regards the full reimbursement to WEP I as an agency mistake, and
asks the Court to give that decision no weight in determining the applicable law. As “the
manifest weight of precedent rejects a ‘least common denominator’ notion of federal
taxation,” the Court is persuaded that a prior favorable reimbursement is not binding for
future Treasury interpretations of Section 1603. See Vons Cos., Inc. v. United States, 51
Fed. Cl. 1, 10 n.10 (2001).

       Accordingly, the Court finds that the Treasury Department’s interpretation of
Section 1603 is entitled to considerable weight as a reasonable interpretation of the

                                            9
statute and a reasonable limitation consistent with the intent of Congress. The Treasury
Guidance properly restrains the broad language of Section 1603. Thus, under Section
1603 and the applicable guidance, the Court must determine (1) whether the WEP II
facility is a “qualified facility” for Section 1603 reimbursement, (2) if the WEP II facility
is a qualified facility, what property is qualifying, and (3) of the qualifying property, what
costs are eligible for reimbursement.

          2. Qualifying Facilities

        To qualify for a Section 1603 reimbursement, a facility must be a “qualifying
facility” as defined in I.R.C. Section 45. § 1603(d)(1), 123 Stat. at 365. Qualifying
open-loop biomass facilities include “a facility using open-loop biomass to produce
electricity . . . the construction of which begins before January 1, 2014.” I.R.C. §
45(d)(3)(A). The WEP II facility began construction prior to January 1, 2014 and burns
biomass to produce electricity. Although there is some ambiguity as to whether Section
1603 applies to cogeneration facilities that do not qualify as combined heat and power
facilities under Section 1603(d)(7), the Government does not seriously contest this issue.
See 123 Stat. at 365. Thus, WEP II is a qualifying facility under Section 45.

          3. Qualifying Property

        Within a qualified facility, only qualified property is eligible for Section 1603
reimbursement. Section 1603(d)(1) uses the definition of qualified property contained in
I.R.C. Section 48. § 1603(d)(1), 123 Stat. at 365. The provision at issue here provides
that qualified property means “tangible personal property” or “tangible property (not
including a building or its structural components), but only if such property is used as an
integral part of the qualified investment credit facility.” I.R.C. § 48(a)(5)(D). I.R.S.
Notice 2008-60 further defines qualifying property as all “components necessary for the
production of electricity from open-loop biomass.” § 3.01(1). Finally, the Treasury
Guidance defines qualifying property as “property that is an integral part of a qualified
facility.” Treasury Guidance at 12-13.

         WEP II asserts there is no evidence that “the facility must be one whose ‘primary
function’ is to produce electricity.” Pl.’s Mot. Summ. J. 5. However, as clarified by
Notice 2008-60, only those components necessary for the production of electricity are
qualified property. Moreover, the Treasury Guidance provides that qualifying property is
property that is an integral part of a qualified facility, here being a facility using open-
loop biomass to produce electricity. In each provision, the eligibility of property within a
facility requires both the use of open-loop biomass and the production of electricity.



                                             10
        The Government contends that not all components of the WEP II facility are
qualifying property because WEP II is primarily a steam facility and includes boilers that
are not necessary for the production of electricity. The Government bases this conclusion
on its calculation that 495 kW of electricity could be produced with a heat input of 8.4 to
11.2 mmBtu, or approximately one-third of the heat produced by WEP II’s three-boiler
system. The Government does not, however, identify any property in the WEP II facility
that remains unused in the production of electricity, but instead refers to property that is
used for both the production of electricity and other nonqualifying activities. More
specifically, although the WEP II facility’s boilers produce both nonqualifying thermal
energy and qualifying electrical energy, all steam produced by the boilers and passing
through the turbine contributes to the generation of electricity. Therefore, every part of
the facility is qualifying property necessary to the production of that electricity. Neither
the Guidance nor the statute require the facility to be designed purely for electrical
production, and neither defines qualifying property “necessary for the production of
electricity” as meaning “only for the production of electricity” or “only as much as
necessary to generate the amount of electricity actually generated.” Instead, the Court
finds that property “necessary for the production of electricity” includes the property that
is actually involved in making electricity, and without which the electrical production
would be reduced. Thus, the Government’s hypothetical facility that maximizes the
efficiency of electrical production is irrelevant to the determination of qualifying property
in this case. All three boilers send steam through the turbine, and thus all three boilers
are necessary to the production of electricity generated therefrom.

       The Government further explains that the facility includes a pressure-reducing
valve (PRV) that can bypass the electricity-generating turbine. The PRV was used by
WEP II on twelve to fifteen percent of the facility’s operating days. Although use of the
PRV undoubtedly reduces the amount of electricity generated, the fact that steam may
occasionally bypass the turbine through the PRV does not alone disqualify WEP II’s
otherwise qualifying property. The Government also contends that Congress could not
have intended any de minimis electricity production to qualify property otherwise
ineligible for Section 1603 reimbursement, but does not identify any statutory provision
that supports that limitation. To the contrary, the Treasury Guidance specifically
contemplates property relating to both nonqualifying and qualifying activity. Treasury
Guidance at 17. Thus, all of the WEP II property is qualifying property. Nonetheless, as
described below, only a portion of the qualifying property’s costs are eligible for Section
1603 reimbursement.

          4. Eligible Cost Basis

      Regarding costs associated with both qualifying and nonqualifying activities, the
Treasury Guidance provides that “the costs must be reasonably allocated between the

                                             11
nonqualifying and qualifying activities,” and illustrates this allocation with a hypothetical
facility burning both biomass and another nonqualifying fuel. Treasury Guidance at 17.
WEP II contends that it is entitled to the full reimbursement requested because “[t]here is
nothing in Section 1603 or the related authorities that supports Treasury’s arbitrary
decision to cut the requested grant amount by two-thirds.” Pl.’s Reply Supp. Mot.
Summ. J. 8. In response to the Treasury Guidance, WEP II asserts that the Guidance “has
nothing to do with the issue before the Court” because it relates only to the type of fuel
used at a qualified facility. Id. at 5. Although the Treasury Guidance illustrates the
eligible cost basis of a facility using qualifying and nonqualifying fuel as an example,
there is no indication that the Guidance applied exclusively to fuel type. To the contrary,
the Treasury Guidance’s use of the phrase “for example” while introducing the
hypothetical facility indicates that there are other, different scenarios where costs must be
allocated between nonqualifying and qualifying activities. In this case, the eligible cost
basis of qualifying property must be reasonably allocated between the nonqualifying
chicken rendering processes and the qualifying electricity generation. WEP II further
contends that its facility was the only economically viable design that suited the needs of
the chicken rendering plant. WEP II does not, however, cite any authority indicating that
economic viability is a factor in determining what constitutes an eligible cost basis for a
section 1603 reimbursement. Instead, qualifying property and eligible cost basis are
defined by I.R.C. Section 48 and the relevant portions of the subsequent IRS Notice and
Treasury Guidance.

       This Court previously held that the government “may decide . . . that an applicant
has miscalculated or misrepresented the basis of its property, [but] it has no discretion to
reimburse an applicant for less than, or more than, thirty percent of the correct basis of
that property.” ARRA Energy, 97 Fed. Cl. at 21. Pursuant to the Treasury Guidance, the
Treasury Department determined that 8.4 and 11.2 mmBtu of steam would be sufficient
to generate 495 kW, the amount produced by WEP II’s turbine. Thus, one of WEP II’s
three 29.4 mmBtu boilers reasonably could be allocated to the qualifying activity of
generating electricity. Based on these calculations, the Treasury Department awarded
WEP II a 30 percent reimbursement for the full cost of the turbine and one-third of all
other costs. In light of the WEP II facility’s substantial thermal energy production and
comparatively small electrical generation, the Court concludes that the Treasury
Department’s determination of the WEP II facility’s eligible cost basis is a reasonable
allocation of the costs between the generation of qualifying electrical energy and
nonqualifying thermal energy.




                                             12
                                    Conclusion

       For the reasons set forth above, the Court finds in favor of the Defendant.
Plaintiff’s motion for summary judgment is DENIED, and Defendant’s cross-motion for
summary judgment is GRANTED. Plaintiff’s complaint shall be dismissed with
prejudice. No costs.

      IT IS SO ORDERED.

                                                   s/ Thomas C. Wheeler
                                                   THOMAS C. WHEELER
                                                   Judge




                                        13
