Opinion
No. 4:CV-99-1822.
January 18, 2002.
Richard L. Caplan, Paoli, PA; Martin J. Cerullo, Cerullo Datte Wallbilich, P.C., Pottsville, PA; Keith Martin, Chadbourne Parke, LLP, Washington, DC; Helena M. Klumpp, Chadbourne Parke LLP, Washington, DC, for Plaintiff Gilberton Power Company
Martin J. Cerullo, Cerullo Datte Wallbilich, P.C., Pottsville, PA; Keith Martin, Chadbourne Parke, LLP, Washington, DC; Helena M. Klumpp, Chadbourne Parke LLP, Washington, DC, for Plaintiff Birch Power Corporation, tax matters partner
R. Scott Clarke, U.S. Department of Justice, Washington, DC; Mary Catherine Frye, U.S. Attorney's Office, Harrisburg, PA, for Defendant United States of America
MEMORANDUM
BACKGROUND:
Birch Power Corporation, as tax matters partner for Gilberton Power Company ("the Partnership") commenced this action against the United States by filing a complaint under and pursuant to 26 U.S.C. § 6226 (a)(2), alleging that the Internal Revenue Service ("the IRS") improperly denied the partnership an energy tax credit for 1987.
Now before the court are the motions for summary judgment submitted by both parties.
For the reasons that follow, plaintiff's motion will be denied and the government's motion will be granted.
DISCUSSION:
I. STANDARD OF REVIEW
Summary judgment is appropriate if the "pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c) (emphasis added).
. . . [T]he plain language of Rule 56(c) mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial. In such a situation, there can be `no genuine issue as to any material fact,' since a complete failure of proof concerning an essential element of the nonmoving party's case necessarily renders all other facts immaterial. The moving party is `entitled to judgment as a matter of law' because the nonmoving party has failed to make a sufficient showing on an essential element of her case with respect to which she as e burden of proof.Celotex Corp. v. Catrett, 477 U.S. 317, 323-24 (1986).
The moving party bears the initial responsibility of stating the basis for its motions and identifying those portions of the record which demonstrate the absence of a genuine issue of material fact. Id. at 323. He or she can discharge that burden by "showing . . . that there is an absence of evidence to support the nonmoving party's case." Id. at 325.
Issues of fact are genuine "only if a reasonable jury, considering the evidence presented, could find for the non-moving party." Childers v. Joseph, 842 F.2d 689, 693-694 (3d Cir. 1988) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986)). Material facts are those which will affect the outcome of the trial under governing law. Anderson, 477 U.S. at 248. The court may not weigh the evidence or make credibility determinations. Boyle v. County of Allegheny, 139 F.3d 386, 393 (3d Cir. 1998). In determining whether an issue of material fact exists, the court must consider all evidence and inferences drawn therefrom in the light most favorable to the non-moving party. Id.; White v. Westinghouse Elec. Co., 862 F.2d 56, 59 (3d Cir. 1988).
If the moving party satisfies its burden of establishing a prima facie case for summary judgment, the opposing party must do more than raise some metaphysical doubt as to material facts, but must show sufficient evidence to support a jury verdict in its favor. Boyle, 139 F.3d at 393 (quoting, inter alia, Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986)).
II. STATEMENT OF FACTS
We recite herein the relevant facts provided by the parties in their Stipulation of Facts (record doc. no. 25).
The Partnership was formed in 1985 for the purpose of building and owning a cogeneration facility located near Frackville, Pennsylvania ("the Project"). Development work on the Project began in 1982 or 1983. The original developer was Charles Strohmeyer, a retired engineer who was doing business under the name Electrodyne Research Corporation ("Electrodyne").
A "cogeneration facility" is a power plant that produces two outputs from a single fuel.
In December 1985, Electrodyne assigned its interest in the Project to the Partnership. The Partnership had the Project recertified by the Federal Energy Regulatory Commission ("FERC") in March of 1986 in its name as owner. Construction of the Project commenced in 1986, and it was placed in service for federal income tax purposes in February 1988.
In December, 1984, FERC issued a staff order certifying the Project Electrodyne hoped to build as a "qualifying cogeneration facility" for purposes of the Public Utility Regulatory Policies Act of 1978. See Pub.L. 95-617 (Nov. 9, 1978).
The Partnership had four partners during the period in which the Project was constructed and in 1988. The partners claimed energy tax credits on amended returns or as voluntary audit adjustments for 1987 on grounds that portions of the Project qualified as "biomass property." The credits were claimed on construction progress payments. On or about August 15, 1991, the Partnership itself filed with the IRS an amended return for the taxable year ended December 31, 1987.
The government points out that, in the case of qualified progress expenditure property, the Internal Revenue Code and corresponding regulations required each partner in the Gilberton Power Company partnership to make an election in order to increase its qualified investment by such qualified progress expenditure(s). I.R.C. § 46(d)(6); Treas. Reg. 1.46-5(o)(1) and (2) (26 C.F.R.). The election was to have been made on Form 3468 and filed with the original income tax return for the first taxable year to which the election applies. Id. The regulation (Treas. Reg. 1.46-5(o)(2)) further notes that the election may not be made on an amended return. Although plaintiff and its partners admittedly did not seek the business energy credit until 1991 when the Partnership filed a second amended return and issued amended K-1s, the partners did make a general investment credit election on Form 3468 with their original returns and, therefore, may seek the credit here. Government's Brief at 5, n. 10.
Section 46(a) of the Internal Revenue Code (I.R.C.) authorized a tax credit for investing in certain kinds of energy property during 1986 and 1987 when the Project was under construction. The percentage varied depending on the type of equipment. The credit was 15% for "biomass property" during 1986 and 10% during 1987. No credit was allowed in 1988.
In order to qualify for the credit, a power plant had to use an "alternate substance" as fuel, defined in § 48(1)(15) of the I.R.C. as any substance other than oil, natural gas or coal (including lignite) or any product of these substances. Further, the term "alternate substance" does not include any inorganic substance.
The IRS disallowed the credits on grounds that "the fuel source used in the property was determined not to be an alternate substance."
The fuel source used by plaintiff is culm. Culm is debris from coal mining made up of a mixture of rock, dirt, coal particles and other materials brought up and discarded on the surface from underground mines and coal processing operations. The word "culm" refers to debris from anthracite mining operations. Culm piles contain carbon that may have been too small or irregular in size or too impure in the era when it was discarded to be sold as coal, but may be considered coal today due to improvements in technology for recovering coal from mining reject.
According to defense counsel, R. Scott Clarke, and defendant's expert, Dr. James Hower, "[A]nthracite is a variety of coal, and is casually used to describe the type of low-volatile, hard, smokeless coal mined in the Anthracite Fields of eastern Pennsylvania." Defendant's Brief in Support of its Motion for Summary Judgment at 5.
The Project draws from approximately 24 million tons of culm scattered over several hundred acres within approximately a mile of the power plant. The culm belongs to the Partnership. The culm piles were extensively reprocessed in the 1940's and 1950's by running them through coal breakers or processing plants to remove saleable material. The piles were reprocessed again in the period leading up to 1985 to remove material that could be sold as coal, filter media materials, road ballast or for other uses.
The Partnership has a contract with Waste Management Processors, Inc. ("WMPI") to prepare the raw culm for use as fuel by removing rock and other materials that might damage the boilers. This has the effect of reducing the "ash" content (i.e., the percentage of noncombustible material) and increasing the energy, or Btu content, as well as the carbon content, of the culm before it is put into the boiler.
WMPI uses screens to remove all materials larger than 4 inches in diameter. The remaining matter is cleaned and crushed to a size 1/4 inch or smaller. This material is then put into a mixture of water and magnetite with a specific gravity of 1.9. Materials with a specific gravity greater than 1.9 sink, including some of the inorganic rock. Other processed culm material containing inorganic and organic components with a specific gravity less than 1.9 floats. The inorganic rock that sinks is discarded. The floating matter, including organic and inorganic compounds, is sent to the Project to be put into the circulating fluidized-bed boilers as fuel.
The contract with WMPI requires WMPI to provide material with a content of between 30% and 45% ash. Culm supplied to the Project has tended toward the higher end of this spectrum. The material that goes into the boilers is more than 50% organic, with the remaining percentage consisting of inorganic material. Based on its chemical composition, according to organic chemists, the organic material is anthracite.
III. ANALYSIS
Preliminarily, we note that "[w]hen there is a question of statutory interpretation, a court begins with the language of the statute itself"Bald Eagle Ridge Prot. Assoc. v. Mallory, 119 F. Supp.2d 473, 479 (M.D.Pa. 2000), aff'd, 275 F.3d 33 (3d Cir. 2001), (citing In re United Healthcare System, Inc., 200 F.3d 170, 176 (3d Cir. 1999), cert. denied sub nom. Local 1199J v. Official Comm. of Unsecured Creditors of United Health Care System, 530 U.S. 1204 . . . (2000)). "When the meaning of statutory language is plain, the sole function of the court is to enforce the statute according to its terms unless the disposition required by the text is absurd. Bald Eagle Ridge Prot. Assoc., 119 F. Supp.2d at 480. (citations omitted). Stated another way, "only absurd results and a most extraordinary showing of contrary intentions on the part of Congress justify a limitation on the plain meaning of the language of a statute."Id. (citation omitted). We apply the plain meaning of the I.R.C. to this case.
As noted above, relevant provisions of the I.R.C. allow business credits against a company's federal income tax liability, including an "investment credit" determined under § 46(a). The investment credit is calculated from the taxpayer's qualified investments, including energy property. The I.R.C. provides that, in the case of energy property placed in service in the taxable year, the amount of the investment credit includes the "energy percentage" of the basis of such energy property. I.R.C. § 46(b)(2). Energy property includes "alternative energy property" and "cogeneration equipment." Id. at § 48(l)(2)(A)(i) and (viii). The term "alternative energy property" includes "a boiler the primary fuel for which will be an alternate substance," as well as equipment used to load, transfer, store, and prepare (including drying crushing, washing and weighing) an alternate substance. Id. at § 48(l)(3)(A)(i) and (vii). Those particular forms of "alternative energy property," as relevant to the instant action, are "biomass property." Id. at § 48(l)(15). Those alternative energy properties must be fueled by an "alternate substance." Id. at § 48(l)(3)(A)(i), (vii). In the case of biomass property, an alternate substance does not include oil, natural gas or any product of oil and natural gas or " any inorganic substance and does not include coal (including lignite) or any product of such coal." Id. at §§ 48(l)(15)(B)(i) and 48(l)(3)(B).
As applicable to this case, we interpret the Internal Revenue Code as it existed in 1987.
The discrete issue for resolution is whether the material plaintiff obtains from its culm piles and uses as fuel in its boilers qualifies as an "alternate substance," for purposes of determining whether plaintiff is entitled to the energy tax credit available under the I.R.C. §§ 38 and 46. Plaintiff contends that the culm is not coal or a product thereof and, therefore, qualifies as an "alternate substance" under the I.R.C. The government, on the other hand, argues that the culm does not constitute an "alternate substance" because (1) the organic portion of the culm is made up of anthracite coal, and (2) the remaining part of the culm is entirely inorganic.
The record supports a finding that the culm in question does not constitute an "alternate substance," thereby disqualifying plaintiff for the aforementioned energy tax credit under the I.R.C.
There is no doubt that the organic portion of the culm is anthracite. Indeed, the parties so stipulate. Stipulation of Facts at ¶ 41 ("Based on its chemical composition, according to organic chemists, the organic material is anthracite"). Further, the record supports that the organic portion is anthracite. The government's expert, James C. Hower, a Coal Geologist, describes anthracite as:
a type of coal, distinguished from bituminous coals on the basis of its rank, or the degree of metamorphism (temperature and pressure, both applied over time) experienced though its geological history. The rank series of coal is a continuum, from peat and lignite at the low rank end of the series; through subbituminous and bituminous coals; to semi-anthracite, anthracite, and meta-anthracite. The chemistry of coal changes with rank changes. Anthracites have a high carbon content, a low volatile matter content, and a high heating value compared to bituminous, and lower rank coals.
Government's Exhibit 1 ("Hower Report") (record doc. no. 24) at 2. The culm used by plaintiff is debris from anthracite coal mining. It "is a combination of rock mined with the coal, high-ash coal, and fine coal which could not be marketed at the time of production." Id. at 2, 11. Although the culm is "a direct consequence of coal mining and processing practices employed at the time of production," id., the parties agree that the culm is not a "primary product" of coal.
Hower opines that during the culm processing practices employed by plaintiff, "[t]he coal particles can be separated with a minimum of crushing." Id. at 12-13. Thus, preparing the culm does not alter the chemical composition of the anthracite coal. Id. at 13. Hower opines further that: "[t]he preparation process did not change the coal particles into sandstone or shale any more than the processing changed the inorganic rock into coal." Id. at 3, 13.
Plaintiff argues that the remining of the culm banks resulted in the removal of all coal from the culm piles from which it derives its fuel. This is clearly contradicted by the record whereby the parties stipulated that "[c]ulm piles contain carbon that may have been too small or irregular in size or too impure in the era when it was discarded to be sold as coal, but that might be considered coal today due to improvements in technology for recovering coal from mining reject." Stipulation of Facts at ¶ 36. Moreover, this is clearly contradictory to the aforementioned stipulation that the organic material being burned in the boilers is anthracite. Id. at ¶ 41.
Paragraph 37 of the Stipulation of Facts discusses the reprocessing of the culm piles in the 1940's, 1950's and in 1985 to "remove material that could be sold as coal." This does not necessary mean that there was no coal left in the culm piles; instead, the court interprets this to mean that only the saleable coal was removed, not all coal material.
The question for the court is not whether the organic portion of the culm is anthracite. It clearly is. The question, rather, is whether there is sufficient anthracite in the culm piles to fall outside the term "alternate substance," disqualifying plaintiff for the energy tax credit at issue. We believe there is.
Plaintiff submits that the fact that the culm piles may contain some anthracite coal does not make the culm bank coal itself. See Plaintiffs Brief at 9. Plaintiff — appearing to forget ¶ 41 of the Stipulation of Facts between the parties that "the organic material is anthracite" — contradicts itself in arguing later that the organic portion of the processed culm actually makes up 63.48% of the material used for fuel in its boilers, an amount well in excess of the 50% stipulated to by the parties. Plaintiffs Reply Brief (record doc. no. 32) at 4 n. 1.
Plaintiff has offered little more than legislative history and a "policy behind the statute" argument, claiming that the culm is organic waste and, thus, an alternate substance which qualifies it as biomass property within the scope of § 48(l)(15)(B)(i). Ironically, plaintiffs own expert, Dr. Peter T. Luckie, states that: "[his] understanding is that "biomass "is defined under the tax laws as organic material other than coal." Annexes to Plaintiffs Brief (record doc. no. 28), Annex 1 at 2 (emphasis added). In light of the evidence indicating that the organic portion of the culm is anthracite coal, as well as the parties' stipulation on that point, it appears as though plaintiffs own expert defeats plaintiffs argument by suggesting that the culm cannot constitute an "alternate substance" and, consequently, "biomass."
Plaintiff submits that the policy behind the energy tax credit was "to reduce consumption of oil and gas," Plaintiffs Brief at 14, and "encourage use of wastes as fuel." Id. at 15.
Dr. Luckie is a professor at The Pennsylvania State University, College of Earth and Mineral Sciences.
Moreover, the organic, or anthracite, portion of the culm makes up the combustible, portion of the fuel which plaintiff burns in its boilers.See Government's Brief at 12. Indeed, plaintiff acknowledges that "[i]n terms of Btu content, the organic portion of the fuel accounts probably for 95% to 99% of the fuel, since ash does not burn." Plaintiffs Reply Brief (record doc. no. 32) at 5. Plaintiff acknowledges further that: "[t]here is no dispute that what goes into the Gilberton power plant as fuel is primarily organic material." Plaintiffs Brief (record doc. no. 27) at 12.
Based on the evidence submitted, it is clear that the organic portion of the culm at issue is anthracite coal and is the primary source of fuel burned in plaintiffs boilers. As such, we find that the culm constitutes coal for purposes of determining whether plaintiff qualifies for the energy tax credit under the I.R.C. Accordingly, in applying the plain meaning of the I.R.C., plaintiffs processed culm is not an "alternative substance" and not "biomass property" within the scope of § 48(l)(15)(B)(i) of the statute, and plaintiff is not entitled to the energy tax credit for 1987 under §§ 38 and 46.
Plaintiff has failed to put forth sufficient evidence for a reasonable jury to find in its favor. Thus, there exists no genuine issue of material fact and summary judgment will be granted in favor of the government pursuant to Fed.R.Civ.P. 56(c).
IV. CONCLUSION
Based on the foregoing, we will deny plaintiffs motion for summary judgment and grant the government's motion for summary judgment.
An appropriate order will issue.
ORDER
For the reasons set forth in the accompanying memorandum,
IT IS ORDERED THAT:
1. The government's motion for summary judgment (record doc. no. 22) is granted pursuant to Fed.R.Civ.P. 56(c).
2. The plaintiffs motion for summary judgment (record doc. no. 26) is denied.
3. The clerk is directed to enter final judgment in favor of the defendant and against the plaintiff.
4. The clerk is directed to close the case file.