Green Gas Delaware Statutory Trust, Methane Bio, LLC, Tax Matters Partner v. Commissioner of Internal Revenue Service

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued March 5, 2018 Decided August 14, 2018
No. 17-1025
GREEN GAS DELAWARE STATUTORY TRUST,
METHANE BIO, LLC, TAX MATTERS PARTNER, ET AL.,
APPELLANTS
v.
COMMISSIONER OF INTERNAL REVENUE SERVICE,
APPELLEE
Consolidated with 17-1026, 17-1027
On Appeals from the Decisions
of the United States Tax Court
Robert J. Kovacev argued the cause for appellants. With
him on the briefs was Caitlin R. Tharp.
Jennifer M. Rubin, Attorney, U.S. Department of Justice,
argued the cause for federal appellee. With her on the brief was
Bruce R. Ellisen, Attorney.
Before: GARLAND, Chief Judge, and TATEL and MILLETT,
Circuit Judges.

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Opinion for the Court filed by Chief Judge GARLAND.
GARLAND, Chief Judge: Rumpelstiltskin could spin straw
into gold. Rumpelstiltskin, Inc. thought it could do the same for
garbage, spinning it into tax credits. The Commissioner of the
Internal Revenue Service disagreed. So did the Tax Court. So
do we.
I
Every year, Americans generate 250 million tons of
garbage. EPA, MUNICIPAL WASTE FACT SHEET 1 (2012),
perma.cc/DQD3-YK9C. Slightly over half of that garbage is
deposited in landfills, where it is left to decompose. Id. at 2.
The decomposition of organic matter in those landfills produces
a gas -- appropriately termed “landfill gas” -- that contains
roughly 50-55% methane, 45-50% carbon dioxide, small
amounts of non-methane organic compounds, and trace amounts
of inorganic compounds. See Stipulation of Facts ¶ 56
(App. 369). Landfill gas is both a potential environmental
hazard and a potential energy source.
During the time relevant to this case, Rumpelstiltskin, Inc.
was the parent of a wholly-owned subsidiary, Resource
Technology Corporation (RTC). See Green Gas Del. Statutory
Tr. v. Comm’r, 147 T.C. 1, 4 (2016). RTC was founded in 1993
and, by 1997, had entered into agreements with 24 landfills
throughout the United States. Each agreement transferred to
RTC the rights to develop and construct a landfill gas-collection
facility and to produce and sell electricity from landfill gas. In
return, RTC agreed to pay the landfill owners royalties,
measured as a percentage of electricity sales. See Green Gas,
147 T.C. at 9; Stipulation of Facts ¶ 52 (App. 368).

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RTC also entered into agreements with the appellants in this
case -- two Delaware trusts named Green Gas and Pontiac --
both of which engaged tax-matters partners controlled, like
RTC, by Rumpelstiltskin. Notwithstanding these connections,
the Internal Revenue Service (IRS) stipulated in the Tax Court
that RTC and the trusts were “unrelated” for purposes of tax
law. Stipulation of Facts ¶¶ 14-15 (App. 361).
Under the agreements between RTC and the trusts, RTC
sold the rights to produce landfill gas at each landfill to the
trusts. It also agreed to maintain the landfill gas equipment at
each landfill. The trusts, in turn, agreed to sell all landfill gas
produced back to RTC. Id. ¶¶ 53-55 (App. 368-69).
During the relevant time period, only five of the 24 landfills
that RTC managed had operational equipment capable of turning
landfill gas into electricity. Green Gas, 147 T.C. at 15-16. At
the other 19, the gas was simply vented (released) or flared
(burned) into the atmosphere. Id. at 11-12. For those 19,
therefore, RTC paid the appellant trusts for landfill gas that it
did not -- and could not -- use productively.
What was the purpose of these byzantine arrangements?
Largely, the appellants admit, to monetize tax credits provided
under 26 U.S.C. § 45K. See Green Gas Br. 8-9. That statutory
tax credit, which Congress first enacted in 1980, creates an
incentive for the production and sale of energy from
“nonconventional” sources. 26 U.S.C. § 45K(a). More
specifically, it provides a credit of $3, multiplied by the “barrel-
of-oil equivalent of qualified fuels[,] . . . sold by the taxpayer to
an unrelated person during the taxable year,” and “the
production of which is attributable to the taxpayer.” Id.
§ 45K(a)(2). We will have more to say about these and other
statutory requirements later in this opinion.

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Between 2005 and 2007, when the Section 45K credit
expired, the appellants claimed $11.7 million in Section 45K
credits for selling landfill gas to RTC. The overwhelming
majority of those claimed credits came from venting/flaring
landfills, where RTC made no (and could make no) use of the
gas. Green Gas, 147 T.C. at 30. Between 2006 and 2007, the1
appellants also sought to deduct $4.3 million in business
expenses. U.S. Br. 17-19 (summarizing Stipulation of Facts).2
During this time period, the appellants reported $4.5 million in
income. Stipulation of Facts ¶ 1007 (App. 494); Pontiac Form
1065 (Apr. 15, 2007) (App. 792); Pontiac Form 1065 (May 20,
2008) (App. 806).
After an audit, the IRS Commissioner disallowed all but
$586,000 of the trusts’ Section 45K credits. Green Gas, 147
T.C. at 30. That figure, the Commissioner explained, excluded
all claimed credits from venting/flaring landfills, as well as all
claimed credits for landfill gas vented or flared from gas-to-
electricity landfills when the gas-to-electricity equipment was
non-operational. See Final Adjustment (Mar. 26, 2010)
(App. 855-58); U.S. Br. 20. In addition, the Commissioner
disallowed the bulk of the appellants’ claimed business-expense
deductions. Finally, the Commissioner determined that the
appellants should be assessed a 20% accuracy penalty under 26
U.S.C. § 6662 for the 2006 and 2007 tax years. See Final
Adjustment (Mar. 26, 2010) (App. 855-56).
It is, perhaps, no coincidence that some of the intermediary 1
entities were named Bye Bye Gas GP, C U Later Gas GP, Arrivederci
Gas GP, Buon Giorno Gas GP, Ciao Gas GP, and Adios Gas GP. See
Green Gas, 147 T.C. at 7 n.7.
The appellants also deducted business expenses for 2005, which 2
the Commissioner did not disallow. See Final Adjustment (Aug. 20,
2009) (App. 826-27); U.S. Br. 16 n.8.

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The Tax Court affirmed the Commissioner’s determinations
in all respects. Green Gas, 147 T.C. 1. The appellants appeal
the Tax Court’s decision, maintaining that they should have
received all of their claimed Section 45K credits and business
deductions, and that the Commissioner should not have assessed
an accuracy penalty. We have jurisdiction pursuant to 26 U.S.C.
§ 7482(a).
II
We first consider the Tax Court’s decision to disallow
Section 45K credits at the venting/flaring landfills and at the
gas-to-electricity landfills during periods when gas-to-electricity
equipment was non-operational and venting or flaring was used.
The Tax Court gave two reasons in support of this holding:
first, that venting and flaring do not satisfy the statutory
requirements of Section 45K; and second, that the appellants
failed to substantiate the amount of landfill gas they allegedly
vented or flared. We review the Tax Court’s legal conclusions
de novo and its findings of fact for clear error. Barnes v.
Comm’r, 712 F.3d 581, 582 (D.C. Cir. 2013). We owe the
Commissioner no Chevron deference in his interpretation of
Section 45K (nor does he request any), because he “makes no
claim” to have reached that interpretation in a rulemaking or
agency adjudication. Id. at 582-83 (citing Chevron U.S.A. Inc.
v. Nat. Res. Def. Council, 467 U.S. 837 (1984)).
Section 45K is hardly a model of drafting clarity. The
statute has several interlocking requirements for claiming a
credit, four of which are relevant here: First, there must be a
“qualified fuel[],” 26 U.S.C. § 45K(a)(2), which includes “gas
produced from . . . biomass,” id. § 45K(c)(1)(B)(ii). Second, the
fuel must be “sold by the taxpayer to an unrelated person during
the taxable year.” Id. § 45K(a)(2)(A). Third, the qualified fuel
must have been produced in a “facility for producing qualified

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fuels” placed in service before July 1, 1998. Id. § 45K(f)(1)(A),
(e)(1)(B). Fourth, the “production” of the qualified fuel must
be “attributable to the taxpayer.” Id. § 45K(a)(2)(B).
The Tax Court held, and the Commissioner does not dispute
on appeal, that landfill gas is a “qualified fuel.” 147 T.C. at 40-
44. And, as we have already mentioned, the Commissioner
stipulated that the appellants and RTC are “unrelated” parties
within the meaning of this statute. Id. at 67. In this Part we
focus our analysis on the third requirement. In Part III, we
address the Tax Court’s analysis of the fourth requirement. See
infra note 3.
According to the Tax Court, in the context of landfill gas
production, a “‘facility for producing qualified fuels’ under
section 45K(f)(1) must allow a taxpayer to capture, sell, or even
transform [landfill gas] into energy.” 147 T.C. at 49. That
conclusion followed from the court’s view that Congress
enacted Section 45K to “encourage production of energy from
alternative sources to reduce the dependency on imported
energy.” Id. at 40. Hence, “the kind of facility Congress had in
mind when enacting the [Section 45K] credit would be one that
could produce energy or is connected to an energy production
facility or is capable of storing or delivering fuel to a customer.”
Id. at 47. Systems like the venting/flaring landfills at issue here
“do not qualify as a ‘facility for producing qualified fuels,’” the
court found, because they “are not meant to produce energy and
do not capture any fuels which could be used by someone else
for that purpose.” Id. at 49.
We agree with the Tax Court that Congress appears to have
intended Section 45K to reward the production of alternative
energy, not the release of gas into the atmosphere. That
intention is evident in the statute’s text, which provides a credit
for producing “fuels” and which prescribes that the credit will

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be proportional to the “barrel-of-oil equivalent of qualified
fuels.” 26 U.S.C. § 45K(a)(2). This language suggests that only
fuels that are capable of substituting for oil -- that is, only fuels
that can be used to generate energy -- are eligible to receive tax
credits. Had Congress instead intended to reward the release of
gas into the atmosphere, it would have used very different
language.
The appellants resist this conclusion by pointing to the floor
statements of four legislators who voted to reauthorize Section
45K. Green Gas Br. 27. This effort is unpersuasive, and not
only because floor statements are often weak evidence of
congressional intent. See Nat’l Ass’n of Mfrs. v. Taylor, 582
F.3d 1, 12 (D.C. Cir. 2009). In this case, the floor statements the
appellants cite actually cut against their reading of the statute.
See, e.g., 138 Cong. Rec. 27,052 (1992) (statement of Sen. Dole)
(“Without [Section 45K], this gas will be simply vented into the
atmosphere.”).
We need not run the statutory issue to ground, however,
because the Tax Court’s other holding -- that the appellants
failed to substantiate the amount of landfill gas that was vented
or flared -- more than suffices to resolve this case.
Taxpayers are required to maintain records substantiating
their claims for credits and deductions, 26 C.F.R. § 16001-1(a),
and bear “the burden of demonstrating [their] clear entitlement,”
Telecom*USA, Inc. v. United States, 192 F.3d 1068, 1072 (D.C.
Cir. 1999). We review substantiation determinations for clear
error. Comm’r v. Simmons, 646 F.3d 6, 12 (D.C. Cir. 2011).
The appellants offered three methods for measuring the
amount of gas they vented or flared, each of which the Tax
Court found unreliable. First, the appellants asserted that RTC
employees maintained site logs measuring gas flow at many of

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the landfills. The Tax Court, however, found those logs
unconvincing. Many of the sites had “four logs or fewer,” and
“the data reported [was] statistically improbable because gas
flow and methane concentrations remain[ed] the same over long
periods.” 147 T.C. at 64. Second, although the appellants
claimed that they used software called LandGEM to measure
landfill gas output, the Tax Court found that this software “is not
designed to be a tool for monitoring or measuring gas
production,” and is not reliable for that purpose. Id. at 65.
Third, the appellants alleged that they estimated landfill gas
output based on “air emissions factors.” The Tax Court
disbelieved the testimony of the appellants’ witness on this
point, id. at 35, and described the method as “basically
eyeball[ing] how much [landfill gas] was emitted from a
particular landfill,” id. at 66.
On this appeal, the appellants expend little energy arguing
that the above findings were clearly erroneous. Instead, they
assert that four legal errors infected the Tax Court’s holding.
We address each in turn.
First, the appellants argue that the Tax Court “implicitly” --
and erroneously -- required them to provide “a full, continuous
record . . . of [landfill gas] flow and concentration measurements
accomplished through a meter.” Green Gas Br. 33. The Tax
Court did no such thing. Rather, it simply found that the
appellants’ substantiating records were riddled with errors or
otherwise not credible, a judgment with which we agree.
Second, the appellants aver that two of the employees who
allegedly prepared 85% of the site logs died prior to the Tax
Court’s proceedings. Accordingly, the appellants contend, the
court erred in employing a presumption that the appellants chose
not to introduce testimony that might have corroborated the logs
because that testimony would instead have been unfavorable.

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See 147 T.C. at 65 (citing Wichita Terminal Elevator Co. v.
Comm’r, 6 T.C. 1158 (1946)). We need not dwell on this
objection because the Tax Court provided ample reasons why
the logs were unreliable on their face. See id. at 63-64. And in
any event, the court’s presumption was appropriate given that
the appellants could have introduced evidence from still-living
employees who prepared the remaining 15% of the site logs, and
yet chose not to do so. See Huthnance v. District of Columbia,
722 F.3d 371, 378 (D.C. Cir. 2013).
Third, the appellants object that, given the parties’
stipulation that landfill gas contains “roughly” 50-55% methane,
the Tax Court should not have rejected the appellants’ use of
50% as a default value for assessing the percentage of methane
in the gas flow reported in the logs. See Stipulation of Facts
¶ 56 (App. 369). This objection is unavailing because the Tax
Court gave numerous other reasons why it did not find the
appellants’ logs credible. See 147 T.C. at 63-64. Moreover, the
parties did not stipulate that every landfill has the same or a
constant methane content -- indeed, the appellants’ expert report
stated that the methane content of landfill gas ranges from less
than ten percent to over sixty percent, depending on the age of
the landfill. Expert Report of Neil D. Williams 31 (Oct. 16,
2015) (App. 3374); see Green Gas, 147 T.C. at 10 (“Methane
content in [landfill gas] varies over time and depends on many
factors, including the life cycle of a landfill.”).
Finally, the appellants argue that, even if they could not
fully substantiate their landfill gas production, they should have
been allowed to estimate that amount. This argument relies on
Cohan v. Commissioner, in which Judge Learned Hand wrote
that the predecessor of the Tax Court should “make as close an
approximation as it can, bearing heavily if it chooses upon the
taxpayer whose inexactitude is of his own making.” 39 F.2d
540, 544 (2d Cir. 1930). Our court has explained, however, that

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the Cohan rule is inapposite when “there are no reliable figures
from which to calculate or extrapolate a reasonable estimate” of
the taxpayers’ entitlements. Plisco v. United States, 306 F.2d
784, 787 (D.C. Cir. 1962). Given the severity of the defects the
Tax Court identified in the appellants’ records, a Cohan estimate
was not required.
For these reasons, we affirm the Tax Court’s judgment that
the appellants were not eligible for the Section 45K credits they
claimed for venting or flaring landfill gas.3
III
We now turn to the Tax Court’s determination that some of
the landfill gas claimed at gas-to-electricity landfills was not
“attributable to the taxpayer,” and thus not eligible for Section
45K credits on that ground. See 26 U.S.C. § 45K(a)(2)(B).
Because the appellants’ dispute with the Tax Court is ultimately
a factual one, we review for clear error. Barnes, 712 F.3d
at 582.
First, the Tax Court disallowed credits at three landfills
because the appellants introduced no credible evidence that they
had the rights to sell landfill gas at those landfills. 147 T.C.
at 55-56. The appellants acknowledge that “the record did not
contain a copy” of the agreements concerning those landfills.
Green Gas Br. 43. But this absence was excusable, they
maintain, because RTC’s former president may have stolen
those documents before leaving the company, or, alternatively,
In light of our decision on this point, we need not address the 3
Tax Court’s alternative holding that vented/flared landfill gas was not
“sold” within the meaning of Section 45K. 147 T.C. at 67-68; see 26
U.S.C. § 45K(a)(2)(A) (requiring that the fuel be “sold by the taxpayer
to an unrelated person during the taxable year”).

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because RTC’s bankruptcy trustee may have misplaced the
documents.
The Tax Court did not clearly err in declining to accept
those excuses. For one thing, any defects in RTC’s record
keeping do not explain why the appellants -- separate legal
entities from RTC -- lack copies of the agreements they
allegedly signed. For another, the Tax Court observed that the
appellants managed to introduce evidence of the agreements at
every venting/flaring landfill, making their failure to do so at
these gas-to-electricity landfills all the more stark. 147 T.C.
at 55.
Second, the Tax Court disallowed credits at the Pontiac,
Illinois landfill after June 13, 2006. Id. at 57-60. On that date,
a bankruptcy court in Chicago held that RTC’s lease of the
Pontiac landfill had expired. See In re RTC, 528 F.3d 467, 468
(7th Cir. 2008). This holding, the Tax Court concluded, meant
that RTC had no authority to assign rights at the Pontiac landfill
after June 13, 2006 -- and, therefore, that the appellants could
not claim credits for selling landfill gas after that date.
The Tax Court’s conclusion was not clear error. The
appellants’ sole argument to the contrary is that the agreement
between RTC and the relevant appellant “is essentially a
sublease, and the possessory rights of a sublessee are not
impaired in bankruptcy unless they would be impaired under
applicable state law.” Green Gas Br. 46. We need not decide
whether that proposition is correct as a matter of bankruptcy law
because, even if it were, Illinois law (which governs the contract
at issue) states that “the termination of [a] top lease ipso facto
works a termination of a sublease.” Arendt v. Lake View Courts
Assocs., 366 N.E.2d 1096, 1097-98 (Ill. App. Ct. 1977) (internal
quotation marks omitted). Accordingly, the Tax Court did not

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clearly err in holding that the appellants had no rights to the
Pontiac landfill after RTC’s lease terminated.
IV
We next address the Tax Court’s decision to disallow the
bulk of the appellants’ business-expense deductions. 147 T.C.
at 68-73; see 26 U.S.C. § 162(a). The “burden of clearly
showing the right to the claimed deduction is on the taxpayer,”
INDOPCO, Inc. v. Comm’r, 503 U.S. 79, 84 (1992) (quoting
Interstate Transit Lines v. Comm’r, 319 U.S. 590, 593 (1943)),
and the Tax Court found that the appellants failed to produce
records that would allow them to carry that burden, see 26
C.F.R. § 1.6001-1(a). 147 T.C. at 68-73. We review that
determination for clear error. Barnes, 712 F.3d at 582.
We find no clear error in the Tax Court’s findings. The
court determined that the appellants could not deduct operation-
and-maintenance expenses at landfills where they could not
produce any operation-and-maintenance agreements, and where
they failed to introduce any “evidence showing that any
payments were actually made, such as bank records.” 147 T.C.
at 70. For a separate landfill, the court held that no operation-
and-maintenance expenses were deductible after June 16, 2006,
when the relevant appellant and RTC were barred from the
landfill following a dispute with the landfill owner. Id. at 72-73.
As to the appellants’ claimed deductions for consulting and
legal fees, the Tax Court determined that the appellants “failed
to provide a credible explanation” for why the consulting fees
were “paid by other entities but deductions were claimed by”
appellant Green Gas. Id. at 70. And it held that the appellants
could not claim legal-fee deductions because there was no
evidence that any legal work benefited the appellants. Id. at 70-
71. Finally, it disallowed various miscellaneous expenses,

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except to the extent that the appellants could corroborate them
with documentation. Id. at 71-72.
All of these determinations were reasonable and supported
by the record, and we have no cause to overturn them. Nor, for
the reasons explained above, do we accept the appellants’
argument that the Tax Court should have applied a Cohan
estimate rather than reject the expenses entirely. We therefore
affirm the Tax Court on this issue.
V
Finally, we consider whether the Tax Court properly
approved a 20% accuracy-related penalty under 26 U.S.C.
§ 6662(a). 147 T.C. at 74-78. That section permits the
Commissioner to impose a penalty of 20% of “the portion of any
underpayment which is attributable to,” inter alia, “[n]egligence
or disregard of rules or regulations.” 26 U.S.C. § 6662(b); see
id. § 7491(c) (providing that the Commissioner bears the burden
to support a penalty). “Because the Tax Court’s assessment of
an accuracy-related penalty is a factual determination, it is
reviewed for clear error.” Rogers v. Comm’r, 783 F.3d 320, 327
(D.C. Cir. 2015) (internal quotation marks omitted).
Under IRS regulations, “negligence includes . . . . any
failure by the taxpayer to keep adequate books and records or to
substantiate items properly.” 26 C.F.R. § 1.6662-3(b)(1). As
should be clear to the reader by this point, the Tax Court did not
clearly err in holding that the appellants’ record-keeping
practices satisfied this definition. The appellants’ multiple
excuses -- their documents were stolen by RTC’s disgruntled
former president, their documents were seized during
bankruptcy, the dog ate their homework, and the like -- cannot
explain the fact that they submitted hardly any documentation of
the key facts underlying their credit and deduction claims.

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Nor did the Tax Court clearly err in rejecting the appellants’
claim that they acted “with reasonable cause and in good faith,”
such that no accuracy penalty should issue. 147 T.C. at 76; see
26 C.F.R. § 1.6664-4. On appeal, the appellants do not attempt
to defend the position they took below -- that they followed the
advice of a tax professional -- likely because the Tax Court
found that “the record is devoid of evidence that [the appellants]
received any written advice on tax issues from anyone.” 147
T.C. at 77. Instead, they claim that they followed industry best
practices in maintaining their records, and hence should not be
penalized. Green Gas Br. 55. But the appellants have cited no
authority for that claim, either on appeal or before the Tax
Court, see Green Gas Tax Court Opening Br. 123-24 (Feb. 22,
2016) (App. 173-74), and we therefore decline to accept it.
VI
For the foregoing reasons, the judgment of the Tax Court is
Affirmed.

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