Westrock Virginia Corporation v. United States , 928 F.3d 1019 ( 2019 )

United States Court of Appeals
for the Federal Circuit
______________________
WESTROCK VIRGINIA CORPORATION,
Plaintiff-Appellant
v.
UNITED STATES,
Defendant-Appellee
______________________
2018-1877
______________________
Appeal from the United States Court of Federal Claims
in No. 1:15-cv-00355-LKG, Judge Lydia Kay Griggsby.
______________________
Decided: June 28, 2019
______________________
JERRY STOUCK, Greenberg Traurig LLP, Washington,
DC, argued for plaintiff-appellant. Also represented by
PAMELA J. MARPLE, MICHAEL J. SCHAENGOLD.
ANDREW M. WEINER, Tax Division, United States De-
partment of Justice, Washington, DC, argued for defend-
ant-appellee. Also represented by BRUCE R. ELLISEN,
RICHARD E. ZUCKERMAN.
______________________
2 WESTROCK VIRGINIA CORPORATION v. UNITED STATES
Before NEWMAN, LINN, and WALLACH, Circuit Judges.
LINN, Circuit Judge.
WestRock Virginia Corporation (“WestRock”) appeals a
decision of the United States Court of Federal Claims
(“Claims Court”) affirming the Department of the Treas-
ury’s award of a cash grant to WestRock in an amount that
WestRock contends is less than the grant amount required
under Section 1603 of the American Recovery and Rein-
vestment Act of 2009 (“Section 1603”). WestRock Va.
Corp. v. United States, 136 Fed. Cl. 267 (2018). Because
the Claims Court correctly determined that the amount of
Treasury’s grant award was consistent with Section 1603,
we affirm.
I
In 2009, President Obama signed the American Recov-
ery and Reinvestment Act (“Recovery Act”) into law to en-
courage investments in clean energy property. Pub. L. No.
111-5, 123 Stat 115, 115–16 (“The purposes of this Act in-
clude . . . invest[ing] in transportation, environmental pro-
tection, and other infrastructure that will provide long-
term economic benefits.”). At the time of enactment, Sec-
tion 48 of the Internal Revenue Code (“IRC” or “Code”) al-
ready encouraged such investments by providing lump
sum, investment tax credits for certain qualifying property.
But, because tax credits are beneficial only if one is already
generating income, Congress enacted Section 1603 of the
Recovery Act to create an alternate program that provides
cash grants in lieu of a tax credit to investors for certain
qualifying investments. See H.R. Rep. No. 111-16 at 620–
21 (“It is intended that the grant provision mimic the oper-
ation of the credit under [IRC] section 48.”). Section 1603,
which is administered by Treasury, recites, in relevant
part:
WESTROCK VIRGINIA CORPORATION v. UNITED STATES 3
SEC. 1603. GRANTS FOR SPECIFIED ENERGY
PROPERTY IN LIEU OF TAX CREDITS.
(a) IN GENERAL.—Upon application, the Secre-
tary of the Treasury shall, subject to the require-
ments of this section, provide a grant to each
person who places in service specified energy prop-
erty to reimburse such person for a portion of the
expense of such property as provided in subsection
(b).
***
(b) GRANT AMOUNT.—
(1) IN GENERAL.—The amount of the grant under
subsection (a) with respect to any specified energy
property shall be the applicable percentage of the
basis of such property.
(2) APPLICABLE PERCENTAGE.—For purposes
of paragraph (1), the term “applicable percentage”
means—
(A) 30 percent in the case of any property described
in paragraphs (1) through (4) of subsection (d), and
(B) 10 percent in the case of any other property.
***
(d) SPECIFIED ENERGY PROPERTY.—For pur-
poses of this section, the term “specified energy
property” means any of the following:
(1) QUALIFIED FACILITIES.—Any qualified
property (as defined in section 48(a)(5)(D) of the In-
ternal Revenue Code of 1986) which is part of a
qualified facility . . . described in [§ 45(d)(3)] of
such Code.
Pub. L. No. 111-5, 123 Stat. 115, 364–65 (emphases added).
4 WESTROCK VIRGINIA CORPORATION v. UNITED STATES
Section 48(a)(5)(D) of the Internal Revenue Code, in
turn, defines “qualified property” as “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 facility,” and IRC § 45(d)(3) defines “qualified
facility” as a “facility using open-loop biomass to produce
electricity.” Id. (emphasis added). In sum, Section 1603
provides for a grant in the amount of 30 percent of the basis
or cost of any qualified property that is used as an integral
part of a facility that uses open-loop biomass to produce
electricity.
II
WestRock runs a paper mill in Covington, Virginia.
Previously, this paper mill was fueled by steam produced
from eight boilers that burned various types of fuel, includ-
ing fossil fuels and black liquor (a non-biomass fuel derived
from the pulping process). In 2013, WestRock placed into
service a cogeneration facility that burns open-loop bio-
mass, i.e. material not originally intended for use as a fuel
source. This facility uses two boilers to provide steam—a
new biomass-fired boiler and an old boiler from WestRock’s
paper mill. The steam produced from both boilers is
comingled and fed into a steam turbine generator. The
generator then uses the steam to generate electricity, but
only after WestRock diverts some of the steam from the
generator to the paper mill for use in the industrial paper
process. WestRock, 136 Fed. Cl. at 270 (citing J. App’x 378–
79). While WestRock disputed this last point before the
Claims Court, it does not do so on appeal. It is therefore
undisputed that not all the steam that is fed into the gen-
erator is used to generate electricity and that some of it is
used to power WestRock’s paper mill.
On December 23, 2013, WestRock submitted a Section
1603 application to Treasury seeking payment in connec-
tion with its open-loop biomass cogeneration facility. In
the application, WestRock claimed that its qualifying
WESTROCK VIRGINIA CORPORATION v. UNITED STATES 5
property cost $286,191,571 and requested a payment of
$85,857,471—30 percent of the total claimed qualifying
cost. The National Renewable Energy Laboratory
(“NREL”) reviewed the application and determined that
WestRock’s facility produced both process steam and elec-
tricity. NREL subsequently determined, based on further
information provided by WestRock, that WestRock used
only 49.1 percent of the energy in the steam produced at
the facility to produce electricity and that fossil fuel still
comprised about 0.22 percent of the total fuel used in
WestRock’s boiler. Accordingly, Treasury determined,
“based on the information provided[,] that the energy prop-
erty uses open-loop biomass to produce electricity at a
value equivalent to 48.8% of the total steam and electricity
produced from biomass and fossil fuel.” J. App’x 722.
Therefore, Treasury reduced the cost basis by 51.2 percent,
and, after statutory sequestration of certain funds,
awarded WestRock $38,881,758—30 percent of the cost of
what Treasury deemed qualifying property.
WestRock filed suit at the Claims Court challenging
Treasury’s award amount and alleging that Treasury im-
properly reduced the cost of the property based on use of
that property. The parties filed cross motions for partial
summary judgment on the issue of whether Treasury may
reduce WestRock’s cost basis under Section 1603(b)(2)(A).
The Claims Court found, based on the statutory text, that
Section 1603 provides for reimbursement of only those
costs associated with electricity production at WestRock’s
open-loop biomass facility. The Claims Court also found
that its conclusion was consistent with applicable, but non-
binding Treasury guidance, which provides for allocation of
the cost basis between qualifying and non-qualifying activ-
ities. The Claims Court determined that this guidance
should be afforded deference under Skidmore v. Swift &
Co., 323 U.S. 134 (1944). Accordingly, it affirmed Treas-
ury’s grant amount. WestRock appeals. We have jurisdic-
tion under 28 U.S.C. § 1295(a)(3) (2012).
6 WESTROCK VIRGINIA CORPORATION v. UNITED STATES
III
Statutory interpretation is question of law that we re-
view de novo. Belkin Int’l, Inc. v. Kappos, 696 F.3d 1379,
1381 (Fed. Cir. 2012). The Supreme Court generally inter-
prets statutes exempting parties from taxes or providing
tax deductions narrowly. See INDOPCO, Inc. v. Comm’r,
503 U.S. 79, 84 (1992) (“[T]his Court has noted the familiar
rule that an income tax deduction is a matter of legislative
grace and that the burden of clearly showing the right to
the claimed deduction is on the taxpayer.” (internal cita-
tions and quotations omitted)); Helvering v. Nw Steel Roll-
ing Mills, Inc., 311 U.S. 46, 49 (1940) (“It has been said
many times that provisions granting special tax exemp-
tions are to be strictly construed.”). While Section 1603 is
not strictly such a statute, it similarly reimburses parties
in lieu of a tax credit to promote the use of clean energy
resources.
The parties agree that Section 1603(b)(2)(A) provides
for reimbursement of 30 percent of the cost of any qualified
property—as defined in section 48(a)(5)(D) of the Code—
that is part of a qualified facility—as defined in Section
45(d)(3) of the Code. They disagree, however, on whether
Treasury may determine the basis or cost of the qualified
property based on the use of that property. We conclude
that Section 1603(b)(2)(A) unambiguously allows Treasury,
in calculating the amount of the grant specified in the stat-
ute, to reduce the basis of qualified property in proportion
to its use in a qualifying activity. The statute’s plain text,
underlying purpose, and legislative history support this
conclusion.
By incorporating the phrase “integral part” into the
definition of “qualified property,” Section 1603 allows for
reimbursement of only those costs associated with a quali-
fying activity. As noted above, section 48(a)(5)(D) of the
Internal Revenue Code defines “qualified property” as “tan-
gible property (not including a building or its structural
WESTROCK VIRGINIA CORPORATION v. UNITED STATES 7
components), but only if such property is used as an inte-
gral part of the qualified investment facility.” Id. (empha-
sis added). And IRC § 45(d)(3) defines a “qualified facility”
as, inter alia, a “facility using open-loop biomass to produce
electricity.” Id. (emphasis added). The plain text of Section
1603 incorporates definitions from the Internal Revenue
Code that make clear that the use of the property should
be considered in determining the basis for purposes of com-
puting the amount of the grant. Thus, we agree with the
Claims Court that the statutory language allows for reim-
bursement in the amount of 30 percent of only those costs
associated with producing electricity.
This reading is also supported by the purpose underly-
ing the Recovery Act. As explained above, when enacting
Section 1603, Congress intended to provide an alternate to
the types of benefits provided under IRC § 48 for similar
types of clean energy investments. Section 48 of the Code,
like Section 1603, defines property that qualifies for an in-
vestment tax credit according to its use. See IRC § 48(a)
(providing an “energy credit” of “30 percent in the case of”
“energy property,” which is defined as “equipment which
uses solar energy to generate electricity, to heat or cool (or
provide hot water for use in) a structure, or to provide solar
process heat, excepting property used to generate energy
for the purposes of heating a swimming pool.”).
In administering IRC § 48, Treasury promulgated reg-
ulations that similarly allocate the cost of the property ac-
cording to use of that property. For example, Treas. Reg.
1.48-9(e) defines “wind energy property” as equipment
“that performs a function described in paragraph (e)(2),”
which, in turn, limits the tax credit to equipment that
“[u]ses wind energy to heat or cool, or provide hot water for
use in, a building or structure” or “[u]ses wind energy to
generate electricity.” Similarly, Treas. Reg. § 1.48-9(d)(4)
states that “[p]ipes and ducts that are used to carry both
energy derived from solar energy and energy derived from
other sources” are eligible for tax credit as solar energy
8 WESTROCK VIRGINIA CORPORATION v. UNITED STATES
property “only to the extent of their basis or cost allocable
to their use of solar energy during an annual measuring
period.” Finally, Treasury Regulation § 1.48-9(d)(8) in-
cludes examples of equipment that qualify as solar energy
property. These examples similarly reduce the cost or ba-
sis of the property according to an allocation of its uses.
Specifically, one example notes that certain equipment
that “serve the oil-fired water heater as well as the solar
energy equipment” qualify for the tax credit “only to the
extent of eighty percent of their cost or basis,” i.e. “the por-
tion allocable to use of solar energy.” Id. Thus, Treasury’s
regulations administering the investment tax credit under
IRC § 48 allocate the cost or basis similar to how Treasury
allocated the cost or basis under Section 1603 here—that
is, based on what Treasury deems are qualifying activities
under the statute.
Because Congress legislated against this regulatory
backdrop when it enacted Section 1603 and because Sec-
tion 1603 provides a cash grant in lieu of a tax credit under
IRC § 48, we conclude that Congress intended that Treas-
ury award grants under Section 1603 similar to how it has
always awarded tax credits under Section 48—i.e., by fairly
allocating the basis according to the use of that property.
See Gazelle v. Shulkin, 868 F.3d 1006, 1011 (Fed. Cir. 2017)
(“Congress ‘legislate[s] against the backdrop of existing
law.’” (citation omitted)). Indeed, in the legislative history
accompanying the Recovery Act, Congress stated that “[i]t
is intended that the grant provision mimic the operation of
the credit under section 48.” H.R. Rep. No. 111-16 at
621. Thus, as the government notes, while Congress pro-
vided another form of subsidy to owners of open-loop bio-
mass facilities when it enacted the Recovery Act—a lump
sum cash grant rather than a lump sum investment tax
credit—it did not change what it was subsidizing.
Finally, our interpretation finds support in the legisla-
tive history. A conference report accompanying the Act ex-
plains, when discussing the relevant portion of Section
WESTROCK VIRGINIA CORPORATION v. UNITED STATES 9
1603, that the statute provides for a grant payment for
property that is “an electricity producing facility.” H.R.
Rep. No. 111-16, at 620–21 (Feb. 12, 2009) (Conf. Rep.). It
further states that:
An income tax credit is allowed for the production
of electricity from qualified energy resources at
qualified facilities (the “renewable electricity pro-
duction credit”). Qualified energy resources com-
prise . . . open-loop biomass . . . . Qualified facilities
are, generally, facilities that generate electricity us-
ing qualified energy resources.
Id. at 620 (emphasis added). These statements from the
legislative history illuminate Congress’s intent when en-
acting the statute. Specifically, they demonstrate that
Congress intended to promote the use of clean energy re-
sources for the production of electricity. This is consistent
with the plain text of the statute and lends further support
to the government’s reading.
WestRock argues that, while the statute establishes
that a qualified facility must use open-loop biomass to pro-
duce electricity, it does not allow Treasury to allocate cost
based on the percentage of steam used to actually produce
electricity. According to WestRock, once it has been estab-
lished that the qualified property uses biomass to produce
electricity, Treasury must blindly reimburse WestRock for
30 percent of the total cost of that property. We disagree.
Not only does this read out the phrase “integral part” from
the Internal Revenue Code, it also produces an absurd re-
sult. Under WestRock’s reading of the statute, any owner
that uses its property to produce even a small amount of
electricity would be reimbursed for 30 percent of the cost of
that property even if the property is in large part used for
purposes entirely unrelated to the production of electricity.
This is not the result Congress intended when it enacted
Section 1603. See Griffin v. Oceanic Contractors, Inc., 458
U.S. 564, 575 (1982) (“[I]nterpretations of a statute which
10 WESTROCK VIRGINIA CORPORATION v. UNITED STATES
would produce absurd results are to be avoided if alterna-
tive interpretations consistent with the legislative purpose
are available.”).
Finally, WestRock contends that the Claims Court
erred when it relied on Treasury guidance and Skidmore
deference to uphold Treasury’s grant amount. Because we
conclude that Treasury’s grant amount is consistent with
Section 1603 based on an unambiguous reading of the stat-
ute, we need not resort to agency deference, and thus, need
not reach WestRock’s argument.
CONCLUSION
For the reasons stated above, we affirm the Claims
Court’s conclusion that the amount of Treasury’s grant
award was consistent with Section 1603.
AFFIRMED
COSTS
No costs.