Can You Spin Garbage Into Gold?

I guess I’ll spoil the post:

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.

So begins the Appeals Court decision of Green Gas Delaware Statutory Trust v. Commissioner, a decision of the US Court of Appeals for the District of Columbia. The case involves tax credits for production of landfill gas (the since repealed Section 45K credits). Three entities, all related, with the parent company having the wonderful name Rumpelstiltskin, Inc. (and no, we didn’t make this up) took these tax credits worth $11.7 million while having $4.5 million in income. The IRS audited these returns, and allowed only $586,000 of tax credits. The IRS also turned the entities’ business expenses from gold into straw, disallowing most of them, and threw in a 20% accuracy penalty. The Tax Court upheld the IRS, and the entities appealed that decision.

So where did the tax credits come from?

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…[footnote:] It is, perhaps, no coincidence that some of the intermediary 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.

The first problem Rumpelstiltskin had is that the tax credits were designed for production of alternative energy, not venting (or burning) landfill gas. The second problem was that Rumpelstiltskin didn’t keep good records. Seriously, something we tell all clients is that if you keep good records an audit is an annoyance; if you don’t keep good records, an audit will be a very painful and expensive annoyance. And so it was here. Rumpelstiltskin tried to blame two deceased employees who kept 85% of the business logs; however, not only did the Tax Court find the logs (that were produced) unreliable the Court of Appeals asked the obvious question: “…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.”

Rumpelstiltskin also tried to get the IRS’s rejection of business expenses reversed by the Court of Appeals. An excerpt from the Court of Appeals:

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. And it held that the appellants could not claim legal-fee deductions because there was no evidence that any legal work benefited the appellants. Finally, it disallowed various miscellaneous expenses, except to the extent that the appellants could corroborate them with documentation. [citations omitted]

It does help if you are claiming an expense that you actually incur that expense….

There are two serious conclusions that can be drawn from this case. First, where there are tax credits there will be schemers trying to get money from them when it’s undeserved. “It’s free money,” they think. Second, document, document, and document some more. If you keep good records…but I said that above. In any case, as Chief Judge Merrick Garland wrote (who, like me, is a native of Lincolnwood, Illinois), the decision of the Tax Court is affirmed.

Case: Green Gas Delaware Statutory Trust v. Commissioner

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