Blue Mountain Energy v. United States of America

Second MOTION for Summary Judgment

D. UtahJanuary 30, 2017

-1 JENNIFER Y. GOLDEN (pro hac vice) RICK WATSON (pro hac vice) Trial Attorneys, Tax Division U.S. Department of Justice P.O. Box 683, Ben Franklin Station Washington, D.C. 20044-0683 Tel: (202) 307-6547 Jennifer.Y.Golden@usdoj.gov Attorneys for the United States of America JOHN W. HUBER (#7226) United States Attorney Of Counsel IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF UTAH, CENTRAL DIVISION BLUE MOUNTAIN ENERGY, INC., ) ) Plaintiff, ) Civil No 2:14-cv-418-DN v. ) ) UNITED STATES’ SECOND UNITED STATES OF AMERICA, ) MOTION FOR SUMMARY ) JUDGMENT ) Defendant. ) Judge David Nuffer ) Introduction The United States of America, through undersigned counsel and pursuant to Fed. R. Civ. P. 56, moves this Court for summary judgment against Plaintiff Blue Mountain Energy, Inc. (“BME”) on the sole remaining issue in this case – whether BME is subject to an accuracy- related penalty under 26 U.S.C. (“IRC”) § 6662(b) based on its improper use of an artificial constructive price, rather than the transfer price set by its parent company, in calculating coal excise taxes. As demonstrated below, BME was negligent, and disregarded clearly applicable Case 2:14-cv-00418-DN Document 67 Filed 01/30/17 Page 1 of 19 -2 rules and regulations, in the manner in which it originally calculated and reported the coal excise taxes. Therefore, it is subject to a 20% accuracy-related penalty for each quarter at issue in this case. Background The Black Lung Excise Tax (“BLET”), found at IRC § 4121, is used to fund the Black Lung Disability Trust Fund, which pays black lung disease benefits to coal miners and their surviving family members which are the responsibility of the federal government, as well as the overall administrative expense of processing black lung claims and administering the benefits program. Section 4121(a) imposes “on coal from mines located in the United States sold by the producer, a tax equal to the rate per ton” determined under the statute. 26 C.F.R. (“Treas. Reg.”) § 48.4121-1. The BLET for underground coal is 4.4 percent of the price of the coal per ton or $1.10 per ton, whichever is lower. IRC § 4121(a)(2), (b).1 Under certain limited circumstances, BLET may be calculated using a constructive price, rather than the actual price at which the coal is sold. IRC § 4216(b); Treas. Reg. §§ 48.4216(b)-1, (b)-2. Coal producers are required to file quarterly a Form 720, Quarterly Federal Excise Tax Return, reporting and paying their BLET liabilities. BME operates the Deserado mine, located near Rangely, Colorado. Corrected Amended Complaint (“Complaint”), ¶ 3, Dkt. #26. The coal produced by BME is used exclusively by BME’s parent corporation, Deseret Generation & Transmission Co-operative (“Deseret”) as the 1 Therefore, to the extent the price per ton of coal exceeds $25, it becomes irrelevant for BLET calculation purposes ($25 x .044 = $1.10). Case 2:14-cv-00418-DN Document 67 Filed 01/30/17 Page 2 of 19 -3 primary source of fuel for the Bonanza Power Plant in Uintah County, Utah. Id. As a producer of coal, BME filed Quarterly Federal Excise Tax Returns (Forms 720) for each of the quarters beginning with the fourth quarter of 2008 and ending with the third quarter of 2011, inclusive (“the quarters at issue”). Id. at ¶ 17. The Deserado mine is located on federally owned land, and as such is required to pay “a royalty of 8 percent on the value of the coal removed from an underground mine.” 43 C.F.R. § 3473.3-2. In November 1998, BME received permission from the Minerals Management Service (“MMS”) of the Department of the Interior to calculate these royalty payments on a value of $13.00 per ton for coal produced by the Deserado Mine, rather than the internal company transfer price. After receiving the letter from MMS, BME unilaterally determined that it would use this determination of “value” from MMS as the “price” used to calculate BLET. BME made no effort to coordinate or seek guidance from the IRS prior to making this decision. During the quarters at issue in this case, the actual price that BME received for the coal it sold to Deseret ranged between $31.04 per ton and $55.77 per ton. However, in filing the Forms 720 for each quarter, BME did not use this actual price (capped at $25.00 per ton), but rather the artificial MMS value of $13 per ton. The IRS initiated an audit of BME’s excise tax returns for the quarters at issue. During the administrative processing of the case, BME asserted that it was entitled to use a constructive sales price of between $3.50 per ton and $7.22 per ton to calculate its BLET liabilities. BME Case 2:14-cv-00418-DN Document 67 Filed 01/30/17 Page 3 of 19 -4 also asserted that even if it calculated BLET incorrectly, it was not subject to an accuracy-related penalty under IRC § 6662(b), as it had a reasonable basis for its actions. After the IRS rejected its administrative claims, BME filed this suit seeking a refund of all excise taxes paid for each quarter at issue and for all accuracy-related penalties. On August 5, 2016, the Court granted summary judgment to the United States, rejecting BME’s claims that it was entitled to use a constructive sales price rather than the actual intercompany transfer price in calculating BLET. Dkt. #60. The Court denied summary judgment to the United States on the issue of the accuracy-related penalties, based solely on BME’s assertion in its summary judgment briefing that, in using the $13.00 per ton figure for its original excise tax returns for each of the quarters at issue, it was relying on IRS Rev. Rul. 81-188. The Court subsequently granted a joint motion to reopen discovery solely on the issue of whether BME was liable for the accuracy-related penalties. Dkt. #64. This additional discovery revealed that the earliest that BME had knowledge of Rev. Rul. 81-188 was September 7, 2011. Declaration of Jennifer Y. Golden (“Golden Decl.”), Ex. 1 (submitted herewith). Accordingly, even if BME’s reliance on Rev. Rul. 81-188 was reasonable (which the United States disputes), such reliance occurred in only one of the relevant quarters in this case. BME’s actions in filing excise tax returns based on the artificial and inaccurate $13.00 per ton MMS value rather than the actual selling price demonstrate negligence and/or a disregard of clear rules and regulations to such a level that the assessment of an accuracy-related penalty under IRC § 6662(b) is proper for each of the quarters at issue. In the alternative, even if BME’s reliance on Rev. Rul. 81-188 is justified, an accuracy-related penalty is proper for each of the Case 2:14-cv-00418-DN Document 67 Filed 01/30/17 Page 4 of 19 -5 quarters at issue in this case except the third quarter of 2011, as those excise tax returns were filed before BME discovered this purported justification. I. Statement of Elements and Undisputed Material Facts Legal Element 1: The IRS’ determination of tax deficiencies is presumed correct, and the taxpayer bears the burden of proving that the deficiency is invalid. Welch v. Helvering, 290 U.S. 111, 115 (1933); Lewis v. Reynolds, 284 U.S. 281 (1932); Esgar Corp. v. Comm’r, 744 F.3d 648, 653 (10th Cir. 2014). Legal Element 2: Section § 4121(a) of the U.S. Tax Code (26 U.S.C.) imposes “on coal from mines located in the United States sold by the producer, a tax equal to the rate per ton” determined under the statute. IRC § 4121(a). Legal Element 3: The excise tax imposed by IRC § 4121 for underground coal is 4.4 percent of the price of the coal per ton or $1.10 per ton, whichever is lower. IRC § 4121(a)(2), (b). Legal Element 4: The term price “includes the total consideration paid for the article, whether that consideration is in the form of money, services, or other things.” Treas. Reg. § 48.4216(a)-1(a). 1. BME is the wholly owned subsidiary of Deseret. Complaint, ¶ 3. 2. BME owns and operates the Deserado mine near Rangely, Colorado. Id. 3. The coal produced by the Deserado mine is used exclusively by Deseret as fuel for the Bonanza power plant located in Uintah County, Utah. Id. Case 2:14-cv-00418-DN Document 67 Filed 01/30/17 Page 5 of 19 -6 4. During the periods at issue, the Bonanza power plant’s sole source of coal was the Deserado mine. Id. 5. For each quarter beginning with the fourth quarter of 2008 and ending with the third quarter of 2011, BME, as required by all coal producers, filed Forms 720, Quarterly Federal Excise Tax Returns. Declaration of Ellie O’Neil (“O’Neil Decl.”), ¶ 2 (filed as Dkt. #32-1, with United States’ Motion for Summary Judgment). 6. For the fourth quarter of 2008, Deseret paid BME an average price of $36.99 per ton for coal delivered to the Bonanza power plant. O’Neil Decl., ¶ 8. 7. For the year 2008, BME reported on its federal corporate income tax return an average price per ton for coal sold to Deseret of $37.09. O’Neil Decl., ¶ 9. 8. For the year 2008, Deseret reported under penalty of perjury to the Energy Information Administration (EIA) that it paid an average price of $38.16 per ton for coal purchased from BME for use in the Bonanza power plant. Declaration of Rick Watson (“Watson Decl.”), ¶ 5 (filed as Dkt. #32-3, with United States Motion for Summary Judgment). 9. For the year 2008, Deseret reported to the Federal Energy Regulatory Commission (“FERC”) that it paid an average of $41.25 per ton for coal purchased from BME to operate the Bonanza power plant. Watson Decl., ¶ 2. 10. For the year 2009, Deseret paid BME an average price per quarter between $31.04 per ton and $41.40 per ton for coal delivered to the Bonanza power plant. O’Neil Decl., ¶ 10. Case 2:14-cv-00418-DN Document 67 Filed 01/30/17 Page 6 of 19 -7 11. For the year 2009, BME reported on its federal corporate income tax return an average price per ton for coal sold to Deseret of $33.23. O’Neil Decl., ¶ 11. 12. For the year 2009, Deseret reported under penalty of perjury to the EIA that it paid an average price per quarter of between $33.83 and $34.67 per ton for coal purchased from BME for use in the Bonanza power plant. Watson Decl., ¶ 5. 13. For the year 2009, Deseret reported to FERC that it paid an average of $39.00 per ton for coal purchased from BME to operate the Bonanza power plant. Watson Decl., ¶ 2. 14. For the year 2010, Deseret paid BME an average price per quarter between $43.91 per ton and $55.77 per ton for coal delivered to the Bonanza power plant. O’Neil Decl., ¶ 12. 15. For the year 2010, Deseret reported under penalty of perjury to the EIA that it paid an average price per quarter of between $44.60 and $45.65 per ton for coal purchased from BME for use in the Bonanza power plant. Watson Decl., ¶ 5. 16. For the year 2010, Deseret reported to FERC that it paid an average of $46.90 per ton for coal purchased from BME to operate the Bonanza power plant. Watson Decl., ¶ 2. 17. For the year 2011, Deseret paid BME an average price of $38.84 per ton for coal delivered to the Bonanza Power Plant. Watson Decl., ¶ 6. 18. For the year 2011, Deseret reported under penalty of perjury to the EIA that it paid an average price per quarter of between $44.46 and $45.76 per ton for coal delivered to the Bonanza Power Plant. Watson Decl., ¶ 5. Case 2:14-cv-00418-DN Document 67 Filed 01/30/17 Page 7 of 19 -8 19. For the year 2011, Deseret reported to FERC that it paid an average of $48.47 per ton for coal purchased from BME to operate the Bonanza power plant. Watson Decl., ¶ 2. Legal Element 5: Section 6662(b) of the Internal Revenue Code imposes an accuracy-related penalty of 20% on tax understatements resulting from negligence and/or disregard of rules and regulations. IRC § 6662(b). 20. The Deserado mine is located on federally owned land, and as such is required to pay “a royalty of 8 percent on the value of the coal removed from an underground mine.” 43 C.F.R. § 3473.3-2. 21. On or about November 3, 1998, BME received approval from MMS to use a value of $13.00 per ton to calculate royalty payments due on the coal produced by the Deserado mine. O’Neil Decl., ¶ 3. 22. For each quarter beginning with the fourth quarter of 2008 and ending with the third quarter of 2011, BME filed Forms 720, Quarterly Federal Excise Tax Returns, using the artificial MMS value of $13.00 per ton rather than the actual selling price of the coal to Deseret. O’Neil Decl., ¶ 4. 23. BME made no efforts to coordinate or confirm with the IRS that it was proper to use the artificial MMS value of $13.00 per ton rather than the actual selling price of the coal. O’Neil Decl., ¶ 5. 24. BME’s reliance on Revenue Ruling (“Rev. Rul.”) 81-188 began, at the earliest, in September 2011.2 Golden Decl., Ex. 1 (submitted herewith). 2 Although BME’s interrogatory response claims it “became aware of” Rev. Rul. 81-188 “at least as early Case 2:14-cv-00418-DN Document 67 Filed 01/30/17 Page 8 of 19 -9 Legal Element 6: Each tax period “is the origin of a new liability and a separate cause of action.” Comm’r v. Sunnen, 333 U.S. 591, 598-99 (1948). II. Law and Argument A. Summary Judgment Standard Summary judgment is proper “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 a judgment as a matter of law.” Fed. R. Civ. P. 56(c); accord Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-250 (1986); Nelson v. Geringer, 295 F.3d 1082, 1086 (10th Cir. 2002); Russillo v. Scarborough, 935 F.2d 1167, 1170 (10th Cir. 1991). The party moving for summary judgment has the initial burden of showing the absence of a genuine issue of material fact. See Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986); Viktus v. Beatrice Co., 11 F.3d 1535, 1539 (10th Cir. 1993). Once the movant’s burden is met by producing evidence which, if uncontroverted, would entitle the movant to judgment as a matter of law, the burden then shifts to the nonmoving party to demonstrate that there are genuine issues for trial. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986); Viktus, 11 F.3d at 1539. An issue of material fact is genuine where a reasonable jury could return a verdict for the party opposing summary judgment. Seymour v. Shawver & Sons, Inc., 111 F.3d 794, 797 (10th Cir. 1997). Conclusory allegations unsupported by specific factual data as September of 2011,” BME has presented no evidence to support awareness prior to September 2011. As proof of reliance, BME attached only one document: a September 7, 2011 meeting agenda. Golden Decl., Ex. 1. Case 2:14-cv-00418-DN Document 67 Filed 01/30/17 Page 9 of 19 -10 are insufficient to create a triable issue of fact so as to preclude summary judgment. See L & M Enters., Inc. v. BEI Sensors & Sys. Co., 231 F.3d 1284, 1287 (10th Cir. 2000); White v. York Int’l Corp., 45 F.3d 357, 360 (10th Cir. 1995). As demonstrated below, the undisputed facts of this case establish that, under this standard, the United States is entitled to summary judgment on the final issue in this case. B. BME is Subject to an Accuracy-Related Penalty under 26 U.S.C. § 6662(b). Section 6662(b)(1) imposes an accuracy-related penalty of 20% on any underpayment of taxes attributable to negligence or disregard of rules and regulations. 26 U.S.C. § 6662(b)(1). Negligence is defined by Treas. Reg. § 1.6662-3(b)(1) as “any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws or to exercise ordinary and reasonable care in the preparation of a tax return.” The IRS’s determination of negligence is presumed correct, and the taxpayer has the burden of proving it wrong. Van Scoten v. Comm’r, 439 F.3d 1243, 1252 (10th Cir. 2006) (quoting Anderson v. Comm’r, 62 F.3d 1266, 1271 (10th Cir. 1995); see also Neonatology Associates PA v. Comm’r, 299 F.3d 221, 233 (3d Cir. 2002) (and cases cited therein).3 That same regulation clarifies that the term “disregard of rules or regulations” includes: Any careless, reckless or intentional disregard of rules or regulations. The term “rules or regulations includes the provisions of the Internal Revenue Code [and] temporary or final Treasury regulations issued under the Code . . . . A disregard of rules or regulations is “careless” if the taxpayer does not exercise reasonable diligence to determine the correctness of a return position that is contrary to the rule or regulation. A disregard is “reckless” if the taxpayer makes little or no effort to determine whether a rule or regulation exists, under circumstances which demonstrate a substantial deviation from the 3 The United States notes that the burden shifting provision related to penalties assessed against individuals contained in 26 U.S.C. § 7491(c) is not applicable here, as BME is a corporation. NT, Inc. v. Comm’r, 126 T.C. 191, 195 (2006). Case 2:14-cv-00418-DN Document 67 Filed 01/30/17 Page 10 of 19 -11 standard of conduct that a reasonable person would observe. A disregard is “intentional” if the taxpayer knows of the rule or regulation that is disregarded. Treas. Reg. §1.6662-3(b)(2); Barrett v. United States, 561 F.3d 1140, 1147 (10th Cir. 2009). BME is liable for the accuracy-related penalty assessed by the IRS, as its conduct was both negligent and ignored clearly applicable rules and regulations. As demonstrated in the United States’ Motion for Summary Judgment (Dkt. #32) and the Court’s August 5, 2016 Order thereon (Dkt. #60), a plain-language reading of IRC § 4216(b)(1) and Treas. Reg. §§ 48.4216(b)- 1 and (b)-2 leads to the inescapable conclusion that the constructive price rules are not applicable to the sales of coal from BME to Deseret, as those sales were non-arm’s length sales equal to or above what BME contended was the fair market price of the coal. Despite this clear guidance, BME unilaterally decided to report the MMS value of $13.00 per ton on the excise tax returns rather than the actual price Deseret paid for the coal. The Ninth Circuit found that similar conduct justified the imposition of the accuracy- related negligence penalty under 26 U.S.C. § 6662(b)(1). In Van Camp & Bennion v. United States, 251 F.3d 862 (9th Cir. 2001), the court addressed the section 6662 negligence penalty in the context of a corporation’s classification of an attorney as an independent contractor rather than an employee. The court there found that “[T]he legal standards to determine whether an officer is an employee were clear; the only question was whether [the attorney] met the standard.” Id. at 869. The court went on to find that the corporation’s mischaracterization of the officer despite clear guidance to the contrary subjected them to the negligence penalty. The same analysis is applicable here. The law setting out the narrow circumstances that permit the use of a constructive price rather than the actual sales price is clear. BME chose to Case 2:14-cv-00418-DN Document 67 Filed 01/30/17 Page 11 of 19 -12 ignore that law, and instead pay BLET based on another federal agency’s determination of the “value” of the coal for a completely unrelated purpose (as opposed to the Internal Revenue Code’s specification of the use of price). BME and Deseret, large corporate entities, had the ability and expertise available to make the correct choice as to the price upon which BLET should be calculated. Their decision to make the wrong choice at least rises to the level found to constitute negligence in Van Camp. BME is also liable for the accuracy-related penalty based on its decision to ignore the Internal Revenue Code and long standing Treasury regulations in making its specious BLET filings. As discussed above, the term “disregard” includes any careless, reckless or intentional disregard of rules or regulations. Treas. Reg. §1.6662-3(b)(2). As those terms are further explained by the regulation, BME intentionally disregarded applicable rules and regulations regarding computing excise taxes. Even if this is not found to be the case, the disregard is reckless, or at a minimum, careless. A disregard is intentional if a taxpayer knows the rule or regulation that is disregarded. Id. BME clearly was aware of the requirements of 26 U.S.C. §§ 4121 and 4216(b)(1) and Treas. Reg. §§ 48.4216(b)-1 and (b)-2. It relies on those authorities in its Complaint, and refers to them in its response to the United States’ Interrogatory No. 1. Complaint (Dkt. #26), ¶¶ 7-21; Golden Decl., Ex. 1. Despite this awareness, BME chose to use an artificial MMS value to calculate BLET. As the Court has held, a plain reading of § 4216 and the regulations thereunder shows that the constructive price rules do not apply to the sales of coal from BME to Deseret. Dkt. #60. Thus, BME’s disregard was intentional, and the accuracy-related penalty is appropriate. Case 2:14-cv-00418-DN Document 67 Filed 01/30/17 Page 12 of 19 -13 Even if BME can show that when it filed the excise tax returns it did not know that the use of the MMS value rather than the actual selling price was wrong, the accuracy-related penalty is still appropriate as its conduct was reckless. A disregard is reckless if the taxpayer makes little or no attempt to determine whether a rule or regulation exists, under circumstances where a reasonable person would make such an attempt. Treas. Reg. §1.6662-3(b)(2). If BME was not aware of the rules regarding the use of constructive price versus actual price in the BLET calculation, it should have made determined efforts to discover what the rules were. That is what a reasonable person or company would do, especially given the amount of the taxes involved. BME’s failure to do so (in the unlikely event it can prove lack of actual knowledge) constitutes reckless conduct subject to the accuracy-related penalty of 26 U.S.C. § 6662(b). Further, should the Court determine that BME’s disregard of clear statutes and regulations was neither intentional nor reckless, it was at a minimum careless. A disregard is careless if the taxpayer does not exercise reasonable diligence to determine the correctness of a return position that is contrary to the rule or regulation. Id. Again, if BME can demonstrate conclusively that it was not aware of the inapplicability of constructive price rules in this context, the exercise of reasonable diligence would have led to the quick discovery that the position it was taking on its excise tax returns was not supported by statute, regulation, or case law. The failure by BME to exercise such reasonable diligence is a proper basis to assess the accuracy- related penalty of 26 U.S.C. § 6662(b). Therefore, BME will not be able to overcome the presumption that the accuracy-related penalty under 26 U.S.C. § 6662(b) was properly assessed by the IRS, and the United States is entitled to summary judgment on this point. Case 2:14-cv-00418-DN Document 67 Filed 01/30/17 Page 13 of 19 -14 C. BME Had No Reasonable Basis for Its Return Position. As the Court has noted, a taxpayer is not liable for an accuracy-related penalty under IRC § 6662(b)(1) if it had a “reasonable basis” for its return position. Treas. Reg. § 1.6662-3(b)(1). Reasonable basis is “a relatively high standard of tax reporting, that is, significantly higher than not frivolous or not patently improper.” Treas. Reg. § 1.6662-3(b)(3). It is not satisfied by “a return position that is merely arguable or that is merely a colorable claim.” Id. If a return position is reasonably based on one or more of the authorities set forth in Treas. Reg. § 1.6662- 4(d)(3)(iii), “taking into account the relevance and persuasiveness of the authorities, and subsequent developments,” then it will generally satisfy the reasonable basis standard. Id. In its summary judgment briefing, BME relied heavily on an assertion that in Rev. Rul. 81-188, and despite the explicit language of the regulation to the contrary, the IRS interpreted the constructive price rules set out in Treas. Reg. §§ 48.4216(b)-1 and 48.4216(b)-2(b) as applicable to a completely non-arm’s length transaction. Dkt. #46 at 25-29. However, that is simply not the case. BME also relied on its own reading of 26 U.S.C. § 4216(b) – a position that the Court has now discredited. Dkt. #60. Thus, BME fails to present any legal support that would constitute a reasonable basis for its use of the MMS value to calculate BLET. 1. Revenue Ruling 81-188 Is Not Applicable Here. The applicability of IRS Revenue Rulings, like court cases, is “directly responsive to and limited in scope by the pivotal facts stated in the revenue ruling.” Treas. Reg. §601.601(d)(2)(v)(a). Revenue Ruling 81-188 is based on a scenario in which a wholly owned subsidiary buys the items in question not only from its parent corporation, but also buys identical Case 2:14-cv-00418-DN Document 67 Filed 01/30/17 Page 14 of 19 -15 items from other manufacturers at the same price. Under the undisputed facts of this case, the coal produced by BME is sold only to its parent, Deseret Power, and Deseret Power buys only from the subsidiary. On this basis alone it is clear that Rev. Rul. 81-188 is not applicable. Further, and despite assertions from BME to the contrary, context matters. Revenue Ruling 81-188 interprets a now repealed excise tax statute, IRC § 4061. Unlike the BLET statute, that provision established an excise tax floor. Revenue Ruling 81-188 was not issued as a broad statement of the applicability of the constructive price rules. Instead, it was issued to address the specific questions raised by this fairly unusual excise tax regime. See General Counsel Memo 38430, 1980 WL 131444 (previously filed at Dkt. #49-1, submitted with U.S. Summary Judgment Reply Brief) (commenting on Rev. Rul. 81-188 prior to its publication). Therefore, the ruling is limited to cases arising under that provision. That conclusion is buttressed by three facts. First, the act which repealed IRC § 4061 specifically deleted from IRC § 4216(b) provisions that were related to § 4061. See Pub. L. 98-369. Second, Rev. Rul. 86-122, the only subsequent revenue ruling to mention Rev. Rul. 81-188, states that it “concerned the now repealed manufacturer’s excise tax on automotive chassis and bodies.” Rev. Rul. 86-122, 1986-2 C.B. 179 (previously filed at Dkt. #49-2, submitted with U.S. Summary Judgment Reply Brief). Revenue Ruling 86-122 goes on to explain “[Rev. Rul. 81-188] held that where a manufacturer regularly sold an article at retail in arm’s length as well as non-arm’s length retail sales, the retail fair market price of the article was the lowest price at which the manufacturer regularly sold the article in the retail arm’s length sales.” Again, that is not the scenario present in this case. Finally, on at least one occasion, the IRS has issued guidance to taxpayers applying Case 2:14-cv-00418-DN Document 67 Filed 01/30/17 Page 15 of 19 -16 the regulatory requirement that constructive price rules in the retail sales context are limited to arm’s length transactions. See Private Letter Ruling 200018049, 2000 WL 1939471 (previously filed at Dkt. #49-3, submitted with U.S. Summary Judgment Reply Brief). Any reliance on Rev. Rul. 81-188 must take into account its relevance and persuasiveness, and subsequent developments. As explained, the revenue ruling’s markedly different fact pattern and analysis of a repealed statute, not to mention its general limited applicability and later IRS guidance, indicate that BME’s reliance was not reasonable. Accordingly, Rev. Rul. 81-188 does not support BME’s legal position in this case, and cannot serve as a “reasonable basis” for its return position. At best BME’s return position is “merely arguable” or “merely a colorable claim,” which is insufficient to avoid penalties. 2. BME Cites No Other Authorities that Could Provide a Reasonable Basis. In summary judgment briefing, BME claimed that in addition to Rev. Rul. 81-188, it relied on the “plain language” of 26 U.S.C. § 4216(b)(1)(A). Dkt. #46 at 28. However, the Court held that the plain language of the statute actually supports the United States’ position: that the constructive price rules in § 4216(b)(1)(A) apply only to arm’s length sales at retail. Dkt. #60. As BME’s sales to Deseret were not arm’s length, § 4216(b)(1)(A) does not apply. Therefore, neither § 4216(b)(1)(A) nor the regulations thereunder can provide a “reasonable basis” for BME’s return position. BME’s response to U.S. Interrogatory No. 1 also mentions the “Audit Technique Guide for Coal Excise Tax, Internal Revenue Service (May 2005),” which was not cited in prior summary judgment briefing. Golden Decl., Ex. 1. BME appears to be referring to the document Case 2:14-cv-00418-DN Document 67 Filed 01/30/17 Page 16 of 19 -17 publicly available here: https://www.irs.gov/businesses/small-businesses-self-employed/coal- excise-tax-table-of-contents. An Audit Technique Guide, however, does not qualify as an “authority.” Only authorities listed in Treas. Reg. § 1.6662-4(d)(3)(iii) qualify for purposes of the reasonable basis exception. Treas. Reg. § 1.6662-3(b)(3). Audit Technique Guides are not explicitly listed in § 1.6662-4(d)(3)(iii), nor are they published in the Internal Revenue Bulletin. See Treas. Reg. § 1.6662-4(d)(3)(iii) (providing catchall category for “other administrative pronouncements published by the Service in the Internal Revenue Bulletin”). Rather, Audit Technique Guides are internal guidance for IRS staff, and are merely made public as required by the Freedom of Information Act (FOIA). They are not intended for the public to rely on, and they do not confer any substantive rights.4 Thus, an Audit Technique Guide cannot provide a “reasonable basis” for BME’s return position. As BME presents no qualifying legal support for its erroneous conclusion that the constructive price rules can be applied in non-arm’s length retail sales, the United States’ should be granted summary judgment on the accuracy-related penalties in this case. 3. Even if the Court Finds BME’s Reliance on Rev. Rul. 81-188 Reasonable, BME Can at Most Avoid Penalties for One Quarter at Issue. Even if the Court were to determine that BME’s reliance on Rev. Rul. 81-188 was reasonable, that reliance did not begin before September 2011. Statement of Elements and 4 Indeed, the Audit Technique Guide for Coal Excise Tax supports the holding that the constructive price rules do not apply to BME. It states: “If the coal was purchased from a related company at less than fair market value, then IRC section 4216(b), dealing with constructive sales price, should be used. The general rule, when inter-company sales are not arm’s-length transactions, is that the fair market price is held to be the price received by the company that finally sold to an unrelated company. (Inecto. Inc., 37-2 U.S.T.C. para. 9554, 21 F.Supp. 418.)” Ch. 2, Issue 4. This confirms that the general rule is to use the actual sale price, but constructive price rules apply when a sale is either (1) arm’s length at retail, or (2) not arm’s length and below fair market value (neither of which is the situation here). See Dkt. #60 at 7-9. Case 2:14-cv-00418-DN Document 67 Filed 01/30/17 Page 17 of 19 -18 Undisputed Material Facts, # 24. Thus, such reliance would only be applicable to one quarter at issue in this case: the third quarter of 2011. As BME has not provided any other qualifying legal support for its position that it was entitled to use the MMS price per ton to calculate its BLET, the United States would still be entitled to summary judgment for each of the other quarters at issue in this case. III. Conclusion For the reasons set out above, the United States is entitled to summary judgment in this case. DATED this 30th day of January, 2017. Respectfully submitted, /s/ Jennifer Y. Golden JENNIFER Y. GOLDEN (pro hac vice) RICK WATSON (pro hac vice) Trial Attorneys, Tax Division U.S. Department of Justice P.O. Box 683, Ben Franklin Station Washington, D.C. 20044-0683 Telephone: (202) 307-6547 Jennifer.Y.Golden@usdoj.gov Attorneys for the United States of America JOHN W. HUBER (#7226) United States Attorney Of Counsel Case 2:14-cv-00418-DN Document 67 Filed 01/30/17 Page 18 of 19 -19 CERTIFICATE OF SERVICE It is hereby certified that service of the foregoing was effected on January 30, 2017, by filing a copy of that document with the Court’s electronic filing system, which effected service on the following: Phillip J. Russell Hatch, James & Dodge 10 West Broadway, Suite 400 Salt Lake City, Utah 84101 Counsel for Plaintiff /s/ Jennifer Y. Golden JENNIFER Y. GOLDEN Trial Attorney, Tax Division U.S. Department of Justice Case 2:14-cv-00418-DN Document 67 Filed 01/30/17 Page 19 of 19 -1 JENNIFER Y. GOLDEN (pro hac vice) RICK WATSON (pro hac vice) Trial Attorneys, Tax Division U.S. Department of Justice P.O. Box 683, Ben Franklin Station Washington, D.C. 20044-0683 Tel: (202) 307-6547 Jennifer.Y.Golden@usdoj.gov Attorneys for the United States of America JOHN W. HUBER (#7226) United States Attorney Of Counsel IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF UTAH, CENTRAL DIVISION BLUE MOUNTAIN ENERGY, INC., ) ) Plaintiff, ) Civil No 2:14-cv-418-DN v. ) ) DECLARATION OF JENNIFER Y. UNITED STATES OF AMERICA, ) GOLDEN ) ) Judge David Nuffer Defendant. ) ) I, Jennifer Y. Golden, pursuant to 28 U.S.C. § 1746, hereby declare that: 1. I am a trial attorney with the United States Department of Justice, Tax Division located in Washington, D.C. I have been assigned as a representative of the United States in the litigation of the above-captioned matter. As part of my duties, I have been provided files by the IRS concerning the above-captioned matter. I have also received documents from the plaintiff, and researched publically available information. 2. Attached as Exhibit 1 to this Declaration is a true and correct copy of Blue Mountain Case 2:14-cv-00418-DN Document 67-1 Filed 01/30/17 Page 1 of 2 -2 Energy, Inc.’s Response to the United States’ First Interrogatory to Plaintiff. I declare under penalty of perjury that the foregoing is true and correct. Executed on January 30, 2017 /s/ Jennifer Y. Golden JENNIFER Y. GOLDEN Trial Attorney, Tax Division U.S. Department of Justice Case 2:14-cv-00418-DN Document 67-1 Filed 01/30/17 Page 2 of 2 Gary A. Dodge (0897) Phillip J. Russell (10445) Hatch, James & Dodge, P.C. 10 West Broadway, Suite 400 Salt Lake City, Utah 84101 Telephone: (801) 363-6363 Facsimile: (801) 363-6666 Email: gdodge@hjdlaw.com prussell@hjdlaw.com Attorneys for Plaintiff Blue Mountain Energy, Inc. IN THE UNITED STATES DISTRICT COURT DISTRICT OF UTAH, CENTRAL DIVISION BLUE MOUNTAIN ENERGY, INC., Plaintiff, v. UNITED STATES OF AMERICA, Defendant. BLUE MOUNTAIN ENERGY, INC.’S RESPONSE TO UNITED STATES’ FIRST INTERROGATORY TO PLAINTIFF Case No. 2:14-cv-418 DN Judge David Nuffer Plaintiff Blue Mountain Energy, Inc. (“BME”), in accordance with and pursuant to Federal Rules of Civil Procedure 26 and 33, hereby responds to United States’ First Interrogatory to Plaintiff. GENERAL OBJECTIONS General Objection No. 1. BME objects to the Interrogatory, including the “Definitions” and “Instructions” to the extent it purports to impose requirements or obligations in excess of, inconsistent with, or beyond those imposed by the Federal Rules of Civil Procedure. General Objection No. 2. BME objects to the Interrogatory to the extent it seeks information or documents protected by the attorney-client privilege, the work product doctrine, Case 2:14-cv-00418-DN Document 67-2 Filed 01/30/17 Page 1 of 7 2 trial preparation materials, or any other valid privilege. Such responses as may hereafter be given shall not include any information or documents protected by such privileges, doctrines, statutes or rules, and inadvertent disclosure of such information or documents shall not be deemed a waiver of any such privilege, protection or confidentiality. General Objection No. 3: BME objects to the Interrogatory to the extent it seeks information or documents that contain confidential or personally identifiable information, the disclosure of which, in the absence of an adequate protective order, will harm BME. Such responses as may hereafter be given shall not include any confidential or personally identifiable information or documents, and inadvertent disclosure of such information or documents shall not be deemed a waiver of confidentiality. General Objection No. 4: BME objects to the Interrogatory to the extent it requires the production of documents that have previously been produced to the IRS or USA, are publicly available, more readily available from other parties, or otherwise equally available to USA, because the identification, collection and production of such information or documents would impose an undue and unnecessary burden on BME. General Objection No. 5: The general objections above, whether or not any additional objections are separately set forth in response to the Interrogatory below, are hereby expressly incorporated into each response. By asserting additional objections, BME does not in any way waive any of the foregoing general objections, but on the contrary, preserves and intends to preserve them. Without limitation of any kind upon the foregoing objections, and without waiving them, BME provides the following responses: Case 2:14-cv-00418-DN Document 67-2 Filed 01/30/17 Page 2 of 7 3 RESPONSE TO INTERROGATORY INTERROGATORY NO. 1: To the extent that you contend you relied on Revenue Ruling 81-188 to support your position as to the proper price of coal to use when calculating tax liabilities reflected on Quarterly Excise Tax Returns (Forms 720) filed by you for any of the quarters between the first quarter of 2008 and the fourth quarter of 2012, inclusive, please state every fact and identify every document that supports this contention. RESPONSE: BME objects to the Interrogatory to the extent that it seeks information that is not relevant to this matter. The tax quarters at issue in this case are the fourth quarter of 2008, all four quarters of 2009, all four quarters of 2010, and the first three quarters of 2011. Counsel for BME has communicated with USA regarding this issue and USA has indicated that it seeks information only related to the tax quarters at issue in this case. Subject to this objection and to USA’s response to BME’s inquiry, and without waiving the objection, BME provides the following response with respect to the tax quarters at issue in this matter: BME relied on its understanding of the constructive sales price rules (26 U.S.C. § 4216) when it filed each of its Quarterly Excise Tax Returns at issue in this case. This understanding was influenced by various factors, including the following: the language of 26 U.S.C. § 4216, the language of Treas. Reg. § 48.4216(b)-1 and -2, the language of Treas. Reg. § 48.4212-1, and the Audit Technique Guide for Coal Excise Tax, Internal Revenue Service (May 2005). In addition, BME became aware of Revenue Ruling 81-188 at least as early as September of 2011, and relied on it in filing Quarterly Excise Tax Returns and amended returns, at the latest from that date forward. Attached hereto as Exhibit A is a copy of a preliminary agenda prepared by and circulated among BME accounting personnel who were personally involved in preparing and Case 2:14-cv-00418-DN Document 67-2 Filed 01/30/17 Page 3 of 7 4 reviewing BME Quarterly Excise Tax Returns. The preliminary agenda was prepared in anticipation of meeting with IRS Audit personnel on the Excise Tax audit. The agenda was prepared no later than September 7, 2011 and lists, among the legal authorities relied upon by BME in asserting the position taken in its Quarterly Excise Tax Returns, Revenue Ruling 81- 188, which BME noted and discussed with IRS Personnel, thus demonstrating that BME was aware of it and relied on it at least from that date going forward. Among other documents contained in BME files, printed copies of the text of Revenue Ruling 81-188 are found in the files of those BME personnel responsible for preparing, reviewing, and/or signing the Quarterly Returns. BME asserts that those printed text versions of Revenue Ruling 81-188 were present in excise tax files maintained by such individuals beginning no later than September, 2011, further demonstrating that BME was aware of it and relied on it at least from that date going forward. Moreover, Revenue Ruling 81-188 was cited as a basis for BME’s understanding of constructive price rules in an October 25, 2011 letter to the Internal Revenue Service written by Deloitte Tax LLP on behalf of BME.1 DATED this 26th day of October, 2016. Respectfully submitted By: /s/ Phillip J. Russell Gary A. Dodge Phillip J. Russell HATCH, JAMES & DODGE, P.C. Attorneys for Plaintiff Blue Mountain Energy, Inc. 1 See ADMIN001312-15. Case 2:14-cv-00418-DN Document 67-2 Filed 01/30/17 Page 4 of 7 Case 2:14-cv-00418-DN Document 67-2 Filed 01/30/17 Page 5 of 7 6 CERTIFICATE OF SERVICE I hereby certify that on this 26th day of October, 2016, I caused a true and correct copy of the foregoing to be served upon the following by U.S. Mail, postage prepaid: Rick Watson Jennifer Golden Tax Division, United States Department of Justice P.O. Box 683 Ben Franklin Station Washington, D.C. 20044-0683 Carlie Christensen John K. Mangum United States Attorney’s Office 185 South State Street, Suite 300 Salt Lake City, UT 84111 Attorneys for Defendant/Counterclaim Plaintiff United States of America /s/ Phillip J. Russell_____________ Case 2:14-cv-00418-DN Document 67-2 Filed 01/30/17 Page 6 of 7 Case 2:14-cv-00418-DN Document 67-2 Filed 01/30/17 Page 7 of 7