Feds sue four Iowa businessmen for tax credit fraud

The lawsuit, filed in U.S. District Court for the Southern District of Iowa, paints a startling picture of how four Iowans allegedly invested a total of $250 to establish an Iowa company that quickly collected $19 million from the federal government's alternative-fuel-mixture tax credit program. Within 18 months of making that initial $250 investment, the lawsuit claims, the four men shuttered the company and paid themselves at least $10 million in company funds.

Filed by the U.S. Department of Justice at the behest of the Internal Revenue Service, the lawsuit seeks cash judgments against the four Iowans who in 2011 created the company known as Alternative Carbon Resources: James Huyser, Matthew Kinley, Kenneth Boyle and Jeffrey W. Carter.

Also named as a defendant is JWC Investments, a company that is alleged to be the alter ego of Carter and which received funds from ACR on Carter's behalf.

The lawsuit accuses the four men of forming ACR for the express purpose of claiming alternative-fuel-mixture credits. It claims ACR purchased waste that was generated as a byproduct of ethanol production, mixed that waste with a small amount of diesel fuel, then falsely informed the federal government it had sold the concoction as an alternative fuel mixture in order to qualify for the $19 million in credits.

The defendants have yet to file a response to the lawsuit.

In March 2018, the U.S. Court of Federal Claims entered a judgment against ACR in the amount of $59.3 million, an amount that represents unpaid excise taxes assessed against the improperly claimed credits, plus penalties.

In its ruling, the Court of Federal Claims held that ACR was never eligible for the credits for two reasons: The company's waste-diesel mixture was never actually used as fuel, and the mixture was never sold to anyone as fuel. That decision was later upheld on appeal.

By the time the federal government had obtained its judgment against ACR, the individual defendants "had long since emptied ACR's bank accounts, shuttered all operations, and all the defendants had personally pocketed millions in improperly claimed alternative fuel mixture credits," the lawsuit claims.

The federal government's $59.3 million judgment against ACR remains unpaid and, when combined with interest owed, the debt to American taxpayers now totals more than $70 million, according to the lawsuit. The lawsuit seeks to pierce the corporate veil at ACR and hold the individual owners responsible for the company's debt.

Feds: ACR was a sham corporation

In arguing that the four individual defendants are liable for the debts of ACR, the government alleges in the lawsuit that ACR itself was a sham corporation with no employees and no office that served no legitimate business purpose and was used primarily as a vehicle to fraudulently lay claim to credits that would personally enrich the four.

According to the lawsuit, Huyser formed and organized ACR, and served as the company's registered agent and managing member. Kinley is a certified public accountant and was an officer of ACR, while Boyle, who holds a master's degree in business administration, was an officer of ACR and acted as its secretary. Carter, who has a degree in finance, allegedly helped Huyser develop the idea to form ACR and personally served as a member of ACR while it was in operation.

Carter is also alleged to have formed JWC Investments, in which he holds a 99% interest, and he allegedly directed that any funds paid to him by ACR be passed through JWC.

$250 investment generated millions in revenue

According to federal authorities, the tax code allows individuals to claim a tax credit for "producing any alternative fuel mixture for sale or use in a trade or business of the taxpayer." During the time ACR was in business, the credits were available for the 2011 calendar year.

In early 2010, according to the lawsuit, Huyser and Carter began to investigate the feasibility of a business that would convert waste products from the production of ethanol into a mixture that would qualify as an "alternative fuel mixture." At the time, the two men each worked in Iowa industries involving waste disposal, and they had allegedly observed that there was an excessive amount of ethanol waste being produced in Iowa.

In March 2011, Huyser, Carter, Kinley, and Boyle each executed an operating agreement for the creation of ACR, which involved the men investing a combined total of just $250, the lawsuit alleges.

According to the lawsuit, ACR then began purchasing ethanol waste, also called feedstock, from a supplier. The trucking company that transported the waste added a small amount of diesel fuel to the waste to create a waste/diesel mixture, and then delivered the concoction to anaerobic digester operators. ACR allegedly paid the digester operators to take the waste-diesel mixture and deposit it into their digesters.

"While in operation during 2011," the lawsuit alleges, "ACR had one primary source of income: the millions in alternative fuel mixture credit payments it improperly claimed and received from the United States' treasury."

To claim the credits, ACR reported to the IRS that it had "sold" its waste-diesel mixture to the digester operators it was actually paying to accept the mixture. ACR then reported the volume of fuel in gallons that it was "selling," calculating the value of the credit to be 50 cents per gallon. By the end of 2011, ACR was allegedly filing weekly claims with the IRS seeking hundreds of thousands of dollars of credits at a time, according to the lawsuit.

For example, on Dec. 7, 2011, ACR claimed a credit of almost $800,000 for having transported 1.5 million gallons of its waste-diesel mixture. Such claims eventually totaled $19 million, according to the lawsuit.

Payments made even after IRS raised questions

During 2011, ACR allegedly reported $10.5 million of net operating income, and the four individual defendants paid themselves more than $6 million, the lawsuit states. In 2012, ACR reported a $215,000 net operating loss, but the defendants still collected $4 million from the company.

Court records indicate the IRS may have suspected something was wrong with ACR's tax-credit claims. In June 2011, the company received a detailed questionnaire from the IRS about its business operations and its qualifications for the credits. The lawsuit alleges Huyser forwarded a copy of the questionnaire to Boyle and Kinley, stating, "Very pointed questions! I can't imagine this is a positive event for ACR."

In August 2011, the IRS sent ACR an advisory letter stating that alternative fuel mixtures being deposited in anaerobic digester tanks were not being "used as fuel" and, therefore, weren't eligible for the credits.

Despite that finding, ACR continued to seek, and collect, millions from the U.S. Treasury, according to the federal government.