Bright prospects for growing business in Reno crushed by IRS rulings

RENO — Inventor and entrepreneur Peter Gunnerman thought his business prospects were looking pretty good back in 2013.

His new GDiesel fuel, created with a patented low-pressure, low-temperature process to make it burn cleaner than regular or biodiesel by using natural gas to change its molecular structure, was selling well with no issues.

He and his father, Rudolph, invested $15 million of the family's money to build a large-scale plant to produce GDiesel in the Tahoe-Reno Industrial Center under the company name of Advanced Refining Concepts. He was selling the fuel locally and trucking it to Southern Nevada, where Clark County was using it in its fleet including airport shuttles at McCarran International Airport.

But a Kafkaesque series of conflicting and inconsistent Internal Revenue Service rulings undermined his fledgling business. Today, the production plant is shuttered, 28 jobs have been lost and plans to expand the business to Las Vegas and beyond have stalled.

All because of what Gunnerman says is a series of inconsistent IRS rulings by three different individual auditors and what he and colleague James Brandmueller call a complete misunderstanding of the business the government agency is trying to regulate.

Gunnerman, walking through his now-moribund facility east of Reno, said the plant once thrived, running with three shifts of workers 24 hours a day, seven days a week.

Now all is silent, with one worker on site continuing to produce a few gallons of the product for testing and research.

"It's like playing a game of 'Whack-a-Mole," Gunnerman said. "One IRS auditor would give us guidance, which we followed, and then a new auditor would pop up with a different interpretation."

Sales began in 2010

Before he began selling the alternative fuel in 2010, Gunnerman registered with the Internal Revenue Service. He then began selling the fuel, both for off-road use by industries such as construction and agriculture, and on-road use for private vehicles through Northern Nevada gas stations.

"Here we have a diesel fuel alternative that burns with greater than 50 percent regulated emission reductions," he said. "And it burns at almost 100 percent reduction in smoke and odor."

Drop-in means it can be pumped in and mixed with regular or biodiesel without any complications and requires no modifications to any diesel-powered vehicle.

By August 2010, the facility was operational with a capacity of about 120,000 gallons a day. In 2011, the capacity was doubled.

"It was an easy product to sell because it was diesel but it was a lot cleaner," Gunnerman said.

From August 2010 until March 2015, when the company stopped selling the product, there were no complaints after 40 million gallons of sales.

In 2011, the company entered the contract with Clark County to use the product, which was being shipped from the Northern Nevada facility until it became cost-prohibitive to do so.

David Johnson, Clark County manager of automotive services, said he read about the product in a magazine. When he called Gunnerman to ask about it, a truck filled with GDiesel was dispatched to Southern Nevada so he could check it out firsthand.

"In most cases it significantly reduced the emissions coming out of the tailpipe," Johnson said. "The normal black smoke you see was either gone or greatly reduced. The diesel smell went away."

After extensive testing, the county negotiated a contract with the company and used the fuel in 1,700 vehicles, everything from street sweepers to fire trucks to public works vehicles to emergency generators. It was used in airport shuttles at McCarran.

"We burned over 3 million gallons in three years without a problem," Johnson said. "In my opinion, it is a lot better than biodiesel. We had no breakdowns and there was no fuel degradation."

Plans for new facility

Trucking the fuel south proved logistically uneconomical, however. That's why Gunnnerman planned to build a new production plant in Southern Nevada.

"So we had a pretty good universe," Gunnerman said. "Then the IRS showed up."

When the company began its sales, it had to obtain registrations from the IRS that dictated how the fuel was sold and how the company dealt with excise taxes.

The company bought diesel and paid the approximately 24 cents per gallon in taxes; when sold on-road, the taxes were recovered. But half the business was to off-road users in construction and agriculture. So heeding the IRS agent's advice, GDiesel sold off-road was dyed red. The company kept track of each quarter's off-road sales and was reimbursed for the excise taxes from the IRS.

But in late summer of 2013, a new IRS auditor arrived and reviewed the company's process for paying and receiving credits for the excise taxes. In spring 2014, he told the company that the past revenue agent erred by allowing the dying the fuel and keeping track of off-road sales for reimbursement. No more off-road sales would be allowed without expensive infrastructure changes to the facility, so the company instantly lost half of its business.

Gunnerman said the new agent decided the company was actually a "blender of alternative fuels." Therefore, the company could receive a subsidy of 5 cents a gallon for on-road, commercial sales. But off-road sales would not be allowed despite the previous IRS auditor's advice.

The company decided to proceed under the new IRS advice pending approval of legislation in Congress.

By December 2014, the company was reeling. Fifty customers had shrunk to seven or eight and the cost of diesel fuel was declining significantly, making it difficult to make a profit. The company began cutting staff. Gunnerman was waiting on the legislation, which would make the subsidy retroactive, giving his financially ailing business a much-needed cash infusion of about $779,000.

"That $779,000 was really a matter of life and death for the company," he said.

The legislation passed in late 2014, and the designation was granted to the company in March 2015 so it could file for the reimbursement. But days turned into months and the IRS' check never arrived in the mail.

Finally, in March 2015, Gunnerman's father died and Gunnerman decided to shut the fuel production down, effectively ending cash flow to the company.

A few employees continued to work, some for no pay, in downtown Reno offices.

The IRS then said it was sending a third auditor at the end of June 2015 to review the company's credit request in its filing.

"Now the craziness starts," Gunnerman said.

Another opinion from IRS

After a review, the third IRS agent said that in his opinion, the company did not qualify as a blender of alternative fuels even though the company process adds methane via natural gas to the diesel in its production.

The IRS agent told Gunnerman natural gas is not an alternative fuel. Only compressed natural gas, or liquefied natural gas, is considered an alternative fuel.

The IRS auditor finally said the requirement in his opinion was that the compression standard was 3,000 pounds per square inch to qualify as a blender of alternative fuels, a number Brandmueller said has changed multiple times since.

Gunnerman said the GDiesel process does not require compressed natural gas beyond 10 parts per square inch.

The IRS then advised Gunnerman he could take the dispute to mediation.

In late October, Gunnerman won a $623,000 ruling based on the company's 80 percent chance of success in a court challenge as found by a mediator in Phoenix. Ultimately, the IRS refused to accept the mediator's findings, saying that because excise taxes were not paid on the natural gas the company used, there was nothing to credit the money against.

Gunnerman enlisted the assistance of Rep. Mark Amodei, R-Nev., and Sen. Harry Reid, D-Nev., to press the IRS to define compressed natural gas so the company could proceed with some certainty. The nickel-a-gallon subsidy for a blender of alternative fuels, given current oil prices, is essential to the company's profitability, he said.

Gunnerman said the company could set up a compressed natural gas tank for its GDiesel process — even though it is unnecessary — to get the designation and the subsidy.

More than a dozen questions were submitted to the IRS through Amodei's office.

Gunnerman said the IRS responded to three of the questions and the replies were incorrect. To this day, the IRS hasn't defined the level of compression needed to quality for the designation. Short of suing the IRS, he has no expectation of ever getting the money the mediator awarded.

The IRS declined to comment for this story.

Amodei: IRS failed

Amodei said the IRS has failed the company by providing incorrect and ever-changing advice and then penalizing it for taking that advice.

"Nobody's perfect, in government or out," he said. "But these guys have a perfect track record of bipolar administrative and legal behavior. It's either glaring incompetence, indifference, arrogance or all three of the above.

"I'm not trying to pick on the IRS, but this is absolutely unacceptable," Amodei said. "If you make a mistake on your own with them they expect absolute adherence to what their program is. But when they make a mistake, the rules are there aren't any rules."

Johnson said the Clark County contract for GDiesel came when the economy was still suffering.

"We were able to buy a product made in Nevada, by Nevadans, for Nevadans," he said. "People were put to work making a cleaner-burning fuel. It did everything they said it would do and then some."

Gunnerman said he intends to proceed with a plant in Clark County that will produce 60,000 gallons of GDiesel a day using compressed natural gas if necessary to meet the IRS standard. It will cost more, and will create unnecessary safety issues that need to be addressed, but it can be incorporated into the process, he said.

"We're in this situation not because we're not competitive," Gunnerman said. "We're not in this situation because there is some guy out there that is better than us. We're in this situation because the government, through the IRS, has become my biggest competitor. My biggest stumbling block to success. They have destroyed my company."

— Contact Sean Whaley at swhaley@reviewjournal.com or 775-461-3820. Find him on Twitter: @seanw801