Sunoco, Inc. v. U.S. (CA Fed Cir 11/1/2018) 122 AFTR 2d ¶2018-5389
The Court of Appeals for the Federal Circuit, affirming the Court of Federal Claims, has upheld the government’s interpretation of how the pre-2012 Code Sec. 6426(b) alcohol fuel mixture excise tax credit is reflected for income tax purposes—specifically, that any reduction in excise tax liability resulting from the credit correspondingly reduces the deduction against income tax. Accordingly, the taxpayer wasn’t entitled to a $300 million refund.
Background. For tax years beginning before 2012, Code Sec. 6426 allowed qualifying fuel producers to claim an alcohol fuel mixture excise tax credit (the “Mixture Credit”) against their excise tax liability under Code Sec. 4081.
Code Sec. 6427(e) grants an interest-free payment to taxpayers of an amount equal to the Mixture Credit, when alcohol, biodiesel, or alternative fuels are used to produce a mixture. However, Code Sec. 6427(e)(3) specifies that no amount is payable with respect to any mixture or alternative fuel with respect to which an amount is allowed as a credit under Code Sec. 6426.
Taxes paid and incurred in business or investment-related activity, including excise taxes, are generally deductible as ordinary and necessary business or investment-related expenses. (Code Sec. 162; Code Sec. 212; Reg. § 1.164-2(f))
2015 Notice & deference. In 2015, IRS issued Notice 2015-56 (the Notice),which provides that, “for federal income tax purposes, a claimant must reduce its § 4081 excise tax liability for each calendar quarter during the 2014 calendar year by its biodiesel mixture credit attributable to a biodiesel mixture sold or used during that calendar quarter.” The Notice called this an “income tax addback”—to the extent the credits reduce the claimant’s excise tax liability, they reduce the deduction against income tax. (See “IRS clarifies timing of income tax effects of retroactive extension of fuel tax credits” for more details.)
The Court of Federal Claims, back in 2016, held that it would consider the Notice “merely another vehicle through which the Government conveyed its position in this case.” (See “Notice on effect of fuel credits on excise tax liability not entitled to deference” for more details.)
Sunoco, claiming a $300 million tax refund for years 2005-2008, argued that it was entitled to include the full, unreduced amount of its excise tax in its cost of goods sold, which in turn decreases its gross income and income tax liability. The government, however, said that Sunoco must include only its net excise tax liability, as reduced for the Mixture Credit, in its costs of goods sold, as outlined in Notice 2015-56.
Lower court decision. The Court of Federal Claims, despite not granting the Notice deference, nonetheless found the government’s interpretation more persuasive and denied the refund. While the statute itself was arguably ambiguous, the legislative history clearly favored the government’s position.
The government argued that Sunoco’s interpretation would result in a windfall that Congress did not intend. Notably, the Mixture Credit was enacted to replace the previous excise tax exemption for alcohol mixtures with an “equivalent benefit,” whereas Sunoco’s interpretation would yield a significantly larger combined excise and income tax benefit than the prior regime.
The government’s argument was further supported by the policy aims of the excise taxes at issue. Increased use of fuel mixtures meant that less tax was being collected on fuel, but cars using these fuels were still imposing the same wear and tear on road, so these taxes were meant to effectively shift money from the Treasury General Fund to the Highway Trust Fund.
Finally, citing the Supreme Court in U.S. v. Wells Fargo Bank, (Sup Ct 1988) 61 AFTR 2d 88-1345, the Court of Federal Claims said the Sunoco’s argument was contrary to the general proposition that “exemptions from taxation are not to be implied; they must be unambiguously proved.” See “Fuel producer’s interpretation of mixture credit rejected; $300 million refund claim denied” for more details.)
Appellate Court affirms. The Court of Appeals for the Federal Circuit agreed with the lower court that Sunoco cannot “deduct, as a cost of goods sold, an excise-tax expense that it never incurred or paid.”
The Federal Circuit first turned to the language to the relevant statutory text and found that Sunoco’s argument, that a “credit” under Code Sec. 6426 is a “payment” of its Code Sec. 4081 tax liability, was undermined by the plain language of the statute, which clearly differentiates between credits and payments. This reading was further reinforced by Code Sec. 9503, which provides that taxes received under Code Sec. 4041 and Code Sec. 4081 are determined “without reduction” for credits under Code Sec. 6426.
Sunoco’s contrary interpretation was contrary both to the logical reading of the statute, especially given the express intent of maximizing funds deposited into the Highway Trust Fund, and would also render a portion of Code Sec. 9503unnecessary. And, allowing the deduction would also be contrary to Code Sec. 162, which allows deductions for business expenses “paid or incurred” during the tax year—and the Mixture Credit isn’t an “expense” that Sunoco incurred.
While finding that Sunoco’s interpretation failed under the plain meaning of the statute, the Federal Circuit also examined legislative history and found that it further undermined Sunoco’s claim. Accordingly, it affirmed the Court of Federal Claim’s denial of Sunoco’s $300 million refund claim.
References: For credits and payments allowable for biodiesel mixtures, alternative fuels, and alternative fuel mixtures, see FTC 2d/FIN ¶ W-1500 et seq.; FTC 2d/FIN ¶ W-1700 et seq.; United States Tax Reporter Excise ¶ 64,264et seq.; United States Tax Reporter Excise ¶ 64,274 et seq.