The Supreme Court recently denied a petition for Writ of Certiorari challenging an appeals court’s affirmation that certain fuel tax credits must be included in taxable income if they were previously deducted as excise tax expenses. Sunoco, Inc. (“Sunoco”), a petroleum and petrochemical company, filed a petition for Writ of Certiorari alleging that the Federal Circuit’s decision conflicted with legal authorities, was irreconcilable with the tax system, and undermined Congressional efforts. Further, the petition argued that certiorari was warranted to ensure taxpayers receive the full benefit of the tax incentives.
Fuel tax credits
An excise tax is imposed on the sale or use of various types of fuel. Specifically, section 4081(a) imposes a tax on the sale of gasoline, diesel, and kerosene sold or removed from a refinery. Alternative fuels are likewise taxed under section 4041. Section 6426 was implemented in order to incentivize the use of alternative fuel production. Under section 6426, a credit is allowed in the amount of an applicable rate, based on the type of credit, multiplied by the number of gallons of fuel used to produce the alternative fuel. Section 6427 allows a taxpayer to claim the amount of the credit authorized under section 6426 as a payment, to the extent it could not claim the amount as a refund of excise tax under section 6426.
Sunoco, Inc. v. United States
Sunoco was a blender of alcohol fuel mixtures, an alternative fuel eligible for a credit under section 6426(b) for the years at issue. Sunoco claimed the credit on its consolidated income tax returns as a credit against its excise tax liability for tax years 2005-2008. In 2013, Sunoco filed refund claims with the IRS alleging that it had computed its tax liability incorrectly and was entitled to $300 million based on deductions attributable to excise tax expenses it neglected to take on its original return. Sunoco believed it was entitled to take a deduction for the excise tax liability on the gasoline while also receiving the full amount of fuel mixture credit as a tax-free payment. The IRS denied Sunoco’s claim and Sunoco responded by filing a refund suit before the United States Court of Federal Claims. (Sunoco, Inc. v. United States, 129 Fed. Cl. 322 (2016).)
Court of Federal Claims
The government, in a motion for judgment on the pleadings, argued that as a matter law, a two-step approach must be used when applying the fuel mixture credit. First the mixture credit reduces any excise tax liability and then, the remainder is paid out to the taxpayer as a direct payment. Sunoco, in a cross motion for summary judgment, argued that the mixture credit does not affect its section 4081 excise tax liability. Instead, the mixture credit, in its entirety, is a tax-free payment. Sunoco maintained that the mixture credit can offset the excise tax liability but it does not remove the liability, and therefore, does not preclude a taxpayer from taking a cost of goods sold deduction on the fuel tax liability. The Court of Federal Claims, noting that the language of the statutory framework was ambiguous, nevertheless granted the government’s motion based on “the Mixture Credit’s legislative history, related case law, and policy considerations.” Sunoco appealed the decision to the U.S. Court of Appeals for the Federal Circuit. (Sunoco, Inc. v. United States, 908 F.3d 710 (Fed. Cir. 2018).)
Court of Appeals
The U.S. Court of Appeals for the Federal Circuit did not find ambiguity in the statutes. The court determined that section 6426 explicitly provides for the application of the credit against a section 4081 excise tax. Further, the court disagreed with Sunoco’s argument that a credit under section 6426 is a payment of its excise tax liability, which serves to preserve the liability for a cost of goods sold deduction. The court determined that credits are treated differently from payments by contrasting the language of section 6427(e)(1) with 6427(e)(3). Section 6427(e)(1), allows for a payment in the same amount as the mixture credit, to the extent the taxpayer's excise tax liability is zero Section 6427(e)(3) requires that the payment be reduced by the amount of the mixture credit that was applied to offset the excise tax liability. Based on its reading of the statute, the court affirmed the lower court, holding that the mixture credit first reduces the taxpayer’s excise tax liability, and any associated deduction, with any excess amount of the credit payable to the taxpayer. Sunoco petitioned the Supreme Court for a writ certiorari to review the lower court’s decision. (Sunoco Inc. v. United States, 908 F.3d 710 (Fed. Cir. 2018), cert. denied, Sup. Ct. Dkt. No. 18-1474 (2019).)
Petition for Writ of Certiorari
Sunoco’s certiorari petition alleged that the court of appeals’ decision conflicted with the treatment given to tax credits by other circuits as well as the Federal Circuit’s treatment of federal tax credits. Sunoco argued that its petition should be granted because the Federal Circuit’s decision conflicted with legal authorities, was irreconcilable with the tax system, and undermined Congressional efforts. Further, Sunoco stated that certiorari was warranted to ensure taxpayers receive the full benefit of the tax incentives. The Supreme Court denied the petition.
Takeaways
Although the mixture credit at issue in the Sunoco case is currently expired, this case demonstrates how the Federal Circuit will treat similar credits and provides a road map for how other circuits may rule. Currently, section 6426 authorizing the credit for the sale or use of certain alternative fuels has terminated. However, the section 6427 credit is still available for taxpayers who were assessed a tax on tax-exempt fuel. The Sunoco decision reinforces the position that a taxpayer must use the section 6427 credit to offset the tax assessed on the fuel rather than treat the credit as a taxable fuel purchase, for which the tax would be an eligible business deduction, and then a tax-free credit paid to the taxpayer. Taxpayers claiming a fuel tax credit should consult their tax advisors to determine the proper treatment of their credits. Taxpayers should ensure they have reasonable cause to justify any fuel credit claim to avoid the 200% civil penalty allowable for excessive fuel tax claims under section 6675.
