A Tennessee District Court recently held that to the extent the alcohol fuel mixture credit offsets fuel excise tax liability, the taxpayer must reduce its excise tax liability for purposes of claiming a production cost deduction. In Delek US Holdings, LLC v. United States, No. 3:19-cv-00332 (M.D. Tenn. Jan. 25, 2021), the Middle District of Tennessee Court found for the government, who denied Delek’s claim for refund of $16 million in income taxes related to alcohol fuel mixture credits claimed in 2010 and 2011 tax years. In reaching its conclusion, the court relied on Sunoco, Inc. v. United States, 908 F.3d 710 (Fed. Cir. 2018), cert. denied 140 S.Ct. 46 (2019). (See prior coverage.)
During 2010 and 2011, Delek incurred fuel excise tax liabilities under section 4081 and claimed allowable alcohol fuel mixture credits under section 6426 against this liability and the balance as excise tax payments under section 6427. When Delek filed its original returns, it reduced its production cost deduction (associated with the fuel tax liability) by the amount of the alcohol fuel mixture credit received. However, Delek subsequently filed an income tax refund claim asserting the full amount of the fuel excise tax liability, without reduction for the alcohol fuel mixture credit, should be allowable in its production cost deduction. The claimed increase in production costs decreased Delek's claimed taxable income, giving rise to the credit. The IRS disallowed this portion of the refund claim.
Section 6426(b) provided a credit against section 4081 fuel excise tax for using alcohol to produce an alcohol fuel mixture for sale or use in a taxpayer’s trade or business. (This credit expired Dec. 31, 2011.) Section 6427(e) allows for the direct payment of the section 6426(b) credit for any amount that exceeds the taxpayer’s section 4081 excise tax liability. The section 6426(b) credit must offset the taxpayer’s excise tax liability before it can receive payment of the credit under section 6427(e). The sole question before the court was whether the alcohol fuel mixture credit under section 6426 is a credit that reduces excise tax liability or is a tax-free payment. The court agreed with the Sunoco decision, finding that, based on the plain reading of the statute, the alcohol fuel mixture credit reduces excise tax liability and thus reduces the deduction associated with any excise tax costs.
This case is another in the line of cases siding with the Sunoco decision. It affirms the IRS’s view that section 6426 fuels credits must first offset excise tax liability thus reducing any deduction for excise tax paid before claiming the remainder of the credit as a tax-free payment. The court is careful mention that fuel credits are not included in income but merely reduce a deduction if one was claimed for an excise tax liability. Taxpayers who claim an alternative fuel credit or a biodiesel mixture credit for B 99.9 blends under section 6427 can still receive the tax-free payment of the credit if they have no fuel excise tax liability to offset the credit.