In ETC Sunoco Holdings, LLC v. United States, No.21-10937 (5th Cir., June 8, 2022), the Fifth Circuit ruled for the IRS, affirming a district court’s denial of a taxpayer’s refund claim arising out of an increase in cost of goods sold (COGS) for excise taxes offset by certain fuel mixture credits. Sunoco (the Taxpayer) previously asked for partial refund of its income tax payments for 2010 and 2011, but the district court held against the Taxpayer because the issue was already fully litigated by the Taxpayer in the Federal Circuit. In the earlier litigation, the Federal Circuit Court of Appeals affirmed the IRS’s view that section 6426 alternative fuel and mixture credits must first offset and reduce a taxpayer’s deductible excise tax liability before the taxpayer may claim the credit as a tax-free payment.
Under section 6426, fuel producers that produce certain alternative or fuel mixtures may claim a credit for such activity against their excise tax liability (collectively, mixture credits). These mixture credits are refundable under section 6427(e) which allows for the direct payment of the mixture credit to the taxpayer, to the extent that the credits are not allowed under section 6426 (i.e., to the extent the credit exceeds the taxpayer’s excise taxes). Because the refundable portion of the credit, under section 6427, is treated as a non-taxable payment, certain taxpayers have argued that the credit claimed under section 6426 should not reduce the taxpayers’ otherwise deductible excise tax liability (which generally is recovered by the taxpayer though COGS).
The Taxpayer, one of the largest producers of blended fuels in the U.S., claimed over $1.3 billion in mixture credits from 2005 to 2011, and in its original returns subtracted the mixture credit amount from the excise tax liability included in COGS. However, in amended returns, Sunoco reduced its gross income to reflect the excise taxes that it would have paid if it had not claimed the credits, which in turn decreased its corresponding tax burden. Based on the difference, Sunoco asked the IRS to refund more than $300 million for 2005-2008 and $150 million for 2010-2011, and the IRS denied the refund claims.
With respect to the 2005-2008 tax years, the Taxpayer brought the dispute to the Court of Federal Claims, arguing that there was no reason to subtract the credits from the taxes included in COGS because the mixture credit did not technically reduce its excise tax liability. However, the court disagreed, holding that the credit does operate to offset a taxpayer’s excise tax liability, with any remaining amount treated as a tax-free payment and that the Taxpayer therefore must reduce its deductible excise taxes for the amount of the credit. The Court of Appeals for the Federal Circuit subsequently affirmed the lower court’s decision (see Sunoco, Inc. v. United States, 129 Fed. Cl. 322 (2016), affirmed by Sunoco, Inc. v. United States, 908 F.3d 710 (Fed. Cir. 2018), cert. denied Sunoco Inc., v. United States, 140 S. Ct. 46 (2019)).
Five years later, the Taxpayer brought suit with respect to the 2010-2011 tax years, this time in a Texas federal district court. The district court dismissed the case, holding that issue preclusion barred the suit because the same issue was already fully litigated by the Taxpayer in the Federal circuit. In its appeal to the Fifth Circuit, the Taxpayer argued that special circumstances apply that render issue preclusion inappropriate, namely that additional taxpayers have appealed the same mixture-credit issue to other circuits which could create a circuit split that might lead the Supreme Court to take up the issue (Exxon Mobil Corp. v. United States, No. 21-10373 (5th Cir. filed Oct. 26, 2021) and Delek US Holdings, Inc. v. United States, 32 F.4th 495 (6th Cir., 2022)). If that were to happen, there could be an intervening change in law that would render the Taxpayer’s earlier case obsolete.
The Fifth Circuit disagreed, affirming that the Taxpayer’s earlier case has preclusive effect. The court noted that no change in law has actually occurred and that relying on a potential future change in law is inappropriate and would mean preclusion would never apply. Importantly, the court also noted that although it has not yet ruled in Exxon, in the time since the Taxpayer filed its appeal, the Sixth Circuit ruled against the taxpayer in Delek (see Court held fuel mixture credit reduces a taxpayer’s excise tax liability)
Although this case hinged on a procedural issue, ultimately the case is in line with several court holdings affirming the IRS’s view that section 6426 mixture credits must offset a taxpayer’s excise tax liability, reducing any income tax deduction for such excise tax. It’s worth noting that the Exxon appeal is presently with the Fifth Circuit, although it remains to be seen whether the court’s decision here will predict its ultimate decision in Exxon.
This issue continues to be litigated in the courts:
- Exxon Mobil Corp. v. United States, No. 21-10373 (5th Cir. Court of Appeals) (Taxpayer’s notice of appeal docketed April 14, 2021)
- Growmark, Inc. & Subs v Commissioner, Docket No. 23797-14 (U.S. Tax Court) (filed Oct. 8, 2014)
- PDV Holding, Inc. v. United States, Dkt. No. 4:20-cv-3621 (S.D. Tx.) (filed Oct. 22, 2020) SOPC
- Holdings West LLC v. United States, Dkt. No. 4:18-cv-374 (S.D. Tx.) (filed Feb. 8, 2018)