Court denies company's claim for refund of alternative fuel payments
IRS may re-evaluate Form 637 registration decision during examination
TAX ALERT |
On March 29, 2021, the U.S. District Court for the Middle District of Florida (Orlando division) ruled that the plaintiffs, Affordable Bio Feedstock, Inc. and Affordable Bio Feedstock of Port Charlotte, LLC, could not recover $50,000 in refunds from the IRS that they paid under protest after the IRS found it erroneously allowed them $465,000 in alternative fuel tax credits.
Plaintiffs were in the business of acquiring oil and food waste (brown grease) from restaurants to be processed into alternative fuels. Plaintiffs resold the brown grease, which was eventually turned into biodiesel. In 2013, plaintiffs applied for IRS Form 637 registrations as alternative fuelers in order to claim the alternative fuel credit. Registration as an alternative fueler is one of the conditions to allowance of the claim.
An IRS excise tax agent reviewed the applications and it was determined, after an Initial Compliance Review, plaintiffs qualified as alternative fuelers. The IRS issued AL registrations to plaintiffs, and they subsequently claimed alternative fuel credits in 2015 and 2016. The IRS paid the alternative fuel credit claims in 2016. A follow up registration review was conducted in 2016 and the IRS concluded that the plaintiffs continued to qualify as alternative fuelers.
Subsequently, the IRS audited plaintiffs’ alternative fuel claims and disallowed plaintiffs’ claims for the credit, determining they were not engaged in activities that qualified for the alternative fuel credit. In 2018, the IRS revoked the AL registrations and assessed tax in the amount of the claimed credits that it had paid to plaintiffs. Plaintiffs did not claim any additional credits after the IRS examination.
Plaintiffs repaid a divisible portion of the refunds paid by the IRS under protest ($50,000) and filed a claim for refund with the IRS, which was denied. Plaintiffs filed suit for refund in U.S. District Court.
In essence, plaintiffs contended that because the IRS registered them as alternative fuelers, the IRS had made a determination that they were engaged in a qualifying activity, which would essentially pre-approve their alternative fuel credit claims with respect to the element that they were engaged in the activity of being an alternative fueler. The district court disagreed, reasoning that the IRS’s approval of plaintiffs 637 application did not rise to the level of an official agency determination. The district court held plaintiffs were not entitled to a return of the $50,000, as this portion of the alternative fuel credit was erroneously issued in excess to the plaintiffs.
The importance of the district court’s ruling is the fact that despite the IRS’s approval of a Form 637 registration as alternative fuelers (after lengthy review process by a seasoned IRS agent and after a subsequent registration review that concluded the plaintiffs continued to be engaged in the activity), during an IRS examination of the claims filed, the IRS can review the claimant’s activities and may determine that even though a registration had been issued, the claimant may not after all, qualify for the activity upon which the claim is based.
This is significant and has broader implications than just this case. Registration is required in advance of claiming many fuel credits – both conventional and renewable – including alternative fuel credit, alternative fuel mixture credit, second generation biofuel credits and even traditional fuel credits such as those by made by ultimate vendors and credit card issuers. Even though registration may be issued by the IRS, this is not a guarantee to claimants that activity qualifies for the credit. If audited, the IRS can review all elements of the claim, including whether the activities qualifies. In essence, the IRS is permitted a second bite at the apple to review whether the claimant’s activity qualifies for the credit when it is examining a claim for credit. The fact that the IRS previously reviewed the activity in issuance of the registration is not determinative.