United States

Court determines Exxon must reduce COGS for fuel tax credit

TAX ALERT  | 

The District Court for the Northern District of Texas, Dallas Division, recently held for the government, deciding that the taxpayer, Exxon Mobile (“Exxon”) was obligated to exclude certain excise tax refunds from its expenses. Both parties made motions for partial summary judgement, alleging an issue of material fact did not exist for the court to decide. The court denied Exxon’s motion and granted the IRS’s motion.

During the years at issue, a fuel excise tax credit was available for alcohol fuel mixtures sold or used in a taxpayer’s trade or business. Exxon utilized this credit against the excise tax it would have otherwise been liable for. When a taxpayer pays taxes on goods it sells, that taxpayer may include the amount of tax in its cost of goods deduction. For the years when Exxon claimed the fuel mixture credit, Exxon did not include full amount of the excise tax liability in its cost of goods sold deduction, but rather it only included the amount of excise tax paid after taking into account the excise tax credit. However, Exxon subsequently decided it should be able to receive the credit for the excise tax liability as well as claim a deduction on the full amount of the liability as if it was not reduced by the credit. The government disagrees and argues that only the amount of tax actually paid should be included in the cost of goods sold deduction.

In determining whether the taxpayer can include the full amount of the excise tax liability versus the net amount of excise tax paid in its cost of goods sold deduction, the court looks to the recently decided case of Sunoco v. United States, 129 Fed. Cl. 322 (2016). The district court cites the Federal Claims court’s determination that the credit “operates ‘as a reduction of the taxpayer’s excise tax liability’ and the taxpayer therefore’“correctly use[s] its net excise taxes paid in calculating its cost of goods sold.’” Exxon argues that the Sunoco decision was decided incorrectly. However the court adopted the Sunoco reasoning in full and held that the taxpayer can only include the actual amount of excise tax paid in its cost of good sold deduction.

Impact

This case further solidifies the matter brought forward in Sunoco, that a taxpayer may not claim a deduction for expenses it was later reimbursed for via a fuel tax credit. It is important to keep in mind that this decision, as well as the Sunoco decision, addresses the impact of credits against fuel excise tax liabilities under section 6426 on income tax deductions. These cases do not address the fuel tax credit payments that are available under section 6427. Taxpayers who claim fuel tax credits should consult with their tax advisors to determine which part, if any, of the fuel tax credit should be included in income or excluded from the cost of good deduction. 

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