Insights and Resources
Court holds fuel mixture credit must first offset excise tax liability
Tennessee court follows Sunoco decision on fuel mixture credits
TAX ALERT |
Authored by RSM US LLP
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.
Call us at +1 213.873.1700, email us at firstname.lastname@example.org or fill out the form below and we'll contact you to discuss your specific situation.
This article was written by Debbie Gordon, Trina Pinneau and originally appeared on 2021-02-01.
2020 RSM US LLP. All rights reserved.
The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.
RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.
Vasquez & Company LLP is a proud member of the RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.
Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise and technical resources.
For more information on how Vasquez & Company LLP can assist you, please call +1 213.873.1700.
Subscribe to receive important updates from our Insights and Resources.