The Tax Court has ruled in Growmark, Inc. & Subsidiaries v. Commissioner (160 T.C. No. 11) that taxpayers must reduce deductions related to fuel excise taxes if they receive refundable fuel tax credits, foreclosing on one of the last opportunities for taxpayers to win a case on the contentious issue.
The Tax Court largely followed the reasoning in a string of other decisions that favored the IRS. At issue is whether taxpayers must either reduce deductions based on fuel tax liability or include their refundable fuel tax credits in income. The IRS has generally agreed (CCA 201342010) that when there is no actual excise tax liability, a purely refundable fuel tax credit does not reduce any deduction for fuel or create any addition to income. When there is actual fuel tax liability, however, the IRS argues that the credits must first offset this liability and reduce the deduction for tax expense (or cost of goods sold), or be included in income.
The IRS has released both a notice (Notice 2015-56) and Chief Counsel Advice (CCA 201406001) outlining this position, and has made it the focus of a compliance campaign. Taxpayers have yet to win a case on the issue despite six different courts taking it up:
- Sunoco v. U.S. (No. 15-587T): The IRS prevailed in the Court of Federal Claims and Federal Circuit Court of Appeals, which declined to rehear the case en banc. The Supreme Court also declined to hear the case.
- Delek US Holdings, Inc v. U.S. (No. 21-5257): The district court echoed Sunoco in its decision, which was upheld by a unanimous three-judge panel in the Sixth Circuit.
- Exxon Mobil Corp v. U.S.A. (3:16-cv-02921): The district court agreed with the IRS and was upheld by the Fifth Circuit, which also declined a request for en banc rehearing.
Growmark was one of the last opportunities for a taxpayer victory. The Tax Court had resolved all the other issues in the case in 2019, raising hopes that the court was struggling with the issue and could break from the other decisions. In the end, the Tax Court offered a strong endorsement of the other rulings, holding that the legislative history and statutory construction support a reading that tax credits must first be used to offset tax liability. There are few remaining opportunities for taxpayers to win on the issue, though Growmark can be appealed to the Seventh Circuit.
None of the cases address situations in which the activity that generates the fuel tax credit is in a separate entity from the activity that generates the tax liability for excise tax purposes. Taxpayers should consider how different structures may affect the tax result.
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