Two taxpayers are appealing to separate Circuit Courts to reverse losses holding that taxpayers must reduce their deduction for fuel excise taxes if they receive fuel tax credits.
Delek U.S. Holding Inc. is appealing its recent district court loss in Delek v. Commissioner (No. 3:19-cv-00332) to the Sixth Circuit, while Exxon Mobil Corp is appealing its 2018 district court loss in Exxon Mobil Corp v. U.S.A. (3:16-cv-02921) to the Fifth Circuit.
The appeals will give taxpayers two opportunities to end a string of IRS victories on the issue. At issue is whether fuel tax credits must either reduce the deduction for fuel tax liability or be included 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 be included in income.
The IRS has released both a Notice (Notice 2015-56) and Chief Counsel Advice (CCA 201406001) outlining this position. It is also actively litigating the issue, and has made it the focus of a compliance campaign.
The IRS won the seminal case in Sunoco v. U.S. (No. 15-587T) in the Court of Federal Claims, but the judge said both sides had merit and that it was a close decision. The Federal Circuit Court of Appeals upheld the lower court’s ruling in a much more forceful decision in the IRS’s favor. The district courts in both Delek and Exxon echoed the Federal Circuit in favor of the IRS.
Taxpayers have yet to win a case on the issue, but it may not be settled yet. The Supreme Court originally declined to hear Sunoco, but a victory in either Exxon or Delek would create a split in the Circuit courts that would elevate the issue. In addition, the Tax Court is still weighing the same issue in Growmark, Inc. & Subsidiaries v. Commissioner (Docket No. 023797-14). Every other aspect of Growmark has been decided, indicating that the court is likely struggling with the issue. Growmark could be appealed to the Seventh Circuit after the Tax Court rules.
Dustin Stamper is a managing director in Grant Thornton’s Washington National Tax Office and leads the tax legislative affairs practice for the firm.
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