A District Court in Tennessee has extended the IRS’s string of court victories on fuel tax deductions, ruling in Delek v. Commissioner (No. 3:19-cv-00332) that a taxpayer must reduce its deduction for fuel excise taxes if it receives fuel tax credits.
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, purely refundable fuel tax credits do not reduce any deduction for fuel and need not be included in 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. Then the U.S. District Court, Northern District of Texas (Dallas), echoed Sunoco in ruling for the IRS in Exxon Mobil Corp v. U.S.A. (3:16-cv-02921). Now the U.S. District Court for the Middle District of Tennessee (Nashville) has followed suit in Delek.
Taxpayers have yet to win a case on the issue, but it may not be settled yet. Exxon could be appealed to the Fifth Circuit Court of Appeals and Delek could be appealed the Sixth. More importantly, 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. The Supreme Court declined to hear Sunoco, and it is likely taxpayers would have to win in a Circuit Court of Appeals to create a split before there is any hope of the Supreme Court addressing the issue.
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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