The Sixth Circuit Court of Appeals has ruled in Delek US Holdings, Inc v. U.S. (No. 21-5257) that taxpayers must reduce their deduction for fuel excise taxes if they receive refundable fuel tax credits, adding to the IRS’s string of victories on the contentious issue.
The three-judge panel ruled unanimously in Delek’s favor, echoing other recent cases. At issue is whether taxpayers must either reduce their deduction for 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 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.
Taxpayers have yet to win a case on the issue in court, and the options for a favorable decision are narrowing. 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 Mobil Corp v. U.S.A. (3:16-cv-02921) echoed the Federal Circuit in favor of the IRS, and the Sixth Circuit has now joined the chorus.
The best hope for taxpayers rests with Exxon’s pending appeal to the Fifth Circuit and the Tax Court’s deliberation 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.
Delek could also appeal to the Supreme Court, but the court already declined to hear the issue when Sunoco appealed. The Supreme Court is unlikely to take up the issue unless a taxpayer wins and creates a circuit split.
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