Controversy grows over inclusion of fuel tax credits in income

Tax Hot TopicsThe fight between taxpayers and the IRS over whether fuel excise tax credits must always be included in income saw two important new developments.

The Federal Court of Claims ruled in Sunoco v. U.S., No. 15-587T (Cl. Ct. 2016) that Notice 2015-56 is not entitled to deference, and is merely another vehicle for the government to convey its position that must be weighed equally under Sunoco’s arguments. Sunoco is suing for more than $300 million in refunds by arguing that fuel excise tax credits do not reduce the cost of goods sold and do not need to be included in income.

The IRS has generally agreed (CCA 201342010) that a refundable tax credit that does not reduce fuel excise tax does not need to be included in income and does not reduce the deduction for the fuel. But the IRS has argued that if there is actual excise tax liability, the credit must offset this liability first and either reduce the deduction for that liability or be included in income. Notice 2015-56 and Chief Counsel Advice (CCA 201406001) take this position.

Taxpayers have argued that the credits are merely refundable credits meant to incentivize a specific activity and should affect the deduction for any excise tax liability. The claims court must still rule on the underlying claim in Sunoco, and the case could go a long way to resolving the controversy, but it is not the only pending litigation. ExxonMobil has just sued the IRS for a $1.35 billion refund over the same issue in a Texas district court.

Contact Dustin Stamper
Director, Washington National Tax Office
T 202.861.4144

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