Federal court denies Exxon $337 million refund of fuel excise taxes

Tax Hot Topics newsletterThe IRS won another round in the battle with taxpayers over the inclusion of fuel excise tax credits in income.

This month, the District Court for the Northern District of Texas denied Exxon’s request for a $337 million refund of income taxes paid, holding that tax credits applied against the fuel excise tax reduce the cost of goods sold and must be included in income. In doing so, it agreed with the government and fully adopted the Court of Federal Claims’ reasoning in Sunoco v. U.S., No. 15-587T (Cl. Ct. 2016), a case which dealt with the same issue.

In prior guidance, the IRS has agreed (CCA 201342010) that if a refundable tax credit does not reduce fuel excise tax, it does not need to be included in income and does not reduce the deduction for the fuel. However, where there is actual excise tax liability, the IRS argues 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 countered that such refundable credits are meant to incentivize certain activities, in this case blending alcohol in gasoline, and should not affect deductions for excise tax liabilities. While the ruling gives the government another victory, the matter is still far from decided. Sunoco has appealed its case to the Federal Circuit, and a similar case, Growmark, Inc. & Subsidiaries v. Commissioner (Docket No. 023797-14), is pending in the U.S. Tax Court. Exxon may also appeal the case to the Fifth Circuit

Dustin Stamper
Managing Director, Washington National Tax Office
T +1 202 861 4144

Omair Taher
Senior Associate, Washington National Tax Office
T +1 202 861 4143

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