DELEK US HOLDINGS, INC. v. UNITED STATES OF AMERICA
Case No. 3:19-cv-00332
IN THE UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF TENNESSEE NASHVILLE DIVISION
January 25, 2021
JUDGE CAMPBELL
MAGISTRATE JUDGE FRENSLEY
Plaintiff Delek US Holdings, LLC (“Delek“) claims it is entitled to an income tax refund of approximately $16 million based on a recalculation of its production costs. The Government has denied the refund request.
This case concerns a single question: whether a credit against fuel excise taxes reduces excise tax liability and must be deducted from production costs or whether it is a tax-free direct payment. To address this $16 million question, the parties have each filed a motion for summary judgment and supporting memoranda; (Doc. Nos. 50, 50-2, 51, 52); a response (Doc. Nos. 55, 56); and a reply (Doc. Nos. 58, 59). The underlying facts are undisputed for purposes of this motion, as reflected in the Stipulation of Facts (Doc. No. 52-2) and statements of undisputed facts (Doc. Nos. 50-1, 52-1, 56-4, 57, 59-2).
Delek has requested the Court hear oral argument. Because the single issue in this case has been extensively briefed on motions by both parties, and the Court finds oral argument will not aid the Court‘s decision, the request for oral argument is denied.
I. BACKGROUND
For purposes of this motion, the Court must consider the relationship between the following provisions of the Internal Revenue Code, United States Code, Title 2:
Congress has long provided tax incentives for renewable fuel mixtures.1 Prior to 2004, these tax incentives were in the form of a reduced fuel excise tax rate, which reduced the per-gallon tax rate for renewable fuels.2 Reduced excise taxes on renewable fuels resulted in reduced funding to the Highway Trust Fund, which is funded by fuel excise tax revenues. See
In 2004, to address the shortfall in funding to the Highway Trust Fund, Congress restructured the tax incentives for renewable fuel. See American Jobs Creation Act of 2004, Pub. L. No. 108-357, 118 Stat. 1418, §§ 301, 853; H.R. Rep. No. 108-548, at 141-42 (2004); H.R. Rep. No. 108-755 at 304 (2004). The relevant statutory provisions of the Internal Revenue Code,
First, the restructuring eliminated the reduced excise tax for renewable fuel mixtures under
Second, to “provide a benefit equivalent to the reduced tax rates, which are being repealed under the provision,” it added a credit for producers of alcohol fuel blends (the “Mixture Credit“).
(a) Allowance of credits.—There shall be allowed as a credit—
(1) Against the tax imposed by section 4081 an amount equal to the sum of the credits described in subsections (b), (c), and (e)...(b) Alcohol fuel mixture credit.—
(1) In general.—For purposes of this section, the alcohol fuel mixture credit is the product of the applicable amount and the number of gallons of alcohol used by the taxpayer in producing any alcohol fuel mixture for sale or use in a trade or business of the taxpayer.
(c) Biodiesel mixture credit.—
(1) In general.—For purposes of this section, the biodiesel mixture credit is the product of the applicable amount and the number of gallons of biodiesel used by the taxpayer in producing any biodiesel mixture for sale or use in a trade or business of the taxpayer.
Third, it amended
Finally, to the extent that the Mixture Credit is not allowed as a credit against fuel excise tax under
(e) Alcohol, biodiesel, or alternative fuel.—
(1) Used to produce a mixture.—If any person produces a mixture described in
section 6426 in such person‘s trade or business, the Secretary shall pay (without interest) to such person an amount equal to the alcohol fuel mixture credit or the biodiesel mixture credit or the alternative fuel mixture credit with respect to such mixture....
(3) Coordination with other repayment provisions.—No amount shall be payable under paragraph (1) or (2) with respect to any mixture or alternative fuel with respect to which an amount is allowed as a credit under
section 6426 .
II. PROCEDURAL HISTORY
The underlying facts of this case are undisputed. During the relevant tax years, Delek incurred fuel excise tax liabilities and also claimed allowable Mixture Credit against this liability. (Stip., Doc. No. 52-2, ¶¶ 13-15). In its original 2010 and 2011 federal tax returns, Delek reduced its claimed production cost by the amount of the Mixture Credit received. (Id., ¶ 20). Delek subsequently filed a refund claim, that, among other things, included the full amount of the calculated fuel excise tax without reduction for the Mixture Credit, thereby increasing its production cost by the amount of the Mixture Credit received in 2010 and 2011. (Id., ¶¶ 21-22). Because production costs are deducted from income, the claimed increase in production costs decreased Delek‘s claimed taxable income. The IRS disallowed this portion of the refund claim.
Delek filed the instant case seeking judgment in the amount of the alleged overpayment, plus interest. (See Compl., Doc. No. 1). The parties each seek summary judgment on the sole claim.
III. STANDARD OF REVIEW
Summary judgment is appropriate “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.”
The sole question presented is whether the Mixture Credit is a credit that reduces excise tax liability or is a tax-free payment. If, as the Government advocates, it is a credit that reduces excise tax liability, Delek must account for the Mixture Credit in calculating its production costs and the tax refund at issue here was properly denied. If, as Delek contends, it incurred the full amount of the excise tax and the Mixture Credit is a payment of a portion of that liability, it may include the full excise tax as a production cost without reduction for the Mixture Credit and is entitled to the refund requested.
The Federal Circuit recently addressed this precise question in Sunoco, Inc. v. United States, 908 F.3d 710 (Fed. Cir. 2018), cert. denied, 140 S. Ct. 46 (2019). The court held the Mixture Credit is “a credit, not a payment,” the credit reduces
A. The Sunoco Decision
The Sunoco court considered “whether, under
The Federal Circuit rejected Sunoco‘s interpretation. Relying on the plain meaning of the statute, the court held that the Mixture Credit is “a credit, not a payment,” and that the credit decreases a taxpayer‘s fuel excise tax liability. Id. at 717-19. The court reasoned that when considered together, the express language of Sections
The Sunoco court then proceeded to consider whether the legislative history “embodies an ‘extraordinary showing of contrary intentions‘” sufficient to overcome the plain meaning of the statute. Id. at 717-18. In support of its argument that Congress intended the Mixture Credit to operate as a payment of excise tax liability, Sunoco identified the same snippet of legislative history as Delek does here – Conference Report, H.R. Rep. No. 108-755. Id. at 718. (See Pl. Br., Doc. No. 52 at 6). Describing the proposed House Bill, the Conference Report states, “[t]he credit is treated as a payment of the taxpayer‘s tax liability received at the time of the taxable
B. The Sunoco Decision Is Not “Fatally Flawed”
Federal Circuit‘s consideration of the tax claim was not results-oriented as Delek contends. Although the court used the term “windfall” in reference to the tax benefit sought, given that Sunoco was seeking a tax refund of over $300 million and the court ultimately determined that the requested refund was unsupported by the plain meaning of the statute, the use of the term is not unwarranted. Moreover, the Sunoco decision was not outcome-determined, but was based on the plain meaning of the statute.5
Delek also argues that the Federal Circuit erred by failing to follow the precedent in Centex Corporation v. United States, 395 F.3d 1283 (Fed. Cir. 2005). Delek‘s assertion that Centex is controlling is misplaced. Centex concerned an entirely different statutory scheme. The
In Sunoco, however, the court relied on the plain meaning of the statute. To the extent that it considered legislative history, the court found that the legislative history pointed in the opposite direction from the result sought by Delek – that Congress did not intend “double-dipping.” Sunoco, 908 F.3d at 718 (looking to legislative history to determine whether “a clear intent contrary to the plain meaning exists” and finding that it does not).
C. The Mixture Credit Reduces Excise Tax Liability
The Court agrees with the Sunoco court that the plain meaning of the statute indicates that the Mixture Credit reduces excise tax liability. Under well-established rules of statutory interpretation, “the starting point for interpreting a statute is the language of the statute itself.” Consumer Prod. Safety Comm‘n v. GTE Sylvania, Inc., 447 U.S. 102, 108 (1980). Departure from the plain language of a statute is disfavored and “appropriate only in rare cases [in which] the literal application of the statute will produce a result demonstrably at odds with the intentions of its drafter ... or when the statutory language is ambiguous.” Hoge v. Honda of Am. Mfg., Inc., 384 F.3d 238, 246 (6th Cir. 2004) (quoting Kelley v. E.I. Dupont de Nemours & Co., 17 F.3d 836, 842 (6th Cir. 1994)).
Here, the statute here states that the Mixture Credit is “allowed as a credit ... against the tax imposed by
Moreover, as further indication that “credit” is to be given its ordinary meaning,
Delek makes much of the allegedly “discriminatory” nature of the disparate tax treatment of the two methods. But the question now before the Court is whether the first method – credit against excise tax – is actually a tax-free payment. The plain meaning of the statute indicates that it is not. Instead, the Mixture Credit reduces the taxpayer‘s excise tax liability by be “allowed as a credit ... against the tax imposed by
Delek also argues that the allocation to the Highway Trust Fund of “taxes received in the Treasury ... under
The Court, therefore, concurs with the Federal Circuit decision in Sunoco that the plain meaning of the statute is that the Mixture Credit is a credit that reduces the taxpayer‘s excise tax liability.
D. The Mixture Credit Is Not Included As Gross Income
This does not result in the Mixture Credit being taxed as income, which Delek argues would violate the “default exclusion rule.” As explained by Delek, the default exclusion rule states that federal tax credits do not increase federal gross income unless Congress expressly provides otherwise. (See Doc. No. 52 at 1, 10). Accepting for purposes of this argument that the default exclusion rule is “bedrock tax law,” the rule is inapplicable here.
Delek‘s argument is based on the economic effect of requiring a taxpayer to deduct the Mixture Credit from production costs. Delek argues that requiring deduction of the Mixture Credit from production costs to account for the reduction in excise tax liability results in increased gross taxable income. Delek claims this results in the IRS taxing the incentive “via the back door.” (Id. at 14.).
The determination that the Mixture Credit reduces excise tax liability does not result in the Mixture Credit being taxed as income. While a change in production cost undeniably affects taxable income, this is not the same as taxing the credit as income. It is evident from the
E. Tax Accounting Principles
Delek‘s argues that even if the Mixture Credit is not a payment of fuel excise tax liability, it is nevertheless allowed to include the full amount of excise tax liability as a production cost. Delek asserts that under the “well-established” tax accounting rules, it incurred the full amount of the excise tax for tax purposes without “cash having changed hands.” (Doc. No. 56 at 16). In other words, under the theory that the excise tax was incurred, Delek seeks to include the full amount of the tax as a production cost without reduction for the amount of the Mixture Credit.
The Government challenges as incorrect the argument that a taxpayer incurs excise tax liability under
The Court agrees. Delek has provided no basis to unlink
F. Sixth Circuit Precedent – Summa Holdings
Delek argues that the interpreting the statute to require Mixture Credits be taken as a credit against excise tax effectively “rewrites” the statute to prevent Delek from claiming a larger tax incentive than expected and is therefore in conflict with the Sixth Circuit decision in Summa Holdings, Inc. v. Comm‘r, 848 F.3d 779 (6th Cir. 2017).
The Court disagrees with Delek‘s characterization. As stated above, the Sunoco decision relies on the plain meaning of the statute that requires the Mixture Credit to reduce excise tax liability. This is not a situation in which the Government seeks to rewrite the statute to achieve the desired effect. The words of the statute are clear – the Mixture Credit is “allowed against” the excise tax and that “no amount shall be payable ... with respect to which an amount is allowed as a credit.”
Moreover, Summa Holdings is distinguishable. In Summa Holding, the plaintiff had availed itself of what would commonly be referred to as a tax loophole. 848 F.3d. at 784. The Government conceded that the plaintiff complied with the relevant provisions of the tax code
V. CONCLUSION
The Court agrees with the Federal Circuit that the language in the statute is clear – if a taxpayer has excise tax liability, the Mixture Credit is a credit, not a payment. The credit must first be applied against the excise tax liability before any remaining balance is paid to the taxpayer. The amount of excise tax liability incurred is determined in conjunction with the Mixture Credit. Accordingly, the Court will enter judgment in favor of the Government.
An Order will enter.
WILLIAM L. CAMPBELL, JR.
UNITED STATES DISTRICT JUDGE