Delek US Holdings, Inc. v. United States

• Decision Date: 25 January 2021
• Docket Number: Case No. 3:19-cv-00332
• Citation: 515 F.Supp.3d 812
• Court: U.S. District Court — Middle District of Tennessee
• Parties: DELEK US HOLDINGS, INC., Plaintiff, v. UNITED STATES of America, Defendant.

515 F.Supp.3d 812

DELEK US HOLDINGS, INC., Plaintiff,

v.UNITED STATES of America, Defendant.

Case No. 3:19-cv-00332

United States District Court, M.D. Tennessee, Nashville Division.

Filed January 25, 2021

Misty L. Foy, Delek US Holdings, Inc., Brentwood, TN, Robert J. Kovacev, Norton Rose Fulbright US LLP, Washington, DC, Robert C. Morris, Norton Rose Fulbright US LLP, Houston, TX, for Plaintiff.

Erin F. Darden, Kari M. Larson, Department of Justice, Washington DC, for Defendant.

MEMORANDUM

WILLIAM L. CAMPBELL, JR. UNITED STATES DISTRICT JUDGE

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: Section 4081, which imposes an excise tax on certain fuel transactions; and Sections 6426 and 6427(e), which provide tax incentives for mixers of renewable fuels. See 26 U.S.C. §§ 4081, 6426, 6427(e).

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 26 U.S.C. § 9503 (2005) (appropriating amounts received under Section 4081 to the Highway Trust Fund).

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, 26 U.S.C. §§ 4081, 6426, 6427, and 9503, were amended to reflect the following:

First, the restructuring eliminated the reduced excise tax for renewable fuel mixtures under Section 4081(c) so that all non-aviation fuel would be taxed at the same rate. 26 U.S.C. § 4081(c).

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"). 26 U.S.C. § 6426(b) ; H.R. Rep. No. 108-548, pt.1 at 142 (2004). Section 6426, which established the Mixture Credit provided:

(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.

26 U.S.C. § 6426.

Third, it amended Section 9503 of the Highway Revenue Act to appropriate the equivalent of taxes received under Section 4081 to the Highway Trust Fund and required that "taxes received" "shall be determined without reduction for credits under section 6426."

Finally, to the extent that the Mixture Credit is not allowed as a credit against fuel excise tax under Section 6426 – i.e. the taxpayer has no fuel excise tax liability, or the allowable credit exceeds that liability – the taxpayer may receive a payment in the amount of the Mixture Credit. Section 6427(e) states in relevant part:

(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.

26 U.S.C. § 6427. The Internal Revenue Service ("IRS") does not tax payments made under Section 6427(e) as income.³

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." Fed. R. Civ. P. 56(a). The underlying material facts are undisputed. Resolution of this claim in this case is entirely dependent on the Court's interpretation of the statute at issue.

IV. ANALYSIS

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 ––– U.S. ––––, 140 S.Ct. 46, 205 L.Ed.2d 35 (2019). The court held the Mixture Credit is "a credit, not a payment," the credit reduces Section 4081 excise tax liability, and Sunoco could not treat the amount of the Mixture Credit as a deductible expense. Id. at 717-19. The Government urges the Court to follow the Federal Circuit. Delek urges the Court to reach the opposite conclusion, arguing that the Sunoco decision is "fatally flawed" because it was improperly results-oriented, failed to apply the so called "default exclusion rule," and failed to follow its own precedent in Centex Corporation v. United States , 395 F.3d 1283 (Fed. Cir. 2005). Delek also contends that Sixth Circuit precedent in Summa Holdings, Inc. v. Comm'r , 848 F.3d 779 (6th Cir. 2017), forecloses application of Federal Circuit's interpretation of the statute in this case.

A. The Sunoco Decision

The Sunoco court considered "whether, under 26 U.S.C. § 6426, a taxpayer that is entitled to an alcohol fuel mixture credit may treat the credit as a tax-free direct payment regardless of excise-tax liability, or whether a taxpayer must first use the mixture credit to reduce any excise tax liability before receiving payment for any about of mixture credit exceeding excise-tax liability." Sunoco , 908 F.3d at 712. Sunoco maintained "that the Mixture Credit does not affect its excise-tax liability under § 4081" because "although the Mixture Credit can be used to offset excise-tax liability, such liability remains constant and does not reduce the cost of goods sold under the statute, therefore making the excise-tax liability fully deductible." Id. at 714. In other words, asserting the same argument as Delek does in this case, Sunoco argued, that it "was entitled to deduct the full amount of the gasoline excise tax under § 4081—without regard to the Mixture Credit—and keep the Mixture Credit as tax-free income." Id. at 712.

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 ...