Growmark, Inc. & Subsidiaries v. Comm'r of Internal Revenue

• Decision Date: 16 May 2023
• Docket Number: 23797-14
• Parties: GROWMARK, INC. & SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

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160 T.C.No. 11

GROWMARK, INC. & SUBSIDIARIES, Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 23797-14

United States Tax Court

May 16, 2023

P, a fuel blender, is allowed tax credits under I.R.C. § 6426(b) and (c) for fuel mixtures it blended. P claimed the tax credits in determining its excise tax liability and paid its excise tax liability as reduced by those credits (actual excise tax expense). As a fuel blender, P may reduce its taxable income from fuel mixture sales by subtracting its cost of goods sold (COGS), including certain federal excise taxes. As part of its COGS, P originally claimed its actual excise tax expense. P asserts in its Petition that it should have claimed its gross excise tax liability, unreduced by the tax credits it received, as part of its COGS. R asserts that for purposes of calculating its COGS, P correctly included its actual excise tax expense.

Held: P may claim as part of its COGS only that excise tax which it actually incurred or paid. Thus, the amount of fuel excise tax includible in P's COGS is reduced by the amount of the tax credits P claimed and received under I.R.C. § 6426(b) and (c).

Held, further, legislative history confirms P must use its actual excise tax expense, rather than gross excise tax liability, for purposes of calculating its COGS.

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George William Benson, Andrew R. Roberson, and Thomas Kevin Spencer, for petitioner.

Justin D. Scheid, Rogelio A. Villageliu, Tess deLiefde, and James M. Cascino, for respondent.

PARIS, JUDGE.

This case is before the Court to decide petitioner's affirmative allegation. All issues in the notice of deficiency were decided in Growmark, Inc. &Subs. v. Commissioner, T.C. Memo. 2019-161.

In a timely notice of deficiency, respondent determined deficiencies with respect to issues other than petitioner's COGS calculation in petitioner's 2009 and 2010 federal income tax of $461,696 and $2,958,319, respectively.^[1] Petitioner-in addition to challenging respondent's adjustments in the notice of deficiency-alleged in its Petition that it may reduce its reported taxable income for 2009 and 2010 by $6,938,292 and $7,329,491, respectively, on the basis that it incorrectly calculated its COGS for each of those years by using its actual (net) excise tax expense instead of its gross excise tax liability. Thus, the only issue to be decided in this Opinion is whether a taxpayer that claims a credit against fuel excise tax under section 6426(b) or (c) may also claim as part of its COGS its gross excise tax liability, unreduced by the amount of the credit it received. We conclude that a taxpayer may not.

Unless otherwise indicated, all statutory references are to the Internal Revenue Code, Title 26 U.S.C. (Code), in effect at all relevant times, all regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure.

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The First Stipulation of Facts and the attached Exhibits are incorporated herein by this reference.

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Petitioner is an affiliated group of corporations that includes parent company Growmark, Inc. (Growmark), a Delaware corporation, and several subsidiaries. Growmark is an agricultural cooperative that, as relevant here, sells gasoline and diesel fuel, renewable fuels, alcohol fuel mixtures, and biodiesel mixtures. Petitioner's principal place of business was in Illinois when it timely petitioned this Court for redetermination of the deficiencies set forth in the notice of deficiency.

Petitioner has been selling fuel products since 1927. It added renewable fuels including ethanol, an alcohol produced from corn, in the 1970s and biodiesel, a fuel produced typically from soybean oil, in 2000. During the years at issue petitioner also owned and operated a "terminal"^[2] in Illinois and was a "position holder"^[3] at that and other terminals, both within the meaning of Treasury Regulation § 48.4081-1(b). In addition, petitioner produced and sold in its trade or business alcohol fuel mixtures by blending taxable gasoline with ethanol^[4] as well as biodiesel mixtures by blending diesel fuel with soybean-oil "agri-biodiesel."^[5]

Petitioner incurred a section 4081 fuel excise tax liability when it removed a taxable fuel that it owned as a position holder from a rack at a terminal. Petitioner also incurred a section 4081 fuel excise tax liability with respect to the gallons of ethanol and biodiesel when it removed and sold the ethanol or biodiesel as part of an alcohol fuel mixture or biodiesel mixture. During the years at issue the excise tax reflected petitioner's fuel mixtures for sale to third parties for use as fuel; petitioner did not use any of the mixtures it produced for sale as fuel in its trade or business.

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During the years at issue the ethanol that petitioner produced and then blended with taxable fuel was eligible for either the alcohol fuel mixture excise tax credit under section 6426(a)(1) and (b) or the alcohol mixture income tax credit under section 40(a)(1). The agribiodiesel that petitioner produced and then blended with diesel was also eligible for either the biodiesel mixture excise tax credit under section 6426(a)(1) and (c) or the biodiesel mixture income tax credit under section 40A(a)(1) for each gallon of biodiesel that was blended with diesel fuel. Both fuel mixture credits required the fuel to be sold or used as a fuel in a trade or business of the taxpayer.^[6] Petitioner was eligible for-but did not elect to use-the income tax credits under sections 40 and 40A. Instead, petitioner claimed the alcohol fuel and biodiesel mixture excise tax credits under section 6426 for all of the alcohol fuel and biodiesel mixtures it produced and sold during 2009 and 2010. It did so because claiming the section 6426 excise tax credits against its section 4081 excise tax liabilities was administratively easier than using the income tax credits and provided a quarterly financial benefit, as opposed to the annual financial benefit that would have been provided by general business credits claimed on an income tax return. Petitioner's entitlement to these credits is not in dispute.

As a taxable fuel position holder, petitioner was required to, and did, file Form 720, Quarterly Federal Excise Tax Return, for each of the quarters beginning or ending within its tax years 2009 and 2010. During all relevant periods petitioner claimed the mixture credits on its Forms 720. Petitioner's excise tax credits and liabilities for 2009 and 2010 were as follows:

2009	2010
Incurred excise tax liabilities under section 4081	$117,389,516.97	$122,062,070.30
Claimed alcohol fuel mixture credits under section 6426(b)[7]	6,928,160.00	7,324,661.00
Claimed biodiesel mixture credits under section 6426(c)[8]	10,132.00	4,380.00[9]

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For each year at issue, petitioner timely filed (under extension) Form 1120-C, U.S. Income Tax Return for Cooperative Associations. On each Form 1120-C, petitioner included in its COGS its actual excise tax expense-petitioner's reported excise tax liability reduced by the amount of tax credits petitioner was allowed under section 6426. As a result, petitioner's COGS was lower, and its taxable income higher, than it would have been had its excise tax liability not been reduced by the tax credits it received.^[10]

Respondent timely issued to petitioner a notice of deficiency on July 16, 2014, determining deficiencies of $461,696 and $2,958,319 for 2009 and 2010, respectively, with respect to the issues set forth in the notice-i.e., issues other than petitioner's COGS calculation. Petitioner timely filed its Petition, alleging error and raising an affirmative allegation as to the excise tax COGS calculation.

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OPINION

The sole legal question addressed in this second Growmark Opinion is whether a taxpayer that claims a credit against fuel excise tax under section 6426(b) or (c) may also claim as part of its COGS its gross excise tax liability, unreduced by the amount of the credit it received.

I. Standard of Review

Generally, the Commissioner's determinations in a statutory notice of deficiency are presumed correct, and the taxpayer bears the burden of disproving each adjustment by a preponderance of the evidence. Rule 142(a)(1); Welch v. Helvering, 290 U.S. 111, 115 (1933). There is no presumption against petitioner's affirmative allegations with respect to its COGS calculation, however, because the deficiencies in the notice of deficiency were determined with respect to other issues. Petitioner must nevertheless meet its burden of proof with respect to the allegations.

II. Background

A. COGS

In the case of a taxpayer that produces and sells inventory in its trade or business, "gross income" includes "the total sales, less the cost of goods sold." Treas. Reg. § 1.61-3(a). In calculating its gross income, the taxpayer may subtract otherwise deductible expenses. Treas. Reg. § 1.446-1(c)(1)(ii).

Although federal excise taxes are generally not deductible under section 164 as taxes paid, those that are "paid or accrued by the taxpayer in connection with an acquisition or disposition of property shall be treated as part of the cost of the acquired property or, in the case of a disposition, as a reduction in the amount realized on the disposition," and, therefore, fuel excise taxes may be included in a taxpayer's COGS calculation. § 164(a)...