Sunoco, Inc. v. United States, 15-587T
| Decision Date | 22 November 2016 |
| Docket Number | No. 15-587T,15-587T |
| Parties | SUNOCO, INC., Plaintiff, v. THE UNITED STATES, Defendant. |
| Court | U.S. Claims Court |
Tax Incentives for Alcohol Fuel Blends; Alcohol Fuel Mixture Credit; 26 U.S.C. §§ 6426, 6427; 26 U.S.C. § 87; Excise Tax; Cost of Goods Sold; Highway Trust Fund.
Kevin Johnson, Baker Hostetler, LLP, with whom were A. Christopher Young and Robert Fay, Pepper Hamilton, LLP, Philadelphia, Pennsylvania, for Plaintiff.
Jason Bergmann, with whom were Caroline D. Ciraolo, Principal Deputy Assistant Attorney General, David I. Pincus, Chief, and Mary M. Abate, Assistant Chief, Court of Federal Claims Section, Tax Division, U.S. Department of Justice, Washington, D.C., for Defendant.
Plaintiff Sunoco, Inc. brought this action against the Government to recover federal income tax refunds totaling over $300 million. Pending before the Court are (1) the Government's motion for judgment on the pleadings pursuant to Rule 12(c) of the Court of Federal Claims ("RCFC"), and (2) Sunoco's cross-motion for partial summary judgment pursuant to RCFC 56.
This is a case of first impression, and Sunoco's argument turns exclusively on statutory interpretation. As a fuel producer that blends ethanol into its fuel, Sunoco was entitled to claim the Alcohol Fuel Mixture Credit ("Mixture Credit"), set out in § 6426(a)- (b),1 against its excise tax liability under § 4081. Sunoco therefore paid less in excise tax than it otherwise would have been required to pay under § 4081 in the tax years 2005-2008. Excise tax payments are includable in a taxpayer's cost of goods sold, and the cost of goods sold reduces the taxpayer's gross income—and, consequently, the taxpayer's income tax liability. Sunoco's interpretation of the Mixture Credit would result in an increased cost of goods sold, which would result in a decreased gross income and lower income tax liability.
The question central to this case is whether a taxpayer like Sunoco must include its net excise tax liability in its cost of goods sold—with a reduction for the Mixture Credit—or whether the taxpayer may include its gross excise tax liability in its cost of goods sold. The latter interpretation (Sunoco's argument) treats the Mixture Credit as a tax-free payment of Sunoco's excise tax liability, and would significantly reduce Sunoco's income tax liability because it would increase Sunoco's cost of goods sold.
The Government argues that Sunoco's interpretation would result in a windfall that Congress did not intend. It cites the Mixture Credit's plain language and legislative history to show that Congress intended to replace the previous excise tax exemption for alcohol mixtures with an "equivalent benefit," rather than a significantly larger combined excise and income tax incentive. Sunoco reads the same statutory language and legislative history to reach the opposite conclusion.
Though the statutes at issue are not crystal clear, the Court ultimately finds the Government's interpretation more persuasive. The Court holds that the Mixture Credit must be treated first as a reduction of the taxpayer's excise tax liability, with any remaining Mixture Credit amount treated as tax-free payment. Had Congress intended, as Sunoco argues, to drastically increase the tax incentives fuel producers receive from blending alcohol into their fuels, one would expect to see at least some inkling of this intent in the legislative history or the Internal Revenue Code. No such inkling appears. Therefore, Sunoco cannot claim that it overpaid its income taxes because it correctly used its net excise taxes paid in calculating its cost of goods sold. The Government's motion for judgment on the pleadings is GRANTED, and Sunoco's cross-motion for partial summary judgment is DENIED.
The few material facts in this case are not in dispute. Sunoco filed its complaint on June 10, 2015, seeking a tax refund of over $300 million for the tax years 2005-2008. See Compl., Dkt. No. 1. In all of the tax years at issue, Sunoco blended ethanol into its fueland thereby qualified for the Mixture Credit. Compl. ¶ 11. Sunoco thus paid a reduced excise tax and reduced its cost of goods sold by the amount of the Mixture Credit for all of the tax years at issue. Sunoco deducted its cost of goods sold from its gross income, and paid income taxes accordingly.
On February 12, 2016, the Government moved for judgment on the pleadings pursuant to RCFC 12(c), arguing that the correct tax treatment of the Mixture Credit means Sunoco's claims must fail as a matter of law. See Dkt. No. 18. Sunoco responded on April 13, 2016, with a cross-motion for partial summary judgment under RCFC 56 as to the Government's liability. Dkt. No. 22. On June 20, 2016, the Government filed its response in opposition to Sunoco's cross-motion, see Dkt. No. 27, and Sunoco filed its reply on July 19, 2016. See Dkt. No. 33. The Court heard oral argument on the parties' motions on November 3, 2016.
Additionally, the Court already has decided that the IRS interpretation of the Mixture Credit's tax treatment, as shown in IRS Notice 2015-56, is not entitled to Skidmore deference for purposes of resolving the parties' motions. See Sunoco, Inc. v. United States, — Fed. Cl. —, 2016 WL 5848909, at *2 (Oct. 6, 2016). The Court found that no deference was appropriate because (1) the IRS issued Notice 2015-56 after litigation in this case had begun, (2) the Notice cited no authority for its interpretation of the Mixture Credit's tax treatment, and (3) the Notice was inconsistent with prior unofficial IRS advice. Id. Therefore, while the Court will consider the Government's interpretation of the Mixture Credit's tax treatment, the Court will not give deference to that interpretation.
A party may move for judgment on the pleadings pursuant to RCFC 12(c) "after the pleadings are closed[,] but early enough not to delay trial." If a party presents and the Court accepts materials outside the pleadings, then the Court must decide the motion as a motion for summary judgment under RCFC 56. RCFC 12(d). Sunoco has presented materials outside the pleadings here; however, as shown below, the Court finds that it is possible to resolve the single legal issue on the face of Sunoco's complaint without resorting to factual materials outside the pleadings. Therefore, the court will decide the pending cross-motions under RCFC 12(c) rather than RCFC 56.
When deciding a motion for judgment on the pleadings under RCFC 12(c), the Court applies substantially the same test that it would on a motion to dismiss for failure to state a claim under RCFC 12(b)(6). Sikorsky Aircraft Corp. v. United States, 122 Fed. Cl. 711, 719 (2015). Under RCFC 12(b)(6), a complaint fails to state a claim upon which relief may be granted "when the facts asserted by the claimant do not entitle [the claimant] to alegal remedy." Briseno v. United States, 83 Fed. Cl. 630, 632 (2008) (citation omitted). The Court also must construe allegations in the complaint favorably to the plaintiff. See Extreme Coatings, Inc. v. United States, 109 Fed. Cl. 450, 453 (2013). Still, "a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face." Id. (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citation omitted)).
The tax treatment of the Mixture Credit is the sole legal question in this case. To that end, it is helpful to keep a few basic principles of tax law in mind while analyzing Sunoco's claims. First, Sunoco was required to pay excise taxes during the relevant period. Excise taxes are imposed on sellers of commodities like fuel, see Cook v. United States, 86 F.3d 1095, 1098 (Fed. Cir. 1996), cert. denied, 519 U.S. 932 (1996), and are set out in § 4081. When a taxpayer like Sunoco pays its excise taxes, those tax receipts go into the Highway Trust Fund. § 9503(b)(1)(D). The Government uses the Highway Trust Fund to maintain the nation's highways and related infrastructure. See § 9503(c)(1).
Second, a taxpayer's excise taxes under § 4081 also directly impact a taxpayer's gross income (which is defined in § 61) because excise taxes become part of the taxpayer's cost of goods sold. See Mohawk Liqueur Corp. v. United States, 324 F.2d 241, 244 (6th Cir. 1963). The taxpayer excludes its cost of goods sold from gross income. Id. With lower gross income comes lower income tax liability. Therefore, one could compare the relationship between excise tax liability and income tax liability to two people on a seesaw: when excise tax liability goes up, income tax liability goes down, and vice versa.
So, if the Mixture Credit is interpreted as a reduction of excise tax liability, then the taxpayer's income tax liability would increase as a result of that reduction. The Government interprets the Mixture Credit in this way. However, if the Mixture Credit does not affect the taxpayer's excise tax liability—as Sunoco argues—then the taxpayer's income tax liability would decrease. Both parties cite the relevant statutes' language, the tax exemption that preceded the Mixture Credit, legislative history, and case law to support their positions. All of these pieces are necessary to evaluate the Mixture Credit's tax treatment, and the Court will address each piece in turn.
The Court first must examine the text of the relevant statutes themselves, and "must construe [the] statute[s], if at all possible, to give effect and meaning to all [their] terms." Splane v. West, 216 F.3d 1058, 1068 (Fed. Cir. 2000) (citation omitted). The dispute in this case centers on §§ 6426(a) and 6427(e).
Section 6426(a) states, in relevant part: "There shall be allowed as a credit . . . against the tax imposed by section 4081 an amount equal to the sum of the credits described in subs...
To continue reading
Request your trial