Sunoco Seeks Refund Based on Fuel Mixture Tax Credit Adjustments

ETC SUNOCO HOLDINGS LLC (formerly known as SUNOCO, INC.),
Plaintiff,
v.
UNITED STATES OF AMERICA,
Defendant.

IN THE UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION

ORIGINAL COMPLAINT

Plaintiff, ETC Sunoco Holdings LLC (formerly known as Sunoco, Inc.) (“Sunoco”) hereby submits this complaint against Defendant, United States of America (“United States”) seeking recovery of federal income tax paid for its tax years 2010 and 2011. Plaintiff alleges the following:

NATURE OF THE ACTION

1. Sunoco brings this action to recover its federal income tax overpayments for tax years 2010 and 2011 which were erroneously denied by the Internal Revenue Service (the “IRS”).

2. Congress provided ethanol blenders with a refundable tax credit to encourage the commercialization of advanced fuels and vehicle technologies and to reduce the nation's dependence on oil (the “Alcohol Fuel Mixture Credit”). During 2010 and 2011, Sunoco qualified for the Alcohol Fuel Mixture Credit.

3. Sunoco incorrectly reduced its cost of goods sold by the amount of the Alcohol Fuel Mixture Credit on its 2010 and 2011 tax returns. When Sunoco filed amended tax returns claiming a refund to which it is entitled, the IRS erroneously denied Sunoco's claims.

PARTIES

4. During its 2010 and 2011 tax years, Sunoco was a corporation, incorporated in Pennsylvania. Sunoco was the common parent of a U.S. affiliated group filing U.S. consolidated tax returns. All references to “Sunoco” include its United States affiliated subsidiaries included in the U.S. consolidated federal income tax returns for 2010 and 2011.

5. The Sunoco affiliated group was acquired by Energy Transfer Partners, L.P. in 2012. Sunoco exists today as ETC Sunoco Holdings LLC, and its global headquarters and principal place of business is located at 8111 Westchester Drive, Dallas, Texas 75225.

6. Sunoco is wholly owned by ETP Holdco Corporation, a Delaware corporation, whose principal place of business is located at 8111 Westchester Drive, Dallas, Texas 75225. ETP Holdco Corporation is wholly owned by Energy Transfer Operating, L.P., which in turn is a consolidated subsidiary of Energy Transfer LP. Both Energy Transfer Operating, L.P. and Energy Transfer LP have principal places of business located at 8111 Westchester Drive, Dallas, Texas 75225.

7. Defendant is the United States of America. Service of process may be made on Defendant by certified mail, return receipt requested, to the following: (i) William P. Barr, Attorney General for the United States, Department of Justice, 950 Pennsylvania Ave., N.W., Washington, D.C. 20530; (ii) Civil Process Clerk, United States Attorney, 1100 Commerce Street Third Floor, Dallas, Texas 75242; and (iii) Charles P. Rettig, Commissioner, Internal Revenue Service 1111, Constitution Ave., N.W., Washington, D.C. 20224.

JURISDICTION ANDVENUE

8. The Court has jurisdiction over this dispute under 28 U.S.C. § 1346(a)(1) because this is an action for the recovery of erroneously assessed and collected internal revenue taxes that were the subject of claims for refund filed with the IRS.

Taxable Year	Tax Paid
2010	$142,256,540
2011	$27,704,313

9. Venue is proper in the Northern District of Texas under 28 U.S.C. § 1402 because Sunoco's principal place of business is located in this judicial district.

FACTUAL BACKGROUND

10. Section 4081(a) of the Internal Revenue Code (the “Code”) imposes a federal excise tax on the removal of taxable fuel from a refinery or terminal; the entry of taxable fuel into the United States for consumption, use, or warehousing; and sales of a taxable fuel to certain purchasers.

11. To continue incentivizing the manufacturing of renewable fuels, the American Jobs Creation Act of 2004, Pub. L. No. 108-357, §§ 301-03, 118 Stat. 1418, 1459-66 (“Jobs Act”) enacted Code section 6426(b), which provided a credit for blending alcohol with taxable fuel — the Alcohol Fuel Mixture Credit.

12. During 2010 and 2011, Sunoco was the parent company of an affiliated group of corporations filing consolidated federal income tax returns. Thus, for federal income tax purposes, Sunoco took into account the income, gains, deductions, losses, and credits of its subsidiaries on its consolidated return, including the Alcohol Fuel Mixture Credit.

13. Sunoco, through its subsidiaries, refined and marketed petroleum products, and manufactured chemicals in the United States. During 2010 and 2011, Sunoco operated in five segments: Refining and Supply, Retail Marketing, Logistics, Chemicals, and Coke. The Refining and Supply segment manufactured petroleum products, including gasoline and middle distillates, such as jet fuel, heating oil, diesel fuel, and residual fuel oil.

14. Sunoco blended alcohol with the taxable fuel it produced as part of its refining and terminal operations and was entitled to claim the Alcohol Fuel Mixture Credit under Code section 6426(a) and (b) for its 2010 and 2011 tax years. Sunoco claimed these credits on Quarterly Federal Excise Tax Returns, Forms 720, for those tax years.

15. Sunoco filed its consolidated federal income tax return for 2010 on or about October 17, 2011.

16. Sunoco filed its consolidated federal income tax return for 2011 on or about September 14, 2012.

17. On its originally filed consolidated corporate income tax return for 2010 and 2011, Sunoco reported excise taxes paid as reduced by the Alcohol Fuel Mixture Credit it received in each year, causing an understatement in its cost of goods sold and a corresponding overstatement of gross income. Sunoco was entitled to include in cost of goods sold the full, unreduced amount of the Code section 4081 excise taxes that it incurred.

18. Sunoco corrected this erroneous reduction of cost of goods sold in its claims for refund filed for 2010 and 2011, resulting in a decrease in gross income for 2010 and 2011.

19. Sunoco submitted a claim for refund for its 2010 tax year to the IRS on March 10, 2015, on Form 1120X, claiming an increase in cost of goods sold in the amount of $233,578,859 for excise taxes incurred under Code section 4081 for the 2010 tax year.

20. Sunoco submitted a claim for refund for the 2011 tax year to the IRS on March 10, 2015, on Form 1120X, claiming an increase in cost of goods sold in the amount of $223,334,627 for excise taxes incurred under Code section 4081 for the 2011 tax year.

21. On March 11, 2015, the IRS issued a notice of claim disallowance denying Sunoco's claims for its 2010 and 2011 tax years. See Exhibit A.

22. The IRS and Sunoco agreed to extend until September 28, 2020, the statute of limitations period under Code section 6511(c) for Sunoco's 2010 and 2011 tax years. The statute of limitations to file this action remained open as of the date of this filing pursuant to the agreements between the IRS and Sunoco, attached as Exhibit B.

CLAIM FOR RELIEF

COUNT I — OVERPAYMENT OF INCOME TAX — ALCOHOL FUEL MIXTURE CREDIT

23. Sunoco incorporates by reference the allegations contained paragraphs 1 through 22.

24. Pursuant to the Code and other authority, the cost of goods sold should not be reduced by the amount of Code section 6426(b) alcohol mixture tax credits. Accordingly, Sunoco amended its 2010 and 2011 income tax returns by adjusting its cost of goods sold to include the full amount of excise tax liability incurred during the 2010 and 2011 tax years, without reduction for Alcohol Fuel Mixture Credit. The adjustment decreases Sunoco's ordinary business income in the amount of $233,578,859

for the 2010 tax year and $223,334,627 for the 2011 tax year. Sunoco is entitled to an increase in cost of goods sold for Code section 4081 excise taxes paid during its 2010 and 2011 tax years.

25. The IRS erroneously disallowed Sunoco's claims for a refund of income tax paid for 2010 and 2011.

26. Sunoco seeks recovery for such portions of the overpayment of federal income taxes for 2010 and 2011 that were erroneously assessed and collected by the IRS, including any additional carrybacks or carryovers that may be applied to 2010 and 2011.

CONDITIONS PRECEDENT

27. All conditions precedent have been satisfied.

PRAYER FOR RELIEF

WHEREFORE, Sunoco respectfully requests that the Court grant the following relief:

Date: September 25, 2020

Respectfully submitted,
Robert H. Albaral
Texas Bar No. 00969175
Robert.Albaral@bakermckenzie.com

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George M. Clarke III
D.C. Bar No. 480073
(pro hac vice motion forthcoming)
George.Clarke@bakermckenzie.com
Vivek A. Patel
D.C. Bar No. 1033178
(pro hac vice motion forthcoming)
Vivek.Patel@bakermckenzie.com

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