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DOJ Argues Collateral Estoppel Applies in Sunoco Refund Suit

MAY 5, 2021

ETC Sunoco Holdings LLC v. United States

DATED MAY 5, 2021
DOCUMENT ATTRIBUTES

ETC Sunoco Holdings LLC v. United States

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

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

DEFENDANT, UNITED STATES' BRIEF IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT ON THE APPLICATION OF COLLATERAL ESTOPPEL

DAVID A. HUBBERT
Deputy Assistant Attorney General

JONATHAN L. BLACKER
Texas Bar No. 00796215
IGNACIO PEREZ DE LA CRUZ
Massachusetts Bar No. 67261
Attorneys, Tax Division
U.S. Department of Justice
717 N. Harwood, Suite 400
Dallas, Texas 75201
(214) 880-9765
(214) 880-9759
(214) 880-9741 (FAX)
Jonathan.Blacker2@usdoj.gov
Ignacio.PerezdelaCruz@usdoj.gov

ATTORNEYS FOR THE UNITED STATES


TABLE OF CONTENTS

BACKGROUND

I. Sunoco Filed Claims for Refund with the IRS for Tax Years 2004-11, so the Issue in the Claims was Identical for All Years

II. Sunoco Files Suit in the Court of Federal Claims Seeking a Refund for Tax Years 2005-08

III. Sunoco Loses in the Court of Federal Claims and the Federal Circuit for its Tax Years 2005-08

IV. Sunoco Seeks to Relitigate Factual and Legal Issues Decided in Sunoco I

ARGUMENT AND AUTHORITIES

A. General Rules of Collateral Estoppel

B. The Elements of Collateral Estoppel Are Satisfied

1. The issue of whether Sunoco was entitled to include in its costs of goods sold the full, unreduced amount of the Code, Section 4081 excise tax liability that it incurred was litigated in Sunoco I

2. Sunoco fully and vigorously litigated the issues and the facts in Sunoco I

3. The issues and facts established in Sunoco I were necessary to support the judgment

CONCLUSION

TABLE OF AUTHORITIES

FEDERAL CASES

Allen v. McCurry, 449 U.S. 90, 94 (1980)

Ashe v. Swenson, 397 U.S. 436, 443 (1970)

Blonder–Tongue Labs, 402 U.S. at 324

Commissioner v. Sunnen, 333 U.S. 591, 597-98 (1948)

Delek v. US Holdings, Inc., No. 3:19-cv-00332 (M.D. Tenn. January 25, 2021)

Exxon Mobil Corp. v. United States, No. 3:16-CV-2921-N, 2018 WL 4178776, at *1 (N.D. Tex. Aug. 8, 2018)

Gandy Nursery, Inc. v. United States, 318 F.3d 631, 639 (5th Cir. 2003)

Hardy v. Johns-Manville Sales Corp., 681 F.2d 334, 338 (5th Cir. 1982)

Hibernia Nat'l Bank v. United States, 740 F.2d at 387-89

James Talcott, Inc. v. Allahabad Bank, Ltd., 444 F.2d 451, 459-60 (5th Cir. 1971)

In the Matter of Schwager, 121 F.3d 177, 181 (5th Cir.1997)

Midwest Mechanical Contractors, Inc. v. Commonwealth Constr. Co., 801 F.2d 748, 751 (5th Cir. 1986)

Montana v. United States, 440 U.S. 147, 153 (1979)

Parklane Hosiery Co. v. Shore, 439 U.S. 322, 329 (1979)

Procter & Gamble Co. v. Amway Corp., 242 F.3d 539, 546 (5th Cir. 2001)

In re Keaty, 397 F.3d 264, 272 (5th Cir. 2005)

RecoverEdge L.P. v. Pentecost, 44 F.3d 1284, 1290 (5th Cir. 1995)

Royal St. Louis v. United States, 578 F. 2d 1017 (5th Circuit 1978)

Southwest Airlines Co. v. Texas Internat'l Airlines, Inc., 546 F.2d 84, 94 (5th Cir. 1977)

St. Paul Mercury Ins. Co. v. Williamson, 224 F.3d 425, 436 (5th Cir. 2002)

Sunoco, Inc. v. United States, 129 Fed. Cl. 322 (2016), aff'd, 908 F.3d 710 (Fed. Cir. 2018)

Swate v. Hartwell, 99 F.3d 1282, 1290 (5th Cir. 1996)

Test Masters Educ. Servs. v. Singh, 428 F.3d 559, 571 (5th Cir. 2005)

United States v. Hartley, 612 F.2d 1009, 1010 (5th Cir. 1980)

United States v. Mendoza, 464 U.S. 154, 158 (1984)

United States v. Shanbaum, 10 F.3d at 311

Yamaha Corp. v. United States, 961 F.2d 245, 254 (D.C.Cir.1992)

FEDERAL STATUTES

26 U.S.C § 4081

26 U.S.C § 6426

26 U.S.C § 6426(a)

26 U.S.C § 6426(b)

26 U.S.C § 6427(e)

OTHER AUTHORITIES

American Jobs Act of 2004 ('AJCA”), Pub. L. 108-357, 118 Stat. 1418, 1469 § 301

Restatement (Second) of Judgments § 27 (1982)


The United States asks this Court to apply collateral estoppel to prevent the relitigation of facts and legal conclusions that were established in prior litigation between the Plaintiff, ETC Sunoco Holdings LLC (formerly Sunoco, Inc.) (“Sunoco”), and the United States.1 The issue in this proceeding is the tax treatment of Sunoco's alcohol fuel mixture credit (“Mixture Credit”) for tax years 2010 and 2011. As explained below, this is the identical issue Sunoco previously litigated and lost with respect to its tax years 2004-09 in Sunoco I.

Here, Sunoco wants a “second bite at the apple” as to facts and legal conclusions established in Sunoco I. In Sunoco I, for its tax years 2004-09, Sunoco fully litigated against the United States the precise issue of whether, under 26 U.S.C. (“I.R.C.”) § 6426,2 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 alcohol fuel mixture credit to reduce any excise-tax liability before receiving payment for any amount of mixture credit exceeding excise-tax liability. The Court of Federal Claims determined that the Mixture Credit must first be applied to reduce Sunoco's gasoline excise-tax liability, with any remaining credit amount treated as a tax-free payment.3 This ruling is entitled to collateral estoppel effect in this case for Sunoco's tax years 2010-11, as both the facts and the legal issues remain the same.

Collateral estoppel should be applied against Sunoco to prevent relitigation in this case, because the elements of collateral estoppel are satisfied. First, as noted above, the issue of the proper tax treatment of the Mixture Credit was explicitly determined by the Court of Federal Claims and the Federal Circuit in Sunoco I. Second, it is incontrovertible that this legal issue and the concomitant facts were fully litigated by Sunoco. Finally, the conclusions the courts reached in Sunoco I, and the ruling that the Mixture Credit must first be applied to reduce a taxpayer's gasoline excise-tax liability, with any remaining credit amount treated as a tax-free payment, were essential elements of the Sunoco I opinion. An early determination of this issue is essential to prevent time-consuming and unnecessary discovery and development of issues that have already been fully litigated.

BACKGROUND

I. Sunoco Filed Claims for Refund with the IRS for Tax Years 2004-11, so the Issue in the Claims was Identical for All Years.

Sunoco explained in its Sunoco I Complaint that on its originally filed returns for the tax years 2004-09, it erroneously reduced its deductions for gasoline excise taxes by the amount of the Mixture Credit, which had the same effect as including the Mixture Credit in income because it subjected the Credit to income tax.4 Similarly, in the Complaint in this case (Dkt. 1, ¶ 17), Sunoco asserts that 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.” In that same paragraph, Sunoco asserts it was “entitled to include in cost of goods sold the full, unreduced amount of the Code, Section 4081 excise taxes that it incurred.”

On March 10, 2015, Sunoco filed its Amended U.S. Corporation Income Tax Returns (Form 1120X) (claims for refund) with the IRS for its tax years 2004-2011.5 Sunoco raised the identical issue in the refund claims for all years, including, 2010-11: it asserted that it was permitted to include in its costs of goods sold all (the gross amount) of its fuel excise tax liability to the Government without reducing the amount of the excise taxes by the Mixture Credit.6 The IRS denied Sunoco's claims for refund on March 11, 2015, for all tax years listed in the claims for refund (2004-11).7

II. Sunoco Files Suit in the Court of Federal Claims Seeking a Refund for Tax Years 2005-08.

Following the IRS' denial of its claims for refund, Sunoco filed suit in the Court of Federal Claims, seeking a refund only for its tax years 2005-2008. Although Sunoco sought to recover income tax payments only for years 2005 through 2008, it included claims for years 2004 and 2009 because “changes to the taxable income in those years affect the amount of the refunds for the other years at issue in [Sunoco I].”8 Sunoco clarified that, although the IRS denied all refund claims for the tax years 2004-11, tax years 2010-11 “are not included in this refund suit.”9 Sunoco did not justify its omission of tax years 2010 and 2011.

The legal issue at the heart of Sunoco I was whether, in tax years 2004 through 2009, Sunoco must include its net excise tax liability in its cost of goods sold — with a reduction for the Mixture Credit — or whether Sunoco may include its gross excise tax liability in its cost of goods sold (without a reduction for the Mixture Credit).10 In other words, the issue was whether as a matter of law, the Mixture Credit that Sunoco received under I.R.C. § 6426, and which Sunoco used to satisfy its gasoline excise tax liability under I.R.C. § 4081, had any effect on the income tax benefit Sunoco claimed for payment of those excise taxes.

III. Sunoco Loses in the Court of Federal Claims and the Federal Circuit for its Tax Years 2005-08.

In the Court of Federal Claims, the United States moved for judgment on the pleadings, while Sunoco moved for partial summary judgment.11 Both parties recognized that no material facts were in dispute.12

After extensive briefing and oral argument,13 the Court of Federal Claims ruled for the United States, finding that “Sunoco's Refund Claims Fail as a Matter of Law.”14 In its opinion, the Court observed that the “tax treatment of the Mixture Credit is the sole legal question” and that 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.15

The Court explained that a taxpayer excludes its cost of goods sold from gross income, and “with lower gross income comes lower income tax liability.”16The Court analogized 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.”17

In support of their arguments, the parties cited the relevant statutes' language, the tax exemption that preceded the Mixture Credit, legislative history, and case law. The Court evaluated each of these arguments, and the Court's determinations and conclusions are entitled to collateral estoppel effect.

In its opinion, the Court conducted an in-depth examination of the Mixture Credit statutes. It determined that the language of the statutes did not resolve the dispute, ultimately concluding the language is ambiguous. In essence, the Court determined that the “statute's language supports both parties' interpretations.”18

The Court next reviewed the legislative history of the Mixture Credit statutes, concluding that the legislative history supported the Government's position.19 The Court went further, however, and held that the legislative history does not support the “increased subsidy” called for by Sunoco's interpretation.20

Finally, although “no case addresses a tax credit identical to the Mixture Credit,” the Court observed that analogous cases support the Government's interpretation.21 Furthermore, the Court held that the “canon of statutory construction” cited by Sunoco does not support its argument.22

The Court of Federal Claims ruled that the ambiguity in the Mixture Credit statutes “counsels against” allowing Sunoco to deduct its gross excise tax from gross income.23 In short, the Court concluded that Sunoco attempted to “exempt from gross income a portion of its cost of goods sold that it never was required to pay. There is nothing preventing Congress from conferring such a benefit on Sunoco; however, one would expect Congress to expressly state, either in the legislative history or by statute, that it intended to convey this benefit. Congress has not done so here.24

Sunoco appealed the Court of Federal Claims' ruling to the Federal Circuit.25 The Federal Circuit affirmed the decision. The Federal Circuit recognized that Sunoco “wishes both to pocket the Mixture Credit as a tax-free refundable payment and to claim an income tax benefit by including in full its gasoline excise-tax liability in its cost of goods sold, thereby reducing its total taxable income. But such double-dipping was not intended by Congress.”26 The Federal Circuit further explained that Sunoco asks it “to permit it to deduct, as a cost of goods sold, an excise-tax expense that it never incurred or paid. Neither the text of the Jobs Act nor its legislative history supports such a reading of the Internal Revenue Code.”27

The Federal Circuit also observed that that the “plain meaning of the statute is clear — the Mixture Credit is a credit, not a payment, which must first be used to decrease a taxpayer's gasoline excise-tax liability before receiving any payment under § 6427(e),”28 and that to “overcome the plain meaning of the statute, Sunoco must show that the legislative history 'embodies an 'extraordinary showing of contrary intentions'. . . . Sunoco has failed to satisfy this heavy burden.”29 The Federal Circuit held that

Sunoco wishes to treat the Mixture Credit as a deductible expense because it considers the Mixture Credit as a payment of its tax liability. But Sunoco never incurs a cost equal to the Mixture Credit. Such a method of accounting would result in an overall lower taxable income, resulting in a windfall to Sunoco. We have already established that Congress does not generally allow taxpayers to receive a tax benefit twice. Nor has Sunoco shown that Congress intended the Jobs Act to increase excise-tax subsidies for fuel blenders. Sunoco has failed to show that the legislative history extraordinarily contradicts the plain reading of the Jobs Act.30

IV. Sunoco Seeks to Relitigate Factual and Legal Issues Decided in Sunoco I.

As previously explained, Sunoco filed claims for refund (Forms 1120X) with the IRS for its tax years 2004-2011, raising the identical factual and legal issues for all the years. The Complaints Sunoco filed in Sunoco I and in this case are virtually identical, both factually and legally, and seek the same relief.

In its Complaint in this case, Sunoco states that “[o]n 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.31 Sunoco then states that “[p]ursuant 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 each of 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.”32

In Sunoco 1, Sunoco similarly claimed that it “erroneously reduced its deductions for gasoline Excise Taxes by the amount of the credit (which had the same effect as including the Mixture Credit in income because it subjected the Credit to income tax).”33 Sunoco avers that it was “entitled to deduct the full amount of the Gasoline Excise Tax that it incurred under Code Section 4081 without regard to and reduction of the Credit.34

ARGUMENT AND AUTHORITIES

A. General Rules of Collateral Estoppel

In general, collateral estoppel, or “issue preclusion,” applies in the following circumstances: (1) the issue in the second action is identical to the issue litigated in the prior action; (2) the issue was fully and vigorously litigated in the prior action; and (3) the issue was necessary to support the judgment in the prior case.35 Collateral estoppel, like the related doctrine of res judicata, has the dual purpose of protecting litigants from the burden of litigating an identical issue decided in previous litigation involving the same party (Sunoco in this case) and of promoting judicial economy by preventing needless litigation.36

The res judicata effect of a prior judgment is a question of law.37 As explained by the Fifth Circuit, “The rule of res judicata encompasses two separate but linked preclusive doctrines: (1) true res judicata or claim preclusion and (2) collateral estoppel or issue preclusion.”38 In this case, the Court should apply the doctrine of collateral estoppel to the issues previously determined in Sunoco I: “[O]nce a Court has decided an issue of fact or law necessary to its judgment, that decision is conclusive in a subsequent suit based on a different cause of action involving a party to the prior litigation.”39

For example, in Hibernia Nat'l Bank v. United States,40 the taxpayer brought a refund suit seeking depreciation deductions for the tax years 1972-77. The taxpayer previously litigated the identical issue in 1970 and lost, but, the taxpayer contended that an amendment to the hotel lease in question in 1977 related back so as to avoid the application of collateral estoppel for the years 1971-77. The District Court agreed and refused to apply collateral estoppel, holding that the 1977 amendment was a factual change.

The Fifth Circuit reversed the District Court, holding that the “District Court erroneously utilized the 1977 amendment to determine the tax consequences for the years 1971-1976.”41 The Court held that the amendment to the Lease in 1977 could not relate back to the tax years 1971-76, noting that at the end of each year through 1976, there had been no change of facts with respect to the Lease, and thus,

the issue in this case as to the years 1971–1976 is the exact issue decided by the District Court and affirmed by this Court in the Royal St. Louis case. That issue was necessary to the resulting judgment and was actually litigated. Additionally, we find that there were no changes in the controlling facts or applicable rules within the period 1970–1976. Accordingly, we hold that the taxpayer is collaterally estopped from relitigating, in the present action, the issue of whether the parties intended under the original 1967 Lease Agreement that Chateau be insulated from economic loss. The District Court's judgment, insofar as it applies to the years 1971–1976, is thus reversed and remanded.42

In large part, the doctrine of collateral estoppel has evolved as Courts have recognized the beneficial purpose of relieving “parties of the cost and vexation of multiple lawsuits, conserve judicial resources, and, by preventing inconsistent decisions, encourage reliance on adjudication.”43 The Fifth Circuit describes the policies of collateral estoppel as follows:

By declaring an end to litigation, the doctrine adds certainty and stability to social institutions. This certainty in turn generates public respect for the Courts. By preventing relitigation of issues, res judicata conserves judicial time and resources. It also supports several private interests, including . . . avoidance of conflicting rights and duties from inconsistent judgments.44

The Fifth Circuit notes that collateral estoppel promotes the interests of judicial economy by treating certain issues of fact or law that are validly and necessarily determined between two parties as final and conclusive.45 Thus, “a right, question, or fact distinctly put in issue and directly determined as a ground of recovery by a Court of competent jurisdiction collaterally estops a party or his privy from relitigating the issue in a subsequent action.”46 Collateral estoppel applies if another Court furnished a trustworthy determination of a given issue of fact or law because a party that has already litigated that issue should not be allowed to attack that determination in a second action.47 “Once an issue is raised and determined, it is the entire issue that is precluded, not just the particular arguments raised in support of it in the first case.”48 “Redetermination of issues is warranted if there is reason to doubt the quality, extensiveness, or fairness of procedures followed in prior litigation.”49 None of these factors are present here.

Collateral estoppel will apply to the same issue in a second proceeding involving separate or different claims, and the subject matter of the suits may be different as long as the requirements for collateral estoppel are met.50 Further, under the modern doctrine of non-mutual issue preclusion, a litigant may also be estopped from advancing a position that he or she has presented and lost in a prior proceeding against a different adversary.51 Of course, the fact that both cases involve the United States strengthens the case for invoking collateral estoppel here. In both Sunoco I and this case, the issue of whether Sunoco is required to subtract the amount of its Mixture Credit from its gross excise tax liability when calculating deductions against its federal income tax liability is the same in both cases.

B. The Elements of Collateral Estoppel Are Satisfied

The elements of collateral estoppel are met: (1) in Sunoco I, the Court determined the Mixture Credit must first be applied to reduce Sunoco's gasoline excise-tax liability, with any remaining credit amount treated as a tax-free payment; (2) Sunoco fully and vigorously litigated this issue; and (3) the Court's determinations were clearly necessary to support the judgment in Sunoco I.

1. The issue of whether Sunoco was entitled to include in its cost of goods sold the full, unreduced amount of the Code, Section 4081 excise tax liability that it incurred was litigated in Sunoco I.

The critical issue, if not the only issue, in this case is the tax treatment of the Mixture Credit, and this was the sole legal question in Sunoco I. That is, the issue in both cases was/is whether Sunoco was entitled to include in cost of goods sold the full, unreduced amount of the Code Section 4081 excise tax liability that it incurred.

In addition to the same legal issue, the facts for all tax years are identical. This is evidenced through Sunoco's submission of identical claims for refund to the IRS for tax years 2004 through 2011. Sunoco did not submit a separate set of facts to the IRS for 2004-09, and 2010-11. Rather, the same set of facts covered all years.

Examples of facts in Sunoco I that are identical in this case include:

(i) Sunoco was the common parent of the U.S. affiliated group filing consolidated tax returns for the years at issue.

(ii) During each of the tax years at issue, Sunoco, through its refining and wholesale fuel supply business, blended ethanol that qualified for the alcohol fuel tax credit under I.R.C. §§ 6426(a) and (b).

(iii) Sunoco claimed the Mixture Credit as a credit against the gasoline excise tax imposed by I.R.C. § 4081 for all years at issue.

(iv) On Sunoco's originally filed consolidated corporate income tax returns, Sunoco reported excise taxes paid as reduced by the Mixture Credit it received in each year. That is, Sunoco included the net amount of its gasoline excise tax liability under I.R.C. § 4081 in its cost of goods sold after reduction for the Mixture Credit.

(v) Sunoco claimed an income tax refund by filing amended federal income tax returns, Forms 1120X, with respect to all six tax years at issue and in which Sunoco included the gross amount of its gasoline excise tax liability under I.R.C. § 4081 in its cost of goods sold without regard to or reduction for the Mixture Credit.

(vi) On March 11, 2015, the IRS issued a notice of claim disallowance with respect to all of the claims for refund for Sunoco's 2004 through 2011tax years.

Finally, as noted above, both the Court of Federal Claims and the Federal Circuit answered the legal question of whether Sunoco was entitled to claim the gross amount of the excise tax liability it incurred under I.R.C. § 6426(a)–(b), against its cost of goods sold, unreduced by the Mixture Credit. The Courts agreed Sunoco could not: they held that Sunoco must include its net excise tax liability — with a reduction for the Mixture Credit — in its cost of goods sold rather than include its gross excise tax liability. The Mixture Credit reduced the amount of the I.R.C. § 4081 excise tax that Sunoco was required to pay, and only the amount of tax that Sunoco was required to pay could be included in its cost of goods sold for purposes of computing its income tax liability. The legal issue and the concomitant facts in Sunoco I are identical to those raised in this tax proceeding. Accordingly, the first element of collateral estoppel is met.

2. Sunoco fully and vigorously litigated the issues and the facts in Sunoco I.

In general, “[w]hen an issue is properly raised, by the pleadings or otherwise, and is submitted for determination, and is determined, the issue is actually litigated.”52 It is incontrovertible that the issue of the tax treatment of the Mixture Credit was actually litigated in Sunoco I, and Sunoco had a full and fair opportunity to litigate these issue and the underlying facts. With over $300 million at stake in Sunoco I, Sunoco had every incentive to vigorously ligate the issues in that suit.

Both Sunoco and the United States agreed no material facts were in dispute.53 Furthermore, Sunoco was able to fully and extensively brief the issues and was granted oral argument. Finally, Sunoco appealed the issue to the Federal Circuit, giving it yet another opportunity to advance its arguments. In short, given (i) the multiple opportunities for Sunoco to advance its arguments, (ii) the extended motion practice, and (iii) that no facts were in dispute, Sunoco had a full opportunity to present (or rebut) evidence regarding the issues and facts for which the United States is seeking collateral estoppel. Moreover, the issues were properly raised by the pleadings, submitted for determination, and actually determined by the Court of Federal Claims and Federal Circuit. As part of its vigorous litigation strategy, Sunoco even petitioned for cert review with the Supreme Court, but the Petition was denied.54

3. The issues and facts established in Sunoco I were necessary to support the judgment.

The final element for the application of collateral estoppel is that the issues and facts determined in Sunoco I were necessary to support the Court's final judgment. Once again, it is indisputable that this element is satisfied for two reasons. First, the facts were undisputed and relied upon by the Court.

Second, the issue of the applicability of the Mixture Credit to the excise tax was in fact the central, if not the only issue, in Sunoco I. Given it was the only issue, in its opinion, the Court analyzed the legal issue involved — the tax treatment of the Mixture Credit. The Court essentially left no stone unturned: (i) it reviewed the language of the statute to determine whether it was ambiguous; (ii) it reviewed the legislative history and determined that the legislative history favors the Government's interpretation; (iii) it reviewed analogous cases and decided those cases also support the Government's position; and (iv) finally, the Court reviewed Sunoco's assertion that certain canons of construction support its case (the Court ruled they did not). In the end, the Court produced a lengthy opinion addressing the each of these issues, and as such, these determinations were clearly necessary to support the Court's ruling in Sunoco I.55

CONCLUSION

The United States is entitled to collateral estoppel on the issue of whether, under I.R.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 alcohol fuel mixture credit to reduce any excise-tax liability before receiving payment for any amount of mixture credit exceeding excise-tax liability. In the present action, Sunoco is bound by the Court of Federal Claims' ruling in Sunoco I that the Mixture Credit reduced the amount of the I.R.C. § 4081 excise tax that Sunoco was required to pay, and that only the amount of tax that Sunoco was required to pay (the net excise tax amount) could be included in its cost of goods sold for purposes of computing its income tax liability.

The elements of collateral estoppel are met: (i) the issue of the taxability of the Mixture Credit was determined by the Court of Federal Claims and the Federal Circuit in Sunoco I; (ii) Sunoco had a full and fair opportunity to litigate this issue and did so; and (iii) determining these issues was necessary to the Court's judgment in Sunoco I.

The application of collateral estoppel in this case also furthers the underlying policies of collateral estoppel. Namely, it will drastically reduce the time and expense of discovery because of the facts already established in Sunoco I, prevent the relitigation of issues already determined by the Court of Federal Claims (thus preventing potentially inconsistent decisions), and it will conserve judicial resources.

Litigants are certainly entitled to a full opportunity to present their side of a case and to have a Court or jury reach a decision. Sunoco was provided that opportunity. Relitigating the identical issue in this Court would create “the aura of the gaming table” condemned by the Supreme Court.56

WHEREFORE, the United States requests that the Court apply collateral estoppel to prevent the relitigation of matters decided in Sunoco I.

DAVID A. HUBBERT
Deputy Assistant Attorney General

JONATHAN L. BLACKER
Texas Bar No. 00796215
IGNACIO PEREZ DE LA CRUZ
Massachusetts Bar No. 67261
Attorneys, Tax Division
U.S. Department of Justice
717 N. Harwood, Suite 400
Dallas, Texas 75201
(214) 880-9765
(214) 880-9759
(214) 880-9741 (FAX)
Jonathan.Blacker2@usdoj.gov
Ignacio.PerezdelaCruz@usdoj.gov

ATTORNEYS FOR THE UNITED STATES

FOOTNOTES

1Sunoco, Inc. v. United States, 129 Fed. Cl. 322 (2016), aff'd, 908 F.3d 710 (Fed. Cir. 2018) (“Sunoco I”).

2Unless otherwise indicated, all citations are to the Internal Revenue Code of 1986, 26 U.S.C., in effect during the income-tax periods in suit.

3Sunoco I, 129 Fed. Cl. at 324. The issue in Sunoco I was recently decided against different parties in two separate cases: Exxon Mobil Corporation (“Exxon Mobil”), in the Northern District of Texas, and Delek v. US Holdings, Inc., in the Middle District of Tennessee. On August 9, 2018, in the Exxon Mobil case, Judge Godbey issued an opinion granting the United States' Cross-Motion for Partial Summary Judgment against Exxon Mobil, explaining that:

At the core of count I is a single question of law: if a taxpayer takes a Mixture Credit against a fuel excise tax, may the taxpayer include the unreduced amount of the excise tax in its cost of goods sold or must the taxpayer include in its cost of goods sold only the fuel excise tax liability actually paid after deducting the Mixture Credit? In Sunoco v. United States, the Court of Federal Claims recently answered this very question. 129 Fed. Cl. 322 (2016). Sunoco held that the Mixture Credit operates “as a reduction of the taxpayer's excise tax liability” and the taxpayer therefore “correctly use[s] its net excise taxes paid in calculating its cost of goods sold.” Id. at 324.

Exxon argues that Sunoco was wrong. Its position is not that Sunoco failed to consider certain arguments, but rather that Exxon disagrees with Sunoco's disposition of those arguments. Respectfully, this Court agrees with Sunoco and thus adopts its reasoning in full. The Court accordingly holds that Exxon's cost of goods sold must include only its fuel excise tax liability actually paid after subtracting the Mixture Credit.

Exxon Mobil Corp. v. United States, No. 3:16-CV-2921-N, 2018 WL 4178776, at *1 (N.D. Tex. Aug. 8, 2018) (Godbey, J.) (emphasis added).

Similarly, in Delek v. US Holdings, Inc., No. 3:19-cv-00332 (M.D. Tenn. January 25, 2021), the Court considered a 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. The Court agreed

with the Sunoco Court that the plain meaning of the statute indicates that the Mixture Credit reduces excise tax liability. . . . 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.

4Gov. Ex. 1, Sunoco I Complaint, ¶ 14, App. p. 5.

5See Gov. Ex. 2, App. pp. 16-81 (Sunoco's claims for refund for tax years 2004-09). These claims for refund were filed in Sunoco I, (Dkt 22). Included for each year (except 2009, which includes only the Form 1120X) are (i) the Form 1120X, and (ii) the basis/explanation for Sunoco's refund claims. The basis/explanations for each year are identical. Id., App. pp. 25, 37, 49, 61, 73. For 2010, Sunoco filed a Form 1120X claiming a refund of federal income tax of $121,588,419 plus statutory interest. Sunoco Complaint (Dkt. 1), ¶ 8(b). For 2011, Sunoco filed a Form 1120X, claiming a refund of federal income tax of $27,704,313 plus statutory interest. Id. ¶ 8(c).

6Id. Gov. Ex. 2. See also Sunoco's Complaint (Dkt. 1).

7See Ex. 1 to Sunoco's Complaint (Dkt. 1).

8Gov. Ex. 1, Sunoco I Complaint, ¶ 3, App. pp. 3-4.

9Id., ¶ 6, App. p. 4.

10Sunoco I, 129 Fed. Cl. at 324.

11Sunoco I, Dkts.18 & 22.

12See Sunoco I, Sunoco's Statement of Uncontested Facts, Dkt. 22-1. See also United States' Motion for Judgment on the Pleadings, Dkt. 18, p. vii.

13See Sunoco I, Dkts. 18, 22, 27, 28, 33, 52 (Transcript of Oral Argument held November 3, 2016).

14Sunoco I, 129 Fed. Cl. at 325.

15Id. at 324.

16Id.

17Id.

18Id. at 326.

19Id. at 327.

20Id. at 329.

21Id. at 330-31.

22Id. at 331.

23Id.

24Id. at 332.

25Sunoco, I, 908 F.3d 710 (Fed. Cir. 2018).

26Id. at 718.

27Id. at 715.

28Id. at 717.

29Id. at 717-18 (citation omitted) (emphasis in original).

30Id. at 719.

31Complaint, Dkt. 1, ¶ 17 (emphasis added).

32Id. ¶ 24.

33Sunoco I Complaint, ¶ 14, Gov. Ex. 1, App. p. 5.

34Id. ¶¶ 37, 47, 57 and 67 (emphasis added), App. pp. 9-10, 12-13.

35Gandy Nursery, Inc. v. United States, 318 F.3d 631, 639 (5th Cir. 2003); United States v. Shanbaum, 10 F.3d 305, 311 (5th Cir. 1994). Some cases note a fourth requirement that there be “no special circumstances that would render issue preclusion inappropriate or unfair.” See Swate v. Hartwell, 99 F.3d 1282, 1290 (5th Cir. 1996); RecoverEdge L.P. v. Pentecost, 44 F.3d 1284, 1290 (5th Cir. 1995); Shanbaum, 10 F.3d at 311. This requirement, however, originated as a limitation on offensive collateral estoppel, which arises when a Plaintiff seeks to estop a Defendant from relitigating an issue the Defendant previously litigated and lost against another Plaintiff. See Parklane Hosiery Co. v. Shore, 439 U.S. 322, 329 (1979). Offensive collateral estoppel is not involved here.

36Parklane Hosiery, 439 U.S. at 326, 336 n.23 (“[T]he whole premise of collateral estoppel is that once an issue has been resolved in a prior proceeding, there is no further fact finding function to be performed.”).

37Test Masters Educ. Servs. v. Singh, 428 F.3d 559, 571 (5th Cir. 2005); See also Procter & Gamble Co. v. Amway Corp., 242 F.3d 539, 546 (5th Cir. 2001).

38Test Masters Educ. Servs. v. Singh, 428 F.3d at 571, citing St. Paul Mercury Ins. Co. v. Williamson, 224 F.3d 425, 436 (5th Cir. 2002).

39United States v. Mendoza, 464 U.S. 154, 158 (1984). See also Montana v. United States, 440 U.S. 147, 153. (1979); Commissioner v. Sunnen, 333 U.S. 591, 597-98 (1948).

40Hibernia Nat'l Bank, Trust Div., 740 F.2d 382, 387-89 (5th Cir. 1984).

41Id. at 388.

42Id. at 388-89 (citation omitted).

43Allen v. McCurry, 449 U.S. 90, 94 (1980)

44Southwest Airlines Co. v. Texas Internat'l Airlines, Inc., 546 F.2d 84, 94 (5th Cir. 1977)

45Shanbaum, 10 F.3d at 311.

46Hardy v. Johns-Manville Sales Corp., 681 F.2d 334, 338 (5th Cir. 1982). See also Hibernia Nat'l Bank v. United States, 740 F.2d at 387-89.

47Id.

48Yamaha Corp. v. United States, 961 F.2d 245, 254 (D.C.Cir.1992) (emphasis in original).

49Montana, 440 U.S. at 164, n.11.

50Midwest Mechanical Contractors, Inc. v. Commonwealth Constr. Co., 801 F.2d 748, 751 (5th Cir. 1986); Shanbaum, 10 F.3d at 311; see also Matter of Schwager, 121 F.3d 177, 181 (5th Cir.1997) (This doctrine can apply whether or not the second suit is based upon the same cause of action as the first suit).

51Blonder–Tongue Labs, 402 U.S. at 324; Parklane Hosiery, 439 U.S. at 329.

52Restatement (Second) of Judgments § 27 (1982); see also In re Keaty, 397 F.3d 264, 272 (5th Cir. 2005); James Talcott, Inc. v. Allahabad Bank, Ltd., 444 F.2d 451, 459-60 (5th Cir. 1971) (“where a question of fact is put in issue by the pleadings, and is submitted to the jury or other trier of facts for its determination, and is determined, that question of fact has been 'actually litigated.'”).

53See Footnote 11, supra.

54See Sunoco, Inc. v. United States, 140 S. Ct. 46 (2019).

55See United States v. Hartley, 612 F.2d 1009, 1010 (5th Cir. 1980) (“collateral estoppel applies 'when an issue of ultimate fact has once been determined by a valid and final judgment' (citing Ashe v. Swenson, 397. U.S. 436, 443 (1970))).

56Parklane Hosiery, 439 U.S. at 328.

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