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Energy Company Seeks Readjustment Based on Fuel Mixture Credits

JUN. 10, 2021

SOPC Holdings East LLC et al. v. United States

DATED JUN. 10, 2021
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SOPC Holdings East LLC et al. v. United States

SOPC HOLDINGS EAST, LLC, the Tax Matters Partner of MOTIVA ENTERPRISES LLC,
Plaintiff,
v.
UNITED STATES OF AMERICA,
Defendant.

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION

COMPLAINT

Plaintiff, SOPC Holdings East, LLC (“SOPC East”), the Tax Matters Partner of Motiva Enterprises LLC (“Motiva”), pursuant to former section 6226 of the Internal Revenue Code of 1986 (the “Code”),1 seeks a readjustment of partnership items for each tax year ending December 31, 2008, December 31, 2009, December 31, 2010, December 31, 2011, December 31, 2012, and December 31, 2013 (collectively, the “Years at Issue”).

This is an action brought with respect to Motiva for the readjustment of partnership items under former section 6226. Former section 6226 was part of section 402 of the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) Pub. L. No. 97-248, section 402, 96 Stat. 324, 648 (codified at 26 U.S.C. §§ 6221-32). TEFRA provided unified audit and litigation procedures for partnership items for the Years at Issue. The Bipartisan Budget Act of 2015, Pub. L. No. 114-74, sections 1101(a) and (g)(1), 129 Stat. 584, 625 replaced those audit procedures with a new regime effective for tax years beginning after December 31, 2018.

This Complaint is being pursued to determine whether Motiva correctly deducted its fuel excise tax obligations under section 4081 when it calculated its partnership income on its Amended Return or Administrative Adjustment Request (Form 1065X) (“Motiva's Amended Returns”) for each of the Years at Issue. In particular, the Complaint seeks a determination by the Court of partnership items such that the full amount of Motiva's fuel excise tax should have been deducted as part of cost of goods sold in determining its gross income for each Year at Issue, without any reduction for the fuel mixing credits provided under sections 6426(b) and 6426(c), and that the Defendant's refusal to permit Motiva to reduce its partnership income for the Years at Issue is therefore erroneous.

I. PARTIES

1. The plaintiff is SOPC East, a partner of Motiva within the meaning of former section 6231(a)(2). Motiva is a limited liability company organized under the laws of Delaware and is a partnership for TEFRA purposes under former section 6231(a)(1). Motiva's current principal place of business is located at One Allen Center, 500 Dallas Street, 9th Floor, Houston, Texas 77002, within the jurisdiction of this Court. SOPC East was Motiva's Tax Matters Partner for the Years at Issue within the meaning of former section 6231(a)(7).

2. During the Years at Issue, Motiva's partners were SOPC East, TMR Company, and Saudi Refining Inc. (“SRI”). After the Years at Issue, through a series of transactions, Motiva became wholly owned by affiliates of SRI.

3. SOPC East is a limited liability company organized under the laws of Delaware and has with respect to each of the Years at Issue properly elected to be treated as a partnership for federal income tax purposes. SOPC East is owned by SOPC Holdings West, LLC and Shell Oil Company (“SOC”), both of which were corporate members of an “affiliated group” as defined by section 1504 with Shell Petroleum Inc. (“SPI”) as the “common parent” responsible for filing the group's consolidated Federal income tax returns. SOPC East is headquartered at 150 N. Dairy Ashford, Houston, Texas 77079.

4. TMR Company is a subsidiary of SPI and a corporate member of the SPI affiliated group.

5. SRI is a subsidiary of Aramco Services Company (“ASC”) and a member of the affiliated group for which ASC is the common parent responsible for filing the group's consolidated Federal income tax returns.

6. In its capacity as the Tax Matters Partner of Motiva for the Years at Issue, SOPC East is the authorized and proper party to bring this action under former section 6226(a).

7. The defendant is the United States of America.

II. JURISDICTION AND VENUE

Jurisdiction

8. The Court has jurisdiction over this dispute under former section 6226(a) and 28 U.S.C. § 1346(e).

9. On or around October 23, 2014, Motiva timely filed its Amended Returns with the Commissioner of the Internal Revenue Service (the “Commissioner”) for each of the Years at Issue. Motiva's Amended Returns sought to correct a calculation error on Motiva's Original Returns by increasing Motiva's “cost of goods sold” and thereby decreasing its gross income and thus its partnership income for each of the Years at Issue.

10. The Commissioner issued Final Partnership Administrative Adjustments (“FPAAs”) on March 15, 2021, which among other items, rejected the correction that Motiva's Amended Returns made to reduce partnership income for each of the Years at Issue. Copies of the FPAAs are attached as Exhibits A-F.

11. SOPC Holdings has timely filed this action within the 90-day period provided by former section 6226(a).

12. Pursuant to former section 6226(e)(1), a partner filing a petition for readjustment of partnership items in a Federal district court must deposit with the Secretary of the U.S. Department of Treasury the amount by which the tax liability of the partner would be increased if the treatment of partnership items on the partner's return were made consistent with the treatment of partnership items on the partnership return as adjusted by the FPAA.

13. The undisputed adjustments reflected in the FPAA for 2008 would increase Motiva's partnership income for that year without regard to the calculation correction made by Motiva's Amended Return for that year. See Ex. A. However, SPI, the common parent of the partners of SOPC East, has already paid the additional tax resulting from those other adjustments.

14. For 2009-2012, the FPAAs included agreed adjustments that would reduce Motiva's partnership income without regard to the Commissioner's erroneous rejection of the calculation correction made by Motiva's Amended Returns. See Exs. B-E. As a result, and in accordance with former section 6226(e)(1), the tax liability of SOPC West and SOC (the partners of SOPC East and members of the SPI consolidated group) for each of these years would not be increased if the treatment of partnership items were made consistent with the adjustments reflected in the FPAA.

15. The undisputed adjustments reflected in the FPAA for 2013 would increase Motiva's partnership income for that year without regard to the calculation correction made by Motiva's Amended Returns for that year. See Ex. F. However, the FPAA adjustments merely reduce the amount of a net operating loss of the SPI consolidated group and would not increase the tax liability of the partners, SOPC East or that of the SPI consolidated group for that year.

16. Accordingly, SOPC East has determined, in good faith, that no deposit is required to satisfy the requirements of former section 6226(c)(1) for any of the Years at Issue.

Venue

17. Motiva's principal place of business is Houston, Texas. Venue is thus proper in this Court pursuant to former section 6226(a)(2) and 28 U.S.C. § 1402(c).

III. BACKGROUND

18. Motiva is a crude refining, fuel distribution, and fuel product marketing company. Through a series of terminals across the United States, Motiva distributes and sells a variety of fuel products. During the Years at Issue, Motiva operated roughly 35 terminals. Incident to these activities, Motiva blends alcohol and biodiesel with taxable fuel products and sells the resulting mixtures to third parties.

Motiva's Fuel Removal Activities

19. Section 4081(a) imposes a federal excise tax on the removal of taxable fuel from a refinery or terminal; the entry into the United States of taxable fuel for consumption, use, or warehousing; and certain sales of a taxable fuel. The rate of the section 4081 excise tax depends on the type of taxable fuel, and ranges from $0.184 per gallon for non-aviation gasoline to $0.244 per gallon for diesel fuel or kerosene.

20. Motiva was subject to the section 4081(a) tax (the “fuel excise tax”) during the Years at Issue because its fuel removal activities included removing gasoline, diesel fuel, and kerosene from a refinery and terminal.

21. Taxpayers who incur federal excise taxes must file Form 720 quarterly and pay any excise tax not yet paid or otherwise satisfied. Each entity liable for the section 4081 excise tax must file its own Form 720.

22. Section 9503(b)(1) provides that taxes received pursuant to section 4081 by the U.S. Department of Treasury are to be appropriated to the “Highway Trust Fund.”

23. Because of its fuel removal activities, Motiva became liable for fuel excise taxes for each of the Years at Issue, as follows:

Year

Amount

2008

$2,091,445,661

2009

$2,111,637,351

2010

$2,277,990,673

2011

$2,414,180,523

2012

$2,468,070,090

2013

$2,491,915,035

Motiva's Fuel Mixing Activities

24. To promote energy independence and encourage the use of alternative fuels, Congress has long subsidized the blending of alcohol with gasoline. The American Jobs Creation Act of 2004, Pub. L. No. 108-357, § 301(a), 118 Stat. 1419, enacted section 6426(b) and 6426(c), which provided a credit for blending alcohol with taxable fuel (the “Alcohol Fuel Credit”) and a credit for blending biodiesel and diesel fuel (the “Biodiesel Mixture Credit”) (both the Alcohol Fuel Credit and the Biodiesel Mixture Credit, the “Fuel Blending Credits”). The Alcohol Fuel Credit replaced the prior subsidy, which provided for reduced excise tax rates for taxable fuels containing certain amounts of alcohol.

25. The Alcohol Fuel Credit is equal to the number of gallons of alcohol a taxpayer blends with a taxable fuel that the taxpayer either sells or uses in its trade or business, multiplied by an applicable rate. For 2008, the applicable rate was $0.51 per gallon and for years 2009 through 2011, the applicable rate was $0.45 per gallon. The Alcohol Fuel Credit expired after 2011.

26. For the Years at Issue, section 6426(c) generally provided a Biodiesel Mixture Credit of $1.00 per each gallon of biodiesel “used by the taxpayer in producing any biodiesel mixture for sale or use in a trade or business of the taxpayer.”

27. Section 6426(a)(1) provides that the Fuel Blending Credits “shall be allowed as a credit against the tax imposed by section 4081.” To the extent a taxpayer's Fuel Blending Credits are not claimed as a credit against its section 4081 fuel excise tax in a given year, the taxpayer can elect to receive the Fuel Blending Credits either as a cash payment under section 6427(e) or an income tax credit under section 34.

28. During the Years at Issue, Motiva blended ethanol (a type of qualified alcohol) with gasoline to produce “gasohol” mixtures in fuels distributed for sale in its trade or business. In addition, during 2010, 2011, and 2013, Motiva blended biodiesel and diesel fuel to produce biodiesel mixtures in fuels distributed for sale in its trade or business. Motiva's fuel mixing activities entitled it to claim, and Motiva did claim, Alcohol Fuel Credits and Biodiesel Mixture Credits under section 6426(b) and 6426(c), respectively.

29. Neither Motiva's entitlement to, nor the amount of, its Fuel Blending Credits are in dispute. For each quarter of the Years at Issue, Motiva reported its fuel excise tax liabilities and claimed Fuel Blending Credits by submitting to the IRS a Quarterly Federal Excise Tax Return (Form 720) (and in some cases an amended Form 720 or a Form 8849). For each quarter of the Years at Issue, the reported fuel excise tax liabilities exceeded the Fuel Blending Credits claimed; Motiva remitted the difference to the U.S. Department of Treasury in cash.

Motiva's Partnership Income Calculations

30. For federal income tax purposes, taxable income is gross income less allowable deductions. Section 63(a). Gross income includes proceeds from the sale of products less the direct costs attributable to the production of those products, known as “cost of goods sold.” Section 61(a)(3); 26 C.F.R. § 1.61-3(a) (1992). In the case of a seller of petroleum products, section 4081 excise taxes are included in the taxpayer's cost of goods sold.

31. When claimed as a credit against the section 4081 fuel excise tax under section 6426(a), the Fuel Blending Credits operate as a payment in satisfaction, rather than a reduction, of that liability. As such, the Fuel Blending Credits do not impact the measurement of cost of goods sold.

32. On its Original Returns for the Years at Issue, Motiva erroneously understated its cost of goods sold by the amount of the Fuel Blending Credits that Motiva earned, which caused a corresponding overstatement of gross income, and, thus, over-reported its partnership income. Motiva's Amended Returns corrected Motiva's Original Returns, increasing Motiva's cost of goods sold by the amount of the Fuel Blending Credits earned and thereby decreasing its gross income by the following amounts for the Years at Issue:

Year

Amount

2008

$228,992,081

2009

$295,009,806

2010

$384,398,033

2011

$415,249,963

2012

$162,781

2013

$1,696,735

IV. CLAIM FOR RELIEF

COUNT I
2008 OVERPAYMENT OF INCOME TAX – ALCOHOL FUEL CREDIT

33. Motiva incorporates by reference the allegations contained in paragraphs 1 through 32, above.

34. In his FPAA issued on March 15, 2021, the Commissioner erroneously failed to reduce Motiva's gross income for 2008 by the amount of $228,992,081.

35. Motiva is entitled to a reduction of its partnership income in the amount of no less than $228,992,081.

COUNT II
2009 OVERPAYMENT OF INCOME TAX – ALCOHOL FUEL CREDIT

36. Motiva incorporates by reference the allegations contained in paragraphs 1 through 32, above.

37. In his FPAA issued on March 15, 2021, the Commissioner erroneously failed to reduce Motiva's gross income for 2009 by the amount of $295,009,806.

38. Motiva is entitled to a reduction of its partnership income in the amount of no less than $295,009,806.

COUNT III
2010 OVERPAYMENT OF INCOME TAX
ALCOHOL FUEL CREDIT

39. Motiva incorporates by reference the allegations contained in paragraphs 1 through 32, above.

40. In his FPAA issued on March 15, 2021, the Commissioner erroneously failed to reduce Motiva's gross income for 2010 by the amount of $384,398,033.

41. Motiva is entitled to a reduction of its partnership income in the amount of no less than $384,398,033.

COUNT IV
2011 OVERPAYMENT OF INCOME TAX — FUEL BLENDING CREDITS

42. Motiva incorporates by reference the allegations contained in paragraphs 1 through 32, above.

43. In his FPAA issued on March 15, 2021, the Commissioner erroneously failed to reduce Motiva's gross income for 2011 by the amount of $415,249,963.

44. Motiva is entitled to a reduction of its partnership income in the amount of no less than $415,249,963.

COUNT V
2012 OVERPAYMENT OF INCOME TAX — BIODIESEL MIXTURE CREDIT

45. Motiva incorporates by reference the allegations contained in paragraphs 1 through 32, above.

46. In his FPAA issued on March 15, 2021, the Commissioner erroneously failed to reduce Motiva's gross income for 2012 by the amount of $162,781.

47. Motiva is entitled to a reduction of its partnership income in the amount of no less than $162,781.

COUNT VI
2013 OVERPAYMENT OF INCOME TAX — BIODIESEL MIXTURE CREDIT

48. Motiva incorporates by reference the allegations contained in paragraphs 1 through 32, above.

49. In his FPAA issued on March 15, 2021, the Commissioner erroneously failed to reduce Motiva's gross income for 2013 by the amount of $1,696,735.

50. Motiva is entitled to a reduction of its partnership income in the amount of no less than $1,696,735.

V. CONDITIONS PRECEDENT

51. All conditions precedent have been satisfied.

VI. PRAYER FOR RELIEF

FOR ALL THESE REASONS, plaintiff, SOPC East, Tax Matters Partner on behalf of Motiva, prays that the Court enter judgment against the United States:

A. Judgment in SOPC East's favor against the United States that Motiva is entitled to include in its cost of goods sold for 2008, 2009, 2010, 2011, 2012, and 2013, the full amount of the fuel excise tax that it incurred, without reduction by the Fuel Mixture Credits that it earned, resulting in a decrease of its partnership income in the amounts of no less than $228,992,082 for 2008, no less than $295,009,806 for 2009, no less than $384,398,032 for 2010, no less than $415,249,962 for 2011, no less than $162,781 for 2012, and no less than $1,696,735 for 2013, plus any resulting interest being awarded to the partners as provided by law, and that the IRS's refusal to allow that decrease to Motiva's partnership income is erroneous; and

B. Any such other and further relief to which SOPC East, Motiva and the other partners of Motiva are entitled that this Court deems just and appropriate.

RESPECTFULLY SUBMITTED,

Date: June 10, 2021

Kevin L. Kenworthy (D.C. Bar No. 414887)
So. Dist. of Tx. Fed. ID No: 3385412
George A. Hani (D.C. Bar No. 451945)
So. Dist. of Tx. Fed. ID No. 3385399
Andrew L. Howlett (D.C. Bar No. 1010208)
So. Dist. of Tx. Fed. ID No. 3385407
Attorneys-in-Charge
Miller & Chevalier Chartered
900 16th Street NW
Washington, DC 20006
Tel. (202) 626-5800
Fax. (202) 626-5801
Email: kkenworthy@milchev.com
Email: ghani@milchev.com
Email: ahowlett@milchev.com
Attorney for Plaintiffs

SOPC Holdings East, LLC the Tax Matters Partner of MOTIVA ENTERPRISES LLC

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