Trade Association Files Amicus Brief in Fuel Mixture Tax Credit Case

DELEK US HOLDINGS, INC.,
Plaintiff-Appellant,
v.
UNITED STATES OF AMERICA,
Defendant-Appellee.

UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT

On Appeal from the United States District Court
for the Middle District of Tennessee (No. 3:19-cv-00332)

The Honorable William L. Campbell, Jr.

BRIEF OF AMICUS CURIAE
AMERICAN FUEL & PETROCHEMICAL MANUFACTURERS IN SUPPORT OF APPELLANT

David B. Blair
Carina C. Federico
CROWELL & MORING LLP
1001 Pennsylvania Ave., N.W.
Washington, D.C. 20004-2595
Phone: (202) 624-2765
Fax: (202) 628-5116
dblair@crowell.com

Counsel for Amicus Curiae

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TABLE OF CONTENTS

INTEREST OF AMICUS CURIAE

INTRODUCTION AND STATUTORY BACKGROUND

SUMMARY OF THE ARGUMENT

ARGUMENT

CONCLUSION

TABLE OF AUTHORITIES

Cases

Flood v. United States, 33 F.3d 1174 (9th Cir. 1994)

Hardin v. Reliance Tr. Co., No. 1:04CV2079, 2006 WL 2850457 (N.D. Ohio Sept. 29, 2006)

United States v. Hemme, 476 U.S. 558 (1986)

Statutes

26 U.S.C. § 31

26 U.S.C. § 37

26 U.S.C. § 38

26 U.S.C. § 39

26 U.S.C. § 41

26 U.S.C. § 43

26 U.S.C. § 163

26 U.S.C. § 280C

26 U.S.C. § 1016

26 U.S.C. § 1245

26 U.S.C. § 4051

26 U.S.C. § 4071

26 U.S.C § 4081

26 U.S.C. § 6423

26 U.S.C. § 6426

26 U.S.C. § 6427

26 U.S.C. § 9503

American Jobs Creation Act of 2004, Pub. L. No. 108-357, 118 Stat. 1418 (2004)

Energy Tax Act of 1978, Pub. L. No. 95-618, 92 Stat. 3174 (1978)

Pub. L. No. 108-357, § 301

Revenue Act of 1926, § 202 (1926)

Revenue Act of 1932, § 113(b)(1)(B), 47 Stat. 201 (1932)

Other Authorities

I.R.S. Priv. Ltr. Rul. 201022012 (Jun. 4, 2010). The IRS

I.R.S. Tech. Adv. Mem. 200215004 (Dec. 20, 2001)

Bittker & Lokken, Federal Taxation of Income, Estates & Gifts ¶ 51.2.4 (2021)

IRS Publication 946

Mertens Law of Federal Income Taxation §47:83

Motor Fuel Excise Tax. H.R. Conf. Rept. No. 108-755, reprinted in 2004 U.S.C.C.A.N. 1341

Treas. Reg. § 48.4081-2 Treas. Reg. § 48.4081-3

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INTEREST OF AMICUS CURIAE¹

AFPM is a national trade association representing most of the U.S. refining and petrochemical manufacturing capacity. These companies provide jobs, directly and indirectly, to more than three million Americans, contribute to our economic and national security, and enable the production of thousands of vital products used by families and businesses throughout the United States. AFPM members manufacture gasoline and diesel fuel and are directly affected by government regulations that distort the free market and impact consumer choices for vehicles and fuel. Depending on their other business activities, AFPM members incur varying amounts Motor Fuel Excise Tax under Section 4081: from zero to billions of dollars.

Some members used the credits they earned from their blending activities to satisfy their liabilities for the Motor Fuel Excise Tax under Section 4081, which is generally triggered upon the removals of taxable fuel from refineries or terminals. Like Delek, other companies, including within AFPM's membership, took their credits in both forms: to satisfy their Section 4081 liability and as a cash payment.

The U.S. District Court for the Middle District of Tennessee held that blenders must apply the credits they earn from their blending activity first to alter (not satisfy) their Motor Fuel Excise Tax liability, with any remaining credits paid in cash. Memorandum Opinion, RE 66, Page ID # 1822. The Court held that this reduction in excise tax would, in turn, reduce these blenders' costs of goods sold, increasing their gross income for income tax purposes. Memorandum Opinion, RE 66, Page ID # 1820. There is no dispute that when a blender received the credits it earned in cash under Section 6427(e), the payment was not taxable income for purposes of determining the producer's federal income tax liability. Memorandum Opinion, RE 66, Page ID # 1813, n.3. Under the District Court's holding, blenders that also incurred the Motor Fuel Excise Tax suffered a competitive disadvantage relative to blenders that incurred less Motor Fuel Excise Tax than credits. The decision created an uneven playing field among blenders of alcohol and taxable fuel that adversely affects members of AFPM and producers of ethanol-blended fuels.

The Alcohol Fuel Mixture Credit, as set forth in 26 U.S.C. §6426(b), is a key part of a federal policy to encourage a specific activity: the blending of alcohol with gasoline. Virtually all gasoline producers claimed the Alcohol Fuel Mixture Credit during the years it was available (2005 through 2011). Like Delek, many of those producers claimed the Alcohol Fuel Mixture Credit in whole or in part as a “credit against” their Motor Fuel Excise Tax. The District Court's decision undermines Congress' policy by effectively subjecting some blenders to income tax on the Congressional subsidy they earned from their blending activity and, at the same time, allowing others to claim the subsidy tax-free. No policy justifies this disparate treatment. All blenders engaged in the same activity, which Congress sought to encourage in the American Jobs Creation Act of 2004, Pub. L. No. 108-357, § 301(c)(7), 118 Stat. 1418, 1461 (2004) (“Jobs Act”), and all of them should have received the same benefit from Congress' incentive.

INTRODUCTION AND STATUTORY BACKGROUND

Congress has long imposed an excise tax on motor and aviation fuels, including blends of alcohol and taxable fuel. See 26 U.S.C § 4081 (the “Motor Fuel Excise Tax”). Treasury's receipts from the Motor Fuel Excise Tax are appropriated to the Highway Trust Fund. See 26 U.S.C. § 9503(b). The government uses these funds to construct and maintain highways.

To simplify collection and avoid fraud, Congress does not impose the Motor Fuel Excise Tax at the point of retail sale. Instead, the tax is imposed further up the supply chain, typically upon the “removal” of taxable fuel from the refinery rack or terminal rack, such as when the fuel is loaded onto a truck for transport to a gas station. See 26 U.S.C. § 4081(a)(1). Prior to a taxable removal, taxable fuel remains untaxed in the bulk system. Taxpayers that are registered with the Internal Revenue Service may engage in bulk sales of taxable fuels without triggering the tax. See 26 U.S.C. § 4081(a)(1). For example, a registered taxpayer that sells its taxable fuel within the bulk system to another registered taxpayer is not liable for the Motor Fuels Excise Tax. See Treas. Reg. § 48.4081-3(f). Instead, the bulk purchaser is liable for the tax at the time of removal at the terminal rack, if it is still the position holder in the taxable fuel at that point. See Treas. Reg. § 48.4081-2.

Congress has used a variety of tax incentives to encourage the production and use of renewable fuels.² For many years, Congress provided a reduced rate of Motor Fuel Excise Tax (or, in some years, an outright exemption from the Motor Fuel Excise Tax) for gasoline that was blended with ethanol. See, e.g., 26 U.S.C. § 4081(c) (2003) (prior to amendment by the Jobs Act). As the popularity of ethanol-blended fuels increased, lower rates and exemptions for blended fuels significantly reduced the excise tax receipts appropriated to the Highway Trust Fund. Congress enacted Section 301 of the Jobs Act, which amended the Motor Fuel Excise Tax to eliminate the reduced rates for blended fuels under Section 4081 and enacted the Alcohol Fuel Mixture Credit to preserve and expand the incentive for all blenders to produce renewable fuel blends. See Jobs Act, § 301, 118 Stat. at 1461.

The Alcohol Fuel Mixture Credit, Section 6426(b), was an activity-based credit based on actions that are distinct from the triggering events under the Motor Fuel Excise Tax.³ Activity-based credits (sometimes referred to as production credits) differ from expenditure-based credits like the research credit under Section 41 or the enhanced oil recovery credit under Section 43, which subsidize specific types of taxpayer expenditures by granting a credit based on the amount that taxpayers spend on research or enhanced oil recovery projects. Under Section 6426, taxpayers that engaged in the activity that Congress intended to subsidize (i.e., producing an alcohol fuel mixture for sale or use in their trade or business) earned a credit of $0.45 for each gallon of ethanol alcohol used in producing the alcohol fuel mixture. See 26 U.S.C. § 6426(b). Under the Alcohol Fuel Mixture Credit, there was no necessary connection between expenditures incurred by a taxpayer and the amount of the credits they earn. Similarly, because the Alcohol Fuel Mixture Credit is earned from the activity of blending alcohol and taxable fuel, there was no necessary relationship between earning the credit and incurring the Motor Fuel Excise Tax. The two are based on distinct events. The Motor Fuel Excise Tax arises upon removal of taxable fuels at the terminal rack. The Alcohol Fuel Mixture Credit is based on blending, which occurs both before and after removal at the terminal rack.

The Alcohol Fuel Mixture Credit was also fully refundable. Under the Jobs Act, taxpayers could receive weekly cash payments equal to the credits that they had earned from blending or use the amounts they earned from blending activity as a credit against their Motor Fuel Excise Tax. See Pub. L. No. 108-357 §§ 301(a), 301(c)(9), 118 Stat. at 1459, 1462; 26 U.S.C. §§ 6427(e), 6426(a); 6427(i)(3). To coordinate the cash payment and credit against excise tax liability options and avoid double counting, the statute provided that no amount was payable in cash “with respect to any mixture . . . with respect to which an amount is allowed as a credit under section 6426” against the Motor Fuel Excise Tax. 26 U.S.C. § 6427(e).

The District Court's ruling, if upheld, would result in disparate income tax treatment of blenders who received some or all of their Alcohol Fuel Mixture Credits in cash and those who used their credits to satisfy their Motor Fuel Excise Tax liabilities. There is no dispute that when a blender received the credits it earned in cash under Section 6427(e), the payment was not taxable income for purposes of determining the producer's federal income tax liability. Memorandum Opinion, RE 66, Page ID # 1813, n.3. However, the District Court held that the income tax result was different for blenders with Motor Fuel Excise Tax liability. Those blenders, the District Court held, were required to first apply their credits earned from blending activity to reduce, rather than satisfy, their excise tax liability, resulting in a lower cost of goods sold and higher taxable income. The disparate treatment of credits earned by taxpayers engaged in the identical activity of blending alcohol and taxable fuel created an uneven playing field for AFPM's members. The District Court offered no policy rationale for this disparate treatment, as explained below, and its analysis contradicts the plain meaning of the Jobs Act's language.

To halt diminishing appropriations to the Highway Trust Fund, Congress provided that the full amount of excise tax imposed under Section 4081, which no longer included reduced rates for blended fuels, would be appropriated to the Highway Trust Fund. The Jobs Act amended Section 9503(b) to “appropriate[ ] to the Highway Trust Fund amounts equivalent to the taxes received in the Treasury” under Section 4081. Moreover, Congress specified that these “taxes received” were to be “determined without reduction for credits under section 6426.” Jobs Act, § 301(c)(11), 118 Stat. at 1462.

The Jobs Act assured additional funding for the Highway Trust Fund. It did so by requiring producers to pay the full Motor Fuel Excise Tax rate on alcohol-fuel blends and appropriating Treasury's receipts under that tax to the Highway Trust Fund. At the same time, Congress preserved and broadened the incentive to produce ethanol-blended fuels by enacting the Alcohol Fuel Mixture Credit, which not only could be used to satisfy the Motor Fuel Excise Tax for taxpayers who incurred the tax, but also could be claimed as a cash payment.

SUMMARY OF THE ARGUMENT

The District Court's ruling is incorrect and should be reversed. The District Court's ruling results in disparate treatment for taxpayers who are engaged in the same activity. The result is that blenders of ethanol and taxable fuels who claim the Section 6426 credit in the form of a cash refund under Section 6427(e) receive the full economic benefit of the credits they earn, while those that apply their credits against their Motor Fuel Excise Tax liability receive a lesser economic benefit from the credits they earned from the same activity. To make matters worse, the District Court required taxpayers with Motor Fuel Excise Tax liabilities to take the less advantageous option and first apply their credits to reduce their excise tax liability, thereby maximizing the increase in their income taxes. Nothing in the statute or legislative history indicates that Congress intended this disparate treatment of taxpayers who engage in identical creditable activity, placing one class of blenders at an economic disadvantage relative to their competitors. Nor is there any policy rationale for the disparate treatment.

Congress intended to confer a benefit upon blenders based upon the activity of blending alcohol with fuel, regardless of the existence or amount of a producer's Motor Fuel Excise Tax liability. Congress gave blenders an option to take advantage of that incentive through either a cash payment or applying the incentive as a credit against their Motor Fuel Excise Tax liability, if any. Congress' intent to permit blenders to choose between a cash payment and a credit is clear from the statutory language, which uses terms of art that are well established in the tax laws.

The District Court misinterpreted Congress' allowance in Section 6426(a) of a “credit — against the tax imposed” under the Motor Fuel Excise Tax to require a reduction in excise tax liability rather than satisfaction of that liability. The Section 6426(a) “credit against” language should be read consistently with how it is used in other provisions of the Internal Revenue Code, IRS guidance, and IRS forms.

The District Court's ruling also cannot be squared with the provisions in the Jobs Act designed to fully fund the Highway Trust Fund. Under the District Court's view that the Alcohol Fuel Mixture Credit reduces (rather than satisfies) a taxpayer's liability for Motor Fuel Excise Tax, appropriations to the Highway Trust Fund would be reduced — in many cases, such as for the taxpayer in this case, to zero.

ARGUMENT

I. The District Court's ruling results in disparate treatment of taxpayers that engage in identical, blending activities.

The District Court held that blenders were required to (i) apply their Alcohol Fuel Mixture Credits to reduce (not satisfy) their liability for Motor Fuel Excise Tax, (ii) claim a cash payment for only the credits remaining after such application, and (iii) treat the reduction in Motor Fuel Excise Tax as a reduction in cost of goods sold, resulting in a higher income tax. This holding created different classes of taxpayers that received disparate tax treatment for the same blending activity.

Because the activities that gave rise to Alcohol Fuel Mixture Credits were distinct from the activities that gave rise to Motor Fuel Excise Tax liability, undertaking blending activity to earn Alcohol Fuel Mixture Credits did not result in liability for the Motor Fuel Excise Tax. Some blenders, like the taxpayer here, earned more credits than their excise tax liability. Others had more excise tax liability than credits. Some AFPM members received significant cash payments under Section 6427(e), and others received no cash payments.

Under the District Court's ruling, each of these classes of blenders would receive different economic benefits from the same blending activity. First, the parties agree that blenders who received cash payments were not liable for income tax on the credits they earned. Memorandum Opinion, RE 66, Page ID # 1813, n.3. Under the District Court's holding, blenders with more credits than excise tax liability were required to apply a portion of their credits to reduce their excise tax liability, increasing their income taxes. They received only the remaining credits in cash, free of income tax. Second, blenders with more excise tax than credits were required to apply all of their credits to reduce their excise tax liability and suffered a loss of up to 35 percent of the value of their credits relative to blenders receiving cash payments (assuming a 35 percent corporate tax rate).

Assuming blenders are eligible for a $100 credit under § 6426 and each is taxed at a corporate income tax rate of 35%, this disparate treatment is as follows:

	Blender takes full amount as a credit against § 4081 Tax	Blender takes $50 as a credit against § 4081 Tax and $50 weekly as cash payment	Blender takes full amount as weekly cash payment
Economic Value of $100 Credit	$65	$82.50	$100

In the scenarios set forth above, blenders engaged in the same activity that Congress intended to reward through Section 6426(a). The blenders all calculated the amount of the incentive using the same method set out in Section 6426(b). Depending upon whether blenders applied all or part of the credits they earned from blending against their excise tax liability or as a cash payment, their tax benefits would differ significantly under the District Court's ruling. The plain language of the statute does not support disparate tax treatment. The District Court offered no explanation for why Congress would have structured the Alcohol Fuel Mixture Credit to require disparate treatment of taxpayers engaged in the same blending activity. The District Court's construction of the statute is flawed and should be reversed.

II. Credits earned from blending activity, when applied against Motor Fuel Excise Tax liability, should be treated as a payment in satisfaction of the excise tax, not a reduction that leads to an increase in income tax.

A. Section 6426 extends credits based upon the taxpayer's activity, not the amount of the taxpayer's otherwise deductible expenditures, and claiming the credit does not increase a taxpayer's liability for income tax.

The Section 6426 Alcohol Fuel Mixture Credit was an activity-based credit that taxpayers earned by engaging in the activity of blending alcohol and taxable fuel. Decoupling the economic benefit associated with blending from the taxpayer's excise tax liability was a principal purpose of the Jobs Act. For purposes of earning and calculating the Section 6426 credit, it did not matter whether the blender was liable for Motor Fuel Excise Tax. Section 6426 provided that the credit was calculated by multiplying the applicable amount of the credit (45 cents in the years at issue) by the number of gallons of alcohol used by the taxpayer in producing an alcohol-taxable fuel mixture for sale or use in a trade or business of the taxpayer. Section 6427(e) made the credit fully refundable in cash, which allowed all blenders to receive the full benefit of the Section 6426 credits that they earned, even if they had no Motor Fuel Excise Tax liability.

Because it was fully refundable, the Section 6426(a) credit was different from tax credits where the amount of the credit was limited by the amount of the taxpayer's income or excise tax liability. For example, the Section 41 research credit is only available to be used to the extent that the taxpayer has sufficient taxable income for the year the taxpayer seeks to claim the credit. Otherwise, the remaining credit must be carried forward to later tax years, expiring if unused after 20 years. See 26 U.S.C. §§ 38(b)(4) and (c), 39. In contrast, the Section 6426(a) credit was immediately available to anyone who blended alcohol and taxable fuel. It could be claimed weekly as a cash payment and was not limited to any tax liability. See 26 U.S.C. § 6427(e)(3); (i)(3).

As an activity-based credit, the Alcohol Fuel Mixture Credit also differed from credits based on the taxpayer's investments or expenditures. Where Congress grants a credit for a tax-favored investment or expenditure, it typically reduces the deductions that taxpayers may claim for the tax-favored expenditures in the absence of the credit. For example, in Section 43 Congress granted a credit for expenditures on certain qualified enhanced oil recovery costs and, at the same time, reduced the deduction for those costs by the amount of the credit. See 26 U.S.C. § 43(a), (d). Similarly, in Section 41, Congress granted a credit for certain qualified research expenses, and in Section 280C it reduced the deduction for those costs by the amount of the credit. See 26 U.S.C. §§ 41(a), 280C(c). Cutting back on the deduction to the extent of the credit was a sensible way to prevent doubling up on tax benefits for one and the same expenditure. The Alcohol Fuel Mixture Credit is not based on expenditures, so Congress did not disallow any expenditure.

B. Taxpayers had the option to either claim the credit as satisfaction against their Section 4081 excise tax liability or as a cash payment.

The District Court held that the Alcohol Fuel Mixture Credit “must first be applied against the excise tax liability before any remaining balance is paid to the taxpayer.” Memorandum Opinion, RE 66, Page ID # 1822. By mandating that taxpayers utilize the credit option before the cash option, the District Court's opinion would force taxpayers into the court's unfavorable tax treatment of the credit option. This holding cannot be reconciled with the plain language of Sections 6426 and 6427(e), which provided blenders with a choice of how to utilize the credits that they earned from their blending activities. Moreover, it makes little policy sense because there is no necessary connection between a blender's earning a credit and incurring a Motor Fuel Excise Tax liability. The fact that blenders have the option to receive cash payments highlights the error in the District Court's holding that, for income tax purposes, blenders are treated as not having paid the Motor Fuel Excise Tax.

In setting out taxpayers' options for using the credits they earned from blending activity, Congress used language that has a long history in the tax laws and belies the District Court's construction of the statute. Specifically, Section 6427(e), entitled “Coordination with other Repayment Provisions,” states that a blender cannot claim a cash payment for any mixture with respect to which an amount is “allowed” as a credit against the Motor Fuel Excise Tax. 26 U.S.C. § 6427(e). By using the term “allowed,” rather than “allowable” or “allowed or allowable” in Section 6427(e), Congress expressed that the limitation was based on the credits that the blender chose to use to satisfy its Motor Fuel Excise Tax, not the amount that it could have used to satisfy that tax.

Congress understood what it was saying. The words “allowed” and “allowable” are well-established terms of art in the Internal Revenue Code. See Flood v. United States, 33 F.3d 1174, 1177 (9th Cir. 1994). The distinctions between the terms “allowed,” “allowable,” and “allowed or allowable” have a history in the Internal Revenue Code of almost 100 years. See Revenue Act of 1926, § 202 (1926) (amendment to replace basis adjustment based on depreciation, depletion, and amortization previously “allowed” with that previously “allowable”); Revenue Act of 1932, § 113(b)(1)(B), 47 Stat. 201 (1932) (basis adjustments to be based on depreciation, amortization, or depletion “to the extent allowed (but not less than the amount allowable).”) Today, it is well understood that the term “allowed” refers to the deductions or credits actually taken by the taxpayer. In contrast, “allowable” refers to the amounts that the taxpayer was permitted to claim, but may not have. See 26 U.S.C. §§ 1016 (basis adjustments must reflect both amounts “allowed” and “allowable”), 1245(a)(2)(B) (permitting taxpayers to establish that amounts previously “allowed” differed from those “allowable”); Bittker & Lokken, Federal Taxation of Income, Estates & Gifts ¶ 51.2.4 (2021) (“allowed” means “actually deducted”); IRS Publication 946 (“Depreciation allowed is depreciation you actually deducted (from which you received a tax benefit). Depreciation allowable is depreciation you are entitled to deduct.”) Courts have long recognized the distinction between “allowed” and “allowable” when used in the tax laws. See United States v. Hemme, 476 U.S. 558 (1986) (discussing meanings of “allowed” and “allowable” under the Gift Tax); Flood, 33 F.3d at 1177 (describing the meaning of “allowable” under Section 163).

The District Court held that blenders had to first apply the credits they earned to reduce their Motor Fuel Excise Tax liability before they could claim a cash payment under Section 6427(e). But this is not what the coordination rule in Section 6427(e)(3) says. The statute states that a taxpayer was not permitted a cash payment for alcohol-fuel mixtures with respect to which an amount was “allowed as a credit under section 6426” — i.e., the amount actually claimed by the blender as a credit against its Motor Fuel Excise Tax liability under Section 6426. Significantly, the coordination rule did not state that the limitation applied to amounts “allowed or allowable.” See 26 U.S.C. § 6427(e)(3). The provision merely allows a taxpayer to claim the Alcohol Fuel Mixture Credit quarterly on its excise tax return, or as frequently as weekly as a cash payment (26 U.S.C. §6427(i)(3)), but not both. It is not possible to read the omission of “allowed or allowable” from Section 6427(e) as a mere oversight, because Congress used both terms in the very same statute. Compare 26 U.S.C. § 6426(b)(5) (determination of number of gallons for which the blending credit is “allowable”), and 26 U.S.C. § 6427(e)(3) (coordination rule applies to amounts “allowed”). The District Court's holding essentially substituted the term “allowed or allowable” for the term “allowed.” It cannot be squared with the actual language of Section 6427(e) and should be rejected.

The District Court's attempt to force blenders into the credit option and away from the cash payment option fails to address that there is no necessary relationship between earning credits from blending alcohol and taxable fuel and incurring the Motor Fuel Excise Tax by removing taxable fuel from a refinery or terminal rack. The activities are distinct. The Alcohol Fuel Mixture Credit is distinguishable from expenditure-based credits, like the research credit and enhanced oil recovery credit, where the statute expressly requires those who claim credits for an expenditure to reduce their deductions for those same expenditures. See, e.g., 26 U.S.C. § 280C(c) (credit for qualified research expenses reduces deductions for those expenses), § 43(d) (credit for enhanced oil recovery costs reduces deduction for those costs). It makes little policy sense to hold that taxpayers engaged in the activity of blending must reduce, rather than satisfy, their tax on a separate activity.

The District Court's erroneous holding that blenders must utilize the credits they earn from blending to satisfy their Motor Fuel Excise Tax liability highlights the fallacy of the District Court's primary holding that the credits reduce, rather than satisfy, the Motor Fuel Excise Tax. Section 6426(a) encourages taxpayers to earn credits from blending activity and, as explained above, taxpayers have the option to either (i) use the credits to satisfy their Motor Fuel Excise Tax liability or (ii) receive those credits as a cash payment. Because they are fully refundable at the option of the blender, the credits are an entitlement to payment from the Treasury. The credits are intended to reward the same blending activity and should provide the same tax benefits to blenders, regardless of how they are claimed. There is no statutory basis or policy rationale for holding that, should the blender utilize the credits to satisfy their Motor Fuel Excise Tax liability they otherwise owe, they should be treated as if they never paid their excise taxes. Yet that is what the District Court held — blenders with excise tax liability (i) must use their credits to reduce that liability and (ii) cannot treat the excise taxes as having been paid when computing their costs of goods sold. Memorandum Opinion, RE 66, Page ID # 1817-19. Both holdings are in error and should be reversed.

C. Section 6426(a) “credit against” language should be read consistently with how it is used in other Internal Revenue Code Sections, IRS guidance, and IRS forms.

The District Court misinterpreted Congress' allowance in Section 6426(a) of a “credit — against the tax imposed” under the Motor Fuel Excise Tax to require a reduction in excise tax liability rather than satisfaction of that liability. Memorandum Opinion, RE 66, Page ID # 1817-18. In support of this conclusion, the court stated that “[i]f Congress intended the credit against excise tax under Section 6426(a) and the payment of any excess under Section 6427(e) to both be treated as payments, it could have provided as much without the need for the distinctions provided.” Memorandum Opinion, RE 66, Page ID # 1818. The Court's analysis makes little sense in the context of the provisions it relies upon and draws on an unreasonably restrictive definition of the term “credit against” in the context of the Internal Revenue Code.

First, the District Court's criticisms of Congress' language in the two sections fails to consider the different purposes of Section 6426(a)'s language, which allows the Alcohol Fuel Mixture Credit to satisfy other liabilities of the taxpayer, with the language of Section 6427(e), which deals with payments of cash. Using a credit to satisfy a liability is not a cash payment within the meaning of Section 6427(e), but that does not mean that there is no exchange of value when a credit is used to satisfy a liability. The District Court does not explain why a taxpayer who has earned credits from blending activity, for which it is entitled to a cash payment, has not paid the government when it uses those credits to satisfy its liability arising from a separate activity of removing taxable fuels from the bulk system.

Refundable credits like Section 6426 differ from nonrefundable credits that are limited by the amount of tax owed and expire after a period of time. See, e.g., 26 U.S.C. § 39(a)(1) (excess business credits are not refundable and may be carried forward up to 20 taxable years, at which point they expire). Section 6426 credits are paid to the taxpayer in cash, can be claimed weekly, and are not limited to the amount of any tax owed by the taxpayer. For this reason, they are refundable credits akin to cash.⁴

Second, the term “credit against” is widely used throughout the Internal Revenue Code, but not in the exclusive way that the District Court relies upon. The District Court construes “credit against” as having only one, specific meaning: a reduction in the underlying tax. But this is simply incorrect. Congress often, but not always, uses the term “credit against” in the ordinary sense that the balance due from the taxpayer is satisfied by the credit, but the underlying tax liability remains the same. Compare, 26 U.S.C. §§ 31(a)(1) (withholding taxes on wages imposed under Chapter 24 of the Code allowed as a “credit against” income tax), 37 (overpayment a “credit against” income tax), and 38(c), 39 (business “credits against” tax limited based on tax for the year — i.e., not refundable — with excess credits subject to carryover and expiration). For example, it would be hard to conclude that Congress has forgiven a portion of the income tax due from a taxpayer for 2020 when it allows the taxpayer to apply its overpayment of 2019 income taxes as a “credit against” its 2020 taxes. To the contrary, the taxpayer has used the 2019 overpayment to satisfy the full amount of its tax liability for 2020. Indeed, the common dictionary definition of “credit” is “the balance in a person's favor in an account.” See Merriam Webster.com (last visited Jun. 1, 2021).

The IRS's own guidance regarding excise tax statutes has confirmed that the phrase “credit against” has a more flexible meaning than the District Court admits. In a private letter ruling concerning Section 4051, which imposes an excise tax on heavy trucks and trailers sold at retail, and Section 4071, which imposes an excise tax on tires, the IRS ruled that the Section 4051(d) provision that there shall be a “credit against” the vehicle tax for tires sold in connection with the sale of heavy trucks and trailers does not mean that the vehicle tax liability was reduced or modified by the tire tax credit. Rather, the IRS ruled that the credit simply reduced the total balance due to the IRS. See I.R.S. Priv. Ltr. Rul. 201022012 (Jun. 4, 2010). The IRS issued similar, consistent guidance that the tire tax credit did not reduce the underlying tax liability in an earlier Technical Advice Memorandum. See I.R.S. Tech. Adv. Mem. 200215004 (Dec. 20, 2001).

The District Court was wrong to treat the term “credit against” as requiring a reduction in underlying tax whenever the phrase appears in the Internal Revenue Code. Instead, the District Court should have looked further to the context in which the phrase was used to determine Congress' meaning. The District Court's restrictive interpretation makes little sense in the context of the Alcohol Fuel Mixture Credit, which is (i) earned from blending activity distinct from the activities triggering the Motor Fuel Excise Tax, (ii) payable in cash and not limited to tax owed, (iii) treated as a payment on account like the credit for excise tax on tires, and (iv) refundable, rather than required to be carried over to other periods.

IRS Form 720, Quarterly Excise Tax Return (Rev. 1-2011) follows this reading of Section 6426. Form 720 treats the taxpayer's “total tax” owed and the taxpayer's balance due or overpayment as separate items on the return. The IRS requires taxpayers to first calculate and report the “total tax” incurred each quarter in Part III, Line 3. The “total tax” is not reduced by any credit. Rather, the Form 720 allows the taxpayer to claim any credits (including the Section 6426(a) credit), deposits made for the quarter, and overpayments from previous quarters against the total tax due for the quarter. If the amount of total tax is greater than the sum of these credits, the taxpayer has a balance due to the IRS. If the amount of total tax is less than the sum of the credits, then the taxpayer has an overpayment and can seek a refund or apply those funds as a “credit against” the next quarter's excise taxes. The Form 720 treats credits the same as deposits and overpayments. Deposits and overpayments do not reduce the underlying tax liability; they simply reduce the balance due or result in an overpayment. Alcohol Fuel Mixture Credits can be used as “credits against” the Motor Fuel Excise Tax in the same way — having no effect upon the underlying tax liability. Although the IRS's forms are not binding on the Court, they are instructive as to how the IRS views the reporting and treatment of different items on the return. See Mertens Law of Federal Income Taxation §47:83 (collecting cases); Hardin v. Reliance Tr. Co., No. 1:04CV2079, 2006 WL 2850457, at *4 (N.D. Ohio Sept. 29, 2006).

The District Court misread the dictionary definition of the term “tax credit” to mean that a credit always reduces, rather than satisfies a tax liability. Memorandum Opinion, RE 66, Page ID # 1817-18. Rather, the portion of Black's Law Dictionary definition of “tax credit” that the District Court relies upon (“an amount subtracted directly from one's total tax liability, dollar for dollar, as opposed to a deduction from gross income.”) merely differentiates tax credits from tax deductions. Memorandum Opinion, RE 66, Page ID # 1818 (citing Black's Law Dictionary (10th ed. 2014). A tax deduction reduces a taxpayer's taxable income, which may reduce tax liability by various amounts, depending on, among other things, the taxpayer's marginal tax rate. A tax credit is applied after taxable income and the total tax are already determined, and satisfies a taxpayer's tax liability dollar-for-dollar. The District Court conflated the balance due by the taxpayer after all credits, deposits, and overpayments are applied with the underlying tax liability due. The correct interpretation of the term “tax credit” matches with usage of the term “credit against” in other provisions of the Internal Revenue Code, IRS guidance, and IRS Form 720, as a payment or satisfaction. The same interpretation of “credit against” should apply to Section 6423(a).

D. The District Court's ruling cannot be reconciled with Congress' appropriation to the Highway Trust Fund under Section 9503.

Ensuring full funding of the Highway Trust Fund was a principal purpose of the Jobs Act amendments to the Motor Fuel Excise Tax. H.R. Conf. Rept. No. 108-755, at 308, reprinted in 2004 U.S.C.C.A.N. 1341, 1382. To accomplish this goal, Congress amended Section 4081 to eliminate the reduced rates of Motor Fuel Excise Tax on blended fuels and revised Section 9503(b) to appropriate the “taxes received” by Treasury under amended Section 4081 to the Highway Trust Fund. The District Court's holding that Alcohol Fuel Mixture Credits must be used to reduce (not satisfy) blenders' Motor Fuels Excise Tax liabilities would reduce the appropriation to the Highway Trust Fund, undermining a principal purpose of the Jobs Act amendments.

Section 9503(b) set out the appropriation to the Highway Trust Fund. It stated that the funds received under certain Internal Revenue Code excise tax provisions, including Section 4081, are appropriated to the Highway Trust Fund in amounts equivalent to “the taxes received in the Treasury” under the Motor Fuels Excise Tax and other excise taxes. Section 9503(b) further states that “[f]or purposes of this paragraph, taxes received under sections 4041 and 4081 shall be determined without reduction for credits under Section 6426. . . .” (emphasis added.)

The District Court's analysis of Section 9503(b) is flawed. In its ruling, the District Court sidesteps the express language of Section 9503(b), which stated that the starting point for the appropriation was the “taxes received” in the Treasury on account of the excise tax, and seeks a lifeline in the clarifying flush language in Section 9503(b), which stated that taxes received shall be determined “without reduction” for the Alcohol Fuel Mixture Credits. Memorandum Opinion, RE 66, Page ID # 1818-19. The District Court simply ignores the starting point specified by Congress in the appropriation language — “amounts equivalent to the taxes received in the Treasury.” 26 U.S.C. § 9503(b). Under the District Court's holding that Alcohol Fuel Mixture Credits earned through blending activity must first reduce (rather than satisfy) any liability for Motor Fuel Excise Tax, the result would be that the Highway Trust Fund would receive less than the full appropriation intended by Congress. For example, in this taxpayer's case, the appropriation under Section 9503(b) would be zero because that would be the amount of Motor Fuel Excise Tax “received in the Treasury” in this case.

The second flaw in the District Court's analysis of Section 9503(b) is that the flush language is directionally specific and cannot get the District Court to the result that it seeks to adopt; if “the taxes received” in the Treasury under the Motor Fuels Excise Tax are zero, avoiding a “reduction” under the flush language seems pointless. A more accurate reading of the appropriation in Section 9503(b) is that the starting point of “the taxes received” in the Treasury was the full amount of the taxpayer's Motor Fuels Excise Tax liability, with clarification in the flush language that using Alcohol Fuel Mixture Credits may satisfy, but does not reduce, the amount paid into the Treasury on account of the Motor Fuels Excise Tax.

In sum, the language in Section 9503(b) explicitly adopts the position of the taxpayer here that credits applied to the Motor Fuel Excise Tax liability are included in the taxes received by the Treasury. Under the District Court's ruling those taxes never would have been received. For these reasons, the District Court's ruling conflicts with the appropriation provision and should be reversed.

CONCLUSION

For the reasons stated, this Court should reverse the ruling of the U.S. District Court for the Middle District of Tennessee.

David B. Blair
Carina C. Federico
CROWELL & MORING LLP
1001 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2595
Tel: (202) 624-2765
Fax: (202) 628-5116
dblair@crowell.com

Counsel for Amicus Curiae