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Sunoco, Inc. v. United States

United States Court of Appeals, Federal Circuit

November 1, 2018

SUNOCO, INC., Plaintiff-Appellant
UNITED STATES, Defendant-Appellee

          Appeal from the United States Court of Federal Claims in No. 1:15-cv-00587-TCW, Judge Thomas C. Wheeler.

          Gregory G. Garre, Latham & Watkins LLP, Washington, DC, argued for plaintiff-appellant. Also represented by Elana Nightingale Dawson, Benjamin Snyder; George Millington Clarke, III, Eric M. Biscopink, Vivek Ashwin Patel, Kathryn E. Rimpfel, Baker & McKenzie LLP, Washington, DC; Daniel Allen Rosen, New York, NY.

          Judith Ann Hagley, Tax Division, United States Department of Justice, Washington, DC, argued for defendant-appellee. Also represented by Gilbert Steven Rothenberg, Richard Farber, David A. Hubbert.

          Before Reyna, Taranto, and Hughes, Circuit Judges.

          Reyna, Circuit Judge.

         This case concerns whether, under 26 U.S.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 mixture credit to reduce any excise-tax liability before receiving payment for any amount of mixture credit exceeding excise-tax liability. Sunoco, Inc. appeals from the Court of Federal Claims' grant of the United States' motion for judgment on the pleadings and denial of Sunoco, Inc.'s cross-motion for partial summary judgment. The Court of Federal Claims determined that the alcohol fuel 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. We affirm.


         1. Statutory Framework

         Since 1932, the United States has imposed an excise tax on various types of fuel, including gasoline. See Revenue Act of 1932, ch. 209, § 617(a), 47 Stat. 169 (1932) (current version at 26 U.S.C. § 4081).[1] Excise taxes are taxes collected on the "manufacture, sale, or use of goods," or "on an occupation or activity." Excise, Black's Law Dictionary (10th ed. 2014). Under § 4081, the United States imposes an excise tax upon the occurrence of events involving the removal of gasoline from a refinery or terminal; the entry of gasoline into the United States for consumption, use, or warehousing; and the sale of gasoline to certain purchasers. § 4081(a)(1)(A). In particular, § 4081 imposes an excise tax of 18.3 cents per gallon of gasoline (other than aviation gasoline). § 4081(a)(2)(A)(i).[2]

         Pursuant to § 9503, the § 4081 gasoline excise tax is used to fund the Highway Trust Fund, created by the Federal-Aid Highway Act of 1956 ("Highway Revenue Act"), Pub. L. No. 84-627, § 209, 70 Stat. 374, 397 (codified at 26 U.S.C. § 9503). These funds are used to construct and maintain the nation's highways and other infrastructure.

         In 1978, Congress started enacting tax incentives for renewable fuels, such as alcohol fuel blends. See Energy Tax Act of 1978, Pub. L. No. 95-618, § 221, 92 Stat. 3174, 3185. One of these tax incentives was a reduced excise-tax rate for alcohol fuel mixtures. See Highway Improvement Act of 1982, Pub. L. No. 97-424, 96 Stat. 2097. While these tax incentives popularized the production of alcohol fuel mixtures, the lower excise-tax rate resulted in fewer tax dollars flowing into the Highway Trust Fund. Roberta F. Mann & Mona L. Hymel, Moonshine to Motor-fuel: Tax Incentives for Fuel Ethanol, 19 Duke Envtl. L. & Pol'y F. 43, 49 (2008). The depletion of funds caught the attention of Congress and triggered a legislative response. H.R. Rep. No. 108-548, pt. 1, at 141-42 (2004) ("Committee Report").

         On October 22, 2004, the American Jobs Creation Act of 2004 ("Jobs Act") passed. Pub. L. No. 108-357, 118 Stat. 1418. In the Jobs Act, Congress sought to increase the flow of revenue to the Highway Trust Fund, but did not want to eliminate the monetary incentives for producers to blend alcohol with fuel. Congress thus restructured the relevant statutory framework in three respects: (1) it eliminated the reduced excise-tax rate for alcohol fuel blends under § 4081(c), thus leaving an 18.3 cents per gallon excise tax on all non-aviation gasoline; (2) it enacted an alcohol fuel mixture credit for producers of alcohol fuel blends set forth in § 6426(b) (the "Mixture Credit"); and (3) it amended § 9503 to appropriate all excise taxes imposed under § 4081 to the Highway Trust Fund "without reduction for credits under section 6426." Jobs Act §§ 301, 853. Congress stated that the Mixture Credit "provide[s] a benefit equivalent to the reduced tax rates, which are being repealed under the provision." Committee Report, at 142.

         By amending § 9503 of the Highway Revenue Act to require the 18.3 cents per gallon excise tax be deposited into the Highway Trust Fund in its entirety, and mandating that the new Mixture Credit be given to producers at an amount equivalent to the now-eliminated reduced excise-tax rate, Congress manufactured a way to shift funds from the General Fund at the U.S. Department of the Treasury ("Treasury") to the Highway Trust Fund without affecting revenue. See H.R. Rep. No. 108-755, at 305 (2004) (Conf. Rep.) ("Conference Report") ("The provision also authorizes the full amount of fuel taxes to be appropriated to the Highway Trust Fund without reduction for amounts equivalent to the excise-tax credits allowed for alcohol fuel mixtures, and the Trust Fund is not required to reimburse any payments with respect to qualified alcohol fuel mixtures."); see also Staff of Joint Committee On Taxation, Estimated Budget Effects of the Conference Agreement for H.R. 4520, the "American Jobs Creation Act of 2004" (JCX-69-04) at Provision III.A.1 (listing the "excise tax credit (in lieu of reduced tax rate on gasoline) to certain blenders of alcohol mixtures" as having "No Revenue Effect"). Under this new regime, the Highway Trust Fund would consistently receive 18.3 cents per gallon under § 4081 regardless of whether the excise tax was actually paid by the taxpayer or obtained from the General Fund at Treasury. In return, alcohol fuel producers would receive the Mixture Credit without impacting the Highway Trust Fund.

         The statutory changes to §§ 4081, 6426, and 9503 also led to the creation of § 6427(e)-added to account for the Mixture Credit-which requires the Secretary of the Treasury to pay, interest-free, to an alcohol fuel producer "an amount equal to the alcohol fuel mixture credit." § 6427(e)(1). But "[n]o amount shall be payable . . . with respect to any mixture or alternative fuel with respect to which an amount is allowed as a credit under section 6426." Id. § 6427(e)(3).

         2. Procedural History

         Sunoco, Inc. ("Sunoco"), a petroleum and petrochemical company, blends ethanol with gasoline to create alcohol fuel mixtures. Sunoco filed consolidated tax returns for 2004 through 2009, and claimed the Mixture Credit under § 6426 as a credit against its gasoline excise-tax liability for the years 2005 through 2008.[3]

         In 2013, Sunoco changed its tax position by submitting both informal and formal claims with the Internal Revenue Service (IRS) to recover over $300 million based on excise-tax expenses for the years 2005 through 2008. Sunoco claimed that it erroneously reduced its gasoline excise tax by the amount of Mixture Credit it received, which had the effect of including the Mixture Credit in its gross income. In its view, Sunoco was entitled to deduct the full amount of the gasoline excise tax under § 4081- without regard to the Mixture Credit-and keep the Mixture Credit as tax-free income.[4] On March 11, 2015, the IRS issued a statutory notice of disallowance denying Sunoco's claims.[5] On June 10, 2015, Sunoco filed its refund suit in the United States Court of Federal Claims ("COFC"). Sunoco, Inc. v. United States, 129 Fed.Cl. 322, 324 (2016); J.A. 16, 1001-13.

         On February 12, 2016, the Government moved for judgment on the pleadings pursuant to Rule 12(c) of the Rules of the Court of Federal Claims, [6] arguing that the Jobs Act requires a two-step, or "bifurcated," approach, in which first, the Mixture Credit reduces any excise-tax liability, and then the taxpayer is compensated for any remaining Mixture Credit via a direct payment pursuant to § 6427. Sunoco, 129 Fed.Cl. at 325-26. Under the Government's interpretation, applying the Mixture Credit to first reduce the excise-tax liability turns the Mixture Credit into taxable income up to the point in which excise-tax liability is reduced to zero. Id. at 329.

         Sunoco responded with a cross-motion for partial summary judgment on liability, arguing that the Mixture Credit does not affect its excise-tax liability under § 4081. Sunoco maintained that although the Mixture Credit can be used to offset excise-tax liability, such liability remains constant and does not reduce the cost of goods sold under the statute, therefore making the excise-tax liability fully deductible. Id. at 325-26. In Sunoco's view, the entirety of the Mixture Credit is a tax-free payment to the taxpayer under § 6427. Id. at 326.

         The COFC found the statutory scheme to be ambiguous, but agreed with the Government's interpretation and granted the ...

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