Sunoco, Inc. v. United States

In the United States Court of Federal Claims

No. 15-587T

(Filed: November 22, 2016)

*************************************

*

SUNOCO, INC., *

*

Plaintiff, * Tax Incentives for Alcohol Fuel

* Blends; Alcohol Fuel Mixture Credit;

v. * 26 U.S.C. §§ 6426, 6427; 26 U.S.C.

* § 87; Excise Tax; Cost of Goods Sold;

THE UNITED STATES, * Highway Trust Fund.

*

Defendant. *

*

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Kevin Johnson, Baker Hostetler, LLP, with whom were A. Christopher Young and Robert

Fay, Pepper Hamilton, LLP, Philadelphia, Pennsylvania, for Plaintiff.

Jason Bergmann, with whom were Caroline D. Ciraolo, Principal Deputy Assistant

Attorney General, David I. Pincus, Chief, and Mary M. Abate, Assistant Chief, Court of

Federal Claims Section, Tax Division, U.S. Department of Justice, Washington, D.C., for

Defendant.

OPINION AND ORDER

WHEELER, Judge.

Plaintiff Sunoco, Inc. brought this action against the Government to recover federal

income tax refunds totaling over $300 million. Pending before the Court are (1) the

Government’s motion for judgment on the pleadings pursuant to Rule 12(c) of the Court

of Federal Claims (“RCFC”), and (2) Sunoco’s cross-motion for partial summary judgment

pursuant to RCFC 56.

This is a case of first impression, and Sunoco’s argument turns exclusively on

statutory interpretation. As a fuel producer that blends ethanol into its fuel, Sunoco was

entitled to claim the Alcohol Fuel Mixture Credit (“Mixture Credit”), set out in § 6426(a)–

(b),1 against its excise tax liability under § 4081. Sunoco therefore paid less in excise tax

than it otherwise would have been required to pay under § 4081 in the tax years 2005–

2008. Excise tax payments are includable in a taxpayer’s cost of goods sold, and the cost

of goods sold reduces the taxpayer’s gross income—and, consequently, the taxpayer’s

income tax liability. Sunoco’s interpretation of the Mixture Credit would result in an

increased cost of goods sold, which would result in a decreased gross income and lower

income tax liability.

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.

The Government argues that Sunoco’s interpretation would result in a windfall that

Congress did not intend. It cites the Mixture Credit’s plain language and legislative history

to show that Congress intended to replace the previous excise tax exemption for alcohol

mixtures with an “equivalent benefit,” rather than a significantly larger combined excise

and income tax incentive. Sunoco reads the same statutory language and legislative history

to reach the opposite conclusion.

Though the statutes at issue are not crystal clear, the Court ultimately finds the

Government’s interpretation more persuasive. The Court holds that the Mixture Credit

must be treated first as a reduction of the taxpayer’s excise tax liability, with any remaining

Mixture Credit amount treated as tax-free payment. Had Congress intended, as Sunoco

argues, to drastically increase the tax incentives fuel producers receive from blending

alcohol into their fuels, one would expect to see at least some inkling of this intent in the

legislative history or the Internal Revenue Code. No such inkling appears. Therefore,

Sunoco cannot claim that it overpaid its income taxes because it correctly used its net excise

taxes paid in calculating its cost of goods sold. The Government’s motion for judgment

on the pleadings is GRANTED, and Sunoco’s cross-motion for partial summary judgment

is DENIED.

Background

The few material facts in this case are not in dispute. Sunoco filed its complaint on

June 10, 2015, seeking a tax refund of over $300 million for the tax years 2005–2008. See

Compl., Dkt. No. 1. In all of the tax years at issue, Sunoco blended ethanol into its fuel

1

Unless otherwise indicated, all references to sections herein refer to the Internal Revenue Code of 1986,

as amended (Title 26 of the U.S. Code).

2

and thereby qualified for the Mixture Credit. Compl. ¶ 11. Sunoco thus paid a reduced

excise tax and reduced its cost of goods sold by the amount of the Mixture Credit for all of

the tax years at issue. Sunoco deducted its cost of goods sold from its gross income, and

paid income taxes accordingly.

On February 12, 2016, the Government moved for judgment on the pleadings

pursuant to RCFC 12(c), arguing that the correct tax treatment of the Mixture Credit means

Sunoco’s claims must fail as a matter of law. See Dkt. No. 18. Sunoco responded on April

13, 2016, with a cross-motion for partial summary judgment under RCFC 56 as to the

Government’s liability. Dkt. No. 22. On June 20, 2016, the Government filed its response

in opposition to Sunoco’s cross-motion, see Dkt. No. 27, and Sunoco filed its reply on July

19, 2016. See Dkt. No. 33. The Court heard oral argument on the parties’ motions on

November 3, 2016.

Additionally, the Court already has decided that the IRS interpretation of the

Mixture Credit’s tax treatment, as shown in IRS Notice 2015-56, is not entitled to Skidmore

deference for purposes of resolving the parties’ motions. See Sunoco, Inc. v. United States,

— Fed. Cl. —, 2016 WL 5848909, at *2 (Oct. 6, 2016). The Court found that no deference

was appropriate because (1) the IRS issued Notice 2015-56 after litigation in this case had

begun, (2) the Notice cited no authority for its interpretation of the Mixture Credit’s tax

treatment, and (3) the Notice was inconsistent with prior unofficial IRS advice. Id.

Therefore, while the Court will consider the Government’s interpretation of the Mixture

Credit’s tax treatment, the Court will not give deference to that interpretation.

Discussion

A. Standard of Review

A party may move for judgment on the pleadings pursuant to RCFC 12(c) “after the

pleadings are closed[,] but early enough not to delay trial.” If a party presents and the

Court accepts materials outside the pleadings, then the Court must decide the motion as a

motion for summary judgment under RCFC 56. RCFC 12(d). Sunoco has presented

materials outside the pleadings here; however, as shown below, the Court finds that it is

possible to resolve the single legal issue on the face of Sunoco’s complaint without

resorting to factual materials outside the pleadings. Therefore, the court will decide the

pending cross-motions under RCFC 12(c) rather than RCFC 56.

When deciding a motion for judgment on the pleadings under RCFC 12(c), the

Court applies substantially the same test that it would on a motion to dismiss for failure to

state a claim under RCFC 12(b)(6). Sikorsky Aircraft Corp. v. United States, 122 Fed. Cl.

711, 719 (2015). Under RCFC 12(b)(6), a complaint fails to state a claim upon which relief

may be granted “when the facts asserted by the claimant do not entitle [the claimant] to a

3

legal remedy.” Briseno v. United States, 83 Fed. Cl. 630, 632 (2008) (citation omitted).

The Court also must construe allegations in the complaint favorably to the plaintiff. See

Extreme Coatings, Inc. v. United States, 109 Fed. Cl. 450, 453 (2013). Still, “a complaint

must contain sufficient factual matter, accepted as true, to state a claim to relief that is

plausible on its face.” Id. (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citation

omitted)).

B. Sunoco’s Refund Claims Fail as a Matter of Law.

The tax treatment of the Mixture Credit is the sole legal question in this case. To

that end, it is helpful to keep a few basic principles of tax law in mind while analyzing

Sunoco’s claims. First, Sunoco was required to pay excise taxes during the relevant period.

Excise taxes are imposed on sellers of commodities like fuel, see Cook v. United States,

86 F.3d 1095, 1098 (Fed. Cir. 1996), cert. denied, 519 U.S. 932 (1996), and are set out in

§ 4081. When a taxpayer like Sunoco pays its excise taxes, those tax receipts go into the

Highway Trust Fund. § 9503(b)(1)(D). The Government uses the Highway Trust Fund to

maintain the nation’s highways and related infrastructure. See § 9503(c)(1).

Second, a taxpayer’s excise taxes under § 4081 also directly impact a taxpayer’s

gross income (which is defined in § 61) because excise taxes become part of the taxpayer’s

cost of goods sold. See Mohawk Liqueur Corp. v. United States, 324 F.2d 241, 244 (6th

Cir. 1963). The taxpayer excludes its cost of goods sold from gross income. Id. With

lower gross income comes lower income tax liability. Therefore, one could compare 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.

So, if the Mixture Credit is interpreted as a reduction of excise tax liability, then the

taxpayer’s income tax liability would increase as a result of that reduction. The

Government interprets the Mixture Credit in this way. However, if the Mixture Credit does

not affect the taxpayer’s excise tax liability—as Sunoco argues—then the taxpayer’s

income tax liability would decrease. Both parties cite the relevant statutes’ language, the

tax exemption that preceded the Mixture Credit, legislative history, and case law to support

their positions. All of these pieces are necessary to evaluate the Mixture Credit’s tax

treatment, and the Court will address each piece in turn.

1. The Language of the Mixture Credit Statutes Does not Resolve the

Parties’ Dispute.

The Court first must examine the text of the relevant statutes themselves, and “must

construe [the] statute[s], if at all possible, to give effect and meaning to all [their] terms.”

Splane v. West, 216 F.3d 1058, 1068 (Fed. Cir. 2000) (citation omitted). The dispute in

this case centers on §§ 6426(a) and 6427(e).

4

Section 6426(a) states, in relevant part: “There shall be allowed as a credit . . .

against the tax imposed by section 4081 an amount equal to the sum of the credits described

in subsections (b), (c), and (e). . . .” Subsection (b) is the Mixture Credit relevant here, and

(as noted above) the parties do not dispute that Sunoco qualified for the Mixture Credit.

When a taxpayer’s Mixture Credit amount is higher than the taxpayer’s § 4081

excise tax liability, the Government pays the difference directly to the taxpayer. This

payment mechanism is set out in § 6427(e):

(1) If any person produces a mixture described in section 6426

in such person’s trade or business, the Secretary shall pay

(without interest) to such person an amount equal to the alcohol

fuel mixture credit . . . with respect to such mixture.

* * *

(3) No amount shall be payable under paragraph (1) or (2) with

respect to any mixture or alternative fuel with respect to which

an amount is allowed as a credit under section 6426.

Under the Government’s interpretation, § 6426(a) describes the Mixture Credit, and

§§ 6427(e)(1) and (e)(3) address a situation in which the taxpayer may claim a payment

for any Mixture Credit amount that is not first used to offset the taxpayer’s excise tax

liability. Taken together, the Government argues, these statutes first give the taxpayer a

credit against its excise tax liability that operates as a “dollar-for-dollar reduction in the

relevant tax liability.” Def. Mot. at 11, Dkt. No. 18. Section 6427(e)(1) then directs the

Secretary of the Treasury to pay the taxpayer “an amount equal to the [Mixture Credit],”

but not, according to Section 6427(e)(3), for any amount that the taxpayer was “allowed as

a credit under section 6426.” Therefore, the Government agrees that part of the Mixture

Credit is a refundable tax-free payment, but only to the extent that the Mixture Credit

amount under § 6426(a) exceeds the taxpayer’s excise tax liability under § 4081. To

summarize, the Government’s approach bifurcates the Mixture Credit into (1) a reduction

of excise tax liability, and (2) a tax-free cash payment after the taxpayer’s entire excise tax

liability is reduced to zero by the Mixture Credit.

Sunoco rejects the Government’s bifurcation approach to the Mixture Credit. It

contends that these statutes, taken together, mean that the Mixture Credit can only be

construed as a single tax-free payment of the taxpayer’s excise tax liability. It cites the

“payment” language in § 6427(e)(1), and argues that § 6427(e)(3) merely describes a

“process” by which the taxpayer’s excise tax liability and the Government’s obligation to

5

pay the credit first offset each other before resulting in a cash payment to the taxpayer. See

Pl. Cross-Mot. at 28–30, Dkt. No. 22.

The statute’s language supports both parties’ interpretations. First, the phrase

“credit against the tax imposed” is not talismanic. Neither party has pointed to a clear

definition of the phrase, and the Court is unaware of any such definition. The treatise the

Government cites makes clear that the Internal Revenue Code “does not contain a general

definition of credit.” J.E. Maule, 506-3rd: Tax Credits: Concepts and Calculation, § II.B

(BNA 2015). Rather, Congress seems to use the term “credit” to mean either a “subtraction

in tax liability” or “amounts that are not subtracted from tax liability, but that instead

resemble deductions or that are credits in an accounting sense.” Id.

The specific reference to § 4081 as the section against which the Credit is imposed

also is not dispositive. The Government argues that the reference means the Mixture Credit

must be a reduction in excise tax liability or else the reference would be superfluous;

however, as noted below, Congress also could have included this language to make clear

that the full excise tax was to be credited to the Highway Trust Fund. Put simply, the

phrase “credit against the tax imposed under section 4081” could fit either the

Government’s or Sunoco’s interpretation.

Second, both parties have advanced plausible arguments as to the payment

mechanism described in § 6427(e). The language in the statute could describe either (1) a

a substantive bifurcation of the Mixture Credit into an excise tax reduction and a cash

payment (the Government’s view), or (2) a process by which the Mixture Credit first is

applied to offset the taxpayer’s excise tax liability, with the balance paid out in cash to the

taxpayer (Sunoco’s view). In sum, the language in the two sections above is unclear, and

the Court must use other tools to interpret the Mixture Credit’s tax treatment.

2. The Legislative History Favors the Government’s Position.

a. Congress Created the Mixture Credit to Replenish the Highway

Trust Fund.

A clearer picture of the Mixture Credit’s tax treatment begins to emerge in its

legislative history. Congress enacted the Mixture Credit as part of the American Jobs

Creation Act of 2004 (“AJCA”), Pub. L. 108-357, 118 Stat. 1418, 1469, § 301. In doing

so, Congress created a new tax incentive that replaced a preexisting excise tax exemption

for alcohol fuel mixtures. Before the Mixture Credit, two linked tax incentives existed for

fuel producers that blended alcohol into their fuel. First, § 40(a) provided an income tax

credit for alcohol fuel blenders (this income tax credit still exists today). Second, § 4081

taxed alcohol fuel mixtures at a lower rate than regular fuels. See H.R. Rep. No. 108-755,

at 300 (2004) (Conf. Rep.). A taxpayer was permitted to claim either the income tax credit

6

or the lower excise tax for alcohol fuel mixtures, but not both. See id.; § 40(c) (2004). If

a taxpayer claimed the income tax credit under § 40(a), the Code specifically included the

credit in the taxpayer’s gross income (this also is still true today). § 87(1).

The AJCA replaced the reduced excise tax rates for alcohol fuel mixtures in § 4081

with a credit to be applied against the excise tax. In other words, on paper, fuel blenders

now pay the full amount of the § 4081 excise tax. The legislative history confirms that the

AJCA “eliminate[d] reduced rates of excise tax on most alcohol-blended fuels and

impose[d] the full rate of excise tax.” H.R. Rep. No. 108-755, at 306 (2004) (Conf. Rep.).

And therein lies a key issue in interpreting the Mixture Credit: in reality, the full tax

rates were not imposed. In § 6426, Congress created two new credits against the § 4081

excise tax; namely, the Mixture Credit and a credit for biodiesel fuels. H.R. Rep. No. 108-

755, at 306 (2004) (Conf. Rep.). Under both Sunoco’s and the Government’s

interpretations, the Mixture Credit means the taxpayer itself does not pay the full amount

of its excise tax liability; rather, it pays excise taxes that are reduced by the amount of the

Mixture Credit. If the legislative history and the Mixture Credit’s practical effect seem

contradictory, they are. In essence, the Mixture Credit amounts to accounting sleight-of-

hand. Congress can say the full excise tax is imposed on fuel blenders, but can nevertheless

reduce the blenders’ tax liability in much the same way it did before.

Why would Congress go to such lengths to create this legal fiction? As the

Government notes, Congress primarily wanted to replenish the Highway Trust Fund. See

Def. Mot. at 14, Dkt. No. 18. Excise taxes go into the Highway Trust Fund, which is used

to maintain the nation’s infrastructure. See H.R. Rep. No. 108-755, at 305 (2004) (Conf.

Rep.); § 9503(b)(1). The Highway Trust Fund understandably became depleted when

more of the nation’s fuel began to contain ethanol. More ethanol blends meant that the

Government could collect fewer excise taxes on fuel. Still, cars that use ethanol blends

cause the same wear and tear on highways that purely gasoline-powered cars cause. See

H.R. Rep. 108-548, Part I, at 141 (2004). Therefore, Congress found it appropriate to

replenish the Fund by imposing, on paper, the full excise tax rates on fuel blenders. In

reality, however, the Government itself pays part of fuel blenders’ excise taxes from the

Treasury General Fund in the form of the Mixture Credit. In other words, the Mixture

Credit created an accounting backdoor that allows Congress to shift money from the

Treasury General Fund to the Highway Trust Fund. See H.R. Rep. No. 108-755, at 305

(2004) (Conf. Rep.) (“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 . . . .”). Therefore, it seems clear that

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Congress’s main aim in passing the Mixture Credit to replace the preexisting lower tax

rates for alcohol blends was to replenish the Highway Trust Fund.2

Taxpayers like Sunoco are construed as having paid their full excise taxes for

purposes of the Highway Trust Fund; however, the legislative history is silent on the

Mixture Credit’s income tax implications. At first blush, there are two passages that could

support Sunoco’s reading of the statute. First, the Conference Report states:

In lieu of the reduced excise tax rates, the provision provides

that the alcohol mixture credit provided under section 40 may

be applied against section 4081 excise tax liability. . . The

credit is treated as a payment of the taxpayer’s tax liability

received at the time of the taxable event.

H.R. Rep. No. 108-755, at 304 (2004) (Conf. Rep.). Sunoco argues that the “payment”

language shows congressional intent to treat the Mixture Credit as a non-taxable payment,

rather than a reduction in excise tax liability. This is certainly the case from the vantage

point of the Highway Trust Fund because of the legal fiction described above; however,

the passage also states that the credit must be “applied against” the section 4081 excise tax

liability. At most, then, this passage is neutral on the Mixture Credit’s tax treatment

because it uses language similar to § 6426(a). As a result, the Court is inclined to believe

that Congress did not attempt to use terms of art when it used phrases such as “applied

against” and “payment.”

Both Sunoco and the Government also point to a second passage:

To the extent the alcohol fuel mixture credit exceeds

any section 4081 liability of a person, the Secretary is to pay

such person an amount equal to the alcohol fuel mixture credit

with respect to such mixture. Thus, if the person has no section

4081 liability, the credit is totally refundable. These payments

are intended to provide an equivalent benefit to replace the

partial exemption for fuels to be blended with alcohol and

alcohol fuels being repealed by the provision. Similar rules

apply to the biodiesel fuel mixture credit.

If claims for payment are not paid within 45 days, the

claim is to be paid with interest. The provision also provides

that in the case of an electronic claim, if such claim is not paid

2

Congress also had other subsidiary aims. It hoped to reduce fraud by the fuel blenders that took advantage

of the lower tax rates, and also hoped to simplify the existing law. See H.R. Rep. 108-548, Part I, at 141–

42 (2004).

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within 20 days, the claim is to be paid with interest. If claims

are filed electronically, the claimant may make a claim for less

than $200. The Secretary is to describe the electronic format

for filing claims by December 31, 2004.

H.R. Rep. No. 108-755, at 308 (2004) (Conf. Rep.).

This passage is neutral on the issue in this case at best, and nonsensical at worst.

The Government cites the “equivalent benefit” language in this and other similar passages

to show that Congress wanted to create a benefit in the Mixture Credit that was essentially

the same as the preexisting lower excise tax rates for alcohol fuel mixtures. If this is what

Congress meant, then the passage defies common sense. The Mixture Credit and the prior

lower excise taxes undeniably create different benefits. Under the prior tax regime, a

taxpayer could only claim the lowered excise tax rates if (1) it had excise tax liability, and

(2) it satisfied the alcohol fuel mixture requirements in § 4081. In contrast, a taxpayer

today may claim the Mixture Credit as long as it satisfies the requirements in § 6426(b).

In other words, the current tax regime does not require the taxpayer to have excise tax

liability to receive a benefit, but the prior tax regime did. The benefits cannot be

“equivalent.”3

Construing the passage more generously—as Sunoco does—the Court is more

inclined to believe Congress meant that payments under § 6427(e)(1) would be made as

quickly as refund payments were made under the prior excise tax regime. Under that

regime, “[i]f fully taxed gasoline (or other taxable fuel) [was] used to produce a qualified

alcohol mixture, the Code permit[ted] the blender to file a claim for a quick excise tax

refund.” H.R. Rep. No. 108-755, at 302 (2004) (Conf. Rep.) (describing existing law at

the time of the Mixture Credit’s enactment). Indeed, the above passage contains an entire

paragraph that concerns the timing of § 6427(e)(1) payments. Therefore, it is more

reasonable to assume Congress meant that taxpayers should receive their cash payments

under § 6427(e)(1) with a similarly quick turnaround time.

To summarize, the legislative history shows that, to replenish the Highway Trust

Fund, Congress chose to upend the preexisting reduced excise tax rates and replace them

with a legal fiction through which the full rates were imposed. However, the legislative

history does not make the logical leap Sunoco asks of it because it does not carry the legal

fiction applicable to the Highway Trust Fund over to individual alcohol fuel blenders’

income tax deductions.

3

The Government also cites the conditional phrase in the above passage—“if the person has no section

4081 liability, the credit is totally refundable”—to show that Congress envisioned a tax-free payment only

if the taxpayer’s excise tax liability was lower than the amount of the Mixture Credit. The Court is not

convinced. This language essentially restates § 6427(e)(1) and (e)(3), and it suffers from the same

ambiguity.

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b. The Legislative History Does not Support the Increased Subsidy

Called For by Sunoco’s Interpretation.

The Conference Report is silent on the—to put it mildly—interesting side-effects

that either interpretation of the Mixture Credit creates. Under the Government’s

bifurcation approach, any Mixture Credit amount that is used to reduce a taxpayer’s excise

tax liability becomes subject to income tax, but any Mixture Credit amount that exceeds

the taxpayer’s excise tax liability is not subject to income tax. If this seems odd, remember

the see-saw described above: any decrease in excise tax liability is mirrored by a

corresponding increase in gross income, which is subject to income tax. This result is

puzzling because taxpayers without excise tax liability, who previously received no benefit

whatsoever under the lowered excise tax rates for alcohol fuel blenders, now receive the

Mixture Credit tax-free. On the other hand, taxpayers with excise tax liability (like

Sunoco), who did receive tax benefits under the prior tax regime, have their Mixture

Credits taxed as income.

Sunoco’s approach also has consequences. It would increase the subsidy to alcohol

fuel blenders by about thirty-five percent over the subsidy that the preexisting lower excise

tax rates conferred. See Def. Resp. Br. at 10, Dkt. No. 27. Such a drastic increase would

have drastic effects. Sunoco is only one major alcohol fuel blender in the United States,

and it is claiming a refund of over $300 million for four tax years. Therefore, if Sunoco

were entitled to this subsidy, then similarly situated blenders could claim refunds totaling

billions of dollars.

Though the Conference Report addresses neither of these effects, the Joint

Committee on Taxation computed the Mixture Credit’s budgetary effects. It found that the

“excise tax credit (in lieu of reduced tax rate on gasoline) to certain blenders of alcohol

fuel mixtures” would produce “No Revenue Effect.” Staff of Joint Comm. on Taxation,

Estimated Budget Effects of the Conference Agreement for H.R. 5250, the “American Jobs

Creation Act of 2004” (JCX-69-04) at Provision III.A.1 (Comm. Print 2004). Therefore,

while either of the parties’ approaches to the Mixture Credit produces an unappetizing

outcome, it seems clear that Congress did not believe when it passed the AJCA that it was

giving a drastically increased subsidy to alcohol fuel blenders. Congress also likely did

not believe it was giving a benefit to taxpayers who did not qualify for any benefits under

the previous tax regime, as this presumably also would have a “net revenue effect.” Still,

Sunoco does not contend that the benefits conferred via tax-free payments under § 6427(e)

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in any way approach the magnitude of a thirty-five percent subsidy to alcohol fuel blenders.

Therefore, the legislative history favors the Government’s position.4

3. Analogous Cases Favor the Government’s Interpretation.

First, the Court agrees with the Government’s argument that the Mixture Credit’s

effect on a taxpayer’s cost of goods sold should resemble the effect of a manufacturer’s

rebate. A manufacturer’s rebate “that a taxpayer receives on goods that it purchased for

resale is not, itself, an item of gross income but, instead, is treated as a reduction in the cost

of goods sold.” Affiliated Foods, Inc. v. Comm’r, 128 T.C. 62, 80 (2007). For example,

the IRS once found that “a cash rebate paid to an automobile dealer should be treated as a

reduction in the cost of the automobile purchased;” in other words, the automobile dealer

could not claim the full cost of the automobile in its cost of goods sold. Rev. Rul. 84-41,

1984-1 C.B. 130 (1984). The Mixture Credit is like a manufacturer’s rebate in that it

reduces the amount of money the taxpayer actually is required to pay out of its own pocket.

This reduction happens in the real world (despite the legal fiction applicable to the

Highway Trust Fund), so it logically follows that the reduction should be reflected in the

taxpayer’s cost of goods sold. Thus, the Mixture Credit, like a manufacturer’s rebate,

should reduce a taxpayer’s cost of goods sold and increase the taxpayer’s gross income.

Second, while no case addresses a tax credit identical to the Mixture Credit, cases

acknowledge that tax credits may be bifurcated as the Government suggests. 5 For example,

in Maines v. Commissioner, 144 T.C. 123 (2015), the Tax Court found that a state’s tax

credit first reduced the taxpayer’s state tax liability before it generated a payment to the

taxpayer. See id. at 136. The portion of the credit that reduced the taxpayer’s liability was

not subject to federal income tax, but the portion the state paid in cash as a refund to the

taxpayer was. Id. Similarly, the IRS previously has bifurcated a tax credit according to

the credit’s function. In Revenue Ruling 79-315, the state tax refund at issue was treated

as gross income to the extent it was not “credited against unpaid 1978 tax.” 1979-2 C.B.

4

The Court declines to consider Congressional Research Service (“CRS”) reports that were issued after

Congress enacted the AJCA. The CRS reports are not legislative history; rather, they simply interpret

enacted legislation. The Court does not require the CRS reports to ascertain that reasonable people have

come to opposite conclusions on the merits of this case.

5

The Government cites several cases that analyze the deduction a taxpayer may take for state and local

taxes. See Def. Mot. at 21–24, Dkt. No. 18; Snyder v. Comm’r, 894 F.2d 1337 (Table) (6th Cir. 1990);

Cummings v. United States, 866 F. Supp. 2d 42, 46–49 (D. Mass. 2011). While the Court agrees that these

cases illustrate a functional approach to income tax deductions, they are not entirely dispositive. State and

local governments impose these taxes, so courts naturally are skeptical when taxpayers try to deduct a

portion of state taxes they never actually had to pay. Allowing taxpayers to do this would be to allow a

state government to directly manipulate federal income taxation. The situation in this case is different

because the same sovereign—the federal government—is responsible for setting out both the relevant taxes

and the credits taken against those taxes.

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27 (1979). Functionally, this approach also divides a tax credit into two distinct parts: a

reduction of state tax liability (nontaxable) and a cash payment (taxable). Sunoco rightly

notes that these cases involve state law tax credits. Further, the Mixture Credit produces

the opposite of the results in both cases: the refundable part of the Mixture Credit is not

taxed, and the part that reduces the taxpayer’s excise tax liability is. Still, Maines and

Revenue Ruling 79-315 show that the Tax Court and the IRS have no qualms about

bifurcating credits into two parts if the credits’ function demands such treatment. This is

a unique case, and no authority cited by either party definitively shows how the Mixture

Credit should be treated for tax purposes; however, the above cases involving

manufacturers’ rebates and bifurcated credits are sufficiently similar to this case to be

persuasive.

4. Canons of Statutory Construction do not Support Sunoco’s Argument.

Sunoco cites the well-established construction canon of expressio unius est exclusio

alterius, or “the expression of the one is the exclusion of the other,” to support its case.

This maxim means that if Congress includes certain related items in a statute but does not

include other items in the same category, it intentionally excludes those other items. See

Ventas, Inc. v. United States, 381 F.3d 1156, 1161 (Fed. Cir. 2004). This canon, Sunoco

argues, applies here because § 87 expressly includes in gross income the income tax credit

in § 40(a)—which, like the Mixture Credit, incentivizes blending alcohol into fuel. Section

87 does not include the Mixture Credit in gross income. Sunoco argues that Congress

intentionally included the § 40(a) income tax credit in gross income, which means that it

intentionally excluded the Mixture Credit.

While this argument at first appears persuasive, the Government correctly notes that

there was a good reason for Congress to include the § 40(a) income tax credit in gross

income. As shown above, the prior tax regime before the Mixture Credit allowed a

taxpayer to take either an income tax credit or reduced excise tax rates, but not both. Lower

excise tax rates meant that a taxpayer’s income tax liability would rise if a taxpayer took

the excise tax route instead of the income tax credit route. Therefore, if the income tax

credit were not included in gross income, it would have been a better tax incentive than the

lower excise tax rates because it would not have increased the taxpayer’s income tax

liability. The legislative history clearly states that Congress did not intend this result;

rather, it was “necessary to have an amount equivalent to the income tax credit (or refund)

includable in income to produce the same net tax effect” as the excise tax rates. S. Rep.

No. 96-394, at 94 & n.16 (1979). Furthermore, there was no reason for Congress to include

the Mixture Credit in § 87 expressly as gross income because any reduction in a taxpayer’s

excise tax liability necessarily results in an increase in gross income. Therefore, the Court

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finds that Congress did not intentionally exclude the Mixture Credit from gross income by

not including it in § 87.6

5. The Ambiguity in the Relevant Statutes Counsels Against Allowing

Sunoco to Deduct its Gross Excise Tax Liability from Gross Income.

On a fundamental level, courts expect Congress to speak unequivocally when it

intends to confer tax benefits on the scale Sunoco suggests. Tax credits like the Mixture

Credit “are a matter of legislative grace, and taxpayers bear the burden of clearly showing

that they are entitled to them.” Schumacher v. United States, 931 F.2d 650, 652 (10th Cir.

1991) (citing New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440 (1934)). In fact, when

the Supreme Court has considered exemptions from taxation, it has used the “settled

principle that exemptions from taxation are not to be implied; they must be unambiguously

proved.” United States v. Wells Fargo Bank, 485 U.S. 351, 354 (1988) (citations omitted);

see also Bank of Commerce v. Tennessee, 161 U.S. 134, 146 (1896) (“Taxes being the sole

means by which sovereignties can maintain their existence, any claim [by a person] to be

exempt from the full payment of his share of taxes on any portion of his property must on

that account be clearly defined and founded upon plain language.”). Exemptions and tax

credits are different, but the real-world effect Sunoco seeks is similar to that of an

exemption. Sunoco wishes 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.

Conclusion

Congress created the Mixture Credit because it wanted to replenish the Highway

Trust Fund. The ambiguity at the center of this case is the collateral damage of that effort.

While Sunoco can be forgiven for seeing in that ambiguity an opportunity for a large tax

incentive, the Mixture Credit’s legislative history, related case law, and policy

considerations counsel against accepting Sunoco’s interpretation. Therefore, the

Government’s motion for judgment on the pleadings is GRANTED, and Sunoco’s cross-

6

Sunoco also argues that Congress intentionally excluded the Mixture Credit from gross income by not

including it in § 280C. Section 280C requires a taxpayer to reduce certain deductions by the amount of

certain tax credits. The problem with Sunoco’s argument is that § 280C appears in the income tax portion

of the Internal Revenue Code, so all of the credits included therein are income tax credits. There was no

reason for Congress to include the Mixture Credit (an excise tax credit) there.

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motion for partial summary judgment is DENIED. The Clerk is directed to dismiss this

case with prejudice under RCFC 12(c).7 No costs.

IT IS SO ORDERED.

s/ Thomas C. Wheeler

THOMAS C. WHEELER

Judge

7

Dismissal with prejudice is appropriate here because Sunoco’s claims rest purely on statutory

interpretation, and the Court disagrees with Sunoco’s interpretation. Therefore, Sunoco could not amend

its complaint to plead facts that would entitle it to a tax refund. See Thales Visionix, Inc. v. United States,

122 Fed. Cl. 245, 256 (2015) (dismissing complaint with prejudice on Rule 12(c) motion where Plaintiff’s

patent claims failed as a matter of law).

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