Alternative Fuel Mixture Credit Did Not Apply to Taxpayer's Mixture of Butane and Gasoline

(Parker Tax Publishing April 2020)

A district court held that the IRS properly rejected a claim for an alternative fuel mixture credit under Code Sec. 6426 by a taxpayer that mixed butane with gasoline. The court found that under Code Sec. 4083, butane is a type of taxable fuel, and rejected the taxpayer's argument that butane is a liquefied petroleum gas and therefore is an alternative fuel for purposes of the alternative fuel mixture credit. U.S. Venture, Inc. v. U.S., 2020 PTC 96 (E.D. Wis. 2020).

Background

U.S. Venture, Inc. is registered with the IRS under Code Sec. 4101 as a blender of gasoline, diesel fuel, or kerosene; a position holder, refiner, terminal operator, or throughputter of gasoline, diesel fuel, or kerosene; a pipeline operator or vessel operator within the bulk transfer/terminal system; an alternative fueler that sells for use or uses alternative fuel as a fuel in a motor vehicle or motorboat; an alternative fueler that produces an alternative fuel mixture that is sold for use or used in the alternative fueler's trade or business; and a producer or importer of biodiesel and renewable fuel, among others.

U.S. Venture's United States Oil business division purchases gasoline with an octane level of 75 or greater and butane from third-party suppliers. U.S. Venture began mixing butane with gasoline in 2012 and resells the mixture to its customers. U.S. Venture mixed butane with at least 0.1 percent of gasoline by volume for sale in U.S. Venture's business during each taxable quarter of years 2013 through 2016. In 2016 and 2017, U.S. Venture filed amended quarterly excise tax returns seeking a total refund of over $33 million. The IRS disallowed U.S. Venture's refund claims, and U.S. Venture sued the IRS in a district court for refunds of taxes it paid for the years at issue.

Code Sec. 4081 imposes a tax on the removal, entry, or sale of a taxable fuel. Taxable fuel is defined in Code Sec. 4083 as gasoline, diesel fuel, and kerosene. The term gasoline includes any gasoline blend stock and, under Reg. Sec. 48.4081-1(c)(3)(i)(B), butane is listed as one type of gasoline blend stock. Under Code Sec. 6426(e), a tax credit (the alternative fuel mixture credit) is available to a taxpayer that produces any alternative fuel mixture for sale or use in a trade or business of the taxpayer. Code Sec. 6426(e)(2) provides that an alternative fuel mixture is a mixture of alternative fuel and "taxable fuel." Code Sec. 6426 lists seven types of alternative fuels, one of which is liquefied petroleum gas. Code Sec. 6426 relies on Code Sec. 4083(a)(1) to define taxable fuel.

U.S. Venture argued that butane is a liquefied petroleum gas and therefore is an alternative fuel for purposes of the alternative fuel mixture credit. U.S. Venture asserted that, even if butane is a taxable fuel, nothing in Code Sec. 6426 prevents it from being both an alternative fuel and a taxable fuel. U.S. Venture further contended that the butane it used was not a taxable fuel at the time it was mixed with gasoline, and that butane is not a component of gasoline until mixed with it and therefore is not a blend stock at the time U.S. Venture creates its butane and gasoline mixture. Finally, U.S. Venture argued that the treatment of renewable diesel under the biodiesel mixture credit under Code Sec. 6426(c) is analogous, and under that provision, renewable diesel fuel is considered to be both a biodiesel and a diesel fuel.

Analysis

The district court granted summary judgment for the IRS and dismissed U.S. Venture's case. The court found that the definition of a taxable fuel under Code Sec. 4083 includes any gasoline blend stock, and Reg. Sec. 48.4081-1(c)(3)(B) defines gasoline blend stock to include butane. The court agreed with the IRS's contention that, because gasoline blend stocks are gasoline, butane is also a gasoline and therefore is a taxable fuel.

The district court rejected U.S. Venture's assertion that butane could be both an alternative fuel and a taxable fuel. The court reasoned that to accept that position would be to ignore the definition of gasoline in Code Sec. 4083. The court went on to conclude that in the context of the overall statutory scheme, it was apparent that butane is a taxable fuel. The court found that butane is present in most, if not all, gallons of traditional gasoline sold in the United States, and said that it would be unreasonable to conclude that butane is both an alternative fuel and a taxable fuel, given that it has been an additive to gasoline and is listed as a gasoline blend stock in Reg. Sec. 48.4081-1(c)(3)(B).

According to the court, the fact that gasoline and its components are not taxed until they are combined into a finished product and sold did not mean that butane is not a taxable fuel. The court noted that the definition of taxable fuel in Reg. Sec. 48.4081-1(c)(3)(B) includes a category of gasoline ingredients and does not require that the components of gasoline become taxable once they are mixed. The court found that nothing in the definitions of taxable fuel, gasoline, or gasoline blend stock requires butane to be a component of a batch of gasoline before becoming a taxable fuel. The court concluded that, in other words, Congress does not require fuels to be capable of being taxed before becoming a taxable fuel.

For a discussion of the excise tax on gasoline, see Parker Tax ¶236.101.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com

We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!

Sincerely,

James Levey

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com