Judge Rules on Exxon’s $960 Million Dollar Mixture Credit

Dec 03, 2018

On August 8, 2018, Judge David Godbey from U.S. District Court, Northern District of Texas issued a ruling to deny a motion for summary judgement that would allow Exxon to exclude from gross income certain credits received for mixing alcohol with gasoline.

Congress provided a tax incentive under IRC Section 6426 for the production and sale or use of alcohol and gasoline mixtures. The incentive, now expired, required a producer of such mixtures to first take a credit against the excise tax imposed under IRC Section 4081. Any incentive that exceeded IRC Section 4081 tax would be allowed as a cash refund under IRC Section 6427.

The IRS exempted 6427 refunds from gross income but required anyone with IRC 6426 credits to include that portion in income. The argument is whether the IRC 6426 credit is merely a tax free payment like IRC 6427 or a reduction of IRC 4081 tax expenses reported on Form 720. The crazy part about the entire argument is that any producer could have easily avoided IRC 6426 credits by filing the claims under a disregarded entity that did not have IRC Section 4081 tax. Those claims default to IRC 6427 incentives.

Judge Godbey writes, “If a taxpayer takes a Mixture Credit against a fuel excise tax, may the taxpayer include the unreduced amount of the excise tax in its cost of goods sold or must the taxpayer include in its cost of goods sold only the fuel excise tax liability actually paid after deducting the Mixture Credit?”

Judge Godbey’s decision appears to deny Exxon’s motion solely on a Court of Federal Claims case where Sunoco made a bookkeeping entry to reduce their excise tax liability by the amount of the IRC Section 6426 credit. Notwithstanding the fact that Sunoco is seeking to reverse the bookkeeping entries, the Judge agreed that Sunoco’s bookkeeping was proper and that Exxon must also reduce their excise tax liability.