IRS Notice on Fuel Credit Is Not Entitled to Deference

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.

The parties in this case are engaged in fact discovery. Their cross-motions for judgment on the pleadings and partial summary judgment also are pending and fully briefed. In deciding those motions, the Court must determine whether IRS Notice 2015-56 is entitled to deference under Skidmore v. Swift, 323 U.S. 134, 139-40 (1944). Notice 2015-56 gives direct guidance on the main legal issue in this case: the tax treatment of the alcohol fuel mixture credit under 26 U.S.C. § 6426(b).

On July 29, 2016, Sunoco, Inc. ("Sunoco") filed a motion to compel production of documents pursuant to Rule 37(a) of the United States Court of Federal Claims. Sunoco seeks certain internal IRS documents that it contends would help the Court determine whether Notice 2015-56 is entitled to Skidmore deference. The Government opposes the motion on the grounds that the requested documents are (1) irrelevant to the issue of whether Skidmore deference should apply, and (2) protected under the deliberative process and attorney-client privileges. The Court agrees that the requested documents are unnecessary, and further finds that IRS Notice 2015-56 is not entitled to Skidmore deference for purposes of the pending motions. Sunoco's motion to compel is therefore DENIED as moot.

The IRS has taken inconsistent stances on the alcohol fuel mixture credit's tax treatment. First, it issued Chief Counsel Advisory 201342010 on October 18, 2013 ("2013 CCA"). See 2013 WL 5858278. In the 2013 CCA, the IRS noted, "Some blenders included the § 6426(c) biodiesel mixture credits and the § 6427(e) payments in income through a negative adjustment to their biodiesel mixture cost of goods sold." Id. It continued, "In our view . . . federal tax credits are not gross income for purposes of determining a taxpayer's federal income tax liability." Id. Therefore, the IRS initially agreed with Sunoco's position and held that a credit substantially similar to the alcohol fuel mixture credit was not required to be counted as part of a taxpayer's gross income. Id.

On February 7, 2014, the IRS issued Chief Counsel Advisory 201406001 ("2014 CCA"). See 2014 WL 499938. The IRS reversed course in the 2014 CCA, stating, "For federal income tax purposes, the claimant must treat the excise tax credits allowed under § 6426(a) as a reduction in its federal excise tax liability under §§ 4081 and 4041. Accordingly, the claimant's allowable federal income tax deduction for federal excise taxes is reduced by the amount of the credits."¹Id.

Finally, the IRS released Notice 2015-56 on August 15, 2015 -- sixty-five days after Sunoco filed its complaint in this case. See 2015-35 I.R.B. 235 (2015). Notice 2015-56 is the only IRS advice on the main issue in this case that may be treated as binding. See 2014 CCA, 2014 WL 499938 ("This advice may not be used or cited as precedent."); 2013 CCA, 2013 WL 5858278 (same). The Notice states that, "for federal income tax purposes, a claimant must reduce its § 4081 excise tax liability for each calendar quarter during the 2014 calendar year by its biodiesel mixture credit attributable to a biodiesel mixture sold or used during that calendar quarter." 2015-35 I.R.B. 235. Thus, Notice 2015-56 sides with the 2014 CCA, and against the 2013 CCA.

AMP Inc. v. United States is instructive. See 185 F.3d 1333, 1338-39 (Fed. Cir. 1999). In that case, the Court of Federal Claims had given deference to an IRS revenue ruling that bore directly on the parties and claims and was issued while the parties' claims were pending with the IRS. Id. at 1338. The Federal Circuit noted that "[a] revenue ruling issued at a time when the I.R.S. is preparing to litigate is often self-serving and not generally entitled to deference by the courts." Id. at 1338-39 (citation omitted). This was "especially true when the ruling cites no authority and is inconsistent with regulations and other pronouncements of the I.R.S." Id. at 1339 (citation omitted). Therefore, the Circuit found that the revenue ruling was not entitled to deference. Id.

The situation here is remarkably similar to AMP. The IRS issued Notice 2015-56 sixty-five days after Sunoco filed its complaint. Therefore, the IRS was not merely preparing to litigate when it issued the Notice -- it was actually litigating. The Notice also does not give authority for the IRS's determination. One would expect to see authority for the IRS's position because Notice 2015-56 conflicts with the IRS's earlier advice in the non-precedential 2013 CCA. These three factors -- the timing of the Notice, the lack of authority, and the Notice's inconsistency with prior IRS advice -- mean that Notice 2015-56 is not entitled to deference under Skidmore. In short, Notice 2015-56 is merely another vehicle through which the Government conveyed its position in this case. That position may be meritorious, or it may not be, but it deserves to be weighed equally against Sunoco's arguments.

IT IS SO ORDERED.

² When an agency exercises its rulemaking authority, courts may apply a higher degree of deference. See Chevron U.S.A., Inc. v. Natural Res. Defense Council, Inc., 467 U.S. 837 (1984).