Court Rejects Exxon’s COGS Argument in Excise Tax Refund Suit

EXXON MOBIL CORPORATION,
Plaintiff,
v.
UNITED STATES OF AMERICA,
Defendant.

IN THE UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION

ORDER

This Order addresses Plaintiff Exxon Mobil Corporation's (“Exxon”) motion for partial summary judgment on count I [58] and Defendant United States of America's (the “Government”) cross-motion for partial summary judgment on count I [67]. For the reasons set forth below, the Court denies Exxon's motion and grants the Government's cross-motion.

This is a tax refund case. From 2005 to 2011, Congress provided a tax incentive to gasoline producers that allowed a credit against the fuel excise tax imposed on the sale or removal of gasoline for each gallon of alcohol blended into an alcohol-gasoline mixture (the “Mixture Credit”). See 26 U.S.C. § 6426. The present dispute over count I involves the effect of the Mixture Credits on Exxon's income tax liabilities for 2008 and 2009. During those two years, Exxon claimed over $960 million in Mixture Credits against the fuel excise tax it otherwise would have owed.

When a taxpayer pays excise taxes on goods it sells, it may include the excise tax payment as an expense in computing its cost of goods sold. See Mohawk Liqueur Corp. v. United States, 324 F.2d 241, 244 (6th Cir. 1963). On its original income tax returns for 2008 and 2009, Exxon thus reduced its fuel excise tax by the Mixture Credits it claimed. Its cost of goods sold, therefore, reflected only the excise tax it actually paid to the Government. However, Exxon now argues that it should be able to include in its cost of goods sold the fuel excise tax it did not pay due to the Mixture Credits it received. Exxon thus seeks a tax refund of approximately $337 million. The Government disagrees.

At the core of count I is a single question of law: 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? In Sunoco v. United States, the Court of Federal Claims recently answered this very question. 129 Fed. Cl. 322 (2016). Sunoco held that the Mixture Credit operates “as a reduction of the taxpayer's excise tax liability” and the taxpayer therefore “correctly use[s] its net excise taxes paid in calculating its cost of goods sold.” Id. at 324.

Exxon argues that Sunoco was wrong. Its position is not that Sunoco failed to consider certain arguments, but rather that Exxon disagrees with Sunoco's disposition of those arguments. Respectfully, this Court agrees with Sunoco and thus adopts its reasoning in full. The Court accordingly holds that Exxon's cost of goods sold must include only its fuel excise tax liability actually paid after subtracting the Mixture Credit. As a result, the Court denies Exxon's motion for partial summary judgment on count I and grants the Government's cross-motion for partial summary judgment on count I.

Signed August 8, 2018.

David C. Godbey
United States District Judge