Seventh Circuit Finds Butane Ineligible for Alternative Fuel Mixture Credit

A recent appeals court decision affirmed that butane is not an alternative fuel and that a mixture of butane and gasoline does not qualify for the alternative fuel mixture tax credit under IRC Section 6426(e). The Seventh Circuit Court of Appeals decision in U.S. Venture, Inc. v. United States, No. 20-1861 (7th Cir. June 29, 2021) adds clarity to an issue that has been the focus of recent tax cases.

Background

U.S. Venture, a motor fuels producer, began adding butane to its gasoline in 2012 and paid the applicable federal fuel excise tax for several years. In 2017, the company filed amended returns for tax years 2013 through 2016 seeking alternative fuel mixture tax credits for the production of the fuel. It sought a similar refund for excise taxes paid in 2017. The blender sought the credits on the theory that butane is a liquefied petroleum gas (LPG), which qualifies as an “alternative fuel” under Section 6426(d)—(e). The IRS rejected the request, concluding that butane did not qualify for the credit.

U.S. Venture then filed two lawsuits, one seeking a refund for fuel excise taxes paid from 2013 to 2016, and another seeking a refund for the company’s 2017 tax payments. The company argued that the alternative fuel mixtures tax credit under Section 6426(e) applied to its gasoline with butane additive, while the government argued that gasoline containing a butane additive is not an alternative fuel and that the statute makes this clear. The court found for the government and U.S. Venture appealed.

Reasoning

The Seventh Circuit addressed two issues: (1) whether butane qualifies as a “taxable fuel” for purposes of the alternative fuel mixture tax credit under Section 6426(e); and, if so, (2) whether butane can also qualify as an “alternative fuel” under Section 6426(e).

The Court affirmed the lower court decision that butane is a “taxable fuel” for purposes of the alternative fuel mixture tax credit because it qualifies as a “taxable fuel” for purposes of the fuel excise tax under IRC Section 4083, and the definition of “taxable fuel” within Section 6426(e)(2) depends on the definition employed in Section 4083.

On the second issue, the Court noted that Section 6426(e) distinguishes between a “taxable fuel” and an “alternative fuel” and allows a credit only when a taxpayer produces a mixture of the two. The Court reasoned that the alternative fuel mixture tax credit under Section 6426(e) requires an alternative fuel to be mixed with a taxable fuel. Given that butane is a taxable fuel, it cannot also be an “alternative to” a taxable fuel, and combining two taxable fuels—butane and gasoline—does not result in a mixture of a taxable fuel and an alternative fuel.

The Court also noted that treating butane as an alternative fuel would not align with the purpose of the tax credit, which Congress passed to provide an incentive for the use of alternative fuels in the production of motor fuel, not to provide an incentive for the continued use of a standard fuel. The Court concluded that although butane may be considered an LPG in other contexts, it is a “taxable fuel” as a “gasoline blend stock” for purposes of IRC Section 4081 and is therefore excluded from the codified definition of “alternative fuels” in Section 6426(e).

What Does This Mean for Butane Blenders?

U.S. Venture, Inc. v. United States makes clear that butane does not qualify as an “alternative fuels” for purposes of the Section 6426(e) tax credit. However, blenders should also watch for the pending Fifth Circuit decision in Vitol Inc. v. United States of America, which covers the same issue. In that case, a lower court found that butane is excluded from the definition of an LPG in Section 6426 and is not an alternative fuel for the purposes of the Section 6426(e) tax credit. If the Appeals Court overturns the lower court decision in that case, there would be a split between the circuits on whether butane qualifies as an alternative fuel.

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© 2021