A tax refund case concerning Alternative Fuel Tax Credits and fuel mixtures could have a significant impact on the production of butane blends. The Fifth Circuit Court of Appeals recently heard oral arguments from oil trader Vitol regarding its claim that the Internal Revenue Service (IRS) wrongly withheld $8.8 million in alternative fuel tax credits for Vitol’s butane blends. The main issue in the dispute concerns whether butane is a liquefied petroleum gas (LPG), and therefore an alternative fuel under the Section 6426(e) alternative fuel tax credit.
The outcome of the appeal could have a significant impact on the production of butane blends if the Appeals Court overturns the lower court decision and finds that butane is an LPG under Section 6242.
Vitol, which produced a mixture of butane and gasoline, paid its excise tax for four tax quarters, but did not reduce the excise tax by the Section 6426(e) alternative fuel mixture tax credit. Vitol then claimed the credit on amended returns and requested an $8.8 million refund of excise tax for the four tax quarters. The IRS denied the refund.
Vitol filed a suit in federal district court arguing in a motion for summary judgment that the term “liquefied petroleum gas” (LPG) under the Section 6426 alternative fuel tax credit included butane. In Vitol Inc. v. United States of America (No. 4:18-cv-2275), the District Court for the Southern District of Texas denied summary judgement and issued a decision finding that butane is excluded from the term LPG in Section 6426 and is not an alternative fuel for the purposes of the Section 6426(e) alternative fuel mixture credit.
Section 6426(e) provides a tax credit to a taxpayer who produces “any alternative fuel mixture for sale or use in a trade or business of the taxpayer.” The section defines an “alternative fuel mixture” as “a mixture of alternative fuel and taxable fuel. . .” Section 6426(d) defines “alternative fuel” in a list that includes LPG as well as other types of fuel, but it does not define LPG. The court found that although common meaning of LPG includes butane, the appropriate inquiry is whether defining butane as an LPG within Section 6426 leads to an absurd result or is contrary to the intent of Congress.
IRC Section 4083(a) defines “taxable fuel” as gasoline, diesel fuel, and kerosene. The term “gasoline” includes “any gasoline blend stock,” a term that includes butane. Butane is therefore a taxable fuel under Section 4083. If butane is considered an LPG under Section 6426, then butane is both an alternative fuel and a taxable fuel within the definition of an alternative fuel mixture. The court stated that Congress “could not have intended for butane to be both an alternative fuel and a taxable fuel within the definition of an alternative fuel mixture.”
The court relied on Rev. Rul. 2018-2 in which the IRS concluded that butane is a taxable fuel under Section 4083. The IRS stated that “a mixture of butane, a taxable fuel, with gasoline, a taxable fuel, is a mixture of two taxable fuels, not a mixture of a taxable fuel and an alternative fuel, as required by Section 6426(e)(2).” The Court said the revenue ruling “avoids the absurd result reached when butane is considered an LPG within Section 6426” and “is also consistent with common sense considering that all gasoline contains butane.”
The court stated that including butane as an LPG within Section 6426 would contradict congressional intent “because it would allow tax credits for the production of gasoline as it has historically been produced and would essentially result in a tax windfall to the nation’s largest gasoline producers.” The court stated that “[c]learly, Congress did not intend to incentivize the production of traditional gasoline with a tax credit titled “alternative fuel mixture credit”.
The court also noted that ethane and propane are common LPGs that are not gasoline blend stocks and are not taxable fuels under Section 4083. The court stated that “ethane and propane can be considered LPGs under Section 6426(d), but neither would be considered both a taxable fuel and an alternative fuel within the definition of an alternative fuel mixture.” Neither ethane nor propane would arguably be eligible for treatment as an alternative fuel mixture by itself, but either could be mixed with a taxable fuel for a mixture that would be eligible for the alternative fuel mixture tax credit.
What does this mean for butane blenders?
If the Appeals Court overturns the lower court decision and finds that butane is an LPG under Section 6242, butane blenders would be able to claim the Section 6426(e) alternative fuel tax credit. If the court upholds the lower court decision that butane is not an LPG and is not an alternative fuel under the Section 6426(e) alternative fuel tax credit, there would be no changes for butane blenders. The impact for butane blenders would be less clear if the two parties settle for a portion of the tax. To prepare for any of these outcomes, companies that are using butane to blend gasoline should file protective claims for a refund of the amount of the credit.
For more information or to find out how to file a refund, contact us. We are here to help.