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Legal Alert – Confirming Position Asserted by Oscar L. Garza & Associates, P.C., Internal IRS Guidance States Biofuel Excise Tax Credits Are Not Includible In Gross Income

Following a short delay due to the government shut down, the IRS on Friday, November 1, 2013 publicly released guidance confirming that biofuels excise tax credits taken under 26 U.S.C. §§ 6426 and 6427 are not includible in gross income under 26 U.S.C. § 61 and therefore are not subject to federal income tax.   

This guidance impacts taxpayers who have benefited from the credits at both the federal and state level.  At the federal level the credits may be excluded from gross income when preparing federal income tax returns.  To the extent that taxpayers have previously included the tax credits in gross income these taxpayers may be able to claim refunds of income tax overpayments for any tax years that are currently open or under audit.  At the state level taxpayers need to revisit their state income tax filings as this may impact the state apportionment factor, the Texas margin tax and filings that do not conform to the federal consolidated rules.

Issuing the guidance in August, 2013 in response to an internal request specifically in reference to the biodiesel mixture tax credit, the IRS states that the excise tax credits are refundable tax credits.  Looking to 26 U.S.C. § 6401(b), the IRS states “[A] taxpayer whose refundable credits and payments exceed its tax liability is considered to have made an overpayment of tax.”  The IRS then goes on to say “[W]here Congress has decided that a particular credit should itself be treated as an additional item of gross income, it has done so expressly.  In our view, in the absence of a specific statutory provision or judicial doctrine requiring inclusion, federal tax credits are not gross income for purposes of determining a taxpayer’s federal income tax liability.” (emphasis added).  This is the first time the IRS has explicitly acknowledged that, unlike the non-refundable income tax credits in sections 40 and 40A of the Internal Revenue Code, which are treated as an item of gross income in section 87 of the Internal Revenue Code, the excise tax credits were never intended to be, and therefore are not, includible in gross income. 

While the official guidance only discusses the biodiesel credit, our experience in addressing this matter with the IRS has shown that the alcohol mixture credit in section 6426(b) is treated the same way.  It follows that the same reasoning can equally be applied to the alternative fuel mixture credit, which also falls within sections 6426 and 6427 of the Internal Revenue Code. 

Attorneys Oscar L. Garza and Leanne Sobel of Oscar L. Garza & Associates, P.C. have been working closely with IRS attorneys and auditors, including the author of the recent guidance, on this issue for the past 12 months.  We currently have several active and approved cases before the IRS.   Our experience suggests that the vast majority of taxpayers did not exclude the credits from gross income when preparing federal income tax returns and therefore may be eligible for a refund. 

Click here to read the full Chief Counsel Memorandum.