our team

The IRS Giveth and the IRS Taketh…Mixture Credit Exclusion From Income…ANOTHER Update


Further to our legal alert of January 24, 2013 (“The IRS Giveth and the IRS Taketh…Mixture Credit Exclusion From Income…Update”), the IRS on January 30, 2014 published a supplemental Chief Counsel Memorandum (CCA 201406001) memorializing its position that credits claimed under § 6426 are simply a reduction in excise taxes due (or a reduction in excise tax expense) and therefore rather than being excluded from taxable income, the mixture credits constitute a reduction in the excise tax expense that the taxpayer may claim as part of its cost of goods sold.

CCA 201406001 addresses federal income tax treatment of excise tax credits under §6426(a) and concludes “[F]or 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.” Drawing analogies to state income tax (and relying on other non‐precedential Chief Counsel guidance), Chief Counsel states “[W]here a credit satisfies an otherwise deductible liability, it is the position of the Service that the deduction is reduced by the amount of the credit. For example, in the analogous situation where a state provides a credit against state income tax liability, the Service has ruled that the state tax credit is not includible in gross income but rather reduces the taxpayer’s state income tax deduction for federal income tax purposes.” Relying on the state tax analogy, the IRS concludes, as it did in its earlier correspondence with a taxpayer, that when claimed under § 6426 the mixture credits are not excludible from taxable income.

The CCA does not address the effect of the distinction between federal income tax treatment of the credits based on the Code section under which they are claimed, nor does it discuss the tax benefit rule which was conceded in recent taxpayer correspondence. The CCA seems to create two distinct credits, one under § 6427 which is excluded from taxable income and one under § 6426 which is not. The Job Creation Act of 2004 repealed the previous mixture credit and replaced it with a single refundable mixture credit which is treated as an overpayment of income tax. The § 6426 language is nothing more than a means to efficiently process the credits by allowing taxpayers to reduce their § 4081 tax liability owed to the IRS by the credit. Interpreting § 6426 to mean a certain accounting treatment is contrary to Congress’ intent.

Oscar L. Garza & Associates, P.C. is closely reviewing the IRS’ position and continues to be regularly engaged with the IRS on this matter as it evolves.

Oscar L. Garza & Associates, P.C. is a Houston‐based boutique law firm specializing in transactional tax and trade matters surrounding all aspects of the oil and petroleum industry. With over 20 years of experience counseling clients operating in all aspects of the oil and petroleum sector our lawyers have an in‐depth knowledge of the industry, enabling us to provide quality service and creative solutions to our clients. Please visit our website at www.olgarza.com. For more information please contact:


Oscar L. Garza 832.758.9084 olgarza@olgarza.com
Leanne Sobel 720.282.9165 lsobel@olgarza.com