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Federal Circuit: Alternative mixture fuel credit denial upheld

Federal Circuit: Alternative mixture fuel credit

The U.S. Court of Appeals for the Federal Circuit today affirmed the federal claims court’s grant of summary judgment for the government in a case concerning whether the taxpayer was entitled to almost $20 million in energy tax credits available for certain alternative fuel mixtures under section 6426.


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The case is: Alternative Carbon Resources, LLC v. United States, 2018-1948 (Fed. Cir. September 26, 2019). Read the Federal Circuit’s decision [PDF 180 KB]


The facts presented by the Federal Circuit can be summarized as follows:

  • The taxpayer purchased feedstock consisting of organic material that otherwise might be considered waste.
  • The taxpayer then paid a trucking company to mix enough diesel fuel with the feedstock so that the resulting mixture could qualify as an alternative fuel mixture under section 6426.
  • The feedstock/diesel mixture was then delivered to operators of anaerobic digestion tanks (tanks that provide a place for microorganisms to digest feedstock).
  • The entities that operated the digester tanks then used the resulting methane to generate electricity (some of the resulting methane was burned off as excess).
  • The taxpayer in 2011 claimed almost $20 million of the alternative mixture fuel credit for the mixture sold to the digester operators.
  • The IRS in 2011 issued an advisory letter stating that alternative fuel mixtures used in anaerobic digester tanks are not “used as a fuel” for purposes of the credit under section 6426. Eventually, the IRS determined that the taxpayer was not entitled to the alternative fuel mixture credit and assessed the full value of the credits plus penalties.

The taxpayer made partial payment to the IRS and then filed a claim for refund. The taxpayer ultimately filed a refund suit with the U.S. Court of Federal Claims which then granted summary judgment for the government.

The taxpayer appealed to the Federal Circuit which, today, affirmed. 

Federal Circuit

The Federal Circuit explained that a taxpayer can claim the alternative fuel mixture credit under section 6426 by selling a mixture of alternative fuel as long as “the mixture is ultimately sold for use as fuel.”

In this case, the Federal Circuit looked, in part, to the fact that the price paid by a digester operator ($950) to the taxpayer was “intentionally offset" by a $950 administrative fee—so that the sale price and fee were “a wash.” The Federal Circuit found no evidence that the digester operators paid “anything that genuinely can be characterized as consideration in order to obtain the feedstock/diesel mixture.” As observed by the appeals court, the taxpayer’s arrangement with the digester operators had no economic substance or any non-tax purpose.

The Federal Circuit also agreed with the claims court in upholding the penalty, finding that the taxpayer failed to show it had reasonable cause for claiming the alternative fuel mixture credits.

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