CCA 1342010: Biodiesel mixture credits and payments are not gross income

Plain-English summary

Chief Counsel advised that biodiesel mixture excise-tax credits under IRC § 6426(c) and payments under § 6427(e) are not gross income under § 61. The advice distinguishes those benefits from the § 40A income-tax credit, which the Code expressly includes in gross income. It also distinguishes an older gasoline-credit ruling because the biodiesel benefits were not structured as refunds of a previously deducted expense. A blender that chooses the § 6426(c) credit or § 6427(e) payment instead of the § 40A credit therefore need not include those amounts in gross income.

Ruling snapshot

• Question: Are IRC § 6426(c) credits and § 6427(e) payments gross income under § 61?
• Outcome: Advice given, they are not gross income.
• Key authorities: IRC §§ 61, 34, 40A, 87, 4081, 6426, 6427, and 6401

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       Memorandum
       Number: 201342010
       Release Date: 10/18/2013
       CC:ITA:B04                              Third Party Communication: None
       POSTF-117811-13                         Date of Communication: Not Applicable

UILC: 61.00-00, 6426.00-00, 6427.00-00, 6427.13-00

date: August 29, 2013

 to:   Carol Bingham McClure
       Associate Area Counsel (Houston)
       (Large Business & International)

from: Michael J. Montemurro
Chief, Branch 4
Office of Associate Chief Counsel
(Income Tax & Accounting)

subject: Tax treatment under § 61 of the Internal Revenue Code of excise tax credits under
§ 6426(c) and payments under § 6427(e) for the sale of biodiesel mixture fuels

       This Chief Counsel Advice responds to your request for assistance. This advice may
       not be used or cited as precedent.

       ISSUE

       Are the § 6426(c) excise tax credits and the § 6427(e) payments items of gross income
       under § 61 of the Internal Revenue Code (Code)?

       CONCLUSION

       The § 6426(c) excise tax credits and the § 6427(e) payments are not items of gross
       income under § 61.

       FACTS

       Blenders that produce and sell qualifying biodiesel mixtures to third parties have
       claimed § 6426(c) biodiesel mixture credits against their excise tax liability, and
       payments under § 6427(e). Blenders submit these claims to the IRS on Schedule C of
       Form 720, Quarterly Federal Excise Tax Return.

POSTF-117811-13 2

Some blenders included the § 6426(c) biodiesel mixture credits and the § 6427(e)
payments in income through a negative adjustment to their biodiesel mixture cost of
goods sold. On amended income tax returns, some blenders claimed a refund of
income tax asserting that the § 6426(c) excise tax credits and the § 6427(e) payments
are not includible in gross income. You ask whether this assertion is correct.

LAW AND ANALYSIS

Section 6426(a)(1) allows a credit against the excise tax imposed by § 4081 on taxable
fuel for each gallon of biodiesel used by the blender to produce any biodiesel mixture for
sale or use in the blender’s trade or business. To the extent that the biodiesel mixture
credit exceeds a person's § 4081 liability for any particular quarter, a payment under
§ 6427(e) or a refundable income tax credit under § 34 is allowable to the blender. See
§ 2(d)(1) of Notice 2005-4, 2005-1 C.B. 289.

As an alternative to the credit under § 6426(a)(1), a blender may choose to claim the
non-refundable income tax credit allowable under § 40A. A blender who chooses the
§ 40A income tax credit is required by § 87 to include the amount of the credit in gross
income. You ask whether blenders that do not opt for the § 40A credit, but instead
claim the § 6426(c) excise tax credit and the § 6427(e) payment, must include those
amounts in gross income for income tax purposes.

The biodiesel mixture credit under § 6426(c) is essentially a refundable federal tax
credit. That is, through the payment mechanism of § 6427(e) and the refundable
income tax credit of § 34, a blender can receive the full amount of the credit even if the
credit exceeds the amount of the blender’s excise and income tax liabilities for the year.
Federal tax credits are an element in the Code’s formula for computing a taxpayer’s tax
due (or refunded). The Code computes a taxpayer’s income tax liability by starting with
gross income, allowing certain deductions to arrive at taxable income, applying a tax
rate to determine tax liability, and applying certain refundable and non-refundable
credits and payments against the tax liability. A taxpayer whose refundable credits and
payments exceed its tax liability is considered to have made an overpayment of tax.
See § 6401(b). Where Congress has decided that a particular credit should itself be
treated as an additional item of gross income, it has done so expressly.1 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.

Our conclusion is consistent with the intent of Congress when it enacted the biodiesel
mixture credit. The American Jobs Creation Act of 2004 (Act), P. L. 108-357, added
several new provisions regarding biodiesel fuels to the Code, including §§ 6426(c),
6427, 40A, and 87. The Act’s legislative history provides that the § 40A credit must be

1
Thus, § 87 includes in gross income the credits for alcohol and biodiesel fuels determined under §§ 40
and 40A; § 54(g) includes in gross income the credits for holders of clean renewable energy bonds; and
§ 1397E(j) includes in gross income the credits for holders of qualified zone academy bonds.

POSTF-117811-13 3

included in gross income but is silent regarding the § 6426(c) credit and the § 6427
payment. See H.R. Conf. Rep. No. 108-755 at 306-310 (2004). We think the fact that
§§ 6426(c), 6427, and 40A were enacted together, yet Congress chose only to
specifically provide that the credit under § 40A is includible in gross income, indicates
that Congress intended to exclude from gross income the § 6426(c) credit and the
§ 6427 payment.

Rev. Rul. 67-2, 1967-1 C.B. 13, addressing when farmers include in gross income the
income tax credit for gasoline used on a farm under current § 34(a)(1) is distinguishable
from the biodiesel mixture credit at issue here. The credit at issue in the revenue ruling
was measured by multiplying the number of gallons of gasoline used for farming
purposes by the rate of Federal gasoline tax which applied on the date the farmer
purchased the gasoline. Congress considered the credit discussed in Rev. Rul. 67-2 to
be, in effect, a “refund of the gasoline tax paid with respect to gasoline used on the farm
for farming purposes.” S. Rep. No. 89-324, 1965 U.S.C.C.A.N. 1745-1746. Because
farmers would have deducted the gasoline tax expense, they should include in gross
income the amount refunded through the income tax credit to the extent of the tax
benefit derived from the deduction. See also Pub. 510 (Rev. July 2012), Excise Taxes,
at pages 22-23 which illustrates the application of the rule in Rev. Rul. 67-2. By
contrast, Congress did not structure the biodiesel mixture credit as a refund of a
previously deducted expense. Instead, “Congress believed that providing a new income
tax credit for biodiesel fuel will promote energy self-sufficiency.” Staff of the Joint
Committee on Taxation, General Explanation of Tax Legislation Enacted in the 108th
Congress 227 (Comm. Print 2005). Thus, Rev. Rul. 67-2 is inapposite.

By electing the § 6426(c) excise tax credit and/or the § 6427(e) excise tax payment
instead of the § 40A income tax credit, a blender is not required by § 87 or by § 61 to
include in its gross income the amount of the § 6426(c) excise tax credits and/or the
§ 6427(e) payments that it claims.

This writing may contain privileged information. Any unauthorized disclosure of this
writing may undermine our ability to protect the privileged information. If disclosure is
determined to be necessary, please contact this office for our views.

Please call (-----) -------------- if you have any further questions.

                                       _____________________________
                                       Michael J. Montemurro
                                       Chief, Branch 4
                                       Office of Associate Chief Counsel
                                       (Income Tax & Accounting)