Refiners Seek To Include Butane as Alternative Fuel

(August 13, 2019) — The Associated Press (AP) reports that the Internal Revenue Service (IRS) has been beset by loads of amended excise tax forms submitted by refiners over the past few years. That industry has gained a heightened appreciation of butane, a liquefied petroleum gas and a byproduct of the crude oil refining process. Refiners maintain it qualifies as an alternative fuel under the 2005 surface transportation law. Therefore, it is eligible to receive a 50-cents-per-gallon tax credit, even when it is blended in gasoline.

AP notes that lawsuits by refiners in federal court reach back more than six years and claim the previously unclaimed credit. IRS did not provide the news agency data on the number of back claims it has received, but the agency in a January 2018 revenue ruling denied that butane mixtures qualify. IRS observed that “every gallon of gasoline sold in the United States contains butane,” a cleaner-burning additive that reduces emissions and helps vehicle engines perform better in colder months.

Nonetheless, refiners are belatedly estimating how much butane was blended into their gasoline in years past. Tax returns can be amended for up to three years after they are filed. AP reports that informal estimates floating around Capitol Hill regarding how much IRS could be on the hook to pay if it is forced to do so by the courts range from $10 billion to $18 billion.

Meanwhile, Democrat and Republican leaders in both chambers of Congress are pushing tax legislation that, while renewing the alternative fuel tax credit, would take the unusual step of retroactively quashing any pending or future claims for the credits on the basis of butane- gasoline mixtures. Observed is that any claims that have already been paid before legislation is enacted, including those stemming from court settlements, would be grand- fathered in. Meanwhile, tax extender bills in which the language is included are hung up in a broader dispute between the House and Senate over offsets.

Refiner lawsuits make the argument that among the hydrocarbons the tax code identifies as alternative fuels are liquid petroleum gases, or LPGs, which are in turn identified elsewhere in federal law as including butane. IRS denies that butane qualifies as an alternative fuel. Butane is the same as gasoline, diesel, and kerosene, according to the agency’s 2018 guidance, which are “taxable fuels” upon which excise taxes are levied. But to add to the confusion, excise taxes can be reduced by blending in alternative fuels that qualify for the 50-cents-per-gallon credit.

The 2005 law that created the alternative fuel tax credit did not define what LPG is. Regulations associated with another tax code section dealing with “special motor fuels” specifically cite butane as an LPG, but the IRS points out there is an exception for products tax- able under yet a different section of the code. Under that latter section, the agency says, since butane is used in the production of finished gasoline it is therefore a “gasoline blendstock,” which is taxable—and two taxable fuels do not qualify as an alternative fuel mixture.

AP adds that the $10-billion rebate estimate is in stark contrast to what had been a sleepy little credit involving users of more readily recognized alternative fuels like propane and natural gas. In February 2018 Congress’ Joint Committee on Taxation estimated a one-year extension of the alternative fuel credits would cost just $555 mil- lion. But that changed dramatically over the course of last year as claims for the butane mixture credit exploded. By November the committee was estimating that a one-year extension would cost $7.1 billion, with the lion’s share going to settle past claims. A Senate aide told AP the IRS already has about $9 billion in claims pending, and believes the number could rise to $18 billion.

The impact on government coffers could be even higher if the U.S. Supreme Court accepts a case filed by Sunoco, which argues it should not have to treat alternative and renewable fuel tax credits as income. Rather, it should be able to deduct the credits from taxable income. “If Sunoco wins and these folks win on the butane-gasoline [mixture], now you get your butane tax credit and it’s tax-free,” says Oscar Garza, a Houston-based attorney who has represented refiners in the dispute.

Garza adds he isn’t worried about legislation to retroactively enjoin the butane credit. While some industry lawyers are anxious to outpace Congress and file lawsuits before a law is passed barring IRS from paying past butane-related credits, Garza says the congressional reaction might actually strengthen future claims.

By revisiting the law and “clarifying” that butane—and propane—are not alternative fuels, Congress would add credence to the position that prior to the clarification the LPGs were alternative fuels. “That’s the risk that they run with that language,” the industry attorney says. “And a judge could say, ‘well, thanks Congress for clarifying it’—that [prior to] 2018 that was the law. Otherwise, why would you have to pass a law?”

(SOURCE: The Weekly Propane Newsletter, August 5, 2019)