# In the United States Court of Federal Claims

No. 15-587T

(Filed: October 6, 2016)

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Discovery Dispute Regarding IRS

N otice 2015-16; Skidmore Deference;
Internal IRS Documents Not Relevan t to Resolving Legal Issue Under 26 U.S.C. § 6426(b). * SUNOCO, INC., *
* Plaintiff, *
*
v. *
* THE UNITED STATES, *
*
Defendant. *
*

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Kevin Johnson , with whom were A. Christopher Young and Robert Fay , Pepper Hamilton, LLP, Philadelphia, Penns ylvania, for Plaintiff.

Jason Bergmann , with whom were Caroline D. Ciraolo , Principal Deputy Assistant Attorney General, David I. Pincus , Chief, and Mary M. Abate , Assistant Chief, Court of Federal Claims Section, Tax Di vision, U.S. Department of Ju stice, Washington, D.C., for
Defendant.

OPINION AND ORDER
DENYING PLAINTIFF’S MOTION TO COMPEL

WHEELER, Judge.

The parties in this case are engaged in fact discovery. Their cross-motions for judgment on the pleadings and partial summ ary judgment also are pending and fully briefed. In deciding those motions, the Co urt must determine wh ether IRS Notice 2015-
56 is entitled to deference under Skidmore v. Swift, 323 U.S. 134, 139–40 (1944). Notice 2015-56 gives direct guidance on the main legal issue in this case: th e tax treatment of the
alcohol fuel mixture credit un der 26 U.S.C. § 6426(b).

On July 29, 2016, Sunoco, In c. (“Sunoco”) filed a motion to compel production of documents pursuant to Rule 37(a ) of the United States Court of Federal Claims. Sunoco2 seeks certain internal IRS do cuments that it contends wo uld help the Court determine
whether Notice 2015-56 is entitled to Skidmore deference. The Go vernment opposes the motion on the grounds that th e requested documents are (1) irrelevant to the issue of whether Skidmore deference should apply, and (2) protected under the deliberative process and attorney-client privileges. The Court agrees that the requested documents are unnecessary, and further finds that IRS Notice 2015-56 is not entitled to Skidmore deference for purposes of the pending motions . Sunoco’s motion to compel is therefore

DENIED as moot.

Background

The core of the parties’ dispute in this ca se is a purely legal issu e. Because the Court
will decide that issue when it resolves the parties’ pe nding motions, only a brief summary is necessary here. Sunoco, lik e many companies that produce fuel, blended ethanol into its fuel and thereby qualified for the alcohol fu el mixture credit under 26 U.S.C. § 6426(b). Compl. ¶¶ 10–11, Dkt. No. 1. The credit reduced Sunoco’s excise tax liability under 26 U.S.C. § 4081. A taxpayer may count excise taxes paid as part of its cost of goods sold or as business expenses, and ther eby may reduce its overall income tax liability. The question therefore is whether a taxpayer must use its net excise tax paid—that is, whether it must
subtract the amount of the alc ohol fuel mixture credit from its gross excise tax liability— when calculating deductions agains t its income tax liability.

The IRS has taken inconsistent stances on the alcohol fuel mixture credit’s tax treatment. First, it issued Chief Counsel Ad visory 201342010 on October 18, 2013 (“2013 CCA”). See 2013 WL 5 858278. In the 201 3 CCA, the IRS noted, “Some blenders included the § 6426(c) biodiesel mixture credits and th e § 6427(e) payments in income through a negative adjustment to their biodiesel mixture co st of goods sold.” Id . It continued, “In our view . . . federal tax credits are not gr oss income for purposes of determining a taxpayer’s federal income tax liability.” Id. Therefore, the IRS initially agreed with Sunoco’s position and held that a credit substa ntially similar to the alcohol fuel mixture credit was not required to be counted as part of a taxpayer’s gross income. Id.

On February 7, 2014, the IRS issued Chief Counsel Adviso ry 201406001 (“2014 CCA”). See 2014 WL 499938. The IRS reversed course in the 2014 CCA, stating, “For federal income tax purposes, the claimant must treat the excise tax credits allowed under § 6426(a) as a reduction in its federal excise tax liab ility 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.” 1 Id.

1 The Government’s attempt to align the 2013 and 2014 CCAs is unconvincing. The 2013 CCA advised that § 6426(c) excise tax credits, which apply to biodie sel mixtures, were not to be included in a taxpayer’s gross income. See 2013 WL 5858278. The 2014 CCA ’s advice meant that the same excise tax credits3 Finally, the IRS released No tice 2015-56 on August 15, 2015—sixty-five days after Sunoco filed its complaint in this case. See 2015- 35 I.R.B. 235 (2015). Notice 2015-56 is the only IRS advice on the main i ssue in this case that may be treated as binding. See 2014 CCA, 2014 WL 499938 (“This advi ce may not be used or cited as precedent.”); 2013 CCA,

2013 WL 5858278 (same). The Notice states that, “f or federal income tax purposes, a claimant must reduce its § 4081 excise tax liability for each calendar quarter during the 2014 calendar year by its biodiesel mixture cred it attributable to a biodiesel mixture sold or used during that calendar quarter.” 201 5-35 I.R.B. 235. Thus, Notice 2015-56 sides with the 2014 CCA, and against the 2013 CCA.

Discussion

Under Skidmore, courts may give deferenc e to an agency’s in terpretation of its governing laws even when the agency does not use its rulemaki ng authority. 323 U.S. at

139-40. 2 Agencies, as administrators of their governing statutes, c ontribute “a body of experience and informed judgment” that prope rly may guide a court’s decision in such cases. Id. at 140. In deciding whether to give deference to an agency interpretation, courts
should consider the in terpretation’s “thoroughness evident in its consideration, the validity of its reasoning, its consistenc y with earlier and later pronoun cements, and all those factors which give it power to persuade, if lacking power to control.” Id. Depending on the balance of these factors, courts may give a ra nge of deference from “gr eat respect” to “near indifference.” United States v. Mead Corp., 533 U.S. 218, 228 (20 01) (citations omitted).

AMP Inc. v. United States is instructive. See 185 F.3d 1333, 1338–39 (Fed. Cir. 1999). In that case, the Court of Federal Cl aims had given deferenc e to an IRS revenue ruling that bore directly on the parties and claims and was issu ed while the parties’ claims were pending with the IRS. Id. at 1338. The Federal Circuit noted that “[a] revenue ruling
issued at a time when the I.R .S. is preparing to litigate is often self-serving and not generally entitled to deference by the courts.” Id. at 1338–39 (citatio n omitted). This was “especially true when the rulin g cites no authority and is inco nsistent with regulations and other pronouncements of the I.R.S.” Id. at 1339 (citation omitted). Therefore, the Circuit
found that the revenu e ruling was not entitled to deference. Id.

The situation here is rema rkably similar to AMP. Th e IRS issued Notice 2015-56 sixty-five days after Sunoco filed its comp laint. Therefore, the IRS was not merely preparing to litigate when it i ssued the Notice—it was actually litigating. The Notice also

reduced a taxpayer’s federal income tax deductions, which necessarily treats any excise tax credit as gross income. See 2014 WL 499938. The positions are irreconcilable.

2 When an agency exercises its rulemaking authority, c ourts may apply a higher degree of deference. See Chevron U.S.A., Inc. v. Natural Res. De fense Council, Inc., 467 U.S. 837 (1984).4 does not give authority for the IRS’s determina tion. One would expect to see authority for the IRS’s position because Notice 2015-56 conflicts with the IR S’s earlier advice in the non-precedential 2013 CCA. These three factor s—the timing of the Notice, the lack of authority, and the Notice’s inconsistency with prior IRS advice—mean that Notice 2015-
56 is not entitled to deference under Skidmore. In short, Notice 2015-56 is merely another vehicle through which the Government convey ed its position in this case. That position may be meritorious, or it may not be, but it deserves to be we ighed equally against Sunoco’s
arguments.

Conclusion

The Court finds that IRS Notice 2015-56 is not entitled to deference for the parties’ cross-motions for judgment on the pleadings and partial summary ju dgment. Plaintiff’s motion to compel seeks documen ts only to support its argume nt that Notice 2015-56 should receive no deference. Therefore, Plainti ff’s motion to compel is DENIED as moot.

IT IS SO ORDERED.

s/Thomas C. Wheeler

THOMAS C. WHEELER Judge