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In Notice 2015-56, the IRS provides additional guidance to claimants making one-time claims for credits and payments allowable under Sections 6426(c), 6426(d) and 6427(e) for biodiesel mixtures and alternative fuels sold or used during calendar year 2014. The notice includes instructions on how a claimant must: (1) offset its Section 4081 liability with the Section 6426(c) biodiesel mixture credit and (2) offset its Section 4041 liability with the Section 6426(d) alternative fuel credit.

Background

The Tax Increase Prevention Act of 2014 (the Act) retroactively extended the excise tax credits and payments for biodiesel mixtures and alternative fuels and the excise tax credit for alternative fuel mixtures through December 31, 2014. Under prior law, these incentives had expired on December 31, 2013 (September 30, 2014, in the case of alternative fuel incentives for liquefied hydrogen).

As a result of the extension, Section 6426 continues to allow the following excise tax credits for alternative fuel, biodiesel mixtures and alternative fuel mixtures sold or used in 2014:

— Biodiesel mixture tax credit (Section 6426(c)): $1.00 per gallon of biodiesel used by the taxpayer in producing any biodiesel mixture for sale or use in its trade or business.

— Alternative fuel tax credit (Section 6426(d)): $0.50 per gallon of an alternative fuel sold by the taxpayer for use as a fuel in a motor vehicle, motorboat, or aviation or so used by the taxpayer.

— Alternative fuel mixture tax credit (Section 6426(e)): $0.50 per gallon of alternative fuel used by the taxpayer in producing any alternative fuel mixture for sale or use in its trade or business.

The credits must be used first to offset the taxpayer's excise tax liability under Section 4081 (for the biodiesel mixture credit and the alternative fuel mixture credit) and under Section 4041 (for the alternative fuel credit). The taxpayer can then claim the excess biodiesel mixture or alternative fuel credit amounts either as a payment under Section 6427(e) or as a refundable income tax credit under Section 34(a). Alternative fuel mixture credits may only be used to offset a taxpayer’s excise tax liability.

Chief Counsel Advice 201342010 and Chief Counsel Advice 201406001 (the CCAs) state that biodiesel mixture payments under Section 6427(e) are not included in gross income, but biodiesel mixture credits allowable under Section 6426(a) reduce for federal income tax purposes the excise tax liability allowable as a deduction (or as an amount included in cost of goods sold). The CCAs do not address the income tax treatment of the alternative fuel and alternative fuel mixture credits under Sections 6426(d) and (e) or alternative fuel payments under Section 6427(e). The rationale in the CCA, however, should apply equally to alternative fuels and alternative fuel mixtures. That is, alternative fuel payments under Section 6427(e) are not included in gross income, but the alternative fuel and alternative fuel mixture credits allowable under Section 6426(d) and (e) reduce excise tax liability for income tax purposes. The CCAs also do not address the treatment of refundable income tax credits under Section 34(a), but their rationale suggests that they should be treated in the same manner as payments under Section 6427(e) (that is, excluded from gross income).

The Act instructed the IRS to issue procedures for claiming the credits and refundable payments relating to periods during 2014. The IRS is authorized to issue these procedures “notwithstanding any provision of law” and “in such manner as the Secretary of the Treasury (or the Secretary’s delegate) shall provide.”

Notice 2015-3 describes the procedure for claiming 2014 biodiesel and alternative fuel incentives. To make a one-time claim under Notice 2015-3 for payment of credits and payments allowable under Sections 6426(c), 6426(d) and 6427(e) relating to the biodiesel mixture and alternative fuel incentives (the one-time claim) claimants must submit Form 8849, Claim for Refund of Excise Taxes. Claimants must include Schedule 3 (Form 8849), Certain Fuel Mixtures and the Alternative Fuel Credit, with their submission and enter amounts for 2014 biodiesel and alternative fuel incentives on Line 2 and Line 3 of Schedule 3, as appropriate.

Each claimant making the one-time claim must use a single Form 8849 to claim all 2014 biodiesel mixture and alternative fuel incentives for which the claimant is eligible. A one-time claim may be submitted during the period beginning on January 16, 2015, and ending on August 8, 2015. One-time claims filed after August 8, 2015, will not be processed or paid.

Each claimant making the one-time claim for the 2014 alternative fuel mixture credit must make the claim for all four quarters of 2014 on Form 720X, Amended Quarterly Federal Excise Tax Return.

Notice 2015-3 did not provide guidance on the interaction between the one-time claim procedures and the income tax guidance provided in the CCAs.

See Tax Alert 2015-160,{} for more information.

Additional guidance

Notice 2015-56 includes the additional guidance that a claimant must reduce its Section 4081 excise tax liability for a calendar quarter by the amount of the 2014 biodiesel mixture excise tax credit allowable under Section 6426(c) for that quarter in determining for federal income tax purposes its deduction for the Section 4081 excise tax or its cost of goods sold deduction attributable to that tax. Similarly, a claimant must reduce its Section 4041 excise tax liability for a calendar quarter by the amount of the 2014 alternative fuel excise tax credit allowable under Section 6426(d) for that quarter in determining for federal income tax purposes its deduction for the Section 4041 excise tax or its cost of goods sold deduction attributable to that tax.

Since Congress restored the credits retroactively, a claimant must treat the credits as if they never expired. Accordingly, the reductions apply whether or not the claimant's tax year ended before the Act was signed into law. Further, the mandate of a one-time submission of claims process does not affect the substantive federal income tax treatment of the credits.

Notice 2015-56 includes an example involving a taxpayer with a tax year ending March 31. For the first calendar quarter of 2014, the taxpayer incurred a Section 4081 tax liability of $25 and was retroactively allowed a biodiesel mixture credit of $20. For its tax year ending March 31, 2014, the taxpayer’s federal income tax deduction (or cost of goods sold) attributable to the Section 4081 tax incurred in the first calendar quarter of 2014 is limited to $5.

Notice 2015-56 does not address the treatment of the alternative fuel mixture credit under Section 6426(e). The Notice states that claimants have requested clarification regarding the proper accounting period in which to take into account the reduction in the income tax deduction (or cost of goods) sold attributable to the biodiesel mixture and alternative fuel credits. The quarter-by-quarter reduction in the income tax deduction (or cost of goods sold) responds to these requests for clarification. The IRS evidently assumed that no such clarification was necessary for the alternative fuel mixture credit because Form 720X, on which the retroactive 2014 alternative fuel mixture credit is claimed, requires a quarter-by-quarter reduction in excise tax liability.

Implications

The guidance was not unexpected. Tax Alert 2015-60 {} noted the failure of Notice 2015-3 to provide guidance on the interaction between the one-time claim procedures and the income tax guidance provided in the CCAs. The Tax Alert cautioned that the excise tax liability reported on 2014 Forms 720 might not be available for federal income tax purposes as a deduction (or as cost of goods sold).

Notice 2015-56 is consistent with the CCAs. For federal income tax purposes, it requires taxpayers to reduce the excise tax allowable as a deduction (or as cost of goods sold) by the amount of the biodiesel mixture credit (for the tax imposed by Section 4081) and by the alternative fuel credit (for the tax imposed by Section 4041). The notice does not require the credit in excess of the applicable tax (that is, the amount payable under Section 6427(e)) to be included in gross income or to reduce the taxpayer’s deductions or cost of goods sold.

Taxpayers should note that the retroactive nature of the changes may require the filing of an amended federal income tax return. In the example above, the notice describes a taxpayer with a tax year ending March 31, 2014. The taxpayer likely would have filed its income tax return for that year before the retroactive extension of the credit. Based on the law in effect before the retroactive extension of the credit, the taxpayer would have properly claimed the full amount of the Section 4081 tax as a deduction (or as cost of goods sold). Under the rules of Notice 2015-56, the taxpayer is apparently required to amend its return for the tax year ending in 2014. Moreover, the resulting underpayment will be subject to interest charges and may be subject to penalties for failure to pay estimated taxes. Although the Service has authority under the Act to prescribe rules for retroactive allowance of the credits and payment “notwithstanding any other provision of law” and “in such manner as the Secretary of the Treasury (or the Secretary’s delegate) shall provide,” the notice provides no relief from the retroactive application of the Code’s interest and penalty provisions.

In the absence of specific guidance, it is unclear how refunds of the alternative fuel mixture credit should be taken into account for federal income tax purposes. Under general tax benefit principles, the refund of a previously deducted tax payment does not require amendment of the return on which the deduction was claimed. Instead, the refund of the tax payment is generally treated, to the extent it provided a tax benefit, as income in the year received or accrued. Since the notice does not appear to adopt this principle for the biodiesel mixture credit and the alternative fuel credit, the IRS may also expect taxpayers claiming the alternative fuel mixture credit for 2014 to amend their returns.

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