Courts reject IRS's "one-claim" rule for sec. 34 fuel tax credits.

Two courts recently held that a taxpayer may file an amended Form 4136, Credit for Federal Tax Paid On Fuels, for a Sec. 34 fuel excise tax credit claim on its income tax return, even though the taxpayer claimed a credit earlier for the same type of fuel use for the same tax year. In Schlumberger Technology Corp., 47 Fed. Cl. 298 (2000), the Court of Federal Claims rejected the IRS's argument that a statutory "one-claim" rule governing fuel tax refunds under Sec. 6427 governs a taxpayer's right to an income tax credit under Sec. 34. In February 2001, the Tax Court agreed with the Court of Federal Claims in FPL Group, Inc., 116 TC No. 7.

The Service has been increasingly intent in recent years on enforcing a one-claim rule for refunds or credits arising from nontaxable use of motor fuels. Gasoline, undyed diesel fuel and undyed kerosene are taxed under Sec. 4081, generally on their removal from a terminal at the end of a refinery/ pipeline/terminal system, and aviation fuel is taxed under Sec. 4091, generally when a producer or registered wholesaler sells it. Thus, the price at the pump reflects the previously imposed Federal tax (18.4 cents a gallon for gasoline, 24.4 cents a gallon for diesel fuel and kerosene and 21.9 cents a gallon for aviation fuel).

Secs. 6421 and 6427 allow certain "exempt" fuel users to claim a refund equal to all or a portion of the excise tax paid on the fuel used. Exempt uses include off-highway business use, use of gasoline by state and local governments, use by nonprofit educational organizations, use of diesel fuel or kerosene as heating fuel, use in certain buses and use of aviation fuel in commercial air transportation. Generally, a user can file a refund claim for any calendar quarter in the tax year in which it has accumulated fuel excise tax claims of at least $750 under Secs. 6421 and 6427. Taxpayers can use Form 8849, Claim for Refund of Excise Taxes, or Form 720, Quarterly Federal Excise Tax Return, and must make claims before the end of the calendar quarter following the last quarter in which the exempt use of the fuel occurred.

Sec. 34 allows a refundable credit against income tax for any fuel the taxpayer could have claimed under Sec. 6421 or 6427, but did not do so. (A credit is also allowed for gasoline used on farms, for which the taxpayer cannot make quarterly refund claims.) The taxpayer uses Form 4136, Credit for Federal Tax Paid on Fuels, attaching the form to its income tax return. A taxpayer may not claim a credit on Form 4136 if there was a timely filed claim relating to those specific gallons of fuel during the year. A taxpayer can claim a credit on Form 4136 for fuel used during the tax year, even if it filed a quarterly claim for other fuel used during the same quarter. A taxpayer can receive a credit only for the tax year in which it used the fuel.

According to Secs. 6421(d)(1) and 6427(i)(1), a taxpayer cannot make "more than one claim" for any type of exempt use of fuel during the year. Sec. 34 defines the amount a taxpayer can claim as a credit by reference to amounts "payable to the taxpayer" under Secs. 6421 and 6427.

Sec. 34 does not state any one-claim rule. However, the Service's position has been that a "one-claim" rule applies to fuel tax credits claimed on Form 4136. According to IRS Pub. 378, Fuel Tax Credits and Refunds, once a taxpayer files Form 4136 for a tax year, making an exempt-fuel tax credit claim for one of the IRS's seven "claim groups," it cannot file an amended Form 4136 to make another claim for that claim group for that tax year. The taxpayer can file an amended Form 4136 to claim a credit for a different claim group for which it made no previous claim for that tax year, as long as the statute of limitations (SOL) is open for the related income tax return.

According to the Service, for example, a taxpayer that made a fuel tax credit claim on its Form 4136 for tax year 1999 for nontaxable use of undyed diesel fuel (for running machinery in a factory) cannot make an amended claim for 1999 if it later discovered that it had other nontaxable uses in the same claim group (such as use of undyed diesel fuel as heating fuel) or that it did not report the correct amount of that nontaxable use on the original Form 4136. The taxpayer could, however, file a second Form 4136 for tax year 1999 to report nontaxable fuel use in a different claim group that it did not claim on the original form (such as off-highway business use of gasoline).

Schlumberger Technology Corporation filed Form 4136 with its income tax returns for 1991-1994, making claims for Sec. 34 credits ranging from $37,069-$169,984 on account of off-highway diesel fuel use at oil drilling sites. These claims were in addition to claims filed under Sec. 6427 during the tax year on Form 8849.

In 1995 and 1996, Schlumberger filed two sets of refund claims for 1991-1994 for additional amounts of diesel fuel tax on nontaxable uses, ranging from $445,194-$642,179 for each year. The IRS paid the claim made for 1993 but denied the claims for the other three years, citing the one-claim rule. Schlumberger filed a refund suit in the Court of Federal Claims, and the Service counter-sued to recover the claim paid for 1993.

After extensive briefing by the parties on the legislative history of the refund and credit rules, the court concluded that the plain language of Sec. 34 does not impose any one-claim rule, and held that Sec. 6427(i) does not "control or limit the rights afforded to the taxpayer by I.R.C. [sections] 34." There was "nothing in the legislative history that is a clearly expressed legislative intention contrary to the plain language." The legislative history, rather, "supports plaintiffs' view that [subsections][34] and 6427 are parallel authorities."

In FPL Group, the taxpayer claimed fuel tax credits on Form 4136 from 1988-1992, ranging from $233,053-$391,516. Later, apparently during an IRS examination, it claimed additional credits for each year, ranging from $135,194-$215,649, which the Service denied, applying its one-claim rule. The Tax Court agreed with the taxpayer, citing Schlumberger. The court found nothing in the Code that would impose any procedural provisions of Sec. 6427 to credits provided by Sec. 34; it found indications in the legislative history that Congress intended the refund and credit provisions to be parallel authorities. According to the court, the one-claim rule did not bar the taxpayer's claim for additional fuel tax credits.

Thus, two Federal courts have held that a taxpayer may file an amended Form 4136 for a tax year in which it discovers additional fuel tax credits after filing a tax return. Any taxpayer with a Sec. 34 fuel tax claim that the Service denies because of the one-claim rule has a judicial forum available that should grant the claim. Taxpayers that make significant use of gasoline, diesel fuel, kerosene or aviation fuel have an opportunity to make a claim for fuel tax credits for past tax years if they now determine that some of that use is nontaxable, even if they already filed a Form 4136 for the tax years in question. The opportunity to make an amended claim will stay open as long as the SOL is open on the income tax return for the same tax year.

FROM DAVID CULP, J.D., CPA, AND ELIZABETH WAGNER, J.D., CPA, WASHINGTON, DC