Butane sparks tax break bonanza
Firms are racing Congress to protect ‘alternative energy’ loophole that could mean millions in unclaimed credit
Refiners racing to claim alternative energy loophole.
WASHINGTON — For more than a decade, oil refiners didn’t realize what a moneymaker they had in butane at least for tax purposes.
They do now.
Over the last few years, the IRS has seen an avalanche of amended excise tax forms from the industry. Their claim is that butane, a liquefied petroleum gas and byproduct of the oil refining process, qualifies as an “alternative fuel” under the 2005 surface transportation law and is, therefore, eligible to receive a 50 cents-per-gallon tax credit.
Lawsuits filed by refiners such as Valero Energy Corp. and Philadelphia Energy Solutions in federal court are reaching back more than six years to claim the previously unclaimed credit. If just those two claims are successful, the companies could win a combined $538 million with PES seeking $416 million of that or almost as much as the entire tax credit was estimated to cost for 2017, the last year it was in effect.
The IRS wouldn’t provide data on how much they’ve been peppered with in back claims. But as the agency points
out in a January 2018 revenue ruling denying that butane mixtures should qualify any more, “(e)very gallon of gasoline sold in the United States contains butane,” a cleanerburning additive to reduce smog and help vehicle engines perform better in colder months.
Refineries are now belatedly estimating how much butane was blended into their gasoline deliveries in years past. Tax returns can be amended for up to three years after they are filed; informal estimates circulating around Capitol Hill about how much the IRS could be on the hook to pay out if the agency were forced to by the courts range from $10 billion to $18 billion.
“If you file it three years later and everybody jumps on the bandwagon, it’s a lot of money,” said Oscar Garza, a Houstonbased lawyer who has represented refiners in the dispute.
Leaders in both parties and both chambers of Congress are pushing tax legislation that, while renewing the alternative fuels credit, would take the unusual step of retroactively squashing any pending or future claims for the credits on the basis of butane-gasoline mixtures.
The catch is any claims that have already been paid before the legislation is enacted, including those stemming from court settlements, would be grandfathered in. And the tax extender bills that the language is included in are hung up in a broader dispute between the House and Senate over offsets.
Valero and PES filed their lawsuits in early April. The Senate bill that would deny their claims was introduced a month earlier. That measure is backed by Finance Chairman Charles E. Grassley of Iowa who’s gone toe-to-toe with oil refiners for years over their opposition to the Renewable Fuel Standard, which requires refiners to buy costly credits to demonstrate compliance.
The House Ways and Means Committee approved that chamber’s version in June.
Tax code semantics
House Ways and Means ranking member Kevin Brady said Congress should leave it to the courts to decide whether the companies should get the tax credits.
“We should not be in the business of imposing retroactive tax increases or intervening in ongoing legal disputes,” the Woodlands Republican said. The retroactive change is “unconstitutional and will invite legal challenge,” he said.
The company lawsuits all make the same argument: that one of the substances the tax code identifies as an alternative fuel is liquid petroleum gases. LPGs are identified elsewhere in federal law as including butane.
The IRS, however, denies that butane qualifies as an alternative fuel. Butane is the same as gasoline, diesel and kerosene, according to the agency’s early 2018 guidance.
The 2005 law creating the tax credit did not define what an LPG is.