Welcome to Green Tax, Vol. 1. Each quarter we will provide a recap of some of the important energy tax issues of the last quarter, including court rulings, IRS rulings and guidance, legislative activity, and more.

Opinions and rulings

• Oil Spill Tax Ruled Unconstitutional
  • On March 24, the Fifth Circuit issued its opinion in Trafigura Trading LLC v. United States, No. 21-20127 (5th Cir. 2022). The court ruled that section 4611(b), which provides for user fees payable to the Oil Spill Liability Trust Fund, is an unconstitutional tax under the export clause. The taxpayer’s award of a $4 million tax refund was affirmed. 
• Butane-Gasoline Mixtures Not Entitled to Alternative Fuel Mixture Credit
  • On March 25, the Court of Federal Claims issued its opinion in Philadelphia Energy Solutions Refining and Marketing LLC v. United States, No. 1:19-cv-00510 (Fed. Cl. 2022). The court granted summary judgement in favor of the United States, finding that butane does not qualify as an alternative fuel under section 6426. This  decision followed similar rulings in the Fifth Circuit in Vitol Inc. v. United States, No. 20-20237 (5th Cir. 2022), and the Seventh Circuit in U.S. Venture Inc. v. United States, No. 20-1861 (7th Cir. 2021).

IRS rulings

• No Normalization Violation for Treatment of Excess Deferred Taxes
  • In PLR 202211004 (March 18, 2022), the IRS ruled that the taxpayer’s proposal to normalize excess deferred taxes attributable to depreciation and cost of removal expenses over the remaining life of the underlying property was consistent with the normalization rules of section 168(i). While cost of removal is not subject to normalization under section 162, treating the excess deferred taxes as including the cost of removal (in the composite depreciation rate) in effect allows for amortization of the protected excess faster than following ARAM. 
• Normalization Rules Must Be Applied Separately to Different Assets
  • In PLR 202213001 (April 1, 2022), the IRS ruled that the normalization rules of section 168(i) must be applied separately to two computations comprising the projected revenue requirement based on (1) the filed commission form and (2) projected additions of public utility property because the separate calculations used different test periods (historic and future test periods) and different set of assets.

Legislation

• The Build Back Better Act contained over 300 pages of energy tax proposals. While the Act as a whole could not garner the required votes in the Senate, some provisions from the Act may make their way into a stand-alone energy tax bill. Access the Senate Finance Committee draft here. Notable provisions include:
  • Extension and expansion of the section 45Q carbon capture and sequestration credit
  • Extension of the renewable energy PTC and ITC through 2026
  • Technology neutral PTC and ITC beginning in 2027
  • Extension of biodiesel and biodiesel mixture credits, alternative fuel and alternative fuel mixture credits through 2026
  • Additional credits for standalone energy storage, transmission, clean hydrogen, sustainable aviation fuels, existing nuclear generation facilities and certain other technologies.
  • Direct pay for certain tax credits
• HR 5423, the Solar Energy Manufacturing for America Act, introduced by Rep. Daniel Kildee (D-MI), would establish a tax credit for the production and sale of certain solar equipment produced and sold in a taxpayer's trade or business. Access and track the bill text here.
• HR 5369, the American Jobs in Energy Manufacturing Act of 2021, introduced by Rep. Conor Lamb (D-PA), would expand the advanced energy project credit to include property designed to produce energy from water; property designed to produce energy conservation technologies; light-, medium-, or heavy-duty electric or fuel cell vehicles; certain hybrid vehicles; and manufacturing facilities designed to reduce greenhouse gas emissions. Access and track the bill text here.

Other news

On January 31, the European Court of Auditors published its review of energy taxation, outlining how energy taxes, carbon pricing, and energy subsidies contribute to achieving the EU’s climate objectives. Access the review here.

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