STATE OF ALASKA

IN THE MATTER OF: Case No. 16-OTA-97

WARBELOW’S AIR VENTURES, INC.

FINAL DECISION

Subject Matter: Corporate Income Tax 9212-9311
Revenue Caseload No: 950941

This appeal arises from the denial by the Department of Revenue (DOR) of the taxpayer’s claim for a federal fuel tax credit on its Alaska Corporation Net Income Tax returns for 1992 and 1993. The taxpayer, Warbelow’s Air Ventures, (taxpayer) is located in Fairbanks. At issue is whether the provision under the Internal Revenue Code (IRC) allowing taxpayers to claim a credit on their federal income tax returns for federal excise taxes paid on fuel used in an exempt manner is incorporated under AS 43.20, thereby allowing taxpayers to use a percentage of the federal fuel tax credit to reduce state income taxes. ¹

This appeal was transferred to the Office of Tax Appeals from the DOR by agreement of the parties. Prior to transfer, a formal hearing was conducted by correspondence on the taxpayer’s appeal from the Informal Conference Decision (ICD) dated June 6, 1995. The record, consisting of all written evidence and pleadings, was received in the Office of Tax Appeals on July 30, 1997.

The record reflects that the taxpayer agreed with the general facts as stated in the ICD. The material facts are summarized here.

In February 1993 the taxpayer timely filed its Alaska Corporation Net Income Tax return for the tax period ending November 30, 1992. The return showed tax of $4,092, less a fuel tax credit in that amount, for a total net income tax of zero. The tax schedule relating to the fuel credit showed that the claimed Alaska credit was calculated by taking 18% of the total credit that the taxpayer had claimed on its federal income tax return for federal taxes paid on gasoline used in aviation.

On April 1, 1993, DOR issued an assessment for additional tax and interest based on an adjustment that disallowed the claimed credits because the federal fuel tax credit cannot be used to reduce the Alaska corporate income tax. The taxpayer timely appealed the assessment.

In April 1994 the taxpayer filed its Alaska income tax return for the 1993 tax year. That return reflected a tax of $10,680, less a fuel tax credit in the same amount, for a total net income tax of zero. The tax schedule relating to the fuel credit showed that the claimed Alaska credit was calculated by taking 18% of the total amount that the taxpayer had claimed as a credit on its federal income tax return for federal taxes paid on gasoline used in aviation, with carryovers of unused amounts of federal fuel tax credit from the previous two tax years.

On August 17, 1994, DOR assessed the taxpayer additional tax and interest attributable to the disallowance of the fuel tax credit. The taxpayer appealed. The appeals for the 1992 and 1993 tax years, both of which involved the federal fuel tax credit issue, were considered together at Informal Conference. The ICD dated June 6, 1995,upheld the disallowance of the credit for federal fuel taxes. This appeal followed.

This is one of a number of cases that turn on whether a provision of the Internal Revenue Code is incorporated under AS 43.20.021 for the purpose of determining Alaska income taxes. AS 43.20.021 provides in relevant part:

Sec. 43.20.021. Internal Revenue Code adopted by reference. (a) Sections 26 U.S.C. 1-1399 and 6001-7872 (Internal Revenue Code), as amended, are adopted by reference as a part of this chapter. These portions of the Internal Revenue Code have full force and effect under this chapter unless excepted to or modified by other provisions of this chapter.

Where a credit is allowed under the Internal Revenue Code is also allowed in computed Alaska income tax, it is limited to 18 percent for corporations of the amount of credit determined for federal income tax purposes which is attributable to Alaska. This limitation does not apply to a special industrial incentive tax credit under AS 43.20.042.

The question in this case is whether Alaska has adopted the provisions of the IRC relating to federal fuel credits. An understanding of the contentions of the parties requires a brief review of the relevant provisions of the IRC (26 U.S.C.1, et seq.).

IRC Section 4081 imposes a federal excise tax on gasoline. IRC Section 6421 provides for a refund of the fuel tax imposed under Section 4081 if the fuel is used in an exempt manner. IRC Section 6421 (a) states:

…if gasoline is used in an off-highway business use, the Secretary

shall pay (without interest) to the ultimate purchaser of such gasoline an amount equal to the amount determined by multiplying the number of gallons so used by the rate at which tax was imposed on such gasoline under section 4081. …

26 U.S.C. 6421(a).

IRC Section 6421(j) allows for an income tax credit in lieu of payment by the Secretary. IRC Section 34 allows as a credit against income tax "an amount equal to the sum of the amounts payable to the taxpayer under section 6421 with respect to gasoline used during the taxable year" for exempt purposes.

The taxpayer’s argument in support of its position that Alaska allows the federal fuel tax credit is straightforward. The sections of the IRC that provide for the credit, IRC sections 34 and 6421, are included in the Code sections that are expressly adopted under AS 43.20.021(a). The only other statute in AS 43.20 that modifies or limits the fuel tax credit is AS 43.20.021(d) which limits an allowable federal credit to 18 percent of the amount of credit determined for federal income tax purposes. In short, the taxpayer contends that since IRC Sections 34 and 6421 are included in the specific incorporation provision of AS 43.20.021(a), and there is no express exception under AS 43.20, taxpayers are allowed to take a fuel tax credit, limited to 18 percent of the allowable federal credit, against Alaska income taxes. ²

DOR’s position that the federal fuel tax credit is not adopted under AS 43.20 emphasizes the nature of the fuel tax credit and the fact that the Internal Revenue Code provision which imposes the fuel tax, IRC Section 4081, is not incorporated under the terms of AS 43.20.021(a). DOR correctly observes that the fuel tax credit represents a refund of federal excise taxes imposed under IRC Section 4081. DOR argues that if no fuel tax were imposed under IRC Section 4081(and no fuel tax paid by the taxpayer), there would be no allowable refund under IRC section 6421 and no corresponding credit under IRC Section 34. Since Alaska does not adopt IRC Section 4081, there is no federal fuel tax paid to the state on which a refund could be based. In essence, DOR contends that there is an implied exception to the apparent adoption of the fuel tax credit under AS 43.20.021(a) which arises from the fact that the federal fuel tax itself is not incorporated under that statute. Furthermore, DOR argues, that, the federal fuel credit under IRC Section 34 is not "attributable to Alaska" within the meaning of AS 43.20.021(d) because the federal fuel tax is not paid to the state.

The taxpayer’s argument, based on the express incorporation under AS 43.20.021(a) of the federal code sections allowing a fuel tax credit, is reasonable on the surface. However, the logic of DOR’s analysis is compelling. I conclude that the federal fuel tax credit is not adopted under AS 43.20 for the following reasons. ³

First, the fact that the federal fuel tax is not adopted under AS 43.20.021(a) operates as an implied exception to the federal fuel tax credit provisions (IRC Sections 34 and 6421) because the credit is contingent on payment of the federal fuel tax. Because the taxpayer has not paid the federal fuel tax to the state, it follows that the taxpayer cannot take a credit for federal fuel tax payments to reduce state income taxes. ⁴ This conclusion is consistent with the resolution of an analogous issue by the Alaska Supreme Court in Gulf Oil Corp. v. State, Dept. of Revenue, 755 P. 2d 372 (Alaska 1988). In Gulf Oil the Court found that the portion of the IRC dealing with foreign tax credits (Sections 901 through

908) were "excepted to or modified by" AS 43.20 because, unlike the IRC, AS 43.20 did not allow either a credit or a deduction for foreign income taxes. 755 P. 2d at 380.

Second, the taxpayer’s argument that the federal fuel tax credit is applicable in computing Alaska income taxes conflicts with the federal tax scheme and sound tax policy. Under IRC Section 34, the entire amount that the taxpayer has paid in fuel taxes on gasoline used for exempt purposes may be taken as a credit by the taxpayer against its federal income taxes. Furthermore, this fuel tax credit is a refundable credit. This means that if the fuel credit amount exceeds the taxpayer’s federal income tax liability for the year, the taxpayer is entitled to a refund payment for the difference. Thus, the federal tax scheme allows the taxpayer to fully recover payments of taxes on fuel used for exempt purposes. If the taxpayer could also take a federal fuel credit against its Alaska income taxes (or income taxes in other states), the taxpayer could potentially recover amounts exceeding its actual federal fuel tax payments for the year. At a minimum, if the taxpayer were able to take a tax credit for federal fuel taxes on both its federal and state income tax returns, the state and federal government would be burdened with the substantial audit task of insuring against double recovery. ⁵

Finally, under a well- settled rule of tax law, tax credits and deductions are a matter of legislative grace and the taxpayer must clearly establish entitlement. Schiff v. United States, 942 F. 2d 348 (6^th Cir. 1991). In this case the taxpayer has failed to clearly establish its entitlement to a federal fuel tax credit on its Alaska income taxes.

CONCLUSION

For the reasons stated above, I conclude that the taxpayer is not entitled to apply a credit for federal fuel taxes in computing its Alaska income tax liability. The Informal Conference Decision disallowing the federal fuel credit is affirmed.

This is the final hearing decision of the Administrative Law Judge under AS 43.05.465 (a). The taxpayer may file an appeal to superior court, in accordance with AS 43.05.480 within 30 days of the date of service of this decision.

Dated this 7th day of April 1998.

Shelley J. Higgins, Administrative Law Judge

Footnotes:

¹ The same legal issue is presented in 17-OTA-97, an appeal by a different taxpayer. Although the two appeals were not consolidated, I considered both at the same time and the decision in 17-OTA-97 is being issued simultaneously. Decisions in these two appeals were initially issued on January 28, 1998. However, prior to expiration of the 60 days under AS 43.05.465 for the decisions to become final, I issued an Order for Reconsideration that withdrew the decisions for the purpose of clarifying that the discussion of fuel taxes and fuel tax credits applied to federal fuel taxes, not to the Alaska motor fuel tax (AS 43.40). This is the corrected and final decision. (return to text)

² The taxpayer finds additional support for its position that the federal fuel credit is incorporated under AS 43.20 in the fact that DOR originally issued a Form 04-708, Underpayment of Estimated Tax by Corporations, which included a line for the federal fuel tax credit. The form, however, was changed as of 1992 to eliminate the reference to the fuel tax. DOR explained that including the reference to the fuel tax credit in the pre-1992 form was an error that arose from modeling the Alaska form on the equivalent federal form. Given this reasonable explanation and the fact that the tax years at issue in the appeal begin in 1992 after the form was corrected, this decision gives no weight to the pre-1992 form in determining whether Alaska has adopted the federal fuel tax credit. (return to text)

³ The parties to this appeal have not addressed the standard of review and it is not necessary to determine which standard of review is appropriate here. The question of whether the fuel tax credit is adopted under AS 43.20 is a question of law. In general, questions of law are resolved in the independent judgment of the Administrative Law Judge. See, AS 43.05.435. However, the reasonable basis test may be the appropriate standard of review if the legal question implicates a matter committed to the discretion of DOR or depends on the particularized experience and knowledge of DOR. See, Gulf Oil Corp. v. State, Dept. of Revenue, 755 P.2d 372 at 378,n.19 (Alaska 1988). In this case, I have concluded that DOR’s interpretation of the relevant statutes prevails regardless of which standard of review is employed. (return to text)

⁴ The record in this appeal indicates that the disputed fuel credits are based on federal fuel taxes paid to the IRS on gasoline used for exempt purposes. See facts infra at p. 2. There is no evidence in this record that the taxpayer is claiming fuel credits related to payments of motor fuel taxes to the state under AS 43.40.010. (return to text)

⁵ The record in this appeal is not sufficient to determine to what extent the taxpayer has recovered its exempt federal fuel tax payments for the tax yeas at issue by using the federal fuel tax credit to reduce its federal income taxes. (return to text)