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U.S. Rep. Kevin Brady (R-TX) speaks to members of the media after he left a House Republican closed door meeting on immigration June 21, 2018 at the U.S. Capitol in Washington, DC. (Alex Wong/Getty Images/TNS) **FOR USE WITH THIS STORY ONLY**

U.S. Rep. Kevin Brady (R-TX) speaks to members of the media after he left a House Republican closed door meeting on immigration June 21, 2018 at the U.S. Capitol in Washington, DC. (Alex Wong/Getty Images/TNS) **FOR USE WITH THIS STORY ONLY**

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 cleaner-burning 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 Houston-based 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.

Complicating matters for PES: Last month's explosion at their Philadelphia refinery that disrupted East Coast gasoline supplies actually started in a butane vat.

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 Texas 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.

U.S. Venture, an Appleton, Wisconsin, fuel marketer, purchases butane from third parties to mix into fuels it sells. They point out in a separate suit seeking $33 million in back payments that butane is "universally regarded" as an LPG, including by government agencies like the Energy Department.

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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, which are "taxable fuels" upon which excise taxes are paid. Excise taxes are reduced by blending in alternative fuels, which qualifies for the 50 cents per gallon credit.

The 2005 law creating the tax credit did not define what an LPG is. Regulations associated with another tax code section dealing with "special motor fuels" specifically cite butane as an LPG, but the IRS points out that there is an exception for products taxable under a different section of the code. And under that section, the agency says, since butane is used in the production of finished gasoline, it is therefore a "gasoline blendstock," which is taxable - and two taxable fuels do not an alternative fuels mixture make.

During last month's Ways and Means markup, Rep. Earl Blumenauer argued that the credit was created to incentivize the use of renewable fuels. The Oregon Democrat said the refining industry knows the "loophole" it recently discovered is "contrary to the intent of the law."

"This is outrageous," Blumenauer said. "I see no sense in rewarding them with a $10 billion windfall."

Alex Hendrie, chief tax counsel for Americans for Tax Reform, sees the retroactive change as a way to artificially lower the cost of the House bill. "Getting rid of this makes it easier to get their tax extenders passed," Hendrie said.

ATR opposes the tax extenders package generally, including the alternative fuels credit, though it argues against the retroactive fix, saying the issue should be resolved in the courts.

Exponential growth

The $10 billion estimate is in stark contrast to what had been a sleepy little credit involving users of more readily recognized alternative fuels like natural gas.

In February 2018, the Joint Committee on Taxation estimated a one-year extension of the alternative fuel credits would cost just $555 million. But that changed dramatically over the course of last year as claims for the mixture credit exploded. By November, JCT was estimating that a one-year extension of the tax credit would cost $7.1 billion with the lion's share going to settle past claims.

A Senate aide said the IRS already has about $9 billion in claims pending, and believes the number could increase to $18 billion.

The impact on government coffers could be even higher if the U.S. Supreme Court takes a case filed by Sunoco, which is arguing that it shouldn't have to treat alternative and renewable fuels tax credits as income - rather, they should be able to deduct the credits from taxable income.

"If Sunoco wins and these folks win on the butane-gasoline (mixture), now you get your butane tax credit and it's tax-free," Garza said.

Meanwhile, Garza said he isn't particularly worried about the bills to retroactively quash the butane credit.

While some industry lawyers feel the need to beat Congress to the punch and file lawsuits before a law is passed barring the IRS from paying past butane-related credits, Garza said the congressional reaction might actually strengthen future lawsuits.

By revisiting the law and "clarifying" that butane, and propane, aren't alternative fuels, Congress is adding credence to the position that before the clarification, these LPGs were alternative fuels.

"That's the risk that they run with that language," Garza said. "And a judge could say that, well, thanks Congress for clarifying it, that pre-(20)18, that was the law. Otherwise, why would you have to pass a law?"

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