Economic Substance and Ethanol Tax Credits

In late 2011, Chemoil Corporation, a fuel-distribution company, entered into a series of seven transactions involving alcohol-fuel mixtures and claimed the Volumetric Ethanol Excise Tax Credit (VEETC) in connection with those transactions. In each transaction, Chemoil purchased and resold fuel at a pre-tax loss, adding small amounts of ethanol to the fuel and relying on the VEETC to compensate for the company’s pre-tax loss. The government challenged the economic substance of the transactions generating these VEETCs.

The government retained two experts in the case, both supported by Brattle. Principal Evan Cohen opined on “the expected economic outcomes of the seven transactions at issue,” including the pre-tax losses experienced by Chemoil for each transaction. Separately, a fuel market expert opined on “the types, uses, and specifications for ethanol, as well as customary industry practices for transporting, blending, sampling, and pricing it.” In a summary judgment memorandum, the District Court concluded that “there [was] no serious question that Chemoil sold ethanol at a pre-tax loss in each of the seven transactions” and “[t]here [was] no evidence in the record that Chemoil was motivated by anything other than tax benefits…” Accordingly, the Court granted the government’s motion for summary judgment, denying Chemoil’s request for a refund of $6.7 million in credits and $4 million in penalties.