Texas Comptroller of Public Accounts STAR System
201404021H
SOAH DOCKET NO. 304-14-0501.13
CPA HEARING NO. 107,457
RE: *************
TAXPAYER NO.: *************
AUDIT OFFICE: *************
AUDIT PERIOD: January 1, 2009 THROUGH December 31, 2009
Franchise Tax/RFD
BEFORE THE COMPTROLLER
OF PUBLIC ACCOUNTS
OF THE STATE OF TEXAS
SUSAN COMBS
PERRY HEITMAN
Representing Tax Division
*************
Representing Claimant
COMPTROLLER’S DECISION
The Tax Division (Staff) (Comptroller)
denied *************’s (Claimant) refund claim for franchise taxes purportedly
paid in error on its 2009 franchise tax return. Claimant had originally
included fuel surcharge reimbursements received from its customers in the
amount reported as income on its 2008 federal income tax return, and
consequently, as required by Texas Tax Code SECTION 171.1011, included said
reimbursements in its calculation of total revenue on its 2009 franchise tax
return. Claimant subsequently filed an amended 2008 federal income tax return
excluding the fuel surcharge reimbursements from both revenue and deductible
expenses. Claimant also amended its 2009 franchise tax return excluding the
fuel surcharge reimbursements from the calculation of its total revenue for
taxable margin purposes and requested a refund of the amounts purportedly paid
in error. Staff denied the refund claim. Claimant appealed the denial. In the
Proposal for Decision (PFD), the Administrative Law Judge (ALJ) concludes that
Claimant properly excluded the fuel surcharge reimbursements from both revenue
and deductible expenses on its amended 2008 federal income tax return and,
thus, properly excluded the reimbursements from its total revenue calculation
on its amended 2009 franchise tax return. Furthermore, the ALJ recommends that
the refund claim should be granted in full.
I. PROCEDURAL HISTORY, NOTICE, AND JURISDICTION
On October 4, 2013, Staff referred the case to the State Office of
Administrative Hearings for an oral hearing. Claimant was represented by
************* of COMPANY A, and Staff was represented by Assistant General
Counsel Perry S. Heitman. The hearing convened before ALJ Peter Brooks on
December 19, 2013. The record was kept open until March 7, 2014, in order to
afford the parties an opportunity to make their post-hearing submissions.
There are no contested issues of notice or jurisdiction in this proceeding.
Therefore, those matters are set out in the Findings of Fact and Conclusions of
Law without further discussion.
II. REASONS FOR DECISION
A. Evidence Presented
Staff submitted the following exhibits:
(1) 60-Day Letter;
(2) Refund Claim Denial letter dated August 10, 2011;
(3) Refund Audit Plan;
(4) Refund Claim dated January 31, 2011;
(5) Claimant’s Audit Plan; and
(6) Claimant’s Response and Objections to Staff’s First Set of Requests for
Admission, Interrogatories, and Requests for Production of Documents.
No objections were raised to Staff’s exhibits. Staff presented the testimony of
Matthew McGuire, the Comptroller auditor who performed the refund verification.
Claimant filed the following exhibits:
1. Transportation Services Agreement between Claimant and COMPANY B dated
January 1, 2008;
2. Email agreement dated May 30, 2008, between Petitioner and COMPANY C;
3. Confirmation of INDIVIDUAL A Verbal Rate Agreement dated May 29, 2008
between Claimant and COMPANY D;
4. ************* (COMPANY E) & ************* (COMPANY G) Model Truckload Motor
Carrier/Shipper Agreement with Commentaries;
5. Claimant’s sample fuel surcharge rate charts;
6. Claimant’s sample customer invoices for 2008;
7. Claimant’s 2008 U.S. Income Tax Return, as originally filed;
8. Claimant’s amended 2008 U.S. Income Tax Return;
9. Comptroller’s Position letter filed January 31, 2013 (exhibits omitted);
10. Email correspondence, dated July 6, 2011 from Mr. McGuire addressed to
INDIVIDUAL B, Claimant’s Certified Public Accountant (CPA); and
11. Email correspondence, dated July 7, 2011, from Mr. McGuire to INDIVIDUAL B.
Staff objected to the admission of Claimant’s Exhibits Nos. 4 and 9. These
objections were overruled. Exhibit 9 was admitted because it is part of the
administrative record and Exhibit 4 was admitted because it establishes a
foundation for the use of fuel surcharges in the transportation industry.
Claimant presented the testimony of INDIVIDUAL C, Claimant’s Controller and of
INDIVIDUAL B. The exhibits proffered by Staff and Claimant at the hearing were
admitted into the record.
Claimant attached to its Post-Hearing Brief its 2008 Trial Balance for Account
7235-Fuel. Staff did not raise any objections to its submission. The Trial
Balance is admitted as Exhibit 12.
A. Agreed Adjustments
Staff has not agreed to any adjustments.
C. Background and Issues Presented
Claimant, headquartered in CITY A, Texas transports freight on a contract
basis. Claimant instituted the practice of charging and collecting from its
customers a reimbursement of fuel costs that exceeded $************* per gallon
of diesel fuel. The reimbursement, referred to as a fuel surcharge, can be
calculated based on mileage, cost of fuel, or average miles per gallon. The
fuel surcharge is separately stated on the invoices to Claimant’s customers.
Because of the volatility of diesel fuel prices, Claimant cannot recover the
majority of its fuel costs through the contracted freight rates and, therefore,
contracts separately for fuel surcharge reimbursements from its clients.
[ENDNOTE: (1)] Fuel costs of a $************* per gallon of diesel fuel are
built into the freight charges. Fuel costs that exceed the floor of
$************* per gallon are recovered through the fuel surcharges. The fuel
surcharges are intended to recover as much of the fuel costs that exceed the
floor of $************* per gallon. Claimant pays for all the fuel costs
upfront. [ENDNOTE: (2)] The clients are invoiced for the fuel surcharges, with
a separate line item on the invoices. [ENDNOTE: (3)] The fuel surcharges are
accounted for separately on Claimant’s books and records. [ENDNOTE: (4)] For
example, there are separate ledger accounts, so Claimant can separately account
for the payments it receives for freight charges and the fuel surcharges.
There are costs other than fuel for which Claimant is reimbursed. They are
referred to as accessorial fees that Claimant pays upfront and then rebills its
customers for reimbursement. The accessorial charges include lumper fees
(off-loading fees), stop-off fees, escort fees, and shuttle fees. [ENDNOTE:
(5)] Generally, these expenses are identified after Claimant has contracted a
fixed freight rate with its customers. The customer is contacted by Claimant
once the prospect of the additional cost is identified to confirm that the
customer agrees to pay these additional fees. [ENDNOTE: (6)] They are invoiced
as a separate line item. [ENDNOTE: (7)] The accessorial fees are not included
in revenue or gross receipts or included in line 1c of Claimant’s federal
income tax return. [ENDNOTE: (8)]
Claimant used the following four types of agreements with its customers during
the accounting periods: [ENDNOTE: (9)]
1. Written Contract;
2. Oral Agreement;
3. Email Agreement; and
4. Rate Confirmation. [ENDNOTE: (10)]
The amount of the fuel surcharge varied weekly based on the Department of
Energy (DOE) National Average for Diesel Fuel that is disseminated each Monday
at 4 pm for the seven-day period beginning the next day. [ENDNOTE: (11)]
Depending on the fuel price, there are two different in-house charts that
Claimant may use to calculate the fuel surcharge for a shipment. [ENDNOTE:
(12)] The first chart calculates the fuel surcharge as a percentage of
Claimant’s freight charge for a particular job. The second chart calculates the
fuel surcharge based on mileage (the surcharge is listed on the chart as a
“cents per mile” charge). [ENDNOTE: (13)] The transportation industry came up
with these charts to allow for the recovery of fuel costs through fuel
surcharge payments. [ENDNOTE: (14)] Claimant permits some customers to provide
their own charts to calculate the fuel surcharge amounts. [ENDNOTE: (15)] A few
clients contract for a flat rate, without a separate fuel surcharge. [ENDNOTE:
(16)] This usually occurs in the case of a one-stop or one-time customers.
[ENDNOTE: (17) In this type of job, the customer does not reimburse Claimant’s
fuel cost (i.e., no fuel surcharge is billed). [ENDNOTE: (18)] Claimant makes
the best effort to recover all its fuel costs through the fixed freight rate.
Claimant acknowledges that fuel surcharge is an estimate. As described by
INDIVIDUAL C, the fuel surcharge is a mathematical calculation intended to
allow Claimant to recover its fuel costs. There is no mark up in the
calculation of the fuel surcharge. It is intended to recover the excess fuel
costs on a dollar-for-dollar basis. [ENDDNOTE: (19)] Any profit is built into
the negotiated freight rate. [ENDNOTE: (20)] INDIVIDUAL C testified that the
trial balance for Account 7235 – Fuel from Claimant’s 2008 general ledger
illustrates that the fuel surcharges are intended to recover the fuel costs on
a dollar-for-dollar basis. [ENDNOTE: (21)] The positive amounts in the account
represent Claimant’s payments to its fuel vendors and the negative amounts
represent the fuel surcharge reimbursements received from its customers. The
total amount spent on fuel was $*************, which exceeds the $*************
in fuel surcharge reimbursements recorded in the same account.
Charging a fuel surcharge as a means of obtaining a reimbursement of fuel costs
separate from the cost of transportation service is a normal practice in
Claimant’s industry. [ENDNOTE: (22)] As fuel costs began to increase, the fuel
surcharge was developed to offset the increased cost, through a reimbursement,
so that profit margins remained stable. [ENDNOTE: (23] Claimant’s fuel
surcharge policy is consistent with the industry practice as illustrated in the
COMPANY E and COMPANY G Model Agreement (Section 3), which states that:
[ENDNOTE: (24)]
Freight charges will be subject to a fuel surcharge which will be billed as a
separate charge on freight bills. The chart provides that up to a floor price
no surcharge is imposed. The charge will be adjusted up or down each Monday by
the cost per mile adjustment listed on the matrix attached as Appendix C.
The Commentary accompanying the Model Agreement further underscores that
Claimant’s policy is based on conditions affecting the transportation industry
as a whole: [ENDNOTE: (25)]
In ordinary situations, carriers are expected to recover their costs through
their transportation rates. The fluctuating price of fuel, however, can add
significant costs to carriers. A fuel surcharge is the most common option to
address volatile fuel prices during periods of high fluctuation in fuel prices.
If the shipper agrees to assume this risk, it also may be appropriate for the
shipper to request a fuel rebate if full prices fall below a specified level.
Claimant built into its charts the possibility of a rebate payable to the
customers. Claimant’s Fuel Surcharge Table shows that if the DOE average price
falls below $************* per gallon, a rebate is due the customer. [ENDNOTE:
(26)]
INDIVIDUAL C used the email agreement between Claimant and COMPANY C to
illustrate how the fuel surcharge reimbursement worked. [ENDNOTE; (27)] The
fuel surcharge was calculated using a percentage–based fuel surcharge chart.
The 59% fuel surcharge was calculated as of the date of the email (I.E., May
30, 2008) or possibly earlier. The rate of 59% would be applied to the fixed
freight rate of $************* for the trip from CITY C, California to CITY B,
Texas. If in route the driver encountered fuel costs greater than anticipated,
COMPANY C would not bear any additional risk. [ENDNOTE: (28)] If on the other
hand, the surcharge exceeded the actual cost incurred, Claimant would recover
more than its costs.
INDIVIDUAL C also reviewed some of the invoices included in Claimant’s Exhibit
6 to illustrate the operation of the fuel surcharge calculations. The invoice
for COMPANY H expressed the fuel surcharge rate in terms of cents per mile,
i.e., $************* per mile. The rate was calculated using Claimant’s
in-house Fuel Surcharge Table. [ENDNOTE: (29)] The parties would have located
the applicable DOE national average for that week and found on the chart the
corresponding cents per mile.
In the invoice from Claimant’s customer, ************* (COMPANY J), the parties
used COMPANY J’s own in-house surcharge rate chart. [ENDNOTE: (30)] The fuel
surcharge was based on a rate of $************* per mile. [ENDNOTE: (31)] The
DOE national average price corresponding to the cents per mile rate of
$************* fell within the range of $************* to $************* set
out in the chart. The rate of $************* was applied to the trip mileage of
626 to produce a fuel surcharge of $*************.
INDIVIDUAL B, Claimant’s CPA, testified regarding the actual rate of payment of
the fuel surcharges. She testified that less than 1% of the fuel surcharges
were written off as bad debt deductions.
When Claimant prepared its 2008 federal income tax return, it included the fuel
surcharge reimbursements in its federal gross receipts reported on line 1c.
Because of the method for calculating total revenue dictated by Texas Tax Code
SECTION 171.1011, the fuel surcharge reimbursements were included in Claimant’s
calculation of its total revenue on its 2009 Texas franchise tax return.
Claimant subsequently concluded that it had erred in including the fuel
surcharge reimbursements in its federal gross receipts and amended its 2008
federal income tax return excluding the fuel surcharge reimbursements from both
the revenue reported and expenses claimed on the return. Claimant relied on the
federal income tax “reimbursement theory,” which prohibits the deduction of
certain reimbursed expenses as ordinary and necessary business expenses under
Internal Revenue Code (IRC) SECTION 162 and requires the exclusion of the
reimbursement payments from gross income. As a result of the federal income tax
return’s amendment, Claimant amended its franchise tax report for report year
2009, by including the amended gross receipts in its calculation of total
revenue, thus excluding the collected fuel surcharge reimbursements from its
calculation of total revenue. The effect was to reduce its total revenue by
$************* its taxable margin by $*************, and the tax due by
$*************.
Staff rejected Claimant’s treatment of the fuel surcharge reimbursements and
denied the resulting refund claim. In the refund denial letter dated August 10,
2011, the auditor denied the refund claim because Claimant’s “reasons for
amending gross receipts are not supported by the Texas Tax Code.” [ENDNOTE:
(32)] The auditor had earlier communicated, in greater detail, his denial of
the refund claim in an e-mail dated July 6, 2011. The auditor, in relevant
part, explained that:
After reviewing the documentation provided, I will not be allowing the fuel
surcharges to be deducted, I will not be allowing the fuel surcharges to be
deducted from gross revenue as an [a] reimbursable expense. These charges are
additional charges to customers for the provision of the taxpayer’s
transportation services rather than expenses paid to the taxpayer for the
reimbursement.
Claimant appealed the denial and requested a refund hearing. Claimant contends
that the amount reported as gross receipts on its amended 2008 federal income
tax return complies with federal law as required by Texas Tax Code SECTION
171.1012 and therefore is the amount that should be included in the calculation
of its total revenue on its corresponding 2009 franchise tax return. [ENDNOTE:
(33)]
D. ALJ’s Analysis
One of the components of a taxpayer’s taxable margin is its total revenue. In
the case of a taxable entity that is treated for federal income tax purposes as
a corporation, Texas Tax Code SECTION 171.1011(c)(1) provides that its total
revenue is computed by adding:
(1) the amount reportable as income on line 1c, Internal Revenue Service Form
1120;
(2) the amounts reportable as income on lines 4 through 10, Internal Revenue
Service Form 1120; and
(3) any total revenue reported by a lower tier entity as includible in the
taxable entity's total revenue under Section 171.1015(b).
The amount reported on line 1c is included in calculating Claimant’s total
revenue “to the extent the amount entered complies with federal income tax
law.” Tex. Tax Code Ann. SECTION 171.1011(b) and 34 Tex. Admin. Code SECTION
3.587(c)(2). Thus, the dispute in this case turns on whether the amount
Claimant reported on line 1c of its amended 2008 federal income tax return
complies with federal income tax law.
Texas Tax Code SECTION 171.1011(b), as originally enacted in 2006, provided as
follows:
In this section a reference to an amount entered on a line number on an
Internal Revenue Service form includes the corresponding amount entered on a
variant of the form or a subsequent form with a different line number.
The statute was amended in 2007 to adopt the “amount reportable” concept and
the requirement that it comply with federal income tax law. . The amendment was
effective January 1, 2008. [ENDNOTE: (34)]
Claimant contends that the Comptroller erred in refusing to use the amounts it
reported on line 1c of its amended 2008 federal income tax return in
calculating Claimant’s total revenue. The dispute rests on whether the fuel
surcharge payments made by Claimant’s customers, under the federal income tax
reimbursement theory, are not deductible as an ordinary and necessary business
expense under IRC SECTION162 and, therefore, are not includible in federal
gross income. Thus, Claimant’s refund claim depends, not on Texas case law or
Comptroller authority, but on federal tax authorities. There are three federal
income tax authorities that are generally recognized as the primary authorities
defining the scope of the reimbursement theory: Internal Revenue Service (IRS)
Gen. Couns. Memo. 38,606 (January 7, 1981), IRS Gen. Couns. Memo. 37,920 (April
5, 1979), and BURNETT V. COMMISSIONER, 356 F. 2d 755 (5th Cir. 1966), CERT.
DENIED, 385 U.S. 832 (1966).
The development and elements of the reimbursement theory are best summarized in
IRS Gen. Couns. Memo. 38,606:
The ‘reimbursement theory’ has developed under the principle that a taxpayer is
not allowed a section 162 deduction for expenditures that are made with a right
or expectation of reimbursement since they are in the nature of loans or
advancements and are not ordinary and necessary business expenses. SEE BURNETT
V. COMMISSIONER, 356 F.2d 755 (5th Cir. 1966), CERT. DENIED, 385 U.S. 832
(1966); FLOWER V. COMMISSIONER, 61 T.C. 140(1973), AFF’D MEMO., (5th Cir. Dec.
12, 1974); REV. RUL. 78-388, 1978-2 C.B. 110; 4A J. MERTENS, LAW OF FEDERAL
INCOME TAXATION, SECTION25.10 (1979 REV.). The application of the reimbursement
theory requires initially that the expenditure would otherwise constitute a
section 162 business expense of the taxpayer. Once the expense is deductible
under section 162 the reimbursement theory serves to disallow the deduction
when a right or expectation of reimbursement exists at the time the expenditure
occurs. SEE G. C. M. 37920, FEDERAL DISASTER ASSISTANCE ADMINISTRATION,
I-351-77 (April 5, 1979), which provides a more exhaustive discussion of the
reimbursement theory.
The reciprocal of disallowing a deduction under the reimbursement theory is
that reimbursement payments will not be includible in the recipient’s gross
income. SEE Rev. Rul. 79-263, 1979-2 C.B. 82. Furthermore, the reimbursement
theory seems to be equally applicable to cash basis and accrual basis
taxpayers. SEE CHARLES BALEVIAN CO. V. COMMISSIONER, 68 T.C. 620 (1977).
IRS Gen. Couns. Memo. 37,920 elaborates on the requirement that the
reimbursement theory only applies if the underlying expenditure qualifies as a
necessary and ordinary business expense under IRC SECTION 162. The
reimbursement theory cannot apply to exclude from gross income a personal
expense of the taxpayer that is not a deductible Section 162 expense. Gen.
Couns. Memo. 37,920, at 18-19. In other words: “The application of the
reimbursement theory requires initially that the expenditure would otherwise
constitute a section 162 business expense of the taxpayer.” Gen. Couns. Memo.
38,606, at 10. Staff has expressly conceded that, “It is undisputed that
Claimant’s fuel cost is an ordinary and necessary expense incurred to perform
its transportation.” [ENDNOTE: (35)] The next step in determining whether the
reimbursement theory serves to disallow the deduction is ascertaining whether a
right or expectation of reimbursement exists at the time the expenditure
occurs.
At one point it was thought that the right of reimbursement had to be
unconditional in order for the expenditure to not be deductible as a business
expense under IRC SECTION 162. SEE BURNETT, 365 F. 2d, at 759. However, the
Fifth Circuit’s holding expanded the principle to include less than an absolute
right to reimbursement. SEE BURNETT, 365 F. 2d, at 760. This case involved the
deductibility from income of certain expenditures made by Mr. Burnett to
clients in the conduct of his law practice. Mr. Burnett’s practice was
primarily devoted to representing plaintiffs in workmen’s compensation and
personal injury litigation on a contingent fee basis. He made disbursements to
or on behalf of certain of his clients principally to provide for their living
expenses incurred in the period during which he handled their claims. The
clients, however, were not unconditionally obligated to repay such amounts.
Repayment would occur only if, when, and to the extent that Mr. Burnett was
successful in effecting a recovery of a client’s claim; and the excess, if any,
was to be shared between Mr. Burnett and the client according to previously
agreed upon percentages. The Tax Court had treated the disbursements as
advances virtually certain of repayment rather than as business expenses,
despite the fact that they were not made as formal loans for which the clients
were personally liable and the right of reimbursement was not unconditional.
The Fifth Circuit affirmed the Tax Court’s treatment of the payments, holding
that, “the disbursements here were made only with the expectation that they
would be substantially repaid, as evidenced by [Burnett’s] high degree of
selectivity in approving clients for financial aid (disbursements were to only
450 out of 2,200 clients represented by [Burnett] during the five-year period
from 1957 to 1961).” SEE BURNETT, 356 F. 2d, at 760.
The Tax Court also has held that an absolute right of reimbursement is not
necessary to render an expenditure nondeductible:
The Tax Court has held that expenditures were not deductible where they were
advanced with ‘good hopes’ and/or a ‘reasonable’ expectation of recovery.
HERRICK V. COMMISSIONER, 63 T.C. 562 (1975); CANELO V. COMMISSIONER, 53 T.C.
217 (1969), AFF’D PER CURIAM, 447 F. 2d 484 (9th Cir. 1971); RONALD R.
SILVERTON, T.C.M. 1977-198.
Gen. Couns. Memo. 37,920, at 21.
The General Counsel concluded that whether the probability of reimbursement is
sufficient for a deduction to be denied under IRC SECTION 162 is determined on
a case-by-case basis. [ENDNOTE: (36)] Claimant’s certainty of receiving the
fuel surcharge reimbursements closely approximates, if not exceeds, the
certainty of reimbursement that the Fifth Circuit found sufficient in BURNETT.
Claimant paid for the fuel upfront with the expectation that it would be
substantially repaid by its clients. The record establishes that clients were
routinely invoiced for the fuel surcharges they owed and were required to make
payment within fifteen days. [ENDNOTE: (37)] Even more significantly,
INDIVIDUAL B, Claimant’s CPA, testified that less than one percent of the fuel
surcharges billed to its customers was ultimately written off as bad debt.
The ALJ concludes that the fuel costs Claimant paid up front, and for which it
received fuel surcharge reimbursements, constituted ordinary and necessary
business expenses otherwise deductible under IRC SECTION 162. However, due to
Claimant’s more than reasonable expectation that it would be substantially
repaid by its clients, the reimbursement payments are neither deductible under
IRC SECTION 162 nor includible in Claimant’s federal gross receipts.
Consequently, the amounts reported on Claimant’s line1c of its amended 2008
federal income return were required by statute to be included in the
calculation of its total revenue on its 2008 franchise tax return. Therefore,
the corresponding refund claim in the amount of $************* should be
granted.
The treatment of the fuel surcharge reimbursements as nondeductible IRC SECTION
162 ordinary and necessary business expenses is consistent with Claimant’s
treatment of the accessorial charges for which Claimant separately rebilled its
clients. Claimant would not pay upfront for accessorial charges which arose
after the freight rate had been negotiated until it had secured its clients
express consent to reimburse these costs. Claimant has not treated the
reimbursed accessorial charges as expenditures deductible under IRC SECTION 162
or as part of its gross income. Thus, they have not been included in Claimant’s
gross receipts on line 1c of its federal income tax return and consequently
were not included in the calculation of Claimant’s total revenue. Staff has not
contested Claimant’s treatment of the accessorial charges. The ALJ cannot
identify a reasonable basis for treating the two types of reimbursements
differently.
Moreover, Staff has tacitly recognized the applicability of the reimbursement
theory in Comptroller’s Decision No. 107,916 (2013), which involved a Texas
corporation whose business activities included warehousing, the forwarding of
merchandise from the United States into Mexico, and the preparation of
documentation required for importation of merchandise into Mexico. The taxpayer
acted as the forwarding agent and representative of an affiliated company and
made payments on behalf of the affiliated company’s clients for accessorial
items such as freight bills, drayage fees, customs fees, and storage, which
were the out-of-pocket costs that were at issue in this hearing. Petitioner was
reimbursed on a dollar-for-dollar basis by its affiliated company’s clients for
these out-of-pocket costs. The taxpayer initially tried to take these
out-of-pocket costs as a deduction from total revenues as flow-through funds
under Texas Tax Code SECTION 171.1011(f) or (g). The Comptroller disallowed the
taxpayer’s deductions and recalculated its franchise tax returns using the E-Z
computation method under Texas Tax Code SECTION 171.1016. The taxpayer and
Staff resolved the dispute with respect its 2008 and 2009 assessments by
allowing Petitioner to amend it 2008 and 2009 franchise tax reports to exclude
the out-of-pocket costs provided the taxpayer filed amended federal income tax
returns for the corresponding federal tax years of 2007 and 2008. Staff, after
issuing the position letters, had determined that federal income tax law
allowed the taxpayer to report its gross receipts, with or without the
reimbursements for the out-of pocket costs. Therefore, under Texas Tax Code
SECTION 171.1011(b), the taxpayer could include or exclude these reimbursements
in its gross receipts on line 1c because the exclusion or inclusion would
comply with federal income tax law. However, because the taxpayer had filed its
federal income tax returns including the reimbursements in its gross receipts,
Staff would not allow taxpayer to amend its 2008 and 2009 franchise tax reports
unless it first amended the corresponding federal income tax returns by excluding
the reimbursements from its gross receipts. Staff agreed that, once the taxpayer
amended its corresponding federal income tax returns to exclude the reimbursed
amounts, the taxpayer could amend its 2008 and 2009 franchise tax returns, and
Staff accepted the resulting recalculation of its franchise tax liability. The
taxpayer was barred by the federal tax statute of limitations from amending its
2007 federal income tax return. Therefore, the taxpayer sought to exclude the
reimbursed amounts from its 2007 franchise tax return on the grounds that they
were flow-through funds excludable from its taxable margin. This was the
remaining disputed issue addressed in this Decision.
Staff has raised several additional arguments to support its position that the
reimbursement theory does not apply to the fuel surcharge reimbursements.
First, Staff cites Rev. Rul. 57-104, 1957- 1 C.B. 166, in which the
contributions made by a stevedore contractor to its employees’ pension trust
were reimbursed by the ship owner. The IRS held that the amount paid pursuant
to the union contract by the ship owner to the stevedore contractor as
reimbursement for the costs of the union-negotiated pension plan for the
employees was deductible under IRC SECTION 162 as an ordinary and necessary
business expense and that the reimbursements received by the stevedore
contractor were included in its gross income. Staff’s reliance on this revenue
ruling is misplaced. There is no discussion in the revenue ruling of the
reimbursement theory, probably because it predates Burnett by almost a decade
and Gen. Couns. Memo. 37.920 and 38,606 by more than twenty years. It is
outdated authority that does not follow the requirements of the reimbursement
theory set out in current tax law.
Staff insists that Claimant bears the burden of proving its contention by clear
and convincing evidence. According to Staff because exclusions, like that
sought by Claimant in this case, decrease the tax base, they are tantamount to
exemptions and must be strictly construed against Claimant. The authority cited
by Staff is Comptroller’s Decision Nos. 103,734 and 102,449 (2012), which
involved a franchise tax credit. Staff mischaracterizes the issue at hand. The
dispute involves the question whether the exclusion of the fuel surcharge
reimbursements from federal gross receipts complies with federal income tax
law. If it does, the amounts reported as federal gross receipts on the federal
income tax return are properly included in the calculation of Claimant’s total
revenue for purposes of calculating its taxable margin. This involves the
imposition of tax and the creation of the tax base, and not the reduction of
the tax base. Therefore, the authorities cited by Staff are distinguishable and
the applicable burden of proof is for Claimant to show that the auditor erred
in denying the refund claim by a preponderance of the evidence. 34 Tex. Admin.
Code SECTION 1.40(2) (B).
E. Recommendations
The ALJ concludes that Claimant properly excluded the fuel surcharge
reimbursements from both revenue and deductible expenses on its amended 2008
federal income tax return. Therefore, the federal gross receipts reported on
line 1c of Claimant’s 2009 federal income tax return, was properly included by
Claimant in its total revenue calculation on its amended 2009 franchise tax
return. Thus, it is recommended that the corresponding refund claim in the
amount of $************* should be granted in full.
III. FINDINGS OF FACT
1. ************* (Claimant) is a transportation company, headquartered in CITY
A, which transports freight on a contract basis for its customers.
2. Claimant instituted the practice of charging and collecting from its
customers a reimbursement of fuel costs that exceeded a floor of $*************
per gallon of diesel fuel.
3. Because of the volatility of diesel fuel prices, Claimant cannot recover the
majority of its fuel costs through the contracted freight rates and, therefore,
contracts separately for fuel surcharge reimbursements from its customers.
4. Fuel costs of a $************* per gallon of diesel fuel are built into the
freight charges.
5. Fuel costs that exceed the floor of $************* per gallon are recovered
through the fuel surcharges.
6. The fuel surcharges are intended to recover as much of the fuel costs that
exceed the floor of $************* per gallon.
7. Claimant pays for all the fuel costs upfront.
8. The clients are invoiced for the fuel surcharges, with a separate line item
on the invoices.
9. The fuel surcharges are accounted for separately on Claimant’s books and
records.
10. There are separate ledger accounts, so Claimant can separately account for
the payments it receives for freight charges and the fuel surcharges.
11. There are costs other than fuel for which Claimant is reimbursed. They are
referred to as accessorial fees that Claimant pays upfront and then rebills its
customers for reimbursement.
12. The accessorial charges include lumper fees (off-loading fees), stop-off
fees, escort fees, and shuttle fees.
13. Generally, these expenses are identified after Claimant has contracted a
fixed freight rate with its customers.
14. The customer is contacted by Claimant once the prospect of the additional
cost is identified to confirm that the customer agrees to pay these additional
fees. The reimbursement for the accessorial charges is invoiced as a separate
line item and is not included in revenue or gross receipts.
15. The reimbursement for the accessorial fees is not included in line 1c of
Claimant’s federal income tax return.
16. The accessorial charges reimbursements are not included in the calculation
of Claimant’s total revenue for Texas franchise tax purposes.
17. Staff has not contested Claimant’s tax treatment of the reimbursements of
the accessorial charges.
18. The amount of the fuel surcharge varies weekly with the Department of
Energy (DOE) National Average for Diesel Fuel that is disseminated each Monday
at 4:00 p.m. for the seven-day period beginning on that Tuesday.
19. Depending on the fuel price, there are two different in-house charts that
Claimant may use to calculate the fuel surcharge for a shipment.
20. The first chart calculates the fuel surcharge as a percentage of Claimant’s
freight charge for a particular job.
21. The second chart calculates the fuel surcharge based on mileage (the
surcharge is listed on the chart as a “cents per mile” charge).
22. The transportation industry came up with these charts to allow for the
recovery of fuel costs through fuel surcharge payments.
23. Claimant permits some customers to provide their own charts to calculate
the fuel surcharge amounts.
24. A few clients contract for a flat rate, without a separate fuel surcharge,
which usually occurs in the case of a one-stop or one-time customer.
25. In this type of job, the customer does not reimburse Claimant’s fuel cost
(i.e., no fuel surcharge is billed).
26. Claimant makes the best effort to recover all its fuel costs even through a
fixed freight rate.
27. There is no mark up in the calculation of the fuel surcharge. It is
intended to recover the excess fuel costs on a dollar-by-dollar basis.
28. Any profit is built into the negotiated freight rate.
29. Charging a fuel surcharge as a means of obtaining a reimbursement of fuel
costs separate from the cost of transportation service is a normal practice in
Claimant’s industry.
30. As fuel costs began to increase, a fuel surcharge was used to offset the
increased cost, through a reimbursement, so that profit margins remained
stable.
31. Less than 1% of the fuel surcharges were written off as bad debt
deductions.
32. Staff has expressly conceded that Claimant’s fuel cost is an ordinary and
necessary expense incurred to perform its transportation services.
33. Claimant prepared its 2008 federal income tax return including the fuel
surcharge reimbursements in its federal gross receipts reported on line 1c of
the return. Because of the method for calculating total revenue dictated by
Texas Tax Code SECTION 171.1011, the fuel surcharge reimbursements were
included in Claimant’s calculation of its total revenue on its 2009 Texas
franchise tax return.
34. Claimant subsequently concluded that it had erred in including the fuel
surcharge reimbursements in its federal gross receipts and amended its 2008
federal income tax return excluding the fuel surcharge reimbursements from both
the revenue reported and expenses claimed on the return.
35. Claimant relied on the federal income tax law’s “reimbursement theory,”
which prohibits the deduction of such reimbursed expenses as ordinary and
necessary business expenses under Internal Revenue Code (IRC) SECTION 162 and
the concomitant exclusion of the reimbursement payments from gross income.
36. As a result of the federal income tax return’s amendment, Claimant amended
its franchise tax report for report year 2009, by including the amended gross
receipts in its calculation of total revenue, thus excluding the collected fuel
surcharge reimbursements from its calculation of total revenue.
37. The effect was to reduce its total revenue by $*************, its taxable
margin by $*************, and ultimately reduce the tax due by $*************.
38. The Tax Division (Staff) of the
(Comptroller) rejected Claimant’s amended franchise tax report and denied the
corresponding refund claim.
39. Claimant appealed the denial and requested a refund hearing.
40. Staff referred the contested case to the State Office of Administrative
Hearings (SOAH) for an oral hearing and issued a Notice of Hearing to Claimant
that contained a statement of the time, date, place, and nature of the hearing;
a statement of the legal authority and jurisdiction under which the hearing was
to be held; a reference to the particular sections of the statutes and rules
involved; and a short, plain statement of the matters asserted.
41. The hearing convened on December 19, 2013, before the Administrative Law
Judge (ALJ).
42. The ALJ closed the record on March 7, 2014.
IV. CONCLUSIONS OF LAW
1. The Comptroller has jurisdiction over this matter pursuant to Texas Tax Code
ch. 111.
2. SOAH has jurisdiction over matters related to the hearing in this matter,
including the authority to issue a proposal for decision with findings of fact
and conclusions of law pursuant to Texas Government Code ch. 2003.
3. The Comptroller provided proper and timely notice of the hearing pursuant to
Texas Government Code ch. 2001.
4. The burden of proof rests on Claimant to show by a preponderance of the
evidence that Staff erred in denying its refund claim. SEE 34 Tex. Admin. Code
SECTION 1.40(2)(B).
5. One of the components of a taxpayer’s taxable margin is its total revenue.
In the case of a taxable entity, such as Claimant, which is treated for federal
income tax purposes as a corporation, Texas Tax Code SECTION 171.1011(c)(1)
provides that its total revenue is computed by adding:
a. the amount reportable as income on line 1c, Internal Revenue Service Form
1120;
b. the amounts reportable as income on lines 4 through 10, Internal Revenue
Service Form 1120; and
c. any total revenue reported by a lower tier entity as includible in the
taxable entity's total revenue under Section 171.1015(b).
6. The amount reported on line 1c is included in calculating Claimant’s total
revenue “to the extent the amount entered complies with federal income tax
law.” Tex. Tax Code Ann. SECTION 171.1011(b) and 34 Tex. Admin. Code SECTION
3.587(c)(2).
7. Once the expense is deductible under IRC SECTION 162 the reimbursement
theory serves to disallow the deduction when a right or expectation of
reimbursement exists at the time the expenditure occurs. Internal Revenue
Service (IRS) Gen. Couns. Memo. 38,606 (January 7, 1981), IRS Gen. Couns. Memo.
37,920 (April 5, 1979).
8. The reciprocal of disallowing a deduction under the reimbursement theory is
that reimbursement payments will not be includible in the recipient’s gross
income. Id.
9. The application of the reimbursement theory requires initially that the
expenditure would otherwise constitute a section 162 business expense of the
taxpayer.” IRS Gen. Couns. Memo. 38,606, at 10.
10. An absolute or unconditional right of reimbursement is not necessary to
render an expenditure nondeductible. IRS Gen. Couns. Memo. 38,606 and 37,920
(April 5, 1979), and BURNETT V. COMMISSIONER, 356 F. 2d 755 (5th Cir. 1966),
CERT. DENIED, 385 U.S. 832 (1966).
11. The Tax Court has held that expenditures were not deductible where they
were advanced with ‘good hopes’ and/or a ‘reasonable’ expectation of recovery.
IRS Gen. Couns. Memo. 37,920, at 21. (Citations omitted).
12. The fuel costs Claimant paid up front, and for which it received fuel
surcharge reimbursements, constituted ordinary and necessary business expenses
otherwise deductible under IRC SECTION 162, but due to Claimant’s more than
reasonable expectation that it would be substantially repaid by its clients,
the reimbursement payments are neither deductible under IRC SECTION 162 nor
includible in Claimant’s federal gross receipts.
13. The amounts reported on Claimant’s line 1c of its amended 2008 federal
income return should have been included in the calculation of its total revenue
on its 2008 franchise tax return.
14. The corresponding refund claim in the amount of $31,423.14 should be
granted.
Hearing No. 107,457
ORDER OF THE COMPTROLLER
On May 2, 2014, the State Office of Administrative Hearings’ Administrative Law
Judge (ALJ), Peter Brooks, issued a Proposal for Decision in the
above-referenced matter to which the Tax Division filed Exceptions on May 13,
2014. Petitioner filed a Response on May 27, 2014. A Corrected Proposal for
Decision was issued on June 10, 2014. The Comptroller has considered the
Exceptions, the Response, and the ALJ’s recommendation letter and determined
that the ALJ’s Corrected Proposal for Decision, except for minor changes to
correct typographical or clerical errors, should be adopted without change and
this Decision represents the ruling thereon.
The above Decision resulting in a credit to Claimant as set out in Attachment
A, which is incorporated by reference, is approved and adopted in all respects.
This Decision becomes final twenty days after the date Claimant receives notice
of this Decision. If either party desires a rehearing, that party must file a
motion for rehearing, which must state the grounds for rehearing, no later than
twenty days after the date Claimant receives notice of this Decision. Notice of
this Decision is presumed to occur on the third day after the date of this
Decision.
Signed on this 4th day of December 2014.
SUSAN COMBS
by: Martin A. Hubert
Deputy Comptroller
ENDNOTE(S)
(1) Testimony of INDIVIDUAL C.
(2) Id.
(3) Claimant’s Exhibit 6, customer invoices.
(4) Testimony of INDIVIDUAL C.
(5) Id.
(6) Id.
(7) Id.
(8) Id.
(9) Staff’s Exhibit 5, Response to Interrogatory No. 4.
(10) A rate confirmation is a document that provides the details of the
shipment including the rate and fuel surcharge. Id.
(11) Testimony of INDIVIDUAL C.
(12) Id., and Exhibit 5, Claimant’s Fuel Surcharge Tables.
(13) Testimony of INDIVIDUAL C.
(14) Testimony of INDIVIDUAL C and Claimant’s Exhibit 4, COMPANY E and COMPANY
G Model Agreement with Commentaries.
(15) Testimony of INDIVIDUAL C, Staff’s Exhibit 5, Response to Interrogatory
No. 5., and Claimant’s Exhibit 5, COMPANY J Fuel Surcharge Chart.
(16) Testimony of INDIVIDUAL C and Staff’s Exhibit 5, Response to Interrogatory
No. 5.
(17) Testimony of INDIVIDUAL C.
(18) Claimant’s Exhibit 3, Confirmation of INDIVIDUAL A Verbal rate Agreement
with COMPANY D
(19) Id.
(20) Id.
(21) Claimant’s Exhibit 12, 2008 Trial balance for Account for 75235.
(22) Testimony of INDIVIDUAL C.
(23) Staff’s Exhibit 5, Response to Interrogatory No. 10.
(24) Claimant’s Exhibit 4.
(25) Claimant’s Exhibit 4, COMPANY E and COMPANY G Model Agreement, Appendix C,
Commentary.
(26) Claimant’s Exhibit 1, Appendix B.
(27) Claimant’s Exhibit 2.
(28) Testimony of INDIVIDUAL C.
(29) Claimant’s Exhibit 5.
(30) Id.
(31) Claimant’s Exhibit 6.
(32) Staff’s Exhibit 2, Refund Claim Denial Letter.
(33) Staff does not dispute the amounts that Claimant identifies that it
received as fuel surcharge reimbursements from its customers.
(34) See Act of June 15, 2007, 80th Leg., R.S., 2007 Gen. Laws 1282.
(35) Staff’s Post-Hearing Brief, dated February 7, 2014, at 1.
(36) Id.
(37) See testimony of INDIVIDUAL C and Exhibit 6, customer invoices.
ACCESSION NUMBER: 201404021H
SUPERSEDED: N
DOCUMENT TYPE: H
DATE: 2014-12-04
TAX TYPE: FRANCHISE-MARGIN