UPDATE – In its Action on Decision (AOD 2023-01, 2023-10 IRB 502), the Internal Revenue Service (“IRS”) announced its acquiescence to the holding of the Fifth Circuit in Trafigura Trading LLC v. United States, No. 21-20127, 29 F.4th 286 (5th Cir. 2022), i.e., that Internal Revenue Code (“IRC”) Section 4611(b)(1)(A) imposes a tax on exports in violation of the Export Clause of the United States Constitution. Although the IRS disagrees with the holding, it will follow the decision in all circuits in the interest of sound tax administration. This blog post was originally published in October 2022 and has been updated to reflect these developments.
On Monday, October 24, the United States Department of Justice (the “DOJ”) confirmed that it did not appeal the Court of Appeals for the Fifth Circuit’s decision in Trafigura Trading LLC v. United States, No. 21-20127, 29 F.4th 286 (5th Cir. 2022). The Fifth Circuit invalidated the federal tax on domestic crude oil exported from the United States as unconstitutional. The DOJ also provided a letter to House Speaker Nancy Pelosi explaining its decision and reaffirming its commitment to defending the oil export tax in other circuits. The Fifth Circuit’s finding that the oil export tax is unconstitutional and the DOJ’s decision not to appeal create both a refund opportunity and considerable uncertainty for taxpayers. In Trafigura Trading, the Fifth Circuit found that the oil export tax violated the Export Clause under Article I, section 9, Clause 5 of the United States Constitution, which bans taxes or duties on articles exported from any state. Any taxpayer that previously paid the tax should consider filing refund claims on a timely basis before the statute of limitations on refunds prevents recovery of these amounts.
Tax on Exported Crude Oil Held Unconstitutional
The tax on exported crude oil is imposed by IRC Section 4611(b) as one of the “Environmental Taxes” under Subtitle D (Miscellaneous Excise Taxes). The tax was originally imposed in 1980 but exports of crude oil were heavily restricted by the Bureau of Industry and Security until 2016. The tax applies to domestic crude oil that is exported from the United States, at a rate of nine cents per barrel (after 2016). The tax is due quarterly, and the return must be filed on the last day of the first calendar month following the quarter for which it is made. Proceeds from the tax go into the Oil Spill Liability Fund (“the Fund”).
Trafigura Trading, the taxpayer, sought a refund of over four million dollars in taxes paid between tax years 2014 and 2017 under IRC Section 4611(b). Trafigura Trading argued that the tax was unconstitutional under the Export Clause. The IRS audit division denied the refund request, and the IRS appeals division denied Trafigura’s protest of the refund claim denial because it “does not consider arguments based on constitutional grounds.”
When Trafigura challenged the denial, the government argued that the levy was not a prohibited tax on exports but a “user fee”, citing United States v. U.S. Shoe, 523 U.S. 360 (1998), and Pace v. Burgess, 92 U.S. 372 (1875) in support of that proposition. The United States District Court for the Southern District of Texas disagreed and granted Trafigura Trading’s motion for summary judgment.
In considering the government’s appeal, the Fifth Circuit looked to the historical context of the Export Clause and noted that delegates to the constitutional convention from the southern states (the nation’s then primary exporters) considered the Export Clause so important that there would have been no Constitution without it. The Appeals Court therefore determined that the ban on export taxes was meant to be unqualified and absolute. Hence, the government’s only defense was to show that the “tax” was, despite its name, a “user fee.”
In order to qualify as a “user fee,” however, the charge contained in IRC Section 4611(b) would have to satisfy a two-part test articulated by the United States Supreme Court in U.S. Shoe and Pace. First, the charge must not be based on the quantity or value of the exported oil – if it was, it was more likely a tax. Second, the charge must “fairly match” or “correlate reliability” with the Fund’s services to exporters.
As to the first part of the test, the government admitted that the charge was based on the volume of oil exported. The tax failed the second part of the test because, as noted by the Appeals Court, the Fund is mainly used to provide reimbursement for oil spill cleanup costs above a statutory cap, to cover costs incurred by federal, state, and Indian tribe trustees for natural resource damage assessment and restoration, and to support research and development on oil pollution. The Appeals Court held that these were not services provided to exporters in return for the charge as a “value-for-value transaction” but were instead “a mishmash of anti-pollution measures for the general benefit of society.” Even if exporters benefitted indirectly from these measures, the same could be said for any tax. For those reasons, the Court held that the charge under IRC Section 4611(b) was a tax and not a “user fee.” As a result, the Appeals Court affirmed the decision of the District Court, and ruled that the tax under IRC Section 4611(b) violated the Export Clause and could not be enforced by the government.
Refund Implications for Taxpayers
Of immediate concern to taxpayers is that the statute of limitations for filing a refund claim expires the later of three years from the date the return was filed or two years from the date the tax was paid. As a result, taxpayers are running out of time to file potential refund claims for recovery of taxes paid in prior years under IRC Section 4611(b). Until the issue is ultimately resolved, taxpayers should consider continuing to file refund claims for open periods.
The DOJ’s decision not to appeal the Fifth Circuit’s decision, highlights one of the longstanding issues with our system of judicial review of tax matters – that authoritative rules to resolve a tax controversy may not be determined for a protracted period of time. In this case, the DOJ’s decision not to appeal causes considerable uncertainty for taxpayers because, absent a legislative fix, taxpayers with materially similar facts may have different tax consequences based solely on whether their challenge to the tax would be subject to the jurisdiction of the Fifth Circuit. This uncertainty will persist until the statute is amended in a manner that renders it constitutional or the United States Supreme Court definitively rules on the issue.
Alleviating some of this uncertainty, in March 2023, the IRS in its Action on Decision (AOD 2023-01, 2023-10 IRB 502) announced that it acquiesces to the Fifth Circuit’s holding that IRC Section 4611(b)(1)(A) imposes a tax on exports in violation of the Export Clause. The IRS stated that although it disagrees with the holding, it will follow the decision in all circuits in the interest of sound tax administration. This implies that the IRS will apply the Fifth Circuit’s decision in disposing of cases in all circuits with the same controlling facts but could cease to do so if the decision is superseded by new legislation, regulations, rulings, cases or Actions on Decisions.
In addition to considering whether to file refund claims related to past tax periods, a taxpayer subject to the tax should also retain necessary documentation and consider filing refund claims on a timely basis with respect to these payments in order to preserve the right to recover these amounts from IRS. Taxpayers outside of the Fifth Circuit should also consider filing timely refund claims to protect their right to recover these amounts as the issue is unresolved and may ultimately be decided in favor of taxpayers, and also given that the IRS has announced that it will follow the Fifth Circuit’s decision in all circuits (unless the controlling facts vary). Finally, taxpayers should monitor any proposed amendments to IRC 4611.
For additional information, please contact: Jaye Calhoun at (504) 293-5936 or Willie Kolarik at (225) 382-3441.
 Treas. Reg. 40.6071(a)-1(a).
 IRC Section 6511.
 Edwin N. Griswold, The Need for a Court of Tax Appeals, 57 Harv.L.Rev. 1153 (1944) (available at: https://repository.uchastings.edu/cgi/viewcontent.cgi?article=1020&context=tax).