Prime Sues IRS for $11M Over Reefer Diesel Tax Credit — Small Carriers Take Note

I was grabbing coffee at a truck stop near Springfield, Missouri, last month when a driver for a small outfit told me his biggest headache wasn’t fuel prices — it was the paperwork to claim a tax credit on the diesel he runs through his reefer unit. Two weeks later, word broke that Prime Inc., one of the nation’s largest trucking companies, is suing the IRS for $11 million over that exact same credit. And here’s the kicker: if Prime wins, it won’t just be a win for the big guys. Small carriers — the ones with one or two trucks — can claim the same money.

The lawsuit, filed in the U.S. Court of Federal Claims in early April, centers on the biodiesel mixture credit — a tax break Congress created to encourage the use of renewable fuels in diesel engines. Prime says the IRS wrongly denied its claims for credits on fuel used in refrigeration units (reefer units) on its trailers. The agency’s position? That diesel burned in those units isn’t used in a ‘trade or business’ in the way the tax code intended. Prime disagrees. And it’s betting $11 million — plus interest — that the courts will side with the trucking industry.

What Exactly Is Reefer Diesel — and Why Does It Matter for Taxes?

Reefer diesel is just standard diesel fuel, but it’s used to power the refrigerated units that keep perishable goods cold during transit. Think of a trailer carrying a load of frozen chicken across Kansas. The reefer unit runs constantly, sometimes for days, burning about 0.5 to 1 gallon per hour. That adds up fast. For Prime, which operates thousands of reefers, we’re talking millions of gallons a year.

The Internal Revenue Code Section 6426 allows a credit for each gallon of diesel fuel that contains at least 0.1% biodiesel or renewable diesel. The credit was worth $1.00 per gallon through 2024 (it’s since been reduced to $0.50 under the Inflation Reduction Act changes, but claims for prior years remain at the higher rate). Prime argues that the fuel it used in its reefer units contained qualifying biodiesel blends, and therefore it should have been able to claim the credit on those gallons.

But the IRS says the credit only applies to fuel ‘used in a trade or business’ as propulsion fuel — i.e., to move the truck down the road. Fuel burned in a reefer unit? That’s auxiliary power, not propulsion. The agency’s logic: Congress intended the credit to incentivize renewable fuel use in highway vehicles, not in stationary equipment on trailers. Prime counters that the reefer unit is an integral part of its refrigerated transportation business and that the plain language of the statute doesn’t distinguish between propulsion and non-propulsion uses.

“This is a classic case of the IRS reading a limitation into the law that simply isn’t there,” says Margaret Chen, a tax attorney at Thompson & Associates who has handled fuel credit disputes. “The statute says ‘used in a trade or business’ — it doesn’t say ‘used to propel a vehicle.’ I think Prime has a solid argument.”

How Small Carriers Can (and Should) Claim the Same Credit

Look, Prime can afford to sue the IRS. They’ve got a legal team and deep pockets. But the beauty of this credit is that it’s available to every carrier that uses biodiesel or renewable diesel in any business activity — including reefer units. The IRS hasn’t been particularly aggressive in auditing small carriers, but the risk is there. If you’re a small fleet owner and you’ve been blending biodiesel into your reefer fuel, you could be leaving money on the table.

To claim the credit, you need to file Form 6478 (Biodiesel and Renewable Diesel Fuels Credit) with your annual tax return. You’ll need records of the amount of biodiesel mixture purchased, the percentage of biodiesel in the blend, and evidence that the fuel was used in your trade or business. For reefer units, you’ll want to document that the unit was attached to a trailer used in commercial transportation.

But here’s the catch: the IRS has been aggressively denying these claims for reefer diesel in audits of larger carriers. Small carriers might fly under the radar, but if you get audited, you could face the same fight. That’s why the Prime lawsuit matters — it could set a precedent that forces the IRS to accept reefer diesel claims from everyone.

This legal battle comes amid broader market volatility — as we saw recently when Dow futures slid on US-Iran tensions, a reminder that transportation costs ripple through the economy. If Prime wins, thousands of small carriers could collectively claim millions in retroactive credits.

The History of the Biodiesel Credit — A Political Roller Coaster

Congress first created the biodiesel mixture credit in 2004 as part of the JOBS Act. It’s been extended, modified, and allowed to lapse multiple times since then. The Inflation Reduction Act of 2022 extended it through 2024 but reduced the rate from $1.00 to $0.50 per gallon starting in 2025. For 2023 and 2024 tax returns — the years at issue in Prime’s case — the full $1.00 is still on the table.

The credit was designed to help the U.S. meet renewable fuel mandates and reduce dependence on foreign oil. But like many tax incentives, it’s created confusion. The IRS has issued contradictory guidance over the years. In 2008, a private letter ruling suggested that auxiliary engine use might qualify. But in more recent audits, the agency has taken a hard line against carriers using reefer units.

“The IRS is essentially changing its interpretation retroactively, which is unfair to businesses that relied on the earlier guidance,” says David O’Malley, a transportation tax specialist at KPMG. “If the government wants to limit the credit to propulsion fuel, it should ask Congress to clarify – not try to rewrite the law through audits.”

What Happens Next — and What It Means for Your Bottom Line

The case will likely take 12 to 18 months to resolve. Prime has asked for summary judgment, meaning they want the judge to rule on the law without a trial. If they win, the IRS will have to refund the $11 million plus interest — and will likely have to change its position on reefer diesel claims for all taxpayers. That could open the door for thousands of amended returns from carriers of all sizes.

If the IRS wins, well, it’s not the end of the road. The credit is still available for fuel used in truck engines. But carriers will have to document carefully that reefer fuel wasn’t mixed with propulsion fuel, or consider separate tanks. Some industry groups are already lobbying for a legislative fix to explicitly include reefer units.

For the small carrier owner reading this: don’t wait for the lawsuit to play out. If you’ve used biodiesel or renewable diesel in your reefer units during 2023 or 2024, talk to a tax professional about filing a protective claim. That preserves your right to a refund if the law changes. The statute of limitations for amending 2023 returns is generally April 2027 — you’ve got time, but not forever.

The Prime case is a reminder that tax credits are only worth as much as your willingness to fight for them. And in this case, the fight is just getting started.