Gasoline and Diesel Fuel Excise Tax; Rules Relating to Gasohol; Tax on Compressed Natural Gas

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 40 and 48

[PS-66-93]

RIN 1545-AS10

Gasoline and Diesel Fuel Excise Tax; Rules Relating to Gasohol;

Tax on Compressed Natural Gas

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

-----------------------------------------------------------------------

SUMMARY: This document contains proposed regulations relating to

gasohol blending and the taxes on diesel fuel and compressed natural

gas. This document also proposes to remove obsolete excise tax

regulations. The proposed regulations reflect and implement certain

changes made by the Energy Policy Act of 1992 (the Energy Act) and the

Omnibus Budget Reconciliation Act of 1993 (the 1993 Act). The proposed

regulations relating to gasoline and diesel fuel affect certain

blenders, enterers, industrial users, refiners, terminal operators, and

throughputters. The proposed regulations relating to compressed natural

gas affect persons that sell or buy compressed natural gas for use as a

fuel in a motor vehicle or motorboat.

DATES: Written comments must be submitted by December 19, 1994.

Outlines of comments to be presented at the public hearing scheduled

for January 11, 1995, must be received by December 21, 1994.

ADDRESSES: Send submissions to: CC:DOM:CORP:T:R (PS-66-93), room 5228,

Internal Revenue Service, POB 7604, Ben Franklin Station, Washington,

DC 20044. In the alternative, submissions may be hand delivered between

the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:T:R (PS-66-93),

Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue NW.,

Washington, DC. The public hearing will be held in the IRS Auditorium,

Seventh Floor, 7400 Corridor, Internal Revenue Building, 1111

Constitution Avenue NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,

Frank Boland, (202) 622-3130; concerning submissions and the hearing,

Carol Savage, at (202) 622-8452; (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information contained in this notice of proposed

rulemaking have been submitted to the Office of Management and Budget

for review in accordance with the Paperwork Reduction Act (44 U.S.C.

3504(h)). Comments on the collections of information should be sent to

the Office of Management and Budget, Attn: Desk Officer for the

Department of the Treasury, Office of Information and Regulatory

Affairs, Washington, DC 20503, with copies to the Internal Revenue

Service, Attn: IRS Reports Clearance Officer, PC:FP, Washington, DC

20224.

The collections of information in this proposed regulation are in

Secs. 48.4041-21 and 48.6427-10. This information is required by the

IRS to verify compliance with sections 4041 and 6427 and will be used

to determine whether an amount of tax, credit, or payment has been

computed correctly. The likely respondents are businesses and other

for-profit organizations, including small businesses and organizations.

Estimated total annual reporting burden: 10 hours.

Estimated average annual burden per respondent: .1 hour.

Estimated number of respondents: 100

Estimated annual frequency of responses: On occasion.

Explanation of Provisions

Background

Effective January 1, 1994, the 1993 Act amends section 4081 to

impose the diesel fuel tax in the same manner as the gasoline tax.

Thus, tax is imposed on (1) the removal of gasoline and diesel fuel

(collectively taxable fuel) from any refinery, (2) the removal of

taxable fuel from any terminal, (3) the entry of taxable fuel into the

United States for consumption, use, or warehousing, and (4) the sale of

taxable fuel to an unregistered person unless there was a prior taxable

removal, entry, or sale of the taxable fuel. However, tax does not

apply to any entry or removal of taxable fuel transferred in bulk to a

refinery or terminal if the persons involved (including the terminal

operator) are registered by the IRS.

Conforming Amendments to Gasoline Regulations

On November 30, 1993, the IRS published in the Federal Register (58

FR 63069) temporary regulations under section 4081 relating to the

imposition of the diesel fuel excise tax for diesel fuel that is

removed at a terminal rack, removed from a refinery, entered into the

United States, or blended outside of the bulk/transfer terminal system.

Those rules are similar to the rules relating to the removal, entry, or

blending of gasoline under Secs. 48.4081-2 and 48.4081-3.

These proposed regulations generally consolidate the rules relating

to gasoline and diesel fuel into a single set of rules applicable to

all taxable fuel.

Compressed Natural Gas

Effective October 1, 1993, section 4041(a)(3) (added to the

Internal Revenue Code by section 13241(e) of the 1993 Act) imposes a

tax on compressed natural gas (CNG) that is sold for use or used as a

fuel in a motor vehicle or motorboat.

The proposed regulations provide rules relating to the imposition

of, and liability for, the tax on CNG. These rules are similar to the

regulations relating to taxes on special motor fuels imposed by section

4041.

Gasohol; Tolerance Rule

The gasoline tax rate is 18.4 cents per gallon (the regular rate).

However, a reduction from the regular rate is allowed for gasohol (a

gasoline/alcohol mixture). Before January 1, 1993, section 4081(c)

treated a mixture of gasoline and alcohol as gasohol only if at least

10 percent of the mixture was alcohol. The rate reduction under pre-

1993 law was 5.4 cents per gallon for gasohol containing ethanol and 6

cents per gallon for gasohol containing alcohol other than ethanol.

This was equivalent to a subsidy of 54 cents or 60 cents per gallon of

alcohol used to produce gasohol.

Section 48.4081-6(b)(2) provides a special rule for the application

of the ``at least 10 percent'' requirement by allowing a tolerance for

mixtures that contain less than 10 percent alcohol but at least 9.8

percent alcohol. Under the tolerance rule, a portion of the mixture

equal to the number of gallons of alcohol in the mixture multiplied by

10 is considered to be gasohol. Any excess liquid in the mixture is

taxed at the regular rate. Absent the tolerance rule, pre-1993 law

would have taxed the entire mixture at the regular rate.

The tolerance rule accommodates operational problems associated

with the blending of gasohol. For example, blenders may fail to attain

the required 10-percent alcohol level because the device used to meter

the amount of gasoline or alcohol added to a tank truck is imprecise or

because the high-speed gasoline or alcohol pump used does not shut off

at the proper moment. Blenders cannot compensate for these errors by

aiming for an alcohol content in excess of 10 percent because

Environmental Protection Agency (EPA) rules do not authorize the sale

of gasohol containing more than 10 percent alcohol.

Effective January 1, 1993, section 1920 of the Energy Act amended

section 4081(c) to allow a reduction from the regular rate for mixtures

containing at least 5.7 percent alcohol but less than 7.7 percent

alcohol (5.7 percent gasohol) and mixtures containing at least 7.7

percent alcohol but less than 10 percent alcohol (7.7 percent gasohol).

The 5.4- and 6-cents-per-gallon rate reductions were retained for

mixtures containing at least 10 percent alcohol (10 percent gasohol)

and were prorated for 5.7 percent and 7.7 percent gasohol to maintain

the subsidy level of 54 cents or 60 cents per gallon, respectively, for

ethanol or other alcohol that is mixed with gasoline.

The proposed regulations continue the present tolerance rule for

mixtures that contain less than 10 percent alcohol but at least 9.8

percent alcohol. However, a similar rule is not extended to mixtures

that contain less than 7.7 or 5.7 percent alcohol because blenders can

compensate for any operational problems by aiming for an alcohol

content above 7.7 or 5.7 percent without violating EPA rules.

Gasohol; Blender Credit or Payment

If a gasohol blender produces gasohol from gasoline that was taxed

at the regular rate, section 6427(f) allows the gasohol blender to

obtain a partial credit or payment relating to that tax. The proposed

regulations provide the conditions under which a credit or payment

under section 6427(f) will be allowed.

Gasohol; ETBE

The regulations under section 40 provide that alcohol used to

produce ethyl tertiary butyl ether (ETBE) generally is treated as

alcohol for purposes of the alcohol fuels credit when the ETBE is mixed

with gasoline. The proposed regulations provide a similar rule with

respect to alcohol used to produce ETBE for purposes of the reduced tax

rates for gasohol.

For example, a gasoline/ETBE mixture would qualify as 5.7 percent

gasohol if the mixture contains 12.7 percent ETBE and each gallon of

ETBE is made from .45 gallon of alcohol.

Reliance on These Proposed Regulations

These regulations are being issued in proposed form to provide

timely guidance to taxpayers and to allow interested parties

appropriate opportunity to provide comments before issuance of final

regulations. Although final regulations may include changes made, for

example, in response to comments, taxpayers may rely on the proposed

regulations until final regulations are issued. For example, alcohol

used to produce ETBE is treated as alcohol for purposes of the gasohol

tax rates.

Special Analyses

It has been determined that this notice of proposed rulemaking is

not a significant regulatory action as defined in EO 12866. Therefore,

a regulatory assessment is not required. It also has been determined

that section 553(b) of the Administrative Procedure Act (5 U.S.C.

chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do

not apply to these regulations, and, therefore, a Regulatory

Flexibility Analysis is not required. Pursuant to section 7805(f) of

the Internal Revenue Code, this notice of proposed rulemaking will be

submitted to the Chief Counsel for Advocacy of the Small Business

Administration for comment on its impact on small business.

Comments and Public Hearing

Before these proposed regulations are adopted as final regulations,

consideration will be given to any written comments that are submitted

timely (preferably a signed original and eight copies) to the IRS. All

comments will be available for public inspection and copying.

A public hearing has been scheduled for Wednesday, January 11,

1995, at 1 p.m. in the Auditorium, Internal Revenue Building, 1111

Constitution Avenue NW, Washington, DC. Because of access restrictions,

visitors will not be admitted beyond the building lobby more than 15

minutes before the hearing starts.

The rules of Sec. 601.601(a)(3) apply to the hearing.

Persons that have submitted written comments by December 19, 1994

and want to present oral comments at the hearing must submit an outline

of the topics to be discussed and the time to be devoted to each topic

by December 21, 1994.

A period of 10 minutes will be allotted to each person for making

comments.

An agenda showing the scheduling of the speakers will be prepared

after the deadline for receiving outlines has passed. Copies of the

agenda will be available free of charge at the hearing.

Drafting Information

The principal author of these regulations is Frank Boland, Office

of Assistant Chief Counsel (Passthroughs and Special Industries).

However, other personnel from the IRS and Treasury Department

participated in their development.

List of Subjects in 26 CFR Parts 40 and 48

Excise taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

Accordingly, 26 CFR parts 40 and 48 are proposed to be amended as

follows:

PART 40--EXCISE TAX PROCEDURAL REGULATIONS

Paragraph 1. The authority citation for part 40 continues to read

in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 40.6302(c)-0 is amended by revising the entries for

Sec. 40.6302(c)-1(b)(1)(ii), (b)(5)(ii), (b)(6)(iii), (c)(2)(iv), and

(c)(3)(iii) to read as follows:

Sec. 40.6302(c)-0 Table of contents.

* * * * *

Sec. 40.6302(c)-1 Use of Government depositaries.

* * * * *

(b) * * *

(1) * * *

(ii) Special rule for section 4081 tax deposits for September.

* * * * *

(5) * * *

(ii) Special rule for section 4081 tax deposits for September.

* * * * *

(6) * * *

(iii) Special rule for section 4081 tax deposits for September.

* * * * *

(c) * * *

(2) * * *

(iv) Modification for section 4081 tax deposits for September.

(3) * * *

(iii) Modification for section 4081 tax deposits for September.

* * * * *

Par. 3. Section 40.6302(c)-1 is amended as follows:

1. Paragraph (a) is amended by removing the parenthetical

``(relating to taxes imposed on gasoline by section 4081)'' from the

last sentence and adding the parenthetical ``(relating to section 4081

taxes)'' in its place.

2. The heading for paragraph (b)(1)(ii) is revised.

3. Paragraph (b)(1)(ii) is amended by removing the parenthetical

``(relating to gasoline)''.

4. The heading for paragraph (b)(5)(ii) is revised.

5. Paragraph (b)(5)(ii) is amended by removing the parenthetical

``(relating to gasoline)'' from the first sentence.

6. Paragraph (b)(6)(ii) is amended by removing the parenthetical

``(relating to deposits of gasoline tax for September)'' and adding

``(relating to deposits of section 4081 tax for September)'' in its

place.

7. The heading for paragraph (b)(6)(iii) is revised.

8. Paragraph (b)(6)(iii)(A), first sentence, is amended by removing

the parenthetical ``(relating to gasoline)''.

9. Paragraph (b)(6)(iii)(B), first sentence, is amended by removing

the parenthetical ``(relating to gasoline)''.

10. The heading for paragraph (c)(2)(iv) is revised.

11. Paragraph (c)(2)(iv)(A) is amended by removing the

parenthetical ``(relating to gasoline)''.

12. The heading for paragraph (c)(3)(iii) is revised.

13. Paragraph (c)(3)(iii)(A) is revised by removing the

parenthetical ``(relating to gasoline)''.

14. The revised provisions read as follows:

Sec. 40.6302(c)-1 Use of Government depositaries.

* * * * *

(b) * * *

(1) * * *

(ii) Special rule for section 4081 tax deposits for September. * *

*

* * * * *

(5) * * *

(ii) Special rule for section 4081 tax deposits for September. * *

*

* * * * *

(6) * * *

(iii) Special rule for section 4081 tax deposits for September. * *

*

* * * * *

(c) * * *

(2) * * *

(iv) Modification for section 4081 tax deposits for September. * *

*

(3) * * *

(iii) Modification for section 4081 tax deposits for September. * *

*

* * * * *

Par. 4. In Sec. 40.6302(c)-4, paragraph (a) is amended by removing

the parenthetical ``(relating to gasoline)''.

Par. 5. In Sec. 40.9999-1, Example 3 is amended by removing the

language ``diesel fuel'' each place it appears (including the heading)

and adding ``aviation fuel'' in its place.

PART 48--MANUFACTURERS AND RETAILERS EXCISE TAXES

Par. 6. The authority citation for part 48 is amended by removing

the entries for Secs. 48.4041.21 and 48.4081-2; revising the entry for

Sec. 48.4081-4; and adding an entry in numerical order to read as

follows:

Authority: 26 U.S.C. 7805 * * *

Section 48.4081-4 also issued under 26 U.S.C. 4083(a)(2). * * *

Section 48.6427-10 also issued under 26 U.S.C. 6427(f).

Par. 7. Section 48.4041-21 is revised to read as follows:

Sec. 48.4041-21 Compressed natural gas.

(a) Delivery of compressed natural gas into the fuel supply tank of

a motor vehicle or motorboat--(1) Imposition of tax. Tax is imposed on

the delivery of compressed natural gas (CNG) into the fuel supply tank

of the propulsion engine of a motor vehicle or motorboat unless tax was

previously imposed on the CNG under paragraph (b) of this section.

(2) Liability for tax. If the delivery of the CNG is in connection

with a sale, the seller of the CNG is liable for the tax imposed under

paragraph (a)(1) of this section. If the delivery of the CNG is not in

connection with a sale, the operator of the motor vehicle or motorboat,

as the case may be, is liable for the tax imposed under paragraph

(a)(1) of this section.

(b) Bulk sales of CNG--(1) In general. Tax is imposed on the sale

of CNG that is not in connection with the delivery of the CNG into the

fuel supply tank of the propulsion engine of a motor vehicle or

motorboat if, by the time of the sale--

(i) The buyer has given the seller a written statement stating that

the entire quantity of the CNG covered by the statement is for use as a

fuel in a motor vehicle or motorboat; and

(ii) The seller has given the buyer a written acknowledgement of

receipt of the statement described in paragraph (b)(1)(i) of this

section.

(2) Liability for tax. The seller of the CNG is liable for the tax

imposed under paragraph (b) of this section.

(c) Exemptions--(1) In general. The taxes imposed under this

section do not apply to a delivery or sale of CNG for a use described

in Sec. 48.4082-4T(c)(1) through (5)(A) or (6) through (11). However,

if the person otherwise liable for tax under this section is the seller

of the CNG, the exemption under this section applies only if, by the

time of sale, the seller has an unexpired certificate (described in

this section) from the buyer and has no reason to believe any

information in the certificate is false.

(2) Certificate; in general. The certificate to be provided by a

buyer of CNG is to consist of a statement that is signed under

penalties of perjury by a person with authority to bind the buyer,

should be in substantially the same form as the model certificate

provided in paragraph (c)(4) of this section, and should contain all

information necessary to complete the model certificate. A new

certificate must be given if any information in the current certificate

changes. The certificate may be included as part of any business

records normally used to document a sale. The certificate expires on

the earliest of the following dates:

(i) The date one year after the effective date of the certificate

(which may be no earlier than the date it is signed).

(ii) The date a new certificate is provided to the seller.

(iii) The date the seller is notified by the Internal Revenue

Service or the buyer that the buyer's right to provide a certificate

has been withdrawn.

(3) Withdrawal of right to provide certificate. The Internal

Revenue Service may withdraw the right of a buyer of CNG to provide a

certificate under this paragraph (c) if the buyer uses CNG to which a

certificate applies in a taxable use. The Internal Revenue Service may

notify any seller to whom the buyer has provided a certificate that the

buyer's right to provide a certificate has been withdrawn.

(4) Model certificate.

CERTIFICATE OF PERSON BUYING CNG FOR A NONTAXABLE USE

(To support tax-free sales of CNG under section 4041 of the Internal

Revenue Code.)

----------------------------------------------------------------------

----------------------------------------------------------------------

Name, address, and employer identification number of seller

________________ (``Buyer'') certifies the

Name of buyer

following under penalties of perjury:

The CNG to which this certificate relates will be used in a

nontaxable use.

This certificate applies to the following (complete as

applicable):

If this is a single purchase certificate, check here ________

and enter:

1. Invoice or delivery ticket number ____________

2. ________ (number of MCFs)

If this is a certificate covering all purchases under a

specified account or order number, check here ________ and enter:

1. Effective date------------------------------------------------------

2. Expiration date-----------------------------------------------------

(period not to exceed 1 year after the effective date)

3. Buyer account or order number---------------------------------------

Buyer will not claim a credit or refund under section 6427 of

the Internal Revenue Code for any CNG to which this certificate

relates.

Buyer will provide a new certificate to the seller if any

information in this certificate changes.

Buyer understands that if Buyer violates the terms of this

certificate, the Internal Revenue Service may withdraw Buyer's right

to provide a certificate.

Buyer has not been notified by the Internal Revenue Service that

its right to provide a certificate has been withdrawn. In addition,

the Internal Revenue Service has not notified Buyer that the right

to provide a certificate has been withdrawn from a purchaser to

which Buyer sells CNG tax free.

Buyer understands that the fraudulent use of this certificate

may subject Buyer and all parties making any fraudulent use of this

certificate to a fine or imprisonment, or both, together with the

costs of prosecution.

----------------------------------------------------------------------

Printed or typed name of person signing

----------------------------------------------------------------------

Title of person signing

----------------------------------------------------------------------

Employer identification number

----------------------------------------------------------------------

Address of Buyer

----------------------------------------------------------------------

Signature and date signed

(d) Rate of tax. The rate of the taxes imposed under this section

is the rate prescribed by section 4041(a)(3).

(e) Effective date. This section is effective January 1, 1995.

Par. 8. Section 48.4081-0 is amended as follows:

1. The heading is revised.

2. The entries for Secs. 48.4081-1 (c) and (k) and 48.4081-3(f) are

revised.

3. The entries for the headings of Secs. 48.4081-1, 48.4081-2,

48.4081-3, 48.4081-5, 48.4081-7, and 48.4081-8 are revised.

4. The revisions read as follows:

Sec. 48.4081-0 Taxable fuel; table of contents.

* * * * *

Section 48.4081-1 Taxable Fuel; Definitions

* * * * *

(c) Blended taxable fuel.

* * * * *

(k) Taxable fuel registrant.

* * * * *

Section 48.4081-2 Taxable Fuel; Tax on Removal at a Terminal Rack

* * * * *

Section 48.4081-3 Taxable Fuel; Taxable Events Other Than Removal at

the Terminal Rack

* * * * *

(f) Tax on sales of taxable fuel within the bulk transfer/terminal

system.

* * * * *

Section 48.4081-5 Taxable Fuel; Notification Certificate of Taxable

Fuel Registrant

* * * * *

Section 48.4081-7 Taxable Fuel; Conditions for, and Reporting Relating

to, Refunds of Taxable Fuel Tax Under Section 4081(e)

* * * * *

Section 48.4081-8 Taxable Fuel; Measurement

* * * * *

Par. 9. Section 48.4081-1 is amended as follows:

1. The heading for Sec. 48.4081-1 is revised.

2. In paragraphs (a) and (b) the language ``gasoline'' is removed

each place it appears and ``taxable fuel'' is added in its place.

3. Paragraph (c) is revised.

4. In paragraphs (d) through (h), the heading and text of paragraph

(k), and paragraphs (m), (n), (p), (q), (r)(1), (s), (u), and (v) the

language ``gasoline'' is removed each place it appears and ``taxable

fuel'' is added in its place.

5. Paragraph (w) is revised.

6. The revised provisions read as follows:

Sec. 48.4081-1 Taxable fuel tax; definitions.

* * * * *

(c) Blended taxable fuel--(1) In general. Except as provided in

paragraph (c)(2) of this section, blended taxable fuel is a mixture

of--

(i) Taxable fuel with respect to which tax has been imposed under

section 4041(a)(1) or 4081(a); and

(ii) Any substance with respect to which tax has not been imposed

under section 4041(a)(1) or 4081(a), other than a minor amount of a

product such as carburetor detergent or oxidation inhibitor.

(2) Exception. Gasohol (as defined in Sec. 48.4081-6(b)(2)), is not

blended taxable fuel if--

(i) The gasohol is a mixture of--

(A) Gasoline with respect to which tax was imposed under section

4081(a) at the gasohol production tax rate described in Sec. 48.4081-

6(e) (relating to gasohol) or with respect to which a valid claim is

made under section 6427(f); and

(B) Alcohol (or alcohol and a minor amount of a product such as

carburetor detergent or oxidation inhibitor); and

(ii) The mixture contains--

(A) At least 9.8 percent alcohol by volume, without rounding, but

not more than 10 percent alcohol by volume, without rounding;

(B) 7.7 percent alcohol by volume, without rounding; or

(C) 5.7 percent alcohol by volume, without rounding.

* * * * *

(w) Effective date. This section is effective January 1, 1994.

Par. 10. Section 48.4081-2 is amended as follows:

1. The heading for Sec. 48.4081-2 is revised.

2. The language ``and'' is added immediately following the

semicolon at the end of paragraph (c)(3)(ii).

3. Paragraph (c)(3)(iii) is revised.

4. Paragraph (c)(3)(iv) is removed.

5. Paragraph (e) is revised.

6. The revised and added provisions read as follows:

Sec. 48.4081-2 Taxable fuel; tax on removal at a terminal rack.

* * * * *

(c) * * *

(3) * * *

(iii) Has no reason to believe that any information in the

certificate is false.

* * * * *

(e) Effective date. This section is effective January 1, 1994.

Par. 11. Section 48.4081-3 is amended as follows:

1. The heading for Sec. 48.4081-3 is revised.

2. In paragraphs (a), (d)(1), (d)(2)(i), and (d)(2)(ii)(A) the

language ``gasoline'' is removed each place it appears and ``taxable

fuel'' is added in its place.

3. Paragraph (d)(2)(iii) is revised.

4. The introductory text of paragraph (e)(1) is revised.

5. In paragraphs (e)(1)(i), (e)(1)(iii), and (e)(2)(i) the language

``gasoline'' is removed each place it appears and ``taxable fuel'' is

added in its place.

6. Paragraph (e)(2)(ii) is revised.

7. In paragraph (e)(2)(iii) the language ``gasoline'' is removed

each place it appears and ``taxable fuel'' is added in its place.

8. In paragraphs (f)(1) and (f)(2)(i) the language ``gasoline'' is

removed each place it appears and ``taxable fuel'' is added in its

place.

9. Paragraphs (f)(2)(ii) is revised.

10. In paragraphs (f)(2)(iii) and (g)(1) the language ``gasoline''

is removed each place it appears and ``taxable fuel'' is added in its

place.

11. Paragraph (h) is revised.

12. The revised provisions read as follows:

Sec. 48.4081-3 Taxable fuel; taxable events other than removal at the

terminal rack.

* * * * *

(d) * * *

(2) * * *

(iii) Conditions for avoidance of liability. A terminal operator is

not liable for tax under this paragraph (d)(2) if, at the time of the

bulk transfer, the terminal operator--

(A) Is a taxable fuel registrant;

(B) Has an unexpired notification certificate (described in

Sec. 48.4081-5) from the position holder; and

(C) Has no reason to believe that any information in the

certificate is false.

* * * * *

(e) * * * (1) * * * Except as provided in Sec. 48.4081-4 (relating

to gasoline blendstocks), and Sec. 48.4082-1T (relating to diesel

fuel), a tax on taxable fuel is imposed if--

* * * * *

(2) * * *

(ii) Conditions for avoidance of liability. An owner of taxable

fuel is not liable for tax under paragraph (e)(2)(i) of this section

if, at the time the taxable fuel is removed from the pipeline or

vessel, the owner of the taxable fuel--

(A) Is a taxable fuel registrant;

(B) Has an unexpired notification certificate (described in

Sec. 48.4081-5) from the operator of the terminal or refinery where the

taxable fuel is received; and

(C) Has no reason to believe that any information in the

certificate is false.

* * * * *

(f) * * *

(2) * * *

(ii) Conditions for avoidance of liability. A seller is not liable

for tax under paragraph (f)(2)(i) of this section if, at the time of

the sale, the seller--

(A) Is a taxable fuel registrant;

(B) Has an unexpired notification certificate (described in

Sec. 48.4081-5) from the buyer; and

(C) Has no reason to believe that any information in the

certificate is false.

* * * * *

(h) Effective date. This section is effective January 1, 1994.

Par. 12. Section 48.4081-4 is amended as follows:

1. In paragraphs (b)(1)(i), (b)(2)(i), and (c)(1), the language

``gasoline registrant'' is removed each place it appears and ``taxable

fuel registrant'' is added in its place.

2. The language ``and'' is added immediately following the

semicolon at the end of paragraph (c)(2).

3. Paragraph (c)(3) is revised.

4. Paragraph (c)(4) is removed.

5. In paragraph (d), the language ``gasoline registrant'' is

removed and ``taxable fuel registrant'' is added in its place.

6. Paragraph (f) is revised.

7. The revised provisions read as follows:

Sec. 48.4081-4 Gasoline tax; special rules for gasoline blendstocks.

* * * * *

(c) * * *

(3) Has no reason to believe that any information in the

certificate is false.

* * * * *

(f) Effective date. This section is effective January 1, 1994.

Par. 13. Section 48.4081-5 is amended as follows:

1. The heading for Sec. 48.4081-5 is revised.

2. In paragraph (a), the first sentence in paragraph (b)(1), and

paragraph (b)(2), the language ``gasoline'' is removed each place it

appears and ``taxable fuel'' is added in its place.

3. Paragraph (c) is revised.

4. The revised provisions read as follows:

Sec. 48.4081-5 Taxable fuel; notification certificate of taxable fuel

registrant.

* * * * *

(c) Effective date. This section is effective January 1, 1994.

Par. 14. Section 48.4081-6 is amended as follows:

1. The heading for Sec. 48.4081-6 is revised.

2. In the last sentence of paragraph (a), the parenthetical

``(which has been taxed at a reduced rate)'' is removed and ``that has

been taxed at a reduced rate'' is added in its place.

3. Paragraph (b)(1)(iii) is added.

4. Paragraph (b)(2) is revised.

5. In paragraphs (c)(1)(i) and (ii), the language ``gasoline

registrant'' is removed each place it appears and ``taxable fuel

registrant'' is added in its place.

6. The language ``and'' is added immediately following the

semicolon at the end of paragraph (c)(1)(ii)(A).

7. Paragraph (c)(1)(ii)(B) is revised.

8. Paragraph (c)(1)(ii)(C) is removed.

9. Paragraph (c)(2)(ii) is revised.

10. In the first sentence of paragraph (d), the language ``,

provided that the alcohol mixture credit allowed by section 40 has not

been taken with respect to the alcohol in the gasohol'' is added before

the end thereof.

10a. Paragraph (e) is revised.

11. In paragraphs (f)(1)(i) and (iii), the language ``10 percent''

is removed each place it appears and ``5.7 percent'' is added in its

place.

12. In paragraph (f)(4), Example 1, second sentence, the language

``gasohol'' is removed and ``10 percent gasohol'' is added in its

place.

13. In paragraph (f)(4), Example 2, fourth sentence, the language

``10 percent'' is removed both places it appears and ``5.7 percent'' is

added in its place.

14. Paragraphs (g)(2)(i) and (iii) are revised.

15. Paragraph (g)(2)(iv) is added.

16. Paragraph (h) is revised.

17. The added and revised provisions read as follows:

Sec. 48.4081-6 Taxable fuel; gasohol.

* * * * *

(b) * * *

(1) * * *

(iii) Products derived from alcohol. Alcohol includes alcohol

described in paragraphs (b)(1)(i) and (ii) of this section that is

chemically transformed in producing another product so that the alcohol

is no longer present as a separate chemical in the other product,

provided that there is no significant loss in the energy content of the

alcohol. Thus, for example, alcohol described in paragraphs (b)(1)(i)

and (ii) of this section that is used to produce ethyl tertiary butyl

ether (ETBE) in a chemical reaction in which there is no significant

loss in the energy content of the alcohol is treated as alcohol when

the ETBE is mixed with gasoline.

(2) Gasohol--(i) In general. Gasohol is a mixture of gasoline and

alcohol that is 10 percent gasohol, 7.7 percent gasohol, or 5.7 percent

gasohol immediately after the mixture is blended. The determination of

whether a particular mixture is 10 percent gasohol, 7.7 percent

gasohol, or 5.7 percent gasohol is made on a batch-by-batch basis. A

batch of gasohol is a discrete mixture of gasoline and alcohol. If a

batch is splash blended, the contents of the batch typically correspond

to a gasoline meter delivery ticket and an alcohol meter delivery

ticket, each of which shows the number of gallons of liquid delivered

into the mixture. In such case, the volume of each component in a batch

(without adjustment for temperature) ordinarily is determined by the

number of metered gallons shown on the delivery tickets for the

gasoline and alcohol delivered. However, if a blender adds metered

gallons of gasoline and alcohol to a tank already containing more than

a minor amount of liquid (other than gasohol), the determination of

whether a batch is gasohol and of its type will be made by taking into

account the amount of alcohol and non-alcohol fuel contained in the

liquid already in the tank. Ordinarily, any amount in excess of 0.5

percent of the capacity of the tank will not be considered minor.

(ii) 10 percent gasohol--(A) In general. A batch of gasoline/

alcohol mixture is 10 percent gasohol if it contains at least 10

percent alcohol by volume, without rounding.

(B) Batches containing less than 10 percent but at least 9.8

percent alcohol. If a batch of mixture contains less than 10 percent

alcohol but at least 9.8 percent alcohol, without rounding, a portion

of the batch is considered to be 10 percent gasohol. That portion

equals the number of gallons of alcohol in the batch multiplied by 10.

Any remaining liquid in the mixture is excess liquid. If tax was

imposed on the excess liquid at the gasohol production rate (as defined

in paragraph (e)(1) of this section), the excess liquid in the batch is

considered to be gasoline with respect to which there is a failure to

blend into gasohol for purposes of paragraph (g) of this section.

Excess liquid is considered to be removed before the removal of the

gasohol portion. If tax was imposed on the excess liquid at the rate of

tax described in section 4081(a), a credit or refund under section

6427(f) is not allowed with respect to the excess liquid.

(iii) 7.7 percent gasohol. A batch of gasoline/alcohol mixture is

7.7 percent gasohol if and only if it contains at least 7.7 percent,

but less than 9.8 percent, alcohol by volume, without rounding.

(iv) 5.7 percent gasohol. A batch of gasoline/alcohol mixture is

5.7 percent gasohol if and only if it contains at least 5.7 percent,

but less than 7.7 percent, alcohol by volume, without rounding.

(v) Examples. This paragraph (b)(2) may be illustrated by the

following examples. In these examples, a gasohol blender creates a

gasoline/alcohol mixture by pumping a specified amount of gasoline into

an empty tank. The blender then splash blends a specified amount of

alcohol into gasoline.

Example 1. Mixtures containing exactly 10 percent alcohol. The

applicable delivery tickets show that the mixture is made with 7200

metered gallons of gasoline and 800 metered gallons of alcohol.

Accordingly, the mixture contains 10 percent alcohol (as determined

based on the delivery tickets provided to the blender) and qualifies

as 10 percent gasohol.

Example 2. Mixtures containing less than 10 percent alcohol but

at least 9.8 percent alcohol. The applicable delivery tickets show

that the mixture is made with 7205 metered gallons of gasoline and

795 metered gallons of alcohol. Because the mixture contains less

than 10 percent alcohol, but more than 9.8 percent alcohol, (as

determined based on the delivery tickets provided to the blender),

7950 gallons of the mixture qualify as 10 percent gasohol. If tax

was imposed on the gasoline in the mixture at the gasohol production

rate, the remaining 50 gallons of the mixture are treated as

gasoline with respect to which there was a failure to blend into

gasohol for purposes of paragraph (g) of this section. If tax was

imposed on the gasoline in the mixture at the rate of tax described

in section 4081(a), a credit or refund under section 6427(f) is

allowed only with respect to 7155 gallons of gasoline.

Example 3. The applicable delivery tickets show that the mixture

is made with 7550 metered gallons of gasoline and 450 metered

gallons of alcohol. Because the mixture contains only 5.625 percent

alcohol (as determined based on the delivery tickets provided to the

blender), the mixture does not qualify as gasohol.

* * * * *

(c) * * *

(1) * * *

(ii) * * *

(B) Has no reason to believe that any information in the

certificate is false.

(2) * * *

(ii) Model certificate.

CERTIFICATE OF REGISTERED GASOHOL BLENDER

(To support sales of gasoline at the gasohol production tax rate

under section 4081(c) of the Internal Revenue Code)

----------------------------------------------------------------------

Name, address, and employer identification number of seller

________________ (Buyer) certifies the

Name of Buyer

following under penalties of perjury:

Buyer is registered as a gasohol blender with registration

number ________________. Buyer's registration has not been suspended

or revoked by the Internal Revenue Service. The gasoline bought

under this certificate will be used by Buyer to produce gasohol (as

defined in Sec. 48.4081-6(b) of the Manufacturers and Retailers

Excise Tax Regulations) within 24 hours after buying the gasoline.

Type of gasohol Buyer will produce (check one only):

________ 10% gasohol

________ 7.7% gasohol

________ 5.7% gasohol

If the gasohol the Buyer will produce will contain ethanol,

check here: ________.

This certificate applies to the following (complete as

applicable):

If this is a single purchase certificate, check here and enter:

1. Account number------------------------------------------------------

2. Number of gallons---------------------------------------------------

If this is a certificate covering all purchases under a

specified account or order number, check here __________ and enter:

1. Effective date------------------------------------------------------

2. Expiration date-----------------------------------------------------

(period not to exceed 1 year after the effective date)

3. Buyer account or order number ____________--------------------------

Buyer will not claim a credit or refund under section 6427(f) of

the Internal Revenue Code for any gasoline covered by this

certificate.

Buyer agrees to provide seller with a new certificate if any

information on this certificate changes.

Buyer understands that Buyer's registration may be revoked if

the gasoline covered by this certificate is resold or is used other

than in Buyer's production of the type of gasohol identified above.

Buyer will not take the alcohol mixture credit under section

40(b) with respect to the alcohol in the gasohol to which this

certificate relates.

Buyer understands that the fraudulent use of this certificate

may subject Buyer and all parties making any fraudulent use of this

certificate to a fine or imprisonment, or both, together with the

costs of prosecution.

----------------------------------------------------------------------

Printed or typed name of person signing

----------------------------------------------------------------------

Title of person signing

----------------------------------------------------------------------

Employer identification number

----------------------------------------------------------------------

Address of Buyer

----------------------------------------------------------------------

Signature and date signed

* * * * *

(e) Tax rates--(1) Gasohol production tax rate. The gasohol

production tax rate is the applicable rate of tax determined under

section 4081(c)(2)(A).

(2) Gasohol tax rate. The gasohol tax rate is the applicable

alcohol mixture rate determined under section 4081(c)(4)(A).

* * * * *

(g) * * *

(2) Failure to blend--(i) Imposition of tax. Tax is imposed on the

entry, removal, or sale of gasoline (including excess liquid described

in paragraph (b)(2)(ii)(B) of this section) with respect to which tax

was imposed at a gasohol production tax rate if--

(A) The gasoline was not blended into gasohol; or

(B) The gasoline was blended into gasohol but the gasohol

production tax rate applicable to the type of gasohol produced is

greater than the rate of tax originally imposed on the gasoline.

* * * * *

(iii) Rate of tax. The rate of tax imposed on gasoline described in

paragraph (g)(2)(i)(A) of this section is the difference between the

rate of tax applicable to gasoline not described in this section and

the rate of tax previously imposed on the gasoline. The rate of tax

imposed on gasoline described in paragraph (g)(2)(i)(B) of this section

is the difference between the gasohol production tax rate applicable to

the type of gasohol produced and the rate of tax previously imposed on

the gasoline.

(iv) Example. The following example illustrates the rule of this

paragraph (g)(2):

Example. (i) A registered gasohol blender bought gasoline in

connection with a removal described in paragraph (c)(1)(ii) of this

section. Based on the blender's certification (described in

paragraph (c)(2) of this section) that the blender would produce 10

percent gasohol with the gasoline, tax at the gasohol production tax

rate applicable to 10 percent gasohol was imposed on the removal.

(ii) The blender then produced a mixture by splash blending in a

tank holding approximately 8000 gallons of mixture. The applicable

delivery tickets show that the mixture was blended by first pumping

7220 metered gallons of gasoline into the empty tank, and then

pumping 780 metered gallons of alcohol into the tank. Because the

mixture contains 9.75 percent alcohol (as determined based on the

delivery tickets provided to the blender) the entire mixture

qualifies as 7.7 percent gasohol, rather than 10 percent gasohol.

(iii) Because the 7220 gallons of gasoline were taxed at the

gasohol production tax rate applicable to 10 percent gasohol but the

gasoline was blended into 7.7 percent gasohol, a failure to blend

has occurred with respect to the gasoline. As the person that bought

the gasoline in connection with the taxable removal, the blender is

liable for the tax imposed under paragraph (g)(2)(i) of this

section. The amount of tax imposed is the difference between--

(A) 7220 gallons times the gasohol production tax rate

applicable to 7.7 percent gasohol; and

(B) 7220 gallons times the gasohol production tax rate

applicable to 10 percent gasohol.

(iv) Because the gasohol does not contain exactly 7.7 percent

alcohol, the benefit of the gasohol production tax rate with respect

to the alcohol is less than the amount of the alcohol mixture credit

under section 40(b) (determined before the application of section

40(c). Accordingly, the blender may be entitled to claim an alcohol

mixture credit for the alcohol used in the gasohol. Under section

40(c), however, the amount of the alcohol mixture credit must be

reduced to take into account the benefit provided with respect to

the alcohol by the gasohol production tax rate.

(h) Effective date. This section is effective January 1, 1993.

Par. 15. Section 48.4081-7 is amended as follows:

1. The heading for Sec. 48.4081-7 is revised.

2. In paragraphs (a), (b), (c), and (d), the language ``gasoline''

is removed each place it appears and ``taxable fuel'' is added in its

place.

3. In paragraph (f), Example 1, paragraph (i), first and fourth

sentences, and paragraph (ii), first and third sentences, the language

``1993'' is removed each place it appears and ``1994'' is added in its

place.

4. Paragraph (g) is revised.

5. The revised provisions read as follows:

Sec. 48.4081-7 Taxable fuel; conditions for, and reporting relating

to, refunds of taxable fuel tax under section 4081(e).

* * * * *

(g) Effective date. This section is effective in the case of

taxable fuel with respect to which the first tax is imposed after

December 31, 1993.

Par. 16. Section 48.4081-8 is revised to read as follows:

Sec. 48.4081-8 Taxable fuel; measurement.

(a) In general. For purposes of the tax imposed by section 4081,

gallons of taxable fuel may be measured on the basis of--

(1) Actual volumetric gallons;

(2) Gallons adjusted to 60 degrees Fahrenheit; or

(3) Any other temperature adjustment method approved by the

Commissioner.

(b) Effective date. This section is effective January 1, 1994.

Sec. 48.4221 [Removed]

Par. 17. Section 48.4221 is removed.

Par. 18. Section 48.4221-1 is amended as follows:

1. Paragraph (a) is revised.

2. Paragraph (b)(2)(iv) is amended by adding ``and'' at the end

thereof.

3. Paragraph (b)(2)(v) is revised.

4. Paragraphs (b)(2)(vi) through (xii) are removed.

5. Paragraph (b)(3) is removed and paragraphs (b)(4) and (5) are

redesignated as paragraphs (b)(3) and (4), respectively.

6. The revised provisions read as follows:

Sec. 48.4221-1 Tax free sales; general rule.

(a) Application of regulations under section 4221--(1) In general.

The regulations under section 4221 provide rules under which the

manufacturer, producer, or importer of an article subject to tax under

chapter 32 (or the retailer of an article subject to tax under

subchapter A or C of chapter 31) may sell the article tax free under

section 4221.

(2) Limitations. The following restrictions must be taken into

account in applying the regulations under section 4221:

(i) The exemptions under section 4221(a)(4) and (5) do not apply to

the tax imposed by section 4064 (gas guzzler tax).

(ii) The exemptions under section 4221 do not apply to the tax

imposed by section 4081 (gasoline and diesel fuel tax).

(iii) The exemptions under section 4221 do not apply to the tax

imposed by section 4091 (aviation fuel tax). For rules relating to tax-

free sales of aviation fuel, see section 4092 and the regulations

thereunder.

(iv) The exemptions under section 4221 do not apply to the tax

imposed by section 4121 (coal tax).

(v) The exemptions under sections 4221(a)(3), (4), and (5) do not

apply to the tax imposed by section 4131 (vaccine tax). In addition,

the exemption under section 4221(a)(2) applies to the vaccine tax only

to the extent provided in Sec. 48.4221-3(e) (relating to tax-free sales

of vaccine for export).

(vi) The exemptions under section 4221(a) apply only in those cases

where the exportation or use referred to is to occur before any other

use.

(b) * * *

(2) * * *

(v) Section 4221(e)(3) relating to the sale of tires used on

intercity, local, or school buses (see Sec. 48.4221-8).

* * * * *

Par. 19. Section 48.4221-2 is amended by:

1. Removing from the first sentence of paragraph (a)(1) the

language ``(other than a tire or inner tube taxable under section 4071,

which are given special treatment under sections 4221(e)(2) and (4),

and Secs. 48.4221-7 and 48.4221-8)'' and adding ``(other than a tire

taxable under section 4071, which is given special treatment under

section 4221(e)(2) and Sec. 48.4221-7)'' in its place.

2. Removing paragraph (a)(2) and redesignating paragraph (a)(3) as

paragraph (a)(2).

3. Revising paragraph (b).

4. The revised provision reads as follows:

Sec. 48.4221-2 Tax-free sale of articles to be used for, or resold

for, further manufacture.

* * * * *

(b) Circumstances under which an article is considered to have been

sold for use in further manufacture--(1) An article shall be treated as

sold for use in further manufacture if the article is sold for use by

the buyer as material in the manufacture or production of, or as a

component part of, another article taxable under chapter 32 of the

Internal Revenue Code.

(2) An article is used as material in the manufacture or production

of, or as a component of, another article if it is incorporated in, or

is a part or accessory of, the other article when the other article is

sold by the manufacturer. In addition, an article is considered to be

used as material in the manufacture of another article if it is

consumed in whole or in part in testing such other article. However, an

article that is consumed in the manufacturing process other than in

testing, so that it is not a physical part of the manufactured article,

is not considered to have been used as material in the manufacture of,

or as a component part of, another article.

* * * * *

Sec. 48.4221-5 [Amended]

Par. 20. Section 48.4221-5 is amended as follows:

1. Paragraph (c)(1) is amended by:

a. Removing the first sentence.

b. Removing the language ``If a State or local government is not

registered, the'' and adding ``The'' in its place in the new first

sentence.

2. In paragraph (d), the first sentence, is amended by:

a. Removing the language ``(whether on the basis of a registration

number or an exemption certificate)''.

b. Removing the language ``(such as gasoline that is'' and adding

``(such as tires that are'' in its place.

Secs. 48.4221-8, 48.4221-9, 48.4221-10 [Removed]

Par. 21. Sections 48.4221-8, 48.4221-9, and 48.4221-10 are removed.

Sec. 48.4221-11 [Redesignated Sec. 48.4221-8]

Par. 22. Section 48.4221-11 is redesignated Sec. 48.4221-8.

Sec. 48.4221-12 [Removed]

Par. 23. Section 48.4221-12 is removed.

Par. 24. In Sec. 48.4222(a)-1, paragraphs (a) and (b) are revised

to read as follows:

Sec. 48.4222(a)-1 Registration.

(a) General rule. Except as provided in Sec. 48.4222(b)-1, tax-

free sales under section 4221 may be made only if the manufacturer,

first purchaser, and second purchaser, as the case may be, have been

registered by the Internal Revenue Service.

(b) Application instructions. Application for registration under

section 4222 must be made in accordance with instructions for Form 637

(or such other form as the Commissioner may designate).

* * * * *

Par. 25. In Sec. 48.4222(b)-1, paragraph (a) is revised to read as

follows:

Sec. 48.4222(b)-1 Exceptions to the requirement for registration.

(a) State and local governments. The Internal Revenue Service will

not register state or local governments under section 4222. To

establish the right to sell articles tax free to a state or local

government, the manufacturer must obtain from a state or local

government the information described in Sec. 48.4221-5(c).

* * * * *

Sec. 48.6416(b)(2)-2 [Amended]

Par. 26. In Sec. 48.6416(b)(2)-2, paragraphs (g) through (k) are

removed.

Sec. 48.6416(g)-1 [Removed]

Par. 27. Section 48.6416(g)-1 is removed.

Secs. 6424-0 through 48.6424-6 [Removed]

Par. 28. Section 48.6424-0 through 48.6424-6 are removed.

Par. 29. Section 48.6427-10 is added to read as follows:

Sec. 48.6427-10 Credit or payment with respect to gasoline used to

produce gasohol.

(a) Conditions to allowance of credit or payment. A claim for

credit or payment with respect to gasoline is allowed under section

6427(f) only if--

(1) The gasoline to which the claim relates was taxed at the

aggregate rate of tax imposed by section 4081 without regard to section

4081(c);

(2) The claimant used the gasoline to produce gasohol (as defined

in Sec. 48.4081-6(b)(2)) that was sold or used in the claimant's trade

or business; and

(3) The claimant has filed a timely claim for a credit or payment

that contains the information required under paragraph (c) of this

section.

(b) Form of claim. Each claim for a payment under section 6427(f)

must be made on Form 8849 (or such other form as the Commissioner may

designate) in accordance with the instructions for that form. Each

claim for a credit under section 6427(f) must be made on Form 4136 (or

such other form as the Commissioner may designate) in accordance with

the instructions for that form.

(c) Content of claim. Each claim for credit or payment under

section 6427(f) must contain the following information with respect to

each batch of gasohol that contains the gasoline covered by the claim:

(1) The claimant's registration number, if the claimant is a

registered gasohol blender (as defined in Sec. 48.4081-6(b)(4)).

(2) The name, address, and employer identification number of the

person that sold the claimant the gasoline.

(3) The date and location of the sale of the gasoline.

(4) The volume of the gasoline.

(5) The name, address, and employer identification number of the

person that sold the claimant the alcohol.

(6) The date and location of the sale of the alcohol.

(7) The volume and type of the alcohol.

(8) In the case of a claim for a payment, a copy of the invoice or

other record of sale relating to each purchase of alcohol.

(9) The written or typed name of the individual signing the claim

and the telephone number of that individual.

(10) The amount of credit or payment claimed.

(d) Time for filing claim. For rules relating to the time for

filing a claim under section 6427(f), see section 6427(i). A claim

under section 6427(f) is not considered to be filed unless it contains

all the information required by paragraph (c) of this section and

received at the place required by the form.

(e) Effective date. This section is effective with respect to

claims relating to gasohol produced after December 31, 1994.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

[FR Doc. 94-25763 Filed 10-17-94; 8:45 am]

BILLING CODE 4830-01-P