Gasohol; Compressed Natural Gas

DEPARTMENT OF THE TREASURY

26 CFR Parts 40, 48, and 602

[TD 8609]

RIN 1545-AS10

Gasohol; Compressed Natural Gas

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations relating to gasohol

blending and the tax on compressed natural gas (CNG). The 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 regulations relating to gasohol blending affect

certain blenders, enterers, refiners, and throughputters. The

regulations relating to CNG affect persons that sell or buy CNG for use

as a fuel in a motor vehicle or motorboat.

EFFECTIVE DATE: These regulations are effective October 1, 1995.

FOR FURTHER INFORMATION CONTACT: Frank Boland (202) 622-3130 (not a

toll-free call).

[[Page 40080]]

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information contained in these final regulations

have been reviewed and approved by the Office of Management and Budget

in accordance with the Paperwork Reduction Act (44 U.S.C. 3504(h))

under control number 1545-1270. The estimated average annual reporting

burden per respondent is .2 hour.

Comments concerning the accuracy of this burden estimate and

suggestions for reducing this burden should be sent to the Internal

Revenue Service, Attn: IRS Reports Clearance Officer, PC:FP,

Washington, DC 20224, and 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.

Background

On October 19, 1994, the IRS published in the Federal Register (59

FR 52735) proposed regulations (PS-66-93) that generally consolidate

the rules relating to the gasoline tax and the diesel fuel tax into a

single set of rules applicable to both fuels. These regulations also

proposed rules relating to gasohol and CNG.

Written comments regarding these regulations were received and a

public hearing was held on January 11, 1995. After consideration of the

comments relating to gasohol and CNG, the proposed regulations on these

topics are adopted as revised by this Treasury decision. Final

regulations relating to the consolidation provisions contained in the

proposed regulations will be issued later.

Explanation of Provisions

CNG; Treatment of Liquefied Natural Gas (LNG)

Section 4041(a)(2) imposes a special motor fuels tax on any liquid

(other than kerosene, gas oil, fuel oil, gasoline, or diesel fuel) that

is sold for use or used as a fuel in a motor vehicle or motorboat. The

rate of this tax is 18.4 cents per gallon (18.3 cents per gallon in the

case of liquefied petroleum gas).

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

Act) imposes a tax of 48.54 cents per MCF (thousand cubic feet) on CNG

that is sold for use or used in a motor vehicle or motorboat.

CNG is a gas at the time it is delivered into the fuel supply tank

of a motor vehicle or motorboat and when it is actually combusted in

the engine. LNG, which is produced by compressing pipeline natural gas

and cooling it to -260 degrees Fahrenheit, is a liquid when it is

delivered into the fuel supply tank of a motor vehicle or motorboat,

but is vaporized into a gas when it is actually combusted in the

engine.

Several commentators suggested that the CNG rate, rather than the

rate on special motor fuels, should apply to LNG because (1) Both

products have the same chemical composition, (2) both products are

gases when they are actually combusted in an engine, and (3) LNG would

be at a competitive disadvantage if taxed at the liquid rate.

The final regulations do not adopt this suggestion. Before the 1993

Act, the section 4041 special fuels tax applied to liquids sold for use

or used as a fuel in motor vehicles or motorboats. Thus, LNG was

subject to tax at the special fuels rate of 18.4 cents per gallon when

the 1993 Act imposed a tax at a lower rate on CNG. The 1993 Act

contained no provision that would change the treatment of LNG, nor is

there any suggestion in the legislative history that Congress intended

to do so.

CNG; Gasoline Gallon Equivalent

The CNG industry has recently begun to sell CNG on the basis of

CNG's Gasoline Gallon Equivalent (GGE). Generally, a GGE represents a

particular fuel's energy content relative to the energy content of

gasoline; thus, vehicles can travel approximately the same distance

with a GGE of CNG as with a gallon of gasoline.

Several commentators suggested that the final regulations should

express the CNG tax rate in terms of GGE instead of in terms of MCF as

provided in the Code. The final regulations do not adopt this

suggestion. However, there is no restriction on taxpayers engaging in

sales on the basis of GGE provided that the tax is actually paid at the

rate of 48.54 cents per MCF.

Gasohol; Tolerance Rule

The gasoline tax rate on most removals and entries is 18.4 cents

per gallon (the regular tax rate). However, a reduction from the

regular tax rate is allowed for gasohol (a gasoline/alcohol mixture

containing a specified amount of alcohol) and gasoline removed or

entered for the production of gasohol.

Prior to its amendment by the Energy Act, section 4081(c) treated a

mixture of gasoline and alcohol as gasohol only if at least 10 percent

of the mixture was alcohol. Regulations allow 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.

This 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 delivered into a tank truck is

imprecise or because the high-speed gasoline or alcohol pump used does

not shut off at the proper moment. As noted in the preamble to an

earlier regulation relating to gasohol tolerances (published in the

Federal Register on August 21, 1987 (52 FR 31614)), this 2 percent

tolerance is based upon a standard industry tolerance specification for

wholesale measuring devices.

Effective January 1, 1993, section 4081(c) was amended 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 proposed regulations did not extend the tolerance rule to

mixtures that contain less than 7.7 or 5.7 percent alcohol. Several

commentators suggested that the tolerance rule be so extended. They

noted that the same operational problems that occur with the blending

of 10 percent gasohol also occur with the blending of 7.7 or 5.7

percent gasohol.

The final regulations adopt this suggestion and allow a tolerance

for 7.7 and 5.7 percent gasohol in approximately the same percentage as

that allowed for 10 percent gasohol. Any excess liquid in a mixture

that qualifies as 5.7 percent gasohol or 7.7 percent gasohol because of

the tolerance rule is taxed at the regular rate.

Gasohol; Alcohol-Based Ethers

The proposed regulations provide that alcohol (that is, alcohol

that is not produced from petroleum, natural gas, or coal (including

peat)) used to produce ethers such as ethyl tertiary butyl ether (ETBE)

or methyl tertiary butyl ether (MTBE) is treated as alcohol for

purposes of the reduced tax rates for gasohol. Some commentators

suggested that, with respect to gasohol produced by blending gasoline

made with alcohol-based ether at a refinery, the regulations should

also provide (1) An allocation rule and (2) guidance regarding the

application of the income tax credit allowable by section 40.

Allocation rule. Traditionally, gasohol has been produced by

delivering the requisite amount of alcohol into a

[[Page 40081]]

transport trailer that contains gasoline while the trailer is at a

terminal rack. The two components are blended together by the motion of

the trailer as it moves on the highway.

Now, however, gasohol may be produced at the refinery with alcohol-

based ether. This type of gasohol does not absorb water, which means it

can be transported through a pipeline. However, after shipment from the

refinery and before its removal at the terminal rack, much of this

gasohol may have been diluted with non-qualifying blends because of the

use of common-carrier pipelines, barges, and non-segregated storage

facilities. As a result, the blend removed at the terminal rack may not

qualify for the reduction from the regular rate due to commingling

between the refinery and terminal rack. To address this issue, several

commentators suggested an allocation system for gasohol that is

produced before it reaches the terminal that would not depend on the

actual existence of a qualified mixture at the taxing point. For

example, a refiner that removes one million gallons of gasohol from its

refinery for bulk shipment to a terminal could designate any one

million gallons of gasoline that is removed at the terminal rack as

gasohol, regardless of the actual alcohol-based ether content of the

gasoline.

Other commentators, by contrast, opposed expanding the benefit for

gasohol made with ether-based alcohol by allowing such an allocation

rule. Rather, these commentators argued that a batch of mixture should

not be taxed at the reduced rate unless the mixture actually contains

the requisite amount of alcohol at the taxing point.

The final regulations do not adopt the suggested allocation rule.

Under section 4081(c), a reduction from the regular tax rate is

allowable in the case of a taxable removal or entry of gasohol. Thus, a

taxable removal or entry of gasoline that does not contain the

requisite amount of alcohol at the time of the taxable removal or entry

is not a removal of gasohol and is subject to tax at the regular rate.

However, the final regulations do address concerns arising from

this relatively recent development of producing gasohol at the refinery

rather than at the terminal rack. Specifically, section 4101 provides

that every person required to be registered with respect to the

gasoline tax must register at such time, in such form and manner, and

subject to such terms and conditions as the Secretary may prescribe by

regulations. Pursuant to that provision, the final regulations provide

that a refiner registered by the IRS that produces a batch of gasohol

may treat itself as not registered with respect to a bulk removal of

that gasohol. If the refiner treats itself in this manner, the removal

would not be exempt from the tax under section 4081(a)(1)(B), which

provides that the bulk removal by a registered refiner for delivery to

a terminal operated by a registered terminal operator is not subject to

the tax. However, because the mixture would qualify as gasohol at the

time of removal from the refinery, it would be subject to tax at the

reduced rate. The final regulations also provide that the refiner is

not required to deposit this tax before filing the return relating to

that tax.

If a refiner chooses this option, tax also will be imposed under

Sec. 48.4081-2(b) at the full rate when the fuel is removed at the

terminal rack, but a refund of this second tax may then be allowable to

the position holder under section 4081(e).

Application of section 40. Section 40 allows an income tax credit

to the producer of certain mixtures of alcohol and gasoline. Under

section 40(c), the amount of this credit with respect to any alcohol is

reduced to take into account any benefit provided with respect to such

alcohol solely by reason of the application of section 4081(c).

One commentator suggested that the final regulations provide that a

refiner that produces a mixture of gasoline with an alcohol-based ether

always is eligible for the section 40 credit, without reduction under

section 40(c).

The final regulations do not adopt this suggestion because it is

inconsistent with section 40(c), which requires a reduction in the

credit whenever a mixture is taxed at a reduced rate for gasohol under

section 4081(c).

Special Analyses

It has been determined that this Treasury decision 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,

the notice of proposed rulemaking preceding these regulations was

submitted to the Small Business Administration for comment on its

impact on small business.

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

26 CFR Parts 40 and 48

Excise taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR parts 40, 48, and 602 are 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 * * *

Sec. 40.6302(c)-0 [Removed]

Par. 2. Section 40.6302(c)-0 is removed.

Par. 3. In Sec. 40.6302(c)-1, paragraph (e)(4) is added to read as

follows:

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

* * * * *

(e) * * *

(4) Taxes excluded; certain removals of gasohol from refineries. No

deposit is required in the case of the tax imposed under Sec. 48.4081-

3(b)(1)(iii) of this chapter.

* * * * *

PART 48--MANUFACTURERS AND RETAILERS EXCISE TAXES

Par. 4. The authority citation for part 48 is amended by removing

the entries for Sections 48.4041.21 and 48.4081-2 to read in part as

follows:

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

Par. 5. In Sec. 48.4041-8, paragraph (f) is amended by:

1. Revising the introductory text of paragraph (f)(1).

2. Revising paragraph (f)(1)(i).

3. Redesignating paragraph (f)(1)(ii) as paragraph (f)(1)(iii) and

adding a new paragraph (f)(1)(ii).

4. Removing from paragraph (f)(2) the language ``diesel fuel or''.

The revisions and additions read as follows:

[[Page 40082]]

Sec. 48.4041-8 Definitions.

* * * * *

(f) Special motor fuel. (1) Except as provided in paragraph (f)(2)

of this section, special motor fuel means any liquid fuel, including--

(i) Any liquefied petroleum gas (such as propane, butane, pentane,

or mixtures of the same);

(ii) Liquefied natural gas; or

* * * * *

Par. 6. Section 48.4041-21 is revised to read as follows:

Sec. 48.4041-21 Compressed natural gas (CNG).

(a) Delivery of CNG 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 this paragraph (b).

(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 (c)(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 receives an unexpired certificate

(as described in this paragraph (c)) 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 the right to provide a 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 Compressed Natural Gas (CNG) for a

Nontaxable Use

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

Revenue Code.)

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Name, address, and employer identification number of seller

____________________ ``Buyer'') certifies the 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.

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Printed or typed name of person signing

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Title of person signing

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Employer identification number

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Address of Buyer

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Signature and date signed

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

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

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

Sec. 48.4081-0 [Removed]

Par. 7. Section 48.4081-0 is removed.

Par. 8. In Sec. 48.4081-3, paragraph (b)(1) is revised to read as

follows:

Sec. 48.4081-3 Gasoline tax; taxable events other than removal at the

terminal rack.

* * * * *

(b) * * * (1) In general. Except as provided in Sec. 48.4081-4

(relating to gasoline blendstocks) and paragraph (b)(2) of this section

(relating to an exception for certain refineries), tax is imposed on

the following removals of gasoline from a refinery:

(i) The removal is by bulk transfer and the refiner or the owner of

the gasoline immediately before the removal is not a gasoline

registrant.

(ii) The removal is at the rack.

(iii) After September 30, 1995, the removal is of a batch of

gasohol from an approved refinery by bulk transfer and the refiner

treats itself with respect to the removal as a person that is not

registered under section 4101. See Sec. 48.4101-3. For the rule

providing that no deposit is required in the case of the tax imposed

under this paragraph (b)(1)(iii), see Sec. 40.6302(c)-1(e)(4) of this

chapter. For the rule allowing inspections of facilities where gasohol

is produced, see section 4083.

Par. 9. Section 48.4081-6 is revised to read as follows:

Sec. 48.4081-6 Gasoline tax; gasohol.

(a) Overview. This section provides rules for determining the

applicability

[[Page 40083]]

of reduced rates of tax on a removal or entry of gasohol or of gasoline

used to produce gasohol. Rules are also provided for the imposition of

tax on the separation of gasoline from gasohol and the failure to use

gasoline that has been taxed at a reduced rate to produce gasohol.

(b) Explanation of terms--(1) Alcohol--(i) In general; source of

the alcohol. Except as provided in paragraph (b)(1)(ii) of this

section, alcohol means any alcohol that is not a derivative product of

petroleum, natural gas, or coal (including peat). Thus, the term

includes methanol and ethanol that are not derived from petroleum,

natural gas, or coal (including peat). The term also includes alcohol

produced either within or outside the United States.

(ii) Proof and denaturants. Alcohol does not include alcohol with a

proof of less than 190 degrees (determined without regard to added

denaturants). If the alcohol added to a fuel/alcohol mixture (the added

alcohol) includes impurities or denaturants, the volume of alcohol in

the mixture is determined under the following rules:

(A) The volume of alcohol in the mixture includes the volume of any

impurities (other than added denaturants and any fuel with which the

alcohol is mixed) that reduce the purity of the added alcohol to not

less than 190 proof (determined without regard to added denaturants).

(B) The volume of alcohol in the mixture includes the volume of any

approved denaturants that reduce the purity of the added alcohol, but

only to the extent that the volume of the approved denaturants does not

exceed five percent of the volume of the added alcohol (including the

approved denaturants). If the volume of the approved denaturants

exceeds five percent of the volume of the added alcohol, the excess

over five percent is considered part of the nonalcohol content of the

mixture.

(C) For purposes of this paragraph (b)(1)(ii), approved denaturants

are any denaturants (including gasoline and nonalcohol fuel

denaturants) that reduce the purity of the added alcohol and are added

to such alcohol under a formula approved by the Secretary.

(iii) Products derived from alcohol. If alcohol described in

paragraphs (b)(1)(i) and (ii) of this section has been chemically

transformed in producing another product (that is, the alcohol is no

longer present as a separate chemical in the other product) and there

is no significant loss in the energy content of the alcohol, any

mixture containing the product includes the volume of alcohol used to

produce the product. Thus, for example, a mixture of gasoline and ethyl

tertiary butyl ether (ETBE), or of gasoline and methyl tertiary butyl

ether (MTBE), includes any alcohol described in paragraphs (b)(1)(i)

and (ii) of this section that is used to produce the ETBE or MTBE,

respectively, in a chemical reaction in which there is no significant

loss in the energy content of the alcohol.

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

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

percent gasohol. 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.

(B) If a particular mixture is produced within the bulk transfer/

terminal system (for example, at a refinery), the determination of

whether the mixture is gasohol is made at the time of the taxable

removal or entry of the mixture.

(C) If a particular mixture is produced outside of the bulk

transfer/terminal system (for example, by splash blending after the

gasoline has been removed from the terminal at the rack), the

determination of whether the mixture is gasohol is made immediately

after the mixture is produced. In such a case, 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. 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 metered

gallons of gasoline and alcohol are added to a tank already containing

more than a minor amount of liquid, the determination of whether a

batch satisfies the alcohol-content requirement 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 9.8

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, only 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.

(iii) 7.7 percent gasohol--(A) In general. A batch of gasoline/

alcohol mixture is 7.7 percent gasohol if it contains less than 9.8

percent alcohol but at least 7.55 percent alcohol by volume, without

rounding.

(B) Batches containing less than 7.7 percent but at least 7.55

percent alcohol. If a batch of mixture contains less than 7.7 percent

alcohol but at least 7.55 percent alcohol, without rounding, only a

portion of the batch is considered to be 7.7 percent gasohol. That

portion equals the number of gallons of alcohol in the batch multiplied

by 12.987. Any remaining liquid in the mixture is excess liquid.

(iv) 5.7 percent gasohol--(A) In general. A batch of gasoline/

alcohol mixture is 5.7 percent gasohol if it contains less than 7.55

percent alcohol but at least 5.59 percent alcohol by volume, without

rounding.

(B) Batches containing less than 5.7 percent but at least 5.59

percent alcohol. If a batch of mixture contains less than 5.7 percent

alcohol but at least 5.59 percent alcohol, without rounding, only a

portion of the batch is considered to be 5.7 percent gasohol. That

portion equals the number of gallons of alcohol in the batch multiplied

by 17.544. Any remaining liquid in the mixture is excess liquid.

(v) Tax on excess liquid. If tax was imposed on the excess liquid

in any gasohol at the gasohol production tax 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 (f) of this section. 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.

(vi) Examples. The following examples illustrate this paragraph

(b)(2). In these examples, a gasohol blender creates a gasoline/alcohol

mixture by pumping a specified amount of gasoline into an empty tank

and then adding a specified amount of alcohol.

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

[[Page 40084]]

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 applicable to

10 percent gasohol, the remaining 50 gallons of the mixture (the

excess liquid) are treated as gasoline with respect to which there

was a failure to blend into gasohol for purposes of paragraph (f) 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. Mixtures containing less than 5.59 percent alcohol.

The applicable delivery tickets show that the mixture is made with

7568 metered gallons of gasoline and 436 metered gallons of alcohol.

Because the mixture contains only 5.45 percent alcohol (as

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

the mixture does not qualify as gasohol.

(3) Gasohol blender. Gasohol blender means any person that

regularly buys gasoline and alcohol and produces gasohol for use in its

trade or business or for resale.

(4) Registered gasohol blender. Registered gasohol blender means a

person that is registered under section 4101 as a gasohol blender.

(c) Rate of tax on gasoline removed or entered for gasohol

production--(1) In general. The rate of tax imposed on gasoline under

Sec. 48.4081-2(b) (relating to tax imposed at the terminal rack),

Sec. 48.4081-3(b)(1) (relating to tax imposed at the refinery), or

Sec. 48.4081-3(c)(1) (relating to tax imposed on entries) is the

gasohol production tax rate if--

(i) The person liable for tax under Sec. 48.4081-2(c)(1) (the

position holder), Sec. 48.4081-3(b)(3) (the refiner), or Sec. 48.4081-

3(c)(2) (the enterer) is a taxable fuel registrant and a registered

gasohol blender, and such person produces gasohol with the gasoline

within 24 hours after removing or entering the gasoline; or

(ii) The gasoline is sold in connection with the removal or entry,

the person liable for tax under Sec. 48.4081-2(c)(1) (the position

holder), Sec. 48.4081-3(b)(3) (the refiner), or Sec. 48.4081-3(c)(2)

(the enterer) is a taxable fuel registrant and the person, at the time

of the sale,--

(A) Has an unexpired certificate (as described in paragraph (c)(2)

of this section) from the buyer; and

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

certificate is false.

(2) Certificate--(i) In general. The certificate referred to in

paragraph (c)(1)(ii)(A) of this section is a statement that is to be

provided by a registered gasohol blender that is signed under penalties

of perjury by a person with authority to bind the registered gasohol

blender, is in substantially the same form as the model certificate

provided in paragraph (c)(2)(ii) of this section, and contains all

information necessary to complete such 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:

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

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

(B) The date the registered gasohol blender provides a new

certificate to the seller.

(C) The date the seller is notified by the Internal Revenue Service

or the gasohol blender that the gasohol blender's registration has been

revoked or suspended.

(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 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 reduce any alcohol mixture credit under section 40(b)

by an amount equal to the benefit of the gasohol production tax rate

under section 4081(c) for 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

(iii) Use of Form 637 or letter of registration as a gasohol

blender's certificate prohibited. A copy of the certificate of registry

(Form 637) or letter of registration issued to a gasohol blender by the

Internal Revenue Service is not a gasohol blender's certificate

described in paragraph (c)(2)(ii) of this section.

(d) Rate of tax on gasohol removed or entered. The rate of tax

imposed on removals or entries of any gasohol under Secs. 48.4081-2(b),

48.4081-3(b)(1), and 48.4081-3(c)(1) is the gasohol tax rate. The rate

of tax imposed on removals and entries of excess liquid described in

paragraph (b)(2) of this section is the rate of tax applicable to

gasoline under section 4081(a).

(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).

(f) Later separation and failure to blend--(1) Later separation--

(i) Imposition of tax. A tax is imposed on the removal or sale of

gasoline separated from gasohol with respect to which tax was imposed

at a rate described in paragraph (e) of this section or with respect to

which a credit or payment was allowed or made by reason of section

6427(f)(1).

(ii) Liability for tax. The person that owns the gasohol at the

time gasoline is

[[Page 40085]]

separated from the gasohol is liable for the tax imposed under

paragraph (f)(1)(i) of this section.

(iii) Rate of tax. The rate of tax imposed under paragraph

(f)(1)(i) of this section is the difference between the rate of tax

applicable to gasoline not described in this section and the applicable

gasohol production tax rate.

(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) 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.

(ii) Liability for tax. (A) In the case of gasoline with respect

to which tax was imposed at the gasohol production tax rate under

paragraph (c)(1)(i) of this section, the person liable for the tax

imposed by paragraph (f)(2)(i) of this section is the person that was

liable for tax on the entry or removal.

(B) In the case of gasoline with respect to which tax was imposed

at the gasohol production tax rate under paragraph (c)(1)(ii) of this

section, the person that bought the gasoline in connection with the

entry or removal is liable for the tax imposed under paragraph

(f)(2)(i) of this section.

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

in paragraph (f)(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 (f)(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 this paragraph

(f)(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 (f)(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.

(g) Effective date. This section is effective August 7, 1995.

Par. 10. Section 48.4081-7 is amended as follows:

1. The heading for Sec. 48.4081-7 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. Paragraphs (b)(4) and (c)(1) are revised.

4. In paragraph (c)(2), the language ``gasoline'' is removed each

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

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

6. In paragraphs (c)(4)(i)(A) and (B), (ii)(A) and (B), and (iii),

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

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

7. In paragraph (c)(4)(iv)(A), the language ``(or such other model

statement as the Commissioner may prescribe)'' is added immediately

after ``paragraph (c)(4)(iv)(B) of this section''.

8. In paragraph (c)(4)(iv)(B):

a. The description of line 4 is revised to read: ``Volume and type

of taxable fuel sold''.

b. In the first paragraph following line 4 the language

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

9. Paragraph (c)(5) is removed.

10. Paragraph (d) is revised.

11. Paragraph (f), Example 1, paragraph (i), is amended by:

a. Removing the language ``1993'' in the first and fourth

sentences and adding ``1996'' in its place.

b. Removing the language ``paragraph (c)(2)'' and adding

``paragraph (c)'' in its place.

12. Paragraph (f), Example 1, paragraph (ii), is amended by

removing the language ``1993'' in the first and second sentences and

adding ``1996'' in its place.

13. Paragraph (g) is revised.

The revisions read as follows:

Sec. 48.4081-7 Taxable fuel; conditions for refunds of taxable fuel

tax under section 4081(e).

* * * * *

(b) * * *

(4) The person that paid the first tax to the government has met

the reporting requirements of paragraph (c) of this section.

(c) * * * (1) Reporting by persons paying the first tax. Except as

provided in paragraph (c)(3) of this section, the person that paid the

first tax under Sec. 48.4081-3 (the first taxpayer) must file a report

that is in substantially the same form as the model report provided in

paragraph (c)(2) of this section (or such other model report as the

Commissioner may prescribe) and contains all information necessary to

complete such model report (the first taxpayer's report). A first

taxpayer's report must be filed with the return to which the report

relates (or at such other time, or in such other manner, as prescribed

by the Commissioner).

* * * * *

(3) Optional reporting for certain taxable events. Paragraph

(c)(1) of this section does not apply with respect to a tax imposed

under Sec. 48.4081-2 (removal at a terminal rack), Sec. 48.4081-

3(c)(1)(ii) (nonbulk entries into the United States), or Sec. 48.4081-

3(g) (removals or sales by blenders). However, if the person liable for

the tax expects that another tax will be imposed under section 4081

with respect to the taxable fuel, that person should (but is not

required to) file a first taxpayer's report.

* * * * *

(d) Form and content of claim--(1) In general. The following rules

apply to claims for refund under section 4081(e):

(i) The claim must be made by the person that paid the second tax

to the government and must include all the information described in

paragraph (d)(2) of this section.

[[Page 40086]]

(ii) The claim must be made on Form 8849 (or such other form as

the Commissioner may designate) in accordance with the instructions on

the form. The form should be marked Section 4081(e) Claim at the top.

Section 4081(e) claims must not be included with a claim for a refund

under any other provision of the Internal Revenue Code.

(2) Information to be included in the claim. Each claim for a

refund under section 4081(e) must contain the following information

with respect to the taxable fuel covered by the claim:

(i) Volume and type of taxable fuel.

(ii) Date on which the claimant incurred the tax liability to

which this claim relates (the second tax).

(iii) Amount of second tax that claimant paid to the government

and a statement that claimant has not included the amount of this tax

in the sales price of the taxable fuel to which this claim relates and

has not collected that amount from the person that bought the taxable

fuel from claimant.

(iv) Name, address, and employer identification number of the

person that paid the first tax to the government.

(v) A copy of the first taxpayer's report that relates to the

taxable fuel covered by the claim.

(vi) If the taxable fuel covered by the claim was bought other

than from the first taxpayer, a copy of the statement of subsequent

seller that the claimant received with respect to that taxable fuel.

* * * * *

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

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

September 30, 1995.

Par. 11. Section 48.4101-3 is added to read as follows:

Sec. 48.4101-3 Registration.

(a) A refiner that is registered under section 4101 may treat

itself with respect to the bulk removal of any batch of gasohol from

its refinery as a person that is not registered under section 4101. See

Sec. 48.4081-3(b)(1)(iii).

(b) This section is effective October 1, 1995.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 12. The authority citation for part 602 continues to read as

follows:

Authority: 26 U.S.C. 7805.

Sec. 602.101 [Amended]

Par. 13. In Sec. 602.101, paragraph (c) is amended by removing the

entry for 48.4041-21 from the table and adding the entry ``48.4041-

21.....1545-1270'' in numerical order to the table.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved: July 25, 1995.

Leslie Samuels,

Assistant Secretary of the Treasury.

[FR Doc. 95-19284 Filed 8-4-95; 8:45 am]

BILLING CODE 4830-01-U