[Federal Register Volume 61, Number 51 (Thursday, March 14, 1996)]
[Proposed Rules]
[Pages 10489-10492]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-5587]



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[[Page 10490]]



DEPARTMENT OF THE TREASURY
26 CFR Part 48

[PS-6-95]
RIN 1545-AT18


Gasoline and Diesel Fuel Excise Tax; Dye Injection Systems and 
Markers; Measurement

AGENCY: Internal Revenue Service (IRS), Treasury.

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

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SUMMARY: This document contains proposed regulations relating to the 
gasoline and diesel fuel excise tax. The proposed regulations reflect 
and implement certain changes made by the Revenue Reconciliation Act of 
1990 and the Omnibus Budget Reconciliation Act of 1993 (the 1993 Act). 
They affect certain enterers, refiners, terminal operators, and 
throughputters. This document also provides a notice of public hearing 
on these proposed regulations.

DATES: Written comments and outlines of oral comments to be presented 
at the public hearing scheduled for June 20, 1996, must be received by 
June 12, 1996.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (PS-6-95), 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:R (PS-6-95), 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, 
Christina Vasquez at (202) 622-7190; (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking has been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507).
    Comments on the collection 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, T:FP, Washington, DC 20224. 
Comments on the collection of information should be received by May 13, 
1996.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid control number.
    The collection of information is in Sec. 48.4082-1(c). This 
information is required by the IRS to monitor manual dyeing at 
terminals. This information will be used to ensure the collection of 
the proper amount of tax imposed by section 4081. The likely 
recordkeepers are business or other for-profit institutions and 
organizations. Responses to this collection of information are required 
to obtain exemption from the diesel fuel excise tax.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.
    Estimated total annual recordkeeping burden: 200 hours.
    Estimated average annual burden per recordkeeper: 1 hour.
    Estimated number of recordkeepers: 200.

Background

    Section 4081 imposes a tax on certain removals, entries, and sales 
of diesel fuel. However, under section 4082, the tax is not imposed if, 
among other conditions, the diesel fuel (1) is indelibly dyed in 
accordance with regulations that the Secretary shall prescribe, and (2) 
meets such marking requirements (if any) as may be prescribed by the 
Secretary in regulations.
    The regulations currently provide that the section 4082 exemption 
applies only to diesel fuel that contains a prescribed type and amount 
of dye. However, the regulations do not prescribe the time or method 
for adding the dye to diesel fuel and do not require the use of a 
marker.

Dye Injection Systems

Dyeing Methods

    Diesel fuel is usually dyed at a terminal rack by either manual 
dyeing or mechanical injection.
    At a terminal using a typical manual dyeing technique, a measured 
amount of dye is manually placed into an empty tank compartment of a 
transport trailer while the trailer is at the terminal rack. Then, as 
diesel fuel is pumped into the compartment at the rack, the dye and the 
fuel are mixed together. Further mixing occurs through the motion of 
the trailer as it moves on the highway.
    At a terminal using a typical mechanical injection system, a 
measured amount of dye is automatically injected into the diesel fuel 
as the fuel is delivered into a compartment of a transport trailer at 
the terminal rack.

Conerns About Manual Dyeing

    The Federal government, State governments, and various segments of 
the petroleum industry have long been concerned with the problem of 
diesel fuel tax evasion, and to address this problem Congress changed 
the law to require that untaxed diesel fuel be indelibly dyed. The IRS 
is concerned, however, that tax can still be evaded through removals at 
a terminal of undyed fuel that has been designated as dyed.
    Manual dyeing is inherently difficult to monitor. It occurs after 
diesel fuel has been withdrawn from a terminal storage tank, generally 
requires the work of several people, is imprecise, and does not 
automatically create a reliable record.
    Mechanical dye injection, on the other hand, occurs while the fuel 
is still under the control of the terminal operator, is computer 
regulated, and can automatically create a reliable record of the amount 
of dye that was injected and fuel that was dyed. Thus, dye injection is 
the preferred method of combining diesel fuel and dye at a terminal.

Explanation of Provisions

    Diesel fuel removed from a terminal at the rack may be dyed before 
the fuel is received at the terminal, while the fuel is in a bulk 
storage tank at the terminal, or at the terminal rack. Under the 
proposed regulations, as under existing law, diesel fuel must contain a 
prescribed type and amount of dye at the time of the removal, entry, or 
sale that would otherwise be subject to tax. For example, high-sulfur 
diesel fuel, which is required to be dyed at a refinery under 
Environmental Protection Agency regulations, must contain the 
prescribed type and amount of dye at the time of the removal at the 
terminal rack even if additional dye must be added at that point.
    Under the proposed regulations, a terminal operator that dyes 
diesel fuel at a terminal generally must use a prescribed mechanical 
injection system or else give a bond to the district

[[Page 10491]]
director as a condition of retaining its registration. The prescribed 
system contains calibrated measurement devices, shut-off devices, and 
locks and similar equipment to secure these devices. If the system 
malfunctions at a particular terminal, the terminal operator may 
manually dye the fuel if the operator notifies the district director of 
the malfunction.
    The proposed regulations also prescribe the records that the 
terminal operator must maintain with respect to any manual dyeing 
performed at its terminals.

Markers

    A marker is a material that is placed in diesel fuel to designate 
the fuel as untaxed. Unlike dye, a marker does not reveal its presence 
until the fuel into which it is introduced is subjected to a special 
test. Markers are effective even if diluted and can be detected even if 
there is no visual evidence of dye.
    The proposed regulations do not require the use of markers. 
However, the IRS expects to issue a notice of proposed rulemaking with 
respect to markers within the next year. In the meantime, the IRS is 
interested in receiving comments relating to the type and concentration 
of markers, the cost of markers, and whether lower concentrations of 
dye could be used in conjunction with a marker.

Measurement

    Existing regulations provide that gallons of taxable fuel may be 
measured on the basis of actual volumetric gallons, gallons adjusted to 
60 degrees Fahrenheit, or any other temperature adjustment method 
approved by the Commissioner.
    These proposed regulations modify this rule by generally providing 
that measurement is to be made on the basis of actual volumetric 
gallons or gallons adjusted to 60 degrees Fahrenheit, whichever is the 
basis for measurement under the position holder's terminaling agreement 
with the terminal operator.

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 (a signed original 
and eight (8) copies) that are submitted timely to the IRS. All 
comments will be available for public inspection and copying.
    A public hearing has been scheduled for Thursday, June 20, 1996, at 
10 a.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 26 CFR 601.601(a)(3) apply to the hearing.
    Persons that wish to present oral comments at the hearing must 
submit written comments and an outline of topics to be discussed and 
the time to be devoted to each topic (signed original and eight (8) 
copies) by June 12, 1996.
    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 Part 48

    Excise taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 48 is proposed to be amended as follows:

PART 48--MANUFACTURERS AND RETAILERS EXCISE TAXES

    Paragraph 1. The authority citation for part 48 continues to read, 
in part, as follows:

    Authority: 26 U.S.C. 7805 * * *
    Par. 2. Section 48.4081-8 is revised to read as follows:


Sec. 48.4081-8  Taxable fuel; measurement.

    (a) Removals from a terminal. For purposes of the tax imposed under 
Secs. 48.4081-2 and 48.4081-3(d), taxable fuel is measured on the basis 
of actual volumetric gallons or gallons adjusted to 60 degrees 
Fahrenheit, whichever is the basis for measurement under the position 
holder's terminaling agreement with the terminal operator.
    (b) Other taxable events. For purposes of the taxes imposed under 
Secs. 48.4081-3(b), 48.4081-3(c), 48.4081-3(e), and 48.4082-4, and the 
tax imposed on the removal of taxable fuel under Sec. 48.4081-3(g), 
taxable fuel is measured on the basis of actual volumetric gallons or 
gallons adjusted to 60 degrees Fahrenheit. For purposes of the tax 
imposed under Sec. 48.4081-3(f) and the tax imposed on the sale of 
taxable fuel under Sec. 48.4081-3(g), taxable fuel is measured on the 
basis of actual volumetric gallons or gallons adjusted to 60 degrees 
Fahrenheit, whichever basis is used to invoice the buyer.
    (c) Effective date. This section is applicable as of October 1, 
1996.
    Par. 3. Section 48.4082-1 is amended as follows:
    1. In the introductory text of paragraph (a), the language ``if--'' 
is removed and ``if, at the time of the removal, entry, or sale--'' is 
added in its place.
    2. Paragraph (d) is revised.
    The revision reads as follows:


Sec. 48.4082-1  Diesel fuel tax; exemption

* * * * *
    (d) Time for adding the dye and marker--(1) Removals from a 
terminal at the terminal rack; in general. With respect to any removal 
from a terminal at the terminal rack, diesel fuel satisfies the dyeing 
and marking requirements of this paragraph (d) only if the dye and 
marker required by paragraphs (b) and (c) of this section are combined 
with diesel fuel--
    (i) Before the fuel is received at the terminal;
    (ii) While the fuel is in a bulk storage tank at the terminal; or
    (iii) At the terminal rack by means of--
    (A) A mechanical injection system described in paragraph (d)(2) of 
this section; or
    (B) Nonconforming dyeing, under the conditions of paragraph (d)(3) 
of this section.
    (2) Removals from a terminal at the terminal rack; mechanical 
injection systems. A mechanical injection system is described in this 
paragraph (d)(2) only if the district director has determined (and such 
determination has not been withdrawn) that the system contains--
    (i) Features that automatically inject a measured amount of dye and 
marker into diesel fuel as the fuel is delivered

[[Page 10492]]
into the transport compartment of a truck, trailer, railroad car, or 
other means of nonbulk transfer;
    (ii) Calibrated devices that accurately measure and record the 
amount of dye, marker, and fuel that is dispensed at the rack for each 
removal;
    (iii) Shut-off devices that prevent the removal of more than 50 
gallons of undyed diesel fuel in the case of a system malfunction; and
    (iv) Locks or similar security equipment that secure the 
measurement devices and shut-off devices.
    (3) Removals from a terminal at the terminal rack; conditions for 
nonconforming dyeing. Nonconforming dyeing meets the conditions of this 
paragraph (d)(3) only if diesel fuel is dyed and marked in the manner 
described in paragraph (d)(4) of this section and--
    (i) The terminal operator has given a bond as a condition of 
registration under the provisions of Sec. 48.4101-1(f)(4)(i); or
    (ii) In the case of a terminal containing a mechanical injection 
system described in paragraph (d)(2) of this section--
    (A) The accurate mechanical injection of dye and marker at the 
terminal cannot occur because of an equipment malfunction or a shutdown 
for maintenance purposes;
    (B) Before beginning any nonconforming dyeing described in 
paragraph (d)(4) of this section, the terminal operator notifies the 
district director of the time, location, and type of malfunction or 
maintenance shutdown; and
    (C) Immediately after correction of the malfunction or completion 
of the maintenance, the terminal operator notifies the district 
director that mechanical injection has resumed.
    (4) Removals from a terminal at the terminal rack; description of 
nonconforming dyeing--(i) In general. Diesel fuel is dyed and marked in 
a manner described in this paragraph (d)(4) only if the diesel fuel is 
dyed and marked by means of a mechanical injection system described in 
paragraph (d)(4)(ii) of this section or manual dyeing described in 
paragraph (d)(4)(iii) of this section.
    (ii) Mechanical injection. Diesel fuel is dyed and marked in a 
manner described in this paragraph (d)(4)(ii) if the diesel fuel is 
dyed and marked by means of a mechanical injection system that is not 
described in paragraph (d)(2) of this section and, with respect to the 
diesel fuel so dyed and marked, the terminal operator maintains a 
record of--
    (A) The identity and registration number of the position holder;
    (B) The identity and taxpayer identification number of the 
individual that physically receives the fuel at the terminal;
    (C) The identity and taxpayer identification number of any 
individual that physically operates the mechanical injection equipment; 
and
    (D) The volume of the fuel dyed and marked and the date and time of 
the dyeing.
    (iii) Manual dyeing. Diesel fuel is dyed and marked in a manner 
described in this paragraph (d)(4)(iii) if--
    (A) The terminal operator places a dye and marker of the type and 
concentration required by paragraphs (b) and (c) of this section into a 
compartment of a truck, trailer, railroad car, or other means of 
nonbulk transfer;
    (B) The diesel fuel is removed from the terminal at the rack and is 
immediately delivered into the compartment described in paragraph 
(d)(4)(iii)(A) of this section; and
    (C) With respect to the diesel fuel so dyed and marked, the 
terminal operator maintains a record of--
    (1) The identity and registration number of the position holder;
    (2) The identity and taxpayer identification number of the 
individual that physically receives the fuel at the terminal;
    (3) The identity and taxpayer identification number of the 
individual that physically places the dye and marker into the 
compartment described in paragraph (d)(4)(iii)(A) of this section; and
    (4) The volume of the fuel dyed and marked and the date and time of 
the manual dyeing.
    (5) Removals from refineries, sales or entries. With respect to any 
removal from a refinery, sale, or entry, diesel fuel satisfies the 
dyeing and marking requirements of this paragraph (d) only if the dye 
and marker required by paragraphs (b) and (c) of this section are 
combined with diesel fuel before the removal, sale, or entry that would 
otherwise be subject to the tax imposed by section 4081. Thus, for 
example, diesel fuel that is entered into the United States by means of 
nonbulk transfer (such as in a railroad car) does not satisfy the 
requirements of this paragraph (d)(5) if the required dye and marker 
are combined with the diesel fuel after the fuel has been entered into 
the United States.
    (6) Cross reference. For rules allowing inspection of equipment 
used for the dyeing of fuel, see section 4083.
    (7) Effective date. This paragraph (d) is applicable as of April 1, 
1997.
* * * * *
    Par. 4. Section Sec. 48.4101-1 is amended as follows:
    1. Paragraph (b)(7) is added.
    2. Paragraph (f)(4)(i) is amended by adding a sentence at the end 
of the paragraph.
    3. In the first sentence of paragraph (j)(2) introductory text, the 
language ``A bond'' is removed and ``Except as provided in the last 
sentence of paragraph (f)(4)(i) of this section, a bond'' is added in 
its place.
    4. Paragraph (l)(4) is added
    The additions read as follows


Sec. 48.4101-1  Registration.

* * * * *
    (b) * * *
    (7) Nonconforming dyeing amount. The nonconforming dyeing amount is 
the product of--
    (i) The rate of tax on diesel fuel provided by section 4081(a)(2); 
and
    (ii) An amount up to the total number of gallons of diesel fuel 
expected to be dyed by nonconforming dyeing (and removed at terminal 
racks of the applicant that do not have a mechanical injection system 
described in Sec. 48.4082-1(d)(2)) during a representative one-month 
period (as determined by the district director).
* * * * *
    (f) * * *
    (4) * * * (i) * * * An applicant that operates a terminal where 
diesel fuel is dyed by nonconforming dyeing (and removed at a rack that 
is not equipped with a mechanical injection system described in 
Sec. 48.4082-1(d)(2)) meets the adequate security test only if the 
applicant has given a bond (in addition to any bond given under 
paragraph (j) of this section) equal to the nonconforming dyeing 
amount.
* * * * *
    (l) * * *
    (4) The last sentence of paragraph (f)(4)(i) of this section is 
applicable as of April 1, 1997.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
[FR Doc. 96-5587 Filed 3-13-96; 8:45 am]
BILLING CODE 4830-01-P