[Federal Register Volume 67, Number 95 (Thursday, May 16, 2002)]
[Proposed Rules]
[Pages 34882-34884]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-12308]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 48

[REG-106457-00]
RIN 1545-AX97


Diesel Fuel; Blended Taxable Fuel

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations relating to the 
tax on diesel fuel and the tax on blended taxable fuel. These 
regulations affect persons that remove, enter, or sell diesel fuel or 
remove or sell blended taxable fuel.

DATES: Written and electronic comments and requests for a public 
hearing must be received by August 14, 2002.

ADDRESSES: Send submissions to: CC:ITA:RU (REG-106457-00), room 5226, 
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, 
DC 20044. Submissions may be hand delivered Monday through Friday 
between the hours of 8 a.m. and 5 p.m. to: CC:ITA:RU (REG-106457-00), 
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, 
NW., Washington, DC. Alternatively, taxpayers may submit electronic 
comments directly to the IRS Internet site at www.irs.gov/regs.

FOR FURTHER INFORMATION CONTACT: Concerning submissions, Sonya Cruse, 
(202) 622-7180; concerning the regulations, Frank Boland, (202) 622-
3130 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background and Explanation of Provisions

Definition of Diesel Fuel

    Section 4081(a) of the Internal Revenue Code (Code) imposes a tax 
on certain removals, entries, and sales of taxable fuel. Taxable fuel 
means gasoline, diesel fuel, and kerosene. Section 4083 defines diesel 
fuel as any liquid (other than gasoline) that is suitable for use as a 
fuel in a diesel-powered highway vehicle or diesel-powered train. 
Existing regulations follow the Code provisions by providing that (with 
certain exceptions) diesel fuel is any liquid that, without further 
processing or blending, is suitable for such use. However, the existing 
regulations do not define the term suitable for use. The proposed 
regulations add to existing regulations by providing that a liquid is 
suitable for use as diesel fuel if the liquid has practical and 
commercial fitness for use in the propulsion engine of a diesel-

[[Page 34883]]

powered highway vehicle or diesel-powered train.

Liability for Tax on Sale or Removal of Blended Taxable Fuel

    Blended taxable fuel is taxable fuel that is created by mixing a 
liquid that has not been taxed under section 4081 with previously taxed 
taxable fuel. Typically, this mixing occurs outside of the bulk 
transfer/terminal system. Under section 4081(b), tax is imposed on the 
removal or sale of the mixture (blended taxable fuel) by the blender 
thereof. Existing regulations provide that the blender is liable for 
this tax. Generally, the blender is the person that owns the mixture 
immediately after it is created. If the mixture is not taxable fuel 
because it is not suitable for use as a fuel in a diesel-powered 
highway vehicle or diesel-powered train, tax is imposed only if the 
mixture is delivered into the fuel supply tank of a diesel-powered 
highway vehicle or diesel-powered train. See section 4041(a).
    The IRS has found that abusive situations exist with regard to the 
blending of diesel fuel. For example, untaxed liquids are sold as taxed 
diesel fuel to a retailer and delivered into the retailer's bulk 
storage tank that contains taxed diesel fuel. Under existing 
regulations, the retailer would be a blender and liable for tax on its 
removal or sale of the resulting mixture.
    When the Congress enacted the present fuel tax regime, it noted 
that the Treasury Department is permitted ``to prescribe rules and 
administrative procedures for determining liability for payment of 
tax.'' H.R. Conf. Rep. No. 101-964, at 1052 (1990). Thus, the Treasury 
Department may impose liability on persons other than the blender if 
that is necessary to prevent abuses and assure that the tax is, in 
fact, paid to the government.
    Under these proposed regulations, a person would be jointly and 
severally liable for the section 4081(b) tax if the person sells a 
previously untaxed liquid as a taxed taxable fuel and that liquid 
becomes a part of a mixture that is blended taxable fuel.

Definition of Refinery

    The proposed regulations clarify that the term refinery generally 
includes any facility that produces taxable fuel.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
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) does not apply to these regulations and, because 
these regulations do not impose on small entities a collection of 
information requirement, the Regulatory Flexibility Act (5 U.S.C. 
chapter 6) does not apply. Therefore, a Regulatory Flexibility Analysis 
is not required. Pursuant to section 7805(f) of the 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 Requests for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any electronic and written comments that 
are submitted timely to the IRS. The IRS and Treasury Department 
specifically request comments on the clarity of the proposed 
regulations and how they may be made easier to understand. All comments 
will be available for public inspection and copying. A public hearing 
may be scheduled if requested in writing by any person that timely 
submits written comments. If a public hearing is scheduled, notice of 
the date, time, and place for the hearing will be published in the 
Federal Register.

Drafting Information

    The principal author of these regulations is Frank Boland, Office 
of Associate 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 48.4081-1 is amended as follows:
    1. Paragraph (b) is amended by removing the language ``from crude 
oil, unfinished oils, natural gas liquids, or other hydrocarbons'' in 
the first sentence of the definition of Refinery.
    2. Paragraph (c)(2)(i) is amended by adding a sentence to the end.
    The addition reads as follows:


Sec. 48.4081-1  Taxable fuel; definitions.

* * * * *
    (c) * * *
    (2) * * * (i) * * * A liquid is suitable for this use if the liquid 
has practical and commercial fitness for use in the propulsion engine 
of a diesel-powered highway vehicle or diesel-powered train.
* * * * *
    Par. 3. Section 48.4081-3 is amended by revising paragraphs (g)(2) 
and (g)(3) to read as follows:


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

* * * * *
    (g) * * *
    (2) Liability for tax--(i) Liability of the blender. The blender is 
liable for the tax imposed under paragraph (g)(1) of this section.
    (ii) Liability of seller of untaxed liquid. On and after the date 
of publication of these regulations as final regulations in the Federal 
Register, a person that sells any liquid that is used to produce 
blended taxable fuel is jointly and severally liable for the tax 
imposed under paragraph (g)(1) of this section on the removal or sale 
of that blended taxable fuel if the liquid--
    (A) Is described in Sec. 48.4081-1(c)(1)(i)(B) (relating to liquids 
on which tax has not been imposed under section 4081); and
    (B) Is sold by that person as gasoline, diesel fuel, or kerosene 
that has been taxed under section 4081.
    (3) Examples. The following examples illustrate the provisions of 
this paragraph (g) and the definitions of blended taxable fuel and 
diesel fuel in Sec. 48.4081-1(c):

    Example 1. (i) Facts. W is a wholesale distributor of petroleum 
products and R is a retailer of petroleum products. W sold to R 
1,000 gallons of an untaxed liquid (a liquid described in 
Sec. 48.4081-1(c)(1)(i)(B)) and delivered the liquid into a storage 
tank (tank) at R's retail facility. However, W's invoice to R stated 
that the liquid is undyed diesel fuel. At the time of the delivery, 
the tank contained 4,000 gallons of undyed diesel fuel, a taxable 
fuel that has been taxed under section 4081. The resulting 5,000 
gallon mixture is suitable for use as a fuel in a diesel-powered 
highway vehicle because it has practical and commercial fitness for 
use in the propulsion engine of a diesel-powered highway vehicle. 
The mixture does not satisfy the dyeing requirements of 
Sec. 48.4082-1. R sold the mixture from the tank to a construction 
company for off-highway business use.
    (ii) Analysis--(A) Production of blended taxable fuel. R is a 
blender within the meaning of Sec. 48.4081-1 because R has produced 
blended taxable fuel, as defined in

[[Page 34884]]

Sec. 48.4081-1, by mixing 4,000 gallons of diesel fuel that has been 
taxed under section 4081 with 1,000 gallons of a liquid that has not 
been taxed under section 4081. The mixing occurred outside of the 
bulk transfer/terminal system and the resulting product is diesel 
fuel because it is suitable for use as a fuel in a diesel-powered 
highway vehicle.
    (B) Imposition of tax. Under paragraph (g)(1) of this section, 
tax is imposed on R's sale of the 5,000 gallons of blended taxable 
fuel to the construction company. Even though the blended taxable 
fuel is sold for off-highway business use, which is a nontaxable use 
as defined in section 4082(b), the sale is not exempt from tax 
because the blended taxable fuel does not satisfy the dyeing 
requirements of Sec. 48.4082-1. Tax is computed on 1,000 gallons, 
which is the difference between the number of gallons of blended 
taxable fuel sold by R (5,000) and the number of gallons of 
previously taxed taxable fuel used to produce the blended taxable 
fuel (4,000).
    (C) Liability for tax. R, as the blender, is liable for this tax 
under paragraph (g)(2)(i) of this section. W is jointly and 
severally liable for this tax under paragraph (g)(2)(ii) of this 
section because the blended taxable fuel was produced using an 
untaxed liquid that W sold as undyed diesel fuel (that is, as diesel 
fuel that was taxed under section 4081).
    Example 2. (i) Facts. W, a wholesale distributor of petroleum 
products, bought 7,000 gallons of diesel fuel at a terminal rack. 
The diesel fuel was delivered into a tank trailer. Tax was imposed 
on the diesel fuel under Sec. 48.4081-2 when the diesel fuel was 
removed at the rack. W then went to another location where X, the 
operator of a chemical plant, sold W 1,000 gallons of an untaxed 
liquid (a liquid described in Sec. 48.4081-1(c)(1)(i)(B)). However, 
X's invoice to W stated that the liquid is undyed diesel fuel. This 
liquid was delivered into the tank trailer already containing the 
7,000 gallons of diesel fuel. The resulting 8,000 gallon mixture is 
suitable for use as a fuel in a diesel-powered highway vehicle 
because it has practical and commercial fitness for use in the 
propulsion engine of a diesel-powered highway vehicle. The mixture 
does not satisfy the dyeing requirements of Sec. 48.4082-1. W sold 
the mixture to R, a retailer of petroleum products, and delivered 
the mixture into a storage tank at R's retail facility. R sold the 
mixture to its customers.
    (ii) Analysis--(A) Production of blended taxable fuel. W is a 
blender within the meaning of Sec. 48.4081-1 because W produced 
blended taxable fuel, as defined in Sec. 48.4081-1, by mixing 7,000 
gallons of diesel fuel that was taxed under section 4081 with 1,000 
gallons of a liquid that was not taxed under section 4081. The 
mixing occurred outside of the bulk transfer/terminal system and the 
resulting product is diesel fuel because it is suitable for use as a 
fuel in a diesel-powered highway vehicle. Thus, R bought blended 
taxable fuel.
    (B) Imposition of tax. Under paragraph (g)(1) of this section, 
tax is imposed on W's sale of the 8,000 gallons of blended taxable 
fuel to R. Tax is computed on 1,000 gallons, which is the difference 
between the number of gallons of blended taxable fuel sold by W 
(8,000) and the number of gallons of previously taxed taxable fuel 
used to produce the blended taxable fuel (7,000). No tax is imposed 
on R's subsequent sale of the blended taxable fuel because tax is 
imposed only with respect to a removal or sale by the blender.
    (C) Liability for tax. W, as the blender, is liable for this tax 
under paragraph (g)(2)(i) of this section. X is jointly and 
severally liable for this tax under paragraph (g)(2)(ii) of this 
section because the blended taxable fuel sold by W was produced 
using a previously untaxed liquid X sold to W as undyed diesel fuel, 
a taxed taxable fuel. R has no liability for tax because R is not a 
blender and did not sell any untaxed liquid as a taxed taxable fuel. 
R only sells previously taxed taxable fuel, the blended taxable fuel 
bought from W.
* * * * *

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 02-12308 Filed 5-15-02; 8:45 am]
BILLING CODE 4830-01-P