[Federal Register Volume 68, Number 63 (Wednesday, April 2, 2003)]
[Rules and Regulations]
[Pages 15940-15942]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-7812]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 40, 48, and 49

[TD 9051]
RIN 1545-AX97


Diesel Fuel; Blended Taxable Fuel

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations relating to the tax 
on diesel fuel and the tax on blended taxable fuel. This document also 
makes clerical and clarifying changes to other excise tax regulations. 
These regulations affect persons that remove, enter, or sell diesel 
fuel or remove or sell blended taxable fuel.

DATES: Effective Date: These regulations are effective April 2, 2003.
    Applicability Date: For date of applicability, see Sec.  48.4081-
3(g)(2)(ii).

FOR FURTHER INFORMATION CONTACT: Frank Boland, (202) 622-3130 (not a 
toll-free call).

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to the Manufacturers and 
Retailers Excise Tax Regulations (26 CFR part 48) relating to the 
definition of diesel fuel, the definition of refinery, and the 
application of the tax on blended taxable fuel.
    On May 16, 2002, a notice of proposed rulemaking (REG-106457-00) 
was published in the Federal Register (67 FR 34882). Written comments 
were received but no public hearing was requested or held. After 
consideration of all the comments, the proposed regulations are adopted 
as revised by this Treasury decision.

Explanation of Provisions

Definition of Diesel Fuel

    Existing regulations generally define diesel fuel as any liquid 
that, without further processing or blending, is suitable for use as a 
fuel in a diesel-powered highway vehicle or diesel-powered train. The 
proposed regulations would 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-powered highway vehicle or diesel-powered train.
    One commentator suggested that the final regulations should provide 
that a liquid does not possess practical and commercial fitness solely 
by reason of its possible or rare use as a fuel in a vehicle or train. 
The final regulations adopt this suggestion. The final regulations also 
provide that a liquid may possess practical and commercial fitness even 
though the liquid is not predominantly used as a fuel in a vehicle or 
train.
    The commentator also suggested that the final regulations should 
describe practical and commercial fitness in a manner similar to the 
description of the term in Sec.  145.4051-1(a)(4) of the temporary 
regulations relating to the tax on the retail sale of certain heavy 
vehicles. The final regulations do not adopt this suggestion because 
Treasury and the IRS believe that such detail is not required to 
determine the classification of most liquids.

Definition of Refinery

    Under existing regulations, refinery generally means a facility 
used to produce taxable fuel from crude oil, unfinished oils, natural 
gas liquids, or other hydrocarbons and from which taxable fuel may be 
removed by pipeline, by vessel, or at a rack. The proposed regulations 
would remove from the definition the references to the source of 
materials used to produce taxable fuel.
    Taxable fuel includes finished gasoline and certain gasoline 
blendstocks. One commentator indicated that because gas processing 
plants and chemical plants produce small amounts of gasoline 
blendstocks, the plants would be considered refineries under the 
proposed definition. Thus, the commentator suggested, refinery should 
exclude gas processing plants and chemical plants that mainly produce 
products other than taxable fuel.
    In fact, however, the gas processing plants and chemical plants 
described by the commentator are refineries under existing regulations. 
A facility does not lose its status as a refinery simply because it 
produces only small amounts of gasoline blendstocks. Thus, the final 
regulations do not adopt the commentator's suggestion.

[[Page 15941]]

Liability for Tax on Sale or Removal of Blended Taxable Fuel

    Under section 4081(b), tax is imposed on taxable fuel removed or 
sold by the blender. Blended taxable fuel is taxable fuel that is 
created by mixing a liquid that has not been taxed with previously 
taxed taxable fuel. Under existing regulations, the blender is liable 
for tax on the sale or removal of blended taxable fuel. Generally, the 
blender is the person that owns the mixture immediately after it is 
created. Under the proposed regulations, a person would be jointly and 
severally liable for the tax on blended taxable fuel 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.
    Several commentators suggested that the regulations provide relief 
for certain unsuspecting blenders. For example, a wholesale distributor 
of petroleum products might offer to sell undyed diesel fuel (a taxed 
taxable fuel) to a retailer but actually deliver an untaxed liquid. 
Even though the retailer bought the liquid in good faith, the retailer 
would be liable for tax as a blender nevertheless because mixing the 
untaxed liquid with the preexisting inventory of undyed diesel fuel 
produces blended taxable fuel. Although the proposed regulations would 
impose joint and several liability on the dishonest wholesaler, the 
commentators are concerned that the unsuspecting retailer would still 
be liable for tax at the discretion of the IRS. To resolve this 
problem, the commentators generally suggested that the blender should 
be able to avoid liability for tax if the blender acted reasonably and 
in good faith when it relied on assurances of the seller as to the 
status of the liquid it bought.
    Treasury and the IRS are concerned that the suggested rule may 
result in losses to the Highway Trust Fund. If retailers and 
wholesalers take inconsistent positions regarding the representations 
made by the wholesaler, the IRS might be unable to establish that 
either party is liable for the tax. Alternatively, even if the IRS is 
able to establish the wholesaler's liability, it may be unable to 
collect the tax from the wholesaler. In either case, the Highway Trust 
Fund would be inappropriately penalized for the retailer's choice of an 
untrustworthy supplier. Accordingly, the final regulations do not adopt 
the suggested rule. Although the final regulations allow the IRS to 
collect the tax from a person other than the blender in certain 
circumstances, blenders will remain liable (as under existing 
regulations) for the tax on the blended fuel.

Other Provisions

    The final regulations also make clerical and clarifying changes to 
other excise tax regulations. For example, in the excise tax procedural 
regulations, the final regulations remove a redundant sentence. In the 
regulations relating to the taxes on communication services and air 
transportation, the final regulations remove obsolete provisions that 
refer to the district director.

Special Analyses

    It has been determined that this Treasury decision 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 Internal Revenue 
Code, the notice of proposed rulemaking preceding these regulations was 
submitted to the Chief Counsel for Advocacy of 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 Associate 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 49

    Excise taxes, Reporting and recordkeeping requirements, Telephone, 
Transportation.

Adoption of Amendments to the Regulations

0
Accordingly, under the authority of 26 U.S.C. 7805, chapter 1 of 26 CFR 
is amended as follows:

PART 40--EXCISE TAX PROCEDURAL REGULATIONS

0
1. The authority citation for part 40 continues to read in part as 
follows:

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


0
2. In Sec.  40.6302(c)-3, paragraph (d) is amended as follows:
0
a. The heading is revised.
0
b. The first sentence is removed.
    The revision reads as follows:


Sec.  40.6302(c)-3  Special rules for use of Government depositaries 
under chapter 33.

* * * * *
    (d) Computation of net amount of tax that is considered as 
collected during a semimonthly period. * * *
* * * * *

PART 48--MANUFACTURERS AND RETAILERS EXCISE TAXES

0
3. The authority citation for part 48 continues to read in part as 
follows:

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


Sec.  48.4041-21  [Amended]

0
4. Section 48.4041-21, paragraph (b)(1)(i), is amended by adding the 
language ``by the buyer for a taxable use'' after ``covered by the 
statement is for use''.

0
5. Section 48.4081-1 is amended as follows:
0
a. Paragraph (b) is amended by:
0
1. Removing the language ``Sec.  48.4041-8(b)'' in the definition of 
Diesel-powered highway vehicle and adding ``Sec.  48.4061(a)-1(d)'' in 
its place.
0
2. Removing the language ``from crude oil, unfinished oils, natural gas 
liquids, or other hydrocarbons'' in the first sentence of the 
definition of Refinery. b. Paragraph (c)(2)(i) is amended by adding 
three sentences 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. A liquid 
may possess this practical and commercial fitness even though the 
specified use is not the liquid's predominant use. However, a liquid 
does not possess this practical and commercial fitness solely by reason 
of its possible or rare use as a fuel in the propulsion engine of a 
diesel-powered highway vehicle or diesel-powered train.
* * * * *
0
6. 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.

* * * * *

[[Page 15942]]

    (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 April 2, 
2003, 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 sells to R 
1,000 gallons of an untaxed liquid (a liquid described in Sec.  
48.4081-1(c)(1)(i)(B)) and delivers the liquid into a storage tank 
(tank) at R's retail facility. However, W's invoice to R states that 
the liquid is undyed diesel fuel. At the time of the delivery, the 
tank contains 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 sells 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 Sec.  48.4081-1, by mixing 1,000 
gallons of a liquid that has not been taxed under section 4081 with 
4,000 gallons of diesel fuel that has been taxed under section 4081. 
The mixing occurs 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 R sells (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 is 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, buys 7,000 gallons of diesel fuel at a terminal rack. The 
diesel fuel is delivered into a tank trailer. Tax is imposed on the 
diesel fuel under Sec.  48.4081-2 when the diesel fuel is removed at 
the rack. W then goes to another location where X, the operator of a 
chemical plant, sells 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 
states that the liquid is undyed diesel fuel. This liquid is 
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 sells the mixture to R, a 
retailer of petroleum products, and delivers the mixture into a 
storage tank at R's retail facility. R sells 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 has produced 
blended taxable fuel, as defined in Sec.  48.4081-1, by mixing 1,000 
gallons of a liquid that has not been taxed under section 4081 with 
7,000 gallons of diesel fuel that has been taxed under section 4081. 
The mixing occurs 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 has 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 W sells 
(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 is produced using an 
untaxed liquid that X sold as undyed diesel fuel (that is, as diesel 
fuel that was taxed under section 4081). 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 sold taxed taxable fuel, the blended 
taxable fuel bought from W.

* * * * *


Sec.  48.6427-8  [Amended]

0
7. Section 48.6427-8, paragraph (d), introductory text, is amended by 
adding ``or kerosene'' after ``diesel fuel''.

PART 49--FACILITIES AND SERVICES EXCISE TAXES

0
8. The authority citation for part 49 continues to read in part as 
follows:

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


Sec.  49.4291-1  [Amended]

0
9. Section 49.4291-1 is amended as follows:
0
a. The language ``district director'' is removed in the three places it 
appears and ``Commissioner'' is added in its place.
0
b. In the fourth sentence, the language ``same district conference'' is 
removed and ``same conference'' is added in its place.

David A. Mader,
Assistant Deputy Commissioner of Internal Revenue.
    Approved: March 7, 2003.
Pamela F. Olson,
Assistant Secretary of the Treasury.
[FR Doc. 03-7812 Filed 4-1-03; 8:45 am]
BILLING CODE 4830-01-P