[Federal Register Volume 70, Number 79 (Tuesday, April 26, 2005)]
[Rules and Regulations]
[Pages 21332-21335]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-8236]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 48 and 602

[TD 9199]
RIN 1545-BE44


Diesel Fuel and Kerosene Excise Tax; Dye Injection

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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

SUMMARY: This document contains regulations relating to the diesel fuel 
and kerosene excise tax. These regulations reflect changes made by the 
American Jobs Creation Act of 2004 regarding mechanical dye injection 
systems for diesel fuel and kerosene. These regulations affect certain 
enterers, refiners, terminal operators, and throughputters. The text of 
the temporary regulation also serves as the text of the proposed 
regulations set forth in the notice of proposed rulemaking on this 
subject elsewhere in this issue of the Federal Register.

DATES: Effective Date: These regulations are effective October 24, 
2005.
    Applicability Dates: For dates of applicability, see Sec. Sec.  
48.4082-1T(e) and 48.4101-1T(h)(3)(iv).

FOR FURTHER INFORMATION CONTACT: William Blodgett at (202) 622-3090 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    These temporary regulations are being issued without prior notice 
and public procedure pursuant to the Administrative Procedure Act (5 
U.S.C. 553). For this reason, the collection of information contained 
in these regulations has been reviewed and, pending receipt and 
evaluation of public comments, approved by the Office of Management and 
Budget under control number 1545-1418. Responses to this collection of 
information are required to obtain a tax benefit.
    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 OMB control number.
    For further information concerning this collection of information, 
and where to submit comments on the collection of information and the 
accuracy of the estimated burden, and suggestions for reducing this 
burden, please refer to the preamble to the cross-referencing notice of 
proposed

[[Page 21333]]

rulemaking published in the Proposed Rules section of this issue of the 
Federal Register.
    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.

Background

    Section 4081 of the Internal Revenue Code (Code) imposes a tax on 
certain removals, entries, and sales of diesel fuel and kerosene. 
However, section 4082(a) provides that the tax is not imposed if the 
diesel fuel or kerosene (1) is destined for a nontaxable use (as 
defined in section 4082(b)), (2) is indelibly dyed in accordance with 
regulations that the Secretary shall prescribe, and (3) meets such 
marking requirements (if any) as may be prescribed by the Secretary in 
regulations.
    Section 4082(a)(2) was amended by the American Jobs Creation Act of 
2004 (the Act) to provide that the diesel fuel and kerosene must be 
indelibly dyed ``by mechanical injection.'' The Act also requires the 
Secretary to issue regulations regarding mechanical dye injection 
systems and to include in the regulations standards for making such 
systems tamper resistant. The amendments to section 4082(a)(2) are 
effective on the 180th day after the date on which the Secretary issues 
such regulations.
    The Act also adds new section 6715A, which imposes a penalty on any 
person that tampers with a mechanical dye injection system and any 
operator of a mechanical injection system that fails to maintain the 
security standards for such system in accordance with the regulations.

Explanation of Provisions

    Under these temporary regulations, diesel fuel or kerosene that is 
removed from a refinery, terminal, or blending facility is exempt from 
tax under section 4082(a) only if the required type and amount of dye 
is added to the fuel by means of a mechanical injection system that is 
approved by the IRS. Manual (or splash) dyeing is not allowed, even in 
the case of a malfunction of the mechanical injection system.
    Application for approval of mechanical injection systems will be 
made in the form and manner prescribed by the IRS. It is anticipated 
that the application process will be similar to the process now in 
place for applications for registrations under section 4101. It is also 
anticipated that the IRS will act on such applications within a 
reasonable time.
    Under these temporary regulations, the IRS will approve a 
mechanical injection system only if it contains adequate calibrated 
measurement devices, shut-off devices, and security equipment to secure 
these devices and other access points.
    Generally, the security equipment must consist of either a ``seal'' 
system or a ``lock box'' system. The ``seal'' system requires that a 
seal be attached to each measuring device, each shut-off device, and 
any other access point to the mechanical injection system. The seals 
must secure the devices from tampering and, if necessary, may be 
accompanied by locks to ensure the necessary security. The alternative 
to the ``seal'' system is the ``lock box'' system, which allows the 
operator to use one secured container, or box, to control access to 
each measuring device, each shut-off device, and any other access point 
to the mechanical injection system. Such container may be transparent 
for ease of satisfying the inspection requirements. If the ``lock box'' 
system is used, the container must be secured by a seal that satisfies 
all of the ``seal'' requirements. Each seal, whether it secures a 
``lock box'' or attaches to an access point, must be separately 
identifiable by a numbering or coding system maintained by the terminal 
operator. In all cases, the type of allowable seal may be prescribed by 
the IRS.
    These temporary regulations also set out ongoing duties of the 
operator of an approved mechanical injection system to maintain the 
system's security standards and to keep certain records. However, no 
particular form for the records is prescribed.

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 flexibility 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. For the 
applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6), 
refer to the Special Analyses section of the preamble to the cross-
reference notice of proposed rulemaking published in the Proposed Rules 
section in this issue of the Federal Register. Pursuant to section 
7805(f) of the Code, these temporary regulations will be submitted to 
the Chief Counsel for Advocacy of the Small Business Administration for 
comment on their impact on small business.

Drafting Information

    The principal author of these regulations is William Blodgett, 
Office of Associate Chief Counsel (Passthroughs and Special 
Industries), IRS. However, other personnel from the IRS and Treasury 
Department participated in their development.

List of Subjects

26 CFR Part 48

    Excise taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR parts 48 and 602 are amended as follows:

PART 48--MANUFACTURERS AND RETAILERS EXCISE TAXES

0
Paragraph 1. The authority citation for part 48 is amended by adding an 
entry in numerical order to read, in part, as follows:


    Authority: 26 U.S.C. 7805 * * *
    Section 48.4082-1T also issued under 26 U.S.C. 4082(a). * * *


0
Par. 2. Section 48.4082-1 is amended by revising paragraphs (d) and (e) 
to read as follows:


Sec.  48.4082-1  Diesel fuel and kerosene; exemption for dyed fuel.

* * * * *
    (d) [Reserved]. For further guidance, see Sec.  48.4082-1T(d).
    (e) Effective date--(1) Except as provided in paragraph (e)(2) of 
this section, this section is applicable March 14, 1996.
    (2) [Reserved] For further guidance, see Sec.  48.4082-1T(e)(2).

0
Par. 3. Section 48.4082-1T is added to read as follows:


Sec.  48.4082-1T  Diesel fuel and kerosene; exemption for dyed fuel 
(temporary).

    (a) through (c) [Reserved]. For further guidance, see Sec.  
48.4082-1(a) through (c).
    (d) Time and method for adding dye--(1) In general. Except as 
provided by paragraph (d)(6) of this section, diesel fuel or kerosene 
satisfies the dyeing requirements of this paragraph (d) only if the dye 
required by Sec.  48.4082-1(b) is combined with the diesel fuel or 
kerosene by means of a mechanical injection system that is approved by 
the Commissioner for use

[[Page 21334]]

at the facility where the dyeing occurs. Application for approval must 
be made in the form and manner required by the Commissioner. Rules 
similar to the rules of Sec.  48.4101-1(g) apply to the Commissioner's 
action on the applications.
    (2) Mechanical injection system; requirements. The Commissioner 
will approve a mechanical injection system only if--
    (i) The system has features that automatically inject an amount of 
dye that satisfies the concentration requirements of Sec.  48.4082-1(b) 
into diesel fuel or kerosene as the diesel fuel or kerosene is 
delivered from the bulk transfer/terminal system into the transport 
compartment of a truck, trailer, railroad car, or other means of 
nonbulk transfer;
    (ii) The system has calibrated devices that accurately measure and 
record the amount of dye and the amount of diesel fuel and kerosene 
that is dispensed for each removal;
    (iii) The system has automatic shut-off devices that prevent the 
removal of more than 100 gallons of undyed diesel fuel or kerosene in 
the case of a system malfunction;
    (iv) The system is secured by either--
    (A) Unbroken seals that are issued, installed, and maintained by 
the terminal operator and secure the measurement devices, shut-off 
devices, and other access points to the injection system; or
    (B) A secured container that controls access to the measurement 
devices, shut-off devices, and other access points and is secured by an 
unbroken seal issued, installed, and maintained by the terminal 
operator;
    (v) Each seal securing the system bears a unique identifying number 
or code and is produced in a manner that provides adequate assurance 
against duplication; and
    (vi) The operator of the facility has written procedures in place 
for complying with its duty, described in paragraph (d)(4) of this 
section, to maintain the system's security standards.
    (3) Mechanical injection system; basis for approval. In determining 
whether to approve a mechanical injection system, the Commissioner will 
take into account the individual circumstances of each facility, 
including local fire and safety codes, to ensure that the cost of 
acquiring and maintaining the appropriate levels of security are 
reasonable for that facility.
    (4) Mechanical injection system; duty of the operator of a 
mechanical injection system to maintain the system's security 
standards. Each operator of a mechanical injection system must--
    (i) Maintain a record for each seal, including its identifying 
number or code, the location of the seal, the date(s) on which the seal 
was issued and installed, and the reason for the installation;
    (ii) Visually inspect each installed seal not less than once during 
every 24 hour period to ascertain that each seal and lock mechanism, if 
applicable, has not been physically altered;
    (iii) Check the identifying number or code for each seal against 
the records maintained by the terminal operator no less frequently than 
once during each seven day period and record each inspection and 
verification;
    (iv) Promptly notify the Commissioner if inspection of a seal 
reveals any inconsistency in the records pertaining to that seal, or if 
the seal has been damaged or removed (other than a removal authorized 
by the operator for testing or maintenance);
    (v) Maintain a record of each seal that has been replaced to 
include the seal number or code, the date the seal was issued, the 
location of the seal, the date the seal was replaced, and the reason 
the seal was replaced;
    (vi) Promptly destroy and replace seals that have been removed from 
the system;
    (vii) Restrict access to unused seal inventory to individuals 
specifically designated by the operator and maintain a record of such 
individuals;
    (viii) Maintain a record of each installation, inspection, and 
destruction described in this paragraph (d)(4), including the name of 
the individual who conducts the installation, inspection, or 
destruction;
    (ix) Make available for the Commissioner's immediate inspection the 
seals and records described in this paragraph (d)(4); and
    (x) Promptly notify the Commissioner if, and when, the dye 
injection system is placed out of service.
    (5) Mechanical injection system; revocation or suspension of 
approval. The Commissioner may revoke or suspend its approval of a dye 
injection system if the Commissioner determines that the system does 
not meet the standards of paragraph (d)(2) of this section or if the 
operator of the system has not complied with the requirements of 
paragraph (d)(4) of this section.
    (6) Sales and entries. For purposes of determining whether tax is 
imposed by section 4081 on a sale or entry of diesel fuel or kerosene, 
such fuel satisfies the dyeing requirements of this paragraph (d) only 
if the dye required by Sec.  48.4082-1(b) is combined with the fuel 
before the sale or entry and the seller or enterer has in its records 
evidence (such as a certificate from the terminal operator providing 
the fuel) establishing that the dye was combined with the fuel by means 
of a mechanical injection system. Thus, for example, diesel fuel or 
kerosene that is entered into the United States by means of nonbulk 
transfer (such as a railroad car) does not satisfy the requirements of 
this paragraph (d) if the required dye and marker are combined with 
diesel fuel or kerosene after the diesel fuel or kerosene has been 
entered into the United States.
    (7) Cross reference. For the penalty relating to mechanical dye 
injection systems, see section 6715A.
    (e) and (e)(1) [Reserved]. For further guidance, see Sec.  48.4082-
1(e) and (e)(1).
    (2) This section is applicable on October 24, 2005.

0
Par. 4. Section 48.4101-1 is amended by revising paragraph (h)(3)(iv) 
to read as follows:


Sec.  48.4101-1  Taxable fuel; registration.

* * * * *
    (h) * * *
    (3) * * *
    (iv) [Reserved]. For further guidance, see Sec.  48.4101-
1T(h)(3)(iv).
* * * * *

0
Par. 5. Section 48.4101-1T is added to read as follows:


Sec.  48.4101-1T  Taxable fuel; registration (temporary).

    (a) through (h)(3)(iii) [Reserved]. For further guidance, see Sec.  
48.4101-1(a) through (h)(3)(iii).
    (iv) Retention of information. In addition to any other requirement 
relating to the retention of records, the terminal operator must--
    (A) Maintain the information described in Sec.  48.4101-1(h)(3)(ii) 
at the terminal from which the removal occurred for at least 3 months 
after the removal to which it relates in the case of information 
relating to removals before January 1, 2006, and at least 12 months 
after the removal to which it relates in the case of information 
relating to removals after December 31, 2005; and
    (B) Maintain the information described in Sec.  48.4101-
1(h)(3)(iii) at the terminal where the dye was received for at least 3 
months after the receipt in the case of receipts before January 1, 
2006, and at least 12 months after the receipt in the case of receipts 
after December 31, 2005.
    (h)(3)(v) through (l) [Reserved] For further guidance see Sec.  
48.4101-1(h)(3)(v) through (l).

[[Page 21335]]

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

0
Par. 6. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.


0
Par. 7. In Sec.  602.101, paragraph (b) is amended by adding entries in 
numerical order to the table to read as follows:


Sec.  602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                             Current OMB
     CFR part or section where identified and described      control No.
------------------------------------------------------------------------
 
                                * * * * *
48.4082-1T.................................................    1545-1418
 
                                * * * * *
48.4101-1T.................................................    1545-1418
 
                                * * * * *
------------------------------------------------------------------------


Cono R. Namorato,
Acting Deputy Commissioner for Services and Enforcement.
    Approved: April 15, 2005.
Eric Solomon,
Acting Deputy Assistant Secretary of the Treasury.
[FR Doc. 05-8236 Filed 4-25-05; 8:45 am]
BILLING CODE 4830-01-P