IRS PREVIEWS AMENDMENTS TO DIESEL FUEL EXCISE TAX REGS.

Notice 94-61

This notice announces amendments that will be made to regulations that were issued on November 30, 1993, (T.D. 8496; 58 Fed. Reg. 63069) to reflect and implement changes made to the diesel fuel excise tax by the Omnibus Budget Reconciliation Act of 1993 (the 1993 Act). A principal feature of the new law is the use of dyes to identify untaxed diesel fuel. These amendments concern claims for credit or payment when taxed (that is, undyed) diesel fuel is used on a farm for farming purposes or by a state or local government.

Tax is imposed on the removal of undyed diesel fuel from a terminal at the terminal rack. However, a credit or payment is allowed if the undyed diesel fuel is used on a farm for farming purposes or by a state or local government. Under section 6427(l)(5) of the Internal Revenue Code, as added by the 1993 Act, only the registered ultimate vendor of undyed diesel fuel is eligible for the credit or payment in those circumstances.

I. Questions have arisen regarding credits or payments for undyed diesel fuel used on a farm for farming purposes or by a state or local government if the use of the fuel also qualifies for other exemptions. For example, diesel fuel used in farm machinery may be exempt either as fuel used on a farm for farming purposes or as fuel used in a nonhighway vehicle. Ordinarily, the credit or payment for undyed diesel fuel used in an off-highway business use would be allowed only to the ultimate purchaser of the fuel. This rule does not apply, however, to fuel used on a farm for farming purposes or by a state or local government; in that case, the credit or payment is allowed only to the registered ultimate vendor even if the use would a1so qualify as off-highway business use. The regulations will be amended to clarify that ultimate purchasers will not be allowed credits or payments for diesel fuel used on a farm for farming purposes or by a state or local government.

Specifically, paragraphs (a) and (e) of section 48.6427-8T wi11 be amended as follows:

SECTION 48.6427-8T CREDIT OR PAYMENT WITH RESPECT TO DIESEL FUEL USED IN A NONTAXABLE USE (OTHER THAN ON A FARM FOR FARMING PURPOSES OR BY A STATE OR LOCAL GOVERNMENT) (TEMPORARY).

(a) CONDITIONS TO ALLOWANCE OF CREDIT OR PAYMENT -- (1) IN GENERAL. A c1aim for credit or payment with respect to diesel fuel is allowed under this section only if --

(i) Tax was imposed by section 4081 on the diesel fuel to which the claim relates;

(ii) The claimant produced or bought the fuel and did not resell it in the United States;

(iii) The claimant has filed a timely claim for a credit or payment that contains the information required under paragraph (c) of this section;

(iv) The fuel was either --

(A) Used in a use described in sections 48.4082-4T(c)(3) through (11);

(B) Exported;

(C) Used other than as a fuel in a propulsion engine of a diesel-powered highway vehicle or diesel-powered boat;

(D) Used as a fuel in a propulsion engine of a diesel-powered train; or

(E) Used as a fuel in the propulsion engine of an automobile bus if the bus was used in a use described in section 6427(b)(1) (after the application of section 6427(b)(3));

(v) The fuel was not bought under a certificate described in section 48.6427-9T(d)(2) (relating to certificate of farmer or state or local government to support claims of ultimate vendors); and

(vi) The fuel was not used on a farm for farming purposes (as defined in section 48.6420-4) or for the exclusive use of a State, political subdivision of a State, or the District of Columbia.

(2) EXAMPlE. The following example illustrates the rules of paragraph (a) of this section:

EXAMPLE. (i) In September 1994, A bought 250 gallons of undyed diesel fuel. In October 1994, A used 200 gallons of the fuel in a farm tractor. This use qualifies as use on a farm for farming purposes (as defined in section 48.6420-4). The farm tractor is not a diesel-powered highway vehicle (as defined in section 48.4081-10T(a)). A used the remaining 50 gallons to heat A's residence. A filed a complete and timely claim for a credit relating to the 250 gallons.

(ii)(A) A is not allowed a credit with respect to the 200 gallons of diesel fuel used in a farm tractor. Even though this fuel was used other than as a fuel in a propulsion engine of a diesel-powered highway vehicle (thus meeting the condition in paragraph (a)(1)(iv)(C)), the condition in paragraph (a)(1)(vi) of this section is not satisfied because the fuel was used on a farm for farming purposes.

(B) A credit is allowed with respect to the 50 gallons used for heating purposes because A has met all of the conditions in paragraph (a)(1) of this section. A used this fuel other than as a fuel in a propulsion engine of a diesel-powered highway vehicle and the use of the fuel for residential heating is not use on a farm for farming purposes.

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(e) EFFECTIVE DATE. This section is effective January 1, 1994, except for paragraph (a)(1)(vi) of this section, which is effective for diesel fuel bought by ultimate purchasers after June 30, 1994.

II. Questions also have arisen regarding undyed diesel fuel used on a farm for farming purposes by custom harvesters. The term "custom harvester" generally refers to a person, other than the owner, tenant, or operator of a farm, that performs a farming activity such as cultivating or harvesting for the owner, tenant, or operator of the farm.

Section 6427(l)(5), as added by the 1993 Act, provides that claims relating to undyed diesel fuel used on a farm for farming purposes may be made only by the registered ultimate vendor of the fuel. The credit or payment is allowed to the registered ultimate vendor whether the fuel is sold to the owner, tenant, or operator of the farm or some other person (such as a custom harvester). Accordingly, section 48.6427-9T will be amended as follows:

1. Paragraph (a)(1), (b)(2), and (d)(1)(iii) will be revised.

2. In paragraph (d)(2)(ii), the sentence following the phrase "penalties of perjury" will be revised.

3. The revised provisions will read as follows:

SECTION 48.6427-9T CREDIT OR PAYMENT WITH RESPECT TO DIESEL FUEL SOLD FOR USE ON A FARM FOR FARMING PURPOSES OR BY A STATE OR LOCAL GOVERNMENT (TEMPORARY).

(a) DEFINITIONS -- (1) An ULTIMATE VENDOR, as used in this section, is the seller described in paragraph (b)(2) of this section.

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(b) * * *

(2) The diesel fuel is undyed and the claimant sold the diesel fuel to --

(i) The owner, tenant, or operator of a farm for use by such person on a farm for farming purposes (as defined in section 48.6420- 4);

(ii) A person other than the owner, tenant, or operator of a farm for use by such person for any of the purposes described in section 48.6420-4(d) (relating to cultivating, raising, or harvesting); or

(iii) Any State, political subdivision of a State, or the District of Columbia for its exclusive use;

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(d) * * *

(1) * * *

(iii) The name, address, telephone number, and taxpayer identification number of each person that bought diesel fuel from the claimant in a transaction described in paragraph (b)(2) of this section and the number of gallons that the claimant sold to each such person.

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(2) * * *

(ii) * * *

Buyer will use the diesel fuel to which this certificate relates either -- (check one)

_____ On a farm for farming purposes (as defined in section 48.6420-4 of the Manufacturers and Retailers Excise Tax Regulations) (and Buyer is the owner, tenant, or operator of the farm on which the fuel will be used);

_____ On a farm (as defined in section 48.6420-4(c)) for any of the purposes described in paragraph (d) of that section (relating to cultivating, raising, or harvesting) (and Buyer is a person that is not the owner, tenant, or operator of the farm on which the fuel will be used); or

_____ For the exclusive use of a State, political subdivision of a State, or the District of Columbia. * * *

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The principal author of this notice is Frank Boland of the Office of Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this notice contact Mr. Boland at (202) 622-3130 (not a toll-free call).