IRS SAYS IT WILL AMEND DIESEL FUEL DYEING REGS.

Notice 94-21

The Omnibus Budget Reconciliation Act of 1993 made significant changes to the diesel fuel excise tax, effective January 1, 1994. A principal feature of the new law is the use of dyes to differentiate taxed and untaxed diesel fuel. On November 30, 1993, temporary regulations were issued to implement these changes (T.D. 8496; 58 FR 63069). Those regulations were amended on December 27, 1993 (T.D. 8512; 58 FR 68304).

This document provides guidance relating to the dyed diesel fuel notice required by the regulations and the application of the penalty imposed by section 6714 of the Internal Revenue Code in certain circumstances. It also announces that the regulations relating to dye concentrations will be amended.

THE DYED DIESEL FUEL NOTICE REQUIREMENT

Section 48.4082-2T(a) of the Manufacturers and Retailers Excise Tax Regulations requires that a notice must be provided to buyers of dyed diesel stating: DYED DIESEL FUEL, NONTAXABLE USE ONLY, PENALTY FOR TAXABLE USE. Because diesel fuel and heating oil are essentially the same product, sellers of heating oil may add language to that required in the notice indicating that the dyed diesel fuel is also heating oil. For example, sellers of heating oil may insert "(HEATING OIL)" immediately after "DYED DIESEL FUEL" in the required notice.

THE SECTION 6714 PENALTY

Section 6714 of the Code provides that if any person willfully alters, or attempts to alter, the strength or composition of any dye or marking done pursuant to section 4082 in any dyed fuel, then such person shall pay a penalty in addition to the tax (if any). The amount of the penalty is the greater of $1,000 or $10 for each gallon of the dyed fuel involved.

The Internal Revenue Service will not consider the strength or composition of the dye in diesel fuel to have been altered if:

1. Diesel fuel that is dyed in accordance with the regulations is blended with any undyed liquid (such as kerosene) and the resulting product continues to satisfy the dye strength and composition requirements of the regulations.

2. Diesel fuel that is dyed in accordance with the regulations is blended with any other liquid (such as kerosene) that contains a dye of the strength and composition required for tax-exempt diesel fuel under the regulations.

3. Low-sulfur diesel fuel that is dyed in accordance with the regulations is blended with high-sulfur diesel fuel that is dyed in accordance with the regulations. (Taxpayers should note, however, that Environmental Protection Agency rules prohibit the use of high- sulfur diesel fuel in motor vehicles.)

DYE CONCENTRATION

Section 48.4082-1T(b)(1) of the regulations will be amended to provide that diesel fuel that is required to be dyed blue pursuant to the Environmental Protection Agency's high sulfur diesel fuel requirement (40 CFR 80.29) satisfies the dyeing requirement of section 48.4082-1T(b) only if it contains--

(i) For periods before April 1, 1994, the blue dye 1,4 dialkylamino-anthraquinone in a concentration of at least 1.2 pounds of active ingredient (exclusive of the solvent) per thousand barrels of diesel fuel;

(ii) For periods after March 31, 1994, and before July 1, 1994, the blue dye 1,4 dialkylamino-anthraquinone (Color Index Solvent Blue 98) in a concentration of at least 4 pounds of active ingredient (exclusive of the solvent) per thousand barrels of diesel fuel;

(iii) For periods after June 30, 1994, the blue dye 1,4 dialkylamino-anthraquinone (Color Index Solvent Blue 98) in a concentration of at least 10 pounds of active ingredient (exclusive of the solvent) per thousand barrels of diesel fuel; or

(iv) Any other dye of a type and in a concentration that has been approved by the Commissioner.

DRAFTING INFORMATION

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