SERVICE PROVIDES EXTENSIVE GUIDANCE CONCERNING GASOLINE EXCISE TAX.

Notice 88-16

The purpose of this notice is to inform taxpayers and other affected persons of changes that the Internal Revenue Service intends to make in regulations ("the proposed regulations") recently proposed under sections 4081-4083, 4101, 6421, and 6427 of the Internal Revenue Code ("the Code"). The proposed regulations would implement amendments to these provisions enacted by section 1703 of the Tax Reform Act of 1986 (P.L. 99-514, 100 Stat. 2774) ("the Act"). The proposed regulations were published in the Federal Register on November 18, 1987 (52 FR 44141). The amendments made by section 1703 of the Act were effective on January 1, 1988.

As amended by the Act, section 4081 of the Code generally provides that the gasoline excise tax is imposed on the earlier of the removal or sale of gasoline by the refiner or importer thereof or the terminal operator. Section 4082 of the Code provides that the term gasoline includes, to the extent prescribed in regulations, gasoline blend stocks ("blend stocks") and products commonly used as additives in gasoline ("additives").

Except as specifically provided otherwise in this Notice, all of the anticipated changes in the proposed regulations described in this Notice will be effective January 1, 1988.

I. BULK TRANSFERS

Paragraph 48.4081-1(a)(1) of the proposed regulations provides that tax is not imposed "on a removal or sale of gasoline pursuant to a bulk transfer of gasoline between a registered taxpayer and another registered taxpayer . . . ." Paragraph 48.4081-1(e)(2) defines bulk transfer as "any transfer of gasoline from one location to another by pipeline tender or marine delivery (i.e., transfer by barge or tanker) of no less than 10,000 barrels."

Final regulations will provide that a transfer of any volume of gasoline will qualify as a bulk transfer if such transfer is by pipeline or marine gasoline transporting vessel from a refinery, customs custody, or terminal to a refinery or terminal. For purposes of determining whether a transfer is a bulk transfer, a facility will qualify as a terminal only if it has a storage capacity of at least 10,000 barrels. The term marine gasoline transporting vessel will include a tanker, inland tanker barge, or offshore loadline barge having cargo compartments in which gasoline is transported.

Final regulations also will clarify that the reference in paragraph 48.4081-1(a)(1) of the proposed regulations to a "bulk transfer of gasoline between a registered taxpayer and another taxpayer" does not mean that tax is imposed on a removal pursuant to a bulk transfer (as defined in the preceding paragraph) of gasoline between facilities of the same registered taxpayer. No tax is imposed on a removal pursuant to such a bulk transfer.

II. EXCHANGES MADE SIMULTANEOUSLY WITH REMOVALS

Paragraph 48.4081-1(a)(1) of the proposed regulations provides that tax is not imposed on a "qualified sale." Paragraph 48.4081- 1(e)(9) of the proposed regulations defines "qualified sale" as

any transfer of title to or possession of gasoline between persons registered under section 4101, including exchanges or consignments of gasoline, when the gasoline is not transferred from one location to another (such as an exchange of title while the gasoline remains stored in a terminal).

The Service is concerned that this definition may not cover exchanges in which title is transferred simultaneously with a removal of the gasoline by the person receiving title in the exchange or by that person's customer. Therefore, final regulations will provide that a "qualified sale" includes an exchange of title to gasoline in a terminal between registered taxpayers that takes place simultaneously with a removal of the gasoline by the taxpayer receiving title to the gasoline or by a customer of that taxpayer, provided that such exchange is in accordance with normal industry practice, and provided that the party transferring title to the gasoline maintains records of the identity and registration number of the party receiving the gasoline, the date of the exchange, and the volume and type of gasoline exchanged. It is normal industry practice that exchanges are made in-kind, and that not more than an insubstantial portion of the exchange be settled in cash or property other than gasoline.

The treatment of exchanges as qualified sales may be illustrated by the following example. Assume that registered refiner A owns previously untaxed gasoline stored in a terminal in California, while registered refiner B owns previously untaxed gasoline stored in a terminal in Maryland. Assume that A wishes to sell a truckload of gasoline to wholesale distributor X located in Maryland. Pursuant to an exchange agreement with A and in accordance with normal industry practice, B permits X to withdraw a truckload of gasoline owned by B from the terminal in Maryland. X pays or will pay A for the gasoline. Pursuant to the exchange agreement, B receives the right to receive (or to transfer to B's customer) an equal volume of gasoline owned by A. B maintains records showing the identity and registration number of A, the date and place of the exchange, and the volume and type of gasoline exchanged. On these facts, B is not required to pay tax on the transfer of title to gasoline to A; however, A must pay tax on the sale of the gasoline to its customer X.

III. BLEND STOCKS AND ADDITIVES

A. PRODUCTS REQUIRING FURTHER PROCESSING

Final regulations will clarify that the term "blend stocks" as defined in paragraph 48.4081-1(e)(5) of the proposed regulations does not include any product that cannot be blended into gasoline without further processing or fractionation. Thus, no tax is imposed on a sale or removal of a mixed hydrocarbon stream produced by a natural gas plant that cannot be blended into gasoline in the stream's form at the time of sale or removal, even though further processing of the stream may produce products, such as butane, that can be blended into gasoline.

Similarly, the term "additives" as defined in paragraph 48.4081- 1(e)(8) of the proposed regulations does not include any product that cannot be used as an additive without further processing. Thus no tax is imposed on the sale of a chemical that cannot itself be used as a gasoline additive, even though such chemical can be used to make another product that can be used as a gasoline additive.

B. PRODUCTS TO BE LISTED IN FORTHCOMING REVENUE RULING

The Service is concerned that the definitions of the terms "blend stock" and "additives" contained in the proposed regulations do not permit taxpayers to determine with certainty whether certain products fit within these definitions. Therefore, the Service intends to list by revenue ruling (or other administrative pronouncement) specific products that will, and specific products that will not, be considered to be blend stocks or additives.

Until the issuance of this revenue ruling, taxpayers may rely on the rules described below in sections C and D of this part III of this Notice to treat as tax-free certain sales and removals of any product that might be considered a blend stock or additive under the definitions included in the proposed regulations. Such rules will continue to apply after issuance of this revenue ruling to permit tax-free treatment of certain sales and removals of products that are specifically listed as blend stocks or additives in this revenue ruling, or that are not listed in this revenue ruling. Final regulations will include rules identical to or similar to these rules to permit tax-free sales of such products.

Whether a product that is not specifically listed in this revenue ruling will be considered a blend stock or additive will be determined under definitions provided in regulations.

C. PURCHASES AND REMOVALS OF BLEND STOCKS AND ADDITIVES BY CERTAIN REGISTERED PERSONS

No tax will be imposed on any sale of blend stocks or additives to, or removal of blend stocks or additives by, a registered person, provided the transferor is registered and maintains records of the identity and registration number of the transferee, the date and location of the transfer, and the volume and type of product transferred. Such a sale or removal will be tax-free regardless of the means by which the blend stock or additive is transferred and regardless of the volume transferred. Thus, a transfer by tank car or truck may be tax-free under this rule. This rule applies only to blend stocks and additives. It does not apply to any product that constitutes gasoline within the meaning of paragraph 48.4081- 1(e)(4)(i) of the proposed regulations.

Final regulations will provide that an industrial user may register as a terminal operator to purchase gasoline blend stocks or additives tax-free, even if such purchase would not constitute a bulk transfer. (The references to "bulk quantities" in the last sentence of paragraph 48.4081-1(e)(15) of the proposed regulations, to "bulk transfer" in the second sentence of paragraph 48.4081-1(e)(7) of the proposed regulations, and to "bulk quantities" in the next to the last sentence of paragraph 48.4101-1(a)(l) of the proposed regulations will be revised to reflect this change.) Therefore, an industrial user as defined in the first sentence of paragraph 48.4081-1(e)(7) of the proposed regulations that has registered as a terminal operator may purchase blend stocks and additives tax-free regardless of the quantity of product involved and regardless of the means of transportation by which such industrial user receives such blend stocks or additives.

D. PURCHASES AND REMOVALS OF BLEND STOCKS AND ADDITIVES BY CERTAIN OTHER PERSONS

A registered person may sell a blend stock or additive tax-free to any person, whether or not registered, provided that (1) the registered person in the normal course of its business maintains on file copies, for at least three years from the date of the transaction, of invoices of sales of blend stocks and additives showing the name of the purchaser, the date of purchase, and the type and volume of product purchased, (2) the registered person obtains from the purchaser a certification, in the form provided below, regarding the use of the product, (3) the certification is either attached to or appears on the invoice for the sale, (4) the registered person provides a disclosure statement to the purchaser in the form provided below, (5) the district director has not determined that the registered person may not make tax-free sales of additives or blend stocks under this rule, and (6) such blend stock or additive is not listed in a revenue ruling (or other administrative pronouncement) as ineligible for tax-free sale under this rule. No such revenue ruling has yet been issued. Therefore, at this time any blend stock or additive may be sold tax-free under the rule of this section D, provided that the required certification is obtained. The effect of any revenue ruling making any product ineligible for sale tax-free under the rule of this paragraph will be prospective only.

A registered person is not required to obtain any certification from a registered purchaser, since a registered person may purchase blend stocks or additives tax-free under section C of this part III. An unregistered person that purchases blend stocks and additives tax- free under the rule of this section D must agree that, if the products are resold to an unregistered person, a certification in the form provided below will be obtained from the purchaser. The certification is to be attached to or appear on the invoice for the resale. No certification need be obtained, however, if the product (1) is resold with the expectation that it will not be used for blending with or adding to gasoline subject to tax under section 4081, and (2) is resold in packages of drum quantity (55 gallons) or less (if the product is a gasoline blend stock), or in packages of gallon quantities or less (if the product is an additive).

The rule of this section D applies only to blend stocks and additives and does not apply to any product that constitutes gasoline within the meaning of paragraph 48.4081-1(e)(4)(i) of the proposed regulations.

A district director has the authority to deny to any registered person the right to sell blend stocks and additives tax-free under the rule of this section D if the district director determines that the district director cannot verify the accuracy of, or compliance with the terms of, any certificate obtained by such registered person, or by any person purchasing tax-free any product that was originally sold by such registered person. Any action by the district director under this paragraph shall be prospective only and shall not result in the imposition of tax on any previous sale.

The certification shall take the following form:

"The undersigned purchaser ("I" or "me") hereby certifies that the product shown on this invoice will not be used by me for blending with or adding to gasoline (other than to produce a fuel taxable under section 4041 (b)(2) or (m)).

"I have received a disclosure statement from the seller describing my legal obligations under this certification. I have read the disclosure statement and agree to the terms described in it.

"I understand that any fraudulent use of this certification to purchase any product free of tax will subject me to penalties of perjury, which may include fine and imprisonment.

"Signature of purchaser __________________________________

Date _________________________________

Taxpayer identification number of purchaser ______________

Address of purchaser _____________________________________"

The disclosure statement shall take the following form.

"If you are an unregistered person who buys a blend stock or additive tax-free based on a certification that you will not use the product for blending with or adding to gasoline, and you then use the product for that purpose, you may be subject to penalties if you do not satisfy applicable registration requirements before incurring any liability for tax resulting from such use.

"You must be prepared to establish by satisfactory evidence the purpose for which you used a blend stock or additive purchased tax- free.

"You can purchase a blend stock or additive tax-free for resale only if you maintain on file, for at least three years from the date of the transaction, in the normal course of business, copies of invoices showing the names of purchasers, the date of purchase, and the type and volume of product sold. If you resell the product to an unregistered person, you must obtain on, or attached to, the invoice for any resale a certification from the purchaser in the same form as the certification you signed when you bought the product tax-free, and you must also give the purchaser a disclosure statement in the same form as this disclosure statement. No certification need be obtained and no disclosure statement need be provided, however, if the product (1) is resold with the expectation that it will not be used for blending with or adding to gasoline subject to tax under section 4081 of the Internal Revenue Code, and (2) is resold in packages of drum quantity (55 gallons) or less (if the product is a gasoline blend stock within the meaning of section 4082(a)(1)), or, in packages of gallon quantity or less (if the product is an additive to gasoline within the meaning of section 4082(a)(2)).

"If you resell the product that you bought tax-free to a registered person, you must obtain, attached to or on the invoice, a statement signed by the purchaser under penalties of perjury that the purchaser possesses a valid Certificate of Registry (Form 637), and giving the number of such Certificate."

IV. FUELS DESCRIBED IN SECTION 4041

Final regulations will clarify that the term "gasoline", as defined in paragraph 48.4081-1(e)(4) of the proposed regulations, does not include any methanol or ethanol fuel described in section 4041(b)(2) or (m).

V. REGISTRATION AND BOND

As provided in I.R.S. Notice 87-83, I.R.B. 1988-51 (December 21, 1987), Certificates of Registry issued prior to January 1, 1988, and Certificates of Registry issued after January 1, 1988, to registrants that used old Form 637 to register, will be revoked on March 31, 1988. Therefore, all such persons that are subject to the registration requirements contained in the proposed regulations and this Notice will be required to reregister. Under Notice 87-83, the effective date of the bond requirements was delayed until April 1, 1988. The bond requirement applies to all persons required to register under section 4101 of the Code, including any person that registered on new Form 637 (Rev. October 1987) for the first quarter of 1988 that was not required to give a bond at the time of such registration.

Paragraph 48.4101-1(b)(2) of the proposed regulations requires that applications for registry include evidence of financial responsibility. In order to satisfy this requirement, the district director will determine whether the applicant has a satisfactory filing, deposit, and payment history. The district director will examine the applicant's filing, deposit, and payment history in all areas of federal taxation, including income, employment, and excise taxes for either the preceding eight quarters (for taxes due on a quarterly basis) or the preceding two years (for taxes due on an annual basis) to determine if the applicant has filed tax returns and made deposits and payments of tax in a timely manner. Generally, if the district director is satisfied with the applicant's filing, deposit, and payment history, no bond will be required of the applicant under sections 4081 and 4101. If the district director is not satisfied with the filing, deposit, and payment history of the applicant, or no such history exists (e.g., in the case of a newly created business), a bond will be required. Under extenuating circumstances however (e.g., bankruptcy of the applicant), the district director may waive the bond requirement and accept an alternative form of security.

If a bond is required, the amount of the bond will be equal to the lesser of (1) $1,000,000 or (2) the amount of tax that would be imposed under section 4081 on the expected volume of gasoline that will be removed or sold by the applicant during an average 1-month period (as determined by the district director) as if all such removals or sales are taxable. This may require a bond from some persons that do not expect to incur any tax liability under section 4081, and therefore would not have been required to give a bond (other than the minimum amount) under the proposed regulations. This portion of the proposed regulations will be issued in proposed form before being issued in final form.

If a bond is required of a for-hire terminal operator (i.e., a terminal operator that does not own any gasoline in its terminal), the bond will be equal to the lesser of (1) $500,000 or (2) the amount of tax that would be imposed under section 4081 on the expected volume of gasoline that will flow through the terminal operator's equipment or facility (as if the terminal operator were the owner of all such gasoline) during an average 1-month period (as determined by the district director).

If a bond is required, the surety on the bond must be a company approved for inclusion on the Department of the Treasury Circular 570 as an acceptable surety or reinsurer on Federal bonds. Any other company or individual cannot be a surety for purposes of a bond required under sections 4081 and 4101.

The final regulations will provide that a registrant that is required to give a bond may apply to the district director for the release of the bond, based on a showing of satisfactory filing, deposit, and payment history.

VI. NO TAX IMPOSED ON SALES OF PREVIOUSLY-TAXED GASOLINE

The final regulations will clarify that no tax is imposed on the removal or sale of gasoline previously subject to tax. However, gasoline will not be considered "previously subject to tax" if a refund is claimed with respect to such gasoline.

VII. TRANSITION RULE FOR SALES BEFORE DATE OF THIS NOTICE

A credit or refund may be claimed for a removal or sale of gasoline between January 1, 1988, and January 29, 1988, that is taxable under the proposed regulations but is not taxable pursuant to this notice, and on which tax was paid, such as a sale of 8500 barrels of gasoline by pipeline.

VIII. VERIFICATION OF REGISTRATION

The Service will provide by revenue procedure (or other administrative pronouncement), a verification procedure whereby a transferor of gasoline or a terminal operator will be able to ascertain whether a registration number is current and valid. Until such time, the procedures provided in Notice 87-83, 1987-51 I.R.B. remain in effect.

For information regarding this notice, contact Timothy J. McKenna on (202) 566-3287 (not a toll-free call).