Ozone-Depleting Chemicals Tax -- Temporary Regulations Under Sections 4681 and 4682

 [4830-01]

 ACTION: Temporary regulations.

 SUMMARY: This document contains temporary regulations relating to the tax on chemicals that deplete the ozone layer and on products containing such chemicals. These temporary regulations reflect changes to the law made by the Revenue Reconciliation Act of 1990, which imposed the tax on additional chemicals. These temporary regulations affect manufacturers and importers of ozone-depleting chemicals, and importers of products containing or manufactured with ozone-depleting chemicals. In addition, these temporary regulations affect persons, other than manufacturers and importers of ozone- depleting chemicals, holding such chemicals for sale or for use in further manufacture on January 1, 1991, and on subsequent tax- increase dates. The text of the temporary regulations set forth in this document also serves as the text of the proposed regulations for the notice of proposed rulemaking on this subject in the Proposed Rules section of this issue of the Federal Register.

 EFFECTIVE DATE: These regulations are effective on January 1, 1991.

 FOR FURTHER INFORMATION CONTACT: Ruth Hoffman, (202) 566-4475 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

BACKGROUND

 This document contains amendments to the Environmental Tax Regulations (26 CFR Part 52) relating to sections 4681 and 4682 of the Internal Revenue Code. Sections 4681 and 4682 were added to the Code by the Omnibus Budget Reconciliation Act of 1989 (Pub. L. 101-239) and were amended by the Revenue Reconciliation Act of 1990 (Pub. L. 101-508). Temporary regulations relating to these sections (as originally enacted) were published in the Federal Register for September 6, 1990. This document amends those temporary regulations to reflect changes made by the Revenue Reconciliation Act of 1990.

NEED FOR TEMPORARY REGULATIONS

 Immediate guidance is needed on the tax imposed with respect to ozone-depleting chemicals. Therefore, good cause is found to dispense with the public notice requirement of 5 U.S.C. 553(b) and the delayed effective date requirement of 5 U.S.C. 553(d).

ADDITIONS TO LIST OF OZONE-DEPLETING CHEMICALS

 Section 4681 imposes a tax on an ozone-depleting chemical (ODC) when the ODC is sold or used by its manufacturer or importer. That section also imposes a tax on an imported product containing or manufactured with ODCs (an imported taxable product) when the product is sold or used by its importer. The initial list of ozone-depleting chemicals included only CFC-11, CFC-112, CFC-113, CFC-114, CFC-115, Halon-1211, Halon-1301, and Halon-2402 (post-1989 ODCs). The Revenue Reconciliation Act of 1990 expanded the list of ozone-depleting chemicals by adding carbon tetrachloride, methyl chloroform, CFC-13, CFC-111, CFC-112, CFC-211, CFC-212, CFC-213, CFC-214, CFC-215, CFC- 216, and CFC-217 (post-1990 ODCs). These temporary regulations reflect the addition of post-1990 ODCs to the list of taxed chemicals.

NEW MIXTURE ELECTION PERMITTED IN 1991

 The existing regulations provide that tax is generally imposed when an ODC is first sold or used by its manufacturer or importer. However, in the case of an ODC used by its manufacturer or importer to create a mixture, the manufacturer or importer may elect to defer the tax until that mixture is sold (the mixture election). For some taxpayers, the addition of post-1990 ODCs to the list of taxed chemicals may change the preferred method of determining when the tax is imposed on ODCs used to create mixtures. Accordingly, the temporary regulations contained in this document permit a new mixture election with respect to ODCs. The election that was permitted under prior law will apply only to post-1989 ODCs, and the new election will apply only to post-1990 ODCs. These elections are made in accordance with the instructions applicable to the form on which the return of tax is made.

IMPORTED TAXABLE PRODUCTS

 The tax on an imported product containing or manufactured with ODCs is based on the weight of the ODCs used in its manufacture (ODC weight). The existing regulations set forth an Imported Products Table that contains an exclusive list of the products subject to the tax. The Table identifies products that are subject to tax by name and Harmonized Tariff Schedule heading. In addition, Table ODC weights are provided for most products. These weights are used to compute the tax when the importer cannot determine the weight of the ODCs actually used in the product's manufacture.

 The Table has not been revised to reflect the addition of post- 1990 ODCs to the list of taxed chemicals, but the regulations grant the Commissioner authority to modify the Table by revenue procedure. Any changes necessary to reflect the addition of post-1990 ODCs to the list of taxed chemicals will be issued under this authority, and manufacturers and importers may request such changes by following the procedures described in the existing regulations.

 Even without revision, the Table will apply to imported products containing or manufactured with post-1990 ODCs. In general, post-1990 ODCs are used in manufacturing as substitutes for post-1989 ODCs. Thus, most imported products containing or manufactured with post- 1990 ODCs are listed in the current Table. If a product containing or manufactured with post-1990 ODCs is listed in the Table, the importer may compute the tax by reference to the weight (and ozone-depletion factors) of the ODCs actually used in the product's manufacture. Alternatively, the importer may use the ODC weights prescribed in the Table to compute the tax even though post-1990 ODCs (rather than the ODCs specified in the Table) are used in the product's manufacture.

 A special rule applies with respect to methyl chloroform. The existing regulations provide that a product listed in the Table is not treated as an imported taxable product if only a de minimis amount of ODCs are used as materials in its manufacture. The de minimis rule is limited, however, to cases in which no ODCs were used for purposes of refrigeration or air conditioning, creating an aerosol or foam, or manufacturing electronic components. The temporary regulations provide that the use of methyl chloroform for these purposes is not subject to the limitation. Thus, a product listed in the Table may be exempt from tax under the de minimis rule even if the methyl chloroform used in its manufacture was used for purposes of refrigeration or air conditioning, creating an aerosol or foam, or manufacturing electronic components.

FLOOR STOCKS TAX

 Section 4682(h) imposes floor stocks taxes on January 1 of 1990, 1991, 1992, 1993, and 1994. The existing regulations provide a de minimis exemption from each floor stocks tax and also identify the ODCs that are taken into account in applying the exemption. Under these rules, an ODC is taken into account in applying an exemption only if the floor stocks tax would otherwise apply (i.e., only if similar ODCs are subject to a rate increase under section 4681 or 4682(g) on the date the floor stocks tax is imposed). The temporary regulations contained in this document modify the de minimis rules to reflect the different schedules of rate increases applicable to post- 1989 and post-1990 ODCs. The thresholds provided by existing regulations for the de minimis exemption are not increased.

 In 1991, only post-1990 ODCs, Halons, and ODCs that will be used in the manufacture of rigid foam insulation (rigid foam ODCs) are subject to a rate increase, and only those ODCs are taken into account in determining whether the de minimis exemption's 400-pound threshold is exceeded. In 1992 and 1993, the threshold is also 400 pounds, but different ODCs are taken into account in determining whether the threshold is exceeded. Only post-1989 ODCs (other than Halons and rigid foam ODCs) are taken into account in 1992, and all ODCs (other than Halons and rigid foam ODCs) are taken into account in 1993. In 1994, tax is imposed only on persons that hold at least 400 pounds of post-1990 ODCs (other than rigid foam ODCs), at least 200 pounds of rigid foam ODCs, or at least 20 pounds of Halons.

 These regulations also modify the rules provided by existing regulations for the floor stocks tax on ODCs that have been mixed with other ingredients. Under existing regulations, no floor stocks tax is imposed on January 1st of 1991 and subsequent years on an ODC that has been mixed with any other ingredients if it is established that the other ingredients contribute to the accomplishment of the purpose for which the mixture will be used. This rule is modified so that it does not apply to an ODC that has been mixed with stabilizing or inhibiting agents and not with other ingredients. Thus, for example, methyl chloroform that has been stabilized to prevent chemical reactions during transportation or use is subject to the floor stocks tax unless it also has been mixed with other ingredients that contribute to the accomplishment of the purpose for which the mixture will be used.

PROCEDURAL RULES

 The Revenue Reconciliation Act of 1990 amended the rule for payment of the floor stocks taxes imposed in 1991, 1992, 1993, and 1994. The temporary regulations contained in this document revise the rules for filing returns and payment of tax to reflect this change. They provide that floor stocks taxes for 1991, 1992, 1993, and 1994 are to be paid on or before June 30 of the year the tax is imposed and are to be reported on the return for the second calendar quarter of that year. The Act also provides that taxpayers are not required to deposit the tax imposed on post-1990 ODCs before April 1, 1991. The temporary regulations amend the rules relating to the deposit of tax to reflect this change.

SPECIAL ANALYSES

 It has been determined that these rules are not major rules as defined in Executive Order 12291. Therefore, a Regulatory Impact Analysis is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C chapter 6) do not apply to these regulations, and therefore, a final Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking that cross-references to these regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

LIST OF SUBJECTS

26 CFR Part 52

Excise taxes, Petroleum, Chemicals.

ADOPTION OF AMENDMENTS TO THE REGULATIONS

Accordingly, Title 26, Part 52 of the Code of Federal Regulations is amended as follows:

Paragraph 1. The authority for Part 52 continues to read in part:

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

Par. 2. Section 52.4681-0T is amended by revising the captions relating to sections 52.4681-1T(c), 52.4682-1T(b)(2), 52.4682-3T(a), and 52.4682-4T(e) to read as set forth below:

 SECTION 52.4681-1T TAXES IMPOSED WITH RESPECT TO OZONE-DEPLETING

SECTION 52.4681-1T TAXES IMPOSED WITH RESPECT TO OZONE-DEPLETING CHEMICALS (TEMPORARY).

* * * * *

(c) * * *

(9) POST-1990 ODC; POST-1989 ODC. The term "post-1990 ODC" means any ODC that is listed below Halon-2402 in the table contained in section 4682(a)(2). The term "post-1989 ODC" means any ODC other than a post-1990 ODC.

(d) EFFECTIVE DATE. The regulations under sections 4681 and 4682 are effective as of January 1, 1990, and apply to --

(1) Post-1989 ODCs that the manufacturer or importer thereof first sells or uses after December 31, 1989, and post-1990 ODCs that the manufacturer or importer thereof first sells or uses after December 31, 1990;

(2) Imported taxable products that the importer thereof first sells or uses after December 31, 1989 (but, in the case of products first sold or used before January 1, 1991, by taking into account only the post-1989 ODCs used as materials in their manufacture); and

(3) Post-1989 ODCs held for sale or for use in further manufacture by any person other than the manufacturer or importer thereof on January 1, 1990, and any ODCs that are so held on January 1 of 1991, 1992, 1993, or 1994.

Par. 4. Section 52.4682-1T is amended by revising paragraph (b)(2)(ii) and (iii) to read as follows:

SECTION 52.4682-1T OZONE-DEPLETING CHEMICALS (TEMPORARY).

* * * * *

(b) * * *

(2) * * *

(ii) MIXTURES. Except as otherwise provided in paragraph (b)(2)(iii) of this section, the creation of a mixture containing two or more ingredients is treated as a use of the ODCs contained in the mixture. Thus, except as otherwise provided in paragraph (b)(2)(iii) of this section --

(A) The tax on the post-1989 ODCs (as defined in section 52.4681-1T(c)(9)) contained in mixtures created after December 31, 1989, or on the post-1990 ODCs (as defined in section 52.4681-1T(c)(9)) contained in mixtures created after December 31, 1990, is imposed when the mixture is created and not on any subsequent sale or use of the mixture; and

(B) No tax is imposed under section 4681 on the post-1989 ODCs contained in mixtures created before January 1, 1990, or on the post- 1990 ODCs contained in mixtures created before January 1, 1991.

(iii) MIXTURE ELECTIONS -- (A) PERMITTED ELECTIONS. The only elections permitted under this paragraph (b)(2)(iii) are --

(1) An election for the first calendar quarter beginning after December 31, 1989, and all subsequent periods (the 1990 election); and

(2) An election for the first calendar quarter beginning after December 31, 1990, and all subsequent periods (the 1991 election).

(B) IN GENERAL. A manufacturer or importer may elect to treat the sale or use of mixtures containing ODCs as the first sale or use of the ODCs contained in the mixtures. If a 1990 election is made under this paragraph (b)(2)(iii), the tax on post-1989 ODCs contained in a mixture sold or used after December 31, 1989 (including any such mixture created before January 1, 1990) is imposed on the date of such sale or use. Similarly, if a 1991 election is made under this paragraph (b)(2)(iii), the tax on post-1990 ODCs contained in a mixture sold or used after December 31, 1990 (including any such mixture created before January 1, 1991) is imposed on the date of such sale or use.

(C) APPLICABILITY OF ELECTIONS. An election under this paragraph (b)(2)(iii) applies --

(1) In the case of a 1990 election, to all post-1989 ODCs contained in mixtures sold or used by the manufacturer or importer after December 31, 1989 (including any such mixture created before January 1, 1990); and

(2) In the case of a 1991 election, to all post-1990 ODCs contained in mixtures sold or used by the manufacturer or importer after December 31, 1990 (including any such mixture created before January 1, 1991).

(D) Making the election; revocation. An election under this paragraph (b)(2)(iii) shall be made in accordance with the instructions for the return on which the manufacturer or importer reports liability for tax under section 4681. Except as provided in Section 52.6071(a)-2T(a)(3) (relating to time for filing returns), the election may be revoked only with the consent of the Commissioner.

* * * * *

Par. 5. Section 52.4682-2T is amended by --

1. Adding the phrase "(as in effect on the date the certificate is obtained)" immediately after the words "of this section" in paragraph (b)(1)(i) and (2)(i); and

2. Revising each list of chemicals contained in a form of certificate set forth in paragraphs (d)(2)(i) and (ii) and (d)(3)(i) and (ii) to read as follows:

 PRODUCT                 PERCENTAGE

SECTION 52.4682-3T IMPORTED TAXABLE PRODUCTS (TEMPORARY).

(A) OVERVIEW; REFERENCES TO TABLES; SPECIAL RULE FOR 1990 -- (1) OVERVIEW. * * *

* * * * *

(3) SPECIAL RULE FOR 1990. In the case of products first sold or used before January 1, 1991, post-1990 ODCs (as defined in section 52.4681-1T(c)(9)) shall not be taken into account in applying the rules of this section.

* * * * *

(b) * * *

(2) * * *

(i) * * *

(B) The product is listed in Part II of the current Table, the adjusted tax with respect to the product is de minimis (within the meaning of paragraph (b)(2)(ii) of this section), and the ODCs (other than methyl chloroform) used as materials in the manufacture of the product were not used for purposes of refrigeration or air conditioning, creating an aerosol or foam, or manufacturing electronic components.

Par. 7. Section 52.4682-4T is amended by revising paragraph (b)(2)(i)(B), paragraph (d)(1)(ii), the first sentence of paragraph (d)(1)(iii), paragraph (d)(2)(iii), paragraph (e), and paragraph (g) to read as follows:

SECTION 52.4682-4T FLOOR STOCKS TAX (TEMPORARY).

* * * * *

(b) * * *

(2) * * *

(i) * * *

(B) TAXES IMPOSED AFTER 1990 -- (1) IN GENERAL. In the case of the floor stocks tax imposed on January 1 of 1991, 1992, 1993, or 1994, the tax is not imposed on an ODC that has been mixed with any other ingredients, but only if it is established that such ingredients contribute to the accomplishment of the purpose for which the mixture will be used. Thus, the tax is not imposed on the mixtures described in the examples in paragraph (b)(2)(i)(A) of this section because the ingredients mixed with the ODCs contribute to the accomplishment of the purpose for which the mixture will be used. A mixture is not exempt from tax under this paragraph (b)(2)(i)(B), however, if it contains only an ODC and an inert ingredient that does not contribute to the accomplishment of the purpose for which the mixture will be used.

(2) EXCEPTION. A mixture is not exempt from floor stocks tax under this paragraph (b)(2)(i)(B) if it contains only ODCs and one or more stabilizing or inhibiting agents.

* * * * *

(d) * * *

(1) * * *

(ii) INITIAL FLOOR STOCKS TAXES -- (A) FLOOR STOCKS TAX IMPOSED ON POST-1989 ODCS ON JANUARY 1, 1990. The floor stocks tax imposed on post-1989 ODCs (as defined in section 52.4681-1T(c)(9)) on January 1, 1990, is equal to the tentative tax amount. Thus, except as provided in paragraph (d)(2) or (3) of this section, the amount of the floor stocks tax imposed on post-1989 ODCs on January 1, 1990, is as follows:

 ODC                        Tax per pound

 ODC                        Tax per pound

* * * * *

(2) * * *

(iii) POST-1989 ODCS SOLD BEFORE JANUARY 1, 1990; POST-1990 ODCS SOLD BEFORE JANUARY 1, 1991. A post-1989 ODC that was sold by its manufacturer or importer before January 1, 1990, or a post-1990 ODC that was sold by its manufacturer or importer before January 1, 1991, shall be treated, for purposes of paragraphs (d)(2)(i), (d)(2)(ii) and (e) of this section, as --

(A) An ODC that was sold in a qualifying sale for purposes of section 52.4682-1T(c) if the ODC will be used as a feedstock (within the meaning of section 52.4682-1T(c)(3)); and

(B) An ODC that was sold in a qualifying sale for purposes of section 52.4682-1T(d) if the ODC will be used in the manufacture of rigid foam insulation (within the meaning of section 52.4682-1T(d)(3) and (4)).

* * * * *

(e) DE MINIMIS EXCEPTION -- (1) 1990 AND 1992. In the case of the floor stocks tax imposed on January 1 of 1990 or 1992, a person is liable for the tax only if, on the date the tax is imposed, the person holds at least 400 pounds of post-1989 ODCs that are not described in paragraph (d)(2) or (3) of this section and are otherwise subject to tax.

(2) 1991. In the case of the floor stocks tax imposed on January 1, 1991, a person is liable for the tax only if, on such date, the person holds at least 400 pounds of ODCs subject to the 1991 floor stocks tax. For this purpose, ODCs subject to the 1991 floor stocks tax are --

(i) Post-1990 ODCs that are not described in paragraph (d)(2)(i) of this section and are otherwise subject to tax; and

(ii) Post-1989 ODCs that are described in paragraph (d)(2)(ii) or (3) of this section and are otherwise subject to tax.

(3) 1993. In the case of the floor stocks tax imposed on January 1, 1993, a person is liable for the tax only if, on such date, the person holds at least 400 pounds of ODCs that are not described in paragraph (d)(2) or (3) of this section and are otherwise subject to tax.

(4) 1994. In the case of the floor stocks tax imposed on January 1, 1994, a person is liable for the tax only if, on such date, the person holds --

(i) At least 400 pounds of post-1990 ODCs that are not described in paragraph (d)(2) of this section and are otherwise subject to tax;

(ii) At least 200 pounds of ODCs that are described in paragraph (d)(2)(ii) of this section and are otherwise subject to tax; or

(iii) At least 20 pounds of ODCs that are described in paragraph (d)(3) of this section and are otherwise subject to tax.

(5) EXAMPLES. The following examples illustrate the rules of this paragraph (e):

EXAMPLE 1. On January 1, 1990, A holds 300 pounds of ODCs for sale. A is not liable for the floor stocks tax imposed on January 1, 1990.

EXAMPLE 2. On January 1, 1990, B holds for sale 250 pounds of CFC-12 and 250 pounds of CFC-113. None of the ODCs are described in paragraph (d)(2) or (3) of this section. Thus, B holds at least 400 pounds of ODCs that are taken into account under paragraph (e)(1) of this section and is liable for the floor stocks tax imposed on January 1, 1990, on the ODCs held for sale.

EXAMPLE 3. On January 1, 1990, C holds 200 pounds of post- 1990 ODCs and 500 pounds of post-1989 ODCs. C will use 300 pounds of the post-1989 ODCs in the manufacture of rigid foam insulation (as defined in section 52.4682-1T(d)(3) and (4)). The remainder of the ODCs are not described in paragraph (d)(2) or (3) of this section. Under paragraph (e)(1) of this section, post-1990 ODCs and ODCs that will be used in the manufacture of rigid foam insulation are disregarded in determining whether the de minimis exemption is applicable in 1990. Thus, C holds only 200 pounds of ODCs that are taken into account under paragraph (e)(1) of this section and is not liable for the floor stocks tax imposed on January 1, 1990.

EXAMPLE 4. The facts are the same as in Example 3, except that the ODCs are held on January 1, 1991. Under paragraph (e)(2) of this section, the 200 pounds of post-1990 ODCs and the 300 pounds of post-1989 ODCs that will be used in the manufacture of rigid foam insulation are taken into account in determining whether the de minimis exemption is applicable in 1991. The remaining 200 pounds of post-1989 ODCs are not taken into account because the base tax amount applicable to post-1989 ODCs does not increase in 1991. Nevertheless, C holds at least 400 pounds of ODCs that are taken into account under paragraph (e)(2) of this section and is liable for the floor stocks tax imposed on January 1, 1991.

* * * * *

(g) TIME FOR PAYING TAX. The floor stocks tax imposed under section 4682(h) shall be paid without assessment or notice. In the case of the floor stocks tax imposed on January 1, 1990, the tax shall be paid on or before April 1, 1990. In the case of floor stocks taxes imposed after January 1, 1990, the tax shall be paid on or before June 30 of the year in which the tax is imposed. See section 52.6151(a)-1T(b) for rules relating to paying the floor stocks tax. See section 52.6071(a)-3T for rules relating to time for filing returns of floor stocks tax.

Par. 8. Section 52.6071(a)-3T is amended by revising paragraph (b)(1) to read as follows:

SECTION 52.6071(a)-3T TIME FOR FILING RETURNS UNDER SECTION 4682(h) (TEMPORARY).

* * * * *

(b) RETURNS FOR FLOOR STOCKS TAX IMPOSED IN 1991, 1992, 1993, AND 1994 -- (1) IN GENERAL. In the case of floor stocks taxes imposed under section 4682(h) on January 1 of 1991, 1992, 1993, and 1994, each return reporting the tax in accordance with section 52.6011(a)- 1T shall be filed on or before August 31 of the year the tax is imposed. Each of these returns will be a return for the second calendar quarter of the year in which the tax is imposed. In the case of a person not otherwise required to file Form 720 (or other return on which the floor stocks tax is reported) the return is also a final return.

* * * * *

Par. 9. Section 52.6151(a)-1T is amended by revising paragraph (b) to read as follows:

SECTION 52.6151(a)-1T TIME AND PLACE FOR PAYING TAX SHOWN ON RETURN (TEMPORARY).

* * * * *

(b) FLOOR STOCKS TAX IMPOSED UNDER SECTION 4682(h). The floor stocks tax imposed under section 4682(h) on January 1, 1990, shall be paid on or before April 1, 1990. The floor stocks tax imposed under section 4682(h) on January 1 of 1991, 1992, 1993, or 1994 shall be paid on or before June 30 of the year the tax is imposed. Payments shall be accompanied by Form 8109, Federal Tax Deposit Coupon (or any other form designated by the Commissioner for making deposits) and deposited in accordance with the instructions applicable to that form. In accordance with the instructions to Form 8109, mark the boxes on Form 8109 for "720" and the quarter for which the Form 720 reporting floor stocks tax is filed.

Par. 10. Section 52.6302(c)-2T is amended by revising paragraph (b)(3) to read as follows:

SECTION 52.6302(c)-2T USE OF GOVERNMENT DEPOSITARIES UNDER SECTION 4681 (TEMPORARY).

(b) * * *

(3) SPECIAL RULES FOR 1990 AND 1991 -- (i) DEPOSITS RELATING TO THE FIRST THREE SEMIMONTHLY PERIODS OF THE THIRD CALENDAR QUARTER OF 1990. The deposit of tax imposed under section 4681 for the first three semimonthly periods of the third calendar quarter of 1990 is due on or before September 27, 1990.

(ii) DEPOSITS RELATING TO THE FIRST FOUR SEMIMONTHLY PERIODS OF THE FIRST CALENDAR QUARTER OF 1991. The deposit of tax imposed under section 4681 on post-1990 ODCs (as defined in section 52.4681-1T(c)(9)) for the first four semimonthly periods of the first calendar quarter of 1991 is due on or before April 1, 1991.

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