Rev. Rul. 58-398

Advice has been requested (1) whether the retailers excise tax applies to the sale or use of a product which is produced by blending gasoline and fuel oil; (2) whether the manufacturers excise tax applies to the use of gasoline by the producer in the production of the fuel; and (3) whether the applicability of these excise taxes would be affected by the fact that the gasoline and fuel oil are held by a common carrier pipeline at the time of the blending operation.

A registered producer of gasoline blends and sells as a special tractor fuel a product made by blending `housebrand' gasoline and `No. 1' fuel oil. The gasoline and fuel oil, although held by a common carrier pipeline, are the property of the blender. The blended product has 90 percent or more evaporated at 392 degrees Fahrenheit and 95 percent or more evaporated at 464 degrees Fahrenheit.

Section 4041(b) of the Internal Revenue Code of 1954 imposes a tax on any liquid (other than gasoline, kerosene, gas oil, or fuel oil) sold for use or used as special motor fuel. The tax attaches when the fuel is sold by any person to the owner, lessee, or other operator of a motor vehicle, motorboat, or airplane, which is not diesel powered, for use as a fuel for the propulsion of such motor vehicle, motorboat, or airplane, or when the fuel is used by any person for such purposes if the fuel was obtained otherwise than by a taxable sale. Section 4041(d) of the Code provides that no tax shall be imposed under subsection (b) of the sald of any liquid sold for use on a farm for farming purposes, or on the use of any liquid used on a farm for farming purposes.

Pursuant to the provisions of section 4082(c) of the Code, no tax applies to gasoline used by a producer in the production of the special motor fuels referred to in section 4041(b) of the Code.

Under the provisions of the Internal Revenue Code of 1939, the manufacturers excise tax on gasoline was imposed by section 3412. Section 3412(c)(2) of the 1939 Code, prior to amendment by the Excise Tax Reduction Act of 1954, 68 Stat. 37, C.B. 1954-1, 343, read as follows:

The term gasoline means (A) all products commonly or commercially known and sold as gasoline (including casinghead and natural gasoline), benzol, benzene, or naphtha, regardless of their classifications or uses; and (B) any other liquid of a kind prepared, advertised, offered for sale or sold for use as, or used as, a fuel for the propulsion of motor vehicles, motorboats, or airplanes; except that it does not include any of the foregoing (other than products commonly or commercially known or sold as gasoline) sold for use otherwise than as a fuel for the propulsion of motor vehicles, motorboats, or airplanes, and otherwise than in the manufacture or production of such fuel and does not include kerosene, gas oil, or fuel oil.

Section 314.30(b)(2) of Regulations 44, applicable to this provision of the 1939 Code, provides that the term `gasoline' includes benzol, benzene, naphtha, or any other liquid of a kind prepared, advertised, offered for sale, or sold for use as, or used as, a fuel for the propulsion of motor vehicles, motor boats, or airplanes, 10 percent of which has been recovered when the thermometer reads 347 degrees Fahrenheit (175 degrees Centigrade) or 95 per cent of which has been recovered when the thermometer reads 464 degrees Fahrenheit (240 degrees Centrigrade) when subjected to distillation in accordance with the Standard Method of Test for Distillation of Gasoline, Naphtha, Kerosene, and Similar Petroleum Products' (A.S.T.M. designation: D86) of the American Society for Testing Materials. Section 314.30(c) of the regulations provides that the term `gasoline' does not include products commonly or commercially known or sold as kerosene, gas oil, or fuel oil, which means any product so designated (1) 10 per cent of which has not been recovered when the thermometer reads 347 degrees Fahrenheit and (2) 95 per cent of which has not been recovered when the thermometer reads 464 degrees Fahrenheit, when subjected to distillation in accordance with the above mentioned method of test.

The Excise Tax Reduction Act of 1954 changed the method of taxation of liquid fuels coming within the distillation range provided in section 314.30(b)(2) of the regulations by eliminating the tax on the manufacturer's sale and imposing it either upon the retailer's sale or upon the consumer's use. The provisions of section 3412(c)(2) of the 1939 Code regarding these fuels were eliminated so that the section as amended by the Excise Tax Reduction Act of 1954 provides that the term `gasoline' means all products commonly or commercially known or sold as gasoline (including casinghead and natural gasoline). Thus, the provisions of section 314.30(b)(2) of the regulations were no longer applicable in defining the term `gasoline' for purposes of section 3412(c)(2) of the 1939 Code. At the same time, the Excise Tax Reduction Act revised section 2450 of the 1939 Code, which imposed a retailers excise tax on diesel fuel, to include a new subsection, (b), imposing a retailers excise tax on these fuels which are designated therein as Special Motor Fuels. Section 2450(b) of the 1935 Code is now section 4041(b) of the 1954 Code.

Pending the issuance of regulations on the provisions of section 4041(b) of the 1954 Code, the Internal Revenue Service considers that the distillation ranges contained in sections 314.30(b)(2) and 314.30(c) of Regulations 44 still provide an acceptable guide for classification of products as special motor fuels, or as kerosene, gas oil, or fuel oil.

Since, in the instant case, the blended product sold as a special tractor fuel meets the distillation test for special motor fuel rather than for kerosene, gas oil, or fuel oil, it is held that the product is subject to the retailers excise tax imposed by section 4041(b) of the Code when sold for use, or used, as fuel for the propulsion of motor vehicles, motorboats, or airplanes. However, under the provisions of section 4041(d) of the Code, the tax does not apply to the sale of the product where it is sold for use on a farm for farming purposes, or to the use of the product where it is used on a farm for farming purposes.

In accordance with the provisions of section 4082(c) of the Code, the producer incurs no liability for the manufacturers excise tax on gasoline used in the production of the special tractor fuel.

Inasmuch as the registered producer holds title to the gasoline and fuel oil used in producing the special tractor fuel, it is immaterial where the blending operation takes place. See S.T. 734, C.B. XIII-1381 (1934).