Rev. Rul. 59-336

Advice has been requested whether gasoline and diesel fuel used in buses under contract with local school districts for the transportation of pupils to and from school qualify for the payment authorized by section 6421(b)(1) of the Internal Revenue Code of 1954 and for the credit or refund provided by section 6416(b)(2)(H) of the Code. Further advice has been requested whether revenue from school contracts must be taken into consideration in determining whether at least 60 percent of the total passenger fare revenue was attributable to tax-exempt passenger fare revenue.

Under the provisions of section 6421(b) of the Code, if gasoline is used during any calendar quarter in transit vehicles while engaged in furnishing scheduled common carrier public passenger land transportation service along regular routes, the ultimate purchaser of such gasoline is entitled to a payment determined by multiplying (A) one cent for each gallon of gasoline so used, by (B) the percentage which the ultimate purchaser's tax-exempt passenger fare revenue from such scheduled service during the calendar quarter was of the total passenger fare revenue derived during the same quarter from such scheduled service. However, in order for a carrier to avail itself of this provision, 60 percent or more of its total passenger fare revenue, not including the excise tax on the transportation of persons, must be attributable to tax-exempt passenger fare revenue.

Under the provisions of section 6416(b)(2)(H) of the Code (section 6416(b)(2)(L) before its redesignation by the Excise Tax Technical Changes Act of 1958, Public Law 85-859, C.B. 1958-3, 92), when diesel fuel or special motor fuel, on which tax was paid under section 4041 of the Code at the rate of three cents a gallon, is used in transit vehicles while engaged in furnishing scheduled common carrier public passenger land transportation service along regular routes, a credit or refund at the rate of one cent a gallon on each gallon so used may be claimed provided at least 60 percent of the passenger fare revenue derived by the transit system during the calendar quarter from furnishing scheduled service along regular routes was attributable to tax-exempt passenger fare revenue. However, the person who paid the tax on the fuel is the one who is entitled to the credit or refund rather than the ultimate purchaser as in the case of gasoline.

Section 4261 of the Code imposes a tax upon the amount paid for taxable transportation (as defined in section 4262 of the Code) of any person by rail, motor vehicle, water, or air. Section 4263(a) of the Code provides that the tax imposed by section 4261 of the Code shall not apply to amounts paid for transportation which do not exceed 60 cents, to amounts paid for commutation or season tickets for single trips of less than 30 miles, or to amounts paid for commutation tickets for one month or less.

Section 6421(d)(2) of the Code states that the term `tax-exempt passenger fare revenue' means revenue attributable to fares which were exempt from the tax imposed by section 4261 of the Code by reason of section 4263(a) of the Code (relating to the exemption for commutation travel, etc.).

Where buses are operated by a contractor who does not qualify as a local transit system furnishing scheduled common carrier public passenger land transportation service along regular routes, the provisions of sections 6421(b)(1) and 6416(b)(2)(H) of the Code do not apply to gasoline and diesel fuel used in such buses. On the other hand, where the contractor qualifies as a local transit system, the allowability of a payment in the case of gasoline, or a credit or refund in the case of diesel fuel, depends on whether the 60 percent passenger fare revenue test set forth in the Code has been met. Whether revenue from school contracts should be included in, or excluded from, total passenger fare revenue derived from common carrier public passenger land transportation service along regular routes in determining whether the 60 percent test has been met depends upon the source from which such revenue was derived. It is held that if the revenue from the school contracts represents an amount paid by a school board or other authority rather than fares paid by pupils, the amount is not considered to be passenger fare revenue derived from furnishing scheduled common carrier public passenger land transportation service along regular routes and, therefore, should be excluded in determining the 60 percent passenger fare revenue test. However, where the contract provides that the pupils must pay their own fares, such fares paid by the pupils must be taken into consideration.

For example, a transit company is authorized to serve the city of A and the nearby communities of B, C , and D . Its passenger fare revenue, including fares paid by students, from all of its scheduled service along regular routes for a particular quarter was $100,000. A total of 50,000 gallons of gasoline was used during this quarter in passenger-carrying vehicles while such vehicles were engaged in furnishing scheduled common carrier public passenger land transportation along regular routes. In arriving at the total passenger fare revenue of $100,000, revenue from other sources, such as any amounts received from school boards for transporting school pupils, charter fees, rentals of property, etc., are not included. Of the total passenger fare revenue for the quarter, $72,000 was attributable to fares which were exempt from the tax on transportation of persons by virtue of the provisions of section 4623(a) of the Code. Therefore, since 72 percent ($72,000 / $100,000) of the revenue for the quarter was from fares exempt from tax, the company would qualify for a payment with respect to a portion of the 50,000 gallons of gasoline used during the quarter.

The payment is to be an amount which bears the same ratio to (1) the amount determined by multiplying by one cent the number of gallons of gasoline used by the transit company in passenger-carrying vehicles, including those used to carry pupils where fares were paid by the pupils, while such vehicles were engaged in furnishing scheduled common carrier public passenger land transportation service along regular routes, as (2) the passenger fare revenues derived from the exempt sources bear to the total public passenger and school fare revenues. Therefore, in the above example, since $72,000 of the $100,000 total passenger fare revenues was attributable to payments for transportation exempt from tax, the company would be entitled to a payment of $360 (one cent times 50,000 gallons times 72, 000/100 ,000ths).

In the above example, if the vehicles used diesel fuel or special motor fuel on which tax had been paid at the rate of three cents a gallon, the person who paid the tax would be entitled to a refund or credit of $360.