Rev. Rul. 68-108

Advice has been requested whether the use of lubricating oil under the circumstances described below is use of lubricating oil otherwise than in a highway motor vehicle for purposes of the payment provided by section 6424 of the Internal Revenue Code of 1954.

A company produces `new' or virgin lubricating oil which is subject to the manufacturers excise tax imposed by section 4091 of the Code. The company blends or mixes such lubricating oil with `reclaimed' oil and sells the resultant product to consumers for use in nonhighway vehicles.

Section 4091 of the Code imposes a tax on lubricating oil sold in the United States by the manufacturer or producer thereof. Under the provisions of section 4218(a) of the Code, if a person manufactures or produces an article and uses it (other than as material in the manufacture or production of, or as a component part of, another taxable article to be manufactured or produced by him), then he shall be liable for the manufacturers excise tax in the same manner as if such article were sold by him.

Section 6424 of the Code, applicable to lubricating oil placed in use after December 31, 1965, provides that if lubricating oil (other than cutting oils, as defined in section 4092(b), and other than oil which has previously been used) is used otherwise than in a highway motor vehicle, the Secretary of the Treasury or his delegate shall pay (without interest) to the ultimate purchaser of such lubricating oil an amount equal to 6 cents for each gallon of lubricating oil so used, except with respect to any lubricating oil which the Secretary or his delegate determines was exempt from the tax imposed by section 4091.

Under the provisions of section 48.4091-2(b)(2)(iii) of the Manufacturers and Retailers Excise Tax Regulations, the term `manufacturer,' for purposes of section 4091, does not include any person who merely blends or mixes one or more taxable oils with used or waste lubricating oil which has been cleaned, renovated, or refined.

In accordance with section 48.4091-2(b)(2)(iii) of the regulations, where the company in the instant case blends or mixes `new' lubricating oil with `reclaimed' lubricating oil, the company is not a `manufacturer' of the resultant product, notwithstanding the fact that the resultant product falls within the definition of `lubricating oil' set forth in section 48.4091-2(a) of the regulations. Accordingly, no manufacturers excise tax applies to the company's sales of the resultant product. However, where the company uses `new' lubricating oil other than as material in the manufacture or production of another taxable article, then, under the provisions of section 4218(a) of the Code, the manufacturers excise tax applies to the company's use of the `new' lubricating oil in the same manner as if the oil were sold by the company. (See Revenue Ruling 62-51, C.B. 1962-1, 218.)

The specific issues in the instant case are (1) whether the company's use of the `new' lubricating oil in the blending process entitles the company to the payment provided by section 6424 of the Code and, if not, (2) whether the use of the resultant product by consumers in nonhighway vehicles entitles the consumers to the payment provided by section 6424.

As indicated above, the company is liable for tax, under the provisions of section 4218(a) of the Code, on its use of the `new' lubricating oil in the blending process, since the company would be liable for the tax if it had sold the `new' lubricating oil instead of using it. However, even though the company has used such oil in the blending process, it has not used the oil otherwise than in a highway motor vehicle within the meaning of section 6424 of the Code. The type of `use' contemplated by section 6424 is a use of lubricating oil (previously unused) through which use the oil is consumed or rendered unfit for further use as a lubricant or for sale as a lubricant. In the instant case, the `new' oil is not consumed in the blending process but becomes a part of the nontaxable resultant product which the company sells to consumers who use it in nonhighway vehicles. Accordingly, it is held that the company is not entitled to the payment provided by section 6424 of the Code.

Furthermore, inasmuch as the consumers are not using `new' (previously unused) lubricating oil within the meaning of section 6424, but are using the nontaxable resultant product described above, it is further held that the consumers are not entitled to the payment provided by section 6424.