Rev. Rul. 77-241

Advice has been requested whether the use of diesel fuel under the circumstances described below qualifies for the allowance provided by section 6427 (b) of the Internal Revenue Code of 1954.

A bus company, operating under a certificate of public convenience and necessity issued by a State public utilities commission, is engaged in providing a bus transportation service for employees of certain large commercial and industrial establishments located in a particular metropolitan area. The company transports the employees in diesel-powered buses over regularly scheduled routes between their residences and places of employment. All fares are regulated by the commission and collected by the bus company directly from the passengers. While daily fares are available, more than 60 percent of the fares consist of weekly commutation tickets. There is no contract or agreement for the bus service, and the commercial and industrial employers do not participate other than by providing parking spaces on their premises for the buses. In order to be certified by the State commission, the bus company was required to establish public need for the service.

In operating the buses, the company recruits and trains part-time drivers from among the employees who use the buses. At night each driver parks the bus near the beginning of the route. In the morning the driver picks up passengers only at specified stops along the route and discharges them at the commercial and industrial sites where the buses are parked. At the close of the workday, the passengers are transported back to specified stops. Although the purpose of the service is to provide transportation for employees of the various business establishments, the bus company has the approval of the commission to transport, and does frequently transport, any member of the general public who wishes to travel from one of the designated pickup points to the vicinity of one of the commercial or industrial sites.

Section 4041 (a) of the Code imposes a tax upon diesel fuel (1) sold by any person to an owner, lessee, or other operator of a diesel- powered highway vehcile [sic], for use as fuel in such vehicle, or (2) used by any person as a fuel in a diesel-powered highway vehicle, unless there was a taxable sale of such liquid under paragraph (1).

Under the provisions of section 6427(b) of the Code, if any fuel subject to tax under section 4041(a) is used by the purchaser in vehicles while engaged in furnishing scheduled common carrier public passenger land transportation service along regular routes, the Secretary of the Treasury or the Secretary's delegate will pay (without interest) to the purchaser an amount determined by multiplying two cents for each gallon of fuel so used on which tax was imposed at the rate of 4 cents a gallon, by the percentage which the purchaser's commuter fare revenue (as defined in section 6421(d)(2)) derived from such scheduled service during the quarter was of his total passenger fare revenue derived from such scheduled service during the quarter. The allowance provided by section 6427(b) is payable only if at least 60 percent of the total passenger fare revenue derived during the quarter from the scheduled service was attributable to commuter fare revenue.

Section 6421(d)(2) of the Code defines the term "commuter fare revenue" as revenue attributable to fares derived from the transportation of persons and attributable to (A) amounts paid for transportation that do not exceed 60 cents, (B) amounts paid for commutation or season tickets for single trips of less than 30 miles, or (C) amounts paid for commutation tickets for one month or less.

Rev. Rul. 67-92, 1967-1 C.B. 361, relates to a passenger bus service rendered by a transportation company under a contract with a railway company whereby the bus company furnishes to the railway's employees local, scheduled bus transportation to and from the railway terminal. Rev. Rul. 67-92 holds that revenue derived from such service does not quality as revenue derived from "scheduled common carrier public passenger land transportation service along regular routes" under section 6421 (b) of the Code (which provides a similar allowance for gasoline). That Revenue Ruling states that an essential element of this type of service is that it be "public" in nature and that a "public" transportation service is a service available to the general public, and usually is operated under a public franchise. The arrangement between the railway company and the transportation company is a private contract under which a private bus transportation service is rendered.

The facts in the instant case are distinguishable from those in Rev. Rul. 67-92. Since there is no contract between the carrier and employers, the fares are collected by the bus company from the passengers riding the buses, and the service furnished is available to and frequently used by the general public.

Accordingly, in the instant case the bus company is providing "scheduled common carrier public passenger land transportation service along regular routes" for purposes of the allowance tinder section 6427(b) of the Code. Since at least 60 percent of the total passenger fare revenue derived from such service is attributable to "commuter fare revenue" in the form of amounts paid for commutation tickets for one month or less, within the meaning of section 6421(d)(2), the diesel fuel used in the buses qualifies for the payment provided by section 427(b).

Section 6421(b) of the Code provides a similar payment with respect to gasoline used in buses furnishing scheduled common carrier public passenger land transportation service long regular routes," provided the "commuter fare revenue" test is met. Accordingly, where buses using gasoline furnish identical service as that described in the instant case, the same conclusions are applicable to gasoline so used.

Rev. Rul. 67-92 is distinguished.