Energy Policy Act of 2005 (Title XIII--Energy Tax Incentives Act of 2005) (P.L. 109-58)

The Chairman's modification extends the credit period from five years to 10 years for electricity produced from qualifying open-loop biomass facilities (including agricultural livestock waste nutrient facilities), geothermal facilities, solar facilities, small irrigation power facilities, landfill gas facilities, and trash combustion facilities placed in service after the date of enactment. The modification extends the credit period from five years to 10 years for electricity produced from qualifying fuel cell facilities placed in service after December 31, 2005.

The Chairman's modification clarifies that a qualifying trash combustion facility includes a new unit that increases electricity production capacity placed in service after October 22, 2004, at an existing trash combustion facility.

The Chairman's modification also includes hydropower as a qualified energy resource and permits taxpayers to claim a credit at one-half the 1.5 cents-per-kilowatt-hour (indexed for inflation rate) for electricity attributable to "incremental hydropower" produced at qualified hydroelectric facilities during the 10-year period commencing when the facility is placed in service. A qualified hydroelectric facility is a facility that produces incremental hydropower placed in service after the date of enactment and before January 1, 2009. "Incremental hydropower" is additional electricity generation achieved from increased efficiency or additions of capacity at an existing hydroelectric facility. A "qualified hydroelectric facility" is a FERClicensed minor diversion structure less than 10 feet in height or an existing non-hydro dam to which turbines or other generating devices are added to produce energy and that does not require enlargement of the impoundment or diversion structures in connection with the installation of the turbine or other generating device. All such facilities are subject to all applicable environmental laws and licensing and regulatory requirements.

2. Modification to item A.6 of the Chairman's Mark relating to the credit for investment in clean coal facilities

The Chairman's modification increases to 7,500 megawatts the amount of power generation capacity the Secretary of Treasury, in consultation with the Secretary of Energy, is authorized to allocate to qualified clean coal projects. The Secretary of Treasury must allocate 55 percent of the total power generation capacity to credit-eligible projects that use an integrated gasification combined cycle technology and 45 percent to credit-eligible projects that use other advanced coal-based technologies. The Chairman's modification also clarifies that lignite is a qualifying coal for a clean coal facility under the proposal.

3. Modification to item B.2 of the Chairman's Mark relating to temporary expensing for equipment used in the refining of liquid fuels

The Chairman's modification requires that as a condition of eligibility for the expensing of equipment used in the refining of liquid fuels, a refinery must report to the IRS concerning its refinery operations (e.g., production and output).

4. Modification to item B.4 of the Chairman's Mark relating to the enhanced oil recovery credit for carbon dioxide injections

The Chairman's modification expands the definition of qualified enhanced oil recovery project to include "deep gas" well projects. Deep gas is natural gas produced from onshore formations deeper than 20,000 feet. Under the modified proposal, the credit phases out using a barrel of oil equivalent for natural gas calculated based on Btu content. The modified proposal also requires that other conforming modifications to the credit be made. The credit for enhanced oil recovery with respect to deep gas wells expires after December 31, 2009.

5. Modification to item C.2 in the Chairman's Mark relating to energy efficient new homes

The modification clarifies that duct sealing and infiltration reduction measures qualify as an energy-efficient building envelope component.

6. Modification to item C.3 in the Chairman's Mark relating to business energy property

The modification clarifies that an oil, natural gas, or propane furnace or hot water boiler that achieves at least 95 percent annual fuel utilization efficiency is eligible for a deduction of $450. The modification further clarifies that a natural gas, propane, or oil water heater must have an energy factor of at least 0.80 to qualify for any deduction.

7. Modification to item C.4 in the Chairman's Mark relating to nonbusiness energy property

The modification clarifies that an oil, natural gas, or propane furnace or hot water boiler that achieves at least 95 percent annual fuel utilization efficiency is eligible for a credit of $150. The modification further clarifies that a natural gas, propane, or oil water heater must have an energy factor of at least 0.80 to qualify for any credit.

The modification also allows certified home inspectors to be eligible to provide certifications of the energy efficiency performance of principal residences.

8. Modification to item C.8 in the Chairman's Mark relating to business investment tax credit for fuel cells and microturbines

For purposes of the fuel cell and microturbine investment tax credit, the modification removes the restriction that prohibits telecommunication utilities from claiming the credit.

9. Modification to item C.9 in the Chairman's Mark relating to business solar investment tax credit

The modification makes hybrid solar lighting systems eligible solar energy property for purposes of the section 48 energy credit.

10. Modification to item D.1 of the Chairman's Mark relating to the alternative vehicle credit

The Chairman's modification changes the applicable emissions standards for a hybrid vehicle with a gross vehicle weight rating greater than 6,000 pounds and less than or equal to 8,500 pounds from Bin 8 Tier II to Bin 5 Tier II.

Cushion gas is the minimum volume of natural gas necessary to provide the pressure to facilitate the flow of gas from a storage reservoir to a pipeline. Recoverable cushion gas will be available for sale or other use upon abandonment of the storage reservoir, while nonrecoverable cushion gas will become obsolete with that abandonment. Under present law, the tax treatment of cushion gas depends on whether such gas is recoverable. The quantity of cushion gas that is recoverable is not subject to depreciation because it is not subject to exhaustion, wear, tear, or obsolescence. Conversely, non-recoverable cushion gas is subject to obsolescence and is therefore subject to tax depreciation. The depreciable life of non-recoverable cushion gas is also 15 years.

2. Modify research credit for research relating to energy

Section 41 provides for a research tax credit equal to 20 percent of the amount by which a taxpayer's qualified research expenses for a taxable year exceed its base amount for that year. The research tax credit is scheduled to expire and generally will not apply to amounts paid or incurred after December 31, 2005.

A 20-percent research tax credit also applies to the excess of (1) 100 percent of corporate cash expenses (including grants or contributions) paid for basic research conducted by universities (and certain nonprofit scientific research organizations) over (2) the sum of (a) the greater of two minimum basic research floors plus (b) an amount reflecting any decrease in nonresearch giving to universities by the corporation as compared to such giving during a fixed-base period, as adjusted for inflation. This separate credit computation is commonly referred to as the university basic research credit (see sec. 41(e)).

Alternative incremental research credit regime

Taxpayers are allowed to elect an alternative incremental research credit regime. If a taxpayer elects to be subject to this alternative regime, the taxpayer is assigned a three-tiered fixed-base percentage (that is lower than the fixed-base percentage otherwise applicable under present law) and the credit rate likewise is reduced. Under the alternative credit regime, a credit rate of 2.65 percent applies to the extent that a taxpayer's current-year research expenses exceed a base amount computed by using a fixed-base percentage of one percent (i.e., the base amount equals one percent of the taxpayer's average gross receipts for the four preceding years) but do not exceed a base amount computed by using a fixed-base percentage of 1.5 percent. A credit rate of 3.2 percent applies to the extent that a taxpayer's current-year research expenses exceed a base amount computed by using a fixed-base percentage of 1.5 percent but do not exceed a base amount computed by using a fixed-base percentage of two percent. A credit rate of 3.75 percent applies to the extent that a taxpayer's current-year research expenses exceed a base amount computed by using a fixed-base percentage of two percent. An election to be subject to this alternative incremental credit regime may be made for any taxable year beginning after June 30, 1996, and such an election applies to that taxable year and all subsequent years unless revoked with the consent of the Secretary of the Treasury.

Eligible expenses

Qualified research expenses eligible for the research tax credit consist of: (1) in-house expenses of the taxpayer for wages and supplies attributable to qualified research; (2) certain time-sharing costs for computer use in qualified research; and (3) 65 percent of amounts paid or incurred by the taxpayer to certain other persons for qualified research conducted on the taxpayer's behalf (so-called contract research expenses). In the case of amounts paid to a research consortium, 75 percent of amounts paid for qualified research is treated as qualified research expenses eligible for the research credit (rather than 65 percent under the general rule) if (1) such research consortium is a tax-exempt organization that is described in section 501(c)(3) (other than a private foundation) or section 501(c)(6) and is organized and operated primarily to conduct scientific research, and (2) such qualified research is conducted by the consortium on behalf of the taxpayer and one or more persons not related to the taxpayer.

To be eligible for the credit, the research must not only satisfy the requirements of present-law section 174 for the deduction for research expenses, but must be undertaken for the purpose of discovering information that is technological in nature, the application of which is intended to be useful in the development of a new or improved business component of the taxpayer, and substantially all of the activities of which must constitute elements of a process of experimentation for functional aspects, performance, reliability, or quality of a business component.

The proposal also provides that 100 percent of amounts paid or incurred by the taxpayer to eligible small businesses, universities, and the Federal government for qualified energy research would constitute qualified research expenses as contract research expenses, rather than 65 percent of qualified research expenditures allowed under present law. An eligible small business for this purpose is a business in which the taxpayer does not own a 50 percent or greater interest and the business has employed, on average, 500 or fewer employees in the two preceding calendar years.

Qualified energy research expenditures are expenditures that would otherwise qualify for the research credit under present law and relate to the production, supply, and conservation of energy, including otherwise qualifying research expenditures related to alternative energy sources or the use of alternative energy sources. For example, research relating to hydrogen fuel cell vehicles would qualify under this proposal, if the research expenditures otherwise satisfy the criteria of present-law section 41. Likewise, otherwise qualifying research undertaken to improve the energy-efficiency of lighting would qualify under this proposal.

3. Create small agri-biodiesel producer credit

The Code provides an income tax credit for biodiesel and qualified biodiesel mixtures, the biodiesel fuels credit. The biodiesel fuels credit is the sum of the biodiesel mixture credit plus the biodiesel credit and is treated as a general business credit. The amount of the biodiesel fuels credit is includible in gross income. The biodiesel fuels credit is coordinated to take into account benefits from the biodiesel excise tax credit and payment provisions created by the Act. The credit may not be carried back to a taxable year ending before or on December 31, 2004. The provision does not apply to fuel sold or used after December 31, 2006.

Biodiesel is monoalkyl esters of long chain fatty acids derived from plant or animal matter that meet (1) the registration requirements established by the EPA under section 211 of the Clean Air Act and (2) the requirements of the American Society of Testing and Materials D6751. Agri-biodiesel is biodiesel derived solely from virgin oils including oils from corn, soybeans, sunflower seeds, cottonseeds, canola, crambe, rapeseeds, safflowers, flaxseeds, rice bran, mustard seeds, or animal fats.

Biodiesel may be taken into account for purposes of the credit only if the taxpayer obtains a certification (in such form and manner as prescribed by the Secretary) from the producer or importer of the biodiesel which identifies the product produced and the percentage of the biodiesel and agri-biodiesel in the product.

The biodiesel income tax credit does not contain any incentives for small producers.

Small ethanol producer credit

Present law provides several tax benefits for ethanol and methanol produced from renewable sources that are used as a motor fuel or that are blended with other fuels (e.g., gasoline) for such a use. In the case of ethanol, a separate 10-cents-per-gallon credit for up to 15 million gallons per year for small producers, defined generally as persons whose production does not exceed 15 million gallons per year and whose production capacity does not exceed 30 million gallons per year. The alcohol fuels tax credits are includible in income. The alcohol fuels tax credit is scheduled to expire after December 31, 2010.

4. Modification to the small ethanol producer credit

5. Qualified recycling equipment credit

Qualified recyclable materials are any packaging or printed material which is glass, paper, plastic, steel, or aluminum generated by an individual or business and which has been separated from solid waste for the purposes of collection and recycling.

6. Five-year carryback of net operating losses of certain electric utility companies

In general, an NOL may be carried back two years and carried forward 20 years to offset taxable income in such years.³ Different rules apply with respect to NOLs arising in certain circumstances. For example, a three-year carryback applies with respect to NOLs (1) arising from casualty or theft losses of individuals, or (2) attributable to Presidentially declared disasters for taxpayers engaged in a farming business or a small business. A five-year carryback period applies to NOLs from a farming loss (regardless of whether the loss was incurred in a Presidentially declared disaster area). Special rules also apply to real estate investment trusts (no carryback), specified liability losses (10-year carryback), and excess interest losses (no carryback to any year preceding a corporate equity reduction transaction).

Section 202 of the Job Creation and Worker Assistance Act of 2002⁴ ("JCWAA") provided a temporary extension of the general NOL carryback period to five years (from two years) for NOLs arising in taxable years ending in 2001 and 2002. In addition, the five-year carryback period applies to NOLs from these years that qualify under present law for a threeyear carryback period (i.e., NOLs arising from casualty or theft losses of individuals or attributable to certain Presidentially declared disaster areas).

A taxpayer can elect to forgo the five-year carryback period. The election to forgo the five-year carryback period is made in the manner prescribed by the Secretary of the Treasury and must be made by the due date of the return (including extensions) for the year of the loss. The election is irrevocable. If a taxpayer elects to forgo the five-year carryback period, then the losses are subject to the rules that otherwise would apply under section 172 absent the provision.

7. Qualifying pollution control equipment credit

8. Credit for production of Indian country coal

Present law does not provide a credit for the production of coal from coal reserves owned by an Indian tribe.

9. Wood stoves for EPA non-attainment areas

10. Exemption of bulk beds for farm crops from the Federal excise tax on heavy trucks and trailers

The Code imposes a 12-percent excise tax on the first retail sale of heavy trucks and trailers (chassis and bodies.⁵ Under present law, the tax on the first retail sale of automobile truck bodies does not apply to any body primarily designed (1) to process or prepare seed, feed, or fertilizer for use on farms, (2) to haul feed, seed, or fertilizer to and on farms, (3) to spread feed, seed, or fertilizer on farms, (4) to load or unload feed, seed, or fertilizer on farms, or (5) for any combination of the foregoing.⁶

11. National Academy of Sciences study

The proposal provides that amounts may be claimed as credits or refunds for kerosene that is used for aviation purposes. If kerosene is used for noncommercial aviation, the amount is 2.5 cents; if kerosene is used for commercial aviation, the amount is 20 cents; if kerosene is used for a use that is exempt from tax (as determined under present law), the amount is 24.3 cents. Present law rules with respect to claims apply, except for claims with respect to kerosene used in noncommercial aviation, which are payable to the ultimate vendor only. To be eligible to receive a payment, a vendor must be registered and must show either that the price of the fuel did not include the tax and the tax was not collected from the purchaser, the amount of tax was repaid to the ultimate purchaser, or the written consent of the purchaser to the making of the claim was filed with the Secretary.

Under the proposal, all taxes collected at the 24.3 cents per gallon rate (under section 4081) initially are credited to the Highway Trust Fund. The proposal requires the Secretary to transfer at least monthly from the Highway Trust Fund into the Airport and Airway Trust Fund amounts equivalent to 21.8 cents per gallon for claims made with respect to kerosene used for noncommercial aviation purposes and 4.3 cents per gallon for claims made with respect to kerosene used for commercial aviation purposes. The proposal requires that transfers be made on the basis of estimates by the Secretary, with proper adjustments to be made subsequently to the extent prior estimates were in excess of or less than the amounts required to be transferred. Transfers are required to be made with respect to taxes received on or after October 1, 2005, and before October 1, 2011.

2. Repeal of ultimate vendor refund claims with respect to diesel and kerosene used for farming purposes

In general, the Code provides that if diesel fuel or kerosene on which tax has been imposed is used by any person in a nontaxable use, the Secretary is to refund (without interest) to the ultimate purchaser the amount of tax imposed.¹⁷ The refund is made to the ultimate purchaser of the taxed fuel by either income tax credit or refund payment.¹⁸ Not more than one claim may be filed by any person with respect to fuel used during its taxable year. However, there are exceptions to this rule.

An ultimate purchaser may make a claim for a refund payment for any quarter of a taxable year for which the purchaser can claim at least $750.¹⁹ If the purchaser cannot claim at least $750 at the end of quarter, the amount can be carried over to the next quarter to determine if the purchaser can claim at least $750. If the purchaser cannot claim at least $750 at the end of the taxable year, the purchaser must claim a credit on the person's income tax return.

As discussed below, these ultimate purchaser refund rules do not apply to diesel fuel or kerosene used on a farm. The Code precludes the ultimate purchaser from claiming a refund for such use. Instead, the refund claims are made by registered ultimate vendors as described below.

Special ultimate vendor rule for fuel used on a farm for farming purposes

In the case of diesel fuel or kerosene used on a farm for farming purposes refund payments are paid to the ultimate, registered vendors ("registered ultimate vendor") of such fuels. Thus a registered ultimate vendor that sells undyed diesel fuel or undyed kerosene to any of the following may make a claim for refund: (1) the owner, tenant, operator of a farm for use by that person on a farm for farming purposes; and (2) a person other than the owner, tenant, or operator of a farm for use by that person on a farm in connection with cultivating, raising or harvesting. The registered ultimate vendor is the only person who may make the claim with respect to diesel fuel or kerosene used on a farm for farming purposes. The purchaser of the fuel cannot make the claim for refund.

Registered ultimate vendors may make weekly claims if the claim is at least $200 ($100 or more in the case of kerosene).²⁰ If not paid within 45 days (20 days for an electronic claim), the Secretary is to pay interest on the claim.

3. Refunds of excise taxes on exempt sales of taxable fuel by credit card

Under a special administrative exception to these rules, a sale of gasoline charged on an oil company credit card issued to an exempt person described above is not considered a direct sale by the person actually selling the gasoline to the ultimate purchaser if the seller receives a reimbursement of the tax from the oil company (or indirectly from an intermediate vendor). Thus, the person that actually paid the tax, in most cases the oil company, is treated as the only person eligible to make the refund claim.²¹

The American Jobs Creation Act of 2004 ("AJCA")²² modified the pre-existing statutory rules with respect to certain sales. Under AJCA, if a registered ultimate vendor purchases any gasoline on which tax has been paid and sells such gasoline to a State or local government or to a nonprofit educational organization, for its exclusive use, such ultimate vendor is treated as the only person who paid the tax and thereby is the proper claimant for a credit or refund of the tax paid.²³ However, AJCA did not change the special administrative oil company credit card rule described above.²⁴

In addition, under AJCA, refund claims made by such an ultimate vendor may be filed for any period of at least one week for which $200 or more is payable. Any such claim must be filed on or before the last day of the first quarter following the earliest quarter included in the claim. The Secretary must pay interest on refunds unpaid after 45 days. If the refund claim was filed by electronic means, and the ultimate vendor has certified to the Secretary for the most recent quarter of the taxable year that all ultimate purchasers of the vendor are certified for highway exempt use as a State or local government or a nonprofit educational organization, refunds unpaid after 20 days must be paid with interest.²⁵

In the case of diesel fuel or kerosene used in a nontaxable use, the ultimate purchaser is generally the only person entitled to claim a refund of excise tax.²⁶ However, in the case of diesel fuel or kerosene used on a farm for farming purposes or by a State or local government, aviation-grade kerosene, and certain nonaviation-grade kerosene, an ultimate vendor may claim the refund if the ultimate vendor is registered and bears the tax (or receives the written consent of the ultimate purchaser to claim the refund).²⁷

If a credit card issuer is not registered, or if either condition (1) or (2) above is not met, then the credit card issuer must collect an amount equal to the tax from the ultimate purchaser, and only the ultimate purchaser may claim a credit or payment from the IRS.²⁸ Thus, tax-paid fuel must not be sold tax free to an exempt entity by means of a credit card unless the credit card issuer is registered. An unregistered credit card issuer that does not collect an amount equal to the tax from the exempt entity is liable for present-law penalties for failure to register.²⁹ It is intended that the IRS will review the registration of a registered credit card issuer that has engaged in multiple violations of the requirements of the proposal.

A credit card issuer entitled to claim a refund under the proposal is responsible for supplying all the appropriate documentation currently required from ultimate vendors. The present-law refund amount and timing rules applicable to ultimate vendors, including the special rules for electronic claims, apply to refunds to credit card issuers under the proposal.³⁰ The proposal also conforms present-law penalty provisions to the new rules.

The proposal does not change the present-law rules applicable to non-credit card purchases.

4. Recertification of exempt status

In general, in order to claim a refund of Federal excise taxes on gasoline (and on other articles subject to manufacturers excise taxes under Chapter 32 of the Code) sold to a State or local government or to a nonprofit educational organization, for its exclusive use, a claimant must submit a statement indicating that it possesses evidence of the exempt use giving rise to the overpayment of tax.³³ Such evidence consists of a certificate executed and signed by the ultimate purchaser. The ultimate purchaser certificate must be signed by the ultimate purchaser and must identify the article, show the name and address of the ultimate purchaser, and state the exempt use made or to be made of the article. In the case where the certificate sets forth the use to be made of the article, rather than its actual use, it must show that the ultimate purchaser has agreed to notify the claimant if the article is not in fact used as specified in the certificate.³⁴

However, if the article to which the claim relates has passed through a chain of sales from the claimant to the ultimate purchaser, a certificate from the ultimate vendor is sufficient. The ultimate vendor certificate contains the exempt sales information, and a statement that it possesses the ultimate purchaser certificates and will forward them to the claimant within three years from the date of the statement. An ultimate vendor statement may be made covering no more than 12 consecutive calendar quarters.³⁵

In general, an ultimate purchaser is the proper party to claim a refund of Federal excise tax on diesel fuel or kerosene used by any person in a nontaxable use.³⁶ However, in the case of diesel or kerosene used by a State or local government, the ultimate vendor is the proper person if such vendor is registered and has borne the tax.³⁷ A registered ultimate vendor claiming a refund under this provision must provide a statement that it has in its possession an unexpired exemption certificate of the purchaser and that the claimant has no reason to believe any information in the certificate is false.³⁸

A State or local government includes any political subdivision of a State, or the District of Columbia.³⁹ A nonprofit educational organization means an educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational activities are regularly carried on, and which is either exempt from income tax under section 501(a) or is a school operated as an activity of an organization described in section 501(c)(3) which is exempt from income tax under section 501(a).⁴⁰

In addition to present-law documentation requirements, in order for a State or local governmental entity to claim exemption from tax on sales of such covered articles, or for any person to claim a credit or refund based upon the State or local governmental status of the purchaser of such articles, the State must certify that the article is sold to a State or local government for the exclusive use of a State or local government. In the case of articles sold to a qualified volunteer fire department, as defined in section 150(e)(2),⁴¹ the State must so certify, and the article must be sold for the exclusive use of the qualified volunteer fire department.

In order for a nonprofit educational organization to claim exemption from tax on such articles, or for any person to claim a credit or refund of tax on such articles based upon the nonprofit educational status of an organization, the State in which such organization is providing educational services must certify that such organization is in good standing.

The Secretary may prescribe forms for such certifications.

5. Reregistration in event of change in ownership

6. Registration of operators of deep-draft vessels

An assessable penalty for failure to register is $10,000 for each initial failure, plus $1,000 per day that the failure continues.⁵⁰ A non-assessable penalty for failure to register is $10,000.⁵¹ A criminal penalty of $10,000, or imprisonment of not more than five years, or both, together with the costs of prosecution also applies to a failure to register and to certain false statements made in connection with a registration application.⁵²

In general, gasoline, diesel fuel, and kerosene ("taxable fuel") are taxed upon removal from a refinery or a terminal.⁵³ Tax also is imposed on the entry into the United States of any taxable fuel for consumption, use, or warehousing. The tax does not apply to any removal or entry of a taxable fuel transferred in bulk (a "bulk transfer") by pipeline or vessel to a terminal or refinery if the person removing or entering the taxable fuel, the operator of such pipeline or vessel, and the operator of such terminal or refinery are registered with the Secretary as required by section 4101.⁵⁴ Transfer to an unregistered party subjects the transfer to tax.

7. Reconciliation of on-loaded cargo to entered cargo

Certain carriers of bulk cargo, however, are exempt from these filing requirements. Such bulk cargo includes that composed of free flowing articles such as oil, grain, coal, ore and the like, which can be pumped or run through a chute or handled by dumping.⁵⁷ Thus, taxable fuels are not required to file the Cargo Declaration within 24 hours before such cargo is laden aboard the vessel at the foreign port. Instead the Cargo Declaration must be filed within 24 hours prior arrival in the United States.

8. Gasoline blend stocks and kerosene

An excise tax is imposed upon (1) the removal of any taxable fuel from a refinery or terminal, (2) the entry of any taxable fuel into the United States, or (3) the sale of any taxable fuel to any person who is not registered with the IRS to receive untaxed fuel, unless there was a prior taxable removal or entry.⁶⁰ The tax does not apply to any removal or entry of taxable fuel transferred in bulk to a terminal or refinery if the person removing or entering the taxable fuel the operator of such pipeline or vessel, and the operator of such terminal or refinery are registered with the Secretary.⁶¹

Gasoline blend stocks not used to produce finished gasoline.--Pursuant to Treasury regulation, no tax is imposed on nonbulk removals from a terminal or refinery, or nonbulk entries into the United States of any gasoline blend stocks if (1) the person liable for the tax is a taxable fuel registrant, and (2) such person does not use the gasoline blend stocks to produce finished gasoline. In connection with a sale, no tax is imposed on the nonbulk removal or entry if (1) the person liable for the tax is a gasoline registrant and (2) at the time of sale such party has an unexpired certificate from the buyer, and knows of no false information in the certificate.⁶³

Any sale (or resale) of a gasoline blend stock that was not subject to tax on nonbulk removal or entry is taxable unless the seller has an unexpired certificate from the buyer and has no reason to believe that any information in the certificate is false.

The certificate to be provided by a buyer of gasoline blend stocks contains a statement that the gasoline blend stocks covered by the certificate will not be used to produce finished gasoline, identifies the type (or types of blend stocks) covered by the certificate and provides that the buyer will not claim a credit or refund for any gasoline covered by the certificate. The certificate is signed under penalties of perjury by a person with authority to bind the buyer. The certificate expires on the earliest of one year from the effective date of the certificate, the date a new certificate is provided to the seller or the date the seller is notified by the IRS or the buyer that the buyer's right to provide a certificate has been withdrawn.

Gasoline blend stocks received at an approved terminal or refinery.--Treasury regulations provide that tax is not imposed on the removal or entry of gasoline blend stocks that are received at a terminal or refinery if the person liable for tax is a taxable fuel registrant, has an unexpired notification certificate from the operator of the terminal or refinery where the gasoline blend stocks are received; and has no reason to believe that any information in the certificate is false.⁶⁴ A notification certificate is used to notify another person of the taxable fuel registrant's registration status.

Bulk transfer to an industrial user.--Tax is not imposed if upon removal of the gasoline blend stocks from a pipeline or vessel, the gasoline blend stocks are received by a taxable fuel registrant that is an industrial user.⁶⁵ An industrial user means any person that receives gasoline blend stocks by bulk transfer for its own use in the manufacture of any product other than finished gasoline.

If gasoline is used in an off-highway business use, the ultimate purchaser of the gasoline is entitled to a credit or refund for the excise taxes imposed on the fuel. "Off-highway business use" means any use by a person in a trade or business of such person otherwise than as a fuel in a highway vehicle that meets certain requirements.⁶⁷ Gasoline for this purpose includes gasoline blend stocks.⁶⁸

The Code also provides for a refund of tax for tax-paid fuel sold to a subsequent manufacturer or producer if the subsequent manufacturer or producer uses the fuel, for nonfuel purposes, as a material in the manufacture or production of any other article manufactured or produced by him.⁶⁹

Kerosene

An "excluded liquid" is (1) any liquid that contains less than four percent normal paraffins, or (2) any liquid that has a distillation range of 125 degrees Fahrenheit or less, sulfur content of 10 ppm or less, and minimum color of +27 Saybolt. These liquids are commonly known as "mineral spirits" and are obtained by distillation of crude oil. Mineral spirits are used for a wide variety of purposes, such as in dry-cleaning fluids, paint thinners, varnishes, photocopy toners, inks, adhesives, and as general purpose cleaners and degreasers.

"Feedstock purpose" means the use of kerosene for nonfuel purposes in the manufacture or production of any substance (other than gasoline, diesel fuel or special fuels subject to tax).⁷⁴ Thus, for example, kerosene is used for a feedstock purpose when it is used as an ingredient in the production of paint and is not used for a feedstock purpose when it is used to power machinery at a factory where paint is produced.

The Code also provides for a refund of tax for tax-paid fuel sold to a subsequent manufacturer or producer if the subsequent manufacturer or producer uses the fuel, for nonfuel purposes, as a material in the manufacture or production of any other article manufactured or produced by him.⁷⁶

The proposal partially repeals exemptions provided in Treas. Reg. sec. 48.4081-4, which, under certain conditions, exempts from tax gasoline blend stocks that are not used to produce finished gasoline or that are received at an approved terminal or refinery. Under the proposal, tax is imposed on all nonbulk entries and removals of gasoline blend stocks, regardless of whether they will be used to produce finished gasoline or received at an approved terminal or refinery. The proposal does not change the exemption for bulk transfers to registered industrial users.

Kerosene and mineral spirits

The proposal requires that with respect to fuel entered or removed after September 30, 2005, the Secretary include mineral spirits in the definition of kerosene. Thus, for entries and removals after September 30, 2005, mineral spirits are taxed and exempt from tax in the same manner as kerosene.

9. Nonapplication of export exemption to delivery of fuel to motor vehicles removed from United States

Special provisions under the Code provide for a refund of tax to any person who sells gasoline to another for exportation.⁷⁸ Section 6421(c) provides "If gasoline is sold to any person for any purpose described in paragraph (2), (3), (4), or (5) of section 4221(a), the Secretary shall pay (without interest) to such person an amount equal to the product of the number of gallons so sold multiplied by the rate at which tax was imposed on such gasoline by section 4081." Section 4221 provides, in pertinent part, "Under regulations prescribed by the Secretary, no tax shall be imposed under this chapter ... on the sale by the manufacturer ... of an article ... for export, or for resale by the purchaser to a second purchaser for export ... but only if such exportation or use is to occur before any other use ... ."

It is the IRS administrative position that the exemption from manufacturers excise tax by reason of exportation does not apply to the sale of motor fuel pumped into a fuel tank of a vehicle that is to be driven, or shipped, directly out of the United States.⁷⁹

A duty-free sales facility that meets certain conditions may sell and deliver for export from the customs territory of the United States duty-free merchandise. Duty-free merchandise is merchandise sold by a duty-free sales facility on which neither Federal duty nor Federal tax has been assessed pending exportation from the customs territory of the United States. The statutes covering duty-free facilities do not contain any limitation on what goods may qualify for dutyfree treatment.

The issue of whether fuel sold from a duty-free facility and placed into the tank of an automobile that is then driven out of the country is exported fuel has been litigated in the courts.⁸⁰ The cases involved the same operator of a duty-free facility seeking a refund of excise tax. The facility is near the Canadian border and is configured in such a way that anyone leaving the facility must depart the United States and enter into Canada. Both the Federal Circuit and the Sixth Circuit of Appeals are in accord with the IRS position and ruled that the operator of the duty-free facility did not have standing to pursue a claim for refund.⁸¹

10. Impose assessable penalty on dealers of adulterated fuel

The Code provides that any person who, in connection with a sale or lease (or offer for sale or lease) of an article, knowingly makes any false statement ascribing a particular part of the price of the article to a tax imposed by the United States, or intended to lead any person to believe that any part of the price consists of such a tax, is guilty of a misdemeanor.⁸³ Another Code provision provides that any person who has in his custody or possession any article on which taxes are imposed by law, for the purpose of selling the article in fraud of the internal revenue laws or with design to avoid payment of the taxes thereon, is liable for "a penalty of $500 or not less than double the amount of taxes fraudulently attempted to be evaded."⁸⁴

The penalty is dedicated to the Highway Trust Fund.

11. Oil Spill Liability Trust Fund

The tax will be suspended during a calendar quarter if the Secretary estimates that, as of the close of the preceding calendar quarter, the unobligated balance in the Oil Spill Liability Trust Fund exceeds $3 billion. The tax terminates after December 31, 2014.

12. Leaking Underground Storage Tank Trust Fund

Diesel fuel and kerosene that is to be used for a nontaxable purpose will not be taxed upon removal from the terminal if it is dyed to indicate its nontaxable purpose.

The Code requires the LUST Trust Fund to reimburse the General Fund for certain refund and credit claims related to the nontaxable use of fuel (only to the extent attributable to the LUST Trust fund financing rate).⁸⁷

² Secs. 40(b)(4) and (g)(1). The alcohol fuels tax credit (which is comprised of the small ethanol producer credit, the alcohol mixture credit, and the alcohol credit) is scheduled to expire after December 31, 2010 (sec. 40(e)(1)).

³ Sec. 172.

⁴ Pub. Law No. 107-147.

⁵ Sec. 4051(a).

⁶ Sec. 4053(2).

⁷ Sec. 4081(a)(2)(A)(iv). (An additional 0.1 cent is imposed on aviation-grade kerosene and credited to the Leaking Underground Storage Tank ("LUST" Trust Fund). Sec. 4081(a)(2)(B). The LUST Trust Fund tax is set to expire after September 30, 2005. Sec. 4081(d)(3).

⁸ Sec. 4081(a)(2)(C).

⁹ Sec. 4082(e). Exempt uses include use in commercial aviation as supplies for vessels or aircraft, which includes use by certain foreign air carriers and for the international flights of domestic carriers. Secs. 4082(e), 6427(l)(2), and 4221(d)(3),

¹⁰ Sec. 4081(a)(1)(B).

¹¹ Sec. 9502(b)(1)(C).

¹² Sec. 6427(l)(4). Nontaxable uses include: (1) use other than as fuel in an aircraft (such as use in heating oil); (2) use on a farm for farming purposes; (3) use in a military aircraft owned by the United States or a foreign country; (4) use in a domestic air carrier engaged in foreign trade or trade between the United States and any of its possessions; (5) use in a foreign air carrier engaged in foreign trade or trade between the United States and any of its possessions (but only if the foreign carrier's country of registration provides similar privileges to United States carriers); (6) exclusive use of a State or local government; (7) sales for export, or shipment to a United States possession; (8) exclusive use by a nonprofit educational organization; (9) use by an aircraft museum exclusively for the procurement, care, or exhibition of aircraft of the type used for combat or transport in World War II; and (10) use as a fuel in a helicopter or a fixed-wing aircraft for purposes of providing transportation with respect to which certain requirements are met. Secs. 4041(f)(2), 4041(g), 4041(h), 4041(l), and 6427(l)(2)(B)(i).

¹³ Sec. 9502(d)(2).

¹⁴ Sec. 4081(a)(2)(iii).

¹⁵ Sec. 9503(b)(1)(D).

¹⁶ For example, for kerosene removed directly into the fuel tank of an aircraft for use in commercial aviation by a person registered for such use, the rate of tax is 4.3 cents per gallon. Kerosene removed directly into the fuel tank of an aircraft for an exempt use is not taxed. For purposes of these reduced rates, it is intended that the following airports be included on the Secretary's expanded list of airports that include a secured area in which a terminal is located: Los Angeles International Airport (T-95-CA-4812) and Federal Express Corporation Memphis (T-62-TN-2220).

¹⁷ Sec. 6427(l)(1).

¹⁸ Generally, refund payments are only made to governmental units and tax-exempt organizations. Sec. 6427(k). The quarterly payment claim rules for ultimate purchasers are an exception to this rule.

¹⁹ Sec. 6427(i)(2).

²⁰ Sec. 6427(i)(4)(A).

²¹ Notice 89-29, 1989-1 C.B. 669.

²² Pub. L. No. 108-357.

²³ AJCA, sec. 865(a), effective January 1, 2005. See Code sec. 6416(a)(4)(A).

²⁴ In Notice 2005-4, 2005-2 I.R.B. 289, the Treasury Department confirmed that it would continue to apply the oil company credit card rule until March 1, 2005. On February 28, 2005, the Treasury Department issued Notice 2005-24, 2005-12 I.R.B. 1, modifying Notice 2005-4. Notice 2005-24 stated that the oil company credit card rule will remain in effect until it is modified by a statutory change or by future guidance.

²⁵ Sec. 6146(a)(4)(B).

²⁶ Sec. 6427(l)(1).

²⁷ See secs. 6427(l)(4)(B), (l)(5)(B), and (l)(5)(C), and sec. 6416(a)(1)(A), (B), and (D).

²⁸ See sec. 6421(c).

²⁹ See secs. 6719, 7232, and 7272.

³⁰ See sec. 6416(a)(4)(B). Present law would continue to apply to the timing of ultimate purchaser claims. Under present law, claims by an ultimate purchaser are generally made on an annual basis. However, claims aggregating over $750 may be made quarterly. See secs. 6421(d) and 6427(i)(2).

³¹ Sec. 6421(c).

³² Sec. 6416(a)(4)(A).

³³ Treas. Reg. sec. 48.6416(b)(2)-3(a)(5).

³⁴ Treas. Reg. sec. 48.6416(b)(2)-3(b)(1)(i) and (ii). The certificate must also contain a statement that the ultimate purchaser understands that it and any other party may, for fraudulent use of the certificate, be subject under section 7201 to a fine of not more than $10,000, or imprisonment for not more than five years, or both, together with the costs of prosecution.

³⁵ Treas. Reg. sec. 48.6416(b)(2)-3(b)(1)(i) and (iii).

³⁶ Sec. 6427(l)(1). In the case of diesel fuel or kerosene, a nontaxable use is any use which is exempt from the tax imposed by section 4041(a)(1) other than by reason of a prior imposition of tax. Sec. 6427(l)(2).

³⁷ Sec. 6427(l)(5)(C).

³⁸ Treas. Reg. sec. 48.6427-9(e)(1)(vi).

³⁹ Sec. 4221(d)(4); Treas. Reg. sec. 48.6416(b)(2)-2(d).

⁴⁰ Sec. 4221(d)(5); Treas. Reg. sec. 48.6416(b)(2)-2(e).

⁴¹ In general, as defined in section 150(e)(2), a qualified volunteer fire department is any organization organized and operated to provide firefighting or emergency medical services for persons in an area that is not provided with any other firefighting services, and which is required by written agreement with the political subdivision to furnish firefighting services in such area.

⁴² Sec. 4101; Treas. Reg. sec. 48.4101-1(a) and (c)(1).

⁴³ Sec. 6719.

⁴⁴ Sec. 7272(a).

⁴⁵ Sec. 7232.

⁴⁶ Treas. Reg. sec. 48.4101-1(h)(1)(v).

⁴⁷ Sec. 4101; Treas. Reg. sec. 48.4101-1(a) and (c)(1).

⁴⁸ Treas. Reg. sec. 48.4101-1(b)(8).

⁴⁹ Sec. 4042(c)(1).

⁵⁰ Sec. 6719.

⁵¹ Sec. 7272(a).

⁵² Sec. 7232.

⁵³ Sec. 4081(a)(1)(A).

⁵⁴ Sec. 4081(a)(1)(B). The sale of a taxable fuel to an unregistered person prior to a taxable removal or entry of the fuel is subject to tax. Sec. 4081(a)(1)(A).

⁵⁵ Sec. 343(a) of Pub. L. No. 107-210 (2002).

⁵⁶ 19 CFR sec. 4.7(b)(2).

⁵⁷ 19 CFR sec. 4.7(b)(4)(i)(A).

⁵⁸ Sec. 4083(a).

⁵⁹ Treas. Reg. sec. 48.4081-1(c)(3)(ii). The term "gasoline blend stocks" means alkylate; butane; catalytically cracked gasoline; coker gasoline; ethyl tertiary butyl ether (ETBE); hexane; hydrocrackate; isomerate; methyl tertiary butyl ether (MTBE); mixed xylene (not including any separated isomer of xylene); natural gasoline; pentane; pentane mixture; polymer gasoline; raffinate; reformate; straight-run gasoline; straight-run naphtha; tertiary amyl methyl ether (TAME); tertiary butyl alcohol (gasoline grade) (TBA); thermally cracked gasoline; and toluene. Treas. Reg. sec. 48.4081-1(c)(3)(i). Effective January 1, 2005, transmix containing gasoline was removed from the definition of gasoline blend stocks. Internal Revenue Service, Notice 2005-4 (December 15, 2004).

⁶⁰ Sec. 4081(a)(1).

⁶¹ Sec. 4081(a)(1)(B).

⁶² Treas. Reg. sec. 48.4081-4.

⁶³ Treas. Reg. sec. 48.4081-4(b)(1) and (2).

⁶⁴ Treas. Reg. sec. 48.4081-4(b)(1)

⁶⁵ Treas. Reg. sec. 48.4081-4(d).

⁶⁶ Sec. 6427(h)(1).

⁶⁷ Sec. 6421(a) and (e).

⁶⁸ Sec. 6421(e)(1) and sec. 4083(a)(2)(B).

⁶⁹ Sec. 6416(b)(3)(B).

⁷⁰ Treas. Reg. sec. 48.4081-1(b).

⁷¹ Sec. 4082(d)(1).

⁷² Treas. Reg. sec. 48.4082-7(c).

⁷³ Treas. Reg. sec. 48.4082-7(c).

⁷⁴ Treas. Reg. sec. 48.4082-7(b).

⁷⁵ A blocked pump is a fuel pump that is used to dispense undyed kerosene that is sold at retail for use by the buyer in any nontaxable use; is at a fixed location; is identifed with a legible and conspicuous notice stating "Undyed Untaxed Kerosene, Nontaxable Use Only," and cannot reasonably be used to dispense fuel directly into the fuel supply tank of a diesel-powered highway vehicle or dieselpowered train; or is locked by the vendor after each sale and unlocked only in response to a request by a buyer for undyed kerosene for use other than as a fuel in a diesel-powered highway vehicle or dieselpowered train.

⁷⁶ Sec. 6416(b)(3)(B).

⁷⁷ Sec. 4081(a)(1).

⁷⁸ Secs. 6421(c) and 4221(a)(2).

⁷⁹ Rev. Rul. 69-150, 1969-1 C.B. 286.

⁸⁰ See, Ammex Inc. v. United States, 52 Fed. Cl. 303 (2002) (on cross-motions for summary judgment, the court found that plaintiff established standing to proceed to trial pursuant to sec. 6421(c) respecting its gasoline purchases only); and Ammex Inc. v. United States, 2002 U.S. Dist. LEXIS 25771 (E.D. Mich. July 31, 2002) (granting defendant's motion for summary judgment), reconsideration denied, Ammex, Inc. v. United States, 2002 U.S. Dist. LEXIS 22893 (E.D. Mich. Oct. 22, 2002). Although the Claims Court ruled that Ammex had standing to challenge the excise tax on gasoline, it subsequently held that Ammex was not entitled to a payment pursuant to sec. 6421(c) because it failed to prove at trial that it did not pass the tax on to its customers. Ammex Inc. v. United States, 2003 U.S. Claims LEXIS 63 (Fed. Cl. Mar. 26, 2003). The Claims Court finding that the plaintiff had standing was reversed on appeal.

⁸¹ See, Ammex Inc. v. United States, 384 F.3d 1368 (Fed. Cir. 2004) cert. denied 125 S.Ct. 1697 (2005); and Ammex Inc. v. United States, 367 F.3d 530 (6th Cir. 2004) cert. denied 125 S.Ct. 1695 (2005).

⁸² Sec. 4083(a)(3)(A).

⁸³ Sec. 7211. Such a violation is punishable by a fine not to exceed $1,000, or by imprisonment for not more than one year, or both.

⁸⁴ Sec. 7268.

⁸⁵ Section 45H(c)(3) refers to "the Highway Diesel Fuel Sulfur Control Requirements of the Environmental Protection Agency."

⁸⁶ For qualified methanol and ethanol fuel the rate is 0.05 cents per gallon (sec. 4041(b)(2)(A)(ii). Qualified methanol or ethanol fuel is any liquid at least 85 percent of which consists of methanol, ethanol or other alcohol produced from coal (including peat) (sec. 4041(b)(2)(B)).

⁸⁷ Specifically, section 9508(c)(2) requires the LUST Trust Fund to reimburse the General Fund from time to time for claims paid pursuant to sections 6420 (relating to amounts paid in respect of gasoline used on farms), section 6421 (relating to amounts paid in respect of gasoline used for certain nonhighway purposes or by local transit systems), and section 6427 (relating to fuels not used for taxable purposes) and income credits allowed under section 34 for the purposes previously mentioned. No income tax credit is allowed for any amount payable under section 6421 or 6427 if a claim for such amount is timely filed and is payable under such section (sec. 34(b)).