GASOHOL DEALERS SAY BLENDING RULE CAN TAINT THE WHOLE TANK.

SUMMARY: Jack W. Carlson of Thomsen & Nybeck, P.A., Minneapolis, on behalf of Thelen Oil Company and Food-N-Fuel, Inc., has asked the Service to amend the gasohol regulations to modify the tolerance rule to the 10-percent alcohol requirement and later-blending rule. Although the proposed regulations take into consideration the problems inherent in meeting the precise test for gasohol, Carlson says, the industry is concerned with the existing later-blending rule, which presents "substantial practical difficulties" to distributors and dealers.

According to Carlson, the real difficulty is that any variance from the later-blending rule could taint not only the gasohol currently in the retail storage tank, but also all subsequent dumps into the "tainted" tank. The rule should be changed, he says, to require measurement of alcohol content when the fuel mixture is placed in the distributor's delivery vehicles. That would avoid the likelihood of imprecise measurement at the retail tank and protect future shipments from being disqualified from the excise tax break.

Carlson also recommends that the regulations be applied retroactively to April 1, 1983. Because there have been no changes in the statute and the newly proposed regulations are interpretive, there is no reason to establish a 1991 effective date, he notes.

These comments have been prepared with respect to the Internal Revenue Service Notice of Proposed Rulemaking (PS-93-88), amending the gasohol regulations to modify the tolerance rule allowed to the 10 percent alcohol requirement and the later blending rule, which notice was published in the February 25, 1991 Federal Register. These comments are submitted on behalf of my clients, Thelen Oil Company, George M. Thelen, and Food-N-Fuel, Inc. Thelen Oil and George Thelen are both distributors and retailers of motor fuels and Food-N-Fuel is a retailer of motor fuels.

COMMENTS ON SUBSTANTIVE RULES

The Treasury Department and the Internal Revenue Service are to be commended for preparing proposed regulations that appear to meet the intent of Congress to encourage the use of gasohol and which generally take into consideration the operational practices of distributors and retailers in the motor fuel business. It appears to us that these proposed regulations appropriately correct the deficiencies in the existing regulations. We are especially appreciative that prior comments made by people in the industry and their representatives have been considered in both the proposed regulations and in the explanatory material accompanying such proposed regulations.

We believe the proposed regulations take into consideration the practical difficulties in meeting the precise test for gasohol (10 percent alcohol and 90 percent gasoline). As the explanation of the proposed regulations properly points out, the exact percentage level may not be attained because the device used to meter the amount of gasoline or alcohol added to the tank truck is imprecise or because the high-speed gasoline or alcohol pump used does not shut off at the proper moment. There can also be human error which may cause a specific truckload of gasohol to fall short of the specific required percentage test. As was also properly pointed out in the explanatory provisions, blenders cannot compensate for errors by consistently aiming for an alcohol content in excess of 10 percent because of Environmental Protection Agency Rules regulating the sale of gasohol to consumers, which explicitly authorize only the sale of gasohol containing not more than 10 percent alcohol. The proposed tolerance rules correspond to the intent of Congress and the prior statements of representatives of the Treasury Department that the gasohol excise tax rules will not be administered in an overly restricted manner and will be administered in a reasonable manner.

We have been concerned with the existing later blending regulation which presents substantial practical difficulties to distributors and retailers. Regulation section 48.4081-2(e)(3). The difficulty with the current regulation is that any variance from the later blending regulation could taint not only the gasohol in a retail storage tank at that time, but all subsequent dumps of gasohol into the "tainted" retail tank. In accordance with the position of some Internal Revenue Service agents, even a minuscule dilution of the gasohol in the retail tank under the current regulation would taint every subsequent gasohol dump to infinity. The proposed later blending regulation changes will make it substantially easier for distributors and retailers to comply with the law as intended by Congress.

The Treasury Department and the Internal Revenue Service have recognized in proposed Regulation section 48.4081-2(e)(3) certain commercial and operational realities involved with later blending. First, in circumstances where the retailer converts a retail pump from gasoline to gasohol in many instances there may still be some gasoline in the storage tank and it is not practical or even prudent to completely drain the gasoline from the tank before the conversion to gasohol. The proposed later blending regulation and especially Example 2 of such regulation meets that concern.

The other practical circumstance which is addressed in the explanatory material is the situation where in certain rare circumstances the retailer is forced to have pure gasoline pumped in the gasohol retail storage tank because the distributor is unable to obtain at the terminal alcohol needed to blend with the gasoline. In those rare situations the distributor may pump gasoline into a gasohol retail storage tank, as the retailer must have fuel to provide for its customers. These circumstances can arise where, for a variety of reasons, a supply of alcohol is not available. It would seem that an Example 3 in the proposed later blending regulation, illustrating the point made in the explanatory material, would be helpful.

The current regulations contain a provision as follows: "Qualifying gasoline (hereinafter defined as gasohol) is a blend of gasoline and alcohol in a mixture at least 10 percent of which is alcohol IMMEDIATELY AFTER THE MIXTURE IS BLENDED. Reg. section 48.4081-2(a)(5). The most efficient and the most accurate time for determining whether or not a mixture of gasoline and alcohol qualifies as gasohol is at the terminal when the gasoline and alcohol are dumped into the trucks of the distributor. The proper tax can be assessed at that time and proper compliance can better be determined by the Internal Revenue Service.

Any determination at the retail storage tank level cannot be precise. First, there is the problem of water condensation inside the underground retail storage tank. This water condensation has an effect on the measurement of the amount of alcohol in an underground tank, thus reducing the percentage of alcohol in the tank.

Second, is the problem that results from "phase separation." In any underground tank there is a form of separation caused by the fact that water is heaviest, gasoline next heaviest and alcohol the lightest of the components inside the tank. Therefore, any tests made to determine the amount of alcohol in the underground tank will likely be inaccurate, especially if the test is not done by stirring the components of the tank and immediately measuring its context. Therefore, any attempt to measure the amount of alcohol and gasoline in a gasohol retail storage tank will be very imprecise and subject to question.

EFFECTIVE DATE

Although we are pleased with the substance of the proposed regulations adopted by the Treasury Department and the Internal Revenue Service, we have major concerns with respect to their effective date. The proposed regulations would apply these revised rules only to sales or removals from the terminal of gasohol made on or after January 1, 1991.

We believe that the proposed regulations should contain the same effective date as the corresponding rules in the existing regulations so that they should apply to sales or removals of gasoline or gasohol made on or after April 1, 1983. These newly proposed regulations and interpretative rules, are designed to make the regulations conform to the 1982 Congressional directive that the 10 percent alcohol requirement in the statute "be enforced in a reasonable manner which recognizes commercial and operational practicalities. . . . (and) with some tolerance of the operating realities of the industry." S. Rep. No. 97-592, 97th Cong., 2d Sess., 48. We believe that the regulations have been modified in order to reflect a better understanding by the Treasury Department and the Internal Revenue Service of the intent of Congress and the operational methods of the motor fuel industry. Since these proposed changes would bring the regulations into conformity with expressed Congressional intent, it is appropriate that the change be applied to the same period as the existing regulations. There has been no change in the statute nor has there been any statements indicating a change in the intent of Congress to encourage the use of gasohol as an alternative fuel.

It is our understanding that there are a very few cases pending involving the issues discussed in the proposed regulations for prior years. It is also our understanding that in most, if not all of those cases the variances have been slight and the intent of the distributors and retailers was to meet the letter and intent of the statute and regulations. It would seem to be unduly harsh to penalize such taxpayers on a very selective basis.

Although some taxpayers whose blending activities have allegedly failed to comply with existing regulations may be able to obtain relief by utilization of the alcohol credit found in Section 40 of the Internal Revenue Code, such credit may not be able to be utilized if the taxpayers do not have sufficient income tax liability.

SUMMARY

In conclusion, we believe the Treasury Department and the Internal Revenue Service have provided the industry with workable rules in the tolerance and later blending areas which are administerable by the Internal Revenue Service. However, we strongly urge that the effective date for the proposed regulations be the same as the effective date of the existing regulations (April 1, 1983).

We reserve the right to request the opportunity to speak at a public hearing on these regulations. However, we are not requesting such a hearing at this time.

Thank you for the opportunity to comment on these proposed regulations.

Yours very truly,