Hydrocarbon Company Opposes Proposed Petroleum Superfund Tax Regs.

C. C. McCampbell of Koch Industries Inc., Wichita, Kan., has written to strongly oppose the proposed regulations under section 4612 that would, he argues, subject natural gas fractionators to the federal petroleum superfund tax for the first time. McCampbell asserts that "for the Service to state that these proposed regulations do not represent a change in the Treasury's interpretation is absurd."

McCampbell suggests that the Service should first determine whether Congress intended to tax the use of natural gasoline -- other than as a feedstock to crude oil. If that is the case, he argues, then such natural gasoline should only be taxed when it can be determined that no tax duplication will occur.

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June 9, 1993

Internal Revenue Service

Re: Comments of Koch Industries, Inc. to Proposed Treasury Regulation

Dear Sir or Madam:

Koch Industries, Inc. would like to strongly oppose the adoption of Proposed Treasury Regulation 52.4612-1 which subject natural gas fractionators to the federal petroleum superfund tax for the first time. You should soon receive detailed letters from the Gas Processors Association and the American Petroleum Institute which we endorse in their entirety. I will not specifically reiterate their points, but would like to explain how this change has already affected Koch Industries, Inc. and our businesses.

Retroactive Application of this Regulation

Koch Industries, Inc. fractionates natural gas liquids at several of our gas plants and at our fractionator located at Medford, Oklahoma. We are also presently undergoing a federal excise examination for the 1990 and 1991 tax years. As a result of these proposed regulations, the auditor would have assessed our company over two million dollars for the two years under examination had we not consented to an extension in the statute pending a resolution of this matter.

For the Service to state that these proposed regulations do not represent a change in the Treasury's interpretation is absurd. The history of legislation in Congress, the Treasury's own proposed regulations in the early 1980's, and the audit examination procedures for over last 10 years are all indications that the imposition of the superfund tax on production of natural gasoline away from a crude oil refinery is a fundamental change in the Services' interpretation. if these proposed regulations are implemented, they should only be applied to future quarters and should require congressional legislation.

Duplicate payment of tax

Since the issuance of the proposed regulations on April 26, there are already problems within Koch which are leading to duplicate petroleum superfund tax payments. NGL fractionators, such as Koch Hydrocarbon Company, are now paying tax and billing an additional surcharge on sales of natural gasoline. Crude oil refiners, such as Koch Refining Company, who have traditionally paid the tax on natural gasoline must now document whether or not the natural gasoline received at a crude oil refinery originated from a fractionating facility or crude oil condensate in order to avoid paying the tax a second time.

A solution

There is a solution to the morass created by these proposed regulations. First, the Service should determine whether or not Congress had intended use of natural gasoline, other than as a feedstock to crude oil refining, to be taxed. It appears from the congressional testimony that this is all Congress intended to tax. Second, assuming that it can be established that Congress intended to tax natural gasoline at locations other than crude oil refineries, it should be taxed only when it can be determined that tax duplication will not occur. The gasoline blender or petrochemical plant should be made responsible for paying tax on their use of natural gasoline. The Service should know who fits this category because they are either 637 registrants or have issued exemption certificates under the regulation dealing with gasoline blendstocks.

I appreciate the opportunity to provide written comments on these proposed regulations.

Very Truly Yours,

C.C. McCampbell