TD 8609 Gasohol; Compressed Natural Gas

Federal Register / Vol. 60, No. 151 / Monday, August 7, 1995 / Rules and Regulations
years’’ and replacing it with ‘‘pre-1954
years’’ in each place that it appears.
The revised paragraphs read as
follows:
§ 1.481–2

Limitation on tax.

(a) Three-year allocation. Section
481(b)(1) provides a limitation on the
tax under chapter 1 of the Internal
Revenue Code for the taxable year of
change that is attributable to the
adjustments required under section
481(a) and § 1.481–1 if the entire
amount of the adjustments is taken into
account in the year of change. If such
adjustments increase the taxpayer’s
taxable income for the taxable year of
the change by more than $3,000, then
the tax for such taxable year that is
attributable to the adjustments shall not
exceed the lesser of the tax attributable
to taking such adjustments into account
in computing taxable income for the
taxable year of the change under section
481(a) and § 1.481–1, or the aggregate of
the increases in tax that would result if
the adjustments were included ratably
in the taxable year of the change and the
two preceding taxable years. * * *
(b) Allocation under new method of
accounting. Section 481(b)(2) provides a
second alternative limitation on the tax
for the taxable year of change under
chapter 1 of the Internal Revenue Code
that is attributable to the adjustments
required under section 481(a) and
§ 1.481–1 where such adjustments
increase taxable income for the taxable
year of change by more than $3,000.
* * *
(c) Rules for computation of tax. (1)
The first step in determining whether
either of the limitations described in
section 481(b) (1) or (2) applies is to
compute the increase in tax for the
taxable year of the change that is
attributable to the increase in taxable
income for such year resulting solely
from the adjustments required under
section 481(a) and § 1.481–1.
*
*
*
*
*
(4) The tax for the taxable year of the
change shall be the tax for such year,
computed without taking any of the
adjustments referred to in paragraph
(c)(1) of this section into account,
increased by the smallest of the
following amounts—
(i) The amount of tax for the taxable
year of the change attributable solely to
taking into account the entire amount of
the adjustments required by section
481(a) and § 1.481–1;
(ii) The sum of the increases in tax
liability for the taxable year of the
change and the two immediately
preceding taxable years that would have
resulted solely from taking into account
one-third of the amount of such

adjustments required for each of such
years as though such amounts had been
properly attributable to such years
(computed in accordance with
paragraph (c)(2) of this section); or
(iii) The net increase in tax
attributable to allocating such
adjustments under the new method of
accounting (computed in accordance
with paragraph (c)(3) of this section).
*
*
*
*
*
§ 1.481–3

[Amended]

Par. 5. Section 1.481–3 is amended as
follows:
1. The language ‘‘pre-1954 Code
years’’ is removed and the language
‘‘pre-1954 years’’ is added in its place in
the section heading and the first, second
and third sentences of the section.
2. Remove the last sentence of the
section.
§ 1.481–4

[Removed]

Par. 6. Section 1.481–4 is removed.
§ 1.481–5

[Redesignated as § 1.481–4]

Par. 7. Section 1.481–5 is
redesignated as § 1.481–4 and is revised
to read as follows:
§ 1.481–4 Adjustments taken into account
with consent.

(a) In addition to the terms and
conditions prescribed by the
Commissioner under § 1.446–1(e)(3) for
effecting a change in method of
accounting, including the taxable year
or years in which the amount of the
adjustments required by section 481(a)
is to be taken into account, or the
methods of allocation described in
section 481(b), a taxpayer may request
approval of an alternative method of
allocating the amount of the
adjustments under section 481. See
section 481(c). Requests for approval of
an alternative method of allocation shall
set forth in detail the facts and
circumstances upon which the taxpayer
bases its request. Permission will be
granted only if the taxpayer and the
Commissioner agree to the terms and
conditions under which the allocation is
to be effected. See § 1.446–1(e) for the
rules regarding how to secure the
Commissioner’s consent to a change in
method of accounting.
(b) An agreement to the terms and
conditions of a change in method of
accounting under § 1.446–1(e)(3),
including the taxable year or years
prescribed by the Commissioner under
that section (or an alternative method
described in paragraph (a) of this
section) for taking the amount of the
adjustments under section 481(a) into
account, shall be in writing and shall be
signed by the Commissioner and the

40079

taxpayer. It shall set forth the items to
be adjusted, the amount of the
adjustments, the taxable year or years
for which the adjustments are to be
taken into account, and the amount of
the adjustments allocable to each year.
The agreement shall be binding on the
parties except upon a showing of fraud,
malfeasance, or misrepresentation of
material fact.
Par. 8. Section 1.481–5 is added to
read as follows:
§ 1.481–5

Effective dates.

Sections 1.481–1, 1.481–2, 1.481–3,
and 1.481–4 are effective for Consent
Agreements signed on or after December
27, 1994. For Consent Agreements
signed before December 27, 1994, see
§§ 1.481–1, 1.481–2, 1.481–3, 1.481–4,
and 1.481–5 (as contained in the 26 CFR
part 1 edition revised as of April 1,
1995).
§ 1.481–6

[Removed]

Par. 9. Section 1.481–6 is removed.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved: July 26, 1995.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 95–19283 Filed 8–4–95; 8:45 am]
BILLING CODE 4830–01–U

26 CFR Parts 40, 48, and 602
[TD 8609]
RIN 1545–AS10

Gasohol; Compressed Natural Gas
Internal Revenue Service (IRS),
Treasury.
AGENCY:
ACTION:

Final regulations.

This document contains final
regulations relating to gasohol blending
and the tax on compressed natural gas
(CNG). The regulations reflect and
implement certain changes made by the
Energy Policy Act of 1992 (the Energy
Act) and the Omnibus Budget
Reconciliation Act of 1993 (the 1993
Act). The regulations relating to gasohol
blending affect certain blenders,
enterers, refiners, and throughputters.
The regulations relating to CNG affect
persons that sell or buy CNG for use as
a fuel in a motor vehicle or motorboat.
SUMMARY:

These regulations are
effective October 1, 1995.

EFFECTIVE DATE:

FOR FURTHER INFORMATION CONTACT:
Frank Boland (202) 622–3130 (not a tollfree call).

40080

Federal Register / Vol. 60, No. 151 / Monday, August 7, 1995 / Rules and Regulations

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act
The collections of information
contained in these final regulations have
been reviewed and approved by the
Office of Management and Budget in
accordance with the Paperwork
Reduction Act (44 U.S.C. 3504(h)) under
control number 1545–1270. The
estimated average annual reporting
burden per respondent is .2 hour.
Comments concerning the accuracy of
this burden estimate and suggestions for
reducing this burden should be sent to
the Internal Revenue Service, Attn: IRS
Reports Clearance Officer, PC:FP,
Washington, DC 20224, and to the
Office of Management and Budget, Attn:
Desk Officer for the Department of the
Treasury, Office of Information and
Regulatory Affairs, Washington, DC
20503.
Background
On October 19, 1994, the IRS
published in the Federal Register (59
FR 52735) proposed regulations (PS–66–
93) that generally consolidate the rules
relating to the gasoline tax and the
diesel fuel tax into a single set of rules
applicable to both fuels. These
regulations also proposed rules relating
to gasohol and CNG.
Written comments regarding these
regulations were received and a public
hearing was held on January 11, 1995.
After consideration of the comments
relating to gasohol and CNG, the
proposed regulations on these topics are
adopted as revised by this Treasury
decision. Final regulations relating to
the consolidation provisions contained
in the proposed regulations will be
issued later.
Explanation of Provisions
CNG; Treatment of Liquefied Natural
Gas (LNG)
Section 4041(a)(2) imposes a special
motor fuels tax on any liquid (other than
kerosene, gas oil, fuel oil, gasoline, or
diesel fuel) that is sold for use or used
as a fuel in a motor vehicle or
motorboat. The rate of this tax is 18.4
cents per gallon (18.3 cents per gallon
in the case of liquefied petroleum gas).
Effective October 1, 1993, section
4041(a)(3) (as added by the 1993 Act)
imposes a tax of 48.54 cents per MCF
(thousand cubic feet) on CNG that is
sold for use or used in a motor vehicle
or motorboat.
CNG is a gas at the time it is delivered
into the fuel supply tank of a motor
vehicle or motorboat and when it is
actually combusted in the engine. LNG,
which is produced by compressing
pipeline natural gas and cooling it to

CNG; Gasoline Gallon Equivalent
The CNG industry has recently begun
to sell CNG on the basis of CNG’s
Gasoline Gallon Equivalent (GGE).
Generally, a GGE represents a particular
fuel’s energy content relative to the
energy content of gasoline; thus,
vehicles can travel approximately the
same distance with a GGE of CNG as
with a gallon of gasoline.
Several commentators suggested that
the final regulations should express the
CNG tax rate in terms of GGE instead of
in terms of MCF as provided in the
Code. The final regulations do not adopt
this suggestion. However, there is no
restriction on taxpayers engaging in
sales on the basis of GGE provided that
the tax is actually paid at the rate of
48.54 cents per MCF.

to be gasohol. Any excess liquid in the
mixture is taxed at the regular rate.
This tolerance rule accommodates
operational problems associated with
the blending of gasohol. For example,
blenders may fail to attain the required
10-percent alcohol level because the
device used to meter the amount of
gasoline or alcohol delivered into a tank
truck is imprecise or because the highspeed gasoline or alcohol pump used
does not shut off at the proper moment.
As noted in the preamble to an earlier
regulation relating to gasohol tolerances
(published in the Federal Register on
August 21, 1987 (52 FR 31614)), this 2
percent tolerance is based upon a
standard industry tolerance
specification for wholesale measuring
devices.
Effective January 1, 1993, section
4081(c) was amended to allow a
reduction from the regular rate for
mixtures containing at least 5.7 percent
alcohol but less than 7.7 percent alcohol
(5.7 percent gasohol) and mixtures
containing at least 7.7 percent alcohol
but less than 10 percent alcohol (7.7
percent gasohol).
The proposed regulations did not
extend the tolerance rule to mixtures
that contain less than 7.7 or 5.7 percent
alcohol. Several commentators
suggested that the tolerance rule be so
extended. They noted that the same
operational problems that occur with
the blending of 10 percent gasohol also
occur with the blending of 7.7 or 5.7
percent gasohol.
The final regulations adopt this
suggestion and allow a tolerance for 7.7
and 5.7 percent gasohol in
approximately the same percentage as
that allowed for 10 percent gasohol. Any
excess liquid in a mixture that qualifies
as 5.7 percent gasohol or 7.7 percent
gasohol because of the tolerance rule is
taxed at the regular rate.

Gasohol; Tolerance Rule
The gasoline tax rate on most
removals and entries is 18.4 cents per
gallon (the regular tax rate). However, a
reduction from the regular tax rate is
allowed for gasohol (a gasoline/alcohol
mixture containing a specified amount
of alcohol) and gasoline removed or
entered for the production of gasohol.
Prior to its amendment by the Energy
Act, section 4081(c) treated a mixture of
gasoline and alcohol as gasohol only if
at least 10 percent of the mixture was
alcohol. Regulations allow a tolerance
for mixtures that contain less than 10
percent alcohol but at least 9.8 percent
alcohol. Under the tolerance rule, a
portion of the mixture equal to the
number of gallons of alcohol in the
mixture multiplied by 10 is considered

Gasohol; Alcohol-Based Ethers
The proposed regulations provide that
alcohol (that is, alcohol that is not
produced from petroleum, natural gas,
or coal (including peat)) used to
produce ethers such as ethyl tertiary
butyl ether (ETBE) or methyl tertiary
butyl ether (MTBE) is treated as alcohol
for purposes of the reduced tax rates for
gasohol. Some commentators suggested
that, with respect to gasohol produced
by blending gasoline made with alcoholbased ether at a refinery, the regulations
should also provide (1) An allocation
rule and (2) guidance regarding the
application of the income tax credit
allowable by section 40.
Allocation rule. Traditionally, gasohol
has been produced by delivering the
requisite amount of alcohol into a

¥260 degrees Fahrenheit, is a liquid
when it is delivered into the fuel supply
tank of a motor vehicle or motorboat,
but is vaporized into a gas when it is
actually combusted in the engine.
Several commentators suggested that
the CNG rate, rather than the rate on
special motor fuels, should apply to
LNG because (1) Both products have the
same chemical composition, (2) both
products are gases when they are
actually combusted in an engine, and (3)
LNG would be at a competitive
disadvantage if taxed at the liquid rate.
The final regulations do not adopt this
suggestion. Before the 1993 Act, the
section 4041 special fuels tax applied to
liquids sold for use or used as a fuel in
motor vehicles or motorboats. Thus,
LNG was subject to tax at the special
fuels rate of 18.4 cents per gallon when
the 1993 Act imposed a tax at a lower
rate on CNG. The 1993 Act contained no
provision that would change the
treatment of LNG, nor is there any
suggestion in the legislative history that
Congress intended to do so.

Federal Register / Vol. 60, No. 151 / Monday, August 7, 1995 / Rules and Regulations
transport trailer that contains gasoline
while the trailer is at a terminal rack.
The two components are blended
together by the motion of the trailer as
it moves on the highway.
Now, however, gasohol may be
produced at the refinery with alcoholbased ether. This type of gasohol does
not absorb water, which means it can be
transported through a pipeline.
However, after shipment from the
refinery and before its removal at the
terminal rack, much of this gasohol may
have been diluted with non-qualifying
blends because of the use of commoncarrier pipelines, barges, and nonsegregated storage facilities. As a result,
the blend removed at the terminal rack
may not qualify for the reduction from
the regular rate due to commingling
between the refinery and terminal rack.
To address this issue, several
commentators suggested an allocation
system for gasohol that is produced
before it reaches the terminal that would
not depend on the actual existence of a
qualified mixture at the taxing point.
For example, a refiner that removes one
million gallons of gasohol from its
refinery for bulk shipment to a terminal
could designate any one million gallons
of gasoline that is removed at the
terminal rack as gasohol, regardless of
the actual alcohol-based ether content of
the gasoline.
Other commentators, by contrast,
opposed expanding the benefit for
gasohol made with ether-based alcohol
by allowing such an allocation rule.
Rather, these commentators argued that
a batch of mixture should not be taxed
at the reduced rate unless the mixture
actually contains the requisite amount
of alcohol at the taxing point.
The final regulations do not adopt the
suggested allocation rule. Under section
4081(c), a reduction from the regular tax
rate is allowable in the case of a taxable
removal or entry of gasohol. Thus, a
taxable removal or entry of gasoline that
does not contain the requisite amount of
alcohol at the time of the taxable
removal or entry is not a removal of
gasohol and is subject to tax at the
regular rate.
However, the final regulations do
address concerns arising from this
relatively recent development of
producing gasohol at the refinery rather
than at the terminal rack. Specifically,
section 4101 provides that every person
required to be registered with respect to
the gasoline tax must register at such
time, in such form and manner, and
subject to such terms and conditions as
the Secretary may prescribe by
regulations. Pursuant to that provision,
the final regulations provide that a
refiner registered by the IRS that

produces a batch of gasohol may treat
itself as not registered with respect to a
bulk removal of that gasohol. If the
refiner treats itself in this manner, the
removal would not be exempt from the
tax under section 4081(a)(1)(B), which
provides that the bulk removal by a
registered refiner for delivery to a
terminal operated by a registered
terminal operator is not subject to the
tax. However, because the mixture
would qualify as gasohol at the time of
removal from the refinery, it would be
subject to tax at the reduced rate. The
final regulations also provide that the
refiner is not required to deposit this tax
before filing the return relating to that
tax.
If a refiner chooses this option, tax
also will be imposed under § 48.4081–
2(b) at the full rate when the fuel is
removed at the terminal rack, but a
refund of this second tax may then be
allowable to the position holder under
section 4081(e).
Application of section 40. Section 40
allows an income tax credit to the
producer of certain mixtures of alcohol
and gasoline. Under section 40(c), the
amount of this credit with respect to any
alcohol is reduced to take into account
any benefit provided with respect to
such alcohol solely by reason of the
application of section 4081(c).
One commentator suggested that the
final regulations provide that a refiner
that produces a mixture of gasoline with
an alcohol-based ether always is eligible
for the section 40 credit, without
reduction under section 40(c).
The final regulations do not adopt this
suggestion because it is inconsistent
with section 40(c), which requires a
reduction in the credit whenever a
mixture is taxed at a reduced rate for
gasohol under section 4081(c).
Special Analyses
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in EO
12866. Therefore, a regulatory
assessment is not required. It also has
been determined that section 553(b) of
the Administrative Procedure Act (5
U.S.C. chapter 5) and the Regulatory
Flexibility Act (5 U.S.C. chapter 6) do
not apply to these regulations, and,
therefore, a Regulatory Flexibility
Analysis is not required. Pursuant to
section 7805(f) of the Internal Revenue
Code, the notice of proposed rulemaking
preceding these regulations was
submitted to the Small Business
Administration for comment on its
impact on small business.

40081

Drafting Information
The principal author of these
regulations is Frank Boland, Office of
Assistant Chief Counsel (Passthroughs
and Special Industries). However, other
personnel from the IRS and Treasury
Department participated in their
development.
List of Subjects
26 CFR Parts 40 and 48
Excise taxes, Reporting and
recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping
requirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 40, 48, and
602 are amended as follows:
PART 40—EXCISE TAX PROCEDURAL
REGULATIONS
Paragraph 1. The authority citation
for part 40 continues to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
§ 40.6302(c)–0

[Removed]

Par. 2. Section 40.6302(c)–0 is
removed.
Par. 3. In § 40.6302(c)–1, paragraph
(e)(4) is added to read as follows:
§ 40.6302(c)–1
depositaries.

Use of Government

*

*
*
*
*
(e) * * *
(4) Taxes excluded; certain removals
of gasohol from refineries. No deposit is
required in the case of the tax imposed
under § 48.4081–3(b)(1)(iii) of this
chapter.
*
*
*
*
*
PART 48—MANUFACTURERS AND
RETAILERS EXCISE TAXES
Par. 4. The authority citation for part
48 is amended by removing the entries
for Sections 48.4041.21 and 48.4081–2
to read in part as follows:
Authority: 26 U.S.C. 7805 * * *

Par. 5. In § 48.4041–8, paragraph (f) is
amended by:
1. Revising the introductory text of
paragraph (f)(1).
2. Revising paragraph (f)(1)(i).
3. Redesignating paragraph (f)(1)(ii) as
paragraph (f)(1)(iii) and adding a new
paragraph (f)(1)(ii).
4. Removing from paragraph (f)(2) the
language ‘‘diesel fuel or’’.
The revisions and additions read as
follows:

40082

Federal Register / Vol. 60, No. 151 / Monday, August 7, 1995 / Rules and Regulations

§ 48.4041–8

Definitions.

*

*
*
*
*
(f) Special motor fuel. (1) Except as
provided in paragraph (f)(2) of this
section, special motor fuel means any
liquid fuel, including—
(i) Any liquefied petroleum gas (such
as propane, butane, pentane, or
mixtures of the same);
(ii) Liquefied natural gas; or
*
*
*
*
*
Par. 6. Section 48.4041–21 is revised
to read as follows:

§ 48.4041–21
(CNG).

Compressed natural gas

(a) Delivery of CNG into the fuel
supply tank of a motor vehicle or
motorboat—(1) Imposition of tax. Tax is
imposed on the delivery of compressed
natural gas (CNG) into the fuel supply
tank of the propulsion engine of a motor
vehicle or motorboat unless tax was
previously imposed on the CNG under
paragraph (b) of this section.
(2) Liability for tax. If the delivery of
the CNG is in connection with a sale,
the seller of the CNG is liable for the tax
imposed under paragraph (a)(1) of this
section. If the delivery of the CNG is not
in connection with a sale, the operator
of the motor vehicle or motorboat, as the
case may be, is liable for the tax
imposed under paragraph (a)(1) of this
section.
(b) Bulk sales of CNG—(1) In general.
Tax is imposed on the sale of CNG that
is not in connection with the delivery of
the CNG into the fuel supply tank of the
propulsion engine of a motor vehicle or
motorboat if, by the time of the sale—
(i) The buyer has given the seller a
written statement stating that the entire
quantity of the CNG covered by the
statement is for use as a fuel in a motor
vehicle or motorboat; and
(ii) The seller has given the buyer a
written acknowledgement of receipt of
the statement described in paragraph
(b)(1)(i) of this section.
(2) Liability for tax. The seller of the
CNG is liable for the tax imposed under
this paragraph (b).
(c) Exemptions—(1) In general. The
taxes imposed under this section do not
apply to a delivery or sale of CNG for
a use described in § 48.4082–4T(c)(1)
through (5)(A) or (c)(6) through (11).
However, if the person otherwise liable
for tax under this section is the seller of
the CNG, the exemption under this
section applies only if, by the time of
sale, the seller receives an unexpired
certificate (as described in this
paragraph (c)) from the buyer and has
no reason to believe any information in
the certificate is false.
(2) Certificate; in general. The
certificate to be provided by a buyer of

CNG is to consist of a statement that is
signed under penalties of perjury by a
person with authority to bind the buyer,
should be in substantially the same form
as the model certificate provided in
paragraph (c)(4) of this section, and
should contain all information
necessary to complete the model
certificate. A new certificate must be
given if any information in the current
certificate changes. The certificate may
be included as part of any business
records normally used to document a
sale. The certificate expires on the
earliest of the following dates:
(i) The date one year after the effective
date of the certificate (which may be no
earlier than the date it is signed).
(ii) The date a new certificate is
provided to the seller.
(iii) The date the seller is notified by
the Internal Revenue Service or the
buyer that the buyer’s right to provide
a certificate has been withdrawn.
(3) Withdrawal of the right to provide
a certificate. The Internal Revenue
Service may withdraw the right of a
buyer of CNG to provide a certificate
under this paragraph (c) if the buyer
uses CNG to which a certificate applies
in a taxable use. The Internal Revenue
Service may notify any seller to whom
the buyer has provided a certificate that
the buyer’s right to provide a certificate
has been withdrawn.
(4) Model certificate.
Certificate of Person Buying Compressed
Natural Gas (CNG) for a Nontaxable Use
(To support tax-free sales of CNG under
section 4041 of the Internal Revenue Code.)
lllllllllllllllllllll
lllllllllllllllllllll

Name, address, and employer identification
number of seller
llllllllll ‘‘Buyer’’) certifies
the following under penalties of perjury:
The CNG to which this certificate relates
will be used in a nontaxable use.
This certificate applies to the following
(complete as applicable):
If this is a single purchase certificate, check
here lll and enter:
1. Invoice or delivery ticket number
llllllll

2. llll (number of MCFs) llll
If this is a certificate covering all purchases
under a specified account or order number,
check here lll and enter:
1. Effective date llllllll
2. Expiration date llllllll
(period not to exceed 1 year after the effective
date)
3. Buyer account or order number
llllllll

Buyer will not claim a credit or refund
under section 6427 of the Internal Revenue
Code for any CNG to which this certificate
relates.
Buyer will provide a new certificate to the
seller if any information in this certificate
changes.

Buyer understands that if Buyer violates
the terms of this certificate, the Internal
Revenue Service may withdraw Buyer’s right
to provide a certificate.
Buyer has not been notified by the Internal
Revenue Service that its right to provide a
certificate has been withdrawn. In addition,
the Internal Revenue Service has not notified
Buyer that the right to provide a certificate
has been withdrawn from a purchaser to
which Buyer sells CNG tax free.
Buyer understands that the fraudulent use
of this certificate may subject Buyer and all
parties making any fraudulent use of this
certificate to a fine or imprisonment, or both,
together with the costs of prosecution.
lllllllllllllllllllll

Printed or typed name of person signing
lllllllllllllllllllll

Title of person signing
lllllllllllllllllllll

Employer identification number
lllllllllllllllllllll

Address of Buyer
lllllllllllllllllllll

Signature and date signed

(d) Rate of tax. The rate of the tax
imposed under this section is the rate
prescribed by section 4041(a)(3).
(e) Effective date. This section is
effective October 1, 1995.
§ 48.4081–0

[Removed]

Par. 7. Section 48.4081–0 is removed.
Par. 8. In § 48.4081–3, paragraph
(b)(1) is revised to read as follows:
§ 48.4081–3 Gasoline tax; taxable events
other than removal at the terminal rack.

*

*
*
*
*
(b) * * * (1) In general. Except as
provided in § 48.4081–4 (relating to
gasoline blendstocks) and paragraph
(b)(2) of this section (relating to an
exception for certain refineries), tax is
imposed on the following removals of
gasoline from a refinery:
(i) The removal is by bulk transfer and
the refiner or the owner of the gasoline
immediately before the removal is not a
gasoline registrant.
(ii) The removal is at the rack.
(iii) After September 30, 1995, the
removal is of a batch of gasohol from an
approved refinery by bulk transfer and
the refiner treats itself with respect to
the removal as a person that is not
registered under section 4101. See
§ 48.4101–3. For the rule providing that
no deposit is required in the case of the
tax imposed under this paragraph
(b)(1)(iii), see § 40.6302(c)-1(e)(4) of this
chapter. For the rule allowing
inspections of facilities where gasohol is
produced, see section 4083.
Par. 9. Section 48.4081–6 is revised to
read as follows:
§ 48.4081–6

Gasoline tax; gasohol.

(a) Overview. This section provides
rules for determining the applicability

Federal Register / Vol. 60, No. 151 / Monday, August 7, 1995 / Rules and Regulations
of reduced rates of tax on a removal or
entry of gasohol or of gasoline used to
produce gasohol. Rules are also
provided for the imposition of tax on
the separation of gasoline from gasohol
and the failure to use gasoline that has
been taxed at a reduced rate to produce
gasohol.
(b) Explanation of terms—(1)
Alcohol—(i) In general; source of the
alcohol. Except as provided in
paragraph (b)(1)(ii) of this section,
alcohol means any alcohol that is not a
derivative product of petroleum, natural
gas, or coal (including peat). Thus, the
term includes methanol and ethanol
that are not derived from petroleum,
natural gas, or coal (including peat). The
term also includes alcohol produced
either within or outside the United
States.
(ii) Proof and denaturants. Alcohol
does not include alcohol with a proof of
less than 190 degrees (determined
without regard to added denaturants). If
the alcohol added to a fuel/alcohol
mixture (the added alcohol) includes
impurities or denaturants, the volume of
alcohol in the mixture is determined
under the following rules:
(A) The volume of alcohol in the
mixture includes the volume of any
impurities (other than added
denaturants and any fuel with which
the alcohol is mixed) that reduce the
purity of the added alcohol to not less
than 190 proof (determined without
regard to added denaturants).
(B) The volume of alcohol in the
mixture includes the volume of any
approved denaturants that reduce the
purity of the added alcohol, but only to
the extent that the volume of the
approved denaturants does not exceed
five percent of the volume of the added
alcohol (including the approved
denaturants). If the volume of the
approved denaturants exceeds five
percent of the volume of the added
alcohol, the excess over five percent is
considered part of the nonalcohol
content of the mixture.
(C) For purposes of this paragraph
(b)(1)(ii), approved denaturants are any
denaturants (including gasoline and
nonalcohol fuel denaturants) that
reduce the purity of the added alcohol
and are added to such alcohol under a
formula approved by the Secretary.
(iii) Products derived from alcohol. If
alcohol described in paragraphs (b)(1)(i)
and (ii) of this section has been
chemically transformed in producing
another product (that is, the alcohol is
no longer present as a separate chemical
in the other product) and there is no
significant loss in the energy content of
the alcohol, any mixture containing the
product includes the volume of alcohol

used to produce the product. Thus, for
example, a mixture of gasoline and ethyl
tertiary butyl ether (ETBE), or of
gasoline and methyl tertiary butyl ether
(MTBE), includes any alcohol described
in paragraphs (b)(1)(i) and (ii) of this
section that is used to produce the ETBE
or MTBE, respectively, in a chemical
reaction in which there is no significant
loss in the energy content of the alcohol.
(2) Gasohol—(i) In general—(A)
Gasohol is a mixture of gasoline and
alcohol that is 10 percent gasohol, 7.7
percent gasohol, or 5.7 percent gasohol.
The determination of whether a
particular mixture is 10 percent gasohol,
7.7 percent gasohol, or 5.7 percent
gasohol is made on a batch-by-batch
basis. A batch of gasohol is a discrete
mixture of gasoline and alcohol.
(B) If a particular mixture is produced
within the bulk transfer/terminal system
(for example, at a refinery), the
determination of whether the mixture is
gasohol is made at the time of the
taxable removal or entry of the mixture.
(C) If a particular mixture is produced
outside of the bulk transfer/terminal
system (for example, by splash blending
after the gasoline has been removed
from the terminal at the rack), the
determination of whether the mixture is
gasohol is made immediately after the
mixture is produced. In such a case, the
contents of the batch typically
correspond to a gasoline meter delivery
ticket and an alcohol meter delivery
ticket, each of which shows the number
of gallons of liquid delivered into the
mixture. The volume of each component
in a batch (without adjustment for
temperature) ordinarily is determined
by the number of metered gallons
shown on the delivery tickets for the
gasoline and alcohol delivered.
However, if metered gallons of gasoline
and alcohol are added to a tank already
containing more than a minor amount of
liquid, the determination of whether a
batch satisfies the alcohol-content
requirement will be made by taking into
account the amount of alcohol and nonalcohol fuel contained in the liquid
already in the tank. Ordinarily, any
amount in excess of 0.5 percent of the
capacity of the tank will not be
considered minor.
(ii) 10 percent gasohol—(A) In
general. A batch of gasoline/alcohol
mixture is 10 percent gasohol if it
contains at least 9.8 percent alcohol by
volume, without rounding.
(B) Batches containing less than 10
percent but at least 9.8 percent alcohol.
If a batch of mixture contains less than
10 percent alcohol but at least 9.8
percent alcohol, without rounding, only
a portion of the batch is considered to
be 10 percent gasohol. That portion

40083

equals the number of gallons of alcohol
in the batch multiplied by 10. Any
remaining liquid in the mixture is
excess liquid.
(iii) 7.7 percent gasohol—(A) In
general. A batch of gasoline/alcohol
mixture is 7.7 percent gasohol if it
contains less than 9.8 percent alcohol
but at least 7.55 percent alcohol by
volume, without rounding.
(B) Batches containing less than 7.7
percent but at least 7.55 percent
alcohol. If a batch of mixture contains
less than 7.7 percent alcohol but at least
7.55 percent alcohol, without rounding,
only a portion of the batch is considered
to be 7.7 percent gasohol. That portion
equals the number of gallons of alcohol
in the batch multiplied by 12.987. Any
remaining liquid in the mixture is
excess liquid.
(iv) 5.7 percent gasohol—(A) In
general. A batch of gasoline/alcohol
mixture is 5.7 percent gasohol if it
contains less than 7.55 percent alcohol
but at least 5.59 percent alcohol by
volume, without rounding.
(B) Batches containing less than 5.7
percent but at least 5.59 percent
alcohol. If a batch of mixture contains
less than 5.7 percent alcohol but at least
5.59 percent alcohol, without rounding,
only a portion of the batch is considered
to be 5.7 percent gasohol. That portion
equals the number of gallons of alcohol
in the batch multiplied by 17.544. Any
remaining liquid in the mixture is
excess liquid.
(v) Tax on excess liquid. If tax was
imposed on the excess liquid in any
gasohol at the gasohol production tax
rate (as defined in paragraph (e)(1) of
this section), the excess liquid in the
batch is considered to be gasoline with
respect to which there is a failure to
blend into gasohol for purposes of
paragraph (f) of this section. If tax was
imposed on the excess liquid at the rate
of tax described in section 4081(a), a
credit or refund under section 6427(f) is
not allowed with respect to the excess
liquid.
(vi) Examples. The following
examples illustrate this paragraph (b)(2).
In these examples, a gasohol blender
creates a gasoline/alcohol mixture by
pumping a specified amount of gasoline
into an empty tank and then adding a
specified amount of alcohol.
Example 1. Mixtures containing exactly 10
percent alcohol. The applicable delivery
tickets show that the mixture is made with
7200 metered gallons of gasoline and 800
metered gallons of alcohol. Accordingly, the
mixture contains 10 percent alcohol (as
determined based on the delivery tickets
provided to the blender) and qualifies as 10
percent gasohol.
Example 2. Mixtures containing less than
10 percent alcohol but at least 9.8 percent

40084

Federal Register / Vol. 60, No. 151 / Monday, August 7, 1995 / Rules and Regulations

alcohol. The applicable delivery tickets show
that the mixture is made with 7205 metered
gallons of gasoline and 795 metered gallons
of alcohol. Because the mixture contains less
than 10 percent alcohol, but more than 9.8
percent alcohol (as determined based on the
delivery tickets provided to the blender),
7950 gallons of the mixture qualify as 10
percent gasohol. If tax was imposed on the
gasoline in the mixture at the gasohol
production rate applicable to 10 percent
gasohol, the remaining 50 gallons of the
mixture (the excess liquid) are treated as
gasoline with respect to which there was a
failure to blend into gasohol for purposes of
paragraph (f) of this section. If tax was
imposed on the gasoline in the mixture at the
rate of tax described in section 4081(a), a
credit or refund under section 6427(f) is
allowed only with respect to 7155 gallons of
gasoline.
Example 3. Mixtures containing less than
5.59 percent alcohol. The applicable delivery
tickets show that the mixture is made with
7568 metered gallons of gasoline and 436
metered gallons of alcohol. Because the
mixture contains only 5.45 percent alcohol
(as determined based on the delivery tickets
provided to the blender), the mixture does
not qualify as gasohol.

(3) Gasohol blender. Gasohol blender
means any person that regularly buys
gasoline and alcohol and produces
gasohol for use in its trade or business
or for resale.
(4) Registered gasohol blender.
Registered gasohol blender means a
person that is registered under section
4101 as a gasohol blender.
(c) Rate of tax on gasoline removed or
entered for gasohol production—(1) In
general. The rate of tax imposed on
gasoline under § 48.4081–2(b) (relating
to tax imposed at the terminal rack),
§ 48.4081–3(b)(1) (relating to tax
imposed at the refinery), or § 48.4081–
3(c)(1) (relating to tax imposed on
entries) is the gasohol production tax
rate if—
(i) The person liable for tax under
§ 48.4081–2(c)(1) (the position holder),
§ 48.4081–3(b)(3) (the refiner), or
§ 48.4081–3(c)(2) (the enterer) is a
taxable fuel registrant and a registered
gasohol blender, and such person
produces gasohol with the gasoline
within 24 hours after removing or
entering the gasoline; or
(ii) The gasoline is sold in connection
with the removal or entry, the person
liable for tax under § 48.4081–2(c)(1)
(the position holder), § 48.4081–3(b)(3)
(the refiner), or § 48.4081–3(c)(2) (the
enterer) is a taxable fuel registrant and
the person, at the time of the sale,—
(A) Has an unexpired certificate (as
described in paragraph (c)(2) of this
section) from the buyer; and
(B) Has no reason to believe that any
information in the certificate is false.
(2) Certificate—(i) In general. The
certificate referred to in paragraph

(c)(1)(ii)(A) of this section is a statement
that is to be provided by a registered
gasohol blender that is signed under
penalties of perjury by a person with
authority to bind the registered gasohol
blender, is in substantially the same
form as the model certificate provided
in paragraph (c)(2)(ii) of this section,
and contains all information necessary
to complete such model certificate. A
new certificate must be given if any
information in the current certificate
changes. The certificate may be
included as part of any business records
normally used to document a sale. The
certificate expires on the earliest of the
following dates:
(A) The date one year after the
effective date of the certificate (which
may be no earlier than the date it is
signed).
(B) The date the registered gasohol
blender provides a new certificate to the
seller.
(C) The date the seller is notified by
the Internal Revenue Service or the
gasohol blender that the gasohol
blender’s registration has been revoked
or suspended.
(ii) Model certificate.
Certificate of Registered Gasohol Blender
(To support sales of gasoline at the gasohol
production tax rate under section 4081(c) of
the Internal Revenue Code)
lllllllllllllllllllll

Name, address, and employer identification
number of seller
llllllllll (Buyer) certifies the
following under penalties of perjury:
Buyer is registered as a gasohol blender
with registration number llllllll.
Buyer’s registration has not been suspended
or revoked by the Internal Revenue Service.
The gasoline bought under this certificate
will be used by Buyer to produce gasohol (as
defined in § 48.4081–6(b) of the
Manufacturers and Retailers Excise Tax
Regulations) within 24 hours after buying the
gasoline.
Type of gasohol Buyer will produce (check
one only):
lll 10% gasohol
lll 7.7% gasohol
lll 5.7% gasohol
If the gasohol the Buyer will produce will
contain ethanol, check here: lll
This certificate applies to the following
(complete as applicable):
If this is a single purchase certificate, check
here lll and enter:
1. Account number llllllll
2. Number of gallons llllllll
If this is a certificate covering all purchases
under a specified account or order number,
check here lll and enter:
1. Effective date llllllll
2. Expiration date llllllll
(period not to exceed 1 year after the effective
date)
3. Buyer account or order number
llllllll

Buyer will not claim a credit or refund
under section 6427(f) of the Internal Revenue
Code for any gasoline covered by this
certificate.
Buyer agrees to provide seller with a new
certificate if any information on this
certificate changes.
Buyer understands that Buyer’s registration
may be revoked if the gasoline covered by
this certificate is resold or is used other than
in Buyer’s production of the type of gasohol
identified above.
Buyer will reduce any alcohol mixture
credit under section 40(b) by an amount
equal to the benefit of the gasohol production
tax rate under section 4081(c) for the gasohol
to which this certificate relates.
Buyer understands that the fraudulent use
of this certificate may subject Buyer and all
parties making any fraudulent use of this
certificate to a fine or imprisonment, or both,
together with the costs of prosecution.
lllllllllllllllllllll

Printed or typed name of person signing
lllllllllllllllllllll

Title of person signing
lllllllllllllllllllll

Employer identification number
lllllllllllllllllllll

Address of Buyer
lllllllllllllllllllll

Signature and date signed

(iii) Use of Form 637 or letter of
registration as a gasohol blender’s
certificate prohibited. A copy of the
certificate of registry (Form 637) or letter
of registration issued to a gasohol
blender by the Internal Revenue Service
is not a gasohol blender’s certificate
described in paragraph (c)(2)(ii) of this
section.
(d) Rate of tax on gasohol removed or
entered. The rate of tax imposed on
removals or entries of any gasohol under
§§ 48.4081–2(b), 48.4081–3(b)(1), and
48.4081–3(c)(1) is the gasohol tax rate.
The rate of tax imposed on removals
and entries of excess liquid described in
paragraph (b)(2) of this section is the
rate of tax applicable to gasoline under
section 4081(a).
(e) Tax rates—(1) Gasohol production
tax rate. The gasohol production tax rate
is the applicable rate of tax determined
under section 4081(c)(2)(A).
(2) Gasohol tax rate. The gasohol tax
rate is the applicable alcohol mixture
rate determined under section
4081(c)(4)(A).
(f) Later separation and failure to
blend—(1) Later separation—(i)
Imposition of tax. A tax is imposed on
the removal or sale of gasoline separated
from gasohol with respect to which tax
was imposed at a rate described in
paragraph (e) of this section or with
respect to which a credit or payment
was allowed or made by reason of
section 6427(f)(1).
(ii) Liability for tax. The person that
owns the gasohol at the time gasoline is

Federal Register / Vol. 60, No. 151 / Monday, August 7, 1995 / Rules and Regulations
separated from the gasohol is liable for
the tax imposed under paragraph
(f)(1)(i) of this section.
(iii) Rate of tax. The rate of tax
imposed under paragraph (f)(1)(i) of this
section is the difference between the
rate of tax applicable to gasoline not
described in this section and the
applicable gasohol production tax rate.
(2) Failure to blend—(i) Imposition of
tax. Tax is imposed on the entry,
removal, or sale of gasoline (including
excess liquid described in paragraph
(b)(2) of this section) with respect to
which tax was imposed at a gasohol
production tax rate if—
(A) The gasoline was not blended into
gasohol; or
(B) The gasoline was blended into
gasohol but the gasohol production tax
rate applicable to the type of gasohol
produced is greater than the rate of tax
originally imposed on the gasoline.
(ii) Liability for tax. (A) In the case of
gasoline with respect to which tax was
imposed at the gasohol production tax
rate under paragraph (c)(1)(i) of this
section, the person liable for the tax
imposed by paragraph (f)(2)(i) of this
section is the person that was liable for
tax on the entry or removal.
(B) In the case of gasoline with respect
to which tax was imposed at the gasohol
production tax rate under paragraph
(c)(1)(ii) of this section, the person that
bought the gasoline in connection with
the entry or removal is liable for the tax
imposed under paragraph (f)(2)(i) of this
section.
(iii) Rate of tax. The rate of tax
imposed on gasoline described in
paragraph (f)(2)(i)(A) of this section is
the difference between the rate of tax
applicable to gasoline not described in
this section and the rate of tax
previously imposed on the gasoline. The
rate of tax imposed on gasoline
described in paragraph (f)(2)(i)(B) of this
section is the difference between the
gasohol production tax rate applicable
to the type of gasohol produced and the
rate of tax previously imposed on the
gasoline.
(iv) Example. The following example
illustrates this paragraph (f)(2):
Example. (i) A registered gasohol blender
bought gasoline in connection with a removal
described in paragraph (c)(1)(ii) of this
section. Based on the blender’s certification
(described in paragraph (c)(2) of this section)
that the blender would produce 10 percent
gasohol with the gasoline, tax at the gasohol
production tax rate applicable to 10 percent
gasohol was imposed on the removal.
(ii) The blender then produced a mixture
by splash blending in a tank holding
approximately 8000 gallons of mixture. The
applicable delivery tickets show that the
mixture was blended by first pumping 7220
metered gallons of gasoline into the empty

tank, and then pumping 780 metered gallons
of alcohol into the tank. Because the mixture
contains 9.75 percent alcohol (as determined
based on the delivery tickets provided to the
blender) the entire mixture qualifies as 7.7
percent gasohol, rather than 10 percent
gasohol.
(iii) Because the 7220 gallons of gasoline
were taxed at the gasohol production tax rate
applicable to 10 percent gasohol but the
gasoline was blended into 7.7 percent
gasohol, a failure to blend has occurred with
respect to the gasoline. As the person that
bought the gasoline in connection with the
taxable removal, the blender is liable for the
tax imposed under paragraph (f)(2)(i) of this
section. The amount of tax imposed is the
difference between—
(A) 7220 gallons times the gasohol
production tax rate applicable to 7.7 percent
gasohol; and
(B) 7220 gallons times the gasohol
production tax rate applicable to 10 percent
gasohol.
(iv) Because the gasohol does not contain
exactly 7.7 percent alcohol, the benefit of the
gasohol production tax rate with respect to
the alcohol is less than the amount of the
alcohol mixture credit under section 40(b)
(determined before the application of section
40(c)). Accordingly, the blender may be
entitled to claim an alcohol mixture credit for
the alcohol used in the gasohol. Under
section 40(c), however, the amount of the
alcohol mixture credit must be reduced to
take into account the benefit provided with
respect to the alcohol by the gasohol
production tax rate.

(g) Effective date. This section is
effective August 7, 1995.
Par. 10. Section 48.4081–7 is
amended as follows:
1. The heading for § 48.4081–7 is
revised.
2. In paragraphs (a) and (b), the
language ‘‘gasoline’’ is removed each
place it appears and ‘‘taxable fuel’’ is
added in its place.
3. Paragraphs (b)(4) and (c)(1) are
revised.
4. In paragraph (c)(2), the language
‘‘gasoline’’ is removed each place it
appears and ‘‘taxable fuel’’ is added in
its place.
5. Paragraph (c)(3) is revised.
6. In paragraphs (c)(4)(i)(A) and (B),
(ii)(A) and (B), and (iii), the language
‘‘gasoline’’ is removed each place it
appears and ‘‘taxable fuel’’ is added in
its place.
7. In paragraph (c)(4)(iv)(A), the
language ‘‘(or such other model
statement as the Commissioner may
prescribe)’’ is added immediately after
‘‘paragraph (c)(4)(iv)(B) of this section’’.
8. In paragraph (c)(4)(iv)(B):
a. The description of line 4 is revised
to read: ‘‘Volume and type of taxable
fuel sold’’.
b. In the first paragraph following line
4 the language ‘‘gasoline’’ is removed
and ‘‘taxable fuel’’ is added in its place.

40085

9. Paragraph (c)(5) is removed.
10. Paragraph (d) is revised.
11. Paragraph (f), Example 1,
paragraph (i), is amended by:
a. Removing the language ‘‘1993’’ in
the first and fourth sentences and
adding ‘‘1996’’ in its place.
b. Removing the language ‘‘paragraph
(c)(2)’’ and adding ‘‘paragraph (c)’’ in its
place.
12. Paragraph (f), Example 1,
paragraph (ii), is amended by removing
the language ‘‘1993’’ in the first and
second sentences and adding ‘‘1996’’ in
its place.
13. Paragraph (g) is revised.
The revisions read as follows:
§ 48.4081–7 Taxable fuel; conditions for
refunds of taxable fuel tax under section
4081(e).

*

*
*
*
*
(b) * * *
(4) The person that paid the first tax
to the government has met the reporting
requirements of paragraph (c) of this
section.
(c) * * * (1) Reporting by persons
paying the first tax. Except as provided
in paragraph (c)(3) of this section, the
person that paid the first tax under
§ 48.4081–3 (the first taxpayer) must file
a report that is in substantially the same
form as the model report provided in
paragraph (c)(2) of this section (or such
other model report as the Commissioner
may prescribe) and contains all
information necessary to complete such
model report (the first taxpayer’s
report). A first taxpayer’s report must be
filed with the return to which the report
relates (or at such other time, or in such
other manner, as prescribed by the
Commissioner).
*
*
*
*
*
(3) Optional reporting for certain
taxable events. Paragraph (c)(1) of this
section does not apply with respect to
a tax imposed under § 48.4081–2
(removal at a terminal rack), § 48.4081–
3(c)(1)(ii) (nonbulk entries into the
United States), or § 48.4081–3(g)
(removals or sales by blenders).
However, if the person liable for the tax
expects that another tax will be imposed
under section 4081 with respect to the
taxable fuel, that person should (but is
not required to) file a first taxpayer’s
report.
*
*
*
*
*
(d) Form and content of claim—(1) In
general. The following rules apply to
claims for refund under section 4081(e):
(i) The claim must be made by the
person that paid the second tax to the
government and must include all the
information described in paragraph
(d)(2) of this section.

40086

Federal Register / Vol. 60, No. 151 / Monday, August 7, 1995 / Rules and Regulations

(ii) The claim must be made on Form
8849 (or such other form as the
Commissioner may designate) in
accordance with the instructions on the
form. The form should be marked
Section 4081(e) Claim at the top.
Section 4081(e) claims must not be
included with a claim for a refund
under any other provision of the
Internal Revenue Code.
(2) Information to be included in the
claim. Each claim for a refund under
section 4081(e) must contain the
following information with respect to
the taxable fuel covered by the claim:
(i) Volume and type of taxable fuel.
(ii) Date on which the claimant
incurred the tax liability to which this
claim relates (the second tax).
(iii) Amount of second tax that
claimant paid to the government and a
statement that claimant has not
included the amount of this tax in the
sales price of the taxable fuel to which
this claim relates and has not collected
that amount from the person that bought
the taxable fuel from claimant.
(iv) Name, address, and employer
identification number of the person that
paid the first tax to the government.
(v) A copy of the first taxpayer’s
report that relates to the taxable fuel
covered by the claim.
(vi) If the taxable fuel covered by the
claim was bought other than from the
first taxpayer, a copy of the statement of
subsequent seller that the claimant
received with respect to that taxable
fuel.
*
*
*
*
*
(g) Effective date. This section is
effective in the case of taxable fuel with
respect to which the first tax is imposed
after September 30, 1995.
Par. 11. Section 48.4101–3 is added to
read as follows:
§ 48.4101–3

Registration.

(a) A refiner that is registered under
section 4101 may treat itself with
respect to the bulk removal of any batch
of gasohol from its refinery as a person
that is not registered under section
4101. See § 48.4081–3(b)(1)(iii).
(b) This section is effective October 1,
1995.
PART 602—OMB CONTROL NUMBERS
UNDER THE PAPERWORK
REDUCTION ACT
Par. 12. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
§ 602.101

[Amended]

Par. 13. In § 602.101, paragraph (c) is
amended by removing the entry for
48.4041–21 from the table and adding

the entry ‘‘48.4041–21.....1545–1270’’ in
numerical order to the table.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved: July 25, 1995.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 95–19284 Filed 8–4–95; 8:45 am]
BILLING CODE 4830–01–U

26 CFR Part 301
[TD 8610]
RIN 1545–AP98

Taxable Mortgage Pools
Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
AGENCY:

This document contains final
regulations relating to taxable mortgage
pools. This action is necessary because
of changes made to the law by the Tax
Reform Act of 1986. The final
regulations provide guidance to entities
for determining whether they are subject
to the taxable mortgage pool rules.
EFFECTIVE DATE: These regulations are
effective September 6, 1995.
FOR FURTHER INFORMATION CONTACT:
Arnold P. Golub or Marshall D. Feiring,
(202) 622–3950 (not a toll-free number).
SUMMARY:

SUPPLEMENTARY INFORMATION:

Background
A notice of proposed rulemaking (FI–
55–91) under section 7701(i) of the
Internal Revenue Code was published in
the Federal Register on December 23,
1992 (57 FR 61029). Written comments
relating to this notice were received, but
no public hearing was requested or
held. After consideration of the
comments, the proposed regulations
under section 7701(i) are adopted as
revised by this Treasury decision.
Explanation of Provisions
Section 301.7701(i)–1(c)(1)—Basis Used
To Determine the Composition of an
Entity’s Assets
Among other requirements, to be
classified as a taxable mortgage pool,
substantially all of an entity’s assets
must consist of debt obligations, and
more than 50 percent of those debt
obligations must consist of real estate
mortgages (or interests therein). Under
the proposed regulations, an entity must
apply these tests using the tax bases of
its assets. One commentator, however,
suggested that the entity should have
the choice of using either the tax bases
of its assets or the fair market value of
its assets. The IRS and Treasury believe

that using fair market value for the asset
composition tests creates uncertainty
and administrative difficulties. The final
regulations, therefore, retain the rule in
the proposed regulations.
Section 301.7701(i)–1(c)(5)—Seriously
Impaired Real Estate Mortgages Not
Treated as Debt Obligations
Under the proposed regulations, real
estate mortgages that are seriously
impaired are not treated as debt
obligations for purposes of the asset
composition tests. Whether real estate
mortgages are seriously impaired
generally depends on all the facts and
circumstances. The proposed
regulations, however, provide two safe
harbors. Under those provisions,
whether mortgages are seriously
impaired depends only on the number
of days the payments on the mortgages
are delinquent (more than 89 days for
single family residential real estate
mortgages and more than 59 days for
multi-family residential and commercial
real estate mortgages). The safe harbors
are not available, however, if an entity
is receiving or anticipates receiving
certain payments on the mortgages such
as payments of principal and interest
that are substantial and relatively
certain as to amount.
Several commentators have asked for
additional safe harbors based on factors
other than the number of days a
mortgage is delinquent. For example,
one suggested a safe harbor for
mortgages having excessively high loan
to value ratios. Others suggested a safe
harbor for mortgages that are purchased
at a substantial discount.
The final regulations retain,
unchanged, the safe harbors of the
proposed regulations. The IRS and
Treasury believe that no single factor is
as clear an indication that a mortgage is
seriously impaired as days delinquent.
For example, a mortgage may be
purchased at a discount for a variety of
reasons, some of which bear no relation
to the quality of the mortgage. To
provide further guidance, however, the
final regulations list some of the facts
and circumstances that should be
considered in determining whether a
mortgage is seriously impaired.
Another commentator has criticized
the safe harbors because they are
unavailable if an entity anticipates
receiving certain payments on a
delinquent mortgage. The commentator
is concerned that a test based on
whether an entity anticipates receiving
payments on a mortgage is both
subjective and open-ended. To address
this concern, the final regulations create
a new rule, under which if an entity
makes reasonable efforts to resolve a