EMPLOYEE PLANS ADMINISTRATIVEFinal regulations under section 6011 of the Code relating to the...

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Bulletin No. 1996–16April 15, 1996

HIGHLIGHTSOF THIS ISSUE

These synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

EMPLOYEE PLANS

Notice 96–24, page 23.Guidelines are set forth for determining for April 1996,the weighted average interest rate and the resultingpermissible range of interest rates used to calculatecurrent liability for purposes of the full fundinglimitation of section 412(c)(7) of the Code as amendedby the Omnibus Budget Reconciliation Act of 1987 andby the Uruguay Round Agreements Act (GATT).

EXCISE TAXES

T.D. 8659, page 4.Final regulations under section 6011 of the Coderelating to the gasoline and diesel fuel excise taxes.

PS–6–95, page 27.Proposed regulations under sections 4081 and 4082 of

the Code relating to the gasoline and diesel fuel excisetaxes. A public hearing will be held on June 20, 1996.

ADMINISTRATIVE

Notice 96–23, page 23.The Service requests comments regarding the properaccounting for loans that are subject to both theprincipal-reduction method of accounting and the mark-to-market rules.

Rev. Proc. 96–29, page 24.VCR and Walk-in CAP compliance programs; eligibility.This procedure describes changes to the eligibilityrequirements for the Voluntary Compliance ResolutionProgram and the Walk-in Closing Agreement Program.Rev. Proc. 94–16 and Rev. Proc. 94–62 modified.

Announcement 96–24, page 30.Proposed examination guidelines for rural electriccooperatives are published for public comment.

Finding Lists begin on page 54.Announcement of Disbarments and Suspensions begins on page 51.

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Mission of the ServiceThe purpose of the Internal Revenue Service is tocollect the proper amount of tax revenue at the leastcost; serve the public by continually improving the

quality of our products and services; and perform in amanner warranting the highest degree of publicconfidence in our integrity, efficiency and fairness.

Statement of Principlesof Internal RevenueTax AdministrationThe function of the Internal Revenue Service is toadminister the Internal Revenue Code. Tax policyfor raising revenue is determined by Congress.

With this in mind, it is the duty of the Service tocarry out that policy by correctly applying the lawsenacted by Congress; to determine the reasonablemeaning of various Code provisions in light of theCongressional purpose in enacting them; and toperform this work in a fair and impartial manner,with neither a government nor a taxpayer point ofview.

At the heart of administration is interpretation of theCode. It is the responsibility of each person in theService, charged with the duty of interpreting thelaw, to try to find the true meaning of the statutoryprovision and not to adopt a strained construction inthe belief that he or she is ‘‘protecting the revenue.’’The revenue is properly protected only when we as-certain and apply the true meaning of the statute.

The Service also has the responsibility of applyingand administering the law in a reasonable,practical manner. Issues should only be raised byexamining officers when they have merit, neverarbitrarily or for trading purposes. At the sametime, the examining officer should never hesitateto raise a meritorious issue. It is also importantthat care be exercised not to raise an issue or toask a court to adopt a position inconsistent withan established Service position.

Administration should be both reasonable andvigorous. It should be conducted with as littledelay as possible and with great courtesy andconsiderateness. It should never try to overreach,and should be reasonable within the bounds of lawand sound administration. It should, however, bevigorous in requiring compliance with law and itshould be relentless in its attack on unreal taxdevices and fraud.

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IntroductionThe Internal Revenue Bulletin is the authoritativeinstrument of the Commissioner of Internal Revenue forannouncing official rulings and procedures of theInternal Revenue Service and for publishing TreasuryDecisions, Executive Orders, Tax Conventions, legisla-tion, court decisions, and other items of generalinterest. It is published weekly and may be obtainedfrom the Superintendent of Documents on a subscrip-tion basis. Bulletin contents of a permanent nature areconsolidated semiannually into Cumulative Bulletins,which are sold on a single-copy basis.

It is the policy of the Service to publish in the Bulletinall substantive rulings necessary to promote a uniformapplication of the tax laws, including all rulings thatsupersede, revoke, modify, or amend any of thosepreviously published in the Bulletin. All publishedrulings apply retroactively unless otherwise indicated.Procedures relating solely to matters of internalmanagement are not published; however, statements ofinternal practices and procedures that affect the rightsand duties of taxpayers are published.

Revenue rulings represent the conclusions of theService on the application of the law to the pivotal factsstated in the revenue ruling. In those based onpositions taken in rulings to taxpayers or technicaladvice to Service field offices, identifying details andinformation of a confidential nature are deleted toprevent unwarranted invasions of privacy and to complywith statutory requirements.

Rulings and procedures reported in the Bulletin do nothave the force and effect of Treasury DepartmentRegulations, but they may be used as precedents.Unpublished rulings will not be relied on, used, or citedas precedents by Service personnel in the disposition ofother cases. In applying published rulings and proce-dures, the effect of subsequent legislation, regulations,court decisions, rulings, and procedures must beconsidered, and Service personnel and others con-cerned are cautioned against reaching the sameconclusions in other cases unless the facts andcircumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.This part includes rulings and decisions based onprovisions of the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.This part is divided into two subparts as follows:Subpart A, Tax Conventions, and Subpart B, Legislationand Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references tothese subjects are contained in the other Parts andSubparts. Also included in this part are Bank SecrecyAct Administrative Rulings. Bank Secrecy Act Admin-istrative Rulings are issued by the Department of theTreasury’s Office of the Assistant Secretary(Enforcement).

Part IV.—Items of General Interest.With the exception of the Notice of Proposed Rulemak-ing and the disbarment and suspension list included inthis part, none of these announcements are consoli-dated in the Cumulative Bulletins.

The first Bulletin for each month includes an index forthe matters published during the preceding month.These monthly indexes are cumulated on a quarterlyand semiannual basis, and are published in the firstBulletin of the succeeding quarterly and semi-annualperiod, respectively.

The Bulletin Index-Digest System, a research andreference service supplementing the Bulletin, may beobtained from the Superintendent of Documents on asubscription basis. It consists of four Services: ServiceNo. 1, Income Tax; Service No. 2, Estate and GiftTaxes; Service No. 3, Employment Taxes; Service No.4, Excise Taxes. Each Service consists of a basicvolume and a cumulative supplement that provides (1)finding lists of items published in the Bulletin, (2)digests of revenue rulings, revenue procedures, andother published items, and (3) indexes of Public Laws,Treasury Decisions, and Tax Conventions.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

For sale by the Superintendent of Documents U.S. Government Printing Office, Washington, D.C. 20402.

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Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

Section 6011.—General Requirementof Return, Statement, or List

26 CFR 40.6011(a)–1: Returns

T.D. 8659

DEPARTMENT OF THE TREASURYInternal Revenue Service26 CFR Parts 40, 42, 48, and 602

Gasoline and Diesel Fuel Excise Tax;Registration Requirements

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document containsfinal regulations relating to the taxes ongasoline and diesel fuel. This documentalso removes obsolete excise tax reg-ulations. The regulations reflect andimplement certain changes made by theOmnibus Budget Reconciliation Act of1990 and the Omnibus Budget Recon-ciliation Act of 1993 (the 1993 Act).The regulations affect certain blenders,enterers, industrial users, refiners, ter-minal operators, and throughputters.The regulations also affect certainpersons that sell, buy, or use diesel fuelfor a nontaxable use.

EFFECTIVE DATE: These regulationsare effective March 14, 1996.

FOR FURTHER INFORMATIONCONTACT: Frank Boland (202)622-3130 (not a toll-free call).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information con-tained in these final regulations havebeen reviewed and approved by theOffice of Management and Budget inaccordance with the Paperwork Reduc-tion Act (44 U.S.C. 3507) undercontrol number 1545–1418. Responsesto this collection of information aremandatory and are required to obtaincertain credits or payments.

An agency may not conduct orsponsor, and a person is not required torespond to, a collection of information

unless the collection of informationdisplays a valid control number.

The estimated average annual report-ing burden per respondent is .1 hour.

Comments concerning the accuracyof this burden estimate and suggestionsfor reducing this burden should be sentto the Internal Revenue Service, Attn:IRS Reports Clearance Officer, PC:FP,Washington, DC 20224, and to theOffice of Management and Budget,Attn: Desk Officer for the Departmentof the Treasury, Office of Informationand Regulatory Affairs, Washington,DC 20503.

Books and records relating to thiscollection of information must be re-tained as long as their contents maybecome material in the administrationof any internal revenue law. Generally,tax returns and tax return informationare confidential, as required by 26U.S.C. 6103.

Background

The diesel fuel regulations. Before1994, the diesel fuel tax applied tosales of diesel fuel by importers orproducers (including registered whole-sale distributors). Because of concernsthat this system fostered considerabletax evasion, Congress made significantchanges to the tax in the 1993 Act.Effective January 1, 1994, tax isimposed on diesel fuel when it isremoved at the terminal rack, anddiesel fuel may be removed tax freeonly if the fuel contains a prescribedtype and amount of dye. These changesmade the taxing point readily identifia-ble, required untaxed fuel to be phys-ically identified (that is, dyed), andreduced the number of taxpayers.

Temporary regulations (TD 8496[1993–2 C.B. 281]) relating to thesechanges (the diesel fuel regulations)were published in the Federal Registeron November 30, 1993 (58 FR 63069),along with a notice of proposedrulemaking (PS–52–93 [1993–2 C.B.639]) cross-referencing the temporaryregulations (58 FR 63131). Amend-ments to these temporary regulations(TD 8512 [1994–1 C.B. 273]) relatingto dye color and concentration werepublished in the Federal Register onDecember 27, 1993 (58 FR 68304),along with a notice of proposedrulemaking (PS–76–93 [1994–1 C.B.

832]) cross-referencing those amend-ments (58 FR 68338). Written com-ments responding to the proposeddiesel fuel regulations were receivedand a public hearing was held onMarch 22, 1994. Final regulations (TD8550 [1994–2 C.B. 243]) relating todye color and concentration were pub-lished in the Federal Register on June30, 1994 (59 FR 33656).

The conforming regulations. On Oc-tober 19, 1994, the IRS published inthe Federal Register (59 FR 52735)proposed regulations (PS–66–93 [1994–2 C.B. 907]) that generally consolidatethe rules relating to the gasoline taxand the diesel fuel tax into a single setof rules applicable to both fuels (theconforming regulations). The conform-ing regulations also proposed rulesrelating to gasohol and compressednatural gas.

Written comments regarding the pro-posed conforming regulations were re-ceived and a public hearing was heldon January 11, 1995.

Final regulations (TD 8609 [1995–37I.R.B. 5]) relating to gasohol andcompressed natural gas were publishedin the Federal Register on August 7,1995 (60 FR 40079).

The final regulations. After consid-eration of written comments and com-ments made at the public hearings, theproposed diesel fuel regulations and theproposed conforming regulations areadopted as revised by this Treasurydecision. Comments and revisions arediscussed below.

Significant Issues Raised inComments and Changes Made in theFinal Regulations

Treatment of kerosene

The temporary diesel fuel regulationsprovide that kerosene would not betreated as diesel fuel before July 1,1994, and invited comments on thetreatment of kerosene after June 30,1994. Notice 94–72 (1994–2 C.B. 553)informed taxpayers that the IRS wasreviewing this issue and would notchange the treatment of kerosene untilthe issuance of further guidance. TheIRS is continuing its review of thisissue. Accordingly, the final regulationsdo not treat kerosene as diesel fuel.

Because kerosene is not treated asdiesel fuel, a person that adds kerosene


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to diesel fuel outside of the bulktransfer/terminal system generally mustpay tax on the added kerosene andmust be registered by the IRS.

Removal from certain refineries

The temporary diesel fuel regulationsprovide that tax is not imposed on theremoval of undyed diesel fuel from anapproved refinery for delivery to anapproved terminal if the fuel is re-moved by rail car, the refinery and theterminal are operated by the sametaxable fuel registrant, and the refineryis not served by pipeline or vessel.

One commentator noted that one ofits refineries is not serviced bypipeline, vessel, or rail. In response tothis comment, the final regulationsexpand this rule so that diesel fuel alsomay be removed tax free from an ap-proved refinery that is not served bypipeline, vessel, or rail if the removalis by a trailer or semi-trailer and addi-tional prescribed conditions are met.

Notice relating to sales and removalsof dyed diesel fuel

The temporary diesel fuel regulationsprovide that terminal operators andothers who sell dyed diesel fuel areresponsible for informing theircustomers that the dyed fuel cannot beused for a taxable purpose and that apenalty may be imposed for taxable use(the notice requirement). Any personthat fails to comply with the noticerequirement is, for purposes of thepenalty for misuse of dyed fuel im-posed by section 6714, presumed toknow that the dyed diesel fuel will notbe used for a nontaxable use.

Under the final regulations, onlyterminal operators and certain retailsellers will be subject to the noticerequirement. A terminal operator mustcomply with the notice requirement asone of the terms and conditions of itsregistration.

Visual inspection devices

The temporary diesel fuel regulationsdo not require the use of visual in-spection devices and the final regula-tions continue this policy. The IRS willcontinue to evaluate the need forregulations addressing this issue. How-ever, the use of visual inspectiondevices is encouraged so that thebuyers and sellers of diesel fuel may

readily determine whether the fuel maybe used for a taxable use.

Back-up tax; trains

A tax is imposed on the delivery ofdyed diesel fuel into the fuel supplytank of a diesel-powered train. Underthe temporary diesel fuel regulations,the operator of the train into whichdyed fuel is delivered is liable for thetax.

Several commentators noted that aprevalent practice in the railroad indus-try is for one railroad’s locomotives tobe used to pull freight on another’strack and to be fueled by the railroadthat owns the track. In these situations,the identity of the operator is unclear.

In response to these comments, thefinal regulations provide that the personthat delivers dyed diesel fuel into thefuel supply tank of a train is liablefor the tax under certain prescribedconditions.

Credits and payments

Information to be submitted withclaims. If undyed diesel fuel is used ina nontaxable use, a credit or payment isallowable to either (1) the ultimatepurchaser or (2) in the case of dieselfuel used on a farm for farmingpurposes or by a State or localgovernment, the registered ultimatevendor of the fuel. The temporarydiesel fuel regulations prescribe theinformation that must be submitted tothe IRS to support claims for thesecredits or payments.

Several commentators asserted thatthe information requirements in thediesel fuel temporary regulations aretoo burdensome. In response to thesecomments, the final regulations reducethe paperwork requirements for claim-ants by eliminating certain items fromthe list of required submissions. How-ever, the paperwork requirements maybe changed in the future if the IRSdetermines that additional informationis necessary for effective enforcementof the tax.

Notice 94–61. Notice 94–61 (1994–1C.B. 371) announced that the tempo-rary diesel fuel regulations would berevised to clarify that (1) a registeredultimate vendor is the only person al-lowed a credit or payment with respectto diesel fuel used on a farm forfarming purposes or by State or localgovernments, and (2) a credit or

payment generally is allowed to aregistered ultimate vendor who sellsundyed diesel fuel to a custom harves-ter for use on a farm for farming pur-poses. The final regulations containthese revisions.

Undyed diesel fuel mixed with dyeddiesel fuel. One condition for theallowance of a credit or payment undersection 6427 is that tax must have beenimposed on the diesel fuel to which theclaim relates. Because untaxed dieselfuel is dyed, the temporary diesel fuelregulations require each claim to beaccompanied by a statement that thediesel fuel covered by a claim did notcontain visible evidence of dye.

On rare occasions, however, anamount of taxed diesel fuel maycontain visible evidence of dye. Thismay occur, for example, when dyeddiesel fuel and undyed diesel fuel aremixed together by a fuel marketer oruser who accidentally delivers one typeof fuel into a storage tank that alreadycontains the other type of fuel.

The final regulations provide thateach claim must be accompanied by astatement that tax has been imposed onthe diesel fuel covered by a claim.Generally, this requirement will be metby a claimant’s statement that thediesel fuel did not contain visibleevidence of dye. However, for claimsinvolving taxed fuel that has beenmixed with dyed fuel, the claimant(that is, the ultimate purchaser or theregistered ultimate vendor) cannotmake such a statement. For theseclaims, the claimant must submit otherevidence showing that the diesel fuelcovered by the claim has been subjectto tax. This evidence might include astatement from the person that pro-duced the undyed/dyed fuel mixtureexplaining how the mixing occurred ora statement from the claimant (if theclaimant did not produce the mixture)that explains when and from whom theclaimant acquired the mixture. As withall claims, these claims are subject toreview by the IRS before they areallowed.

Section 6714 penalty

Section 6714(a)(3) provides that ifany person willfully alters, or attemptsto alter, the strength or composition ofany dye or marking done pursuant tosection 4082 in any dyed fuel, thensuch person shall pay a penalty inaddition to the tax (if any).


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Notice 94–21 (1994–1 C.B. 339) de-scribes three situations in which thesection 6714(a)(3) penalty does notapply. The final regulations incorporatethe substance of the Notice. In addi-tion, the final regulations provide thatthe section 6714(a)(3) penalty does notapply if dyed diesel fuel is blendedwith undyed diesel fuel and the blend-ing occurs as part of an exempt orpartially exempt (that is, bus or train)use. Thus, for example, the section6714(a)(3) penalty does not apply ifdyed and undyed diesel fuel areblended together in the fuel supply tankof a nonhighway vehicle such as abulldozer or farm tractor.

Dye injection systems and markers

The final regulations do not requirethe use of dye injection systems ormarkers. These topics will be addressedin a future notice of proposed rule-making.

Effect on other documents

The following publications are ob-solete as of March 14, 1996:

Rev. Rul. 72–213, 1972–1 C.B. 328.Rev. Proc. 73–21, 1973–2 C.B. 471.Notice 88–26, 1988–1 C.B. 495.Notice 89–17, 1989–1 C.B. 647.Notice 94–18, 1994–1 C.B. 338.Notice 94–21, 1994–1 C.B. 339.Notice 94–61, 1994–1 C.B. 371.Notice 94–72, 1994–2 C.B. 553.

Special Analyses

It has been determined that thisTreasury decision is not a significantregulatory action as defined in EO12866. Therefore, a regulatory assess-ment is not required. It also has beendetermined that section 553(b) of theAdministrative Procedure Act (5 U.S.C.chapter 5) and the Regulatory Flex-ibility Act (5 U.S.C. chapter 6) do notapply to these regulations, and, there-fore, a Regulatory Flexibility Analysisis not required. Pursuant to section7805(f) of the Internal Revenue Code,the notices of proposed rulemakingpreceding these regulations were sub-mitted to the Small Business Admin-istration for comment on their impacton small business.

Drafting Information

The principal author of these regula-tions is Frank Boland, Office of Assist-ant Chief Counsel (Passthroughs andSpecial Industries). However, otherpersonnel from the IRS and TreasuryDepartment participated in their de-velopment.

* * * * * *

Adoption of Amendments to theRegulations

Accordingly, under the authority of26 U.S.C. 7805, chapter 1 is amendedas follows:

PART 40—EXCISE TAXPROCEDURAL REGULATIONS

Paragraph 1. The authority citationfor part 40 is amended by removing theentry for sections 40.6011(a)–1,40.6011(a)–2, and 40.6011(a)–3T andadding entries in numerical order toread in part as follows:

Authority: 26 U.S.C. 7805 * * *Section 40.6011(a)–1 also issued un-

der 26 U.S.C. 6011(a). Section 40.6011(a)–2 also issued un-

der 26 U.S.C. 6011(a). * * *Par. 2. Section 40.6011(a)–1(b) is

amended by:1. Redesignating the text of para-

graph (b) following the heading asparagraph (b)(1) and adding a headingfor newly designated paragraph (b)(1).

2. Adding paragraph (b)(2). The additions read as follows:

§40.6011(a)–1 Returns.

* * * * * *

(b) * * * (1) In general. * * *(2) Certain persons liable for tax on

taxable fuel. Effective January 1, 1994,the district director may require aperson to make a return of tax for amonthly or semimonthly period in themanner prescribed in paragraph (b)(1)of this section if the person—

(i) Is a bonded registrant (as definedin §48.4101–1(b) of this chapter) at anytime during the period;

(ii) Has been registered under sec-tion 4101 for less than one year at thebeginning of the period;

(iii) Meets the acceptable risk test of§48.4101–1(f)(3) of this chapter byreason of §48.4101–1(f)(3)(i)(B) of thischapter at any time during the period;

(iv) Has failed to comply with theapplicable provisions of §48.4101–1(h)of this chapter (relating to the termsand conditions of registration);

(v) Is liable for tax under §48.4082–4(a) of this chapter (relating to theback-up tax on diesel fuel) at any timeduring the period; or

(vi) Is liable for tax under section4081 (relating to the tax on taxablefuel) at any time during the period andis not a taxable fuel registrant at thattime.

* * * * * *

§40.6011(a)–3T [Removed]

Par. 3. Section 40.6011(a)–3T isremoved.

PART 42—[REMOVED]

Par. 4. Part 42 is removed.

PART 48—MANUFACTURERSAND RETAILERS EXCISE TAXES

Par. 5. The authority citation for part48 is amended by removing the entriesfor sections 48.4081–4, 48.4082–1 and48.4082–2T, 48.4101–3T, 48.4101–4T,48.6427–8T and 48.6427–9T, andadding entries in numerical order toread in part as follows:

Authority: 26 U.S.C. 7805 * * *Section 48.4081–4 also issued under

26 U.S.C. 4083(a)(2). * * *Section 48.4082–1 also issued under

26 U.S.C. 4082. Section 48.4082–2 also issued under

26 U.S.C. 4082. Section 48.4101–1 also issued under

26 U.S.C. 4101(a).Section 48.4101–2 also issued under

26 U.S.C. 4101(d). * * *Section 48.6427–8 also issued under

26 U.S.C. 6427(n). Section 48.6427–9 also issued under

26 U.S.C. 6427(n). Par. 6. Section 48.0–1 is amended by

removing from the fourth sentence thelanguage ‘‘gasoline, diesel and aviationfuel,’’ and adding ‘‘taxable fuel, avia-tion fuel,’’ in its place.

§48.4041–0T [Removed]

Par. 7. Section 48.4041–0T isremoved.


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Par. 8. Section 48.4041–0 is added toread as follows:

§48.4041–0 Applicability ofregulations relating to diesel fuelafter December 31, 1993.

S e c t i o n s 4 8 . 4 0 4 1 – 3 t h r o u g h48.4041–17 do not apply to sales oruses of diesel fuel after December 31,1993. For rules relating to the dieselfuel tax imposed by section 4041 afterthat date, see §48.4082–4.

§§48.4041–1 and 48.4041–2[Removed]

Par. 9. Sections 48.4041–1 and48.4041–2 are removed.

§48.4041–2T [Removed]

Par. 10. Section 48.4041–2T isremoved.

§48.4041–21 [Amended]

§§48.4041–15 through 48.4041–21[Transferred]

Par. 11. Sections 48.4041–15 through48.4041–21 are transferred from sub-part G to subpart F.

Par. 12. In the first sentence of§48.4041–21(c)(1), the language‘‘§48.4082–4T(c)(1) through (5)(A) or(c)(6) through (11)’’ is removed and‘‘§48.4082–4(c)(1) through (c)(4)(i) or(c)(5) through (c)(10)’’ is added in itsplace.

Par. 13. The heading for subpart G isrevised to read as follows:

Subpart G—Fuel Used on InlandWaterways

Par. 14. Section 48.4042–1 isamended as follows:

1. Paragraphs (b) and (e) are revised.2. In the introductory text of para-

graph (f)(1), the language ‘‘(26)’’ isremoved and ‘‘(27)’’ is added in itsplace.

3. Paragraphs (g)(25) and (g)(26) areredesignated as paragraphs (g)(26) and(g)(27), respectively, and a new para-graph (g)(25) is added.

The revisions and additions read asfollows:

§48.4042–1 Tax on fuel used incommercial waterway transportation.

* * * * * *

(b) Amount of tax. For the amount oftax, see section 4042(b).

* * * * * *

(e) Liquid fuel. For purposes of thetax imposed under this section, liquidfuel means any liquid fuel includinggasoline, diesel fuel, special motor fuel,or Bunker C residual fuel oil.

* * * * * *

(g) * * *(25) Tennessee-Tombigbee Water-

way: From its confluence with theTennessee River to the Warrior Riverat Demopolis, Alabama.

* * * * * *

Par. 15. The heading for subpart H isrevised to read as follows:

Subpart H—Motor Vehicles, Tires,Tubes, Tread Rubber, and TaxableFuel

Par. 16. Section 48.4064–1(e)(2) isamended by removing the language‘‘Form 843’’ and adding ‘‘Form 8849(or on such other form as the Commis-sioner may designate)’’ in its place.

Par. 17. The undesignated centerheading preceding §48.4081–1 is re-vised to read as follows:

TAXABLE FUEL

Par. 18. Sections 48.4081–1,48.4081–2 and 48.4081–3 are revisedto read as follows:

§48.4081–1 Taxable fuel; definitions.

(a) Overview. This section providesdefinitions for purposes of the tax ontaxable fuel imposed by section 4081.

(b) Definitions. Approved terminal or refinery means

a terminal or refinery that is operated,respectively, by a taxable fuel regis-trant that is a terminal operator, or by ataxable fuel registrant that is a refiner.

Blender means any person that pro-duces blended taxable fuel.

Bulk transfer means any transfer oftaxable fuel by pipeline or vessel.

Bulk transfer/terminal system meansthe taxable fuel distribution systemconsisting of refineries, pipelines, ves-sels, and terminals. Thus, taxable fuelin a refinery, pipeline, vessel, orterminal is in the bulk transfer/terminal

system. Taxable fuel in the fuel supplytank of any engine, or in any tank car,rail car, trailer, truck, or other equip-ment suitable for ground transportationis not in the bulk transfer/terminalsystem.

Bus means automobile bus. Diesel-powered boat means any wa-

terborne vessel of any size or config-uration that is propelled, in whole or inpart, by a diesel-powered engine.

Diesel-powered bus means any busthat is propelled by a diesel-poweredengine.

Diesel-powered highway vehiclemeans a highway vehicle, as defined in§48.4041–8(b), that is propelled by adiesel-powered engine.

Diesel-powered train means anydiesel-powered equipment or machinerythat rides on rails. Thus, for example,the term includes a locomotive, worktrain, switching engine, and track main-tenance machine.

Enterer generally means the importerof record (under customs law) withrespect to the taxable fuel. However, ifthe importer of record is acting as anagent (for example, the importer ofrecord is a customs broker engaged bythe owner of the taxable fuel), theperson for whom the agent is acting isthe enterer. If there is no importer ofrecord for taxable fuel entered into theUnited States, the owner of the taxablefuel at the time it is brought into theUnited States is the enterer.

Entry of taxable fuel into the UnitedStates occurs when—

(1) The taxable fuel is brought intothe United States and applicablecustoms law requires that the taxablefuel be entered into the United Statesfor consumption, use, or warehousing;or

(2) The taxable fuel is brought intothe United States from Puerto Rico andapplicable customs law would requirethat the taxable fuel be entered into theUnited States for consumption, use, orwarehousing if the taxable fuel werebrought into the United States fromsomewhere other than Puerto Rico.

Finished gasoline means all products(including gasohol (as defined in§48.4081–6(b)(2))) that are commonlyor commercially known or sold asgasoline and are suitable for use as amotor fuel, other than products thathave an ASTM octane number of lessthan 75 as determined by the motormethod.


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Gasoline means finished gasolineand gasoline blendstocks.

Industrial user means any personthat receives gasoline blendstocks bybulk transfer for its own use in themanufacture of any product other thanfinished gasoline.

Position holder means, with respectto taxable fuel in a terminal, the personthat holds the inventory position in thetaxable fuel, as reflected on the recordsof the terminal operator. A personholds the inventory position in taxablefuel when that person has a contractualagreement with the terminal operatorfor the use of storage facilities andterminaling services at a terminal withrespect to the taxable fuel. The termalso includes a terminal operator thatowns taxable fuel in its terminal.

Rack means a mechanism for deliv-ering taxable fuel from a refinery orterminal into a truck, trailer, railroadcar, or other means of nonbulk transfer.

Refiner means any person that owns,operates, or otherwise controls arefinery.

Refinery means a facility used toproduce taxable fuel from crude oil,unfinished oils, natural gas liquids, orother hydrocarbons and from whichtaxable fuel may be removed by pipe-line, by vessel, or at a rack. However,the term does not include a facilitywhere only blended fuel or gasohol (asdefined in §48.4081–6(b)(2)), and noother type of taxable fuel, is produced.For this purpose blended fuel is anymixture that, if produced outside thebulk transfer/terminal system, would beblended taxable fuel.

Removal means any physical transferof taxable fuel, and any use of taxablefuel other than as a material in theproduction of taxable fuel or specialfuels (as defined in §48.4041–8(f)).However, taxable fuel is not removedwhen it evaporates or is otherwise lostor destroyed.

Sale means—(1) The transfer of title to, or sub-

stantial incidents of ownership in,taxable fuel (other than taxable fuel ina terminal) to the buyer for a consid-eration, which may consist of money,services, or other property; or

(2) The transfer of the inventoryposition in the taxable fuel in aterminal if the transferee becomes theposition holder with respect to thetaxable fuel.

State includes any State, any politicalsubdivision of a State, the District of

Columbia, the American Red Cross,and, subject to the limitations ofsection 7871, any Indian tribalgovernment.

Taxable fuel means gasoline anddiesel fuel.

Taxable fuel registrant means anenterer, industrial user, refiner, terminaloperator, or throughputter that is regis-tered under section 4101.

Terminal means a taxable fuel stor-age and distribution facility that issupplied by pipeline or vessel, andfrom which taxable fuel may be re-moved at a rack. However, the termdoes not include any facility at whichgasoline blendstocks are used in themanufacture of products other thanfinished gasoline and from which nogasoline is removed.

Terminal operator means any personthat owns, operates, or otherwise con-trols a terminal.

Throughputter means any personthat—

(1) Owns taxable fuel within thebulk transfer/terminal system (otherthan in a terminal); or

(2) Is a position holder. Vessel means a waterborne taxable

fuel transporting vessel.(c) Blended taxable fuel, diesel fuel,

and gasoline blendstocks; definitions—(1) Blended taxable fuel—(i) In gen-eral. Except as provided in paragraphs(c)(1)(ii) and (c)(iii) of this section,blended taxable fuel means any mixturethat is produced outside the bulktransfer/terminal system and that con-sists of—

(A) Taxable fuel with respect towhich tax has been imposed undersection 4041(a)(1) or 4081(a); and

(B) Any other liquid on which taxhas not been imposed under section4081.

(ii) Exclusion; minor blending. Amixture described in paragraph (c)(1)(i)of this section is not blended taxablefuel if, during the calendar quarter inwhich the blender removes or sells themixture, all such mixtures removed orsold by the blender contain, in theaggregate, less than 400 gallons ofliquid described in paragraph (c)(1)-(i)(B) of this section.

(iii) Exclusion; gasohol. Blendedtaxable fuel does not include anygasohol (as defined in §48.4081–6(b)-(2)) if, disregarding the alcohol, thegasohol is not blended taxable fuel andcontains, in addition to permitted

amounts of liquids described in para-graph (c)(1)(i)(B) of this section, onlygasoline with respect to which—

(A) Tax was imposed under section4081(a) at a rate described in§48.4081–6(e) (relating to the gasoholproduction tax rate and the gasohol taxrate); or

(B) A valid claim is made undersection 6427(f).

(2) Diesel fuel. (i) Effective April 1,1996, diesel fuel means any liquid(other than gasoline) that, withoutfurther processing or blending, is suita-ble for use as a fuel in a diesel-powered highway vehicle, diesel-powered train, or diesel-powered boat.However, diesel fuel does not includekerosene, No. 5 and No. 6 fuel oils (asdescribed in ASTM Specification D396, which may be obtained from theAmerican Society for Testing andMaterials, 100 Barr Harbor Drive, WestConshohocken, PA 19428), or F–76(Fuel Naval Distillate MIL–F–16884,which may be obtained from Standardi-zation Document Order Desk, Building4, Section D, 700 Robbins Avenue,Philadelphia, PA 19111).

(ii) Before April 1, 1996, diesel fuelmeans any liquid (other than kerosene)that is commonly or commerciallyknown or sold as a fuel that is suitablefor use in a diesel-powered highwayvehicle, diesel-powered train, or diesel-powered boat. A liquid meets this re-quirement if, without further processingor blending, the liquid has practical andcommercial fitness for use in thepropulsion engine of the highway vehi-cle, train, or boat. A liquid may possessthis practical and commercial fitnesseven though the specified use is not theliquid’s predominant use. However, aliquid does not possess this practicaland commercial fitness solely by rea-son of its possible or rare use as a fuelin the propulsion engine of a highwayvehicle, train, or boat.

(iii) Cross reference. For the tax onblended taxable fuel, see §48.4081–3(g). For the back-up tax on certainuses of liquids other than diesel fuel,see §48.4082–4.

(3) Gasoline blendstocks—(i) Ingeneral. Except as provided in para-graph (c)(3)(ii) of this section, gasolineblendstocks means—

(A) Alkylate;(B) Butane;(C) Butene;(D) Catalytically cracked gasoline;


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(E) Coker gasoline;(F) Ethyl tertiary butyl ether

(ETBE); (G) Hexane;(H) Hydrocrackate;(I) Isomerate;(J) Methyl tertiary butyl ether

(MTBE);(K) Mixed xylene (not including any

separated isomer of xylene);(L) Natural gasoline;(M) Pentane;(N) Pentane mixture;(O) Polymer gasoline;(P) Raffinate;(Q) Reformate;(R) Straight-run gasoline;(S) Straight-run naphtha;(T) Tertiary amyl methyl ether

(TAME);(U) Tertiary butyl alcohol (gasoline

grade) (TBA);(V) Thermally cracked gasoline;(W) Toluene; and(X) Transmix containing gasoline.(ii) Exclusion. Gasoline blendstocks

does not include any product that can-not, without further processing, be usedin the production of finished gasoline.For example, a mixed hydrocarbonstream that is produced in a natural gasprocessing plant is not a gasolineblendstock if the stream cannot be usedto produce finished gasoline withoutfurther processing.

(d) Effective date. This section iseffective January 1, 1994.

§48.4081–2 Taxable fuel; tax onremoval at a terminal rack.

(a) Overview. This section providesthe general rule that all removals oftaxable fuel at a terminal rack aresubject to tax and the position holderwith respect to the fuel is liable for thetax.

(b) Imposition of tax. Except asprovided in §48.4081–4 (relating togasoline blendstocks) and §48.4082–1(relating to dyed diesel fuel), tax isimposed on the removal of taxable fuelfrom a terminal if the taxable fuel isremoved at the rack.

(c) Liability for tax—(1) In general.The position holder with respect to thetaxable fuel is liable for the taximposed under paragraph (b) of thissection.

(2) Joint and several liability ofterminal operator; unregistered posi-tion holder—(i) In general. The termi-nal operator is jointly and severallyliable for the tax imposed underparagraph (b) of this section if—

(A) The position holder with respectto the taxable fuel is a person otherthan the terminal operator and is not ataxable fuel registrant; and

(B) The terminal operator has notmet the conditions of paragraph(c)(2)(ii) of this section.

(ii) Conditions for avoidance of lia-bility. A terminal operator is not liablefor tax under this paragraph (c)(2) if, atthe time of the removal, the terminaloperator—

(A) Is a taxable fuel registrant;(B) Has an unexpired notification

certificate (as described in §48.4081–5)from the position holder; and

(C) Has no reason to believe thatany information in the notificationcertificate is false.

(3) Joint and several liability ofterminal operator; incorrect informa-tion provided. The terminal operator isjointly and severally liable for the taximposed under paragraph (b) of thissection if, in connection with theremoval of diesel fuel that is not dyedand marked in accordance with§48.4082–1, the terminal operatorprovides any person (including theposition holder with respect to the fuel)with any bill of lading, shipping paper,record, or similar document indicatingthat the diesel fuel is dyed and markedin accordance with §48.4082–1.

(4) Example. The following exampleillustrates this paragraph (c) and§48.4082–1:

Example. (i) TO is a terminal operator and PHis the position holder with respect to, and ownerof, 8,000 gallons of diesel fuel stored in TO’sterminal. TO and PH are taxable fuel registrants.When the fuel is removed from the terminal atthe rack, the fuel is not dyed and marked inaccordance with §48.4082–1, and TO does notprovide any person with any paperwork indicat-ing that the fuel is dyed and marked. After theremoval from the terminal, PH sells the fuel toindividuals for use as heating oil, a nontaxableuse.

(ii) Because PH is the position holder of thefuel at the time of the removal from the terminal,PH is liable for the tax imposed by section 4081.The removal is subject to tax because the fuel isnot dyed and marked in accordance with§48.4082–1, and later use of the fuel in anontaxable use does not make the removal fromthe terminal exempt from tax.

(iii) Because PH is a taxable fuel registrantand TO did not provide any person with any

paperwork indicating that the fuel is dyed andmarked, TO is not jointly and severally liable fortax under paragraph (c)(2) or (3) of this section.

(d) Rate of tax. For the rate of taxgenerally, see section 4081(a). For therate of tax on gasohol and on gasolineremoved for gasohol production, see§48.4081–6.

(e) Effective date. This section iseffective January 1, 1994.

§48.4081–3 Taxable fuel; taxableevents other than removal at theterminal rack.

(a) Overview. Although tax is im-posed when taxable fuel is removedfrom the terminal at the rack, tax alsois imposed in certain other situationsdescribed in this section. For the back-up tax on the use of dyed diesel fuel,see §48.4082–4.

(b) Tax on removal from a re-finery—(1) Imposition of tax. Except asprovided in paragraph (b)(2) of thissection (relating to an exemption forcertain refineries), §48.4081–4 (relatingto gaso l ine b lends tocks) , and§48.4082–1 (relating to dyed dieselfuel), tax is imposed on the followingremovals from a refinery:

(i) A removal by bulk transfer if therefiner or the owner of the taxable fuelimmediately before the removal is nota taxable fuel registrant.

(ii) A removal at the rack.(iii) After September 30, 1995, a

removal of a batch of gasohol from anapproved refinery by bulk transfer ifthe refiner treats itself with respect tothe removal as a person that is notregistered under section 4101. See§48.4101–1(a). For the rule providingthat no deposit is required in the caseof the tax imposed under this paragraph(b)(1)(iii), see §40.6302(c)–1(e)(4) ofthis chapter. For the rule allowinginspections of facilities where gasoholis produced, see section 4083.

(2) Exception for certain refineries.The tax imposed under paragraph (b)-(1)(ii) of this section does not apply toa removal of taxable fuel if—

(i) The taxable fuel is removed froman approved refinery that is not servedby pipeline (other than a pipeline forthe receipt of crude oil) or vessel;

(ii) The taxable fuel is received at afacility that is operated by a taxablefuel registrant and is located within thebulk transfer/terminal system;

(iii) The removal from the refineryis by—


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(A) Rail car; or(B) In the case of diesel fuel, a

trailer or semi-trailer that is usedexclusively for the transport servicedescribed in paragraphs (b)(2)(i) and(b)(2)(ii) of this section;

(iv) In the case of taxable fuelremoved by rail car, the facility atwhich the fuel is received is operatedby the same person that operates therefinery from which the fuel wasremoved; and

(v) In the case of diesel fuel re-moved by a trailer or semi-trailer, thefacility at which the fuel is received isless than 20 miles from the refineryfrom which the diesel fuel wasremoved.

(3) Liability for tax. The refiner isliable for the tax imposed under para-graph (b)(1) of this section.

(c) Tax on entry into the UnitedStates—(1) Imposition of tax. Except asprovided in §48.4081–4 (relating togasoline blendstocks) and §48.4082–1(relating to dyed diesel fuel), a tax isimposed on the entry of taxable fuelinto the United States if—

(i) The entry is by bulk transfer andthe enterer is not a taxable fuelregistrant; or

(ii) The entry is not by bulk transfer.(2) Liability for tax. The enterer is

liable for the tax imposed under para-graph (c)(1) of this section.

(d) Tax on bulk transfers from aterminal by an unregistered positionholder—(1) Imposition of tax. A tax isimposed on the removal by bulk trans-fer of taxable fuel from a terminal ifthe position holder with respect to thetaxable fuel is not a taxable fuelregistrant.

(2) Liability for tax—(i) In general.The position holder with respect to thetaxable fuel is liable for the taximposed under paragraph (d)(1) of thissection.

(ii) Joint and several liability ofterminal operator. The terminal opera-tor is jointly and severally liable for thetax imposed under paragraph (d)(1) ofthis section if—

(A) The position holder with respectto the taxable fuel is a person otherthan the terminal operator; and

(B) The terminal operator has notmet the conditions of paragraph(d)(2)(iii) of this section.

(iii) Conditions for avoidance of lia-bility. A terminal operator is not liablefor tax under this paragraph (d)(2) if, at

the time of the bulk transfer, theterminal operator—


certificate (described in §48.4081–5)from the position holder; and


(e) Tax on bulk transfers not re-ceived at an approved terminal or re-finery—(1) Imposition of tax. Except asprovided in §48.4081–4 (relating togasoline blendstocks) and §48.4082–1(relating to dyed diesel fuel), a tax ontaxable fuel is imposed if—

(i) Taxable fuel is removed by bulktransfer from a refinery or terminal, orentered by bulk transfer into the UnitedStates;

(ii) No tax was imposed on suchremoval or entry under paragraph (b),(c), or (d) of this section; and

(iii) Upon removal from the pipelineor vessel, the taxable fuel is notreceived at an approved terminal orrefinery (or at another pipeline orvessel).

(2) Liability for tax—(i) In general.The owner of the taxable fuel when itis removed from the pipeline or vesselis liable for the tax imposed underparagraph (e)(1) of this section if theowner has not met the conditions ofparagraph (e)(2)(ii) of this section.

(ii) Conditions for avoidance of lia-bility. An owner of taxable fuel is notliable for tax under paragraph (e)(2)(i)of this section if, at the time thetaxable fuel is removed from the pipe-line or vessel, the owner of the taxablefuel—


certificate (described in §48.4081–5)from the operator of the terminal orrefinery where the taxable fuel isreceived; and


(iii) Liability of the operator of thefacility where the taxable fuel isreceived. The operator of the facilitywhere the taxable fuel is received isliable for the tax imposed underparagraph (e)(1) of this section if theowner of the taxable fuel has met theconditions of paragraph (e)(2)(ii) ofthis section and is jointly and severallyliable for the tax if the owner has notmet such conditions.

(f) Tax on sales within the bulktransfer/terminal system—(1) Imposi-tion of tax. Except as provided inparagraph (f)(2) of this section and§48.4082–1 (relating to dyed dieselfuel), a tax is imposed on the sale oftaxable fuel located within the bulktransfer/terminal system if the sale is toa person that is not a taxable fuelregistrant and tax has not been imposedon such taxable fuel under §48.4081–2,or paragraph (b), (c), (d), or (e) of thissection.

(2) Exception for certain sales oftaxable fuel for export. The tax im-posed under paragraph (f)(1) of thissection does not apply to a sale oftaxable fuel if—

(i) The buyer’s principal place ofbusiness is not within the UnitedStates;

(ii) The sale of the fuel occurs as thefuel is delivered into a transport vessel;

(iii) The vessel has a capacity of atleast 20,000 barrels of fuel;

(iv) The seller is a taxable fuelregistrant and the exporter of record ofthe fuel; and

(v) The fuel was exported in duecourse.

(3) Liability for tax—(i) In general.The seller of the taxable fuel is liablefor the tax imposed under paragraph(f)(1) of this section if the seller hasnot met the conditions of paragraph(f)(3)(ii) of this section.

(ii) Conditions for avoidance of lia-bility. A seller is not liable for taxunder paragraph (f)(3)(i) of this sectionif, at the time of the sale, the seller—


certificate (described in §48.4081–5)from the buyer; and

(C) Has no reason to believe thatany information in the certificate isfalse.

(iii) Liability of the buyer. The buyerof the taxable fuel is liable for the taximposed under paragraph (f)(1) of thissection if the seller of the taxable fuelhas met the conditions of paragraph(f)(3)(ii) of this section and is jointlyand severally liable for the tax if theseller has not met such conditions.

(4) Example. The following exampleillustrates this paragraph (f) and thedefinition of the term sale in §48.4081–1:

Example. PH owns one million gallons of un-taxed gasoline that is stored in TO’s terminal.


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PH also is the position holder with respect to thegasoline. While the gasoline remains stored inthe terminal, PH transfers title to 200,000 gallonsof the gasoline to A, a person that is not a tax-able fuel registrant. PH continues to hold theinventory position on TO’s records with respectto the one million gallons. Because PH continuesas the position holder with respect to the gaso-line, the transfer of title to the gasoline from PHto A is not a sale of gasoline. Because thistransfer of title from PH to A is not a sale ofgasoline, the tax imposed under paragraph (f) ofthis section does not apply to the transfer.

(g) Tax on removal or sale ofblended taxable fuel by the blender—(1) Imposition of tax. A tax is imposedon the removal or sale of blendedtaxable fuel by the blender thereof. Taxis computed on the difference betweenthe total number of gallons of blendedtaxable fuel removed or sold and thenumber of gallons of previously taxedtaxable fuel used to produce theblended taxable fuel. For this purpose,the alcohol in gasohol is treated aspreviously taxed taxable fuel.

(2) Liability for tax. The blender isliable for the tax imposed underparagraph (g)(1) of this section.

(3) Example. The following exampleillustrates the provisions of this para-graph (g) and the definition of the termblended taxable fuel in §48.4081–1(c):

Example. (i) X, a gasoline wholesale distribu-tor, buys 9,500 gallons of gasoline at a terminalrack. The gasoline is delivered into a tank trailer.The position holder is liable for tax under§48.4081–2 when the gasoline is removed at therack. X then goes to another location where 500gallons of alcohol (a substance not subject to taxunder section 4081) are delivered into the tanktrailer already containing the 9,500 gallons ofgasoline. The gasoline and alcohol are splashblended as X drives to X’s retail service stationwhere X pumps the blended gasoline into astorage tank for sale to consumers.

(ii) X is a blender within the meaning of§48.4081–1 because X has produced blendedtaxable fuel, as defined in §48.4081–1, bymixing the 9,500 gallons of gasoline on whichtax has been imposed under §48.4081–2(b) with500 gallons of alcohol, a substance not subject totax under section 4081. The 10,000 gallon mix-ture is not gasohol because it does not satisfy thealcohol-content requirement described in§48.4081–6(b)(2). X, the blender, is liable for thetax imposed under this paragraph (g) on theblended gasoline. The tax is imposed when theblended gasoline is removed from the tank trailerat the retail station. Tax on the blended mixtureis computed on 500 gallons, the number ofgallons not previously subject to tax undersection 4081.

(h) Rate of tax. For the rate of taxgenerally imposed under this section,see section 4081(a). For the rate of taxon gasohol and on gasoline removed orentered for gasohol production, see§48.4081–6.

(i) Effective date. This section iseffective January 1, 1994.


1. The heading for §48.4081–4 isrevised.

2. In paragraph (a), the language ‘‘toproduce gasoline’’ is removed and ‘‘toproduce finished gasoline’’ is added inits place.

3. In paragraph (b)(1)(i), the lan-guage ‘‘gasoline registrant’’ is removedand ‘‘taxable fuel registrant’’ is addedin its place.

4. In paragraph (b)(1)(ii), the lan-guage ‘‘gasoline (as defined in§48.4081–1(i)(1))’’ is removed and‘‘finished gasoline’’ is added in itsplace.

5. In paragraphs (b)(2)(i) and (c)(1),the language ‘‘gasoline registrant’’ isremoved each place it appears and‘‘taxable fuel registrant’’ is added in itsplace.

6. The language ‘‘and’’ is addedfollowing the semicolon at the end ofparagraph (c)(2).

7. Paragraph (c)(3) is revised.8. Paragraph (c)(4) is removed.9. In paragraph (d), the language

‘‘gasoline registrant’’ is removed and‘‘taxable fuel registrant’’ is added in itsplace.

10. In paragraphs (e)(2) and (e)(3),the language ‘‘production of gasoline’’is removed each place it appears and‘‘production of finished gasoline’’ isadded in its place.

11. In paragraph (e)(3), the language‘‘to produce gasoline’’ is removed eachplace it appears, and ‘‘to producefinished gasoline’’ is added in its place.

12. In paragraph (f), the language‘‘1993’’ is removed and ‘‘1994’’ isadded in its place.

The revisions read as follows:

§48.4081–4 Gasoline; special rulesfor gasoline blendstocks.

* * * * * *

(c) * * *(3) Has no reason to believe that

any information in the certificate isfalse.

* * * * * *


1. The heading for §48.4081–5 isrevised to read as follows:

§48.4081–5 Taxable fuel; notificationcertificate of taxable fuel registrant.

2. In paragraph (a), the first sentencein paragraph (b)(1) introductory text,and paragraph (b)(2), the language‘‘gasoline’’ is removed each place itappears and ‘‘taxable fuel’’ is added inits place.

3. In paragraph (b)(3), the language‘‘or letter of registration’’ is addedafter ‘‘Form 637’’ in the heading andafter ‘‘(Form 637)’’ in the text.

4. In paragraph (c), the language‘‘1993’’ is removed and ‘‘1994’’ isadded in its place.

Par. 21. The heading for §48.4081–6is revised to read as follows:

§48.4081–6 Gasoline; gasohol.

§40.4081–7 [Amended]


1. In paragraph (c)(2), two newlistings are added at the end of thelistings in line 5 of the taxpayer’sreport:

‘‘ Removal at theterminal rack

Removal or sale bythe blender’’

2. In paragraph (c)(4)(i)(A) and thefirst sentence of paragraph (c)(4)(iii),the language ‘‘§48.4081–1(r))’’ is re-moved and ‘‘§48.4081–1))’’ is added inits place.

Par. 23. Section 48.4081–8 is revisedto read as follows:

§48.4081–8 Taxable fuel;measurement.

(a) In general. For purposes of thetax imposed by section 4081, gallons oftaxable fuel may be measured on thebasis of—

(1) Actual volumetric gallons;(2) Gallons adjusted to 60 degrees

Fahrenheit; or(3) Any other temperature adjust-

ment method approved by theCommissioner.

(b) Effective date. This section iseffective January 1, 1994.


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§§48.4081–10T, 48.4081–11T, and48.4081–12T [Removed]

Par. 24. Sections 48.4081–10Tthrough 48.4081–12T are removed.


§48.4082–1 Diesel fuel tax;exemption.

(a) Exemption. Tax is not imposedby section 4081 on the removal, entry,or sale of any diesel fuel if—

(1) The person otherwise liable fortax is a taxable fuel registrant;

(2) In the case of a removal from aterminal, the terminal is an approvedterminal; and

(3) The diesel fuel satisfies thedyeing and marking requirements ofparagraphs (b), (c), and (d) of thissection.

(b) Dyeing requirements. Diesel fuelsatisfies the dyeing requirement of thisparagraph (b) only if it contains—

(1) The dye Solvent Red 164 (andno other dye) at a concentration spec-trally equivalent to at least 3.9 poundsof the solid dye standard Solvent Red26 per thousand barrels of diesel fuel;or

(2) Any dye of a type and in aconcentration that has been approvedby the Commissioner.

( c ) M a r k i n g r e q u i r e m e n t s .[Reserved]

(d) Time for adding the dye andmarker. [Reserved]

(e) Effective date. This section iseffective March 14, 1966.

§§48.4082–2T, 48.4082–3T, 48.4082–4T and 48.4083 [Removed]

Par. 26. Sections 48.4082–2T,48.4082–3T, 48.4082–4T, and 48.4083are removed.

Par. 27. Sections 48.4082–2,48.4082–3, 48.4082–4, and 48.4083–1are added to read as follows:

§48.4082–2 Diesel fuel tax; noticerequired with respect to dyed dieselfuel.

(a) In general. A legible and con-spicuous notice stating: DYED DIESELFUEL, NONTAXABLE USE ONLY,PENALTY FOR TAXABLE USE mustbe posted by a seller on any retail

pump or other delivery facility where itsells dyed diesel fuel for use by itsbuyer. Any seller that fails to post therequired notice on any retail pump orother delivery facility where it sellsdyed diesel fuel is, for purposes of thepenalty imposed by section 6714, pre-sumed to know that the fuel will not beused for a nontaxable use.

(b) Cross reference; terminal opera-tors. For the requirement that terminaloperators provide a notice with respectto dyed diesel fuel, see §48.4101–1(h)(3) (relating to terms and condi-tions of registration for terminaloperators).

(c) Effective date. This section iseffective January 1, 1994.

§48.4082–3 Diesel fuel; visualinspection devices. [Reserved]

§48.4082–4 Diesel fuel; back-up tax.

(a) Imposition of tax—(1) In gen-eral. Tax is imposed by section 4041on the delivery into the fuel supplytank of the propulsion engine of adiesel-powered highway vehicle (otherthan a diesel-powered bus) or diesel-powered boat of—

(i) Any diesel fuel on which tax hasnot been imposed by section 4081;

(ii) Any diesel fuel on which acredit or payment has been allowedunder section 6427; or

(iii) Any liquid other than gasolineor diesel fuel.

(2) Liability for tax—(i) In general.The operator of the highway vehicle orboat into which the fuel is delivered isliable for the tax imposed underparagraph (a)(1) of this section.

(ii) Joint and several liability of theseller. The seller of the fuel is jointlyand severally liable for the tax imposedunder paragraph (a)(1) of this section ifthe seller knows or has reason to knowthat the fuel will not be used in anontaxable use.

(3) Rate of tax. The rate of tax is therate imposed on diesel fuel by section4081(a).

(b) Tax on diesel fuel; buses andtrains—(1) In general. Tax is imposedby section 4041 on the delivery intothe fuel supply tank of the propulsionengine of a diesel-powered bus or adiesel-powered train of—

(i) Any diesel fuel on which tax hasnot been imposed by section 4081;

(ii) Any diesel fuel on which acredit or payment has been allowedunder section 6427; or

(iii) Any liquid other than gasolineor diesel fuel.

(2) Liability for tax—(i) In general.Except as provided in paragraph (b)(2)-(ii) of this section, the operator of thebus or train into which the fuel isdelivered is liable for the tax imposedunder paragraph (b)(1) of this section.

(ii) Special rule for certain trainoperators. The person that delivers thefuel into the fuel supply tank of a train,rather than the train operator, is liablefor the tax imposed under paragraph(b)(1) of this section if, at the time ofthe delivery—

(A) The deliverer of the fuel and theoperator of the train are both registeredas train operators under §48.4101–1;and

(B) A written agreement between thedeliverer of the fuel and the operatorrequires the deliverer to pay the taximposed under paragraph (b)(1) of thissection.

(3) Rate of tax—(i) Buses—(A) Ingeneral. The rate of tax under para-graph (b)(1) of this section is the sumof the rates described in sections4041(a)(1)(C)(iii)(I) and 4041(d)(1)(the bus rate) if the bus is used tofurnish (for compensation) passengerland transportation available to thegeneral public and either such transpor-tation is scheduled and along regularroutes or the seating capacity of thebus is at least 20 adults (not includingthe driver). A bus is available to thegeneral public if the bus is availablefor hire to more than a limited numberof persons, groups, or organizations.

(B) Other uses. The rate of taxunder paragraph (b)(1) of this section isthe rate of tax imposed on diesel fuelby section 4081(a) if the bus is usedfor a purpose other than that describedin paragraph (b)(3)(i)(A) of this sec-tion.

(ii) Trains. The rate of tax underparagraph (b)(1) of this section is therate prescribed in section 4041 fordiesel fuel sold for use in a train (thetrain rate).

(4) Cross reference. For the registra-tion requirement relating to certain busand train operators, see §48.4101–1(c)(2).

(c) Exemptions. The taxes imposedunder paragraphs (a) and (b) of thissection do not apply to a delivery ofany liquid for—

(1) Use on a farm for farming pur-poses as that term and related terms aredefined in §48.6420–4(a) through (g);


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(2) The exclusive use of a State;(3) Use described in section 4041(h)

(relating to use in a vehicle owned byan aircraft museum);

(4) Use in a boat employed in—(i) The business of commercial

fishing;(ii) The business of transporting per-

sons or property for compensation orhire; or

(iii) Any other trade or business,unless the boat is used in any activityof a type generally considered toconstitute entertainment, amusement, orrecreation (within the meaning of sec-tion 274(a)(1)(A) and the regulationsunder that section);

(5) Use in a bus while the bus isengaged in the transportation of stu-dents and employees of schools (asdefined in the last sentence of section4221(d)(7)(C));

(6) Use in a qualified local bus (asdefined in section 6427(b)(2)(D)) whilethe bus is engaged in furnishing (forcompensation) intracity passenger landtransportation that is available to thegeneral public and is scheduled andalong regular routes;

(7) Use in a highway vehicle that—(i) Is not registered (and is not

required to be registered) for highwayuse under the laws of any State orforeign country; and

(ii) Is used in the operator’s trade orbusiness or in an activity of theoperator described in section 212 (relat-ing to the production of income);

(8) The exclusive use of a nonprofiteducational organization, as defined in§48.4221–6(b);

(9) Use in a highway vehicle that isowned by the United States and is notused on the highway; or

(10) Use in any boat operated by theUnited States for the exclusive use ofthe United States or any vessel of warof any foreign nation, as described in§48.4221–4(b)(5).

(d) Effective date. This section iseffective January 1, 1994.

§48.4083–1 Taxable fuel;administrative authority.

(a) In general—(1) Authority to in-spect. Officers or employees of the IRSdesignated by the Commissioner, uponpresenting appropriate credentials and awritten notice to the owner, operator,or agent in charge, are authorized to

enter any place and to conduct inspec-tions in accordance with paragraphs (a)through (c) of this section.

(2) Reasonableness. Inspections willbe performed in a reasonable mannerand at times that are reasonable underthe circumstances, taking into consid-eration the normal business hours ofthe place to be entered.

(b) Place of inspection—(1) In gen-eral. Inspections may be at any place atwhich taxable fuel is (or may be) pro-duced or stored or at any inspectionsite where evidence of activities de-scribed in section 6714(a) may bediscovered. These places may include,but are not limited to—

(i) Any terminal;(ii) Any fuel storage facility that is

not a terminal;(iii) Any retail fuel facility; or(iv) Any designated inspection site.(2) Designated inspection sites. A

designated inspection site is any Statehighway inspection station, weigh sta-tion, agricultural inspection station,mobile station, or other location desig-nated by the Commissioner to be usedas a fuel inspection site. A designatedinspection site will be identified as afuel inspection site.

(c) Scope of inspection—(1) Inspec-tion. Officers or employees may phys-ically inspect, examine or otherwisesearch any tank, reservoir, or othercontainer that can or may be used forthe production, storage, or transporta-tion of fuel, fuel dyes, or fuel markers.Inspection may also be made of anyequipment used for, or in connectionwith, production, storage, or transporta-tion of fuel, fuel dyes, or fuel markers.This includes any equipment used forthe dyeing or marking of fuel. Thisalso includes books and records, if any,that are maintained at the place ofinspection and are kept to determineexcise tax liability under section 4081.

( 2 ) D e t a i n m e n t . O f f i c e r s o remployees may detain any vehicle,train, or boat for the purpose ofinspecting its fuel tanks and storagetanks. Detainment will be either on thepremises under inspection or at adesignated inspection site. Detainmentmay continue for such reasonableperiod of time as is necessary todetermine the amount and compositionof the fuel.

(3) Removal of samples. Officers oremployees may take and remove sam-ples of fuel in such quantities as are

reasonably necessary to determine thecomposition of the fuel.

(d) Refusal to submit to inspection—(1) Imposition of penalty. Any personthat refuses to allow an inspection willbe fined $1,000 for each refusal. Thispenalty is in addition to any otherpenalty or tax that may be imposedupon that person or any other personliable for tax under section 4081 orpenalty under section 6714.

(2) Assessment of penalty. Thispenalty is an assessable penalty and isassessed in accordance with section6671.

(e) Effective date. This section iseffective January 1, 1994.

Par. 28. The undesignated centerheading preceding §48.4101–1 isremoved.


§48.4101–1 Registration.

(a) In general. (1) This sectionprovides rules relating to registrationunder section 4101 for purposes of thefederal excise tax on taxable fuelimposed by sections 4041(a)(1) and4081 and the credit or payment allowedto registered ultimate vendors of dieselfuel under section 6427.

(2) A person is registered undersection 4101 only if the district directorhas issued a registration letter to theperson and the registration has not beenrevoked or suspended.

(3) A refiner that is registered undersection 4101 may, with respect to thebulk removal of any batch of gasoholfrom its refinery, treat itself as a personthat is not registered. See §48.4081–3-(b)(1)(iii).

(4) Each business unit that has, or isrequired to have, a separate employeridentification number is treated as aseparate person. Thus, two businessunits (for example, a parent corporationand a subsidiary corporation, or aproprietorship and a related part-nership), each of which has a differentemployer identification number, aretwo persons.

(5) A registration in effect on De-cember 31, 1993, with respect to thetax on gasoline or diesel fuel is subjectto the district director’s review, and torevocation or suspension, under thestandards set forth in this section, butremains in effect until the earlier of—

(i) The effective date of a registra-tion issued under paragraph (g)(3) ofthis section; or


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(ii) The effective date of the revoca-tion or suspension of the registrationunder paragraph (i) of this section.

(b) Definitions—(1) Applicant. Anapplicant is a person that has appliedfor registration under paragraph (e) ofthis section.

(2) Bonded registrant. A bondedregistrant is a person that has given abond to the district director underparagraph (j) of this section as acondition of registration.

(3) Gasohol bonding amount. Thegasohol bonding amount is the productof—

(i) The rate of tax applicable to laterseparation, as described in §48.4081–6-(f)(1)(iii); and

(ii) The total number of gallons ofgasoline expected to be bought at thegasohol production tax rate by thegasohol blender during a representative6-month period (as determined by thedistrict director).

(4) Penalized for a wrongful act. Aperson has been penalized for a wrong-ful act if the person has—

(i) Been assessed any penalty underchapter 68 of the Internal RevenueCode (or similar provision of the lawof any State) for fraudulently failing tofile any return or pay any tax, and thepenalty has not been wholly abated,refunded, or credited;

(ii) Been assessed any penalty underchapter 68 of the Internal RevenueCode, such penalty has not been whollyabated, refunded, or credited, and thedistrict director determines that theconduct resulting in the penalty is partof a consistent pattern of failing todeposit, pay, or pay over a substantialamount of tax;

(iii) Been convicted of a crime underchapter 75 of the Internal RevenueCode (or similar provision of the lawof any State), or of conspiracy tocommit such a crime, and the convic-tion has not been wholly reversed by acourt of competent jurisdiction;

(iv) Been convicted, under the lawsof the United States or any State, of afelony for which an element of theoffense is theft, fraud, or the making offalse statements, and the conviction hasnot been wholly reversed by a court ofcompetent jurisdiction;

(v) Been assessed any tax undersection 4103 and the tax has not beenwholly abated, refunded, or credited; or

(vi) Had its registration under sec-tion 4101 or 4222 revoked.

(5) Related person. A related personis a person that—

(i) Directly or indirectly exercisescontrol over an activity of the applicantif the activity is described in paragraph(c)(1) or (d) of this section;

(ii) Owns, directly or indirectly, fivepercent or more of the applicant;

(iii) Is under a duty to assure thepayment of a tax for which the ap-plicant is responsible;

(iv) Is a member, with the applicant,of a group of organizations (as definedin §1.52–1(b) of this chapter) thatwould be treated as a group of tradesor businesses under common controlfor purposes of §1.52–1 of this chapter;or

(v) Distributed or transferred assetsto the applicant in a transaction inwhich the applicant’s basis in the assetsis determined by reference to the basisof the assets in the hands of thedistributor or transferor.

(6) Registrant. A registrant is aperson that the district director has, inaccordance with paragraph (g)(3) ofthis section, registered under section4101 and whose registration has notbeen revoked or suspended.

(c) Persons required to be regis-tered—(1) In general. A person isrequired to be registered under section4101 if the person is a—

(i) Blender;(ii) Enterer; (iii) Refiner;(iv) Terminal operator; or(v) Position holder.(2) Bus and train operators. Every

operator of a bus or train is required tobe registered under section 4101 at anytime it incurs any liability for tax undersection 4041 at the bus rate (as de-scribed in §48.4082–4(b)(3)(i)) or thetrain rate (as described in §48.4082–4-(b)(3)(ii)).

(3) Consequences of failing to regis-ter. For the criminal penalty imposedfor failure to register, see section 7232.For the civil penalty imposed forfailure to register, see section 7272.

(d) Persons that may, but are notrequired to, be registered. A personmay, but is not required to, be regis-tered under section 4101 if the personis a—

(1) Gasohol blender;(2) Industrial user; (3) Throughputter that is not a posi-

tion holder; or

(4) Ultimate vendor of diesel fuel.(e) Application instructions. Ap-

plication for registration under section4101 must be made in accordance withthe instructions for Form 637 (or suchother form as the Commissioner maydesignate).

( f ) Registrat ion tes ts—(1) Ingeneral—(i) Persons other than ulti-mate vendors. Except as provided inparagraph (f)(1)(ii) of this section, thedistrict director will register an appli-cant only if the district director deter-mines that the applicant meets thefollowing three tests (collectively, theregistration tests):

(A) The activity test of paragraph(f)(2) of this section.

(B) The acceptable risk test of para-graph (f)(3) of this section.

(C) The adequate security test ofparagraph (f)(4) of this section.

(ii) Ultimate vendors. The districtdirector will register an applicant as anultimate vendor of diesel fuel only ifthe district director—

(A) Determines that the applicantmeets the activity test of paragraph(f)(2) of this section; and

(B) Is satisfied with the filing, de-posit, payment, and claim history forall federal taxes of the applicant andany related person.

(2) The activity test. An applicantmeets the activity test of this paragraph(f)(2) only if the district directordetermines that the applicant—

(i) Is, in the course of its trade orbusiness, regularly engaged as an oper-ator of a bus or train or in the charac-teristic activity of a person described inparagraph (c)(1) or (d) of this section;or

(ii) Is likely to be (because of suchfactors as the applicant’s businessexperience, financial standing, or tradeconnections), in the course of its tradeor business, regularly engaged as anoperator of a bus or train or in thecharacteristic activity of a person de-scribed in paragraph (c)(1) or (d) ofthis section within a reasonable timeafter becoming registered under section4101.

(3) Acceptable risk test—(i) In gen-eral. An applicant meets the acceptablerisk test of this paragraph (f)(3) onlyif—

(A) Neither the applicant nor arelated person has been penalized for awrongful act; or

(B) Even though the applicant or arelated person has been penalized for a


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wrongful act, the district director deter-mines, after review of evidence offeredby the applicant, that the registration ofthe applicant does not create a signifi-cant risk of nonpayment or late pay-ment of the tax imposed by sections4041(a)(1) and 4081.

(ii) Significant risk of nonpaymentor late payment of tax. In making thedetermination described in paragraph(f)(3)(i)(B) of this section, the districtdirector may consider factors such asthe following:

(A) The time elapsed since the ap-plicant or related person was penalizedfor a wrongful act.

(B) The present relationship betweenthe applicant and any related personthat was penalized for any wrongfulact.

(C) The degree of rehabilitation ofthe person penalized for any wrongfulact.

(D) The amount of bond given bythe applicant. In this regard, the districtdirector may accept a bond underparagraph (j) of this section, withoutregard to the limits on the amount ofthe bond set by paragraph (j)(2) of thissection.

(4) Adequate security test—(i) Ingeneral. An applicant meets the ade-quate security test of this paragraph(f)(4) only if the district directordetermines that the applicant has bothadequate financial resources and asatisfactory tax history, or the applicantgives the district director a bond (underthe provisions of paragraph (j) of thissection).

(ii) Adequate financial resources—(A) In general. An applicant hasadequate financial resources only if thedistrict director determines that theapplicant is financially capable ofpaying—

(1) Its expected tax liability undersections 4041(a)(1) and 4081 for arepresentative 6-month period (as deter-mined by the district director);

(2) In the case of a terminal opera-tor, the expected tax liability undersection 4081 of persons other than theterminal operator with respect to tax-able fuel removed at the racks of itsterminals during a representative1-month period (as determined by thedistrict director); and

(3) In the case of a gasohol blender,the gasohol bonding amount.

(B) Basis for determination. Thedetermination under this paragraph

(f)(4)(ii) must be based on financialinformation such as the applicant’sincome statement, balance sheet orbond ratings, or other informationrelated to the applicant’s financialstatus.

(iii) Satisfactory tax history. An ap-plicant has a satisfactory tax historyonly if the district director is satisfiedwith the filing, deposit, and paymenthistory for all federal taxes of theapplicant and any related person.

(g) Action on the application by thedistrict director—(1) Review of ap-plication. The district director mayinvestigate the accuracy and complete-ness of any representations made by anapplicant, request any additional rele-vant information from the applicant,and inspect the applicant’s premisesduring normal business hours withoutadvance notice.

(2) Denial. If the district directordetermines that an applicant does notmeet all of the applicable registrationtests described in paragraph (f) of thissection, the district director must notifythe applicant, in writing, that itsapplication for registration is deniedand state the basis for the denial.

(3) Approval. If the district directordetermines that an applicant meets allof the applicable registration testsdescribed in paragraph (f) of thissection, the district director must regis-ter the applicant under section 4101and issue the applicant a letter ofregistration containing the effectivedate of the registration. The effectivedate of the registration must be noearlier than the date on which thedistrict director signs the letter ofregistration. A copy of an applicationfor registration (Form 637) is not aletter of registration.

(h) Terms and conditions of regi-stration—(1) Affirmative duties. Eachregistrant must—

(i) Make deposits, file returns, andpay taxes required by the InternalRevenue Code and the regulations;

(ii) Keep records sufficient to showthe registrant’s tax liability under sec-tions 4041(a)(1) and 4081 and pay-ments or deposits of such liability;

(iii) Make all information reportsrequired under section 4101(d) and§48.4101–2;

(iv) Make available for inspection ondemand by the Internal Revenue Serv-ice during normal business hours rec-ords relevant to a determination of tax

liability under sections 4041(a)(1) and4081; and

(v) Notify the district director of anychange (such as a change in ownership)in the information the registrant sub-mitted in connection with its applica-tion for registration, or previouslysubmitted under this paragraph (h)(1)-(v), within 10 days after the changeoccurs.

(2) Prohibited actions. A registrantmay not—

(i) Sell, lease or otherwise allowanother person to use its registration;

(ii) Make any false statement to thedistrict director in connection with asubmission under paragraph (h)(1) or(h)(3) of this section;

(iii) Make any false statement on, orviolate the terms of—

(A) A notification certificate of ataxable fuel registrant (as described in§48.4081–5(b)); or

(B) A certificate of a registeredgasohol blender (as described in§48.4081–6(c)(2)).

(3) Additional terms and conditionsfor terminal operators—(i) Notice re-quired with respect to dyed diesel fuel.A legible and conspicuous notice stat-ing: DYED DIESEL FUEL, NONTAX-ABLE USE ONLY, PENALTY FORTAXABLE USE must be provided byeach terminal operator to any personthat receives dyed diesel fuel at aterminal rack of that operator. Thisnotice must be provided by the time ofthe removal and must appear on allshipping papers, bills of lading, andsimilar documents that are provided bythe terminal operator to accompany theremoval of the fuel.

(ii) Records to be maintained relat-ing to removals of diesel fuel. Eachterminal operator must keep the follow-ing information with respect to eachrack removal of diesel fuel at eachterminal it operates:

(A) The bill of lading or othershipping document.

(B) The record of whether the fuelwas dyed and marked in accordancewith §48.4082–1.

(C) The volume and date of theremoval.

(D) The identity of the person, suchas a common carrier, that physicallyreceived the fuel.

(E) Any other information requiredby the Commissioner.

(iii) Records to be maintained relat-ing to dye. With respect to each of its


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terminals, a terminal operator mustkeep records relating to dye inventoriesand usage.

(iv) Retention of information. In ad-dition to any other requirement relatingto the retention of records, the terminaloperator must—

(A) Maintain the information de-scribed in paragraph (h)(3)(ii) of thissection at the terminal from which theremoval occurred for at least 3 monthsafter the removal to which it relates;and

(B) Maintain the information de-scribed in paragraph (h)(3)(iii) of thissection at the terminal where the dyewas received for at least 3 months afterthe receipt.

(v) Prohibition on providing incor-rect information. In connection withthe removal of diesel fuel that is notdyed and marked in accordance with§48.4082–1, a terminal operator maynot provide any person (including theposition holder with respect to the fuel)with any bill of lading, shipping paper,or similar document indicating that thediesel fuel is dyed and marked in ac-cordance with §48.4082–1.

(i) Adverse actions by the districtdirector against a registrant—(1) Man-datory revocation or suspension. Thedistrict director must revoke or suspendthe registration of any registrant if thedistrict director determines that theregistrant, at any time—

(i) Does not meet one or more of theapplicable registration tests under para-graph (f) of this section and has notcorrected the deficiency within a rea-sonable period of time after notificationby the district director;

(ii) Has used its registration toevade, or attempt to evade, the pay-ment of any tax imposed by section4041(a)(1) or 4081, or to postpone orin any manner to interfere with thecollection of any such tax, or to make afraudulent claim for a credit orpayment;

(iii) Has aided or abetted anotherperson in evading, or attempting toevade, payment of any tax imposed bysection 4041(a)(1) or 4081, or inmaking a fraudulent claim for a creditor payment; or

(iv) Has sold, leased, or otherwiseallowed another person to use itsregistration.

(2) Remedial action permitted inother cases. If the district directordetermines that a registrant has, at any

time, failed to comply with the termsand conditions of registration underparagraph (h) of this section, made afalse statement to the district director inconnection with its application forregistration or retention of registration,or otherwise used its registration in amanner that creates a significant risk ofnonpayment or late payment of tax,then the district director may—

(i) Revoke or suspend the regis-trant’s registration;

(ii) In the case of a registrant otherthan an ultimate vendor, require theregistrant to give a bond under theprovisions of paragraph (j) of thissection as a condition of retaining itsregistration; and

(iii) In the case of a registrant otherthan an ultimate vendor, require theregistrant to file monthly or semi-monthly returns under §40.6011(a)–1(b) of this chapter as a condition ofretaining its registration.

(3) Action by the district director torevoke or suspend a registration. If thedistrict director revokes or suspends aregistration, the district director mustso notify the registrant in writing andstate the basis for the revocation orsuspension. The effective date of therevocation or suspension may not beearlier than the date on which thedistrict director notifies the registrant.

(j) Bonds—(1) Form. Each bondgiven to the district director as acondition of registration under para-graph (f)(4)(i) or (i)(2)(ii) of thissection must be executed in the formprescribed by the district director. Eachbond must be—

(i) A public debt obligation of theUnited States Government;

(ii) An obligation the principal andinterest of which are unconditionallyguaranteed by the United StatesGovernment;

(iii) A bond executed by a suretycompany listed in Department of theTreasury Circular 570 as an acceptablesurety or reinsurer of federal bonds (asurety bond); or

(iv) Any other bond with security(including liens under section 4101(b)-(1)(B)) considered acceptable by thedistrict director.

(2) Amount of bond. A bond givenunder this paragraph (j) must be in anamount that the district director deter-mines will ensure timely collection ofthe taxes imposed by sections 4041(a)-(1) and 4081, taking into account the

applicant’s financial capabilities, taxhistory, and expected liability undersections 4041(a)(1) and 4081. Thedistrict director may increase or de-crease the amount of the required bondto take into account changes in theapplicant’s financial capabilities, taxhistory, and expected liability undersections 4041(a)(1) and 4081. How-ever, in no case may the amount of thebond be greater than the amount thatthe district director determines is equalto—

(i) The applicant’s expected tax lia-bility under sections 4041(a)(1) and4081 for a representative 6-monthperiod (as determined by the districtdirector);

(ii) In the case of a terminal opera-tor, the expected tax liability of personsother than the terminal operator undersection 4081 with respect to taxablefuel removed at the racks of itsterminals (determined as if all removalsof taxable fuel were taxable) during arepresentative 1-month period (as deter-mined by the district director); and

(iii) In the case of a gasohol blender,the gasohol bonding amount.

(3) Collection of taxes from a bond.If a bonded registrant does not pay theamount of tax it incurs under section4041(a)(1) or 4081 by the time pre-scribed in section 6151 for paying thattax, the district director may collect theamount of the unpaid tax (includingpenalties and interest with respect tothat tax) from the bonded registrant’sbond.

(4) Termination of bonds—(i) Suretybonds. A surety on a bond may givewritten notice to the district directorand the bonded registrant that thesurety desires to be relieved of liabilityunder the bond after a certain date,which date must be at least 60 daysafter the receipt of the notice by thedistrict director. The surety will berelieved of any liability that the bondedregistrant incurs after the date named inthe notice. However, the surety remainsliable for the amount of tax that thebonded registrant incurred under sec-tions 4041(a)(1) and 4081 during theterm of the bond and for penalties andinterest with respect to that tax.

(ii) Other bonds. A bond (other thana surety bond) given to the districtdirector may be returned to the bondedregistrant only after the earlier of—

(A) The district director’s determina-tion that the bonded registrant has paidall taxes that the bonded registrant


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incurred under sections 4041(a)(1) and4081 during the period covered by thebond and any penalties and interestwith respect to the taxes;

(B) The expiration of the period forassessment of the taxes that the bondedregistrant incurred under sections4041(a)(1) and 4081 taxes during theperiod covered by the bond, as deter-mined under the provisions of subchap-ter A of chapter 66 of the InternalRevenue Code; or

(C) The date that the district directorreceives from the registrant a substitutebond given under this paragraph (j).

(5) Determination that bond is nolonger required. If the district directordetermines that the bonded registrantmeets the adequate security test ofparagraph (f)(4) of this section withouta bond, the registrant is to be releasedfrom the obligation to give a bond as acondition of registration under section4101.

(k) Cross references. For a rulerelating to the filing of monthly andsemimonthly returns by certain personsthat are registered under section 4101,see §40.6011(a)–1(b)(2) of this chapter.For rules relating to the tax on taxablefuel, see §§48.4081–1 through48.4083–1. For rules relating to claimsby registered ultimate vendors, see§48.6427–9.

(l) Effective dates. (1) Except asotherwise provided in this paragraph(l), this section is applicable as ofJanuary 1, 1994.

(2) Paragraph (c)(1) of this section(relating to persons required to beregistered) is applicable as of January1, 1995.

(3) Paragraph (h)(3)(iii) of this sec-tion (relating to certain recordkeepingrequirements) is applicable as of July1, 1996.

Par. 30. Section 48.4101–2 is addedto read as follows:

§48.4101–2 Information reporting.

(a) In general—(1) Taxable fuel reg-istrants. Each taxable fuel registrantmust make a return showing—

(i) The name and registration num-ber (if any) of each person that is aposition holder at each terminal itoperates;

(ii) The amount of taxable fuelreceived at each terminal it operates;

(iii) The identity of each positionholder with respect to—

(A) All rack removals of taxable fuelfrom each terminal it operates, and thevolume and dates of the removals; and

(B) In the case of rack removals ofdiesel fuel, whether the fuel was dyedand marked at the operator’s terminalin accordance with §48.4082–1;

(iv) The amount of taxable fuelstored at each terminal it operates;

(v) The destination (by state) of alltaxable fuel removed at a terminal rackof each terminal it operates, to theextent such information has beenprovided to the registrant;

(vi) The name and registration num-ber (if any) of the operator of eachterminal at which it is a positionholder;

(vii) The volume and date of theremoval with respect to all rack re-movals of taxable fuel for which it isthe position holder;

(viii) In the case of nonbulk re-movals and entries of gasolineblendstocks for which it would beliable for tax but for the special rule in§48.4081–4(c), the name and registra-tion number of each operator of eachrefinery and terminal where the gas-oline blendstocks are received;

(ix) The name and registration num-ber (if any) of each person to which itsells (within the meaning of §48.4081–1) taxable fuel located in the bulktransfer/terminal system;

(x) The name and registration num-ber of each person from which itreceives a certificate described in§48.4081–6(c) (relating to certificate ofregistered gasohol blender);

(xi) With respect to any liabilityincurred under §48.4081–3(e) (relatingto tax on bulk transfers not received atan approved terminal or refinery)—

(A) The date on which the removalof the taxable fuel from a pipeline orvessel gave rise to the liability; and

(B) The location of the taxable fuelat the time of the removal; and

(xii) Any other information requiredby the Commissioner.

(2) Gasohol blenders. Each regis-tered gasohol blender must make areturn showing, with respect to eachbatch of gasohol it produced fromgasoline it bought at the gasoholproduction tax rate—

(i) The name and registration num-ber of the person that sold it thegasoline;

(ii) The date and location of the pur-chase of the gasoline;

(iii) The volume of the gasoline;(iv) The name, address, and em-

ployer identification number of theperson that sold it the alcohol;

(v) The date and location of thepurchase of the alcohol;

(vi) The volume and type of thealcohol; and

(vii) Any other information requiredby the Commissioner.

(3) Pipeline and vessel operators.Each operator of a pipeline or vesselthat makes a bulk transfer of taxablefuel to a terminal or refinery mustmake a return showing—

(i) The location of the terminal orrefinery where the taxable fuel wasdelivered;

(ii) The date of the delivery; and(iii) Any other information required

by the Commissioner.(b) Form and time of return. Each

return required under this section mustbe made at the time and in the formrequired by the Commissioner.

(c) Consequences for failure to makea return. For the consequences for fail-ing to make an information return re-quired by this section, see §48.4101–1(i) (relating to adverse actions againsta registrant) and section 6721 (relatingto a penalty for failure to file aninformation return).

(d) Effective date. This section isapplicable as of April 1, 1996.

§§48.4101–2T, 48.4101–3, 48.4101–3T, and 48.4101–4T [Removed]

Par. 31. Sections 48.4101–2T,48.4101–3, 48.4101–3T, and 48.4101–4T are removed.


1. Paragraph (a) is revised.2. Paragraph (b)(1) is amended by

removing the language ‘‘on the sale oruse of gasoline or lubricating oil,respectively,’’.

3. Paragraph (b)(2) is amended by re-moving ‘‘gasoline or lubricating oil’’each place it appears and adding ‘‘tax-able fuel or aviation fuel’’ in its place.

The revision reads as follows:

§48.4102–1 Inspection of records byState or local tax officers.

(a) Inspection of records maintainedby taxpayer. The records that a tax-


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payer is required to keep with respectto the taxes imposed by section 4081 or4091 must be open to inspection byany officer of any State or politicalsubdivision thereof, or of the Districtof Columbia, who is charged with theenforcement or collection of any tax ontaxable fuel or aviation fuel.

* * * * * *

§48.4221 [Removed]

Par. 33. Section 48.4221 is removed.Par. 34. Section 48.4221–1 is

amended as follows:1. Paragraph (a) is revised.2. Paragraph (b)(2)(iv) is amended

by adding ‘‘and’’ at the end.3. Paragraph (b)(2)(v) is revised.4. Paragraphs (b)(2)(vi) through

(b)(2)(xii) are removed. 5. Paragraph (b)(3) is removed and

paragraphs (b)(4) and (b)(5) are re-designated as paragraphs (b)(3) and(b)(4), respectively.

The revised provisions read asfollows:

§48.4221–1 Tax-free sales; generalrule.

(a) Application of regulations undersection 4221—(1) In general. Theregulations under section 4221 providerules under which the manufacturer,producer, or importer of an articlesubject to tax under chapter 32 (or theretailer of an article subject to taxunder subchapter A or C of chapter 31)may sell the article tax free undersection 4221.

(2) Limitations. The following re-strictions must be taken into account inapplying the regulations under section4221:

(i) The exemptions under section4221(a)(4) and (a)(5) do not apply tothe tax imposed by section 4064 (gasguzzler tax).

(ii) The exemptions under section4221 do not apply to the tax imposedby section 4081 (gasoline and dieselfuel tax).

(iii) The exemptions under section4221 do not apply to the tax imposedby section 4091 (aviation fuel tax). Forrules relating to tax-free sales ofaviation fuel, see section 4092 and theregulations thereunder.

(iv) The exemptions under section4221 do not apply to the tax imposedby section 4121 (coal tax).

(v) The exemptions under section4221(a)(3) through (a)(5) do not applyto the tax imposed by section 4131(vaccine tax). In addition, the exemp-tion under section 4221(a)(2) applies tothe vaccine tax only to the extentprovided in §48.4221–3(e) (relating totax-free sales of vaccine for export).

(vi) The exemptions under section4221(a) apply only in those caseswhere the exportation or use referred tois to occur before any other use.

(b) * * *(2) * * *(v) Section 4221(e)(3) relating to the

sale of tires used on intercity, local, orschool buses (see §48.4221–8).

* * * * * *

Par. 35. Section 48.4221–2 isamended by:

1. Removing from the first sentenceof paragraph (a)(1) the language‘‘(other than a tire or inner tube taxableunder section 4071, which are givenspecial treatment under sections4221(e)(2) and (4), and §§48.4221–7and 48.4221–8)’’ and adding ‘‘(otherthan a tire taxable under section 4071,which is given special treatment undersection 4221(e)(2) and §48.4221–7)’’in its place.

2. Removing paragraph (a)(2) andredesignating paragraph (a)(3) as para-graph (a)(2).

3. Revising paragraph (b). The revision reads as follows:

§48.4221–2 Tax-free sale of articlesto be used for, or resold for, furthermanufacture.

* * * * * *

(b) Circumstances under which anarticle is considered to have been soldfor use in further manufacture. (1) Anarticle shall be treated as sold for usein further manufacture if the article issold for use by the buyer as material inthe manufacture or production of, or asa component part of, another articletaxable under chapter 32 of the InternalRevenue Code.

(2) An article is used as material inthe manufacture or production of, or asa component of, another article if it isincorporated in, or is a part or ac-cessory of, the other article when theother article is sold by the manufac-turer. In addition, an article is consid-ered to be used as material in themanufacture of another article if it is

consumed in whole or in part in testingsuch other article. However, an articlethat is consumed in the manufacturingprocess other than in testing, so that itis not a physical part of the manufac-tured article, is not considered to havebeen used as material in the manufac-ture of, or as a component part of,another article.

* * * * * *


1. Paragraph (c)(1) is amended by:a. Removing the first sentence.b. Removing the language ‘‘If a

State or local government is notregistered, the’’ and adding ‘‘The’’ inits place in the new first sentence.

2. In paragraph (d), the first sen-tence is amended by:

a. Removing the language ‘‘(whetheron the basis of a registration number oran exemption certificate)’’.

b. Removing the language ‘‘(such asgasoline that is’’ and adding ‘‘(such astires that are’’ in its place.

§§48.4221–8, 48.4221–9, 48.4221–10[Removed]

Par. 37. Sections 48.4221–8,48.4221–9, and 48.4221–10 areremoved.

§48.4221–11 [Redesignated as§48.4221–8]

Par. 38. Section 48.4221–11 is re-designated as §48.4221–8.

§48.4221–12 [Removed]

Par. 39. Section 48.4221–12 isremoved.

Par. 40. In §48.4222(a)–1, para-graphs (a) and (b) are revised to readas follows:

§48.4222(a)–1 Registration.

(a) General rule. Except as providedin §48.4222(b)–1, tax-free sales undersection 4221 may be made only if themanufacturer, first purchaser, and sec-ond purchaser, as the case may be,have been registered by the InternalRevenue Service.

(b) Application instructions. Ap-plication for registration under section4222 must be made in accordance with


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instructions for Form 637 (or suchother form as the Commissioner maydesignate).

* * * * * *

Par. 41. In §48.4222(b)–1, paragraph(a) is revised to read as follows:

§48.4222(b)–1 Exceptions to therequirement for registration.

(a) State and local governments. TheInternal Revenue Service will not regis-ter State or local governments undersection 4222. To establish the right tosell articles tax free to a State or localgovernment, the manufacturer mustobtain the information described in§48.4221–5(c).

* * * * * *

§48.4222(d)–1 [Amended]

Par. 42. Section 48.4222(d)–1 isamended by:

1. Removing paragraphs (a), (b), and(c).

2. Redesignating paragraph (d) asparagraph (a).

3. Removing paragraphs (e) and (f).4. Redesignating paragraph (g) as

paragraph (b).

§48.6206–1 [Removed]


§48.6416(b)(2)–2 [Amended]

Par. 44. In §48.6416(b)(2)–2, para-graphs (g) through (k) are removed.

§48.6416(g)–1 [Removed]

Par. 45. Section 48.6416(g)–1 isremoved.

§48.6421–3 [Amended]

Par. 46. In §48.6421–3, paragraph(d)(2) is amended by removing fromthe first sentence the language ‘‘Form843’’ and adding ‘‘Form 8849 (or onsuch other form as the Commissionermay designate)’’ in its place.

§§6424–0 through 48.6424–6[Removed]

Par. 47. Sections 48.6424–0 through48.6424–6 are removed.

§48.6427–3 [Amended]

Par. 48. In §48.6427–3, paragraph(d)(2) is amended by removing fromthe first sentence the language ‘‘Form843’’ and adding ‘‘Form 8849 (or onsuch other form as the Commissionermay designate)’’ in its place.

§48.6427–7 [Amended]

Par. 49. In §48.6427–7, paragraph(g)(4) is amended by removing thelanguage ‘‘Form 843 (Claim)’’ andadding ‘‘Form 8849 (or such otherform as the Commissioner may desig-nate)’’ in its place.

Par. 50. Sections 48.6427–8 and48.6427–9 are added to read asfollows:

§48.6427–8 Claims by ultimatepurchasers with respect to diesel fueltaxed after December 31, 1993.

(a) Overview. This section providesthe rules for obtaining a credit orpayment with respect to undyed dieselfuel that was taxed after December 31,1993, and that was used in a nontax-able use (other than on a farm forfarming purposes or by a State). Acredit or payment for undyed dieselfuel used on a farm for farmingpurposes or by a State is allowableonly to a registered ultimate vendorunder the rules of §48.6427–9.

(b) Conditions to allowance of creditor payment—(1) In general. Except asprovided in section 6427(l)(5), a claimfor credit or payment with respect todiesel fuel is allowable under section6427(l) only if—

(i) Tax was imposed by section 4081on the diesel fuel to which the claimrelates;

(ii) The claimant produced or boughtthe fuel and did not resell it in theUnited States;

(iii) The claimant has filed a timelyclaim for a credit or payment thatcontains the information required underparagraph (d) of this section;

(iv) The fuel was not bought under acertificate described in §48.6427–9(e)-(2) (relating to certificate of farmer orState to support claim of ultimatevendor);

(v) The fuel was not used on a farmfor farming purposes (as defined in§48.6420–4) or by a State; and

(vi) The fuel was either—

(A) Used in a use described in§48.4082–4(c)(3) through (c)(10);

(B) Exported; (C) Used other than as a fuel in a

propulsion engine of a diesel-poweredhighway vehicle or diesel-poweredboat;

(D) Used as a fuel in a propulsionengine of a diesel-powered train; or

(E) Used as a fuel in the propulsionengine of a diesel-powered bus if thebus was used in a use described insection 6427(b)(1) (after the applicationof section 6427(b)(3)).

(2) Examples. The following exam-ples illustrate this paragraph (b).

Example 1. (i) In September 1996, F bought250 gallons of undyed diesel fuel. In October1996, F used 200 gallons of the fuel in a farmtractor. This use qualifies as use on a farm forfarming purposes (as defined in §48.6420–4).The farm tractor is not a diesel-powered highwayvehicle (as defined in §48.4081–1(h)). F used theremaining 50 gallons to heat F’s residence. Ffiled a complete and timely claim for a creditrelating to the 250 gallons.

(ii) A credit or payment is not allowable to Fwith respect to the 200 gallons of diesel fuelused in the farm tractor. Even though this fuelwas used other than as a fuel in a propulsionengine of a diesel-powered highway vehicle (thusmeeting the condition in paragraph (b)(1)(vi)(C)of this section), the condition in paragraph(b)(1)(v) of this section is not satisfied becausethe fuel was used on a farm for farmingpurposes.

(iii) A credit is allowable to F with respect tothe 50 gallons F used for heating purposesbecause the conditions in paragraph (b)(1) of thissection have been met. F used this fuel otherthan as a fuel in a propulsion engine of a diesel-powered highway vehicle and the use of the fuelfor residential heating is not use on a farm forfarming purposes.

Example 2. (i) In September 1996, W, awholesale distributor, sold 3,500 gallons ofdiesel fuel on which tax has been imposed to C,a construction company located in the UnitedStates. W’s selling price to C did not include anamount equal to the federal excise tax on thefuel. C used the fuel other than as a fuel in apropulsion engine of a diesel-powered highwayvehicle or diesel-powered boat. Both W and Cfile a complete and timely claim for a creditrelating to the fuel.

(ii) Because W resold the fuel in the UnitedStates, the condition of paragraph (b)(1)(ii) ofthis section is not met. Thus, W is not allowed acredit or payment with respect to the fuel.

(iii) C is eligible for a credit or payment withrespect to the fuel because the conditions toallowance in paragraph (b)(1) of this sectionhave been met. The conditions to allowance donot include a requirement that C buy the fuel at aprice that includes the amount of the tax.

(c) Form of claim. Each claim for anincome tax credit under this sectionmust be made on Form 4136 (or onsuch other form as the Commissioner


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may designate) in accordance with theinstructions for that form. Each claimfor a payment under this section mustbe made on Form 8849 (or on suchother form as the Commissioner maydesignate) in accordance with the in-structions for that form.

(d) Content of claim. Each claim fora credit or payment under this sectionmust contain the following informationwith respect to all the diesel fuelcovered by the claim:

(1) The total number of gallonscovered by the claim.

(2) A statement by the claimant thattax has been imposed on the diesel fuelcovered by the claim.

(3) The use made of the diesel fuelcovered by the claim described byreference to specific categories listed inparagraph (b)(1)(vi) of this section(such as use in a boat employed incommercial fishing or the exclusive useof a nonprofit educational organiza-tion).

(4) If the diesel fuel covered by theclaim was exported, a declaration thatthe claimant has proof of exportation(as described in §48.4221–3(d)(1)).

(5) A declaration that the claimanthas in its possession the name andaddress of the person(s) that sold thediesel fuel to the claimant and thedate(s) of the purchase(s).

(e) Time and place for filing claim.For rules relating to the time for filinga claim under section 6427, see section6427(i). A claim under this section isnot filed unless it contains all theinformation required by paragraph (d)of this section and is filed at the placerequired by the form.

(f) Effective date. This section iseffective January 1, 1994, except forparagraph (b)(1)(v) of this section,which is effective for diesel fuelbought by ultimate purchasers afterJune 30, 1994.

§48.6427–9 Claims by registeredultimate vendors with respect todiesel fuel taxed after December 31,1993.

(a) Overview. This section providesthe rules for obtaining a credit orpayment with respect to undyed dieselfuel that was taxed after December 31,1993, and that was used on a farm forfarming purposes or by a State.

(b) Definitions. (1) An ultimatevendor, as used in this section, is a

person that sells undyed diesel fuelto—

(i) The owner, tenant, or operator ofa farm for use by such person on afarm for farming purposes (as definedin §48.6420–4);

(ii) A person other than the owner,tenant, or operator of a farm for use bysuch person for any of the purposesdescribed in §48.6420–4(d) (relating tocultivating, raising, or harvesting); or

(iii) Any State for its exclusive use.(2) A registered ultimate vendor

is—(i) An ultimate vendor that is regis-

tered under section 4101 as an ultimatevendor; or

(ii) With respect to a claim filedbefore January 1, 1995, an ultimatevendor that is registered as a producerof diesel fuel on December 31, 1993, ifthe registration has not been revoked orsuspended.

(c) Conditions to allowance of creditor payment. A claim for a credit orpayment with respect to diesel fuel isallowable under section 6427(l)(5) onlyif—

(1) Tax was imposed by section4081 on the diesel fuel to which theclaim relates;

(2) The claimant sold the diesel fuelto—

(i) The owner, tenant, or operator ofa farm for use by such person on afarm for farming purposes (as definedin §48.6420–4);

(ii) A person other than the owner,tenant, or operator of a farm for use bysuch person for any of the purposesdescribed in §48.6420–4(d) (relating tocultivating, raising, or harvesting); or

(iii) Any State for its exclusive use;(3) The claimant is a registered

ultimate vendor; and(4) The claimant has filed a timely

claim for a credit or payment thatcontains the information required underparagraph (e) of this section.

(d) Form of claim. Each claim for anincome tax credit under this sectionmust be made on Form 4136 (or onsuch other form as the Commissionermay designate) in accordance with theinstructions for that form. Each claimfor a payment under this section mustbe made on Form 8849 (or on suchother form as the Commissioner maydesignate) in accordance with the in-structions for that form.

(e) Content of claim—(1) In general.Each claim for credit or payment under

this section must contain the followinginformation with respect to all thediesel fuel covered by the claim:

(i) The total number of gallonscovered by the claim.

(ii) A statement by the claimant thattax has been imposed on the diesel fuelcovered by the claim.

(iii) The claimant’s registrationnumber.

(iv) The name and taxpayer identi-fication number of each person thatbought diesel fuel from the claimant ina transaction described in paragraph(c)(2) of this section and the number ofgallons that the claimant sold to thatperson.

(v) A statement that the claimant—(A) Has not included the amount of

the tax in its sales price of the dieselfuel and has not collected the amountof tax from its buyer;

(B) Has repaid the amount of the taxto the ultimate purchaser of the fuel; or

(C) Has obtained the written consentof its buyer to the allowance of theclaim.

(vi) For claims relating to sales bythe claimant after March 31, 1994, astatement that the claimant has in itspossession an unexpired certificate de-scribed in paragraph (e)(2) of thissection and the claimant has no reasonto believe any information in thecertificate is false.

(vii) For claims relating to sales bythe claimant before April 1, 1994,either the statement described in para-graph (e)(1)(vi) of this section or astatement that—

(A) The claimant has in its posses-sion an unexpired exemption certificaterelating to tax-free sales of diesel fuelfor use on a farm for farming purposesor for the exclusive use of a State;

(B) The certificate was receivedfrom the buyer before January 1, 1994;and

(C) The claimant has no reason tobelieve any information in the certifi-cate is false.

(2) Certificate—(i) In general. Thecertificate to be provided to the ulti-mate vendor consists of a statementthat is signed under penalties of perjuryby a person with authority to bind thebuyer, is in substantially the same formas the model certificate provided inparagraph (e)(2)(ii) of this section, andcontains all information necessary tocomplete such model certificate. A newcertificate must be given if any infor-


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mation in the current certificatechanges. The certificate may be in-cluded as part of any business recordsnormally used to document a sale. The

certificate expires on the earlier of thefollowing dates:

(A) The date one year after theeffective date of the certificate.

(B) The date a new certificate isprovided to the seller.

(ii) Model certificate.

CERTIFICATE OF FARMING USE OR STATE USE(To support vendor’s claim for a credit or payment under section 6427 of the Internal Revenue Code.)

Name, address, and employer identification number of vendorThe undersigned buyer (‘‘Buyer’’) hereby certifies the following under penalties of perjury: Buyer will use the diesel fuel to which this certificate relates—(check one)

On a farm for farming purposes (as defined in §48.6420–4(c) of the Manufacturers and Retailers Excise TaxRegulations) and Buyer is the owner, tenant, or operator of the farm on which the fuel will be used;

On a farm (as defined in §48.6420–4(c)) for any of the purposes described in paragraph (d) of that section (relatingto cultivating, raising, or harvesting) and Buyer is a person that is not the owner, tenant, or operator of the farm on whichthe fuel will be used; or

For the exclusive use of a State or local government, or the District of Columbia.This certificate applies to the following (complete as applicable): If this is a single purchase certificate, check here

and enter:1. Invoice or delivery ticket number2. (number of gallons)

If this is a certificate covering all purchases under a specified account or order number, check here and enter: 1. Effective date2. Expiration date(period not to exceed 1 year after the effective date)3. Buyer account or order number

Buyer will provide a new certificate to the vendor if any information in this certificate changes. If Buyer uses the diesel fuel to which this certificate relates for a purpose other than stated in the certificate Buyer will be

liable for tax. Buyer understands that the fraudulent use of this certificate may subject Buyer and all parties making such fraudulent use

of this certificate to a fine or imprisonment, or both, together with the costs of prosecution.

Printed or typed name of person signing

Title of person signing

Name of Buyer

Employer identification number

Address of Buyer

Signature and date signed


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(f) Time and place for filing claim.For rules relating to the time for filinga claim under section 6427, see section6427(i). A claim under this section isnot filed unless it contains all theinformation required by paragraph (e)of this section and is filed at the placerequired by the form.

(g) Effective date. This section iseffective January 1, 1994.

§§48.6427–8T and 48.6427–9T[Removed]

Par. 51. Sections 48.6427–8T and48.6427–9T are removed.

§48.6675–1 [Removed]


Par. 53. Section 48.6714–1 is addedto read as follows:

§48.6714–1 Penalty for misuse ofdyed diesel fuel.

(a) In general. If any person will-fully alters, or attempts to alter, thestrength or composition of any dye ormarking done pursuant to §48.4082–1in any dyed fuel, then section 6714(a)-(3) provides that such person shall paya penalty in addition to any tax. Thepenalty imposed by section 6714(a)(3)will not apply in the following cases:

(1) Diesel fuel that satisfies thedyeing and marking requirements of§48.4082–1(b) and (c) is blended withany undyed liquid and the resultingproduct satisfies the dyeing and mark-ing requirements of §48.4082–1(b) and(c).

(2) Diesel fuel that satisfies thedyeing and marking requirements of§48.4082–1(b) and (c) is blended withany other liquid (other than diesel fuel)that contains the type and amount ofdye and marker required for diesel fueldyed and marked in accordance with§48.4082–1(b) and (c).

(3) Diesel fuel that is dyed one colorin accordance with §48.4082–1(b) isblended with diesel fuel that is dyedanother color in accordance with§48.4082–1(b).

(4) Diesel fuel that does not satisfythe dyeing and marking requirementsof §48.4082–1(b) and (c) is blendedwith diesel fuel that satisfies the dyeingand marking requirements of §48.4082–1(b) and (c) and the blending occurs aspart of a use described in §48.4082–4(c) or §48.6427–8(b)(vi)(C), (D), or(E).

(b) Effective date. This section iseffective January 1, 1994.

PART 602—OMB CONTROLNUMBERS UNDER THEPAPERWORK REDUCTION ACT

Par. 54. The authority citation forpart 602 continues to read as follows:

Authority: 26 U.S.C. 7805.Par. 55. In §602.101, paragraph (c) is

amended as follows:1. Removing the following entries

from the table:

§602.101 OMB Control numbers.

* * * * * *

(c) * * *

CFR part or section Current OMBwhere identified control numberand described

* * * * * *

42.5(b) . . . . . . . . . . . . . . . . . 1545–1206

* * * * * *

48.4041–2T . . . . . . . . . . . . . 1545–0143

* * * * * *

48.4082–2T . . . . . . . . . . . . . 1545–141848.4101–1 . . . . . . . . . . . . . . 1545–0023

1545–07251545–0014

48.4101–2T . . . . . . . . . . . . . 1545–072548.4101–3T . . . . . . . . . . . . . 1545–141848.4101–4T . . . . . . . . . . . . . 1545–1418

* * * * * *

48.6427–8T . . . . . . . . . . . . . 1545–141848.6427–9T . . . . . . . . . . . . . 1545–1418

* * * * * *

2. Adding entries in numerical orderto the table to read as follows:

§602.101 OMB Control numbers.

* * * * * *

(c) * * *

CFR part or section Current OMBwhere identified control numberand described

* * * * * *

48.4082–2 . . . . . . . . . . . . . . 1545–141848.4101–1 . . . . . . . . . . . . . . 1545–141848.4101–2 . . . . . . . . . . . . . . 1545–1418

* * * * * *

48.6427–8 . . . . . . . . . . . . . . 1545–141848.6427–9 . . . . . . . . . . . . . . 1545–1418

* * * * * *

Margaret Milner Richardson,Commissioner of Internal Revenue.

Approved December 18, 1995.

Leslie Samuels,Assistant Secretary of the Treasury.

(Filed by the Office of the Federal Register onMarch 13, 1996, 8:45 a.m., and published inthe issue of the Federal Register for March 14,1996, 61 F.R. 10450)


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Part III. Administrative, Procedural, and Miscellaneous

Debt Instruments Subject to Both§ 475 and the Principal-ReductionMethod of Accounting

Notice 96–23

The Internal Revenue Service is con-cerned that the principal-reductionmethod of accounting for de minimisoriginal issue discount (OID) on loansoriginated by the taxpayer, see Rev.Proc. 94–29, 1994–1 C.B. 616, may beused to claim inappropriate tax treat-ment under the mark-to-market rules of§ 475 of the Internal Revenue Code.Accordingly, the Internal RevenueService requests comments regardingthe proper accounting for loans that aresubject to both the principal-reductionmethod of accounting and the mark-to-market rules.

BACKGROUND

A loan is originated with a deminimis amount of OID if the loan’sstated redemption price at maturityexceeds the issue price of the loan byless than a certain amount (for exam-ple, 0.25 percent of a loan’s statedredemption price at maturity multipliedby the number of complete years fromits issue date to its maturity date).Section 1273(a)(3) and § 1.1273–1(d)of the Income Tax Regulations.

If a loan is originated with a deminimis amount of OID, the lendergenerally includes the de minimis OID(other than any de minimis OID treatedas qualified stated interest) in incomeas principal payments are made.§ 1.1273–1(d)(5). As a matter of tax-payer convenience, Rev. Proc. 94–29authorizes the use of an aggregatemethod of accounting (the principal-reduction method) for de minimis OIDon certain loans originated by a tax-payer. In general, under the principal-reduction method, the portion of theaggregate de minimis OID that is takeninto account in a taxable year isdetermined on a monthly basis. Theportion is the ratio of the statedprincipal that is recovered during eachmonth to the sum of the statedprincipal that is outstanding at the startof the month plus the stated principalon loans originated during the month.Principal is treated as recovered whenprincipal payments are made, when

loans are written off in whole or inpart, and when loans are sold orexchanged.

A taxpayer’s unadjusted basis in aloan originated with a de minimisamount of OID generally is the issueprice of the loan. If the loan isaccounted for under the principal-reduction method, however, the tax-payer’s unadjusted basis in the loan isdeemed to be the loan’s stated principalamount, which is greater than theloan’s issue price. This basis increaseassures that all of the gain representedby the de minimis OID is recognizedsolely under the principal-reductionmethod. See section 5.01 of Rev. Proc.94–29.

Section 475 requires a dealer insecurities to use the mark-to-marketmethod of accounting for certain se-curities, including certain loans. Underthis method, a security that is inventoryin the hands of a dealer is included ininventory at its fair market value. Anyother security subject to § 475 istreated as sold at its fair market valueon the last business day of the taxableyear, with any resulting gain or losstaken into account by the dealer in thetaxable year of the deemed sale.

The Service is considering the properapplication of the mark-to-market rulesto a loan that is being accounted forunder the principal-reduction method.As a result of its consideration to date,the Service has concluded that ataxpayer may not take the basis in-crease provided under Rev. Proc. 94–29 into account for mark-to-marketpurposes and, at the same time, treatthe principal on the marked loan asoutstanding at the end of a monthlycomputation period (and thus not re-covered) for purposes of Rev. Proc.94–29. This approach would distort thetaxpayer’s income by allowing thetaxpayer to create an artificial lossunder § 475 or to avoid recognitionunder § 475 of all or a portion of theappreciation on the loan. In either case,this distortion is attributable solely tothe basis increase provided under sec-tion 5.01 of Rev. Proc. 94–29.

The Service is considering a numberof alternatives for reconciling mark-to-market accounting and the principal-reduction method. Under one alterna-tive, the entire principal on a loan thatis subject to § 475 would be treated as

recovered for purposes of Rev. Proc.94–29 on the first date on which theloan is required to be marked tomarket, and the loan would not thereaf-ter be treated as outstanding for pur-poses of the principal-reduction com-putation under Rev. Proc. 94–29. Underanother alternative, the gain or lossfrom marking a loan to market under§ 475 would be determined withoutregard to the basis increase providedunder section 5.01 of Rev. Proc. 94–29.

REQUEST FOR COMMENTS

The Service requests comments onthe most appropriate method of ac-counting for loans that are subject toboth § 475 and the principal-reductionmethod of accounting, includingwhether an aggregate method of mark-ing loans to market in this circum-stance is feasible and desirable.

Written comments should be sent induplicate no later than July 15, 1996to: CC:DOM:FI&P, Room 4300, Inter-nal Revenue Service, 1111 ConstitutionAvenue, N.W., Washington, D.C.20224. The Service will make thesecomments available for publicinspection.

CONTACT PERSON

This notice was drafted in the Officeof Assistant Chief Counsel (FinancialInstitutions & Products). For furtherinformation regarding this notice, con-tact Albert J. Kiss at (202) 622-3940(not a toll-free call).

Weighted Average Interest RateUpdate

Notice 96–24

Notice 88–73 provides guidelines fordetermining the weighted average inter-est rate and the resulting permissiblerange of interest rates used to calculatecurrent liability for the purpose of thefull funding limitation of § 412(c)(7) ofthe Internal Revenue Code as amendedby the Omnibus Budget ReconciliationAct of 1987 and as further amended bythe Uruguay Round Agreements Act,Pub. L. 103–465 (GATT).

The average yield on the 30-yearTreasury Constant Maturities for March1996 is 6.60 percent.


778/20054/1JUL96/D06-007

24

The following rates were determined for the plan years beginning in the month shown below.

Month YearWeightedAverage

90% to 108%Permissible

Range

90% to 110%Permissible

Range

April 1996 6.95 6.26 to 7.51 6.26 to 7.65


The principal author of this notice isDonna Prestia of the Employee PlansDivision. For further information re-garding this notice, call (202) 622-6076between 2:30 and 4:00 p.m. Easterntime (not a toll-free number). Ms.Prestia’s number is (202) 622-7377(also not a toll-free number).

26 CFR 601.202: Closing agreements.

Rev. Proc. 96–29

SECTION 1. PURPOSE

.01 This revenue procedure modifiesRev. Proc. 94–62, 1994–2 C.B. 778,which describes the Voluntary Com-pliance Resolution (VCR) Program, andRev. Proc. 94–16, 1994–1 C.B. 576,which describes the Walk-in ClosingAgreement Program (Walk-in CAP), tochange the definition of when a plan isineligible for those programs because itis under examination. The modificationconforms the definition to that set forthin Rev. Proc. 95–24, 1995–1 C.B. 694,which describes the Tax ShelteredAnnuity Voluntary Correction (TVC)Program.

.02 This revenue procedure alsomodifies Rev. Proc. 94–62 to providethat a plan that is submitted under theVCR program on or after January 1,1996, will not be considered ineligiblefor the VCR program solely by reasonof its not having received a favorabledetermination letter that considers theTax Reform Act of 1986 (TRA ’86) ifcertain conditions have been met at thetime of the plan’s submission under theVCR program. These conditions requirethat the plan have received a favorableletter that considers the Tax Equity andFiscal Responsibility Act of 1982(TEFRA), the Deficit Reduction Act of1984 (DEFRA), and the RetirementEquity Act of 1984 (REA), and, at thetime of its VCR submission, have beensubmitted within the plan’s § 401(b)remedial amendment period for a deter-mination letter that considers TRA ’86.

Those plans for which the § 401(b)remedial amendment period has notexpired (including adopters of certainmaster and prototype plans, regionalprototype plans, volume submitterplans, governmental plans, and plansmaintained by tax-exempt organiza-tions), may be submitted for considera-tion under the VCR program on orafter January 1, 1996, if the plan is thesubject of a favorable letter that con-siders TEFRA, DEFRA, and REA.

SECTION 2. BACKGROUND

.01 The Internal Revenue Servicehas developed a number of voluntarycompliance programs over the pastseveral years for plans, annuities, orother arrangements (‘‘plans’’) qualifiedunder § 401(a), or described in§ 403(b), of the Code. Under each ofthese programs, the employer correctsdefects in the plan for all years and theService treats the plan as qualifiedunder § 401(a), or as satisfying§ 403(b), with respect to those defects.Plans submitted under these complianceprograms must meet certain eligibilityrequirements.

.02 Background concerning eligibil-ity of plans under examination for theVCR program, Walk-in CAP, and theTVC program.

(1) VCR program. On November16, 1992, the Service established theVCR program as a temporary, experi-mental program, that was later ex-tended indefinitely with the publicationof Rev. Proc. 94–62. The VCR pro-gram permits plan sponsors to pay afixed compliance fee and correct opera-tional qualification defects in their§ 401(a) plans. Regarding the eligibil-ity of plans under examination, section4.07 of Rev. Proc. 94–62 provides inpart that ‘‘[a] plan that is under anEmployee Plans examination (that is,an examination of a Form 5500 seriesreturn) is not eligible for the VCRprogram. A plan that is under anEmployee Plans examination includesany plan for which the plan sponsor, ora representative, has received verbal orwritten notification from the EP/EO

Division of an impending EmployeePlans examination.’’

(2) Walk-in CAP. On January 31,1994, the Service established Walk-inCAP with the publication of Rev. Proc.94–16. Walk-in CAP permits plansponsors of § 401(a) plans that are noteligible for the VCR program to pay anegotiated, limited, monetary sanctionand correct form and operationalqualification defects. Participation inWalk-in CAP must be voluntary. Sec-tion 3.06 of Rev. Proc. 94–16 providesin part that ‘‘a request is voluntary if itis made before the plan sponsor, or arepresentative, has received verbal orwritten notification from the EP/EODivision of an impending EmployeePlans examination.’’

(3) Voluntary compliance programfor § 403(b) plans. On May 1, 1995,the Service established the TVC pro-gram as a temporary, experimentalprogram pursuant to Rev. Proc. 95–24.The TVC program will sunset onOctober 31, 1996. The TVC programpermits plan sponsors to correct defectsin their § 403(b) plans, and to pay afixed correction fee and a negotiatedsanction. Section 5.04 of Rev. Proc.95–24 provides in part that ‘‘a 403(b)plan that is under Employee Plans orExempt Organization examination (thatis, an examination of a Form 5500series, a Form 990 series or otherEmployee Plans or Exempt Organiza-tions examination) is not eligible forthe program. This includes any plan forwhich the employer, or a representa-tive, has received verbal or writtennotification from the EP/EO Divisionof an impending Employee Plans orExempt Organizations examination.’’

.03 Background concerning eligibil-ity for the VCR program of plans thatdo not have a favorable determination,opinion, or notification letter for TRA’86.

(1) Section 4.02 of Rev. Proc. 94–62 provides that the VCR program isavailable only for an individually de-signed plan that has reliance on afavorable determination letter, a planthat is an adopter of a master orprototype plan with an opinion letter,


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or a plan that is an adopter of aregional prototype plan with a notifica-tion letter. Under section 4.02(2) ofthat revenue procedure, for VCR re-quests submitted on or after January 1,1996, a plan must have received afavorable determination, opinion, ornotification letter that takes into ac-count TRA ’86.

(2) Section 13.05 of Rev. Proc.94–62 provides that a plan’s VCRsubmission must be accompanied bycertain documents. These include acopy of the determination letter thatconsidered TEFRA, DEFRA, and REA,and any subsequent letter. After De-cember 31, 1995, the letter must haveconsidered TRA ’86.

(3) Rev. Proc. 95–12, 1995–1C.B. 508, extends the deadline bywhich employers may request deter-mination letters for certain plans and beconsidered to have amended their planstimely to comply with TRA ’86. UnderRev. Proc. 95–12, the filing of adetermination letter request for certainplans within three months after the endof the plan’s remedial amendmentperiod (as modified therein) is treatedas having been filed on or before theend of the plan’s remedial amendmentperiod. In addition, Rev. Proc. 95–12,at section 3, extends the remedialamendment period for adopters ofcertain regional prototype, master andprototype, and volume submitter plansthat comply with TRA ’86 to, ingeneral, six months after a favorableletter is issued with respect to the plan.

(4) Announcement 95–48, 1995–23 I.R.B. 13, extends the remedialamendment period for governmentalplans described in § 414(d) to the lastday of the first plan year beginning onor after the later of January 1, 1999, or90 days after the opening of the firstlegislative session beginning on or afterJanuary 1, 1999, of the governing bodywith authority to amend the plan, ifthat body does not meet continuously.Announcement 95–48 also extends theremedial amendment period for plansmaintained by organizations exemptfrom income tax under § 501(a), otherthan non-electing church plans de-scribed in § 410(c)(1)(B), to the lastday of the first plan year beginning onor after January 1, 1997. For non-electing church plans, Announcement95–48 extends the remedial amendmentperiod to the last day of the first planyear beginning on or after January 1,1999.

SECTION 3. DEFINITION OFPLAN UNDER EXAMINATION

.01 Section 4.07 of Rev. Proc. 94–62is hereby modified to read as follows:

.07 Plans under examination. If aplan or plan sponsor is under anEmployee Plans or Exempt Organiza-tions examination (that is, an examina-tion of a Form 5500 series, a Form 990series or other Employee Plans orExempt Organizations examination) theplan is not eligible for the VCRprogram.

(1) A plan or plan sponsor that isunder an Employee Plans or ExemptOrganizations examination includes anyplan for which the employer, or arepresentative, has received verbal orwritten notification from the EP/EODivision of an impending EmployeePlans or Exempt Organizations ex-amination, or of an impending referralfor Employee Plans or Exempt Organi-zations examination, and also includesany plan that has been under anEmployee Plans or an Exempt Organi-zations examination and is now inAppeals or in litigation for issuesraised in the Employee Plans or Ex-empt Organizations examination.

(2) An Employee Plans examina-tion also includes a case in which aplan sponsor has submitted a Form5310, Application for Determination ofQualification Upon Termination, andthe EP Agent notifies the plan sponsor,or a representative, of possible defects,whether or not the plan sponsor isofficially notified of an ‘‘examina-tion.’’ For example, if an employer hasapplied for a determination letter onplan termination, and an EP Agentnotifies the employer that there arepartial termination concerns, the plan isno longer eligible for the VCRprogram.

(3) The VCR program is availablewith respect to any other plan of theplan sponsor that is not aggregated forpurposes of satisfying the qualificationrequirements of § 401(a), or the re-quirements of § 403(b), with the plan(or plans) under examination. In addi-tion, the VCR program is available fora plan that is aggregated with a planthat is under an Employee Plansexamination with respect to a defectthat is not related to provisions forwhich the plans are aggregated. Thus,for example, a plan sponsor of a planaggregated with a plan that is underexamination could request considera-

tion under the VCR program for adefect arising under the spousal consentrules of § 417, or the vesting rules of§ 411, but could not ask for considera-tion of a defect under provisions forwhich the plans are aggregated, includ-ing the nondiscrimination provisions(§§ 401(a)(4), 410(b), etc.), § 415, or§ 416. For purposes of this revenueprocedure, the term aggregation doesnot include consideration of benefitsprovided by various plans for purposesof the average benefits test set forth in§ 410(b)(2).

.02 Section 3.06 of Rev. Proc. 94–16is hereby modified to read as follows:

.06 If a plan or plan sponsor is underan Employee Plans or Exempt Organi-zations examination (that is, an ex-amination of a Form 5500 series, aForm 990 series or other EmployeePlans or Exempt Organizations ex-amination) the plan is not eligible forvoluntary consideration under CAP.

(1) A request for considerationunder CAP is voluntary if it is madebefore the plan sponsor, or a represent-ative, has received verbal or writtennotification from the EP/EO Divisionof an impending Employee Plans orExempt Organizations examination, orof an impending referral for EmployeePlans or Exempt Organizations ex-amination, and also includes any planthat has been under an Employee Plansor an Exempt Organizations examina-tion and is now in Appeals or inlitigation for issues raised in theEmployee Plans or Exempt Organiza-tions examination.

(2) A request for considerationunder CAP will not be consideredvoluntary if it is made as part of adetermination letter application.

(3) An Employee Plans examina-tion also includes a case in which aplan sponsor has submitted a Form5310, Application for Determination ofQualification Upon Termination, andthe EP Agent notifies the plan sponsor,or a representative, of possible defects,whether or not the plan sponsor isofficially notified of an ‘‘examina-tion.’’ For example, if an employer hasapplied for a determination letter onplan termination, and an EP Agentnotifies the employer that there arepartial termination concerns, a requestfor consideration under CAP will notbe considered voluntary.

(4) Walk-in CAP is available withrespect to any other plan of the plansponsor that is not aggregated for


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26

purposes of satisfying the qualificationrequirements of § 401(a), or the re-quirements of § 403(b), with the plan(or plans) under examination. In addi-tion, Walk-in CAP is available for aplan that is aggregated with a plan thatis under an Employee Plans examina-tion with respect to a defect that is notrelated to provisions for which theplans are aggregated. Thus, for exam-ple, a plan sponsor of a plan aggre-gated with a plan that is underexamination could voluntarily requestconsideration under CAP for a defectarising under the spousal consent rulesof § 417, or the vesting rules of § 411,but could not ask for consideration of adefect under provisions for which plansare aggregated, including the non-discrimination provisions (§§ 401(a)(4),410(b), etc.), § 415, or § 416. For pur-poses of this revenue procedure, theterm aggregation does not include con-sideration of benefits provided byvarious plans for purposes of theaverage benefits test set forth in§ 410(b)(2).

SECTION 4. PLANS THAT HAVENOT YET RECEIVED A TRA ’86LETTER

.01 Section 4.02(2) of Rev. Proc.94–62 is hereby modified to read asfollows:

For VCR requests submitted on orafter January 1, 1996, the plan must (1)have received a favorable determina-

tion, opinion, or notification letter thatconsidered TEFRA, DEFRA, and REA,and, (2) at the time of the request, havebeen submitted within the plan’s§ 401(b) remedial amendment periodfor a determination, opinion, or noti-fication letter that considers TRA ’86(TRA ’86 remedial amendment period).This second condition does not applyin the case of plans for which the TRA’86 remedial amendment period has notyet expired, such as adopters of masterand prototype plans, regional prototypeplans, and volume submitter plans,described in section 3 of Rev. Proc.95–12; governmental plans described inAnnouncement 95–48; and plans main-tained by tax-exempt organizations,including non-electing church plans,described in Announcement 95–48.

.02 Section 13.05(3) of Rev. Proc.94–62 is hereby modified to read asfollows:

(3) A copy of the determinationletter, opinion letter, or notificationletter that considered TEFRA, DEFRA,and REA, and any subsequent letter.For VCR requests submitted afterDecember 31, 1995, either the lettermust have considered TRA ’86 or thefollowing additional documentationmust be supplied:

(a) For individually designedplans (including volume submitterplans) for which the TRA ’86 remedialamendment period under § 401(b) hasexpired, but which have not yet re-ceived a favorable determination letter

that considers TRA ’86, a copy of theletter acknowledging receipt of theTRA ’86 determination letter applica-tion (Form 2693).

(b) For plans for which theTRA ’86 remedial amendment periodhas not yet expired, a statement thatexplains the reason why the period hasnot yet expired (for example, becausethe plan is a governmental plan, orbecause it is an adopter of a master orprototype plan that is still entitled tocontinued or interim reliance underRev. Proc. 89–9, 1989–1 C.B. 780).

SECTION 5. EFFECTS ON OTHERDOCUMENTS

Rev. Proc. 94–16 and Rev. Proc. 94–62 are modified.

SECTION 6. EFFECTIVE DATE

This revenue procedure is effectiveon April 15, 1996.

DRAFTING INFORMATION

The principal author of this revenueprocedure is Diane S. Bloom of theEmployee Plans Division. For moreinformation concerning this revenueprocedure, call the Employee PlansDivision VCR telephone number (202)622-8165 (not a toll-free number). Ms.Bloom may be reached at (202)622-6214 (also not a toll-free number).


778/20054/1JUL96/D06-008

27 1996–28 I.R.B.

Part IV. Items of General Interest

Notice of Proposed Rulemaking andNotice of Public Hearing

Gasoline and Diesel Fuel Excise Tax;Dye Injection Systems and Markers;Measurement

PS–6–95

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Notice of proposed rulemak-ing and notice of public hearing.

SUMMARY: This document containsproposed regulations relating to thegasoline and diesel fuel excise tax. Theproposed regulations reflect and imple-ment certain changes made by the Rev-enue Reconciliation Act of 1990 and theOmnibus Budget Reconciliation Act of1993 (the 1993 Act). They affect certainenterers, refiners, terminal operators, andthroughputters. This document alsoprovides a notice of public hearing onthese proposed regulations.

DATES: Written comments and out-lines of oral comments to be presentedat the public hearing scheduled forJune 20, 1996, must be received byJune 12, 1996.

ADDRESSES: Send submissions to:CC:DOM:CORP:R (PS–6–95), Room5228, Internal Revenue Service, POB7604, Ben Franklin Station, Wash-ington, DC 20044. In the alternative,submissions may be hand deliveredbetween the hours of 8 a.m. and 5 p.m.to: CC:DOM:CORP:R (PS–6–95), Cou-rier’s Desk, Internal Revenue Service,1111 Constitution Avenue, NW., Wash-ington, DC. The public hearing will beheld in the IRS Auditorium, SeventhFloor, 7400 Corridor, Internal RevenueBuilding, 1111 Constitution Avenue,NW., Washington, DC.

FOR FURTHER INFORMATIONCONTACT: Concerning the proposedregulations, Frank Boland, (202)622-3130; concerning submissions andthe hearing, Christina Vasquez at (202)622-7190; (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information con-tained in this notice of proposed

rulemaking has been submitted to theOffice of Management and Budget forreview in accordance with the Paper-work Reduction Act of 1995 (44U.S.C. 3507).

Comments on the collection of infor-mation should be sent to the Office ofManagement and Budget, Attn: DeskOfficer for the Department of theTreasury, Office of Information andRegulatory Affairs, Washington, DC20503, with copies to the InternalRevenue Service, Attn: IRS ReportsClearance Officer, T:FP, Washington,DC 20224. Comments on the collectionof information should be received byMay 13, 1996.

An agency may not conduct orsponsor, and a person is not required torespond to, a collection of informationunless the collection of informationdisplays a valid control number.

The collection of information is in§48.4082–1(c). This information is re-quired by the IRS to monitor manualdyeing at terminals. This informationwill be used to ensure the collection ofthe proper amount of tax imposed bysection 4081. The likely recordkeepersare business or other for-profit institu-tions and organizations. Responses tothis collection of information are re-quired to obtain exemption from thediesel fuel excise tax.

Books or records relating to acollection of information must be re-tained as long as their contents maybecome material in the administrationof any internal revenue law. Generally,tax returns and tax return informationare confidential, as required by 26U.S.C. 6103. Estimated total annual recordkeepingburden: 200 hours.Estimated average annual burden perrecordkeeper: 1 hour.Estimated number of recordkeepers:200.

Background

Section 4081 imposes a tax oncertain removals, entries, and sales ofdiesel fuel. However, under section4082, the tax is not imposed if, amongother conditions, the diesel fuel (1) isindelibly dyed in accordance withregulations that the Secretary shallprescribe, and (2) meets such markingrequirements (if any) as may be pre-scribed by the Secretary in regulations.

The regulations currently providethat the section 4082 exemption appliesonly to diesel fuel that contains aprescribed type and amount of dye.However, the regulations do not pre-scribe the time or method for addingthe dye to diesel fuel and do notrequire the use of a marker.

Dye injection systems

Dyeing methods. Diesel fuel is usu-ally dyed at a terminal rack by eithermanual dyeing or mechanical injection.

At a terminal using a typical manualdyeing technique, a measured amountof dye is manually placed into anempty tank compartment of a transporttrailer while the trailer is at theterminal rack. Then, as diesel fuel ispumped into the compartment at therack, the dye and the fuel are mixedtogether. Further mixing occurs throughthe motion of the trailer as it moves onthe highway.

At a terminal using a typical me-chanical injection system, a measuredamount of dye is automatically injectedinto the diesel fuel as the fuel isdelivered into a compartment of atransport trailer at the terminal rack.

Concerns about manual dyeing. TheFederal government, State govern-ments, and various segments of thepetroleum industry have long beenconcerned with the problem of dieselfuel tax evasion, and to address thisproblem Congress changed the law torequire that untaxed diesel fuel beindelibly dyed. The IRS is concerned,however, that tax can still be evadedthrough removals at a terminal ofundyed fuel that has been designated asdyed.

Manual dyeing is inherently difficultto monitor. It occurs after diesel fuelhas been withdrawn from a terminalstorage tank, generally requires thework of several people, is imprecise,and does not automatically create areliable record.

Mechanical dye injection, on theother hand, occurs while the fuel is stillunder the control of the terminaloperator, is computer regulated, andcan automatically create a reliablerecord of the amount of dye that wasinjected and fuel that was dyed. Thus,dye injection is the preferred method ofcombining diesel fuel and dye at aterminal.


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281996–28 I.R.B.

Explanation of provisions. Dieselfuel removed from a terminal at therack may be dyed before the fuel isreceived at the terminal, while the fuelis in a bulk storage tank at theterminal, or at the terminal rack. Underthe proposed regulations, as underexisting law, diesel fuel must contain aprescribed type and amount of dye atthe time of the removal, entry, or salethat would otherwise be subject to tax.For example, high-sulfur diesel fuel,which is required to be dyed at arefinery under Environmental Protec-tion Agency regulations, must containthe prescribed type and amount of dyeat the time of the removal at theterminal rack even if additional dyemust be added at that point.

Under the proposed regulations, aterminal operator that dyes diesel fuelat a terminal generally must use aprescribed mechanical injection systemor else give a bond to the districtdirector as a condition of retaining itsregistration. The prescribed systemcontains calibrated measurement de-vices, shut-off devices, and locks andsimilar equipment to secure these de-vices. If the system malfunctions at aparticular terminal, the terminal opera-tor may manually dye the fuel if theoperator notifies the district director ofthe malfunction.

The proposed regulations also pre-scribe the records that the terminaloperator must maintain with respect toany manual dyeing performed at itsterminals.

Markers

A marker is a material that is placedin diesel fuel to designate the fuel asuntaxed. Unlike dye, a marker does notreveal its presence until the fuel intowhich it is introduced is subjected to aspecial test. Markers are effective evenif diluted and can be detected even ifthere is no visual evidence of dye.

The proposed regulations do notrequire the use of markers. However,the IRS expects to issue a notice ofproposed rulemaking with respect tomarkers within the next year. In themeantime, the IRS is interested inreceiving comments relating to the typeand concentration of markers, the costof markers, and whether lower con-centrations of dye could be used inconjunction with a marker.

Measurement

Existing regulations provide that gal-lons of taxable fuel may be measuredon the basis of actual volumetricgallons, gallons adjusted to 60 degreesFahrenheit, or any other temperatureadjustment method approved by theCommissioner.

These proposed regulations modifythis rule by generally providing thatmeasurement is to be made on the basisof actual volumetric gallons or gallonsadjusted to 60 degrees Fahrenheit,whichever is the basis for measurementunder the position holder’s terminalingagreement with the terminal operator.

Special Analyses

It has been determined that thisnotice of proposed rulemaking is not asignificant regulatory action as definedin EO 12866. Therefore, a regulatoryassessment is not required. It also hasbeen determined that section 553(b) ofthe Administrative Procedure Act (5U.S.C. chapter 5) and the RegulatoryFlexibility Act (5 U.S.C. chapter 6) donot apply to these regulations, and,therefore, a Regulatory FlexibilityAnalysis is not required. Pursuant tosection 7805(f) of the Internal RevenueCode, this notice of proposed rulemak-ing will be submitted to the ChiefCounsel for Advocacy of the SmallBusiness Administration for commenton its impact on small business.

Comments and Public Hearing

Before these proposed regulationsare adopted as final regulations, consid-eration will be given to any writtencomments (a signed original and eight(8) copies) that are submitted timely tothe IRS. All comments will be avail-able for public inspection and copying.

A public hearing has been scheduledfor Thursday, June 20, 1996, at 10 a.m.in the Auditorium, Internal RevenueBuilding, 1111 Constitution AvenueNW., Washington, DC. Because ofaccess restrictions, visitors will not beadmitted beyond the building lobbymore than 15 minutes before thehearing starts.

The rules of 26 CFR 601.601(a)(3)apply to the hearing.

Persons that wish to present oralcomments at the hearing must submitwritten comments and an outline of

topics to be discussed and the time tobe devoted to each topic (signedoriginal and eight (8) copies) by June12, 1996.

A period of 10 minutes will beallotted to each person for makingcomments.

An agenda showing the schedulingof the speakers will be prepared afterthe deadline for receiving outlines haspassed. Copies of the agenda will beavailable free of charge at the hearing.


The principal author of these regula-tions is Frank Boland, Office of Assist-ant Chief Counsel (Passthroughs andSpecial Industries). However, otherpersonnel from the IRS and TreasuryDepartment participated in their de-velopment.

* * * * * *

Proposed Amendments to theRegulations

Accordingly, 26 CFR part 48 isproposed to be amended as follows:

PART 48—MANUFACTURERSAND RETAILERS EXCISE TAXES

Paragraph 1. The authority citationfor part 48 continues to read, in part, asfollows:

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 48.4081–8 is revised

to read as follows:

§48.4081–8 Taxable fuel;measurement.

(a) Removals from a terminal. Forpurposes of the tax imposed under§§48.4081–2 and 48.4081–3(d), taxablefuel is measured on the basis of actualvolumetric gallons or gallons adjustedto 60 degrees Fahrenheit, whichever isthe basis for measurement under theposition holder’s terminaling agreementwith the terminal operator.

(b) Other taxable events. For pur-poses of the taxes imposed under§ § 4 8 . 4 0 8 1 – 3 ( b ) , 4 8 . 4 0 8 1 – 3 ( c ) ,48.4081–3(e), and 48.4082-4, and thetax imposed on the removal of taxablefuel under §48.4081–3(g), taxable fuelis measured on the basis of actualvolumetric gallons or gallons adjustedto 60 degrees Fahrenheit. For purposes


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29 1996–28 I.R.B.

of the tax imposed under §48.4081–3(f)and the tax imposed on the sale oftaxable fuel under §48.4081–3(g), tax-able fuel is measured on the basis ofactual volumetric gallons or gallonsadjusted to 60 degrees Fahrenheit,whichever basis is used to invoice thebuyer.

(c) Effective date. This section isapplicable as of October 1, 1996.


1. In the introductory text of para-graph (a), the language ‘‘if—’’ isremoved and ‘‘if, at the time of theremoval, entry, or sale—’’ is added inits place.

2. Paragraph (d) is revised.The revision reads as follows:

§48.4082–1 Diesel fuel tax;exemption.

* * * * * *

(d) Time for adding the dye andmarker—(1) Removals from a terminalat the terminal rack; in general. Withrespect to any removal from a terminalat the terminal rack, diesel fuel satisfiesthe dyeing and marking requirementsof this paragraph (d) only if the dyeand marker required by paragraphs (b)and (c) of this section are combinedwith diesel fuel—

(i) Before the fuel is received at theterminal;

(ii) While the fuel is in a bulkstorage tank at the terminal; or

(iii) At the terminal rack by meansof—

(A) A mechanical injection systemdescribed in paragraph (d)(2) of thissection; or

(B) Nonconforming dyeing, underthe conditions of paragraph (d)(3) ofthis section.

(2) Removals from a terminal at theterminal rack; mechanical injectionsystems. A mechanical injection systemis described in this paragraph (d)(2)only if the district director has deter-mined (and such determination has notbeen withdrawn) that the systemcontains—

(i) Features that automatically injecta measured amount of dye and markerinto diesel fuel as the fuel is deliveredinto the transport compartment of atruck, trailer, railroad car, or othermeans of nonbulk transfer;

(ii) Calibrated devices that accu-rately measure and record the amount

of dye, marker, and fuel that isdispensed at the rack for each removal;

(iii) Shut-off devices that prevent theremoval of more than 50 gallons ofundyed diesel fuel in the case of asystem malfunction; and

(iv) Locks or similar security equip-ment that secure the measurementdevices and shut-off devices.

(3) Removals from a terminal at theterminal rack; conditions for noncon-forming dyeing. Nonconforming dyeingmeets the conditions of this paragraph(d)(3) only if diesel fuel is dyed andmarked in the manner described inparagraph (d)(4) of this section and—

(i) The terminal operator has given abond as a condition of registrationunder the provisions of §48.4101–1(f)-(4)(i); or

(ii) In the case of a terminal con-taining a mechanical injection systemdescribed in paragraph (d)(2) of thissection—

(A) The accurate mechanical injec-tion of dye and marker at the terminalcannot occur because of an equipmentmalfunction or a shutdown for mainte-nance purposes;

(B) Before beginning any noncon-forming dyeing described in paragraph(d)(4) of this section, the terminaloperator notifies the district director ofthe time, location, and type of malfunc-tion or maintenance shutdown; and

(C) Immediately after correction ofthe malfunction or completion of themaintenance, the terminal operator no-tifies the district director that mechan-ical injection has resumed.

(4) Removals from a terminal at theterminal rack; description of noncon-forming dyeing—(i) In general. Dieselfuel is dyed and marked in a mannerdescribed in this paragraph (d)(4) onlyif the diesel fuel is dyed and marked bymeans of a mechanical injection systemdescribed in paragraph (d)(4)(ii) of thissection or manual dyeing described inparagraph (d)(4)(iii) of this section.

(ii) Mechanical injection. Diesel fuelis dyed and marked in a manner de-scribed in this paragraph (d)(4)(ii) ifthe diesel fuel is dyed and marked bymeans of a mechanical injection systemthat is not described in paragraph (d)(2)of this section and, with respect to thediesel fuel so dyed and marked, theterminal operator maintains a recordof—

(A) The identity and registrationnumber of the position holder;

(B) The identity and taxpayer identi-fication number of the individual thatphysically receives the fuel at theterminal;

(C) The identity and taxpayer identi-fication number of any individual thatphysically operates the mechanical in-jection equipment; and

(D) The volume of the fuel dyed andmarked and the date and time of thedyeing.

(iii) Manual dyeing. Diesel fuel isdyed and marked in a manner describedin this paragraph (d)(4)(iii) if—

(A) The terminal operator places adye and marker of the type andconcentration required by paragraphs(b) and (c) of this section into acompartment of a truck, trailer, railroadcar, or other means of nonbulk transfer;

(B) The diesel fuel is removed fromthe terminal at the rack and is imme-diately delivered into the compartmentdescribed in paragraph (d)(4)(iii)(A) ofthis section; and

(C) With respect to the diesel fuel sodyed and marked, the terminal operatormaintains a record of—

(1) The identity and registrationnumber of the position holder;

(2) The identity and taxpayer identi-fication number of the individual thatphysically receives the fuel at theterminal;

(3) The identity and taxpayer identi-fication number of the individual thatphysically places the dye and markerinto the compartment described inparagraph (d)(4)(iii)(A) of this section;and

(4) The volume of the fuel dyed andmarked and the date and time of themanual dyeing.

(5) Removals from refineries, salesor entries. With respect to any removalfrom a refinery, sale, or entry, dieselfuel satisfies the dyeing and markingrequirements of this paragraph (d) onlyif the dye and marker required byparagraphs (b) and (c) of this sectionare combined with diesel fuel beforethe removal, sale, or entry that wouldotherwise be subject to the tax imposedby section 4081. Thus, for example,diesel fuel that is entered into theUnited States by means of nonbulktransfer (such as in a railroad car) doesnot satisfy the requirements of thisparagraph (d)(5) if the required dye andmarker are combined with the dieselfuel after the fuel has been entered intothe United States.


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(6) Cross reference. For rules allow-ing inspection of equipment used forthe dyeing of fuel, see section 4083.

(7) Effective date. This paragraph (d)is applicable as of April 1, 1997.

* * * * * *

Par. 4. Section §48.4101–1 isamended as follows:

1. Paragraph (b)(7) is added.2. Paragraph (f)(4)(i) is amended by

adding a sentence at the end of theparagraph.

3. In the first sentence of paragraph(j)(2) introductory text, the language‘‘A bond’’ is removed and ‘‘Except asprovided in the last sentence of para-graph (f)(4)(i) of this section, a bond’’is added in its place.

4. Paragraph (l)(4) is added. The additions read as follows

§48.4101–1 Registration.

* * * * * *

(b) * * *(7) Nonconforming dyeing amount.

The nonconforming dyeing amount isthe product of—

(i) The rate of tax on diesel fuelprovided by section 4081(a)(2); and

(ii) An amount up to the totalnumber of gallons of diesel fuelexpected to be dyed by nonconformingdyeing (and removed at terminal racksof the applicant that do not have amechanical injection system describedin §48.4082–1(d)(2)) during a repre-sentative one-month period (as deter-mined by the district director).

* * * * * *

(f) * * *(4) * * * (i) * * * An applicant that

operates a terminal where diesel fuel isdyed by nonconforming dyeing (andremoved at a rack that is not equippedwith a mechanical injection systemdescribed in §48.4082–1(d)(2)) meetsthe adequate security test only if theapplicant has given a bond (in additionto any bond given under paragraph (j)of this section) equal to the noncon-forming dyeing amount.

* * * * * *

(l) * * *(4) The last sentence of paragraph

(f)(4)(i) of this section is applicable asof April 1, 1997.

Margaret Milner Richardson,Commissioner of Internal Revenue.

(Filed by the Office of the Federal Register onMarch 13, 1996, 8:45 a.m., and published inthe issue of the Federal Register for March 14,1996, 61 F.R. 10490)

Exempt Organizations; ProposedExamination Guidelines RegardingRural Electric Cooperatives

Announcement 96–24

PURPOSE

The Internal Revenue Service hasdeveloped proposed examinationguidelines for Exempt OrganizationsInternal Revenue Agents to use duringthe examinations of rural electric coop-eratives. These guidelines are intendedto provide a framework that agents canfollow in conducting the examination.Because they address matters that mayhave a significant impact on ruralelectric cooperatives, the Service issoliciting public comments on them.The guidelines will be published in theInternal Revenue Manual.

BACKGROUND

These guidelines offer suggestionson issues, documents and techniquesfor examining rural electric coopera-tives. They do not attempt to coverevery issue that might arise in anexamination. They are not intended torequire examiners to exhaustively re-view all areas described in each ruralelectric cooperative examination.

PROPOSED EXAMINATIONGUIDELINES

(12)20 Specific ExaminationGuidelines

(12)21 Rural Telephone Cooperatives[Reserved]

(12)22 Rural Electric Cooperatives

These guidelines offer suggestionson issues, documents and techniquesfor examining rural electric coopera-tives. They do not attempt to coverevery issue that might arise in an

examination. Conversely, some issuesin these guidelines will not arise inevery examination. Examinations ofgeneration and transmission coopera-tives and distribution and transmissioncooperatives, for example, present dif-ferent issues. Further, these guidelinesare not intended to require examinersto exhaustively review all areas de-scribed in examining every ruralelectric cooperative. Examiners or casemanagers should use their professionaljudgment to determine the scope anddepth of each examination.

(12)22.1 Introduction: ElectricUtilities and Rural ElectricCooperatives

(1) Electric Utilities. Electric utilities(including rural electric cooperatives)were once monopolies. Now they con-front many challenges including in-creased competition from their ownconsumers, independent power pro-ducers and other electric utilities.Electricity is becoming a commodity.Industry and government consumersdemand electricity at the lowest costand increasingly, if dissatisfied withrates from the local electric utility, theymay build their own generating plants(and bypass the electric utility al-together) or purchase electricity fromanother electric utility (to be transmit-ted over the local utility’s power lines(retail wheeling)). Other changes ineconomics and technology are chal-lenging electric utilities. Demand forelectricity is growing, only slowly,thereby holding down revenues (as arestranded investments). Further, it re-mains to be decided what role electricutilities will play in developing theinformation superhighway. Legislaturesand regulatory agencies are respondingto these questions.

(2) Trends. Industry analysts forecastseveral trends: more price wars be-tween competing utilities, more mer-gers among electric utilities, (includinggeneration and transmission coopera-tives (G&Ts)); more joint venturesbetween cooperatives and other utilitiesto own and operate power generationplants; and more sharing of services.This environment will very likely gen-erate new accounting and tax questions.

(3) Rural Electric Cooperatives.Rural electric cooperatives (coopera-tives) provide electric power to mem-bers and other consumers. G&Ts con-struct and operate power plants (alone


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or in arrangements with other utilities)and sell electricity at wholesale to theirmember distribution cooperatives,which in turn, sell electricity retail toconsumers. Distribution cooperativesare members of G&T cooperatives. Thedistribution cooperatives purchaseelectricity from their G&T to furnishelectricity to consumers. Each coopera-tive, in turn, may be a member of othercooperatives, including cooperativesubsidiaries. To carry out their ac-tivities, G&Ts and distribution coopera-tives acquire land and land rights(including easements, water and powerrights, diversion rights, submersionrights). They own (or lease) andoperate electric generating plant andtransmission and distribution plant, of-fice space, furniture and equipment. 7C.F.R. § 1767.16. Cooperatives alsocontract for fuel, power supply andoperate power plants jointly with otherutilities. See GAO Reports REA Bor-rowers’ Investment in Cable and Satel-lite Television Services, RCED–93–164(1993); Legislation Needed to ImproveAdministration of Tax Exemption Pro-visions For Electric Cooperatives,GGD–83–7 (1983). On the history andbackground of rural electric coopera-tives, see Exempt Organizations Hand-book, ‘‘Local Benevolent Life Insur-ance Association, Mutual Ditch,Irrigation and Telephone Companies,and Like Organizations,’’ ch. 12(00).

(4) Joint Ventures. G&Ts often joinwith other electric utilities to build andoperate power generating stations. Thejoint venturers may own the station astenants in common, operating the sta-tion and sharing its capacity and energyaccording to various operating agree-ments, station agreements and loadmanagement agreements. These jointventures may raise issues bearing onthe 85 percent test. See generally,Specialized Industry Audit Guidelines—Public Utilities (Utilities Handbook)§ 240.

(5) Diversification. Cooperatives arediversifying, offering water manage-ment, sewage treatment, venturing intoeconomic development, offering satel-lite television service and selling satel-lite reception equipment (and, lesscommonly, offering cable televisionservice). Many cooperatives belong tothe National Rural TelecommunicationsCooperative (NRTC) which offersRural TV programming on the satelliteC-band. NRTC also plans to offerDirect TV (which uses different re-

ceivers) on the satellite Ku-band. Manyof these satellite and cable televisionservices are for-profit (noncooperative)businesses. GAO Report RCED–93–164.

(12)22.2 Overview—IRC 501(c)(12)

(1) Background on Electric Coopera-tives. See Exempt Organizations Hand-book, ‘‘Local Benevolent Life Insur-ance Association, Mutual Ditch,Irrigation and Telephone Companies,and Like Organizations,’’ ch. 12(00);‘‘Taxation of Cooperatives,’’ ch.(45)10, Utilities Handbook, includingExhibits 200–2, Index of Revenue Rul-ings and 200–3 Index of Court Casesand Examination Guidelines Handbook,‘‘Local Benevolent Life Insurance As-sociation, Mutual Ditch, Irrigation andTelephone Companies, and LikeOrganizations—IRC 501(c)(12),’’ ch.(12)10.

(2) Requirements for Exemption.Mutual ditch or irrigation companies,mutual or cooperative telephone com-panies and like organizations are ex-empt from federal income tax underIRC 501(c)(12) if 85 percent or moreof their income consists of amountscollected from members for the solepurpose of meeting losses and expenses(the 85 percent test). To be exempt,cooperatives must be:

(a) like organizations;(b) operate under cooperative

principles; and (c) meet the 85 percent test. (1) Like Organizations and Not

Like Organizations. Rural electriccooperatives and cable televisionservices operating on a cooperativebasis are like organizations de-scribed in IRC 501(c)(12). Rev.Ruls. 67–265, 1967–2 C.B. 205; 83–170, 1983–2 C.B. 97. See also,Exempt Organizations Handbook,Chapter (12)33. The following arenot like organizations:

(a) Cooperative organizationsformed by electric cooperatives tofinance their customers’ purchasesof electrical, water or plumbingappliances. Consumers Credit RuralElectric Cooperative Corp. v. Com-missioner, 319 F.2d 475 (6th Cir.1963);

(b) Cooperatives whose soleactivity is selling electrical mate-rials, equipment and supplies andfurnishing equipment manufacturing,

testing and repair services, althoughall the members are cooperatives.Rev. Rul. 65–201, 1965–2 C.B. 170.

(c) Nonprofit automobile clubsfurnishing travel and other servicesto members. New Jersey AutomobileClub v. United States, 181 F. Supp.259 (Cl. Ct. 1960), cert. denied, 366U.S. 964 (1961);

(d) Housing cooperatives. Rev.Rul. 65–201, 1965–2 C.B. 170; and

(e ) Organ iza t ions s e l l i ngelectrical materials, equipment andsupplies and manufacturing, repair-ing or testing for members. Rev.Rul. 65–201, 1965–2 C.B. 170.

(2) Cooperatives Engaged inIRC 501(c)(12) and Non-IRC501(c)(12) Activities. If a coopera-tive engages in activities describedin IRC 501(c)(12) and in activitiesnot described in IRC 501(c)(12), theexaminer should determine whetherthe latter activities are insubstantialor are conducted incident to and infurtherance of IRC 501(c)(12)activities.(3) Cooperative Principles. Coopera-

tives must operate according to thefollowing principles:

(a) subordination of capital incontrol over the cooperative under-taking and in ownership of thefinancial benefits from ownership(unlike stockholders who earn areturn on capital invested);

(b) democratic control by themembers of the cooperative;

(c) vesting in and allocationamong the members of all excess ofoperating revenues over the ex-penses incurred to generate revenuesin proportion to their participation inthe cooperative (patronage) (unlikestockholders who own equal sharesin a corporation’s net worth, regard-less of how much business theytransact (if any) with the corpora-tion); and

(d) operation at cost (not oper-ating for profit or below cost). Puget Sound Plywood, Inc. v. Com-missioner, 44 T.C. 305, 308 (1965),acq., 1966–2 C.B. 6; Mutual FireIns. Co. of Germantown, Inc. v.United States, 142 F.2d 344 (3d Cir.1944), cert. denied 323 U.S. 729(1945); Keystone Auto. Club Cas-ualty Co. v. Commissioner, 122 F.2d886 (3d Cir. 1941), cert. denied, 315U.S. 814 (1942). See generally,parallel provisions in IRC 521 andTreas. Reg. § 1.521–1.


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(e) Cooperative Principles Ap-plied to IRC 501(c)(12). Rev. Rul.72–36, 1972–1 C.B. 151 holds thatIRC 501(c)(12) cooperatives mustcomply with fundamental coopera-tive principles. Because a coopera-tive must operate at cost, it must notaccumulate cash reserves exceedingits reasonable needs. Any unneededfunds must be returned to membersas patronage dividends. The rightsof members in the cooperative’spatronage capital account (the bal-ance sheet account approximatingretained earnings) must be deter-mined on the basis of members’patronage throughout their years ofmembership. The cooperative mustat all times keep records of mem-bers’ rights to these assets and makedistributions accordingly when thecooperative retains a reasonable cashreserve, when a member withdrawsfrom the cooperative and when thecooperative realizes gains on sale ofappreciated assets prior to dissolu-tion. Rev. Rul. 78–238, 1978–1 C.B.161.

(f) Maintaining Exemption. Asubstantial departure from demo-cratic ownership, operation and con-trol may warrant revocation of ex-emption (e.g., activities that wouldconstitute private inurement or im-permissible private benefit as de-fined in IRC 501(c)(3)). Cf. Key-stone Auto. Club Casualty Co. v.Commissioner, 122 F.2d 886 (3dCir. 1941).

(12)22.3 The 85 Percent MemberIncome Test

(1) General Principles. The follow-ing rules apply:

(a) Annual Testing. The 85 per-cent test must be computed in eachtaxable year. A cooperative may failthe test one year but meet the test ina prior or subsequent year. Rev. Rul.65–99, 1965–1 C.B. 242. The test isapplied using the cooperative’smethod of accounting. Rev. Rul. 68–18, 1968–1 C.B. 271. See also IRC451(f) and IRC 166 discussed at(12)22(16).

(b) Gross Receipts or Gross In-come. (Safe Harbor Guidelines)Prop. Treas. Reg. § 1.501(c)(12)–2(49 Fed. Reg. 1244 (January 10,1984)) would have determined theincome from sale of electricity bysubtracting the cost of goods sold

(computed according to Treas. Reg.§ 1.471–11) from gross sales. Thepreamble to the proposed regulationsstated that the regulations would beeffective for taxable years beginningafter the date of publication of finalregulations and that in prior years,cooperatives may continue to applythe 85 percent test using the methodthat they consistently used in thepast. The proposed regulations werewithdrawn (58 Fed. Reg. 25587(April 27, 1993)). Under the SafeHarbor Guidelines, cooperatives maycontinue to use the method theyhave consistently used in the past. Ifthe cooperative computes memberincome using the gross receiptsmethod, the cooperative should usethe same method to compute non-member income.

(c) No Netting. Gross incomederived from a transaction with athird party cannot be offset byamounts owed to that third party.Rev. Rul. 65–174, 1965–2 C.B. 169;Rev. Rul. 74–362, 1974–2 C.B. 131,obsoleted in Rev. Rul. 81–291,1981–2 C.B. 131.

(d) No Reductions. Rents, divi-dends and interest must be includedin gross income without reduction. (2) Members vs. Nonmembers. Co-

operatives may have several types ofmembers. In general, members arethose entitled to voice in managementof the cooperative and to share inpatronage capital. Rev. Rul. 78–238,1978–1 C.B. 161. If the cooperativehas more than one type or class of‘‘members,’’ ascertain which are mem-bers as defined in IRC 501(c)(12). Amunicipal corporation may be a mem-ber or nonmember. Rev. Rul. 68–75,1968–1 C.B 271. G&Ts may havemembers that are not distributioncooperatives.

(3) Classifying Income as Memberor Nonmember Income. Each transac-tion for which income is realized mustbe classified as member income, non-member income or excluded income.Member income is member-sourcedand derived from activities conductedaccording to cooperative principles.IRC 501(c)(12); Rev. Rul. 72–36,1972–1 C.B. 151; Rev. Rul. 78–238,1978–1 C.B. 161; Rev. Rul. 80–86,1980–1 C.B. 118. Common transactionsinclude:

(a) Sale of Electricity. Incomefrom sale of electricity may bemember or nonmember income, de-

pending on the membership status ofthe purchaser/consumer.

(b) Power Pooling Arrange-ments and Power Interchange Agree-ments. These agreements may gener-ate member or nonmember income.Payments received by a cooperativeunder an arrangement with a com-mercial power company to operatethe cooperative’s generator unit con-stitute income to be considered incalculating whether the cooperativemeets the 85 percent test. Thecooperative may contend that thearrangement is merely an inter-change of power involving no in-come or revenue for either party.Rev. Rul. 65–174, 1965–1 C.B. 242.

(c) Income from sale and serv-ice of appliances to nonmemberswho purchase no electricity from thecooperative is nonmember income,even if the sales are made throughagents or subsidiar ies . (See(12)22.4(2) for treatment as unre-lated business taxable income.)

(d) Interest Income. Interest in-come is often nonmember incomebecause the source/payor of theinterest is a nonmember. Transac-tions yielding interest incomeinclude:

(1) Interest Income from theInstallment Sale of an Office Build-ing. This is nonmember income. Cf.Rev. Rul. 65–99, 1965–1 C.B. 242(holding that a cooperative mustaccount for gain on an installmentsale of property to a nonmember asnonmember income on a year-by-year basis).

(2) Interest Income from Sale/Leaseback of Cooperative’s Assets.Interest income received by an ex-empt cooperative in sale/leasebacktransaction (including safe harborleases described in former IRC168(f)(8)) is nonmember income.

(e) Discharge of IndebtednessIncome. This income may be non-member income or excluded income.See (12)22.3(4)(c) and (12)22.3-(3)(g).

(f) Rent. Leasingg a powergenerating station to a nonmemberutility from which the cooperativepurchases power results in nonmem-ber rental income. Rev. Rul. 65–174,1965–2 C.B. 169. See below forqualified pole rentals.

(g) Original Issue Discount andCancellation of Indebtedness Income


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Resulting from Modification of DebtInstruments. Cooperatives enter intoagreements under which the terms oftheir long-term debt are modified.For example, under section 12 of theRural Electrification Act of 1936,REA is authorized to allow finan-cially distressed cooperatives to de-fer principal and interest paymentson REA loans. If a modification ofthe terms of a debt instrumentoccurs, it must be determinedwhether the modification is signifi-cantly material to constitute adeemed exchange of the debt instru-ment for a new debt instrument(with the modified terms) under IRC1001. In general, a significant defer-ral of interest or principal paymentsconstitutes a deemed exchange underIRC 1001.

(1) Original Issue Discount. Ifan IRC 1001 exchange occurs, origi-nal issue discount (OID) is createdon the new debt equal to the dif-ference between the IRC 1274 issueprice of the new debt and the statedredemption price at maturity(SRPM) of the new debt. The SRPMof the new debt is equal to thestated principal (face) amount of thenew debt plus any interest that is notpaid on a current basis. The IRC1274 issue price of the new debt isequal to the lesser of: (A) the faceamount of the new debt and (B) thepresent value, as of the date of themodification, of all payments ofprincipal and interest due on thenew debt, calculated using a dis-count rate equal to the ApplicableFederal Rate. OID on the new debtis amortized by the cooperative overthe term of the new debt on aconstant yield basis.

(2) Cancellation of Indebted-ness Income. In addition, the coop-erative recognizes cancellation ofindebtedness income on the ex-change to the extent the face valueof the old (unmodified) debt (plusany unamortized premium and lessand unamortized discount) exceedsthe IRC 1274 issue price of the newdebt. Discharge of indebtedness in-come will generally occur if the olddebt bears an interest rate that isbelow the Applicable Federal Rate.Any discharge of indebtedness in-come is (nonmember) gross incomein the taxable year realized. See also(12)22.3(4)(c) on discharge of in-debtedness income on prepayment of

certain REA loans at a discount. Foradditional information on modifica-tion of debt instruments, contact theOffice of the Assistant Chief Coun-sel (Financial Institutions &Products).

(h) Gains and Losses from Saleof IRC 1221, 1231, 1245 and 1250Property. See The Mountain WaterCo. of LaCrescenta v. Commis-sioner, 35 T.C. 418 (1960), acq. onother issues, 1961–2 C.B. 5; CateDitch Co. v. United States, 194 F.Supp. 688 (S.D. Cal. 1961); Rev.Rul. 65–99, 1965–1 C.B. 242 (gainon sale of office building). Cf. Rev.Rul. 74–84, 1974–1 C.B. 244. (4) Exclusions from the 85 Percent

Test. The following amounts are ex-cluded in computing the 85 percent testin Treas. Reg. § 1.501(c)(12)–1:

(a) Sale of Excess Fuel at Cost.Sale of excess fuel, (an inventoriableitem) at cost, yields no gross incomeand, therefore, does not enter intothe 85 percent test. Rev. Rul. 80–86,1980–1 C.B. 118.

(b) Qualified Pole Rentals.Qualified pole rentals are rentalincome from the right to use anypole (or other structure that supportswires) that the cooperative uses toprovide electricity to members. IRC501(c)(12)(C)(i), (D).

(c) Discharge of IndebtednessIncome on Prepayment of CertainREA Loans at a Discount. Grossincome includes income from dis-charge of indebtedness. IRC61(a)(12). The amount of indebted-ness discharged equals the faceamount of the debt (adjusted for anyunamortized premium or discount)minus any consideration given bythe taxpayer to effect the discharge.Discount income is nonmember in-come. The effect on the 85 percenttest of loan prepayment at a dis-count, however, depends on whenthe loans are prepaid:

(1) Prepayments Between 1986and 1989. Cooperatives were permit-ted to prepay at a discount certainREA loans made pursuant to sec-tions 306A, 306B or 311 of theRural Electrification Act of 1936 (asin effect on January 1, 1987) (7U.S.C. §§ 936a, 936b, 940a). OBRA1986, Pub. L. No. 99–509 § 1101(a)and Continuing Appropriations forF/Y 1987, Pub. L. No. 99–591§ 101(m) (Title IV § 623); Food,Agriculture, Conservation and Trade

Act of 1990, Pub. L. No. 101–624§ 2387. However, TAMRA 1988 ex-cludes from the 85 percent testdischarge of indebtedness incomerealized from prepayment of loansfrom REA or any loans made orguaranteed by the United States (orany of its agencies or instrumen-talities) after December 31, 1986and before January 1, 1990.TAMRA 1988, Pub. L. No. 100–647§ 6203; S. Rep. No. 445, 100thCong., 2d Sess. 411, reprinted in1988 U.S.C.C.A.N. 4918–9; H.Conf. Rep. No. 1104, 100th Cong.,2d Sess., 211, 1988–3 C.B. 211.

(2) Prepayments in 1990 andLater Years. Cooperatives may againprepay certain REA loans at adiscounted present value. REA Im-provement Act of 1992, Pub. L. No.102–428 § 2; 7 C.F.R. § 1786 (59Fed. Reg. 13616 (Mar. 22, 1994)).Loan discounts probably range be-tween 10 and 15 percent. Anydischarge of indebtedness incomerealized from loan prepayments onor after January, 1, 1990 is non-member income in computing the 85percent test.(5) Consequences of Failing the 85

Percent Test. If, in any taxable year, acooperative fails the 85 percent test, itis a nonexempt cooperative and mustfile Form 1120. IRC 501(c)(4) does notapply. Rev. Rul. 57–494, 1957–2 C.B.315, nonacq. in United States v.Pickwick Elec. Mem. Corp., 158 F.2d272 (6th Cir. 1946).

(12)22.4 Unrelated Business TaxableIncome

(1) For an overview of IRC 511–514, see Exempt Organizations Hand-book, ‘‘Taxation of Unrelated BusinessTaxable Income,’’ ch. (35)00—(41)00and annual Technical Instruction Pro-grams. The following additional issuesmay also arise in examination ofcooperatives:

(2) Sales and service of appliancesfor nonmembers who purchase noelectricity from the cooperative areunrelated trade or business. Treas. Reg.§§ 1.501(c)(12)–1(a); 1.513–1(a), (d).

(3) Income from debt-financed in-vestments may be taxable under IRC514(a) (e.g., arbitrage investments ofREA loan funds). Southwest Tex. Elec.Coop. v. Commissioner, T.C. Memo.1994-363 (1994); Kern County Elec.Pension Fund v. Commissioner, 96


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T.C. 845 (1991), aff’d 988 F.2d 120(9th Cir. 1993);

(4) IRC 1245 and 1250 depreciationrecapture rules override IRC 512(b)(5).Treas. Reg. §§ 1.1245–6(b); 1.1250–1(c)(2);

(5) Payments from affiliated organi-zations or subsidiaries may be taxableunder IRC 512(b)(13); and

(6) Qualified pole rentals are notincome from unrelated trade or busi-ness. IRC 513(g).

(12)22.5 Other Code SectionsApplicable in Examinations ofCooperatives

(1) IRC 446 and 481. Method of ac-counting issues and changes in methodsof accounting arise in many examina-tions of cooperatives. There are nu-merous differences between book andtax. See Utilities Handbook §§ 320–322, 426, 430–438, 445 and discussionbelow. Note that a method of account-ing (e.g., depreciation and capitaliza-tion) elected on Form 990 may not bechanged without the consent of theCommissioner, irrespective of whetherthe cooperative files Form 990 or Form1120 in a subsequent year. Treas. Reg.§ 1.446–1(e).

(2) IRC 266. Cooperatives may electto capitalize certain taxes and carryingcharges (including interest) into theadjusted basis of property. An electionmay affect the amount of gain on acooperative’s sale of utility plant, af-fecting the 85 percent test. On electionsand their consequences, see Treas. Reg.§ 1.266–1; Rev. Rul. 90–38, 1990–1C.B. 57.

(3) IRC 118. (a) Contributions to the capital

of a cooperative are not grossincome to the cooperative. But con-tributions in aid of construction orany other contribution as a customeror potential customer are not contri-butions to capital. IRC 118(a), (b);Treas. Reg. § 1.118–1; United Statesv. Chicago, B. & O. R. Co., 412U.S. 401 (1973), 1973–2 C.B. 428;Utilities Handbook § 434.

(b) For taxable years beginningafter December 31, 1985, IRC118(b) was repealed. Consequently,contributions that a cooperative re-ceives after December 31, 1985 toprovide or encourage providing serv-ices or for the benefit of thecontributor must be reported asincome by the cooperative.

(4) IRC 269. If any person(s) ac-quire, directly or indirectly, controlover a corporation and the principalpurpose of the acquisition is to evadeor avoid federal income tax by securingthe benefit of a deduction, credit orother allowance, which the acquiringperson(s) or the controlled corporationwould not otherwise enjoy, then theService may disallow the deduction,credit or allowance. IRC 269(a); Treas.Reg. § 1.269–1. ‘‘Allowance’’ is de-fined very broadly. Treas. Reg.§ 1.269–1(a). IRC 269 may apply tocooperatives and/or their subsidiaries(e.g., in applying the 85 percent test, ifa subsidiary is used as a conduit forsales to nonmembers).

(5) IRC 483 and 7872. Imputedinterest rules on deferred payments orbelow-market loans receivable (e.g.,installment sales) may affect the com-putation of interest income, the 85percent test or unrelated trade orbusiness taxable income.

(6) IRC 103. [Reserved].

(12)22.6 Deferred Compensation andRetirement Benefits

(1) Cooperatives may provide sev-eral types of deferred compensation orretirement benefits for their employees.These include qualified plans, andeligible and ineligible deferred compen-sation plans under IRC 457. Foradditional information on deferredcompensation plans under IRC 457contact the Office of Associate ChiefCounsel (Employee Benefits & ExemptOrganizations).

(2) Qualified Plans. A qualified planis a funded, tax exempt plan. Theemployer makes contributions whichare generally held in trust. In somecases, employees may also contribute.There is a wide variety of qualifiedplan types, including pension andprofit-sharing plans. They are subjectto numerous qualification requirementsunder IRC 401. A plan may (but is notrequired to) obtain a determinationletter from a key district office. Thisletter would constitute a ruling that theplan met the qualification requirementsin form. It would not assure that theplan met all of the requirements forqualification in operation.

(a) Qualified Plan Require-ments. Qualified plans are subject tonumerous and complex requirementsgoverning discrimination in favor ofhighly compensated employees, lim-

itations on contributions and bene-fits, coverage of employees, par-ticipation levels, vesting, funding,portability, holding of investments,and other requirements.

(b) IRC 401(k) Plans. Aqualified plan may include a‘‘qualified cash or deferred arrange-ment,’’ often called a ‘‘section401(k) plan.’’ A cooperative, unlikeother tax-exempt organizations andstate and local government entities,is allowed to maintain a qualifiedcash or deferred arrangement. SeeIRC 401(k)(4)(B) (last sentence).Under a qualified cash or deferredarrangement, an employee maychoose whether to receive part of hisor her compensation in cash or tohave it contributed to the plan. Theelection most commonly takes theform of a salary reduction arrange-ment. The contributions are called‘‘elective deferrals,’’ and are limitedto a dollar amount ($9,240 in 1994),which is adjusted annually forchanges in the cost of living. Elec-tive deferrals are subject to a specialnondiscrimination test called theactual deferral percentage test(‘‘ADP test’’), in which the averagedeferral percentage of highly com-pensated employees is compared tothat of non-highly compensatedemployees. The plan is also subjectto all of the requirements thatgenerally apply to qualified plans,and to some special requirements.(3) Nonqualified Plans. Any other

plans, agreements, or arrangements de-ferring the receipt of compensation tosome future date or event such as re-tirement or separation from service arenonqualified plans. There is a widevariety of nonqualified deferred com-pensation plans. These arrangementsmay be elective (including salary re-duction) plans or nonelective plans.They may be defined benefit or definedcontribution plans. They may be un-funded plans where the participantshave only a contractual promise fromthe employer that future payments willbe made and any assets held to makepayments are reachable by generalcreditors of the employer or they maybe funded plans where cash or otherassets are transferred to a trust or otherthird party, such as an insurancecompany, for payment to participants ata later date.

(a) Unfunded Plans. The taxconsequences of unfunded plans are


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contained in IRC 457 and the regu-lations thereunder. An unfundedplan of a state or local governmentor an agency or instrumentalitythereof, or of any other tax exemptorganization is either (A) an eligibledeferred compensation plan, or (B)an ineligible deferred compensationplan. The tax consequences differsignificantly.

(1) Eligible Plans. Under IRC457(a), participants in an eligibleplan, defined in IRC 457(b), aretaxed on deferred amounts whenthose amounts are paid or madeavailable to plan participants follow-ing separation from service or in theevent of a distribution for an un-foreseeable emergency.

(2) Ineligible Plans. If the planis not an eligible plan, plan partici-pants are taxed when amounts aredeferred unless there is a substantialrisk of forfeiture. A ‘‘substantial riskof forfeiture’’ is defined by IRC457(f)(3)(B) as existing if a ‘‘per-son’s rights to [the] compensationare conditioned upon the futureperformance of substantial servicesby any individual.’’

(3) Participants. All employeesof a state or local government or anagency or instrumentality thereofmay participate in an IRC 457 plan.Only a select group of managementor highly compensated employees,however, may participate in an IRC457 plan maintained by a tax exemptemployer. (This is necessary tomaintain the plan’s exemption fromthe funding requirements of ERISA.)

(4) Maximum Deferrals. Eachparticipant in an eligible IRC 457plan may defer up to the lesser of$7,500, or 331⁄3 percent of includiblecompensation (generally meaningtaxable compensation) in a taxableyear. This limit applies to bothelective and nonelective deferredcompensation. It is not indexed.Under a catch-up provision, a par-ticipant may defer up to $15,000 ineach of the last three taxable yearsbefore he or she reaches normal re-tirement age, but the increase overthe normal limit is available only tothe extent of unused portions of thelimitations for previous years. Alleligible IRC 457 plans of an em-ployer are aggregated, and no indi-vidual may defer a total of morethan $7,500 ($15,000 if the catch-upprovision applies) in a taxable year

(even under plans of more than oneemployer). The same limits apply toa nonqualified defined benefit plan.This is a plan that specifies thebenefit that a participant will receivein the future rather than the amountthat will be added to his or heraccount each year. A defined benefitplan often fixes a benefit based onfactors such as compensation andlength of service, and usuallyprovides a benefit in the form of anannuity or payments over a numberof years. Benefits under a definedbenefit plan do not depend on theperformance of any investments ac-quired by the employer. Applyingthe limits to a nonqualified definedbenefit plan is more difficult thanapplying them to a defined contribu-tion plan. The benefit subject to thelimit in any year is the present valueof the increase in the participant’saccrued benefit during that year.This present value will usually bedifferent for each participant, andwill often change from year to year.Consult an actuary (in EmployeePlans) for assistance in determiningthe present values. It is important toremember that the limit applies toincreases in the participant’s accruedbenefit on a year-by-year basis. Aplan would not satisfy this require-ment if it merely applied an aggre-gate limit (based on all of theparticipant’s service) to the totalaccrued benefit. If an employeeparticipates in both a nonqualifieddefined benefit plan and a non-qualified defined contribution plan,the annual limit applies to the sumof (A) the present value of theincrease in the accrued benefit underthe defined benefit plan, and (B) theamount deferred under the definedcontribution plan.

(5) Coordination of Deferrals.IRC 457(c) requires that deferralsunder an eligible IRC 457 plan becoordinated with certain other planssuch as IRC 401(k) plans. Thismeans that elective deferrals by theemployee under an IRC 401(k) planare subtracted from the $7,500 (or$15,000 in a catch-up year) limit. Asa result, an employee who elects anydeferrals under an IRC 401(k) planwill only be able to defer $7,500 (or$15,000 in a catch-up year) underthe combination of IRC 401(k) and457 plans, even though a higherlimit might be available under theIRC 401(k) plan alone.

(6) Plan Administration Consis-tent with IRC 457(b). A plan that isconsistent with IRC 457(b), but thatis administered in a manner that isinconsistent with the requirements ofIRC 457(b), may lose its status as aneligible plan. If the employer is astate or local government or anagency or instrumentality thereof,the plan does not become ineligibleuntil the beginning of the first planyear beginning more than 180 daysafter notification by the Secretary ofthe Treasury of the inconsistentadministration. If the inconsistencyis corrected before the first day ofthat plan year, the plan remains aneligible plan. This grace period forcorrecting administrative defectsdoes not apply to an employer thatis a tax exempt organization otherthan a government.

(b) Funded, Nonqualified Plans.A plan that is funded (e.g., througha trust, annuity contracts, or othervehicle insulating the assets from thegeneral creditors of the employer)but is not a qualified plan is notgoverned by either IRC 401 or IRC457. The tax consequences offunded, nonqualified plans are con-tained in IRC 402(b), 403(c) and 83,which require that a participantrecognize income when amounts arepaid to a trust or insurance companyunless there is a substantial risk offorfeiture as defined in IRC 83(c)(1)and the participant’s interest isnontransferable.(4) Tax-Sheltered Annuity. An IRC

403(b) annuity, often called a ‘‘tax-sheltered annuity,’’ is an annuity con-tract that may be purchased by an IRC501(c)(3) organization or educationalinstitution of a state or local govern-ment for its employees. Custodial ac-counts for registered investment com-pany stock (mutual funds) may also betreated as annuity contracts for pur-poses of IRC 403(b), if they meetcertain requirements. Since a coopera-tive is neither an IRC 501(c)(3) organi-zation nor an educational institution ofa state or local government, it cannotmaintain an IRC 403(b) annuity plan.Any plan of a cooperative purporting tobe an IRC 403(b) plan would probablyconsist of either nonqualified annuitycontracts or taxable custodial accountsor trusts, and would be a funded, non-qualified plan. Contact an EmployeePlans specialist if you encounter such aplan.


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(12)22.7 Employee Benefits

(1) Cafeteria Plans. (a) Under present law, compen-

sation generally is includible ingross income when actually or con-structively received. An amount isconstructively received by an indi-vidual if it is made available to theindividual or the individual has anelection to receive such amount.Under one exception to the generalprinciple of constructive receipt, noamount is included in the grossincome of a participant in a cafeteriaplan described in IRC 125 solelybecause, under the plan, the partici-pant may elect among cash andcertain employer-provided qualifiedbenefits.

(1) Qualified Benefits. In gen-eral, a qualified benefit is a benefitthat is excludable from an em-ployee’s gross income by reason ofa specific provision of the Code.Thus, employer-provided accident orhealth coverage, group-term life in-surance coverage (whether or notsubject to tax by reason of being inexcess of the dollar limit on theexclusion for such insurance) andbenefits under dependent care assist-ance programs may be providedthrough a cafeteria plan. However, acafeteria plan may not providequalified scholarships or tuition re-duction (IRC 117), educational as-sistance (IRC 127), or miscellaneousemployer-provided fringe benefits(IRC 132). In addition, a cafeteriaplan may not offer deferred compen-sation except through a qualifiedcash or deferred arrangement (IRC401(k)).

(2) Cash or Qualified Benefits.Employer contributions to the caf-eteria plan are usually made pur-suant to salary reduction agreementsbetween the employer and the em-ployee in which the employee agreesto contribute a portion of his or hersalary on a pre-tax basis to pay forthe qualified benefits. A salaryreduction agreement is sufficient tosatisfy the ‘‘cash’’ requirement of acafeteria plan.

(3) Plan Requirements. A caf-eteria plan must be in writing, mustinclude only employees (includingformer employees) as participantsand must satisfy certain non-discrimination requirements. Anemployer that maintains a cafeteria

plan is required to file an annualreturn relating to such plan.

(b) Employment Taxes. Thecafeteria plan exception from theprinciple of constructive receipt gen-erally also applies for employmenttax (FICA and FUTA) purposes.(2) Voluntary Employees’ Benefit

Associations (VEBAs). If the coopera-tive maintains a VEBA or taxable trustfor payment of welfare benefits, it maybe appropriate to include the VEBA inthe examination. See Exempt Organiza-tions Handbook, ‘‘Voluntary Em-ployees’ Benefit Associations,’’ ch.900.

(12)22.8 Employment Taxes

(1) General Considerations. Taxablecompensation paid to employees maynot be properly reflected on Forms 990,employment tax returns, or FormsW–2. Determine whether payments toindividuals who are not employees areproperly reported on Forms 1099.Determine whether the cooperative hasproperly classified its workers. Be alertto efforts to treat employees as inde-pendent contractors. For a list of the 20common law factors indicating an em-ployment relationship, see Rev. Rul.87–41, 1987–1 C.B. 296. In any ques-tionable situation, determine whether aForm SS–8 has been filed by thecooperative or the worker. See IRM7(10)(16)4.8.

(2) Section 530. Be sure to raiseemployment tax classification issues.Under section 530 of the Revenue Actof 1978, a cooperative may be entitledto relief from employment taxes withrespect to a particular worker if threerequirements are satisfied: the coopera-tive must have filed all federal taxreturns (including information returns)required to be filed on a basis consis-tent with treating the worker as notbeing an employee; the cooperativemust not have treated any worker hold-ing a substantially similar position asan employee for employment tax pur-poses after December 31, 1977, and thecooperative must have a ‘‘reasonablebasis’’ for not treating the worker as anemployee. Reasonable basis may existif the cooperative’s treatment ofworkers as independent contractors wasin ‘‘reasonable reliance’’ on a pastexamination of the cooperative inwhich there was no assessment attribu-table to the treatment for employmenttax purposes of individuals holding

positions substantially similar to theposition held by the worker in question.The cooperative may be entitled to relyon a prior examination whether or notit was an employment tax examination.See Rev. Proc. 85–18, 1985–1 C.B.518.

(3) Meal Allowances. See ISP Coor-dinated Issue: Meal Allowances (1994).

(4) Fringe Benefits.(a) Overview. A fringe benefit

is any property or service (or cash,under certain circumstances) that anemployee receives from the coopera-tive in lieu of or in addition toregular taxable wages. If a benefit isnot specifically excluded from grossincome by the Code (e.g., IRC 79,105, 106, 107, 117(d), 119, 127,129, and 132), its value must betreated as compensation and reportedas wages in Box 1 of the employee’sForm W–2. See IRM 7(10)(16)9.81.In 1989, the Service issued finalregulations under IRC 61 and 132,setting forth specific rules for valu-ing fringe benefits and for determin-ing the applicability of the exclu-sions in IRC 132 (no-additional-costservices, qualified employee dis-counts, working condition fringesand de minimis fringes). Fringebenefits can take many forms. Seethe User’s Guide to ‘‘More Basics:The Basics of Fringe Benefits’’,which was produced by the Officeof Chief Counsel, IRS Technical TV(January 1994).

(b) Examination of Fringe Ben-efits. Perform the followingprocedures:

(1) Review a sampling or listof Forms 1099 and W–2 issued bythe cooperative. Compare them witha sample of expense entries todetermine if the cooperative is con-sistently and properly issuing Forms1099 and W–2;

(2) If the cooperative has aplan whereby employees receivereduced rates for insurance or otherservices provided by suppliers to thecooperative, determine the extent ofthe cooperative’s involvement andwhether the reduced rates constitutea fringe benefit; and

(3) Determine whether the co-operative provides free or discountedparking to its employees. Under IRC132(f), the fair market value of‘‘qualified parking’’ in excess of thestatutory exclusion is includable in


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an employee’s gross income andmust be reported as wages in Box 1of Form W–2. See Notice 94–3,1994–1 C.B. 327, for more infor-mation.

(12)22.9 Excise Taxes

An excise tax is imposed on sales ofcoal taken from mines located in theUnited States and on certain fuels.These are issues which may arise in theexamination of G&Ts. IRC 4121, 4081.The excise taxes on certain largevehicles and the highway use tax mayarise in examinations of all coopera-tives. IRC 4051, 4481. See generally,Utilities Handbook § 448; IRM 4700.

(12)22(10) State and FederalRegulation of Electric Cooperatives

(1) State Public Utility Commissions(PUCs). In approximately 21 states, thestate public utility commission (PUC)regulates rates charged by electriccooperatives. These and other statesmay also restrict or regulate the non-utility investments of electric coopera-tives (e.g., no loans from a cooperativeto any affiliated companies withoutPUC approval). To ascertain if thecooperative is regulated by a PUC, seeUtility Regulatory Policy in the UnitedStates and Canada, NARUC (1992). Inthese states, the cooperative’s filingswith the PUC and the PUC’s ordersmay reveal information useful to theexaminer (e.g., changes in billing pro-cedures).

(2) Federal Energy Regulatory Com-mission (FERC). FERC regulates therates, terms and condition of wholesaleelectric power sales and transmissionservices. Certain G&Ts file annualreports with FERC. (FERC Form 1).These reports are public information.

(3) Rural Electrification Administra-tion (REA).

(a) Virtually all electric cooper-atives finance their utility plantthrough loans from or guaranteed byREA. (Note: Although REA’s namehas been changed to Rural UtilitiesService (RUS), these guidelines re-fer to ‘‘REA.’’ Pub. L. No. 103–354§ 232 (1994)). G&Ts generally bor-row from the Federal FinancingBank (FFB) or from private lenderswith REA guaranteeing the loans.

(b) Loan Terms. G&Ts’ interestrate equals Treasury’s cost of funds

plus 1⁄8 percent. G&Ts also obtainfinancing through pollution controlbonds. Distribution cooperativesgenerally obtain insured loans fromREA. REA finances 70-90 percentof the loan amount, with otherlenders (e.g., National Utilities Co-operative Finance Corporation(CFC)) financing the balance. Theinterest rate is a blended rate of 5percent on the REA portion andmarket rate on the balance. Theinterest rate on other loans varies. 7C.F.R. § 1714.2 et seq.

(c) Loan Origination and Docu-mentation. Cooperatives submit loanproposals requesting REA financingfor constructing new utility plant orreplacing existing plant. REA lendsonly for construction of capitalassets, not for maintenance or re-pairs. As a result, cooperatives gen-erally have an economic incentive toclassify disbursements as capitalexpenditures (as opposed to currentexpenses). Upon approval of theloan proposal, the cooperative ex-ecutes a promissory note in favor ofREA and executes the REA Mort-gage. The cooperative deposits REAloan proceeds in a special trusteeaccount and expends its own fundsto construct the new plant. AfterREA reviews and approves the co-operative’s documentation of con-struction expenditures, the co-operative may then withdraw theapproved amount from the trusteeaccount and deposit the funds in itsown cash accounts.

(d) REA Oversight. To ensurerepayment of loans, REA requirescooperatives to follow its UniformSystem of Accounts and audit proce-dures (see below). REA holds a firstmortgage on all the cooperative’sproperty. The REA Mortgage re-quires the cooperative to submitdetailed annual financial reports toREA including certified audits per-formed by independent certifiedpublic accountants (CPAs) and otherreports. All reports are public infor-mation. If cooperatives do not com-ply with these (and other) require-ments, REA may declare the loan indefault, suspend all future lending tothe cooperative and exercise otherremedies reserved under the REAMortgage. To insure that loan fundsare used properly, REA field ac-countants review cooperatives’ fi-nancial records, reports and financial

statements prepared by cooperatives’CPAs at least once every threeyears. These REA Field Reports arepublic documents.

(12)22(11) REA’s Uniform System ofAccounts

(1) Overview. REA requires detailedfinancial information and reporting oncooperatives’ activities (e.g., corporatestructure, reorganizations and acquisi-tions, investments in affiliated com-panies, extraordinary gains and losses).Cooperatives must keep detailed booksof account using REA’s Uniform Sys-tem of Accounts (USoA), published at7 C.F.R. § 1767 (58 Fed.Reg. 59822(1993)), clarifying and modifying theprior USoA. The USoA is based onFERC’s accounting system, with somemodifications. Cooperatives must alsofollow REA Accounting Principles(Accounting Principles). 7 C.F.R.§ 1767.41. Accounting Principles man-date the entries to book particulartransactions and aid in understandingthe proper accounting treatment ofitems. REA also publishes AccountingInterpretations on the USoA. Becausemany accounts and account numbers inthe USoA from prior years remainunchanged, these examination guide-lines (citing to the 1994 USoA) cangenerally be used to examine taxableyears beginning before 1994.

(2) Recordkeeping and AccountingRequirements. Cooperatives must keepbooks of account and all supportingbooks, records, minute books, memo-randa, etc. to support all entries inbooks of account. 7 C.F.R. § 1767.15.Cooperatives must use the accrualmethod of accounting (as defined inGenerally Accepted Accounting Princi-ples (GAAP)). 7 C.F.R. § 1767.15(k).Separate accounting records must bemaintained for each power plant andfor any other utility department (e.g.,gas or water). 7 C.F.R. § 1767.15(l),(m).

(3) The USoA contains the follow-ing Accounts:

(a) Balance Sheet Accounts:100 – 199 Assets and Other

Debits200 – 299 Liabili t ies and

Other Credits300 – 399 Plant Accounts433, 436 – 439 Retained Earnings

Accounts(b) Income and Expense Ac-

counts:


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400 – 432;434 – 435

Income Accounts(Net Income)

440 – 459 R e v e n u e A c -counts

500 – 599 P r o d u c t i o n ,Transmission andDistribution Ex-penses

900 – 949 Cus tomer Ac-counts, CustomerService and Infor-mational, Salesand General andAdmin i s t r a t i veExpenses

(c) Note on Accounts. MostUSoA nonbalance sheet accounts arepaired Revenue Accounts and Ex-pense Accounts. ‘‘Income Ac-counts’’ (generally, the less signifi-cant accounts), combine revenue andexpense in a single account. Certainnonbalance sheet accounts show rev-enue and expense for transactionsbetween different departments withinthe cooperative. As noted below,timing differences and permanentdifferences abound between REAaccounting and income tax account-ing. For these and other reasons, inconducting the examination, it maybe necessary adjust the amountsshown on the financial statements.

(d) Exhibits. On closing operat-ing and nonoperating revenue andexpense accounts into patronagecapital accounts at the end of thefiscal year, see Exhibit 12(20)–1,‘‘Summary of Accounts Used inConnection with Recording Pa-tronage Capital.’’ Exhibit 12(20)–2,‘‘Applying the 85 Percent Test:Analysis of REA Uniform System ofAccounts (Selected Revenue, In-come, Expense and Balance SheetAccounts)’’ illustrates the incometax treatment of certain USoA Ac-counts.

(e) There is insufficient spacein these guidelines to explore allaspects of the USoA, GAAP, Gener-ally Accepted Government AuditingStandards (GAGAS) relevant to ex-amination of cooperatives. Reviewparticular provisions relevant to theexamination. Examiners may contactREA’s Technical Accounting andAuditing Staff with questions at(202) 720-5227. (4) Entities Covered by Financial

Statements. A cooperative’s financialstatements must comply with FAS No.94, ‘‘Consolidation of All Majority-

Owned Subsidiaries.’’ If the coopera-tive owns a majority interest in asubsidiary (as defined (12)22(21)), thecooperative must prepare consolidatedfinancial statements including the sub-sidiary, together with supplementaryschedules presenting a balance sheetand income statement for each subsidi-ary. REA Forms 7 and 12 must be pre-pared on an unconsolidated basis. Ac-counting Principle 404, ConsolidatedFinancial Statements. The REA regula-tions contain sample financial state-ments (with accountants’ notes) for anelectr ic cooperat ive. 7 C.F.R.§§ 1789.38; 1773 Appendix B, Exhibit7.

(5) REA Regulations on CPAs’ Au-dits of REA Borrowers. The CPAsmust prepare and submit the followingannual reports to REA:

(a) Auditor’s Report (on thecooperative’s financial statements,including accountants’ notes andstatements of cash flows);

(b) Report on Compliance withApplicable Laws and Regulations(as required by SAS No. 63, ‘‘Com-pliance Auditing Applicable to Gov-ernmental Entities and Other Recip-ients of Governmental FinancialAssistance’’ and GAGAS);

(c) Report on Internal Controls;and

(d) Management Letter (includ-ing disclosure of material transac-tions with related parties (e.g., of-ficers and directors) as required bySFAS No. 57, ‘‘Related Party Dis-closures’’).7 C.F.R. §§ 1773.30–1773.34. These reports and the managementletter are public documents.

(e) See 7 C.F.R. § 1773 Ap-pendix A for sample financial state-ments, auditor’s report, compliancereport and report on internal con-trols. See 7 C.F.R. § 1773, Appen-dix C for a sample managementletter.

(12)22(12) General Considerations inExaminations

(1) Coordinated Examinations. Ex-aminations of cooperatives may use thecoordinated examination procedures,where appropriate. See IRM 7(10)-(18)0. If an examination is of limitedscope, the coordinated examinationprocedures may be followed to theextent they are useful, although the

examination has not been approved as aCEP case.

(2) Assistance from Other Functions.If, in connection with the examinationof a cooperative, the case manager andthe examiner believe that it is alsonecessary to examine an entity notunder the jurisdiction of EP/EO Ex-amination (e.g., a joint venture operat-ing a power generating plant), theyshould request assistance from thefunction responsible for examining thatentity.

(3) Employment Taxes. Follow thepackage audit procedures in IRM7(10)44.5 and, as appropriate, theemployment tax procedures in IRM7(10)(16)0. For general instructions onhandling employment tax examinationsand assessments of additional tax onfringe benefits, see IRM 7(10)(16)9.81.See generally, Utilities Handbook§§ 447, 44(14).

(4) Compliance Checks. UtilitiesHandbook § 460 outlines compliancechecks on certain issues (e.g., unlawfulactivities). Consider whether perform-ing any of these procedures isappropriate.

(12)22(13) Initial Contact Items

(1) The examiner should consult thefollowing for assistance in planningand conducting the examination:

(a) State Public Utility Com-missions. If one or more PUCsregulate the cooperative, contact thePUC(s) concerning the cooperative’sfilings and PUC orders.

(b) Federal Energy RegulatoryCommission. Contact the Office ofChief Accountant at (202) 219-2600.

(c) Rural Electrification Ad-ministration. Contact the Director ofBorrower Accounting at (202)720-9450.

See Utilities Handbook § 240.

(12)22(14) Requesting theAssistance of Specialists

(1) Utilities Industry Specialist/Media/Communications Industry Spe-cialist (cable television and direct TV).The Industry Specialists can assist theexaminer with the following:

(a) identifying unique industryissues and Service position;

(b) giving insight into theeconomic conditions of the industry;


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(c) describing accounting andbusiness practices; and

(d) suggesting examination proce-dures and computer programs that mayhave potential application. Utilities Handbook § 152; IRM42(10)(14)0.

(2) VEBA (Voluntary Employees’Beneficiary Association) Industry Spe-cialist. The Industry Specialist canassist with examination of VEBAs.

(3) Computer Audit Specialist. If theservices of a computer audit specialistare necessary, obtain a description ofthe cooperative’s hardware, software(including accounting software) andformats of files and records.

(4) Engineer. All cooperative returnswith assets of $10 million or over mustbe referred for engineering action. IRM42(16)0, 7(10)25.1. This mandated re-ferral overrides IRM 7(10)25.1(4). Inexamination of exempt and nonexemptcooperatives, the engineer is a valuableresource (e.g., tax exempt bonds, con-struction techniques, machinery andbuilding design, repairs, depreciation,depletion and valuation of assets). Theengineer should be involved in theearly planning stages of the examina-tion. See generally, Utilities Handbook§ 154.

(5) Excise Tax Specialist. Examina-tions of cooperatives (particularlyG&Ts) often raise excise tax issueswhich may require the use of an ExciseTax Specialist. Utilities Handbook§§ 158, 448; IRM 4700.

(6) Employee Plans Specialist. SeeIRM 45(10)0 for employee plans ex-aminations.

(7) Tax Exempt Bonds. [Reserved].See 7(10)7(11).4.

(12)22(15) Initial Document Requests

(1) Obtain and review the documentslisted below to gain a basic understand-ing of the cooperative’s activities,c a p i t a l s t r u c t u r e a n d r e l a t e dorganizations:

(a) Documents to be Requestedfrom All Electric Cooperatives:

(1) Articles of Incorporation(and all amendments);

(2) bylaws (and all amend-ments);

(3) a list of all the names andaddresses of subsidiaries and associ-ated companies (as defined in(12)22(21));

(4) names and addresses of alldirectors, trustees and officers of thecooperative and of all subsidiariesand associated companies;

(5) minutes of meetings ofboard of directors and of all boardcommittees;

(6) annual reports, financialstatements (including statement ofcash flows and accountants’ notes)and tax returns for all subsidiariesand associated companies (as de-fined in (12)22(21));

(7) REA Forms 7 Financial andStatistical Report, Operating Report— Financial, Form 12;

(8) REA Field Reports on thecooperative (from REA field ac-countants or engineers);

(9) any debt restructuring planentered into between the cooperativeand REA;

(10) Methods and ProceduresManual (procedures to recordtransactions);

(11) a chart of accounts cor-relating general ledger accounts toUSoA Accounts;

(12) the cooperative’s 85 per-cent test worksheets;

(13) the cooperative’s policybook on patronage capital and pa-tronage dividends;

(14) an analysis of income andexpense;

(15) an analysis of deferredcredits and deferred debits withsupporting documentation (this anal-ysis is required in 7 C.F.R.§ 1773.34(h)).

(16) all reports filed with REA(including but not limited to: REAForms 7, 12; audited financial state-ments (including statement of cashflows and accountants’ notes)); audi-tor’s report, compliance report, re-port on internal controls and man-agement letter;

(17) all reports and other fil-ings with PUCs and PUC orders (ifapplicable);

(18) all agreements between thecooperative and any subsidiary orassociated company;

(19) qualified employee retire-ment plans: the official plan andtrust documents, any determinationletters issued to qualified plans,records of employer and employeecontributions, account balances oraccrued benefits and employeecompensation;

(20) nonqualified deferred com-pensation plans: employee benefitplans and related documents (e.g.,trusts, insurance contracts, privateletter rulings), records of employerand employee contributions and ac-count balances or accrued benefits;

(21) all other employee benefitplans: including accident and healthplans, cafeteria plans and VEBAs,related documents (including anytrust instruments); See Exempt Or-ganizations Handbook, ‘‘VoluntaryEmployees’ Benefit Associations,’’ch. 900;

(22) all arrangements for com-pensation of directors (includingqualified and nonqualified deferredcompensation plans). See also Util-ities Handbook § 132; and

(23) a schedule of all fundedreserves (including any trusts orVEBAs for payment of welfarebenefits or postretirement benefits).(2) Documents to be Requested from

G&T Cooperatives:(a) a list of the names and

addresses of all members;(b) all reports filed with FERC

(including complete FERC Forms 1)(If the G&T jointly operates anygenerating station with another co-operative, public utility or govern-ment agency, also request completeFERC reports filed by the otherentity or entities);

(c) all power delivery agree-ments (or power supply agreements)in effect during the years underexamination;

(d) all power exchange orpower pooling agreements;

(e) all power rate schedules ineffect during the years underexamination;

(f) representative sample in-voices for excess capacity sales andfor off-peak sales;

(g) for any jointly operatedgenerating station (as definedabove): all operating agreements,station agreements, load manage-ment agreement and all other agree-ments concerning a jointly operatedstation, income and expense anal-ysis. In some circumstances, theexaminer may also need to requestall documents (including agreementsand correspondence) concerning ac-quisition, construction and financingof such stations;

(h) Securities and ExchangeCommission Forms 10-K filed bythe cooperative (if applicable);


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(i) the method used to computepatronage dividends;

(j) workpapers used to supportclaimed patronage dividends;

(k) notification letters to allmembers on allocations of patronagedividends; and

(l) tax exempt bonds. ContactHeadquarters; Chief, Exempt Orga-nizations Technical Branch 4. (3) Documents to be Requested from

Distribution Cooperatives:Newsletters and other communica-

tions to members.

(12)22(16) Examination of FinancialStatements and Reports to RegulatoryAgencies

(1) Methods of Accounting. Asnoted, cooperatives must use the ac-crual method (as defined in GAAP,with modifications) for REA reporting.7 C.F.R. § 1767.15(k). Although thebasic principles are the same, theaccrual methods for REA accountingand income tax accounting diverge.When this occurs, income tax account-ing rules control. Thor Power Tool Co.v. Commissioner, 439 U.S. 522 (1979);Treas. Reg. § 1.446(e)–1; Rev. Rul.90–38, 1990–1 C.B. 57; Rev. Proc. 92–20, 1992–1 C.B. 685. There are manydifferences between REA accountingand income tax accounting affectingthe timing of income and expense, gainand loss and raising issues under IRC61, 118, 451, 1001, 1231, IRC 446 and481 for changes in methods of account-ing. This may affect the 85 percent testin IRC 501(c)(12) and also IRC 461and 512. Utilities Handbook §§ 320–322, 430–438.

(2) IRC 451(f). Accrual basiselectric utilities must recognize incomefrom sale of electricity to customersnot later than the taxable year in whichthe electricity is provided. Utilities maynot accrue income relying on whenthey read customers’ meters or whenthey bill customers. IRC 451(f), effec-tive for taxable years beginning afterDecember 31, 1986. On IRC 481(a)adjustments resulting from IRC 451(f),see Pub. L. Nos. 99–514 § 821(b)(2),(3) and 100–647 § 1008(h). S. Rep.No. 313, 99th Cong., 2d Sess., 1986–3C.B. (Vol. 3) 120–121; H. Conf. Rep.No. 841, 99th Cong., 2d Sess., 1986–3C.B. (Vol. 4) II–322–324. For priorlaw (cycle billing vs. budget billing),see Rev. Rul. 72–114, 1972–1 C.B.

124; Utilities Handbook § 432. Notethat Account 173, Accrued UtilityRevenue, unlike IRC 451(f), allowscooperatives to accrue (or not accrue)estimated revenue for electricity soldbut not billed as of the end of thetaxable year. As a result, adjustmentsto the cooperative’s income may benecessary.

(3) Timing Differences BetweenREA Accounting and Income TaxAccounting.

(a) Distribution cooperativesgenerally use cycle billing or budgetbilling. Cycle billing is based onmonthly meter reading and billingcycle. Budget billing is based on anannual projected budget; customersare billed a level amount monthlywith an annual adjustment reflectingactual electricity consumption. Ac-count 173, Accrued Utility Revenue.On billing methods, see Rev. Rul.72–114, 1972–1 C.B. 124; UtilitiesHandbook § 432. Ascertain whetherthe cooperative accrues income con-sistently and in accord with IRC451(f).

(b) Accounts 200.1, Member-ships Issued; 252, Customer Ad-vances for Construction or 208,Donated Capital may raise issuesunder the 85 percent test and IRC118, 446 or 481. See Rev. Rul. 75–557, 1975–2 C.B. 33, clarified inRev. Rul. 76–61, 1976–1 C.B. 12;Utilities Handbook §§ 434, 435.

(c) Amounts in Account 235,Customer Deposits typically repre-sent a security deposit for electricity.Commissioner v. Indianapolis Power& Light Co., 493 U.S. 203 (1990);Rev. Proc. 91–31, 1991–1 C.B. 566;Rev. Rul. 72–519, 1972–2 C.B. 32;Utilities Handbook § 435.

(d) The following Accountsmay also affect the timing of in-come, expense, gain or loss: Ac-count 229, Accumulated Provisionfor Rate Refunds; Account 449.1,Provision for Rate Refunds. Seealso, discussion of transfer of utilityplant and other property.

(12)22(17) Analysis of FinancialStatements and Accountants’ Notes

(1) Information on the Cooperativeand its Activities. Initial inquiries thatmay affect planning the examinationinclude the following:

(a) Margin Stabilization Plans.If the cooperative is operating under

a margin stabilization plan, it will benecessary to reconstruct the coopera-tive’s actual income and expense.

(1) Cooperatives must maintaincertain financial ratios (e.g., TIER(defined in (12)22(21)) of 1.00 forG&T cooperatives and 1.50 fordistribution cooperatives), or theirREA loans are in default. To moreeasily meet the required ratios, somecooperatives seek to average theirmargins in good and bad yearsthrough ‘‘margin stabilization.’’ Thecooperative selects a target margin(usually REA’s required TIER of1.00 or 1.50) by which income is toexceed expenses. The income shownin financial statements and in thefinancial reports to REA is the targetmargin, not the actual income andexpense accrued in that year. In agood year, the cooperative books theexcess of income over expense as adeferred credit; in a bad year, theoperating loss is booked as a de-ferred charge. GAAP allows this, ifcertain conditions are met. SFASNo. 71, Accounting for the Effectsof Certain Types of Regulation; No.90, Regulated Enterprises—Ac-counting for Abandonments and Dis-allowances of Plant Costs; or No.92, Regulated Enterprises—Ac-counting for Phase-in Plans. REAalso allows margin stabilizationplans if cooperatives meet certainrequirements and disclose the planin their financial statements. See 7C.F.R. § 1718 (proposed regula-tions). The deferred charges anddeferred credits should appear inAccounts 181–188, 251–253, 255and 256.

(2) To check for margin stabili-zation plans, review REA corre-spondence and accountants’ notes tofinancial statements. (Cooperativesmay implement SFAS Nos. 71, 90or 92 (the basis for margin stabiliza-tion plans) only with REA’s priorwr i t t en app rova l . 7 C .F .R .§ 1767.13(d).) REA can verifywhether it approved a cooperative’smargin stabilization plan. See alsoREA Publication 201–1, TIER, line88 (for distribution cooperatives). IfTIER on line 88 is exactly 1.50, thismay also indicate a margin stabiliza-tion plan.

(3) These plans raise issueswith respect to the 85 percent testand Rev. Rul. 72–36. See TechnicalInstruction Program for FY 1994,


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‘‘Current Issues Affecting CertainCooperatives and Like OrganizationsDescribed Under IRC 501(c)(12)’’,38, 47–49.

(b) Account 923, Outside Serv-ices Employed. Entries in this ac-count may reveal payments to ac-countants, attorneys, appraisers,engineers and other consultants forspecial reports on financing, con-struction or rates. (2) Cooperative Principles, 85 Per-

cent Test and Unrelated Business Tax-able Income.

(a) Operating Revenue fromSale of Electricity. A cooperative’selectricity customers may vary: resi-dential, commercial, industrial, agri-cultural, governmental consumers orother public utilities. Review Ac-counts 440–456 for the 85 percenttest and possible unrelated trade orbusiness. To classify sales to mem-bers and nonmembers, compare in-formation on members to the per-sons the cooperative supplieselectricity. For example, on Ac-counts 444, Public Street and High-way Lighting and 445, Other Salesto Public Authorities, ascertainwhether the local, state or federalgovernment agency is a member ofthe cooperative. Ascertain if com-mercial customers are members ornonmembers. Review Accounts 447,Sales for Resale (and all subac-counts) and 442, Commercial andIndustrial Sales for member/nonmember income. (Late paymentcharges from government customersbooked in Account 450, ForfeitedDiscounts, are not exempt underIRC 103. Kurtz Bros. v. Commis-sioner, 42 B.T.A. 561 (1940) andother authorities cited in UtilitiesHandbook § 437.) The total amountof the electric operating revenueaccounts is entered in Account 400,Operating Revenue.

(1) Review Accounts 142, Cus-tomer Accounts Receivable; 142.1Customer Accounts Receivable—Electric; 142.2 Customer AccountsReceivable—Other; 144.1, Accumu-lated Provision for UncollectibleCustomer Accounts — Credit andAccount 904, Uncollectible Ac-counts. REA Accounting Course at214–215. Taxpayers must use thespecific charge-off method in ac-counting for losses on bad debts.Tax Reform Act of 1986, Pub. L.No. 99–514 § 805(a), repealing IRC

166(c) (the reserve method), effec-tive for taxable years beginning afterDecember 31, 1986. Utilities are notbarred from charging-off uncollect-ible accounts merely because theymust continue to serve customers inarrears on their accounts. H.R. Conf.Rep. No. 841, 99th Cong., 2d Sess.,II–314, 1986–3 C.B. (Vol. 4) 314–316. For the change in method ofaccounting from reserve to specificcharge-off and IRC 481(a) adjust-ment, see Pub. L. No. 99–514§ 805(d)(2). Analyze customer ac-counts for member/nonmemberincome.

(2) Account 555, PurchasedPower, shows the cost of electricitypurchased for resale and all netset t lements for exchange ofelectricity (including economypower, off-peak power for on-peakpower and spinning reserve capac-ity). The cooperative must maintainrecords showing, by months, thedemands, demand charges, kilowatt-hours and prices under each pur-chase contract and the charges andcredits under each exchange orpower pooling contract.

(b) Income from Interest andDividends. Review the followingAccounts:

(1) Cash Accounts. Coopera-tives must invest cash in income-producing accounts and should giveprimary consideration to safety andliquidity. 7 C.F.R. §§ 1715, 1789;REA Mortgage; REA Bulletin 1–7,General Funds (12/6/77). Review thecash accounts, trace earnings to theappropriate Revenue Accounts orIncome Accounts, ascertain whetherearnings are member or nonmemberand trace to Form 990. See Ac-counts 131.1, Cash—General;Cash—Construction Fund—Trustee;131.3 Cash—Installation Loan andCollection Fund (distribution cooper-atives’ loans to consumers for in-stallation of appliances). For REA’srules on accounting for cash, seeREA Accounting Course at 1–25.

(2) Other Investment Funds.Review Accounts 124, Other Invest-ments; 125, Sinking Funds (if appli-cable); 126 Depreciation Fund; 128,Other Special Funds; 134, OtherSpecial Deposits; 136 TemporaryCash Investments Trace investmentincome attributable to these Ac-counts to appropriate income Ac-counts and Form 990.

(3) CFC. Many cooperativesalso borrow from the CFC and pay amembership fee to join CFC. Ac-count 123.23 Other Investments inAssociated Organizations. As part ofthe financing, they execute a sub-scription agreement with CFC andagree to purchase interest-bearingcapital term certificates. These trans-actions are booked in Accounts123.21, Subscriptions to CapitalTerm Certificates—CFC; 224.11,Other Long-Term Debt Subscrip-tions; 171, Interest and DividendsReceivable; 419, Interest and Divi-dend Income.

(4) Interest and Dividend In-come. Analyze Accounts 171, Inter-est and Dividends Receivable and419, Interest and Dividend Income.

(5) Interest Income from‘‘Cushion of Credit Accounts.’’ As-certain whether interest income from‘‘cushion of credit accounts’’ isreported. Cooperatives with REAloans may deposit amounts incushion of credit accounts at theU.S. Department of the Treasury.These accounts can only be used topay principal and interest on REAloans. They earn interest at 5 per-cent (a fixed rate, not based onTreasury’s changing cost of funds).When interest rates from other in-vestments fall below 5 percent,cooperatives often increase depositsto their cushion of credit accounts.Transactions in cushion of creditaccounts should be booked as fol-lows: Deposits are debited to Ac-count 222.6, Advance PaymentsUnapplied—LTD Debt and creditedto Account 131, Cash. Interest in-come earned is debited to Account419 and credited to Account 222.4.Cushion of credit payments (andinterest) applied to REA loans aredebited to Account 224.3, Long-Term Debt—REA ConstructionNotes and credited to Account224.6. The interest earned oncushion of credit accounts should berecorded as interest income andnever as a reduction of interestexpense. See REA Bulletin 20–9;320–12 Loan Payments and State-ments; REA Bulletin 181–1. If nec-essary, the examiner can request atranscript of REA’s loan receivableaccounts for the cooperative andanalyze deposits and accrued interestincome applied to installments ofprincipal and interest on REA loans.


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(6) Notes Receivable. ReviewAccount 141 for amount, timing andsource of interest income.

(7) Premium Income. G&Tsusing pollution control bond financ-ing or cooperatives borrowing fromFFB may have premium income.Cooperatives must maintain separateaccounts for premium, discount andexpense for each class and series ofl o n g - t e r m d e b t . 7 C . F . R .§ 1767.15(q). See Accounts 225,Unamortized Premium on Long-termDebt (amortized monthly under Ac-count 429, (Amortization of Pre-mium on Debt—Credit); AccountingPrinciple 624, Pollution ControlBonds. See Treas. Reg. § 1.61–12.

(c) Forgiveness of IndebtednessIncome from Reacquisition of Long-Term Debt. When cooperatives reac-quire or redeem their debt, under theUSoA, the difference between theamount paid upon reacquisition andthe face value (plus any unamortizedpremium less any related unamor-tized debt expense and reacquisitionexpense) less any unamortized dis-count, related debt expense andreacquisition expense attributable tothe redeemed debt are booked inAccount 189, Unamortized Loss onReacquired Debt or Account 257,Unamortized Gains on ReacquiredDebt. These amounts are amortizedmonthly over the remaining life ofthe old original debt (Account 428.1,Amortization of Loss on ReacquiredDebt; Account 429.1, Amortizationof Gain on Reacquired Debt—Credit). Accounting Principle 625,Prepayment of Debt. As statedabove, for income tax purposes,discharge of indebtedness income is(nonmember) gross income in thetaxable year realized unless TAMRA§ 6203 applies. IRC 61(a)(12), 451,501(c)(12)(C)(ii). Review Accounts189, 257, 428.1, 429.1.

(d) Rental Income. AnalyzeAccount 172, Rents Receivable and418, Nonoperating Rental Income.Review Accounts 104, Electric PlantLeased to Others; 412, Revenuesfrom Electric Plant Leased to Oth-ers; 413, Expenses of Electric PlantLeased to Others) for source andamount of rental income for the 85percent test (including qualified polerentals, if any) and unrelated tradeor business taxable income. Quali-fied pole rentals are recorded inAccount 454, Rent from Electric

Property. See Utilities Handbook§ 44(12) on joint use of poles.

(e) Gains and Losses. TheUSoA rules on plant accounting andrealization differ from the incometax rules on adjusted basis andrealization:

(1) Accounting for UtilityPlant. Utility plant is the largestasset account on the balance sheet.REA plant accounting differs radi-cally from income tax accounting inmany ways (e.g., acquisitions, retire-ments and depreciation reserves).Utilities Handbook §§ 230, 426.

(2) Work in progress appears inAccount 107, Construction Work inProgress—Elec t r ic . 7 C.F .R.§ 1767.16(a)–(d), (f)–(h) (detaileddiscussion of multiple expenditurescovered). On booking additions andretirement of plant, see 7 C.F.R.§ 1767.16(j); Account 102, ElectricPlant Purchased or Sold; Accounts301—399; Account 101, ElectricPlant in Service. Some REA capital-ization, basis and depreciation rulesdiverge from income tax accounting(e.g., Account 419.1, Allowance forFunds Used During Construction(imputed interest income for rate-making purposes only), booked toAccount 101, must be eliminated tocompute adjusted basis in utilityplant). For equipment, see 7 C.F.R.§ 1767.16(i). On basis and deprecia-tion, see Utilities Handbook §§ 426,445. The cooperative’s CPA is re-quired to test utility plant anddepreciation accounts for additions,replacements, retirements and con-struction work in process. 7 C.F.R.§ 1773.39. If appropriate, requestthe CPAs’ workpapers.

(3) Transfer of Electric Plantand Other Property. When electricplant is transferred, the book cost ofthe transferred plant is debited toAccount 102, Electric Plant Pur-chased or Sold (a suspense account)and credited to the appropriate plantaccount(s) and the accumulated de-preciation amount (Accounts 108,115, 119) (and any amount inAccount 252, Customer Advancesfor Construction) are charged tothose Accounts. This net amount,minus the consideration received forthe transferred plant (less expensesof sale) is then credited to Account102 and, if a ‘‘significant’’ amount,closed into Accounts 256, DeferredGains from Disposition of Utility

Plant or 187, Deferred Losses fromSale of Utility Plant and amortizedover five years (generally) in, re-spectively, Accounts 411.6, Gainsfrom Disposition of Utility Plant and411.7, Losses from Disposition ofUtility Plant. Nonsignificant gainsand losses are closed into Accounts421.1, Gain on Disposition of Prop-erty or Account 421.2, Loss onDisposition of Property. 7 C.F.R.§ 1767.16(e); REA AccountingCourse at 296–297.

(4) Income Tax Accounting.Gains and losses from disposition orretirement of utility plant and otherassets is included in gross income inthe taxable year realized and recog-nized. IRC 1001, 1231, 451; Treas.Reg. § 1.167(a)–11(d) for pre-ACRSproperty. Review and reconcile ac-tivity in these Accounts with incometax accounting rules. Utilities Hand-book §§ 433, 445.

(5) Gains and Losses on Trans-fers of Other Property. For otherproperty (e.g., land or land rights),see Accounts 421.1, Gain on Dis-position of Property or Account421.2, Loss on Disposition of Prop-erty. 7 C.F.R. § 1767(e)(5). Ac-counting Principles 128, Sale ofProperty; 129, Gain or Loss on theSale of an Office Building.

(f) Transfer of Clean Air ActAllowances.

(1) The Clean Air Act Amend-ments of 1990 (the Act). The Actestablished a system to issue emis-sion allowances for airborne pollu-tants, implemented by the Environ-mental Protection Agency (EPA).Electric utilities (including G&Ts)are issued emission allowances au-thorizing the emission of a specifiedamount of airborne pollutants by theutility during a specified calendaryear or later period. Starting in1993, unused allowances may besold, traded or held in inventory foruse against emissions in futureyears.

(2) Accounting for Allowances.Account 158.1, Allowance Inven-tory, includes the cost of allowancesowned by the G&T and not withheldby the Environmental ProtectionAgency. (See Account 158.2, Al-lowances Withheld, for treatment ofwithheld allowances.) Concurrentwith the cooperative’s monthlyemission of sulfur dioxide, Account158.1 is credited and Account 509,


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Allowances, is debited. Separatesubdivisions of the Account aremaintained to separately account forallowances usable in the current yearand those used in subsequent years.The records should be sufficientlydetail to identify each allowance, itsorigin, and the acquisition cost, ifany. The cost of allowances ownedby the G&T, but withheld by theEPA, are included in Account 158.2.Upon release of the allowance foruse by the G&T, inventory cost istransferred to Account 158.1.

(3) Gains and Losses. G&Tsmay realize gains and losses fromthe disposition of allowances oroptions on allowances. Accountingtreatment of dispositions of al-lowances under the USoA variesdepending on whether the allowanceis held for speculative purposes:

(a) Nonspeculative Gains andLosses. Gains on dispositions ofallowances not held for speculativepurposes are credited to either: (1)Account 254, Other Regulatory Lia-bilities, when there is uncertainty asto the existence of a regulatoryliability or definite regulatory lia-bility; or (2) Account 411.8, Gainsfrom Disposition of Allowances.Losses that qualify as regulatoryassets are charged to Account 182.3,Other Regulatory Assets. All otherlosses are charged to Account 411.9,Losses f rom Dispos i t ion ofAllowances.

(b) Speculative Gains andLosses. Gains on disposition ofallowances held for speculative pur-poses appear in Account 421, Mis-cellaneous Nonoperating Income.Losses are charged to Account426.5, Other Deductions. Costs andbenefits of exchange-traded al-lowance futures contracts used toprotect a utility from the risk ofunfavorable price changes (hedgingtransactions) are deferred in Account186, Miscellaneous Deferred Debits,or Account 253, Other DeferredCredits. The deferred amounts areincluded in Account 158.1 in themonth in which the related al-lowances are acquired, sold or other-wise disposed of. Where the costs orbenefits of hedging transactions arenot identifiable with specific al-lowances, amounts are included inAccount 158.1 when the contractcloses.

(4) Income Tax Accounting.Examine Account 158.1 to ascertain

gains and losses realized from dis-position of air emission allowances.Rev. Proc. 92–1, 1992–2 C.B. 503,discusses the federal income taxconsequences of the air emissionallowance program. Contact the Of-fice of the Assistant Chief Counsel(Income Tax and Accounting) forfurther assistance in determining theincome tax consequences of transac-tions involving the sale or exchangeof allowances.

(g) Associated (Affil iated)Companies and Subsidiaries. TheseAccounts may raise issues concern-ing the 85 percent test, operation asa cooperative, unrelated trade orbusiness and employment taxes.

(1) A cooperative’s investmentin an associated company embracescorporations, joint ventures andfunded deferred compensation plans.Cooperatives must keep accountsand records to accurately reporttransactions with subsidiaries. 7C.F.R. § 1767.15(n). AccountingPrinciple 623, Satellite or CableTelevision Services. The results ofsubsidiaries’ operations appear onthe cooperative’s balance sheet inAccounts 123.11, Investment in Sub-sidiary Companies; 418.1, Equity inEarnings of Subsidiary Companiesand 216.1, Unappropriated Un-distributed Subsidiary. AccountingPrinciple 623, Satellite or CableTelevision Services; FAS No. 94.

(2) Review Accounts 123, In-vestment in Associated Companies;123.23, Other Investments in Asso-ciated Organizations; 136, Tempo-rary Cash Investments; 145, NotesReceivable from Associated Com-panies; 233, Notes Payable to Asso-ciated Companies; 146 AccountsReceivable from Associated Com-panies; Accounts Payable to Associ-ated Companies; 223, Advancesfrom Associated Companies. Theseaccounts show the book cost ofinvestments in securities issued (orassumed by) each associated com-pany and joint venture, the coopera-tive’s investment advancements andany accrued interest on any debt.Amortization of discount or pre-mium on interest-bearing invest-ments is booked in Account 419,Interest and Dividend Income.Write-offs appear in Account 426.5,Other Deductions.

(h) Economic DevelopmentLoan Fund. Cooperatives are en-

couraged to participate in REA’sRural Economic Development Loanand Grant Program. REA providesinterest-free loans or grants to coop-eratives to promote rural economicdevelopment and job-creation proj-ects, through revolving loan fundsand pass-through grants. See 7C.F.R. § 1703, Subpart B (includingfinal regulations published in 59Fed. Reg. 11702 (Mar. 14, 1994));Accounts 131.12, Cash-General-Economic Development Loan Funds;224.16, Long-Term Debt—REAEconomic Development Notes Ex-ecuted; 224.17, REA NotesExecuted—Economic Develop-ment—Debit; Accounting Principle626, Rural Economic DevelopmentLoan and Grant Program. Analyzeactivity in these accounts in connec-tion with the 85 percent test.

(i) Miscellaneous. Entries inthe following accounts may revealmember, nonmember or unrelatedtrade or business income:

(1) Accounts 105, ElectricPlant Held for Future Use; 121,Nonutility Property or 389–399,General Plant (particularly Account397, Communication Equipment)may suggest nonmember incomeand/or unrelated business (e.g., non-cooperative cable TV service dealingwith nonmembers) See also, Ac-counting Principle 623, Satellite orCable Television Services.

(2) Sale of Nuclear Materials(as opposed to reuse): Account 157,Nuclear Materials Held for Sale isdebited for salvage value; Account120.5, Accumulated Provision forAmortization of Nuclear Fuel As-semblies is credited. Any differencebetween salvage value and theamount realized is credited/debitedto Account 518, Nuclear Fuel Ex-pense.

(3) Make Ready Charges Re-ceived from Cable Television Com-panies. The cooperative and a cabletelevision company (an affiliate oran unrelated firm) may agree toplace lines, attachments or apparatuson the cooperative’s poles for trans-mission of TV signals. See REABulletin, Joint Use Agreement WithCATV Companies. To make readythe poles, the cooperative incurslabor and materials costs. Makeready charges may be booked inseveral ways: as a reimbursement(Accounting Principle 135, Account-


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ing for Removal or Relocation ofElectric Facilities Resulting from theAction of Others (Reimbursement));as contract work (Account 415,Revenues from Merchandising, Job-bing and Contract Work) or asreductions in expenses (Account142.2, Customer Accounts Re-ceivable—Other (when the invoiceis paid, cash is credited and mainte-nance and operation expenses aredebited)).

(4) Sales of Timber, Sand andGravel. See 7 C.F.R. § 1767.16(g)-(3). Account 421, MiscellaneousNonoperating Income. (3) Patronage Capital. Cooperatives

must keep detailed records on namesand addresses of members and apatronage capital ledger. Accounts 200;201.1. See GAO Reports RCED 93–164; GGD–83–7.

(a) The Patronage Capital Cy-cle. As discussed above, coopera-tives must operate on a cooperative(nonprofit) basis. The excess ofoperating revenues over operatingexpenses for each year is consideredto be capital furnished by members(patrons). Such capital or margins isto be assigned to members on thebasis of each year’s margins. SeeExhibit 12(20)–1. This is done asfollows:

(1) At the end of each year,revenue and expense from sale ofelectricity (income and expense net-ted from Accounts 400–408; 412–414; 423–428; 431) are closed intoAccount 219.1, Operating Margins.Note: Accounts 219.1 and 219.2cannot be used (unless adjusted) tocheck the 85 percent test becausethey reflect net income from opera-tions and because the income ac-counts do not uniformly parallelmember/nonmember classificationsin IRC 501(c)(12).

(2) The balance in Account219.1 is then transferred to Account201.2, Patronage Capital Assignable.(If the amount in Account 219.1 is adeficit, the amount is not transferredto Account 201.2.) Patronage capitalis assigned to individual memberson the basis of patronage, pursuantto the cooperative’s bylaws.

(3) After the margins are al-located to members, this amount istransferred from Account 201.2 toAccount 201.1, Patronage CapitalCredits.

(4) Nonoperating margins fromother activities (Accounts 415–417;417.1, 418–419; 419; 421, 421.1,421.2, 422, 434–435) are closed intoAccount 219.2, Nonoperating Mar-gins. If the cooperative’s bylawspermit, nonoperating margins maybe assigned to members. Accounts219.1, 219.2, 219.3, Other Margins;219.4, Other Margins and Equities—Prior Periods which are assignableto patrons (members) are transferredto Account 201.2 and 201.2 (asabove).

(5) When the board of directorsauthorizes the return of capitalcredits to patrons, the amount au-thorized is transferred to Account238.1, Patronage Capital Payable.See Accounting Principles 501, Pa-tronage Capital Assignments; 502Patronage Capital Retirements; 503Operating and Nonoperating Mar-gins; 504, Patronage Capital fromG&T Cooperatives, 505, PatronageCapital Furnished by Other Coopera-tive Service Organizations.

(6) Forfeited membership feesappear in Account 208, DonatedCapital. See Accounting Principle506, Forfeited Membership Fees.Ascertain whether forfeitures aretreated consistently with Rev. Rul.72-36, Q&A 4.

(b) The cooperative’s CPAsmust analyze patronage capital ac-counts and a sample of membershiptransactions. 7 C.F.R. § 1773.43(b),(c).

(c) Electric cooperatives are notrequired to file Forms 1099 to reportpayments of patronage dividends.Treas. Reg. § 301.6044–2(b)(2)(iii).

(d) Review the patronage capi-tal credits allocated to a distributionand transmission cooperative byG&T Cooperatives. Account 123.1,Patronage Capital from AssociatedCooperatives.(4) Unrelated Business Taxable In-

come. Entries in the following Ac-counts may suggest unrelated trade orbusiness:

(a) Accounts 415, Revenuesfrom Merchandising, Jobbing andContract Work; 416, Costs andExpenses of Merchandising, Jobbingand Contract Work; 417 Revenuesfrom Nonutility Operations (e.g.,cable TV or furnishing managementor engineering services to others);417.1, Expenses of Nonutility Oper-

ations; 418, Nonoperating RentalIncome (net income from real prop-erty, equipment, intangibles (i.e.,from Nonutility Property in Account121)); 421, Miscellaneous Non-operating Income (net gain fromdisposition of investments (7 C.F.R.§ 1767.15(q)); net income from tim-ber sales (7 C.F.R. § 1767.16(g)(3));net profit on certain contracts); 434Extraordinary Income; 435, Extraor-dinary Deductions; 451, Mis-cellaneous Service Revenues. Ac-counting Principle 623, Satellite orCable Television Services.

(b) Allocation of Expenses. Co-operatives must keep accurate rec-ords of payroll distribution by func-tion. Because REA finances onlycapital items (new construction andreplacement) but not operating ex-pense, the USoA requires detailedallocations of labor and materialsexpense between these functions.These records may assist the ex-aminer with allocating expenses un-der Treas. Reg. § 1.512(a)–1(c). 7C.F.R. §§ 1767.15(i), (j); 1767.17;1767.27 (Accounts 500—598); Ac-counts 163, Stores Expense Un-distributed. Cooperatives often sharefacilities, equipment or labor be-tween furnishing electricity and tele-vision services. GAO Report 93–164.(5) Retirement or Pension Plans,

Other Deferred Compensation Arrange-ments and Employee Benefits. Thecooperative may maintain one or morequalified or nonqualified plans.

(a) Examination of QualifiedPlans. Determine what plans a coop-erative maintains, and the type ofplan. Where necessary, seek theassistance of an Employee PlansSpecialist for further analysis of theplans and to make sure that there areno problems with participation, dis-crimination, contributions or benefitslevels, vesting, funding, portability,or the security of pension invest-ments. Review Account 228.3, Ac-cumulated Provisions Pensions andBenefits and any Account 128 sub-accounts, Other Special Funds—Deferred Compensation; SpecialFunds Reserve—Deferred Compen-sation. Accounting Principle 604.

(b) Examinat ion of Non-qualified Plans. Seek the assistanceof a deferred compensation specialistin the Office of Associate ChiefCounsel (Employee Benefits & Ex-


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empt Organizations) for further anal-ysis of the plans. To review non-qualified deferred compensationplans and other employee benefits,see Accounts 128, Other SpecialFunds and Account 123, Investmentin Associated Companies (and sub-accounts). See Accounting Principle604, Deferred Compensation. (6) Employment Taxes. Employment

taxes paid and accrued appear inAccounts 236.3, Accrued U.S. SocialSecurity Tax—F.I.C.A. (employer’sshare of F.I.C.A.); 408.2 Accrued U.S.Social Security Tax—Unemployment;408.3, U.S. Social Security Tax—F.I.C.A.; 236.7, Accrued Taxes—Other;408.7 Taxes—Other; 241.1, Tax Col-lections Payable—F.I.C.A. (employee’sshare of F.I.C.A. collected byemployer). Purchase rebates receivedfrom materials and supplies vendorsmay be in the form of package travelarrangements. The board of directorsdecides who receives these benefits.The contra charge for the reduction incost is posted to Account 926,Employee Pensions and Benefits (foremployees) or to Account 930.2, Mis-cellaneous General Expenses (for direc-tors and members). Accounting Princi-ple 620, Purchase Rebates.

(7) Other Accounts to be Reviewed.For compliance with the 85 percent testand employment tax reporting, reviewAccounts 143, Other Accounts Receiv-able (amounts due from employees tobe separately stated); 144.3, Accumu-lated Provision for Uncollectible Ac-counts, Officers and Employees—Credit; Account 904, Uncollectible Ac-counts, Account 920, Administrativeand General Salaries (salaries, bonusesand compensation for officers and otheremployees not chargeable to a particu-lar operating function). Compensationexpense for operating functions appearin other expense accounts. Account926, Employee Pensions and Benefits,shows current accrued expense forqualified employee retirement plans,nonqualified unfunded plans, life insur-ance, accident and health benefits,educational and recreational activitiesfor the benefit of employees. Onnonqualified deferred compensationplans maintained by the cooperative,Account 926 may reflect accruedemployee benefit expense nettedagainst investment income. The invest-ment income is included in computingthe 85 percent test. Accounting Princi-ples 601, Employee Benefits; 602

Compensated Absences; 603, EmployeeRetirement and Group Insurance; 604,Deferred Compensation; 605, Life In-surance Premium on Life of a Bor-rower Employee; 606, Pension Costs;607, Unproductive Time; 608, TrainingCosts, Attendance at Meetings, etc.;627, Postretirement Benefits.

(12)22(18) Analysis of Statement ofCash Flows

Cooperatives’ financial statementsmust include a statement of cash flows.FAS No. 95, ‘‘Statement of CashFlows.’’ The statement provides infor-mation on the cooperative’s ability togenerate positive cash flows, to paypatronage dividends and need to bor-row funds. This statement may assistthe examiner in assessing whether thecooperative operates according to coop-erative principles (including the reason-ableness of cash reserves). See samplestatement of cash flows in 7 C.F.R. §1789, Appendix A; REA AccountingCourse at 270-281. Analyze the state-ment of cash flows (or, if a condensedstatement of cash flows is used, a moredetailed cash flows statement). If ap-propriate, request the underlying work-papers. See IRM 7(10)44.(10)4.

(12)22(19) COBRA ContinuationCoverage

(1) If a cooperative maintains agroup health plan, the plan may besubject to the COBRA continuationcoverage requirements under IRC4980B. Under those requirements,plans generally must make continuationcoverage available to beneficiaries los-ing coverage under the plan due tocertain events, such as termination ofemployment, death, or divorce. IRC4980B imposes an excise tax forfailures to comply with the COBRAcontinuation coverage requirements.The excise tax is generally $100 perday for each beneficiary affected by thenoncompliance. Two exceptions mayapply to plans of cooperatives so thatthe excise tax of IRC 4980B would notapply.

(a) First, if the plan constitutesa governmental plan under IRC414(d), then the excise tax wouldnot apply.

(b) Second, if the employersmaintaining the plan employ in theaggregate fewer than twentyemployees (including independent

contractors eligible for coverage un-der the plan), then the excise taxdoes not apply. (2) For more information on the

excise tax of IRC 4980B, see theCOBRA Employee Benefit ContinuationCoverage Examination User’s Guide(January 1994).

(12)22(20) Nonexempt ElectricCooperatives

(1) Overview. If it is necessary toprepare a Form 1120 for any yearsunder examination, seek assistancefrom the Utilities Industry Specialist(e.g., Schedule M adjustments, whenutility plant is placed in service,MACRS, alternative minimum tax)from the Farmers’ Cooperatives Indus-try Specialist (e.g., IRC 277) and, ifappropriate, the Media/CommunicationsIndustry Specialist and the VEBA(Voluntary Employees’ Beneficiary As-sociation) Industry Specialist (IRC501(c)(9), 419, 419A (including dif-ferences in calculations for IRC 419Aand FAS No. 106). Many aspects of theUSoA not covered in these guidelines(e.g., plant accounts and deferred taxesaccounts) may be useful in preparingForm 1120. See also Utilities Hand-book Exhibits.

(2) Patronage Deductions. Nonex-empt cooperatives not subject to Sub-chapter T may exclude patronage divi-dends paid or allocated to patrons,according to their bylaws. Rev. Rul.83–135, 1983–2 C.B. 149. Informationfrom the cooperative will be needed toanalyze patronage and nonpatronageincome and expense (e.g., analysis ofmaturity of certificates of deposits.)

(3) IRC 277. Nonexempt electriccooperatives are subject to IRC 277, amethod of accounting as defined inIRC 446. Treas. Reg. § 1.446–1(e)(2)(ii)(a); Concord ConsumersHous. Coop. v. Commissioner, 89 T.C.105, 116 (1989); Rev. Rul. 90–38,1990–1 C.B. 57.

(12)22(21) Definitions

(1) See 7 C.F.R. §§ 1767.10, 1773.2for definitions used in the USoA. Forconvenience, certain definitions arereproduced here:

(2) ‘‘Associated (or affiliated) com-panies’’ are persons that are directly orindirectly (through one or more inter-mediaries) control or are controlled by,


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or under common control with, thecooperative. 7 C.F.R. § 1767.10.

(3) ‘‘Control’’ means the possession,directly or indirectly, of the power todirect or cause the direction of themanagement and policies of a com-pany, whether such power is exercisedalone, through one or more intermedi-ary companies, or in conjunction withor pursuant to an agreement andwhether such power is establishedthrough a majority or minority owner-ship or through voting of securities;common directors, officers or stock-holders; voting trusts, holding trusts,associated companies; contracts, or anyother direct or indirect means. 7 C.F.R.§ 1767.10.

(4) ‘‘Subsidiary company’’ is a com-pany controlled by the cooperativethrough ownership of voting stock. 7C.F.R. § 1767.10.

(5) Financial Ratios. REA tracksfinancial ratios on cooperatives’ opera-tions. Some may interest examiners(e.g., net working capital in relation toreasonable cash reserves). See REAAccounting Course at 257–287.‘‘TIER’’ (times interest earned ratio)equals:

(patronage capital and margins)+

(interest on long-term debt)interest on long-term debt

TIER appears on line 88 of REAPublication 201–1. Patronage capitaland margins appear on line 50; intereston long-term debt on line 48. Example:Patronage capital and margins is$600,000. Interest on long-term debt is$500,000. TIER is 2.20:

(600,000 + 500,000)500,000

(12)22(22) Additional References

(1) Internal Revenue Service:(a) Technical Instruction Program(1977—current).(b) ISP Coordinated Issue Papers. ( c ) E x e m p t O r g a n i z a t i o n sHandbook.(d) Specialized Industry AuditGuidelines—Public Utilities (Util-ities Handbook).(e) ‘‘More Basics: the Basics ofFringe Benefits’’ and User Guide(Chief Counsel Technical TV)(1994).

(f) COBRA Employee Benefit Con-tinuation Coverage ExaminationUser’s Guide (January 1994).(g) Office of Chief Counsel Tele-phone Directory and Subject MatterDirectory, Document 7801 (includ-i n g U t i l i t i e s I S P , M e d i a /Communications ISP, Farmers’ Co-operatives ISP and VEBA (Volun-tary Employees’ Beneficiary Asso-ciation) ISP).

(2) General Accounting Office:(a) Generally Accepted GovernmentAuditing Standards (GAGAS orYellow Book) (rules for requiredreports on electric and telephonecooperatives prepared by independ-ent CPAs).(b) Legislation Needed to ImproveAdministration of Tax ExemptionProvisions For Electric Coopera-tives, GGD–83–7 (1983).(c) REA Borrowers’ Investment inCable and Satellite Television Serv-ices, RCED–93–164 (1993).(d) To order GAO reports, call(202) 512-6000 or fax (301)258-4066. The first copy is free.Additional copies are $2.00.

(3) Federal Energy Regulatory Com-mission (FERC):

(a) Uniform System of Accounts, 18C.F.R. § 101 et seq.(b) Glossary of Important Powerand Rate Terms, Abbreviations andUnits of Measurement, InteragencyCommittee on Water Resources(Federal Power Commission 1965).

(4) Rural Electrification Admini-stration:

(a) Rural Electrification Act of 1936(With Amendments as ApprovedThrough December 17, 1993), Infor-mational Publication 100–1 (1993)(chronology of amendments, text ofstatute and guide to provisions).(b) Uniform System of Accounts(Electric), 7 C.F.R. § 1767 et seq.(1994) (58 Fed. Reg. 59822 (1993))(or see REA Bulletin 1767–B(1993)) (USoA). (c) Policy on Audits of REA Bor-rowers, 7 C.F.R. § 1773 (require-ments for audit of cooperatives byindependent CPA under GAAP andGAGAS). (d) Margin Stabilization Plans, Rev-enue and Expense Deferrals, andRefunds of Previously RecordedRevenues, 7 C.F.R. § 1718 (pro-posed regulations) (53 Fed. Reg.44887 (1988)).

(e) Note on REA regulations: REAregulations are available in hardcopy (Code of Federal Regulations,published annually) and on disk inASCII. Contact the National Officefor additional information. (f) REA Forms 7 Financial andStatistical Report, Operating Report— Financial, Form 12.(g) Guide for Preparing Financialand Statistical Reports for PowerSupply Borrowers and Electric Dis-tribution Borrowers with GeneratingFacilities, Bulletin 1717B–3.(h) Guide for Preparing Financialand Statistical Reports for ElectricDistribution Borrowers, Bulletin1717B–2.(i) REA Standard Mortgage.(j) A Brief History of the RuralElectric and Telephone Programsand Report of the Administrator,Fiscal Year 1992 Informational Pub-lication 100–7.(k) REA Financed GeneratingPlants, Informational Publication200–2 (1993).(l) 1992 Statistical Report, RuralElectric Borrowers, InformationalPublication 201–1.(m) REA Bulletins (selected):(1) Evaluation and Enforcement ofInternal Control of Borrowers’ En-terprises, 182–1 (1/10/65).(2) Procedures for Computing andRecording Capital Credits, Section1951, Issue 2 (7/64).(3) Capital Credits—ConsumerBenefits, 102–1 (Electric) (7/64, re-printed 7/28/74).(4) General Funds, 1–7 (12/6/77)(cash management guidelines).(5) Joint Use Agreement WithCATV Companies (joint use ofutility poles), 1726A–125 (9/17/93).(n) REA Accounting Interpretations.(o) REA Telephone Directory, Infor-mational Publication 500–1.

(5) Graduate School, U.S. Departmentof Agriculture:

REA Borrower Accounting (Electric),Correspondence Program course guide(1991) (REA Accounting Course).(6) National Association of RegulatoryUtility Commissioners (NARUC):

(a) Utility Regulatory Policy in theUnited States and Canada, (1992)(guide to state rate regulation ofelectric cooperatives).(b) To order NARUC publications,call (202) 898-2200 or fax (202)898-2213.


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(7) American Institute of CertifiedPublic Accountants (AICPA):

(a) Audit and Accounting Guide:Consideration of Internal ControlStructure in a Financial StatementAudit (1990).(b) Audit Risk Alerts (matters ofinterest to CPAs in planning audits,issued annually).

(8) Treatises:(a) J. Bonbright, Principles of Pub-lic Utility Rates (1988). (b) R. Hahne, G. Aliff, Accountingfor Public Utilities (1993).(c) M. Reeser, Introduction to Pub-lic Utility Accounting (1984).(d) Pacific Gas and Electric, Re-source: An Encyclopedia of UtilityIndustry Terms (1984).(e) Glossary of Cable & TV Terms,National Cable Television Associa-tion, A.C. Nielsen Co. (1981).(f) M. Abrahamsen, CooperativeBusiness Enterprise (1976).(g) I. Packel, The Organization andOperation of Cooperatives (4th ed.1970).

(h) G. Bauernfeind, Income Taxa-tion: Accounting Methods and Peri-ods (1992).

(9) Periodicals: (a) The Cooperative Accountant

National Society of Accountantsfor Cooperatives.

(b) Journal of AccountancyAICPA.

(c) Electric Utility WeekMcGraw-Hill.

(d) Electrical WorldMcGraw-Hill.

(e) The Energy DailyKing Publications Group.

(f) Fortnightly (formerly PublicUtilities Fortnightly) Public Util-ities Reports.

(g) Rural ElectrificationNational Rural Electric Coopera-tive Association (NRECA).

(h) NRECA’s Power Supply Report.(i) Rural Electric Newsletter

NRECA.

(j) Electric Power AlertInside Washington Publishers.

(k) Broadcasting & CableCahners Publishing Co./ReedPublishing.

(l) CablevisionDiversified Publishing Group.

(m) Telecommunications PolicyBRP Publications, Inc.

(12)22(23) Exhibits

Exhibit 12(20)–1, ‘‘Summary of Ac-counts Used in Connection with Rec-ording Patronage Capital’’ (reproducedwith the compliments of the GraduateSchool, U.S. Department of Agricul-ture, from the Correspondence Programcourse REA Borrower Accounting(Electric), copyright (c) 1991).

Exhibit 12(20)–2, ‘‘Applying the 85Percent Test: Analysis of REA UniformSystem of Accounts (Selected Revenue,Income, Expense and Balance SheetAccounts).’’

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Exhibit 12(20)–2

Applying the 85 Percent Test: Analysis of REA Uniform System of Accounts (Selected Revenue, Income, Expense andBalance Sheet Accounts)1

USoA Account NameNon-

Member Member Excluded

411.6 Gains from Disposition of Utility Plant [1] X411.7 Losses from Disposition of Utility Plant [1] X411.8 Gains from Disposition of Allowances [1] X411.9 Losses from Disposition of Allowances [1] X412 Revenues from Electric Plant Leased to Others X414 Other Utility Operating Income [2] X X415 Revenues from Merchandising, Jobbing and Contract Work X X418 Nonoperating Rental Income [2] X418.1 Equity in Earnings of Subsidiaries [1] X X419 Interest and Dividend Income [2] X419.1 Allowance for Funds Used During Construction [1] N/A N/A N/A421 Misc. Nonoperating Income [2], [4] X421.1 Gain on Disposition of Property [1] X421.2 Loss on Disposition of Property [1] X428.1 Amortization of Loss on Reacquired Debt [1] X429 Amortization of Premium on Debt — Credit [1] X429.1 Amortization of Gain on Reacquired Debt [1], [4] X X434 Extraordinary Income [2] X440 Residential Sales [3] X X440.1 Residential Sales—Excluding Seasonal [3] X X440.2 Residential Sales—Seasonal [3] X X441 Irrigation Sales [3] X X442 Commercial and Industrial Sales [3] X X442.1 Commercial and Industrial Sales—1000 kVA or Less [3] X X442.2 Commercial and Industrial Sales—Over 1000 kVA [3] X X444 Public Street and Highway Lighting [3] X X445 Other Sales to Public Authorities [3] X X446 Sales to Railroads and Railways [3] X X447 Sales for Resale [3] X X447.1 Sales for Resale to REA Borrowers [3] X X447.2 Sales for Resale—Others [3] X X448 Interdepartmental Sales [1] N/A N/A N/A449.1 Provision for Rate Refunds [4] X X450 Forfeited Discounts [4] X X451 Misc. Service Revenue X X453 Sales of Water and Water Power X X454 Rent from Electric Property X X X456 Other Electric Revenue X158.1 Allowance Inventory XLegend:

[1]: This Account requires an adjustment for differences between regulatoryand income tax accounting. [2]: This Account combines revenue and expense.[3]: This Account may require an adjustment to comply with IRC 451(f).[4]: This Account may require an adjustment for other timing differencesbetween regulatory and income tax accounting. N/A: Not applicable.

1This Exhibit is a general guide to the range of classification of USoA revenue and income accounts for purposes of IRC 501(c)(12)(A),(C). Some Accounts may contain member, nonmember or excluded income (alone or in combination), depending upon the nature of thetransactions, the parties thereto and/or in what taxable year the transactions occurred.


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PUBLIC COMMENTS

These proposed examination guide-lines address specific issues relating torural electric cooperatives. Becausethey address matters that may have asignificant impact on these coopera-tives, the Service is soliciting publiccomments on them.

Comments should be submitted inwriting on or before June 14, 1996.

Comments should be sent to thefollowing address:

Internal Revenue ServiceAssistant Commissioner(Employee Plans and ExemptOrganizations) Attn:CP:E:EO:T:3, Rm. 6137Washington, DC 20224

If warranted, after consideration ofthe comments received, the Service willschedule a public hearing to discuss

these proposed guidelines before theyare finalized.

DRAFTING INFORMATION

The person to contact regarding thisannouncement is Edward Karcher ofthe Exempt Organizations Division. Forfurther information you can contact Mr.Karcher on (202) 622-8120 (not a toll-free number).

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Announcement of the Disbarment, Suspension, or Consent to VoluntarySuspension of Attorneys, Certified Public Accountants, Enrolled Agents andEnrolled Actuaries From Practice Before the Internal Revenue Service

Under 31 Code of Federal Regula-tions, Part 10, an attorney, certifiedpublic accountant, enrolled agent or en-rolled actuary, in order to avoid the in-stitution or conclusion of a proceedingfor his disbarment or suspension frompractice before the Internal RevenueService, may offer his consent tosuspension from such practice. TheDirector of Practice, in his discretion,may suspend an attorney, certifiedpublic accountant, enrolled agent orenrolled actuary in accordance with theconsent offered.

Attorneys, certified public account-ants, enrolled agents and enrolled actu-aries are prohibited in any Internal

Revenue Service matter from directlyor indirectly employing, acceptingassistance from, being employed by,or sharing fees with, any practi-tioner disbarred or suspended frompractice before the Internal RevenueService.

To enable attorneys, certified publicaccountants, enrolled agents and en-rolled actuaries to identify practitionersunder consent suspension from practicebefore the Internal Revenue Service,the Director of Practice will announcein the Internal Revenue Bulletin thenames and addresses of practitionerswho have been suspended from suchpractice, their designation as attor-

ney, certified public accountant, en-rolled agent or enrolled actuary anddate or period of suspension. This an-nouncement will appear in the weeklyBulletin at the earliest practicable dateafter such action and will continue toappear in the weekly Bulletins for fivesuccessive weeks or for as many weeksas is practicable for each attorney,certified public accountant, enrolledagent or enrolled actuary so suspendedand will be consolidated and publishedin the Cumulative Bulletin.

The following individuals have beenplaced under consent suspension frompractice before the Internal RevenueService:

Name Address Designation Date of Suspension

Miller, Gorden A. Mineral Wells, WV CPA February 1, 1996 to April 30, 1996Barnes, Charles E. Louisville, KY Enrolled

AgentIndefinite from February 1, 1996

Polizzi, Angelo J. Grosse Point, MI Attorney Indefinite from February 6, 1996Pegler, Charles R. Islandia, NY CPA Indefinite from February 7, 1996Foster, David M. Birmingham, MI Attorney Indefinite from February 9, 1996Smith, Jerry A. Evansville, IN CPA February 9, 1996 to November 8, 1996Penn, Michael J. Dearborn, MI CPA February 9, 1996 to February 8, 1997Mueller, E. Laird Seal Beach, CA CPA February 12, 1996 to June 11, 1996Zezima, Paul P. Norwalk, CT CPA April 1, 1996 to May 31, 1996Van Houten, Robert R. Danbury, CT CPA May 1, 1996 to April 30, 1997

Under Section 330, Title 31 of theUnited States Code, the Secretary ofthe Treasury, after due notice andopportunity for hearing, is authorizedto suspend or disbar from practicebefore the Internal Revenue Serviceany person who has violated the rulesand regulations governing the recogni-tion of attorneys, certified public ac-countants, enrolled agents or enrolledactuaries to practice before the InternalRevenue Service.

Attorneys, certified public account-ants, enrolled agents, and enrolledactuaries are prohibited in any InternalRevenue Service matter from directly

or indirectly employing, accepting as-sistance from, being employed by orsharing fees with, any practitionerdisbarred or under suspension frompractice before the Internal RevenueService.

To enable attorneys, certified publicaccountants, enrolled agents andenrolled actuaries to identify suchdisbarred or suspended practitioners,the Director of Practice will announcein the Internal Revenue Bulletin thenames and addresses of practitionerswho have been suspended from suchpractice, their designation as attorney,certified public accountant, enrolled

agent or enrolled actuary, and the dateof disbarment or period of suspension.This announcement will appear in theweekly Bulletin for five successiveweeks or as long as it is practicable foreach attorney, certified public account-ant, enrolled agent or enrolled actuaryso suspended or disbarred and will beconsolidated and published in theCumulative Bulletin.

After due notice and opportunityfor hearing before an administrativelaw judge, the following individualshave been disbarred from further prac-tice before the Internal RevenueService:

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Name Address Designation Effective Date

Gimbel, Stephen Columbia, SC CPA January 20, 1996Tropsa, Donna C. Stamford, CT Attorney January 20, 1996Seifert, Frank J. Birmingham, AL CPA January 20, 1996Hansen, Joe B. Lubbock, TX CPA March 2, 1996

Announcement of the Expedited Suspension of Attorneys, Certified PublicAccountants, Enrolled Agents, and Enrolled Actuaries From Practice Before theInternal Revenue Service

Under title 31 of the Code of FederalRegulations, section 10.76, the Directorof Practice is authorized to immediatelysuspend from practice before the Inter-nal Revenue Service any practitionerwho, within five years, from the datethe expedited proceeding is instituted,(1) has had a license to practice as anattorney, certified public accountant, oractuary suspended or revoked forcause; or (2) has been convicted of anycrime under title 26 of the UnitedStates Code or, of a felony under title18 of the United States Code involvingdishonesty or breach of trust.

Attorneys, certified public account-ants, enrolled agents, and enrolled ac-tuaries are prohibited in any Internal

Revenue Service matter from directlyor indirectly employing, accepting as-sistance from, being employed by, orsharing fees with, any practitionerdisbarred or suspended from practicebefore the Internal Revenue Service.

To enable attorneys, certified publicaccountants, enrolled agents, and en-rolled actuaries to identify practitionersunder expedited suspension from prac-tice before the Internal Revenue Serv-ice, the Director of Practice will an-nounce in the Internal Revenue Bulletinthe names and addresses of practition-ers who have been suspended from suchpractice, their designation as attorney,certified public accountant, enrolled

agent, or enrolled actuary, and date orperiod of suspension. This announce-ment will appear in the weekly Bulletinat the earliest practicable date aftersuch action and will continue to appearin the weekly Bulletins for five succes-sive weeks or for as many weeks as ispracticable for each attorney, certifiedpublic accountant, enrolled agent, orenrolled actuary so suspended and willbe consolidated and published in theCumulative Bulletin.

The following individuals have beenplaced under suspension from practicebefore the Internal Revenue Service byvirtue of the expedited proceedingprovisions of the applicable regulations:

Name Address Designation Date of Suspension

Ginsberg, Melvin R. Univ. Heights, OH Attorney Indefinite from January 24, 1996Lahey, Charles W. South Bend, IN Attorney Indefinite from January 24, 1996DePiano, Robert Venice, CA Attorney Indefinite from January 24, 1996Kraig, Jerry B. Shaker Hgts, OH Attorney Indefinite from January 29, 1996Brown, David M. Los Angeles, CA Attorney Indefinite from January 29, 1996Hanke Jr., Dale L. Duluth, MN Attorney Indefinite from February 1, 1996Guillory, Patrick R. San Francisco, CA Attorney Indefinite from February 1, 1996Miller, Brian R. Grove, OK CPA Indefinite from February 23, 1996McLeod, Timothy R. Saginaw, MI Attorney Indefinite from February 26, 1996Simone, Robert F. Philadelphia, PA Attorney Indefinite from February 26, 1996Bowen, David Lee Frisco City, AL CPA Indefinite from February 27, 1996Lindley, Clarkson Wayazata, MN Attorney Indefinite from February 27, 1996

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Definition of TermsRevenue rulings and revenue proce-dures (hereinafter referred to as ‘‘rul-ings’’) that have an effect on previousrulings use the following defined termsto describe the effect:

Amplified describes a situation whereno change is being made in a priorpublished position, but the prior posi-tion is being extended to apply to avariation of the fact situation set forththerein. Thus, if an earlier ruling heldthat a principle applied to A, and thenew ruling holds that the same princi-ple also applies to B, the earlier rulingis amplified. (Compare with modified,below).

Clarified is used in those instanceswhere the language in a prior ruling isbeing made clear because the languagehas caused, or may cause, some confu-sion. It is not used where a position ina prior ruling is being changed.

Distinguished describes a situationwhere a ruling mentions a previouslypublished ruling and points out anessential difference between them.

Modified is used where the substanceof a previously published position isbeing changed. Thus, if a prior rulingheld that a principle applied to A butnot to B, and the new ruling holds thatit applies to both A and B, the prior

ruling is modified because it corrects apublished position. (Compare with am-plified and clarified, above).

Obsoleted describes a previouslypublished ruling that is not considereddeterminative with respect to futuretransactions. This term is most com-monly used in a ruling that listspreviously published rulings that areobsoleted because of changes in law orregulations. A ruling may also beobsoleted because the substance hasbeen included in regulations subse-quently adopted.

Revoked describes situations wherethe position in the previously publishedruling is not correct and the correctposition is being stated in the newruling.

Superseded describes a situationwhere the new ruling does nothingmore than restate the substance andsituation of a previously publishedruling (or rulings). Thus, the term isused to republish under the 1986 Codeand regulations the same position pub-lished under the 1939 Code and regula-tions. The term is also used when it isdesired to republish in a single ruling aseries of situations, names, etc., thatwere previously published over aperiod of time in separate rulings.

If the new ruling does more thanrestate the substance of a prior ruling, acombination of terms is used. Forexample, modified and superseded de-scribes a situation where the substanceof a previously published ruling isbeing changed in part and is continuedwithout change in part and it is desiredto restate the valid portion of thepreviously published ruling in a newruling that is self contained. In thiscase the previously published ruling isfirst modified and then, as modified, issuperseded.

Supplemented is used in situations inwhich a list, such as a list of the namesof countries, is published in a rulingand that list is expanded by addingfurther names in subsequent rulings.After the original ruling has beensupplemented several times, a newruling may be published that includesthe list in the original ruling and theadditions, and supersedes all priorrulings in the series.

Suspended is used in rare situationsto show that the previous publishedrulings will not be applied pendingsome future action such as the issuanceof new or amended regulations, theoutcome of cases in litigation, or theoutcome of a Service study.

AbbreviationsThe following abbreviations in current use andformerly used will appear in material publishedin the Bulletin.

A—Individual.Acq.—Acquiescence.B—Individual.BE—Beneficiary.BK—Bank.B.T.A.—Board of Tax Appeals.C.—Individual.C.B.—Cumulative Bulletin.CFR—Code of Federal Regulations.CI—City.COOP—Cooperative.Ct.D.—Court Decision.CY—County.D—Decedent.DC—Dummy Corporation.DE—Donee.Del. Order—Delegation Order.DISC—Domestic International Sales Corporation.DR—Donor.E—Estate.EE—Employee.

E.O.—Executive Order.ER—Employer.ERISA—Employee Retirement Income Security Act.EX—Executor.F—Fiduciary.FC—Foreign Country.FICA—Federal Insurance Contribution Act.FISC—Foreign International Sales Company.FPH—Foreign Personal Holding Company.F.R.—Federal Register.FUTA—Federal Unemployment Tax Act.FX—Foreign Corporation.G.C.M.—Chief Counsel’s Memorandum.GE—Grantee.GP—General Partner.GR—GrantorIC—Insurance Company.I.R.B.—Internal Revenue Bulletin.LE—Lessee.LP—Limited Partner.LR—Lessor.M—Minor.Nonacq.—Nonacquiescence.O—Organization.P—Parent Corporation.

PHC—Personal Holding Company.PO—Possession of the U.S.PR—Partner.PRS—Partnership.PTE—Prohibited Transaction Exemption.Pub. L.—Public Law.REIT—Real Estate Investment Trust.Rev. Proc.—Revenue Procedure.Rev. Rul.—Revenue Ruling.S—Subsidiary.S.P.R.—Statements of Procedural Rules.Stat.—Statutes at Large.T—Target Corporation.T.C.—Tax Court.T.D.—Treasury Decision.TFE—Transferee.TFR—Transferor.T.I.R.—Technical Information Release.TP—Taxpayer.TR—Trust.TT—Trustee.U.S.C.—United States Code.X—Corporation.Y—Corporation.Z—Corporation.

SEQ 0058 JOB D06-053-003 PAGE-0054 FINDING LIST REVISED 01JUL96 AT 01:04 BY LR DEPTH: 65.01 PICAS WIDTH 40.11 PICAS COMPOSITE COLOR

778/20054/1JUL96/D06-053

54

Numerical Finding List1

Bulletins 1996–1 through 1996–15

Announcements:

96–1, 1996–2 I.R.B. 5796–2, 1996–2 I.R.B. 5796–3, 1996–2 I.R.B. 5796–4, 1996–3 I.R.B. 5096–5, 1996–4 I.R.B. 9996–6, 1996–5 I.R.B. 4396–7, 1996–5 I.R.B. 4496–8, 1996–7 I.R.B. 5696–9, 1996–8 I.R.B. 3096–10, 1996–8 I.R.B. 3096–11, 1996–9 I.R.B. 1196–12, 1996–11 I.R.B. 3096–13, 1996–12 I.R.B. 3396–14, 1996–12 I.R.B. 3596–15, 1996–11 I.R.B. 996–16, 1996–13 I.R.B. 2296–17, 1996–13 I.R.B. 2296–18, 1996–15 I.R.B. 1596–19, 1996–15 I.R.B. 1596–20, 1996–15 I.R.B. 1596–21, 1996–15 I.R.B. 1596–22, 1996–15 I.R.B. 16

Delegations Orders:

232 (Rev. 2), 1996–7 I.R.B. 49239 (Rev. 1), 1996–7 I.R.B. 49

Notices:

96–2, 1996–2 I.R.B. 1596–1, 1996–3 I.R.B. 3096–4, 1996–4 I.R.B. 6996–5, 1996–6 I.R.B. 2296–6, 1996–5 I.R.B. 2796–7, 1996–6 I.R.B. 2296–8, 1996–6 I.R.B. 2396–9, 1996–6 I.R.B. 2696–10, 1996–7 I.R.B. 4796–11, 1996–8 I.R.B. 1996–12, 1996–10 I.R.B. 2996–13, 1996–10 I.R.B. 2996–14, 1996–12 I.R.B. 1196–15, 1996–13 I.R.B. 1996–16, 1996–13 I.R.B. 2096–17, 1996–13 I.R.B. 2096–18, 1996–14 I.R.B. 2796–19, 1996–14 I.R.B. 2896–20, 1996–14 I.R.B. 3096–21, 1996–14 I.R.B. 3096–22, 1996–14 I.R.B. 30

Proposed Regulations:

DL–1–95, 1996–6 I.R.B. 28

1A cumulative list of all Revenue Rulings,Revenue Procedures, Treasury Decisions, etc.,published in Internal Revenue Bulletins 1995–27through 1995–52 will be found in InternalRevenue Bulletin 1996–1, dated January 2, 1996.

Proposed Regulations—Continued

EE–20–95, 1996–5 I.R.B. 15EE–34–95, 1996–3 I.R.B. 49EE–35–95, 1996–5 I.R.B. 19EE–53–95, 1996–5 I.R.B. 23EE–55–95, 1996–12 I.R.B. 12EE–106–82, 1996–10 I.R.B. 31EE–142–87, 1996–12 I.R.B. 13EE–148–81, 1996–11 I.R.B. 29IA–33–95, 1996–4 I.R.B. 99IA–41–93, 1996–11 I.R.B. 29INTL–3–95, 1996–6 I.R.B. 29INTL–9–95, 1996–5 I.R.B. 25INTL–54–95, 1996–14 I.R.B. 39PS–2–95, 1996–7 I.R.B. 50

Revenue Procedures:

96–1, 1996–1 I.R.B. 896–2, 1996–1 I.R.B. 6096–3, 1996–1 I.R.B. 8296–4, 1996–1 I.R.B. 9496–5, 1996–1 I.R.B. 12996–6, 1996–1 I.R.B. 15196–7, 1996–1 I.R.B. 18596–8, 1996–1 I.R.B. 18796–8A, 1996–9 I.R.B. 1096–9, 1996–2 I.R.B. 1596–10, 1996–2 I.R.B. 1796–11, 1996–2 I.R.B. 1896–12, 1996–3 I.R.B. 3096–13, 1996–3 I.R.B. 3196–14, 1996–3 I.R.B. 4196–15, 1996–3 I.R.B. 4196–16, 1996–3 I.R.B. 4596–17, 1996–4 I.R.B. 6996–18, 1996–4 I.R.B. 7396–19, 1996–4 I.R.B. 8096–20, 1996–4 I.R.B. 8896–21, 1996–4 I.R.B. 9696–22, 1996–5 I.R.B. 2796–23, 1996–5 I.R.B. 2796–24, 1996–5 I.R.B. 2896–24A, 1996–15 I.R.B. 1296–25, 1996–8 I.R.B. 1996–26, 1996–8 I.R.B. 2296–27, 1996–11 I.R.B. 2796–28, 1996–14 I.R.B. 31

Revenue Rulings:

96–1, 1996–1 I.R.B. 796–2, 1996–2 I.R.B. 596–3, 1996–2 I.R.B. 1496–6, 1996–2 I.R.B. 896–4, 1996–3 I.R.B. 1696–5, 1996–3 I.R.B. 2996–7, 1996–3 I.R.B. 1296–8, 1996–4 I.R.B. 62

Revenue Rulings—Continued

96–9, 1996–4 I.R.B. 596–10, 1996–4 I.R.B. 2796–11, 1996–4 I.R.B. 2896–12, 1996–9 I.R.B. 496–13, 1996–10 I.R.B. 1996–14, 1996–6 I.R.B. 2096–15, 1996–11 I.R.B. 996–16, 1996–11 I.R.B. 496–17, 1996–13 I.R.B. 596–18, 1996–13 I.R.B. 496–19, 1996–14 I.R.B. 2496–20, 1996–15 I.R.B. 596–21, 1996–15 I.R.B. 796–22, 1996–15 I.R.B. 996–23, 1996–15 I.R.B. 11

Treasury Decisions:

8630, 1996–3 I.R.B. 198631, 1996–3 I.R.B. 78632, 1996–4 I.R.B. 68633, 1996–4 I.R.B. 208634, 1996–3 I.R.B. 178635, 1996–3 I.R.B. 58636, 1996–4 I.R.B. 648637, 1996–4 I.R.B. 298638, 1996–5 I.R.B. 58639, 1996–5 I.R.B. 128640, 1996–2 I.R.B. 108641, 1996–6 I.R.B. 48642, 1996–7 I.R.B. 48643, 1996–11 I.R.B. 48644, 1996–7 I.R.B. 168645, 1996–8 I.R.B. 48646, 1996–8 I.R.B. 108647, 1996–9 I.R.B. 78648, 1996–10 I.R.B. 238649, 1996–9 I.R.B. 58650, 1996–10 I.R.B. 58651, 1996–11 I.R.B. 248652, 1996–11 I.R.B. 118653, 1996–12 I.R.B. 48654, 1996–11 I.R.B. 148655, 1996–12 I.R.B. 98656, 1996–13 I.R.B. 98657, 1996–14 I.R.B. 48658, 1996–14 I.R.B. 13

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