GUIDANCE ISSUED ON APPLICATION OF FLOOR STOCKS TAX ON DIESEL AND AVIATION FUEL.

Notice 88-44

The purpose of this notice is to provide guidance to taxpayers relating to the floor stocks tax imposed by section 10502(f) of the Omnibus Budget Reconciliation Act of 1987 (P.L. 100-203, 101 Stat. 1330) ("1987 Act") on taxable fuel held by a taxable person on April 1, 1988. See also Notice 88-30, 1988-13 I.R.B. 7 and Announcement 88-64, 1988-16 I.R.B. __.

Section 10502(f) of the 1987 Act imposes a floor stocks tax on any taxable fuel held by a taxable person on April 1, 1988, at the rate of tax which would be imposed if such fuel were sold on such date in a sale subject to tax under section 4091 of the Internal Revenue Code ("Code"). Section 10502(f)(3) of the 1987 Act provides that the taxes imposed by section 10502(f) shall be paid before June 16, 1988.

A "taxable person" is defined in section 10502(f)(4)(B) of the 1987 Act as any person other than a producer (as defined in section 4092 of the Code) or importer of taxable fuel. Section 10502(f)(4)(A)(i) defines "taxable fuel" as any taxable fuel (as defined in section 4092 of the Code) on which no tax has been imposed under section 4041 of the Code. Section 10502(f)(4)(A)(ii) provides, however, that the term "taxable fuel" shall not include fuel held exclusively for any use which is a nontaxable use (as defined in section 6427(1) of the Code). Thus, a person must pay a floor stocks tax only if such person is a taxable person and holds taxable fuel on April 1, 1988.

A person must satisfy both prongs of this test before the tax will apply. A person is a taxable person if such person is not a producer (as defined in section 4092(b)) or importer of diesel or aviation fuel. See also Notice 88-30. A liquid is taxable fuel for purposes of the floor stocks tax only if all three of the following apply --

(1) The liquid is a liquid other than gasoline which is suitable for use as a fuel in a diesel-powered highway vehicle or in an aircraft,

(2) The liquid was acquired prior to April 1, 1988, in a sale not subject to tax under section 4041, and

(3) The liquid is not held exclusively for a nontaxable use as defined in section 6427(1) of the Code. (That is, diesel or aviation fuel held for a taxable use is subject to the floor stocks tax, and fuel held exclusively for a nontaxable use is not subject to the floor stocks tax.)

The Internal Revenue Service will consider fuel held for a nontaxable use to be held exclusively for a nontaxable use (and therefore not subject to the floor stocks tax) as follows --

(a) If fuel is held in a storage facility that contains only fuel intended for a nontaxable use, the Internal Revenue Service will consider all fuel in the storage facility to be held exclusively for a nontaxable use.

(b) If fuel is held in a storage facility that holds both fuel intended for a taxable use and fuel intended for a nontaxable use (i.e. "mixed storage"), the Internal Revenue Service will consider the amount or percentage of such fuel intended for a nontaxable use to be held exclusively for a nontaxable use.

If a taxable person maintains diesel or aviation fuel in mixed storage on April 1, 1988, such person must determine the amount or percentage of such fuel intended for a nontaxable use by the date payment of the floor stocks tax is due. This determination is made on a first-in, first-out basis. If all fuel held in mixed storage on April 1, 1988, has been used by the date payment of the floor stocks tax is due, such determination shall be made based on actual usage.

If all fuel held in mixed storage on April 1, 1988, is not used by the date payment of the floor stocks tax is due, such determination shall be made based on the amount of such fuel actually used for a nontaxable purpose, together with a reasonable estimate of such person's anticipated use of all such fuel not used by the date payment of the floor stocks tax is due. An estimate generally will be considered to be reasonable if it is based on such person's past usage of diesel or aviation fuel. However, if, when the fuel is actually used, the amount of fuel actually used for a nontaxable use is less than the amount of fuel estimated to be held for a nontaxable use, such taxable person must pay the additional tax due and file an amended return reflecting the proper amount of taxable fuel held on April 1, 1988, by the date prescribed for the filing of a Form 720 for the quarter in which the fuel is actually used. See also section 10502(f)(2) of the 1987 Act and section VI(E)(4) of Notice 88-30 relating to a credit or refund for overpayment of the floor stocks tax.

The provisions of this notice may be illustrated by the following examples:

EXAMPLE 1: A producer or importer holds diesel fuel on April 1, 1988, on which no tax was imposed under section 4041. The producer or importer is not a taxable person and the floor stocks tax does not apply.

EXAMPLE 2: At the first moment of April 1, 1988, a fuel retailer holds diesel fuel on which no tax was imposed under section 4041. All of the fuel is held for sale to users. The retailer is a taxable person holding taxable fuel. The floor stocks tax applies to the retailer's entire inventory.

EXAMPLE 3: At the first moment of April 1, 1988, a farmer holds diesel fuel in mixed storage on which no tax was imposed under section 4041. All of the fuel is not used by the date payment of the floor stocks tax is due. Based on actual usage until such date and past practice with respect to usage of diesel fuel, the farmer determines that 90% of the diesel fuel held in inventory on April 1, 1988, is held exclusively for a nontaxable use and that 10% of such fuel is held for a taxable use. The farmer is a taxable person and 10% of the fuel held on April 1, 1988, is taxable fuel. The floor stocks tax applies to 10% of the fuel held in the farmer's inventory on April 1, 1988.

The floor stocks tax imposed by section 10502(f) of the 1987 Act is reported on Form 720, "Quarterly Federal Excise Tax Return". The floor stocks tax applies only to the number of gallons of taxable fuel held in inventory on April 1, 1988, as determined under the rules of this notice and Notice 88-30. Fuel held exclusively for a nontaxable use as determined under the rules of this notice is not taxable fuel for purposes of the floor stocks tax, and the floor stocks tax should not be reported with respect to this fuel on Form 720. See also section VI of Notice 88-30 regarding the inventory required to be taken on April 1, 1988.

This document serves as an "administrative pronouncement" as that term is described in section 1.6661-3(b)(2) of the Income Tax Regulations and may be relied upon to the same extent as a revenue ruling or revenue procedure.

The principal author of this announcement is Lauren Shaw of the Legislation and Regulations Division of Chief Counsel. For further information regarding this announcement, contact Ms. Shaw on (202) 566-3287 (not a toll-free call).