In Revenue Ruling 2018-2, the IRS has ruled that a mixture of butane and gasoline is not an alternative fuel mixture and does not qualify for the alternative fuel mixture credit under Section 6246(e).

Facts

Taxpayer mixes gasoline and butane and sells the mixture for use as a fuel. Taxpayer claims that the mixture qualifies for the alternative fuel mixture credit under Section 6246(e) because it consists of a taxable fuel (gasoline) and an alternative fuel (liquefied petroleum gas (LPG), an alternative fuel listed in Section 6426(d)(2)(A)). Taxpayer's cites IRS Publication 510, Excise Taxes (Including Fuel Tax Credits and Refunds), which states that LPG "includes propane, butane, pentane, or mixtures of those products."

Law

Section 4081 imposes tax on certain removals, entries and sales of "taxable fuel." Section 4083 defines "taxable fuel" to include gasoline and gasoline blendstocks. Under corresponding regulations, gasoline blendstocks include butane.

Section 6426(e) allows a $0.50 credit against a claimant's Section 4081 tax liability for each gallon of alternative fuel used by the taxpayer to produce an "alternative fuel mixture" for sale or use in the taxpayer's trade or business. In general, an "alternative fuel mixture" means a mixture of alternative fuel and taxable fuel. Section 6426(d)(2)(A) specifies that the term "alternative fuel" includes LPG. LPG is not defined in Section 6426. The regulations under Section 4041 (relating to the tax on special motor fuels), however, provide that special motor fuel includes "[a]ny liquefied petroleum gas (such as propane, butane, pentane or mixtures of the same)." The regulations further provide that "the term 'special motor fuel' does not include any product taxable under the provisions of [Section] 4081" (i.e., taxable fuel).

Ruling

The IRS explained that all gasoline sold in the US contains butane, which results naturally from refining processes and is also commonly blended with gasoline to achieve correct vapor pressure properties.

Under Section 4083, the IRS noted, taxable fuels include both gasoline and gasoline blendstocks and the regulations under Section 4083 treat butane as a gasoline blendstock. The IRS concluded that a mixture of gasoline (a taxable fuel) with butane (another taxable fuel) is a mixture of two taxable fuels, not of a taxable fuel and an alternative fuel, and that Taxpayer may not claim the alternative fuel mixture credit under Section 6426(e).

The IRS rejected Taxpayer's argument that Publication 510 treats butane as an LPG. The IRS concluded that the references in Publication 510 and the regulations under Section 4041 treating butane as an LPG were not controlling because both the regulations and Publication 510 provide an exclusion from the definition of fuels subject to the Section 4041 tax for fuels that are taxable under Section 4081 (i.e., taxable fuels, including butane).

Implications

The implications of this guidance were previously discussed in a prior Alert on energy items in the 2017-2018 Priority Guidance Plan (see Tax Alert 2017-1807). That Alert noted that refiners can blend LPG with gasoline blendstocks that are treated, under Treas. Reg. Section 48.4081-1, as taxable fuel to produce finished gasoline. The Alert also noted that refiners engaged in such blending have claimed the alternative fuel credit for the LPG used in the blending process and predicted that the proposed guidance was intended to address these claims. Finally, the Alert noted that the alternative fuel credit expired on December 31, 2016, and that, unless the credit is extended, the guidance will have only retroactive effect.

The implications described in Tax Alert 2017-1807 remain relevant. As the Alert predicted, the revenue ruling addresses claims for the alternative fuel credit. For refiners that use butane in the blending process, the revenue ruling concludes that butane is not an alternative fuel qualifying for the alternative fuel mixture credit. The ruling specifically addresses only butane and the alternative fuel mixture credit. The rationale underlying the ruling, however, would also disallow the alternative fuel credit under Section 6426(d). In addition, as discussed later, the same rationale has implications relating to the biodiesel credits under Sections 40A and 6426(c) and to other fuels, such as liquid fuel derived from coal through the Fischer-Tropsch process and renewable diesel. Because of the large dollar amounts at issue, the revenue ruling is likely to be challenged in court. Any such challenge is likely to focus on the conclusory nature of the ruling. The revenue ruling argues that butane should not be considered an LPG because it is subject to tax as a taxable fuel under Section 4081 rather than as a special motor fuel under Section 4041, which imposes tax on liquefied petroleum gases other than butane. In essence, the revenue ruling is based on the principle that no taxable fuel can be an alternative fuel. The ruling, however, offers no support for this principle other than noting that viewing butane as an alternative fuel "would mean that Congress intended to allow a mixture of gasoline (a taxable fuel) and a gasoline blendstock, i.e., butane (a taxable fuel) to qualify for the alternative fuel mixture credit." That, of course, is the issue, but the ruling provides no evidence regarding congressional intent.

Challenges to the ruling are likely to note that butane is included in both the Internal Revenue Service and the Department of Energy definitions of liquefied petroleum gases. Furthermore, while, as the ruling notes, the regulations and Publication 510 exclude butane from the definition of special motor fuels subject to tax under Section 4041 (quite appropriately since butane should previously have been taxed under Section 4081) nothing in either the regulations or Publication 510 states that butane is not an LPG.

Challenges are also likely to note that Section 6426(d)(2)(E) treats liquid fuel derived from coal through the Fischer-Tropsch process as an alternative fuel. The principal fuels derived through from coal through this process are diesel fuel and kerosene, both of which are taxable fuels. Thus, Section 6426(d)(2)(E) would be essentially meaningless if the IRS is correct that no taxable fuel can be an alternative fuel.

Finally, challenges to the ruling are likely to cite Notice 2007-37. Although Notice 2007-37 involved renewable diesel and the biodiesel credit rather than butane and the alternative fuel credit, the statutory language is similar. The biodiesel mixture credit is available for "a mixture of biodiesel and diesel fuel" (that is, a mixture of biodiesel and a taxable fuel). The alternative fuel mixture credit is available for "a mixture of alternative fuel and taxable fuel." The Notice's conclusions, however, are contrary to those in the revenue ruling. The Notice held that renewable diesel was treated for purposes of the Code as diesel fuel (i.e., as a taxable fuel). In addition, the ruling concluded that renewable diesel qualified as biodiesel. Accordingly, a mixture of renewable diesel with diesel fuel other than renewable diesel qualified for the biodiesel mixture credit. In other words, the same fuel can be both a taxable fuel and biodiesel qualifying for the biodiesel mixture credit. Nothing in the statutory language suggests that a different analysis should apply when butane is mixed with gasoline.

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