RR-2018-02

Is a mixture of butane and gasoline an alternative fuel mixture that qualifies for the alternative fuel mixture credit under § 6426(e) of the Internal Revenue Code (Code)?

A claimant (Producer) mixes gasoline and butane and sells it for use as a fuel. Producer claims the alternative fuel mixture credit under § 6426(e) for an open tax period ending on or before December 31, 2016, on the premise that the gasoline in the mixture is a taxable fuel and the butane in the mixture is a form of liquefied petroleum gas (LPG), an alternative fuel. Producer indicates in its claim that the basis for its position that butane is a form of LPG is the language in Chapter One of IRS Publication 510, “Excise Taxes (Including Fuel Tax Credits and Refunds),” which provides, in the “Other Fuels (Including Alternative Fuels)” section, that “[I]iquefied petroleum gas includes propane, butane, pentane, or mixtures of those products.”

Section 4081(a)(1)(A) imposes a tax on certain removals, entries, and sales of taxable fuel.

Section 4083(a)(1) provides that the term “taxable fuel” means gasoline, diesel fuel, and kerosene.

Section 4083(a)(2)(B) provides that the term “gasoline” includes, to the extent prescribed in the regulations, (i) any gasoline blend stock, and (ii) any product commonly used as an additive in gasoline (other than alcohol), and that for purposes of § 4083(a)(2)(B)(i), the term “gasoline blend stock” means any petroleum product component of gasoline.

Section 48.4081–1(b) of the Manufacturers and Retailers Excise Tax Regulations provides that “gasoline” means finished gasoline and gasoline blendstocks.

Section 48.4081–1(b) also provides that “finished gasoline” means all products that are commonly or commercially known or sold as gasoline and are suitable for use as a motor fuel, other than products that have an American Society for Testing and Materials (ASTM) octane number of less than 75 as determined by the motor method.

Section 48.4081–1(c)(3)(i) provides that, except as provided in § 48.4081–1(c)(3)(ii), “gasoline blendstocks” means (A) alkylate; (B) butane; (C) butene; (D) catalytically cracked gasoline; (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.

Section 48.4081–1(c)(3)(ii) provides that the term “gasoline blendstocks” does not include any product that cannot, without further processing, be used in the production of finished gasoline.

Section 6426(a)(1) and (e)(1) allows a $0.50 credit against a claimant’s § 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.

Section 6426(e)(2) provides that for purposes of § 6426, the term “alternative fuel mixture” means a mixture of alternative fuel and taxable fuel (as defined in § 4083(a)(1)(A), (B), or (C)) that is sold by the taxpayer producing such mixture to any person for use as a fuel, or used as a fuel by the taxpayer producing such mixture.

Section 6426(d)(2)(A) provides that the term “alternative fuel” includes LPG.

Section 2(b) of Notice 2006–92, 2006–2 C.B. 774, provides that an alternative fuel mixture requires a mixture of alternative fuel and at least 0.1 percent (by volume) of taxable fuel.

Section 6(a)(1) of Notice 2006–92 provides that a liquid alternative fuel is a liquid other than gas oil, fuel oil, or taxable fuel and is subject to the tax imposed by § 4041(a)(2) when it is sold for use or used as fuel in a motor vehicle or motorboat.

Section 4041(a) generally imposes a tax on the sale or use of certain liquids, including LPG. The tax does not apply to any liquid taxed under § 4081.

Section 48.4041–8(f)(1)(i) provides that the term “special motor fuel” includes “[a]ny [LPG] (such as propane, butane, pentane, or mixtures of the same).”

Section 48.4041–8(f)(2) further provides that the term “special motor fuel” does not include any product taxable under the provisions of § 4081.

Every gallon of gasoline sold in the United States contains butane. Gasoline contains some butane naturally from the typical refining process. Butane is also commonly blended with gasoline to achieve correct vapor pressure properties depending on where and when the gasoline will be used.

Under the facts presented, Producer blended butane with gasoline and contends that the mixture qualifies for the alternative fuel mixture credit under § 6246(e) because the gasoline in the mixture is a taxable fuel and the butane in the mixture is LPG, an alternative fuel.

Section 4083(a)(1) provides that gasoline is a taxable fuel. Section 4083(a)(2)(B) provides that, to the extent prescribed in regulations, gasoline includes any gasoline blendstock, and that for purposes of § 4083(a)(2)(B)(i), a gasoline blendstock includes any petroleum product component of gasoline. Section 48.4081–1(c)(3)(i), which was issued in 1996, states that butane is a gasoline blendstock. See T.D. 8659, 1996–1 C.B. 264. Accordingly, butane is and has been a taxable fuel since before the enactment of § 6426(d) and (e) in 2005 as part of the Safe, Accountable, Flexible, Efficient Transportation Equity Act. See 119 Stat. 1144, P.L. 109–59 (2005). A mixture of butane, a taxable fuel, with gasoline, a taxable fuel, is a mixture of two taxable fuels, not a mixture of a taxable fuel and an alternative fuel, as required by § 6426(e)(2). Therefore, Producer may not claim the alternative fuel mixture credit under § 6426(e) for the mixture of butane and gasoline. See Notice 2006–92.

Producer nevertheless cites to IRS Publication 510 to support its contention that the gasoline in its mixture is a taxable fuel and the butane is LPG, which is an alternative fuel. The term “liquefied petroleum gas” as used in § 6426(d)(2)(A) is not defined in the Code or the regulations. Section 48.4041–8(f)(1)(i) provides that the term “special motor fuel” includes any LPG, “such as propane, butane, pentane, or mixtures of the same.” However, the following subsection, § 48.4041–8(f)(2), provides that the term “special motor fuel” does not include any product taxable under the provisions of § 4081. Thus, the language in § 48.4041–8(f) that suggests that butane is a type of LPG also contains an express exception for products taxable under § 4081. IRS Publication 510, although not authoritative guidance, is consistent with this conclusion because it lists butane as a type of LPG in the section called “Other Fuels (Including Alternative Fuels)” but also provides that the term “other fuels,” which include alternative fuels, “means any liquid except gas oil, fuel oil, or any product taxable under § 4081” (emphasis added).

Since Producer used butane in the production of finished gasoline, the butane is a gasoline blendstock. See § 48.4081–1(c)(3)(i) and (ii). Because gasoline blendstocks are taxable under § 4081, Producer’s butane is a taxable fuel and not an alternative fuel. See Notice 2006–92; see also § 4041(a)(2). Producer’s mixture is not an alternative fuel mixture for purposes of § 6426(e) because Producer blended two taxable fuels, not a taxable fuel and an alternative fuel. This conclusion is supported by §§ 6426(e), 4081(a), 4083(a), 48.4081–1(b), and 48.4081–1(c)(3), as well as the language in § 48.4041–8(f). Moreover, to view butane as an alternative fuel within the meaning of section 6426(d)(2)(A) 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.

A mixture of butane (or other gasoline blendstock as defined in § 48.4081–1(c)(3)(i)) and gasoline is a mixture of two taxable fuels. Therefore, it is not an alternative fuel mixture and does not qualify for the alternative fuel mixture credit under § 6426(e) of the Code.

The principal author of this revenue ruling is Amanda F. Dunlap of the Office of the Associate Chief Counsel (Passthroughs & Special Industries). For further information about this revenue ruling, please contact Branch 7 of Passthroughs & Special Industries at (202) 317-6855 (not a toll-free number).