Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 76-58

1976-1 C.B. 328

Section 4041 -- Special Fuels Tax

IRS Headnote

Jet fuel. The taxability is explained for jet fuel used in preflight testing, flight testing, and "first tank fill-ups" by a jet aircraft manufacturer that also repairs used aircraft and whose customers include the armed forces of the U.S. and foreign countries, noncommercial operators, and commercial airlines; Rev. Rul. 66-349 superseded.

Full Text

Rev. Rul. 76-58

Advice has been requested whether, under the circumstances described below, jet fuel used in certain testing, repairing, and in a "first tank fill-up" of aircraft is subject to the retailers excise tax on aviation fuel imposed by section 4041(c) of the Internal Revenue Code of 1954.

A company manufactures and sells new jet aircraft and also repairs used aircraft. Its customers include the armed forces of the United States and foreign countries, noncommercial operators, and commercial airlines that use aircraft in a business of transporting persons or property for hire. In connection with its operations, the company uses jet fuel in the following situations.

Situation (1). In manufacturing, inspection, stationary testing and ground testing, prior to flight testing of new aircraft and aircraft being repaired. This work may include incorporation of engineering changes, completion of work after the aircraft has left the factory, performance of electronic systems, functional tests, fueling operations, engine trim and test, shakedown of all areas of the aircraft and pre-flight operations including a preflight engine run.

Situation (2). In flight testing by its own personnel of new aircraft before acceptance by customers as well as aircraft being repaired for customers.

Situation (3). As a first tank fill-up included with the delivery of each new aircraft sold, the cost of which is incorporated in the price of the aircraft rather than being stated as a separate charge.

Section 4041(c) of the Code imposes a tax upon any liquid (other than any product taxable under section 4081 as gasoline) sold by any person to an owner, lessee, or other operator of an aircraft, for use as a fuel in such aircraft in noncommercial aviation; or used by any person as a fuel in an aircraft in noncommercial aviation, unless there was a taxable sale of such liquid under this section.

Section 4041(c)(4) of the Code provides that, for purposes of the tax imposed by section 4041, the term "noncommercial aviation" means any use of an aircraft, other than use in a business of transporting persons or property for compensation or hire by air.

Section 4041(g) of the Code provides that no tax shall be imposed under section 4041 on any liquid sold for use or used as supplies for vessels or aircraft (within the meaning of section 4221(d)(3)).

Under the provisions of section 4221(d)(3) of the Code, the term "supplies for vessels or aircraft" means fuel supplies, ships' stores, sea stores, or legitimate equipment on vessels of war of the United States or of any foreign nation. Furthermore, the term "vessels of war of the United States or of any foreign nation" includes aircraft owned by the United States or by any foreign nation and constituting a part of the armed forces thereof.

Section 6427(a) of the Code provides that if tax has been imposed under section 4041(c) on the sale of any fuel and the purchaser uses such fuel other than for the use for which sold, or resells such fuel, the Secretary of the Treasury or his delegate shall pay (without interest) to him an amount equal to (1) the amount of tax imposed on the sale of the fuel to him, reduced by (2) if he uses the fuel, the amount of tax that would have been imposed under section 4041 on such use if no tax under section 4041 had been imposed on the sale of the fuel.

Rev. Rul. 66-349, 1966-2 C.B. 460, holds that special motor fuels used in certain preflight manufacturing, inspection, and stationary testing operations of jet aircraft are not used for the propulsion of an airplane within the meaning of section 4041(b) of the Code (as in effect at the time of publication) and are not taxable, but special motor fuels sold for use or used in the propulsion of jet aircraft after being placed in operational status are taxable. Section 4041(b) was amended by the Airport and Airway Revenue Act of 1970, section 202, 1970-1 C.B. 361, which provided that the tax on aviation fuels is imposed by new section 4041(c).

With respect to Situation (1), the use of jet fuels in the described preflight testing of aircraft is not a use of fuel in an aircraft as contemplated by section 4041(c) of the Code. Accordingly, the jet fuel used by the company in the preflight testing of new aircraft and aircraft being repaired is not subject to the retailers excise tax on special fuels imposed by that section.

With respect to Situation (2), jet fuel used in preacceptance test flights of new aircraft is used in noncommercial aviation. Therefore, jet fuel used by the company for flight testing new aircraft before acceptance by its customers is subject to the tax imposed by section 4041(c) of the Code. Likewise, jet fuel used by the company for flight testing aircraft being repaired for its customers is used in noncommercial aviation and is subject to the tax imposed by that section. However, under the provisions of section 4041(g), fuel used in flight testing aircraft being repaired that are owned by the United States or a foreign nation and are part of the armed forces thereof is exempt from the tax imposed by that section.

With respect to Situation (3), in providing a first tank fill-up of fuel with the delivery of new aircraft, the company, in substance, sells the fuel to the purchaser of the aircraft and the provisions of section 4041(c) of the Code, and sections related thereto, apply to such sales. Thus, such fuel is subject to the tax imposed by section 4041(c) if the aircraft is to be used in noncommercial aviation. However, such fuel is not subject to the tax imposed by that section in the case of an aircraft that is sold for use in commercial aviation or has been accepted for use by the armed forces of the United States or a foreign country and becomes a part of the armed forces thereof, provided the requirements of the applicable law and regulations relating to tax-free sales and purchases of fuel are met.

In the case of any jet fuel purchased on a tax-paid basis by the company and used by it in the preflight testing in Situation (1), under the provisions of section 6427(a) of the Code the company is entitled to a payment of an amount equal to the amount of tax imposed on the sale of the fuel to it since it used the fuel for a nontaxable purpose. Likewise, in the case of any jet fuel purchased on a tax-paid basis by the company and provided by it as a first tank fill-up in Situation (3), the company is entitled to a payment under that section of an amount equal to the amount of tax imposed on the sale of the fuel to it since it resold the fuel. In the latter event, however, as indicated in Situation (3), above, the resales of the fuel by the company are subject to the provisions of section 4041(c) and sections related thereto.

Rev. Rul. 66-349, is modified and, as modified, superseded since the position set forth in Rev. Rul. 66-349 is restated in this Revenue Ruling.