Rev. Rul. 86-91

1986-2 C.B. 177, 1986-30 I.R.B. 5.

ALCOHOL USED IN FUELS; APPLICATION OF PARTIAL EXEMPTION TO ETHANOL

DERIVED FROM ETHANE

Published: July 28, 1986

Section 4041.-Imposition of Tax, 26 CFR 48.4041-18: Fuels containing alcohol.

  Alcohol used in fuels; application of partial exemption to ethanol derived from ethane. The partial exemption for alcohol fuels provided under section

4041(m)(1)(A) of the Code applies to ethanol produced through the process of thermally cracking ethane that is a constituent of natural gas. Rev. Rul. 85-18 clarified.

  Section 4041(a)(2) of the Internal Revenue Code imposes a tax of 9 cents a gallon on the sale or use of certain special motor fuels. Section 4041(b)(2) exempts from the tax imposed by section 4041(a) qualified methanol or ethanol fuel, which is defined as any liquid at least 85 percent of which consists of methanol, ethanol, or other alcohol produced from a substance other than petroleum or natural gas.

  Rev. Rul. 85-18, 1985-1 C.B. 15, holds that since the ethanol by-product of the ethylcellulose manufacturing process described therein is derived from ethane (a constituent of natural gas) or crude oil, the ethanol does not qualify as alcohol for purposes of the alcohol fuels provisions of sections 40,

4041(b)(2), 4041(k) and 4081(c) of the Code.

  Under section 4041(m)(1)(A) of the Code, as added by section 913(a) of the Tax Reform Act of 1984, 1984-3 (Vol. 1) C.B. 1, 516, effective August 1, 1984, the sale or use of any 'partially exempt methanol or ethanol fuel' will be subject to a tax per gallon of 4- 1/2 cents rather than 9 cents under section

4041(a)(2). The term 'partially exempt methanol or ethanol fuel' is defined in

section 4041(m)(2) as meaning any liquid at least 85 percent of which consists of methanol, ethanol, or other alcohol produced from natural gas.

  Thus, to the extent that the ethanol described in Rev. Rul. 85-18 is produced through the process of thermally cracking ethane that is a constituent of natural gas, the ethanol is produced from natural gas and qualifies for the partial exemption provided under section 4041(m)(1)(A) of the Code, effective August 1, 1984.

EFFECT ON OTHER REVENUE RULINGS

  Rev. Rul. 85-18 is clarified.

Rev. Rul. 86-91, 1986-2 C.B. 177, 1986-30 I.R.B. 5.