REVENUE RULE 95-54

1995-2 C.B. 6, 1995-35 I.R.B. 5

APPLICATION OF SECTION 40

Released: August 7, 1995
Published: August 28, 1995

Section 40. - Alcohol Used as a Fuel
Application of section 40. Guidance is provided under section 40 of the Code regarding the application of the alcohol mixture credit with respect to eligible alcohol that has been commingled with ineligible alcohol.

ISSUE

If a taxpayer commingles alcohol eligible for the alcohol mixture credit under s 40(b)(1)(A) of the Internal Revenue Code with other alcohol and then uses some of the resulting commingled alcohol in a manner that qualifies for the credit, how does the taxpayer determine the amount of the credit?

FACTS

X buys 300 gallons of methanol that is derived from biomass. This methanol (the eligible alcohol) meets the definition of alcohol in s 40(d)(1). X also buys 700 gallons of methanol that is derived from natural gas. This methanol (the ineligible alcohol) does not meet the definition of alcohol in s 40(d)(1).

X commingles the eligible and ineligible alcohol in a storage tank. X withdraws 100 gallons of the commingled alcohol from the storage tank and mixes it with gasoline for sale for use as a fuel. X sells the remaining 900 gallons of the commingled alcohol for use in the production of paints and plastics.

LAW AND ANALYSIS

Section 40(b)(1)(A) allows an alcohol mixture credit for alcohol used by the taxpayer in the production of a qualified mixture.

Section 40(b)(1)(B) provides that qualified mixture means a mixture of alcohol and gasoline or of alcohol and a special fuel that is sold by the taxpayer producing that mixture to any person for use as a fuel, or is used as a fuel by the taxpayer producing that mixture.

Section 40(d)(1) provides that alcohol includes methanol and ethanol but does not include (i) any alcohol produced from petroleum, natural gas, or coal (including peat), or (ii) alcohol with a proof of less than 150.

Because the eligible and ineligible alcohol are commingled in X's storage tank, a portion of the alcohol removed from the tank contains both eligible and ineligible alcohol. Therefore, a portion of the commingled alcohol may not be designated as composed only of either eligible or ineligible alcohol. Because X cannot determine the actual amounts of eligible and ineligible alcohol contained in the portion removed, these amounts should be determined based on the proportionate volume of each that was placed into the storage tank. Thus, because the eligible and ineligible alcohol were placed into the storage tank at a thirty-seventy ratio, of the 100 gallons of alcohol that X mixes with gasoline for sale for use as a fuel, 30 gallons are eligible for the alcohol mixture credit allowed by s 40(b)-(1)(A).

HOLDING

If a taxpayer commingles eligible alcohol with ineligible alcohol and then uses some of the resulting commingled alcohol in a manner that qualifies for the alcohol mixture credit under s 40(b)(1)(A), the amount of alcohol eligible for the credit is determined based on the proportionate amount of eligible alcohol that is contained in the commingled alcohol.

DRAFTING INFORMATION

The principal author of this revenue ruling is Frank Boland of the Office of Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling contact Mr. Boland on (202) 622-3130 (not a toll-free call)

Rev. Rul. 95-54, 1995-2 C.B. 6, 1995-35 I.R.B. 5