CCA 200945035: Renewable diesel may include any ASTM D975 or D396 fuel grade

Plain-English summary

Chief Counsel advised that renewable diesel is not limited to higher-grade fuels under ASTM D975 or ASTM D396. A fuel qualifies if it is derived from biomass, meets the applicable EPA registration requirements, and meets the requirements of any grade under either ASTM standard, including grade No. 6 fuel oil under ASTM D396. The fuel must meet the ASTM specifications before it is blended with petroleum-based diesel fuel. Whether a particular fuel meets the standards is a factual determination for the IRS Excise Tax Program.

Ruling snapshot

• Question: Which fuel grades qualify as renewable diesel, and when must ASTM compliance be tested?
• Outcome: Advice given
• Key authorities: IRC §§ 40A, 4101, 6426, and 6427; 42 U.S.C. § 7545; ASTM D975 and ASTM D396

Full text (IRS public release)

Office of Chief Counsel
Internal Revenue Service
Memorandum
Number: 200945035
Release Date: 11/6/2009
CC:PSI:7:CLANGLEY: Third Party Communication: None
POSTS-121721-09
Date of Communication: Not Applicable

UILC: 40A.00-00

date: September 02, 2009
to: W. Ricky Stiff
(Chief, Excise Tax Program)

from: Stephanie N. Bland
(Senior Technician Reviewer, CC:PSI:7)

subject: Qualification of Renewable Diesel; Testing Requirements

ISSUES

You requested advice on the following issues:

1. Whether renewable diesel is limited to higher grade fuels, such as fuel oil
   grades No. 1 or No. 2 under ASTM D396 or diesel fuel oil grades No. 1-D or
   No. 2-D under ASTM D975; or whether renewable diesel also includes lower
   grades of fuel such as ASTM D396 fuel oil grade No. 6.

2. Whether the determination of whether a liquid fuel meets the appropriate
   ASTM standard should be done on the neat liquid or on the liquid after it has
   been blended with petroleum-based diesel fuel.

LAW

              Section 40A of the Internal Revenue Code (Code) provides tax
       incentives for the sale and use of biodiesel and biodiesel mixtures. Sections
       6426 and 6427(e) provide incentives for the sale and use of biodiesel
       mixtures.

              Under § 40A(f)(1), renewable diesel is treated the same as biodiesel
       for purposes of the entire Code, except that the small agribiodiesel producer
       credit does not apply to renewable diesel. Section 40A(f)(2).

POSTS-121721-09 2

          Section 40A(f)(3), defines “renewable diesel” as a liquid fuel derived
   from biomass which meets (i) the registration requirements for fuels and fuel
   additives established by the Environmental Protection Agency under section
   211 of the Clean Air Act (42 U.S.C. 7545), and (ii) the requirements of ASTM
   D975 or ASTM D396. However, renewable diesel does not include any fuel
   derived from coprocessing biomass with a feedstock that is not biomass (as
   defined in § 45K(c)(3)).

         ASTM D975 provides the specifications for the classification of
   “hydrocarbon based oils” into 7 different grades of diesel fuel oils, including
   No. 1-D and No. 2-D each at three sulfur grades (S15, S500 and S5,000),
   and No. 4-D. All of the diesel grades are suitable for various types of diesel
   engines.

          ASTM D396 provides for the classification of “homogenous
   hydrocarbon based oils” into 9 different grades of fuel oils, including No. 1
   and No. 2 at two sulfur grades each (S500 and S5,000), No. 4 (light), No. 4
   (heavy), No. 5 (light), No. 5 (heavy) and No. 6. No. 1 and No. 2 fuel oils are
   middle distillate fuels, No. 4 fuel oils are heavy distillate fuel oils, and Nos. 5
   and 6 fuel oils are residual distillate fuel oils. The specifications for fuel oil
   beyond grade No. 2 are gradually less demanding as No. 6 is approached,
   with No. 6 being the least demanding of the ASTM D396 specifications. No. 1
   and No. 2 fuel oils are suitable for vehicle use, while the heavier grades of
   fuel are not.

           42 U.S.C. § 7545 provides the EPA registration requirements for fuel
   and fuel additives. The EPA requires the manufacturer of fuel or fuel
   additives to perform various health, safety, and performance tests on the fuel
   or fuel additives and provide the results to the EPA.

          Section 4101(a)(1) requires producers and importers of renewable
   diesel to be registered with the IRS.

ANALYSIS

       In order for a product to be “renewable diesel” it must be a liquid fuel
   derived from biomass which meets (i) the registration requirements for fuels
   and fuel additives established by the Environmental Protection Agency under
   section 211 of the Clean Air Act (42 U.S.C. 7545), and (ii) the requirements of
   ASTM D975 or D396. The language of § 40A(f)(3) does not limit the
   definition of renewable diesel to any particular fuel grades within ASTM D975
   or D396. Furthermore, nothing in the legislative history suggests that
   Congress intended to limit the definition of renewable diesel to certain grades
   within the prescribed ASTM specifications. Thus, a fuel meets the definition
   of renewable diesel if it: (i) is a liquid fuel derived from biomass; (ii) meets the

POSTS-121721-09 3

        registration requirements for fuels and fuel additives established by the EPA
        under § 211 of the Clean Air Act1; and (iii) meets the requirements of any fuel
        grade within ASTM D975 or ASTM D396 (including, but not limited to, grade
        No. 6 fuel oil under ASTM D396). With regard to the ASTM requirements, the
        liquid fuel must meet the specifications of ASTM D975 or ASTM D396 before
        it is blended with petroleum-based diesel fuel.

               We note that the issue of whether a particular fuel meets the
        requirements of ASTM D975 or ASTM D396 is factual in nature. Thus, we
        believe the IRS’s Excise Tax Program is in the best position to determine
        whether a particular product satisfies the requirements of ASTM D975 or
        ASTM D396.

CONCLUSIONS

1. A liquid meets the definition of renewable diesel if it: (i) is a liquid fuel derived
       from biomass; (ii) meets the registration requirements for fuels and fuel
       additives established by the EPA under § 211 of the Clean Air Act; and (iii)
       qualifies as any fuel grade specified in ASTM D975 or ASTM D396, including
       grade No. 6 fuel oil under ASTM D396.

2. The determination of whether a liquid fuel meets the requirements of ASTM D975
      or ASTM D396 must be made before the liquid is blended with petroleum-
      based diesel fuel.

    This document may not be used or cited as precedent.

    If you have any questions concerning this memorandum, please contact
    Charles J. Langley, Jr. at (202) 622-3130

1
A fuel meets the EPA's registration requirements for purposes of § 40A(f)(3)(A) if the EPA does not
require the fuel to be registered.