TAM 1121013: fuel mixture is sold under a qualifying two-party exchange

Plain-English summary

The IRS concluded that a gasoline and alcohol mixture delivered over a terminal rack under a qualifying two-party exchange agreement is “sold” for purposes of the alcohol fuel mixture credit. The taxpayer exchanged the mixture with another taxable-fuel registrant for like fuel delivered in another geographic area. The IRS treated that transfer of ownership for consideration as a sale under IRC § 6426, even though the transaction met the two-party exchange rules of IRC § 4105. The taxpayer could therefore claim the alcohol fuel mixture credit, subject to the stated facts and caveat concerning later regulations.

Ruling snapshot

• Question: Is a fuel mixture delivered under a qualifying two-party exchange “sold” for purposes of IRC § 6426?
• Outcome: Advice given.
• Key authorities: IRC §§ 4081, 4105, and 6426; Rev. Proc. 2011-1.

Full text (IRS public release)

                        INTERNAL REVENUE SERVICE
              NATIONAL OFFICE TECHNICAL ADVICE MEMORANDUM

                                         January 12, 2011

                                              Third Party Communication: None
                                              Date of Communication: Not Applicable

Number: 201121013
Release Date: 5/27/2011
Index (UIL) No.: 6426.00-00, 4105.00-00
CASE-MIS No.: TAM-142651-10

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     Taxpayer's Name:                        -------------------------------
     Taxpayer's Address:                     -------------------------------------------
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     Taxpayer's Identification No            ----------------
     Year(s) Involved:                       ---------------------------
     Date of Conference:                     -------------

LEGEND:

Taxpayer = -------------------------------

ISSUE:

Where Taxpayer delivers a fuel mixture of gasoline and alcohol over the rack to a
receiving person under a two-party exchange agreement within the meaning of § 4105
of the Internal Revenue Code, is the fuel mixture “sold” within the meaning of
§§ 6426(b)(1) and (b)(3)(A)?

TAM-142651-10 2

CONCLUSION:

Yes, a fuel mixture delivered over the rack under a two-party exchange agreement
within the meaning of section § 4105 is “sold” by the delivering person within the
meaning of §§ 6426(b)(1) and (b)(3)(A).

FACTS:

Taxpayer is a taxable fuel registrant and a position holder in gasoline at terminals that it
operates. Taxpayer owns gasoline and alcohol as separate components in its
terminals. Taxpayer has two-party exchange agreements with its Exchange Partners,
which are other taxable fuel registrants. All agreements are detailed in written contracts
between the parties. The two-party exchange agreements are explicitly for the
exchange of fuel mixtures, not for the exchange of one or more components of the
mixtures. Taxpayer produces the alcohol/gasoline mixture by combining gasoline and
alcohol in its terminals before delivering the mixture over the rack to the receiving
person. The resulting alcohol/gasoline mixture is gasoline, a taxable fuel, and it is
ultimately used as a fuel. Taxpayer exchanges the fuel mixtures with its Exchange
Partners in a manner that meets the requirements of § 4105 (b)(1) through (b)(4) and
the Exchange Partners are liable for the tax imposed by § 4081 on their removal of the
fuel mixtures at the terminal rack.

LAW AND ANALYSIS:

Under § 4105(a), the delivering person in a two-party exchange is not liable for the tax
imposed under § 4081(a)(1)(A)(ii) (relating to tax on removal from a terminal). Section
4105(b) defines “two-party exchange” as a transaction, other than a sale, in which
taxable fuel is transferred from a delivering person that is a taxable fuel registrant to a
receiving person who is so registered where certain prescribed events occur (which are
described in § 4105 (b)(1) through (b)(4)).

Sections 6426(a) and (b)(1) allow an alcohol mixture credit for alcohol used by the
taxpayer in producing any alcohol fuel mixture for sale or use in a trade or business of
the taxpayer.

Section 6426(b)(3) defines “alcohol fuel mixture” to mean a mixture of alcohol and a
taxable fuel which

(A) is sold by the taxpayer producing such mixture to any person for use as a fuel,
or

(B) is used as a fuel by the taxpayer producing such a mixture.

TAM-142651-10 3

Taxpayer delivers the fuel to the receiving person under a two-party exchange contract
within the meaning of § 4105. Section 4105 defines a two-party exchange, in part, as a
transaction, other than a sale, in which taxable fuel is transferred from a delivering
person who is a taxable fuel registrant to a receiving person who is a taxable fuel
registrant.

The fuel mixture delivered by Taxpayer under the two-party exchange agreement to a
receiving person is provided for a consideration, namely the provision of like fuel to
Taxpayer in another geographic area. Thus, the fuel mixture is exchanged for other
property, specifically, like property elsewhere. In the § 4105 definition of the term “two-
party exchange,” Congress intended to exclude “sales” in which fuel is exchanged for
money or similar property from the definition. (There may be, however, a reconciliation
involving monetary payments at the end of a period specified in the two-party exchange
agreement.) By definition, however, Congress intended to include the transfer of
ownership in taxable fuel for other consideration such as that provided by Taxpayer in
the two-party exchange agreements.

Taxpayer’s delivery of the fuel mixture to the receiving person under a two-party
exchange agreement is a “sale” within the meaning of § 6426(b)(1) of the Code, and the
fuel mixture is “sold” within the meaning of § 6426(b)(3)(A). Accordingly, under these
facts, Taxpayer, a producer of an alcohol/gasoline mixture, sells an “alcohol fuel
mixture” for use as a fuel within the meaning of § 6426(b)(3)(A), and may claim the
alcohol fuel mixture credit under § 6426(b).

CAVEAT:

Temporary or final regulations pertaining to one or more of the issues addressed in this
memorandum have not yet been adopted. This memorandum therefore will be modified
or revoked by the adoption of temporary or final regulations to the extent the regulations
are inconsistent with any conclusion in the memorandum. See section 11.04 of Rev.
Proc. 2011-1, 2011-1 I.R.B. 1.

A copy of this technical advice memorandum is to be given to the taxpayer. Section
6110(k)(3) of the Code provides that it may not be used or cited as precedent.