CCA 1315018: Freeze-control mixture sprayed on coal does not qualify for the fuel credit

Plain-English summary

Chief Counsel advice considers whether a mixture of glycerin, diesel fuel, and water qualifies for the alternative fuel mixture credit when sprayed on coal as a freeze-control agent. The mixture helps prevent coal from forming blocks and supports unloading from railcars and trucks. The advice concludes that the producer sells the mixture for use as a freeze-control agent, not as a fuel consumed to produce energy. After application, the mixture is absorbed by the coal and loses its identity as a separate product. It therefore does not qualify for the credit on the stated facts.

Ruling snapshot

• Question: What did the IRS decide under the facts presented?
• Outcome: Advice given, with the conclusion stated in the memorandum.
• Key authorities: IRC § 6426; IRC § 6110.

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       memorandum
       Number: 201315018
       Release Date: 4/12/2013
       CC:PSI:7                                              Third Party Communication: None
       POSTN-150632-12                                       Date of Communication: Not Applicable

UILC: 6426.04-00

date: February 14, 2013

 to:   Chief, Excise Tax Program
       (-----------------------)

from: Chief, Branch 7
Office of Associate Chief Counsel
(Passthroughs and Special Industries)
(-------------------)

subject: ------------------------------------------------------------------------------------------------

       This responds to your request for Non-Taxpayer Specific Legal Advice that asks
       whether a blend of glycerin, diesel fuel, and water that is sprayed on coal as a freeze
       control agent qualifies for the alternative fuel mixture credit. This advice may not be
       used or cited as precedent.

       Facts

       A domestic blender (Producer) mixes glycerin, diesel fuel (a taxable fuel), and water to
       produce a mixture (Mixture). The glycerin is a liquid fuel derived from biomass. The
       glycerin is not ethanol, methanol, biodiesel, or any fuel derived from the production of
       paper or pulp. Depending on the specific result intended, the proportion of these three
       components in the Mixture varies between 50 percent and 70 percent for glycerin; .25
       percent to 1 percent for diesel fuel; and 29.5 percent to 49.5 percent for water.
       Producer sells the Mixture to domestic coal producers and transporters (Purchasers) as
       a freeze control agent for coal that is burned in the United States.

       Purchaser sprays the Mixture on coal to prevent the formation of a solid coal block too
       large to easily unload from railcars or trucks. Purchaser may also apply the Mixture to
       the floors and sides of the railcars and trucks to prevent the coal from sticking to their
       sides and bottoms. These applications facilitate the efficient and complete unloading of
       coal from railcars and trucks.

2
POSTN-150632-12

Although Producer sells the Mixture as a freeze control agent, Producer claims the
alternative fuel mixture credit because some of the Producer’s Mixture will be consumed
along with the coal when the coal is burned to produce heat.

Law

Section 6426(e)(1) allows an alternative fuel mixture credit that is the product of $0.50
cents and the number of gallons of alternative fuel the taxpayer uses in producing any
alternative fuel mixture for sale or use in the taxpayer’s trade or business. Section
6426(e)(2) defines “alternative fuel mixture” as a mixture of alternative fuel and taxable
fuel that is sold by the taxpayer producing the mixture to any person for use as fuel or is
used as a fuel by the taxpayer producing the mixture. Section 6426(d)(2)(G) defines
“alternative fuel” as including certain liquid fuels derived from biomass (as defined in
section 45K(c)(3)).

Alternative fuel mixture is a mixture of alternative fuel and taxable fuel that contains at
least 0.1 percent (by volume) of taxable fuel. See section 2(b) of Notice 2006-92, 2006-
2 C.B. 774.

Section 2(f) of Notice 2006-92 defines “use of a fuel” in the context of alternative fuel
mixtures. A mixture is “used as a fuel” when it is consumed in the production of energy.
Thus, for example, a mixture is used as a fuel when it is consumed in a furnace to
produce heat. A mixture producer sells a mixture “for use as a fuel” if the producer has
reason to believe that the mixture will be used as a fuel either by the person buying the
mixture from the producer or by any later buyer of the mixture.

Rev. Rul. 69-150, 1969-1 C.B. 286, determined that gasoline delivered into the fuel tank
of a vehicle to serve as fuel for the vehicle’s operation is not carried by the vehicle for
the purpose of transporting the fuel from one place to another place; rather the fuel is
part of the vehicle. Therefore, for purposes of the export exemption from the
manufacturers excise tax in § 4221(a)(2), the fuel in the tank of an exported vehicle is
considered to be part of the vehicle, and not a separate commodity that is exported.

Analysis

To qualify for the alternative fuel mixture credit a mixture producer must either sell a
mixture “for use as a fuel” or use the mixture as a fuel. A producer sells a mixture for
use as a fuel if the producer has reason to believe that the mixture will be used as a fuel
either by the person buying the mixture from the producer or by any later buyer of the
mixture. A mixture is “used as a fuel” when it is consumed in the production of energy.

Producer sells its Mixture as a freeze control agent that prevents its customers’ coal
from freezing into blocks that are unmanageable and to facilitate the coal’s safe and
efficient transportation rather than as a fuel to be consumed in the production of energy.
 3
POSTN-150632-12

Comparable to the analysis in Rev. Rul. 69-150, the Mixture, after being applied to the
coal as a freeze control agent, is absorbed by the coal and loses its identity as a
separate and identifiable product that can be burned as a fuel. Therefore, Producer
does not have reason to believe that its Purchasers will use the Mixture as a fuel rather
than a freeze control agent.

Conclusion

Consequently, the Mixture that is sprayed on coal as a freeze control agent does not
qualify for the alternative fuel mixture credit.

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