Internal Revenue Bulletin 1996-16 (PDF rendition): IRS Revenue Procedures

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing. Whole bulletin rendition: numbered items are identified below; other legal material and publisher context remain included. This is not a new standalone advance release.

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Bulletin No. 1996–16
April 15, 1996
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
EMPLOYEE PLANS
Notice 96–24, page 23.
Guidelines are set forth for determining for April 1996,
the weighted average interest rate and the resulting
permissible range of interest rates used to calculate
current liability for purposes of the full funding
limitation of section 412(c)(7) of the Code as amended
by the Omnibus Budget Reconciliation Act of 1987 and
by the Uruguay Round Agreements Act (GATT).
EXCISE TAXES
T.D. 8659, page 4.
Final regulations under section 6011 of the Code
relating to the gasoline and diesel fuel excise taxes.
PS–6–95, page 27.
Proposed regulations under sections 4081 and 4082 of
the Code relating to the gasoline and diesel fuel excise
taxes. A public hearing will be held on June 20, 1996.
ADMINISTRATIVE
Notice 96–23, page 23.
The Service requests comments regarding the proper
accounting for loans that are subject to both the
principal-reduction method of accounting and the mark-
to-market rules.
Rev. Proc. 96–29, page 24.
VCR and Walk-in CAP compliance programs; eligibility.
This procedure describes changes to the eligibility
requirements for the Voluntary Compliance Resolution
Program and the Walk-in Closing Agreement Program.
Rev. Proc. 94–16 and Rev. Proc. 94–62 modified.
Announcement 96–24, page 30.
Proposed examination guidelines for rural electric
cooperatives are published for public comment.
Finding Lists begin on page 54.
Announcement of Disbarments and Suspensions begins on page 51.

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Mission of the Service
The purpose of the Internal Revenue Service is to
collect the proper amount of tax revenue at the least
cost; serve the public by continually improving the
quality of our products and services; and perform in a
manner warranting the highest degree of public
confidence in our integrity, efficiency and fairness.
Statement of Principles
of Internal Revenue
Tax Administration
The function of the Internal Revenue Service is to
administer the Internal Revenue Code. Tax policy
for raising revenue is determined by Congress.
With this in mind, it is the duty of the Service to
carry out that policy by correctly applying the laws
enacted by Congress; to determine the reasonable
meaning of various Code provisions in light of the
Congressional purpose in enacting them; and to
perform this work in a fair and impartial manner,
with neither a government nor a taxpayer point of
view.
At the heart of administration is interpretation of the
Code. It is the responsibility of each person in the
Service, charged with the duty of interpreting the
law, to try to find the true meaning of the statutory
provision and not to adopt a strained construction in
the belief that he or she is ‘‘protecting the revenue.’’
The revenue is properly protected only when we as-
certain and apply the true meaning of the statute.
The Service also has the responsibility of applying
and administering the law in a reasonable,
practical manner. Issues should only be raised by
examining officers when they have merit, never
arbitrarily or for trading purposes. At the same
time, the examining officer should never hesitate
to raise a meritorious issue. It is also important
that care be exercised not to raise an issue or to
ask a court to adopt a position inconsistent with
an established Service position.
Administration should be both reasonable and
vigorous. It should be conducted with as little
delay as possible and with great courtesy and
considerateness. It should never try to overreach,
and should be reasonable within the bounds of law
and sound administration. It should, however, be
vigorous in requiring compliance with law and it
should be relentless in its attack on unreal tax
devices and fraud.

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Introduction
The Internal Revenue Bulletin is the authoritative
instrument of the Commissioner of Internal Revenue for
announcing official rulings and procedures of the
Internal Revenue Service and for publishing Treasury
Decisions, Executive Orders, Tax Conventions, legisla-
tion, court decisions, and other items of general
interest. It is published weekly and may be obtained
from the Superintendent of Documents on a subscrip-
tion basis. Bulletin contents of a permanent nature are
consolidated semiannually into Cumulative Bulletins,
which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin
all substantive rulings necessary to promote a uniform
application of the tax laws, including all rulings that
supersede, revoke, modify, or amend any of those
previously published in the Bulletin. All published
rulings apply retroactively unless otherwise indicated.
Procedures relating solely to matters of internal
management are not published; however, statements of
internal practices and procedures that affect the rights
and duties of taxpayers are published.
Revenue rulings represent the conclusions of the
Service on the application of the law to the pivotal facts
stated in the revenue ruling. In those based on
positions taken in rulings to taxpayers or technical
advice to Service field offices, identifying details and
information of a confidential nature are deleted to
prevent unwarranted invasions of privacy and to comply
with statutory requirements.
Rulings and procedures reported in the Bulletin do not
have the force and effect of Treasury Department
Regulations, but they may be used as precedents.
Unpublished rulings will not be relied on, used, or cited
as precedents by Service personnel in the disposition of
other cases. In applying published rulings and proce-
dures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be
considered, and Service personnel and others con-
cerned are cautioned against reaching the same
conclusions in other cases unless the facts and
circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on
provisions of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows:
Subpart A, Tax Conventions, and Subpart B, Legislation
and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to
these subjects are contained in the other Parts and
Subparts. Also included in this part are Bank Secrecy
Act Administrative Rulings. Bank Secrecy Act Admin-
istrative Rulings are issued by the Department of the
Treasury’s Office of the Assistant Secretary
(Enforcement).
Part IV.—Items of General Interest.
With the exception of the Notice of Proposed Rulemak-
ing and the disbarment and suspension list included in
this part, none of these announcements are consoli-
dated in the Cumulative Bulletins.
The first Bulletin for each month includes an index for
the matters published during the preceding month.
These monthly indexes are cumulated on a quarterly
and semiannual basis, and are published in the first
Bulletin of the succeeding quarterly and semi-annual
period, respectively.
The Bulletin Index-Digest System, a research and
reference service supplementing the Bulletin, may be
obtained from the Superintendent of Documents on a
subscription basis. It consists of four Services: Service
No. 1, Income Tax; Service No. 2, Estate and Gift
Taxes; Service No. 3, Employment Taxes; Service No.
4, Excise Taxes. Each Service consists of a basic
volume and a cumulative supplement that provides (1)
finding lists of items published in the Bulletin, (2)
digests of revenue rulings, revenue procedures, and
other published items, and (3) indexes of Public Laws,
Treasury Decisions, and Tax Conventions.
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents U.S. Government Printing Office, Washington, D.C. 20402.

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Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 6011.—General Requirement
of Return, Statement, or List
26 CFR 40.6011(a)–1: Returns
T.D. 8659
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 40, 42, 48, and 602
Gasoline and Diesel Fuel Excise Tax;
Registration Requirements
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations relating to the taxes on
gasoline and diesel fuel. This document
also removes obsolete excise tax reg-
ulations. The regulations reflect and
implement certain changes made by the
Omnibus Budget Reconciliation Act of
1990 and the Omnibus Budget Recon-
ciliation Act of 1993 (the 1993 Act).
The regulations affect certain blenders,
enterers, industrial users, refiners, ter-
minal operators, and throughputters.
The regulations also affect certain
persons that sell, buy, or use diesel fuel
for a nontaxable use.
EFFECTIVE DATE: These regulations
are effective March 14, 1996.
FOR FURTHER INFORMATION
CONTACT: Frank Boland (202)
622-3130 (not a toll-free call).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information con-
tained in these final regulations have
been reviewed and approved by the
Office of Management and Budget in
accordance with the Paperwork Reduc-
tion Act (44 U.S.C. 3507) under
control number 1545–1418. Responses
to this collection of information are
mandatory and are required to obtain
certain credits or payments.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless the collection of information
displays a valid control number.
The estimated average annual report-
ing burden per respondent is .1 hour.
Comments concerning the accuracy
of this burden estimate and suggestions
for reducing this burden should be sent
to the Internal Revenue Service, Attn:
IRS Reports Clearance Officer, PC:FP,
Washington, DC 20224, and to the
Office of Management and Budget,
Attn: Desk Officer for the Department
of the Treasury, Office of Information
and Regulatory Affairs, Washington,
DC 20503.
Books and records relating to this
collection of information must be re-
tained as long as their contents may
become material in the administration
of any internal revenue law. Generally,
tax returns and tax return information
are confidential, as required by 26
U.S.C. 6103.
Background
The diesel fuel regulations. Before
1994, the diesel fuel tax applied to
sales of diesel fuel by importers or
producers (including registered whole-
sale distributors). Because of concerns
that this system fostered considerable
tax evasion, Congress made significant
changes to the tax in the 1993 Act.
Effective January 1, 1994, tax is
imposed on diesel fuel when it is
removed at the terminal rack, and
diesel fuel may be removed tax free
only if the fuel contains a prescribed
type and amount of dye. These changes
made the taxing point readily identifia-
ble, required untaxed fuel to be phys-
ically identified (that is, dyed), and
reduced the number of taxpayers.
Temporary regulations (TD 8496
[1993–2 C.B. 281]) relating to these
changes (the diesel fuel regulations)
were published in the Federal Register
on November 30, 1993 (58 FR 63069),
along with a notice of proposed
rulemaking (PS–52–93 [1993–2 C.B.
639]) cross-referencing the temporary
regulations (58 FR 63131). Amend-
ments to these temporary regulations
(TD 8512 [1994–1 C.B. 273]) relating
to dye color and concentration were
published in the Federal Register on
December 27, 1993 (58 FR 68304),
along with a notice of proposed
rulemaking (PS–76–93 [1994–1 C.B.
832]) cross-referencing those amend-
ments (58 FR 68338). Written com-
ments responding to the proposed
diesel fuel regulations were received
and a public hearing was held on
March 22, 1994. Final regulations (TD
8550 [1994–2 C.B. 243]) relating to
dye color and concentration were pub-
lished in the Federal Register on June
30, 1994 (59 FR 33656).
The conforming regulations. On Oc-
tober 19, 1994, the IRS published in
the Federal Register (59 FR 52735)
proposed regulations (PS–66–93 [1994–
2 C.B. 907]) that generally consolidate
the rules relating to the gasoline tax
and the diesel fuel tax into a single set
of rules applicable to both fuels (the
conforming regulations). The conform-
ing regulations also proposed rules
relating to gasohol and compressed
natural gas.
Written comments regarding the pro-
posed conforming regulations were re-
ceived and a public hearing was held
on January 11, 1995.
Final regulations (TD 8609 [1995–37
I.R.B. 5]) relating to gasohol and
compressed natural gas were published
in the Federal Register on August 7,
1995 (60 FR 40079).
The final regulations. After consid-
eration of written comments and com-
ments made at the public hearings, the
proposed diesel fuel regulations and the
proposed conforming regulations are
adopted as revised by this Treasury
decision. Comments and revisions are
discussed below.
Significant Issues Raised in
Comments and Changes Made in the
Final Regulations
Treatment of kerosene
The temporary diesel fuel regulations
provide that kerosene would not be
treated as diesel fuel before July 1,
1994, and invited comments on the
treatment of kerosene after June 30,
1994. Notice 94–72 (1994–2 C.B. 553)
informed taxpayers that the IRS was
reviewing this issue and would not
change the treatment of kerosene until
the issuance of further guidance. The
IRS is continuing its review of this
issue. Accordingly, the final regulations
do not treat kerosene as diesel fuel.
Because kerosene is not treated as
diesel fuel, a person that adds kerosene

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to diesel fuel outside of the bulk
transfer/terminal system generally must
pay tax on the added kerosene and
must be registered by the IRS.
Removal from certain refineries
The temporary diesel fuel regulations
provide that tax is not imposed on the
removal of undyed diesel fuel from an
approved refinery for delivery to an
approved terminal if the fuel is re-
moved by rail car, the refinery and the
terminal are operated by the same
taxable fuel registrant, and the refinery
is not served by pipeline or vessel.
One commentator noted that one of
its refineries is not serviced by
pipeline, vessel, or rail. In response to
this comment, the final regulations
expand this rule so that diesel fuel also
may be removed tax free from an ap-
proved refinery that is not served by
pipeline, vessel, or rail if the removal
is by a trailer or semi-trailer and addi-
tional prescribed conditions are met.
Notice relating to sales and removals
of dyed diesel fuel
The temporary diesel fuel regulations
provide that terminal operators and
others who sell dyed diesel fuel are
r e s p o n s i b l e f o r i n f o r m i n g t h e i r
customers that the dyed fuel cannot be
used for a taxable purpose and that a
penalty may be imposed for taxable use
(the notice requirement). Any person
that fails to comply with the notice
requirement is, for purposes of the
penalty for misuse of dyed fuel im-
posed by section 6714, presumed to
know that the dyed diesel fuel will not
be used for a nontaxable use.
Under the final regulations, only
terminal operators and certain retail
sellers will be subject to the notice
requirement. A terminal operator must
comply with the notice requirement as
one of the terms and conditions of its
registration.
Visual inspection devices
The temporary diesel fuel regulations
do not require the use of visual in-
spection devices and the final regula-
tions continue this policy. The IRS will
continue to evaluate the need for
regulations addressing this issue. How-
ever, the use of visual inspection
devices is encouraged so that the
buyers and sellers of diesel fuel may
readily determine whether the fuel may
be used for a taxable use.
Back-up tax; trains
A tax is imposed on the delivery of
dyed diesel fuel into the fuel supply
tank of a diesel-powered train. Under
the temporary diesel fuel regulations,
the operator of the train into which
dyed fuel is delivered is liable for the
tax.
Several commentators noted that a
prevalent practice in the railroad indus-
try is for one railroad’s locomotives to
be used to pull freight on another’s
track and to be fueled by the railroad
that owns the track. In these situations,
the identity of the operator is unclear.
In response to these comments, the
final regulations provide that the person
that delivers dyed diesel fuel into the
fuel supply tank of a train is liable
for the tax under certain prescribed
conditions.
Credits and payments
Information to be submitted with
claims. If undyed diesel fuel is used in
a nontaxable use, a credit or payment is
allowable to either (1) the ultimate
purchaser or (2) in the case of diesel
fuel used on a farm for farming
purposes or by a State or local
government, the registered ultimate
vendor of the fuel. The temporary
diesel fuel regulations prescribe the
information that must be submitted to
the IRS to support claims for these
credits or payments.
Several commentators asserted that
the information requirements in the
diesel fuel temporary regulations are
too burdensome. In response to these
comments, the final regulations reduce
the paperwork requirements for claim-
ants by eliminating certain items from
the list of required submissions. How-
ever, the paperwork requirements may
be changed in the future if the IRS
determines that additional information
is necessary for effective enforcement
of the tax.
Notice 94–61. Notice 94–61 (1994–1
C.B. 371) announced that the tempo-
rary diesel fuel regulations would be
revised to clarify that (1) a registered
ultimate vendor is the only person al-
lowed a credit or payment with respect
to diesel fuel used on a farm for
farming purposes or by State or local
governments, and (2) a credit or
payment generally is allowed to a
registered ultimate vendor who sells
undyed diesel fuel to a custom harves-
ter for use on a farm for farming pur-
poses. The final regulations contain
these revisions.
Undyed diesel fuel mixed with dyed
diesel fuel. One condition for the
allowance of a credit or payment under
section 6427 is that tax must have been
imposed on the diesel fuel to which the
claim relates. Because untaxed diesel
fuel is dyed, the temporary diesel fuel
regulations require each claim to be
accompanied by a statement that the
diesel fuel covered by a claim did not
contain visible evidence of dye.
On rare occasions, however, an
amount of taxed diesel fuel may
contain visible evidence of dye. This
may occur, for example, when dyed
diesel fuel and undyed diesel fuel are
mixed together by a fuel marketer or
user who accidentally delivers one type
of fuel into a storage tank that already
contains the other type of fuel.
The final regulations provide that
each claim must be accompanied by a
statement that tax has been imposed on
the diesel fuel covered by a claim.
Generally, this requirement will be met
by a claimant’s statement that the
diesel fuel did not contain visible
evidence of dye. However, for claims
involving taxed fuel that has been
mixed with dyed fuel, the claimant
(that is, the ultimate purchaser or the
registered ultimate vendor) cannot
make such a statement. For these
claims, the claimant must submit other
evidence showing that the diesel fuel
covered by the claim has been subject
to tax. This evidence might include a
statement from the person that pro-
duced the undyed/dyed fuel mixture
explaining how the mixing occurred or
a statement from the claimant (if the
claimant did not produce the mixture)
that explains when and from whom the
claimant acquired the mixture. As with
all claims, these claims are subject to
review by the IRS before they are
allowed.
Section 6714 penalty
Section 6714(a)(3) provides that if
any person willfully alters, or attempts
to alter, the strength or composition of
any dye or marking done pursuant to
section 4082 in any dyed fuel, then
such person shall pay a penalty in
addition to the tax (if any).

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Notice 94–21 (1994–1 C.B. 339) de-
scribes three situations in which the
section 6714(a)(3) penalty does not
apply. The final regulations incorporate
the substance of the Notice. In addi-
tion, the final regulations provide that
the section 6714(a)(3) penalty does not
apply if dyed diesel fuel is blended
with undyed diesel fuel and the blend-
ing occurs as part of an exempt or
partially exempt (that is, bus or train)
use. Thus, for example, the section
6714(a)(3) penalty does not apply if
dyed and undyed diesel fuel are
blended together in the fuel supply tank
of a nonhighway vehicle such as a
bulldozer or farm tractor.
Dye injection systems and markers
The final regulations do not require
the use of dye injection systems or
markers. These topics will be addressed
in a future notice of proposed rule-
making.
Effect on other documents
The following publications are ob-
solete as of March 14, 1996:
Rev. Rul. 72–213, 1972–1 C.B. 328.
Rev. Proc. 73–21, 1973–2 C.B. 471.
Notice 88–26, 1988–1 C.B. 495.
Notice 89–17, 1989–1 C.B. 647.
Notice 94–18, 1994–1 C.B. 338.
Notice 94–21, 1994–1 C.B. 339.
Notice 94–61, 1994–1 C.B. 371.
Notice 94–72, 1994–2 C.B. 553.
Special Analyses
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in EO
12866. Therefore, a regulatory assess-
ment is not required. It also has been
determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) and the Regulatory Flex-
ibility Act (5 U.S.C. chapter 6) do not
apply to these regulations, and, there-
fore, a Regulatory Flexibility Analysis
is not required. Pursuant to section
7805(f) of the Internal Revenue Code,
the notices of proposed rulemaking
preceding these regulations were sub-
mitted to the Small Business Admin-
istration for comment on their impact
on small business.
Drafting Information
The principal author of these regula-
tions is Frank Boland, Office of Assist-
ant Chief Counsel (Passthroughs and
Special Industries). However, other
personnel from the IRS and Treasury
Department participated in their de-
velopment.
******
Adoption of Amendments to the
Regulations
Accordingly, under the authority of
26 U.S.C. 7805, chapter 1 is amended
as follows:
PART 40—EXCISE TAX
PROCEDURAL REGULATIONS
Paragraph 1. The authority citation
for part 40 is amended by removing the
entry for sections 40.6011(a)–1,
40.6011(a)–2, and 40.6011(a)–3T and
adding entries in numerical order to
read in part as follows:
Authority: 26 U.S.C. 7805 ** *
Section 40.6011(a)–1 also issued un-
der 26 U.S.C. 6011(a).
Section 40.6011(a)–2 also issued un-
der 26 U.S.C. 6011(a). ** *
Par. 2. Section 40.6011(a)–1(b) is
amended by:
1.Redesignating the text of para-
graph (b) following the heading as
paragraph (b)(1) and adding a heading
for newly designated paragraph (b)(1).
2.Adding paragraph (b)(2).
The additions read as follows:
§40.6011(a)–1 Returns.
******
(b) * ** (1) In general. ** *
(2)Certain persons liable for tax on
taxable fuel. Effective January 1, 1994,
the district director may require a
person to make a return of tax for a
monthly or semimonthly period in the
manner prescribed in paragraph (b)(1)
of this section if the person—
(i)Is a bonded registrant (as defined
in §48.4101–1(b) of this chapter) at any
time during the period;
(ii)Has been registered under sec-
tion 4101 for less than one year at the
beginning of the period;
(iii)Meets the acceptable risk test of
§48.4101–1(f)(3) of this chapter by
reason of §48.4101–1(f)(3)(i)(B) of this
chapter at any time during the period;
(iv)Has failed to comply with the
applicable provisions of §48.4101–1(h)
of this chapter (relating to the terms
and conditions of registration);
(v)Is liable for tax under §48.4082–
4(a) of this chapter (relating to the
back-up tax on diesel fuel) at any time
during the period; or
(vi)Is liable for tax under section
4081 (relating to the tax on taxable
fuel) at any time during the period and
is not a taxable fuel registrant at that
time.
******
§40.6011(a)–3T [Removed]
Par. 3. Section 40.6011(a)–3T is
removed.
PART 42—[REMOVED]
Par. 4. Part 42 is removed.
PART 48—MANUFACTURERS
AND RETAILERS EXCISE TAXES
Par. 5. The authority citation for part
48 is amended by removing the entries
for sections 48.4081–4, 48.4082–1 and
48.4082–2T, 48.4101–3T, 48.4101–4T,
48.6427–8T and 48.6427–9T, and
adding entries in numerical order to
read in part as follows:
Authority: 26 U.S.C. 7805 ** *
Section 48.4081–4 also issued under
26 U.S.C. 4083(a)(2). ** *
Section 48.4082–1 also issued under
26 U.S.C. 4082.
Section 48.4082–2 also issued under
26 U.S.C. 4082.
Section 48.4101–1 also issued under
26 U.S.C. 4101(a).
Section 48.4101–2 also issued under
26 U.S.C. 4101(d). ** *
Section 48.6427–8 also issued under
26 U.S.C. 6427(n).
Section 48.6427–9 also issued under
26 U.S.C. 6427(n).
Par. 6. Section 48.0–1 is amended by
removing from the fourth sentence the
language ‘‘gasoline, diesel and aviation
fuel,’’ and adding ‘‘taxable fuel, avia-
tion fuel,’’ in its place.
§48.4041–0T [Removed]
Par. 7. Section 48.4041–0T is
removed.

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Par. 8. Section 48.4041–0 is added to
read as follows:
§48.4041–0 Applicability of
regulations relating to diesel fuel
after December 31, 1993.
S e c t i o n s 4 8 . 4 0 4 1 – 3 t h r o u g h
48.4041–17 do not apply to sales or
uses of diesel fuel after December 31,
1993. For rules relating to the diesel
fuel tax imposed by section 4041 after
that date, see §48.4082–4.
§§48.4041–1 and 48.4041–2
[Removed]
Par. 9. Sections 48.4041–1 and
48.4041–2 are removed.
§48.4041–2T [Removed]
Par. 10. Section 48.4041–2T is
removed.
§48.4041–21 [Amended]
§§48.4041–15 through 48.4041–21
[Transferred]
Par. 11. Sections 48.4041–15 through
48.4041–21 are transferred from sub-
part G to subpart F.
Par. 12. In the first sentence of
§ 4 8 . 4 0 4 1 – 2 1 ( c ) ( 1 ) , t h e l a n g u a g e
‘‘§48.4082–4T(c)(1) through (5)(A) or
(c)(6) through (11)’’ is removed and
‘‘§48.4082–4(c)(1) through (c)(4)(i) or
(c)(5) through (c)(10)’’ is added in its
place.
Par. 13. The heading for subpart G is
revised to read as follows:
Subpart G—Fuel Used on Inland
Waterways
Par. 14. Section 48.4042–1 is
amended as follows:
1.Paragraphs (b) and (e) are revised.
2.In the introductory text of para-
graph (f)(1), the language ‘‘(26)’’ is
removed and ‘‘(27)’’ is added in its
place.
3.Paragraphs (g)(25) and (g)(26) are
redesignated as paragraphs (g)(26) and
(g)(27), respectively, and a new para-
graph (g)(25) is added.
The revisions and additions read as
follows:
§48.4042–1 Tax on fuel used in
commercial waterway transportation.
******
(b)Amount of tax. For the amount of
tax, see section 4042(b).
******
(e)Liquid fuel. For purposes of the
tax imposed under this section, liquid
fuel means any liquid fuel including
gasoline, diesel fuel, special motor fuel,
or Bunker C residual fuel oil.
******
(g) * * *
(25) Tennessee-Tombigbee Water-
way: From its confluence with the
Tennessee River to the Warrior River
at Demopolis, Alabama.
******
Par. 15. The heading for subpart H is
revised to read as follows:
Subpart H—Motor Vehicles, Tires,
Tubes, Tread Rubber, and Taxable
Fuel
Par. 16. Section 48.4064–1(e)(2) is
amended by removing the language
‘‘Form 843’’ and adding ‘‘Form 8849
(or on such other form as the Commis-
sioner may designate)’’ in its place.
Par. 17. The undesignated center
heading preceding §48.4081–1 is re-
vised to read as follows:
TAXABLE FUEL
P a r . 1 8 . S e c t i o n s 4 8 . 4 0 8 1 – 1 ,
48.4081–2 and 48.4081–3 are revised
to read as follows:
§48.4081–1 Taxable fuel; definitions.
(a)Overview. This section provides
definitions for purposes of the tax on
taxable fuel imposed by section 4081.
(b)Definitions.
Approved terminal or refinery means
a terminal or refinery that is operated,
respectively, by a taxable fuel regis-
trant that is a terminal operator, or by a
taxable fuel registrant that is a refiner.
Blender means any person that pro-
duces blended taxable fuel.
Bulk transfer means any transfer of
taxable fuel by pipeline or vessel.
Bulk transfer/terminal system means
the taxable fuel distribution system
consisting of refineries, pipelines, ves-
sels, and terminals. Thus, taxable fuel
in a refinery, pipeline, vessel, or
terminal is in the bulk transfer/terminal
system. Taxable fuel in the fuel supply
tank of any engine, or in any tank car,
rail car, trailer, truck, or other equip-
ment suitable for ground transportation
is not in the bulk transfer/terminal
system.
Bus means automobile bus.
Diesel-powered boat means any wa-
terborne vessel of any size or config-
uration that is propelled, in whole or in
part, by a diesel-powered engine.
Diesel-powered bus means any bus
that is propelled by a diesel-powered
engine.
Diesel-powered highway vehicle
means a highway vehicle, as defined in
§48.4041–8(b), that is propelled by a
diesel-powered engine.
Diesel-powered train means any
diesel-powered equipment or machinery
that rides on rails. Thus, for example,
the term includes a locomotive, work
train, switching engine, and track main-
tenance machine.
Enterer generally means the importer
of record (under customs law) with
respect to the taxable fuel. However, if
the importer of record is acting as an
agent (for example, the importer of
record is a customs broker engaged by
the owner of the taxable fuel), the
person for whom the agent is acting is
the enterer. If there is no importer of
record for taxable fuel entered into the
United States, the owner of the taxable
fuel at the time it is brought into the
United States is the enterer.
Entry of taxable fuel into the United
States occurs when—
(1)The taxable fuel is brought into
the United States and applicable
customs law requires that the taxable
fuel be entered into the United States
for consumption, use, or warehousing;
or
(2)The taxable fuel is brought into
the United States from Puerto Rico and
applicable customs law would require
that the taxable fuel be entered into the
United States for consumption, use, or
warehousing if the taxable fuel were
brought into the United States from
somewhere other than Puerto Rico.
Finished gasoline means all products
(including gasohol (as defined in
§48.4081–6(b)(2))) that are commonly
or commercially known or sold as
gasoline and are suitable for use as a
motor fuel, other than products that
have an ASTM octane number of less
than 75 as determined by the motor
method.

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Gasoline means finished gasoline
and gasoline blendstocks.
Industrial user means any person
that receives gasoline blendstocks by
bulk transfer for its own use in the
manufacture of any product other than
finished gasoline.
Position holder means, with respect
to taxable fuel in a terminal, the person
that holds the inventory position in the
taxable fuel, as reflected on the records
of the terminal operator. A person
holds the inventory position in taxable
fuel when that person has a contractual
agreement with the terminal operator
for the use of storage facilities and
terminaling services at a terminal with
respect to the taxable fuel. The term
also includes a terminal operator that
owns taxable fuel in its terminal.
Rack means a mechanism for deliv-
ering taxable fuel from a refinery or
terminal into a truck, trailer, railroad
car, or other means of nonbulk transfer.
Refiner means any person that owns,
operates, or otherwise controls a
refinery.
Refinery means a facility used to
produce taxable fuel from crude oil,
unfinished oils, natural gas liquids, or
other hydrocarbons and from which
taxable fuel may be removed by pipe-
line, by vessel, or at a rack. However,
the term does not include a facility
where only blended fuel or gasohol (as
defined in §48.4081–6(b)(2)), and no
other type of taxable fuel, is produced.
For this purpose blended fuel is any
mixture that, if produced outside the
bulk transfer/terminal system, would be
blended taxable fuel.
Removal means any physical transfer
of taxable fuel, and any use of taxable
fuel other than as a material in the
production of taxable fuel or special
fuels (as defined in §48.4041–8(f)).
However, taxable fuel is not removed
when it evaporates or is otherwise lost
or destroyed.
Sale means—
(1)The transfer of title to, or sub-
stantial incidents of ownership in,
taxable fuel (other than taxable fuel in
a terminal) to the buyer for a consid-
eration, which may consist of money,
services, or other property; or
(2)The transfer of the inventory
position in the taxable fuel in a
terminal if the transferee becomes the
position holder with respect to the
taxable fuel.
State includes any State, any political
subdivision of a State, the District of
Columbia, the American Red Cross,
and, subject to the limitations of
section 7871, any Indian tribal
government.
Taxable fuel means gasoline and
diesel fuel.
Taxable fuel registrant means an
enterer, industrial user, refiner, terminal
operator, or throughputter that is regis-
tered under section 4101.
Terminal means a taxable fuel stor-
age and distribution facility that is
supplied by pipeline or vessel, and
from which taxable fuel may be re-
moved at a rack. However, the term
does not include any facility at which
gasoline blendstocks are used in the
manufacture of products other than
finished gasoline and from which no
gasoline is removed.
Terminal operator means any person
that owns, operates, or otherwise con-
trols a terminal.
Throughputter means any person
that—
(1)Owns taxable fuel within the
bulk transfer/terminal system (other
than in a terminal); or
(2)Is a position holder.
Vessel means a waterborne taxable
fuel transporting vessel.
(c)Blended taxable fuel, diesel fuel,
and gasoline blendstocks; definitions—
(1) Blended taxable fuel—(i) In gen-
eral. Except as provided in paragraphs
(c)(1)(ii) and (c)(iii) of this section,
blended taxable fuel means any mixture
that is produced outside the bulk
transfer/terminal system and that con-
sists of—
(A)Taxable fuel with respect to
which tax has been imposed under
section 4041(a)(1) or 4081(a); and
(B)Any other liquid on which tax
has not been imposed under section
4081.
(ii)Exclusion; minor blending. A
mixture described in paragraph (c)(1)(i)
of this section is not blended taxable
fuel if, during the calendar quarter in
which the blender removes or sells the
mixture, all such mixtures removed or
sold by the blender contain, in the
aggregate, less than 400 gallons of
liquid described in paragraph (c)(1)-
(i)(B) of this section.
(iii)Exclusion; gasohol. Blended
taxable fuel does not include any
gasohol (as defined in §48.4081–6(b)-
(2)) if, disregarding the alcohol, the
gasohol is not blended taxable fuel and
contains, in addition to permitted
amounts of liquids described in para-
graph (c)(1)(i)(B) of this section, only
gasoline with respect to which—
(A)Tax was imposed under section
4081(a) at a rate described in
§48.4081–6(e) (relating to the gasohol
production tax rate and the gasohol tax
rate); or
(B)A valid claim is made under
section 6427(f).
(2)Diesel fuel. (i) Effective April 1,
1996, diesel fuel means any liquid
(other than gasoline) that, without
further processing or blending, is suita-
ble for use as a fuel in a diesel-
powered highway vehicle, diesel-
powered train, or diesel-powered boat.
However, diesel fuel does not include
kerosene, No. 5 and No. 6 fuel oils (as
described in ASTM Specification D
396, which may be obtained from the
American Society for Testing and
Materials, 100 Barr Harbor Drive, West
Conshohocken, PA 19428), or F–76
(Fuel Naval Distillate MIL–F–16884,
which may be obtained from Standardi-
zation Document Order Desk, Building
4, Section D, 700 Robbins Avenue,
Philadelphia, PA 19111).
(ii)Before April 1, 1996, diesel fuel
means any liquid (other than kerosene)
that is commonly or commercially
known or sold as a fuel that is suitable
for use in a diesel-powered highway
vehicle, diesel-powered train, or diesel-
powered boat. A liquid meets this re-
quirement if, without further processing
or blending, the liquid has practical and
commercial fitness for use in the
propulsion engine of the highway vehi-
cle, train, or boat. A liquid may possess
this practical and commercial fitness
even though the specified use is not the
liquid’s predominant use. However, a
liquid does not possess this practical
and commercial fitness solely by rea-
son of its possible or rare use as a fuel
in the propulsion engine of a highway
vehicle, train, or boat.
(iii)Cross reference. For the tax on
blended taxable fuel, see §48.4081–
3(g). For the back-up tax on certain
uses of liquids other than diesel fuel,
see §48.4082–4.
(3)Gasoline blendstocks—(i) In
general. Except as provided in para-
graph (c)(3)(ii) of this section, gasoline
blendstocks means—
(A)Alkylate;
(B)Butane;
(C)Butene;
(D)Catalytically cracked gasoline;

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(E)Coker gasoline;
( F ) E t h y l t e r t i a r y b u t y l e t h e r
(ETBE);
(G)Hexane;
(H)Hydrocrackate;
(I)Isomerate;
(J) Methyl tertiary butyl ether
(MTBE);
(K)Mixed xylene (not including any
separated isomer of xylene);
(L)Natural gasoline;
(M)Pentane;
(N)Pentane mixture;
(O)Polymer gasoline;
(P)Raffinate;
(Q)Reformate;
(R)Straight-run gasoline;
(S)Straight-run naphtha;
(T) Tertiary amyl methyl ether
(TAME);
(U)Tertiary butyl alcohol (gasoline
grade) (TBA);
(V)Thermally cracked gasoline;
(W)Toluene; and
(X)Transmix containing gasoline.
(ii)Exclusion. Gasoline blendstocks
does not include any product that can-
not, without further processing, be used
in the production of finished gasoline.
For example, a mixed hydrocarbon
stream that is produced in a natural gas
processing plant is not a gasoline
blendstock if the stream cannot be used
to produce finished gasoline without
further processing.
(d)Effective date. This section is
effective January 1, 1994.
§48.4081–2 Taxable fuel; tax on
removal at a terminal rack.
(a)Overview. This section provides
the general rule that all removals of
taxable fuel at a terminal rack are
subject to tax and the position holder
with respect to the fuel is liable for the
tax.
(b)Imposition of tax. Except as
provided in §48.4081–4 (relating to
gasoline blendstocks) and §48.4082–1
(relating to dyed diesel fuel), tax is
imposed on the removal of taxable fuel
from a terminal if the taxable fuel is
removed at the rack.
(c)Liability for tax—(1) In general.
The position holder with respect to the
taxable fuel is liable for the tax
imposed under paragraph (b) of this
section.
(2)Joint and several liability of
terminal operator; unregistered posi-
tion holder—(i) In general. The termi-
nal operator is jointly and severally
liable for the tax imposed under
paragraph (b) of this section if—
(A)The position holder with respect
to the taxable fuel is a person other
than the terminal operator and is not a
taxable fuel registrant; and
(B)The terminal operator has not
met the conditions of paragraph
(c)(2)(ii) of this section.
(ii)Conditions for avoidance of lia-
bility. A terminal operator is not liable
for tax under this paragraph (c)(2) if, at
the time of the removal, the terminal
operator—
(A)Is a taxable fuel registrant;
(B)Has an unexpired notification
certificate (as described in §48.4081–5)
from the position holder; and
(C)Has no reason to believe that
any information in the notification
certificate is false.
(3)Joint and several liability of
terminal operator; incorrect informa-
tion provided. The terminal operator is
jointly and severally liable for the tax
imposed under paragraph (b) of this
section if, in connection with the
removal of diesel fuel that is not dyed
and marked in accordance with
§48.4082–1, the terminal operator
provides any person (including the
position holder with respect to the fuel)
with any bill of lading, shipping paper,
record, or similar document indicating
that the diesel fuel is dyed and marked
in accordance with §48.4082–1.
(4)Example. The following example
illustrates this paragraph (c) and
§48.4082–1:
Example. (i) TO is a terminal operator and PH
is the position holder with respect to, and owner
of, 8,000 gallons of diesel fuel stored in TO’s
terminal. TO and PH are taxable fuel registrants.
When the fuel is removed from the terminal at
the rack, the fuel is not dyed and marked in
accordance with §48.4082–1, and TO does not
provide any person with any paperwork indicat-
ing that the fuel is dyed and marked. After the
removal from the terminal, PH sells the fuel to
individuals for use as heating oil, a nontaxable
use.
(ii)Because PH is the position holder of the
fuel at the time of the removal from the terminal,
PH is liable for the tax imposed by section 4081.
The removal is subject to tax because the fuel is
not dyed and marked in accordance with
§48.4082–1, and later use of the fuel in a
nontaxable use does not make the removal from
the terminal exempt from tax.
(iii)Because PH is a taxable fuel registrant
and TO did not provide any person with any
paperwork indicating that the fuel is dyed and
marked, TO is not jointly and severally liable for
tax under paragraph (c)(2) or (3) of this section.
(d)Rate of tax. For the rate of tax
generally, see section 4081(a). For the
rate of tax on gasohol and on gasoline
removed for gasohol production, see
§48.4081–6.
(e)Effective date. This section is
effective January 1, 1994.
§48.4081–3 Taxable fuel; taxable
events other than removal at the
terminal rack.
(a)Overview. Although tax is im-
posed when taxable fuel is removed
from the terminal at the rack, tax also
is imposed in certain other situations
described in this section. For the back-
up tax on the use of dyed diesel fuel,
see §48.4082–4.
(b)Tax on removal from a re-
finery—(1) Imposition of tax. Except as
provided in paragraph (b)(2) of this
section (relating to an exemption for
certain refineries), §48.4081–4 (relating
t o g a s o l i n e b l e n d s t o c k s ) , a n d
§48.4082–1 (relating to dyed diesel
fuel), tax is imposed on the following
removals from a refinery:
(i)A removal by bulk transfer if the
refiner or the owner of the taxable fuel
immediately before the removal is not
a taxable fuel registrant.
(ii)A removal at the rack.
(iii)After September 30, 1995, a
removal of a batch of gasohol from an
approved refinery by bulk transfer if
the refiner treats itself with respect to
the removal as a person that is not
registered under section 4101. See
§48.4101–1(a). For the rule providing
that no deposit is required in the case
of the tax imposed under this paragraph
(b)(1)(iii), see §40.6302(c)–1(e)(4) of
this chapter. For the rule allowing
inspections of facilities where gasohol
is produced, see section 4083.
(2)Exception for certain refineries.
The tax imposed under paragraph (b)-
(1)(ii) of this section does not apply to
a removal of taxable fuel if—
(i)The taxable fuel is removed from
an approved refinery that is not served
by pipeline (other than a pipeline for
the receipt of crude oil) or vessel;
(ii)The taxable fuel is received at a
facility that is operated by a taxable
fuel registrant and is located within the
bulk transfer/terminal system;
(iii)The removal from the refinery
is by—

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(A)Rail car; or
(B)In the case of diesel fuel, a
trailer or semi-trailer that is used
exclusively for the transport service
described in paragraphs (b)(2)(i) and
(b)(2)(ii) of this section;
(iv)In the case of taxable fuel
removed by rail car, the facility at
which the fuel is received is operated
by the same person that operates the
refinery from which the fuel was
removed; and
(v)In the case of diesel fuel re-
moved by a trailer or semi-trailer, the
facility at which the fuel is received is
less than 20 miles from the refinery
from which the diesel fuel was
removed.
(3)Liability for tax. The refiner is
liable for the tax imposed under para-
graph (b)(1) of this section.
(c)Tax on entry into the United
States—(1) Imposition of tax. Except as
provided in §48.4081–4 (relating to
gasoline blendstocks) and §48.4082–1
(relating to dyed diesel fuel), a tax is
imposed on the entry of taxable fuel
into the United States if—
(i)The entry is by bulk transfer and
the enterer is not a taxable fuel
registrant; or
(ii)The entry is not by bulk transfer.
(2)Liability for tax. The enterer is
liable for the tax imposed under para-
graph (c)(1) of this section.
(d)Tax on bulk transfers from a
terminal by an unregistered position
holder—(1) Imposition of tax. A tax is
imposed on the removal by bulk trans-
fer of taxable fuel from a terminal if
the position holder with respect to the
taxable fuel is not a taxable fuel
registrant.
(2)Liability for tax—(i) In general.
The position holder with respect to the
taxable fuel is liable for the tax
imposed under paragraph (d)(1) of this
section.
(ii)Joint and several liability of
terminal operator. The terminal opera-
tor is jointly and severally liable for the
tax imposed under paragraph (d)(1) of
this section if—
(A)The position holder with respect
to the taxable fuel is a person other
than the terminal operator; and
(B)The terminal operator has not
met the conditions of paragraph
(d)(2)(iii) of this section.
(iii)Conditions for avoidance of lia-
bility. A terminal operator is not liable
for tax under this paragraph (d)(2) if, at
the time of the bulk transfer, the
terminal operator—
(A)Is a taxable fuel registrant;
(B)Has an unexpired notification
certificate (described in §48.4081–5)
from the position holder; and
(C)Has no reason to believe that
any information in the notification
certificate is false.
(e)Tax on bulk transfers not re-
ceived at an approved terminal or re-
finery—(1) Imposition of tax. Except as
provided in §48.4081–4 (relating to
gasoline blendstocks) and §48.4082–1
(relating to dyed diesel fuel), a tax on
taxable fuel is imposed if—
(i)Taxable fuel is removed by bulk
transfer from a refinery or terminal, or
entered by bulk transfer into the United
States;
(ii)No tax was imposed on such
removal or entry under paragraph (b),
(c), or (d) of this section; and
(iii)Upon removal from the pipeline
or vessel, the taxable fuel is not
received at an approved terminal or
refinery (or at another pipeline or
vessel).
(2)Liability for tax—(i) In general.
The owner of the taxable fuel when it
is removed from the pipeline or vessel
is liable for the tax imposed under
paragraph (e)(1) of this section if the
owner has not met the conditions of
paragraph (e)(2)(ii) of this section.
(ii)Conditions for avoidance of lia-
bility. An owner of taxable fuel is not
liable for tax under paragraph (e)(2)(i)
of this section if, at the time the
taxable fuel is removed from the pipe-
line or vessel, the owner of the taxable
fuel—
(A)Is a taxable fuel registrant;
(B)Has an unexpired notification
certificate (described in §48.4081–5)
from the operator of the terminal or
refinery where the taxable fuel is
received; and
(C)Has no reason to believe that
any information in the notification
certificate is false.
(iii)Liability of the operator of the
facility where the taxable fuel is
received. The operator of the facility
where the taxable fuel is received is
liable for the tax imposed under
paragraph (e)(1) of this section if the
owner of the taxable fuel has met the
conditions of paragraph (e)(2)(ii) of
this section and is jointly and severally
liable for the tax if the owner has not
met such conditions.
(f)Tax on sales within the bulk
transfer/terminal system—(1) Imposi-
tion of tax. Except as provided in
paragraph (f)(2) of this section and
§48.4082–1 (relating to dyed diesel
fuel), a tax is imposed on the sale of
taxable fuel located within the bulk
transfer/terminal system if the sale is to
a person that is not a taxable fuel
registrant and tax has not been imposed
on such taxable fuel under §48.4081–2,
or paragraph (b), (c), (d), or (e) of this
section.
(2)Exception for certain sales of
taxable fuel for export. The tax im-
posed under paragraph (f)(1) of this
section does not apply to a sale of
taxable fuel if—
(i)The buyer’s principal place of
business is not within the United
States;
(ii)The sale of the fuel occurs as the
fuel is delivered into a transport vessel;
(iii)The vessel has a capacity of at
least 20,000 barrels of fuel;
(iv)The seller is a taxable fuel
registrant and the exporter of record of
the fuel; and
(v)The fuel was exported in due
course.
(3)Liability for tax—(i) In general.
The seller of the taxable fuel is liable
for the tax imposed under paragraph
(f)(1) of this section if the seller has
not met the conditions of paragraph
(f)(3)(ii) of this section.
(ii)Conditions for avoidance of lia-
bility. A seller is not liable for tax
under paragraph (f)(3)(i) of this section
if, at the time of the sale, the seller—
(A)Is a taxable fuel registrant;
(B)Has an unexpired notification
certificate (described in §48.4081–5)
from the buyer; and
(C)Has no reason to believe that
any information in the certificate is
false.
(iii)Liability of the buyer. The buyer
of the taxable fuel is liable for the tax
imposed under paragraph (f)(1) of this
section if the seller of the taxable fuel
has met the conditions of paragraph
(f)(3)(ii) of this section and is jointly
and severally liable for the tax if the
seller has not met such conditions.
(4)Example. The following example
illustrates this paragraph (f) and the
definition of the term sale in §48.4081–
1:
Example. PH owns one million gallons of un-
taxed gasoline that is stored in TO’s terminal.

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PH also is the position holder with respect to the
gasoline. While the gasoline remains stored in
the terminal, PH transfers title to 200,000 gallons
of the gasoline to A, a person that is not a tax-
able fuel registrant. PH continues to hold the
inventory position on TO’s records with respect
to the one million gallons. Because PH continues
as the position holder with respect to the gaso-
line, the transfer of title to the gasoline from PH
to A is not a sale of gasoline. Because this
transfer of title from PH to A is not a sale of
gasoline, the tax imposed under paragraph (f) of
this section does not apply to the transfer.
(g)Tax on removal or sale of
blended taxable fuel by the blender—
(1) Imposition of tax. A tax is imposed
on the removal or sale of blended
taxable fuel by the blender thereof. Tax
is computed on the difference between
the total number of gallons of blended
taxable fuel removed or sold and the
number of gallons of previously taxed
taxable fuel used to produce the
blended taxable fuel. For this purpose,
the alcohol in gasohol is treated as
previously taxed taxable fuel.
(2)Liability for tax. The blender is
liable for the tax imposed under
paragraph (g)(1) of this section.
(3)Example. The following example
illustrates the provisions of this para-
graph (g) and the definition of the term
blended taxable fuel in §48.4081–1(c):
Example. (i) X, a gasoline wholesale distribu-
tor, buys 9,500 gallons of gasoline at a terminal
rack. The gasoline is delivered into a tank trailer.
The position holder is liable for tax under
§48.4081–2 when the gasoline is removed at the
rack. X then goes to another location where 500
gallons of alcohol (a substance not subject to tax
under section 4081) are delivered into the tank
trailer already containing the 9,500 gallons of
gasoline. The gasoline and alcohol are splash
blended as X drives to X’s retail service station
where X pumps the blended gasoline into a
storage tank for sale to consumers.
(ii)X is a blender within the meaning of
§48.4081–1 because X has produced blended
taxable fuel, as defined in §48.4081–1, by
mixing the 9,500 gallons of gasoline on which
tax has been imposed under §48.4081–2(b) with
500 gallons of alcohol, a substance not subject to
tax under section 4081. The 10,000 gallon mix-
ture is not gasohol because it does not satisfy the
alcohol-content requirement described in
§48.4081–6(b)(2). X, the blender, is liable for the
tax imposed under this paragraph (g) on the
blended gasoline. The tax is imposed when the
blended gasoline is removed from the tank trailer
at the retail station. Tax on the blended mixture
is computed on 500 gallons, the number of
gallons not previously subject to tax under
section 4081.
(h)Rate of tax. For the rate of tax
generally imposed under this section,
see section 4081(a). For the rate of tax
on gasohol and on gasoline removed or
entered for gasohol production, see
§48.4081–6.
(i)Effective date. This section is
effective January 1, 1994.
Par. 19. Section 48.4081–4 is
amended as follows:
1.The heading for §48.4081–4 is
revised.
2.In paragraph (a), the language ‘‘to
produce gasoline’’ is removed and ‘‘to
produce finished gasoline’’ is added in
its place.
3.In paragraph (b)(1)(i), the lan-
guage ‘‘gasoline registrant’’ is removed
and ‘‘taxable fuel registrant’’ is added
in its place.
4.In paragraph (b)(1)(ii), the lan-
guage ‘‘gasoline (as defined in
§48.4081–1(i)(1))’’ is removed and
‘‘finished gasoline’’ is added in its
place.
5.In paragraphs (b)(2)(i) and (c)(1),
the language ‘‘gasoline registrant’’ is
removed each place it appears and
‘‘taxable fuel registrant’’ is added in its
place.
6.The language ‘‘and’’ is added
following the semicolon at the end of
paragraph (c)(2).
7.Paragraph (c)(3) is revised.
8.Paragraph (c)(4) is removed.
9.In paragraph (d), the language
‘‘gasoline registrant’’ is removed and
‘‘taxable fuel registrant’’ is added in its
place.
10.In paragraphs (e)(2) and (e)(3),
the language ‘‘production of gasoline’’
is removed each place it appears and
‘‘production of finished gasoline’’ is
added in its place.
11.In paragraph (e)(3), the language
‘‘to produce gasoline’’ is removed each
place it appears, and ‘‘to produce
finished gasoline’’ is added in its place.
12.In paragraph (f), the language
‘‘1993’’ is removed and ‘‘1994’’ is
added in its place.
The revisions read as follows:
§48.4081–4 Gasoline; special rules
for gasoline blendstocks.
******
(c) * * *
(3) Has no reason to believe that
any information in the certificate is
false.
******
Par. 20. Section 48.4081–5 is
amended as follows:
1.The heading for §48.4081–5 is
revised to read as follows:
§48.4081–5 Taxable fuel; notification
certificate of taxable fuel registrant.
2.In paragraph (a), the first sentence
in paragraph (b)(1) introductory text,
and paragraph (b)(2), the language
‘‘gasoline’’ is removed each place it
appears and ‘‘taxable fuel’’ is added in
its place.
3.In paragraph (b)(3), the language
‘‘or letter of registration’’ is added
after ‘‘Form 637’’ in the heading and
after ‘‘(Form 637)’’ in the text.
4.In paragraph (c), the language
‘‘1993’’ is removed and ‘‘1994’’ is
added in its place.
Par. 21. The heading for §48.4081–6
is revised to read as follows:
§48.4081–6 Gasoline; gasohol.
§40.4081–7 [Amended]
Par. 22. Section 48.4081–7 is
amended as follows:
1.In paragraph (c)(2), two new
listings are added at the end of the
listings in line 5 of the taxpayer’s
report:
‘‘
Removal at the
terminal rack
Removal or sale by
the blender’’
2.In paragraph (c)(4)(i)(A) and the
first sentence of paragraph (c)(4)(iii),
the language ‘‘§48.4081–1(r))’’ is re-
moved and ‘‘§48.4081–1))’’ is added in
its place.
Par. 23. Section 48.4081–8 is revised
to read as follows:
§48.4081–8 Taxable fuel;
measurement.
(a)In general. For purposes of the
tax imposed by section 4081, gallons of
taxable fuel may be measured on the
basis of—
(1)Actual volumetric gallons;
(2)Gallons adjusted to 60 degrees
Fahrenheit; or
(3)Any other temperature adjust-
m e n t m e t h o d a p p r o v e d b y t h e
Commissioner.
(b)Effective date. This section is
effective January 1, 1994.

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§§48.4081–10T, 48.4081–11T, and
48.4081–12T [Removed]
Par. 24. Sections 48.4081–10T
through 48.4081–12T are removed.
Par. 25. Section 48.4082–1 is revised
to read as follows:
§48.4082–1 Diesel fuel tax;
exemption.
(a)Exemption. Tax is not imposed
by section 4081 on the removal, entry,
or sale of any diesel fuel if—
(1)The person otherwise liable for
tax is a taxable fuel registrant;
(2)In the case of a removal from a
terminal, the terminal is an approved
terminal; and
(3)The diesel fuel satisfies the
dyeing and marking requirements of
paragraphs (b), (c), and (d) of this
section.
(b)Dyeing requirements. Diesel fuel
satisfies the dyeing requirement of this
paragraph (b) only if it contains—
(1)The dye Solvent Red 164 (and
no other dye) at a concentration spec-
trally equivalent to at least 3.9 pounds
of the solid dye standard Solvent Red
26 per thousand barrels of diesel fuel;
or
(2)Any dye of a type and in a
concentration that has been approved
by the Commissioner.
( c )M a r k i n g r e q u i r e m e n t s.
[Reserved]
(d)Time for adding the dye and
marker. [Reserved]
(e)Effective date. This section is
effective March 14, 1966.
§§48.4082–2T, 48.4082–3T, 48.4082–
4T and 48.4083 [Removed]
Par. 26. Sections 48.4082–2T,
48.4082–3T, 48.4082–4T, and 48.4083
are removed.
P a r . 2 7 . S e c t i o n s 4 8 . 4 0 8 2 – 2 ,
48.4082–3, 48.4082–4, and 48.4083–1
are added to read as follows:
§48.4082–2 Diesel fuel tax; notice
required with respect to dyed diesel
fuel.
(a)In general. A legible and con-
spicuous notice stating: DYED DIESEL
FUEL, NONTAXABLE USE ONLY,
PENALTY FOR TAXABLE USE must
be posted by a seller on any retail
pump or other delivery facility where it
sells dyed diesel fuel for use by its
buyer. Any seller that fails to post the
required notice on any retail pump or
other delivery facility where it sells
dyed diesel fuel is, for purposes of the
penalty imposed by section 6714, pre-
sumed to know that the fuel will not be
used for a nontaxable use.
(b)Cross reference; terminal opera-
tors. For the requirement that terminal
operators provide a notice with respect
to dyed diesel fuel, see §48.4101–
1(h)(3) (relating to terms and condi-
tions of registration for terminal
operators).
(c)Effective date. This section is
effective January 1, 1994.
§48.4082–3 Diesel fuel; visual
inspection devices. [Reserved]
§48.4082–4 Diesel fuel; back-up tax.
(a)Imposition of tax—(1) In gen-
eral. Tax is imposed by section 4041
on the delivery into the fuel supply
tank of the propulsion engine of a
diesel-powered highway vehicle (other
than a diesel-powered bus) or diesel-
powered boat of—
(i)Any diesel fuel on which tax has
not been imposed by section 4081;
(ii)Any diesel fuel on which a
credit or payment has been allowed
under section 6427; or
(iii)Any liquid other than gasoline
or diesel fuel.
(2)Liability for tax—(i) In general.
The operator of the highway vehicle or
boat into which the fuel is delivered is
liable for the tax imposed under
paragraph (a)(1) of this section.
(ii)Joint and several liability of the
seller. The seller of the fuel is jointly
and severally liable for the tax imposed
under paragraph (a)(1) of this section if
the seller knows or has reason to know
that the fuel will not be used in a
nontaxable use.
(3)Rate of tax. The rate of tax is the
rate imposed on diesel fuel by section
4081(a).
(b)Tax on diesel fuel; buses and
trains—(1) In general. Tax is imposed
by section 4041 on the delivery into
the fuel supply tank of the propulsion
engine of a diesel-powered bus or a
diesel-powered train of—
(i)Any diesel fuel on which tax has
not been imposed by section 4081;
(ii)Any diesel fuel on which a
credit or payment has been allowed
under section 6427; or
(iii)Any liquid other than gasoline
or diesel fuel.
(2)Liability for tax—(i) In general.
Except as provided in paragraph (b)(2)-
(ii) of this section, the operator of the
bus or train into which the fuel is
delivered is liable for the tax imposed
under paragraph (b)(1) of this section.
(ii)Special rule for certain train
operators. The person that delivers the
fuel into the fuel supply tank of a train,
rather than the train operator, is liable
for the tax imposed under paragraph
(b)(1) of this section if, at the time of
the delivery—
(A)The deliverer of the fuel and the
operator of the train are both registered
as train operators under §48.4101–1;
and
(B)A written agreement between the
deliverer of the fuel and the operator
requires the deliverer to pay the tax
imposed under paragraph (b)(1) of this
section.
(3)Rate of tax—(i) Buses—(A) In
general. The rate of tax under para-
graph (b)(1) of this section is the sum
of the rates described in sections
4041(a)(1)(C)(iii)(I) and 4041(d)(1)
(the bus rate) if the bus is used to
furnish (for compensation) passenger
land transportation available to the
general public and either such transpor-
tation is scheduled and along regular
routes or the seating capacity of the
bus is at least 20 adults (not including
the driver). A bus is available to the
general public if the bus is available
for hire to more than a limited number
of persons, groups, or organizations.
(B)Other uses. The rate of tax
under paragraph (b)(1) of this section is
the rate of tax imposed on diesel fuel
by section 4081(a) if the bus is used
for a purpose other than that described
in paragraph (b)(3)(i)(A) of this sec-
tion.
(ii)Trains. The rate of tax under
paragraph (b)(1) of this section is the
rate prescribed in section 4041 for
diesel fuel sold for use in a train (the
train rate).
(4)Cross reference. For the registra-
tion requirement relating to certain bus
and train operators, see §48.4101–
1(c)(2).
(c)Exemptions. The taxes imposed
under paragraphs (a) and (b) of this
section do not apply to a delivery of
any liquid for—
(1)Use on a farm for farming pur-
poses as that term and related terms are
defined in §48.6420–4(a) through (g);

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(2)The exclusive use of a State;
(3)Use described in section 4041(h)
(relating to use in a vehicle owned by
an aircraft museum);
(4)Use in a boat employed in—
(i) The business of commercial
fishing;
(ii)The business of transporting per-
sons or property for compensation or
hire; or
(iii)Any other trade or business,
unless the boat is used in any activity
of a type generally considered to
constitute entertainment, amusement, or
recreation (within the meaning of sec-
tion 274(a)(1)(A) and the regulations
under that section);
(5)Use in a bus while the bus is
engaged in the transportation of stu-
dents and employees of schools (as
defined in the last sentence of section
4221(d)(7)(C));
(6)Use in a qualified local bus (as
defined in section 6427(b)(2)(D)) while
the bus is engaged in furnishing (for
compensation) intracity passenger land
transportation that is available to the
general public and is scheduled and
along regular routes;
(7)Use in a highway vehicle that—
(i)Is not registered (and is not
required to be registered) for highway
use under the laws of any State or
foreign country; and
(ii)Is used in the operator’s trade or
business or in an activity of the
operator described in section 212 (relat-
ing to the production of income);
(8)The exclusive use of a nonprofit
educational organization, as defined in
§48.4221–6(b);
(9)Use in a highway vehicle that is
owned by the United States and is not
used on the highway; or
(10)Use in any boat operated by the
United States for the exclusive use of
the United States or any vessel of war
of any foreign nation, as described in
§48.4221–4(b)(5).
(d)Effective date. This section is
effective January 1, 1994.
§48.4083–1 Taxable fuel;
administrative authority.
(a)In general—(1) Authority to in-
spect. Officers or employees of the IRS
designated by the Commissioner, upon
presenting appropriate credentials and a
written notice to the owner, operator,
or agent in charge, are authorized to
enter any place and to conduct inspec-
tions in accordance with paragraphs (a)
through (c) of this section.
(2)Reasonableness. Inspections will
be performed in a reasonable manner
and at times that are reasonable under
the circumstances, taking into consid-
eration the normal business hours of
the place to be entered.
(b)Place of inspection—(1) In gen-
eral. Inspections may be at any place at
which taxable fuel is (or may be) pro-
duced or stored or at any inspection
site where evidence of activities de-
scribed in section 6714(a) may be
discovered. These places may include,
but are not limited to—
(i)Any terminal;
(ii)Any fuel storage facility that is
not a terminal;
(iii)Any retail fuel facility; or
(iv)Any designated inspection site.
(2)Designated inspection sites. A
designated inspection site is any State
highway inspection station, weigh sta-
tion, agricultural inspection station,
mobile station, or other location desig-
nated by the Commissioner to be used
as a fuel inspection site. A designated
inspection site will be identified as a
fuel inspection site.
(c)Scope of inspection—(1) Inspec-
tion. Officers or employees may phys-
ically inspect, examine or otherwise
search any tank, reservoir, or other
container that can or may be used for
the production, storage, or transporta-
tion of fuel, fuel dyes, or fuel markers.
Inspection may also be made of any
equipment used for, or in connection
with, production, storage, or transporta-
tion of fuel, fuel dyes, or fuel markers.
This includes any equipment used for
the dyeing or marking of fuel. This
also includes books and records, if any,
that are maintained at the place of
inspection and are kept to determine
excise tax liability under section 4081.
( 2 )D e t a i n m e n t. O f f i c e r s o r
employees may detain any vehicle,
train, or boat for the purpose of
inspecting its fuel tanks and storage
tanks. Detainment will be either on the
premises under inspection or at a
designated inspection site. Detainment
may continue for such reasonable
period of time as is necessary to
determine the amount and composition
of the fuel.
(3)Removal of samples. Officers or
employees may take and remove sam-
ples of fuel in such quantities as are
reasonably necessary to determine the
composition of the fuel.
(d)Refusal to submit to inspection—
(1) Imposition of penalty. Any person
that refuses to allow an inspection will
be fined $1,000 for each refusal. This
penalty is in addition to any other
penalty or tax that may be imposed
upon that person or any other person
liable for tax under section 4081 or
penalty under section 6714.
(2)Assessment of penalty. This
penalty is an assessable penalty and is
assessed in accordance with section
6671.
(e)Effective date. This section is
effective January 1, 1994.
Par. 28. The undesignated center
heading preceding §48.4101–1 is
removed.
Par. 29. Section 48.4101–1 is revised
to read as follows:
§48.4101–1 Registration.
(a)In general. (1) This section
provides rules relating to registration
under section 4101 for purposes of the
federal excise tax on taxable fuel
imposed by sections 4041(a)(1) and
4081 and the credit or payment allowed
to registered ultimate vendors of diesel
fuel under section 6427.
(2)A person is registered under
section 4101 only if the district director
has issued a registration letter to the
person and the registration has not been
revoked or suspended.
(3)A refiner that is registered under
section 4101 may, with respect to the
bulk removal of any batch of gasohol
from its refinery, treat itself as a person
that is not registered. See §48.4081–3-
(b)(1)(iii).
(4)Each business unit that has, or is
required to have, a separate employer
identification number is treated as a
separate person. Thus, two business
units (for example, a parent corporation
and a subsidiary corporation, or a
proprietorship and a related part-
nership), each of which has a different
employer identification number, are
two persons.
(5)A registration in effect on De-
cember 31, 1993, with respect to the
tax on gasoline or diesel fuel is subject
to the district director’s review, and to
revocation or suspension, under the
standards set forth in this section, but
remains in effect until the earlier of—
(i)The effective date of a registra-
tion issued under paragraph (g)(3) of
this section; or

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(ii)The effective date of the revoca-
tion or suspension of the registration
under paragraph (i) of this section.
(b)Definitions—(1) Applicant. An
applicant is a person that has applied
for registration under paragraph (e) of
this section.
(2)Bonded registrant. A bonded
registrant is a person that has given a
bond to the district director under
paragraph (j) of this section as a
condition of registration.
(3)Gasohol bonding amount. The
gasohol bonding amount is the product
of—
(i) The rate of tax applicable to later
separation, as described in §48.4081–6-
(f)(1)(iii); and
(ii)The total number of gallons of
gasoline expected to be bought at the
gasohol production tax rate by the
gasohol blender during a representative
6-month period (as determined by the
district director).
(4)Penalized for a wrongful act. A
person has been penalized for a wrong-
ful act if the person has—
(i)Been assessed any penalty under
chapter 68 of the Internal Revenue
Code (or similar provision of the law
of any State) for fraudulently failing to
file any return or pay any tax, and the
penalty has not been wholly abated,
refunded, or credited;
(ii)Been assessed any penalty under
chapter 68 of the Internal Revenue
Code, such penalty has not been wholly
abated, refunded, or credited, and the
district director determines that the
conduct resulting in the penalty is part
of a consistent pattern of failing to
deposit, pay, or pay over a substantial
amount of tax;
(iii)Been convicted of a crime under
chapter 75 of the Internal Revenue
Code (or similar provision of the law
of any State), or of conspiracy to
commit such a crime, and the convic-
tion has not been wholly reversed by a
court of competent jurisdiction;
(iv)Been convicted, under the laws
of the United States or any State, of a
felony for which an element of the
offense is theft, fraud, or the making of
false statements, and the conviction has
not been wholly reversed by a court of
competent jurisdiction;
(v)Been assessed any tax under
section 4103 and the tax has not been
wholly abated, refunded, or credited; or
(vi)Had its registration under sec-
tion 4101 or 4222 revoked.
(5)Related person. A related person
is a person that—
(i)Directly or indirectly exercises
control over an activity of the applicant
if the activity is described in paragraph
(c)(1) or (d) of this section;
(ii)Owns, directly or indirectly, five
percent or more of the applicant;
(iii)Is under a duty to assure the
payment of a tax for which the ap-
plicant is responsible;
(iv)Is a member, with the applicant,
of a group of organizations (as defined
in §1.52–1(b) of this chapter) that
would be treated as a group of trades
or businesses under common control
for purposes of §1.52–1 of this chapter;
or
(v)Distributed or transferred assets
to the applicant in a transaction in
which the applicant’s basis in the assets
is determined by reference to the basis
of the assets in the hands of the
distributor or transferor.
(6)Registrant. A registrant is a
person that the district director has, in
accordance with paragraph (g)(3) of
this section, registered under section
4101 and whose registration has not
been revoked or suspended.
(c)Persons required to be regis-
tered—(1) In general. A person is
required to be registered under section
4101 if the person is a—
(i)Blender;
(ii)Enterer;
(iii)Refiner;
(iv)Terminal operator; or
(v)Position holder.
(2)Bus and train operators. Every
operator of a bus or train is required to
be registered under section 4101 at any
time it incurs any liability for tax under
section 4041 at the bus rate (as de-
scribed in §48.4082–4(b)(3)(i)) or the
train rate (as described in §48.4082–4-
(b)(3)(ii)).
(3)Consequences of failing to regis-
ter. For the criminal penalty imposed
for failure to register, see section 7232.
For the civil penalty imposed for
failure to register, see section 7272.
(d)Persons that may, but are not
required to, be registered. A person
may, but is not required to, be regis-
tered under section 4101 if the person
is a—
(1)Gasohol blender;
(2)Industrial user;
(3)Throughputter that is not a posi-
tion holder; or
(4)Ultimate vendor of diesel fuel.
(e)Application instructions. Ap-
plication for registration under section
4101 must be made in accordance with
the instructions for Form 637 (or such
other form as the Commissioner may
designate).
( f )R e g i s t r a t i o n t e s t s— ( 1 ) I n
general—(i) Persons other than ulti-
mate vendors. Except as provided in
paragraph (f)(1)(ii) of this section, the
district director will register an appli-
cant only if the district director deter-
mines that the applicant meets the
following three tests (collectively, the
registration tests):
(A)The activity test of paragraph
(f)(2) of this section.
(B)The acceptable risk test of para-
graph (f)(3) of this section.
(C)The adequate security test of
paragraph (f)(4) of this section.
(ii)Ultimate vendors. The district
director will register an applicant as an
ultimate vendor of diesel fuel only if
the district director—
(A)Determines that the applicant
meets the activity test of paragraph
(f)(2) of this section; and
(B)Is satisfied with the filing, de-
posit, payment, and claim history for
all federal taxes of the applicant and
any related person.
(2)The activity test. An applicant
meets the activity test of this paragraph
(f)(2) only if the district director
determines that the applicant—
(i)Is, in the course of its trade or
business, regularly engaged as an oper-
ator of a bus or train or in the charac-
teristic activity of a person described in
paragraph (c)(1) or (d) of this section;
or
(ii)Is likely to be (because of such
factors as the applicant’s business
experience, financial standing, or trade
connections), in the course of its trade
or business, regularly engaged as an
operator of a bus or train or in the
characteristic activity of a person de-
scribed in paragraph (c)(1) or (d) of
this section within a reasonable time
after becoming registered under section
4101.
(3)Acceptable risk test—(i) In gen-
eral. An applicant meets the acceptable
risk test of this paragraph (f)(3) only
if—
(A)Neither the applicant nor a
related person has been penalized for a
wrongful act; or
(B)Even though the applicant or a
related person has been penalized for a

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wrongful act, the district director deter-
mines, after review of evidence offered
by the applicant, that the registration of
the applicant does not create a signifi-
cant risk of nonpayment or late pay-
ment of the tax imposed by sections
4041(a)(1) and 4081.
(ii)Significant risk of nonpayment
or late payment of tax. In making the
determination described in paragraph
(f)(3)(i)(B) of this section, the district
director may consider factors such as
the following:
(A)The time elapsed since the ap-
plicant or related person was penalized
for a wrongful act.
(B)The present relationship between
the applicant and any related person
that was penalized for any wrongful
act.
(C)The degree of rehabilitation of
the person penalized for any wrongful
act.
(D)The amount of bond given by
the applicant. In this regard, the district
director may accept a bond under
paragraph (j) of this section, without
regard to the limits on the amount of
the bond set by paragraph (j)(2) of this
section.
(4)Adequate security test—(i) In
general. An applicant meets the ade-
quate security test of this paragraph
(f)(4) only if the district director
determines that the applicant has both
adequate financial resources and a
satisfactory tax history, or the applicant
gives the district director a bond (under
the provisions of paragraph (j) of this
section).
(ii)Adequate financial resources—
(A) In general. An applicant has
adequate financial resources only if the
district director determines that the
applicant is financially capable of
paying—
(1) Its expected tax liability under
sections 4041(a)(1) and 4081 for a
representative 6-month period (as deter-
mined by the district director);
(2) In the case of a terminal opera-
tor, the expected tax liability under
section 4081 of persons other than the
terminal operator with respect to tax-
able fuel removed at the racks of its
terminals during a representative
1-month period (as determined by the
district director); and
(3) In the case of a gasohol blender,
the gasohol bonding amount.
(B)Basis for determination. The
determination under this paragraph
(f)(4)(ii) must be based on financial
information such as the applicant’s
income statement, balance sheet or
bond ratings, or other information
related to the applicant’s financial
status.
(iii)Satisfactory tax history. An ap-
plicant has a satisfactory tax history
only if the district director is satisfied
with the filing, deposit, and payment
history for all federal taxes of the
applicant and any related person.
(g)Action on the application by the
district director—(1) Review of ap-
plication. The district director may
investigate the accuracy and complete-
ness of any representations made by an
applicant, request any additional rele-
vant information from the applicant,
and inspect the applicant’s premises
during normal business hours without
advance notice.
(2)Denial. If the district director
determines that an applicant does not
meet all of the applicable registration
tests described in paragraph (f) of this
section, the district director must notify
the applicant, in writing, that its
application for registration is denied
and state the basis for the denial.
(3)Approval. If the district director
determines that an applicant meets all
of the applicable registration tests
described in paragraph (f) of this
section, the district director must regis-
ter the applicant under section 4101
and issue the applicant a letter of
registration containing the effective
date of the registration. The effective
date of the registration must be no
earlier than the date on which the
district director signs the letter of
registration. A copy of an application
for registration (Form 637) is not a
letter of registration.
(h)Terms and conditions of regi-
stration—(1) Affirmative duties. Each
registrant must—
(i)Make deposits, file returns, and
pay taxes required by the Internal
Revenue Code and the regulations;
(ii)Keep records sufficient to show
the registrant’s tax liability under sec-
tions 4041(a)(1) and 4081 and pay-
ments or deposits of such liability;
(iii)Make all information reports
required under section 4101(d) and
§48.4101–2;
(iv)Make available for inspection on
demand by the Internal Revenue Serv-
ice during normal business hours rec-
ords relevant to a determination of tax
liability under sections 4041(a)(1) and
4081; and
(v)Notify the district director of any
change (such as a change in ownership)
in the information the registrant sub-
mitted in connection with its applica-
tion for registration, or previously
submitted under this paragraph (h)(1)-
(v), within 10 days after the change
occurs.
(2)Prohibited actions. A registrant
may not—
(i)Sell, lease or otherwise allow
another person to use its registration;
(ii)Make any false statement to the
district director in connection with a
submission under paragraph (h)(1) or
(h)(3) of this section;
(iii)Make any false statement on, or
violate the terms of—
(A)A notification certificate of a
taxable fuel registrant (as described in
§48.4081–5(b)); or
(B)A certificate of a registered
gasohol blender (as described in
§48.4081–6(c)(2)).
(3)Additional terms and conditions
for terminal operators—(i) Notice re-
quired with respect to dyed diesel fuel.
A legible and conspicuous notice stat-
ing: DYED DIESEL FUEL, NONTAX-
ABLE USE ONLY, PENALTY FOR
TAXABLE USE must be provided by
each terminal operator to any person
that receives dyed diesel fuel at a
terminal rack of that operator. This
notice must be provided by the time of
the removal and must appear on all
shipping papers, bills of lading, and
similar documents that are provided by
the terminal operator to accompany the
removal of the fuel.
(ii)Records to be maintained relat-
ing to removals of diesel fuel. Each
terminal operator must keep the follow-
ing information with respect to each
rack removal of diesel fuel at each
terminal it operates:
(A)The bill of lading or other
shipping document.
(B)The record of whether the fuel
was dyed and marked in accordance
with §48.4082–1.
(C)The volume and date of the
removal.
(D)The identity of the person, such
as a common carrier, that physically
received the fuel.
(E)Any other information required
by the Commissioner.
(iii)Records to be maintained relat-
ing to dye. With respect to each of its

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terminals, a terminal operator must
keep records relating to dye inventories
and usage.
(iv)Retention of information. In ad-
dition to any other requirement relating
to the retention of records, the terminal
operator must—
(A)Maintain the information de-
scribed in paragraph (h)(3)(ii) of this
section at the terminal from which the
removal occurred for at least 3 months
after the removal to which it relates;
and
(B)Maintain the information de-
scribed in paragraph (h)(3)(iii) of this
section at the terminal where the dye
was received for at least 3 months after
the receipt.
(v)Prohibition on providing incor-
rect information. In connection with
the removal of diesel fuel that is not
dyed and marked in accordance with
§48.4082–1, a terminal operator may
not provide any person (including the
position holder with respect to the fuel)
with any bill of lading, shipping paper,
or similar document indicating that the
diesel fuel is dyed and marked in ac-
cordance with §48.4082–1.
(i)Adverse actions by the district
director against a registrant—(1) Man-
datory revocation or suspension. The
district director must revoke or suspend
the registration of any registrant if the
district director determines that the
registrant, at any time—
(i)Does not meet one or more of the
applicable registration tests under para-
graph (f) of this section and has not
corrected the deficiency within a rea-
sonable period of time after notification
by the district director;
(ii) Has used its registration to
evade, or attempt to evade, the pay-
ment of any tax imposed by section
4041(a)(1) or 4081, or to postpone or
in any manner to interfere with the
collection of any such tax, or to make a
fraudulent claim for a credit or
payment;
(iii)Has aided or abetted another
person in evading, or attempting to
evade, payment of any tax imposed by
section 4041(a)(1) or 4081, or in
making a fraudulent claim for a credit
or payment; or
(iv)Has sold, leased, or otherwise
allowed another person to use its
registration.
(2)Remedial action permitted in
other cases. If the district director
determines that a registrant has, at any
time, failed to comply with the terms
and conditions of registration under
paragraph (h) of this section, made a
false statement to the district director in
connection with its application for
registration or retention of registration,
or otherwise used its registration in a
manner that creates a significant risk of
nonpayment or late payment of tax,
then the district director may—
(i)Revoke or suspend the regis-
trant’s registration;
(ii)In the case of a registrant other
than an ultimate vendor, require the
registrant to give a bond under the
provisions of paragraph (j) of this
section as a condition of retaining its
registration; and
(iii)In the case of a registrant other
than an ultimate vendor, require the
registrant to file monthly or semi-
monthly returns under §40.6011(a)–
1(b) of this chapter as a condition of
retaining its registration.
(3)Action by the district director to
revoke or suspend a registration. If the
district director revokes or suspends a
registration, the district director must
so notify the registrant in writing and
state the basis for the revocation or
suspension. The effective date of the
revocation or suspension may not be
earlier than the date on which the
district director notifies the registrant.
(j)Bonds—(1) Form. Each bond
given to the district director as a
condition of registration under para-
graph (f)(4)(i) or (i)(2)(ii) of this
section must be executed in the form
prescribed by the district director. Each
bond must be—
(i)A public debt obligation of the
United States Government;
(ii)An obligation the principal and
interest of which are unconditionally
guaranteed by the United States
Government;
(iii)A bond executed by a surety
company listed in Department of the
Treasury Circular 570 as an acceptable
surety or reinsurer of federal bonds (a
surety bond); or
(iv)Any other bond with security
(including liens under section 4101(b)-
(1)(B)) considered acceptable by the
district director.
(2)Amount of bond. A bond given
under this paragraph (j) must be in an
amount that the district director deter-
mines will ensure timely collection of
the taxes imposed by sections 4041(a)-
(1) and 4081, taking into account the
applicant’s financial capabilities, tax
history, and expected liability under
sections 4041(a)(1) and 4081. The
district director may increase or de-
crease the amount of the required bond
to take into account changes in the
applicant’s financial capabilities, tax
history, and expected liability under
sections 4041(a)(1) and 4081. How-
ever, in no case may the amount of the
bond be greater than the amount that
the district director determines is equal
to—
(i)The applicant’s expected tax lia-
bility under sections 4041(a)(1) and
4081 for a representative 6-month
period (as determined by the district
director);
(ii)In the case of a terminal opera-
tor, the expected tax liability of persons
other than the terminal operator under
section 4081 with respect to taxable
fuel removed at the racks of its
terminals (determined as if all removals
of taxable fuel were taxable) during a
representative 1-month period (as deter-
mined by the district director); and
(iii)In the case of a gasohol blender,
the gasohol bonding amount.
(3)Collection of taxes from a bond.
If a bonded registrant does not pay the
amount of tax it incurs under section
4041(a)(1) or 4081 by the time pre-
scribed in section 6151 for paying that
tax, the district director may collect the
amount of the unpaid tax (including
penalties and interest with respect to
that tax) from the bonded registrant’s
bond.
(4)Termination of bonds—(i) Surety
bonds. A surety on a bond may give
written notice to the district director
and the bonded registrant that the
surety desires to be relieved of liability
under the bond after a certain date,
which date must be at least 60 days
after the receipt of the notice by the
district director. The surety will be
relieved of any liability that the bonded
registrant incurs after the date named in
the notice. However, the surety remains
liable for the amount of tax that the
bonded registrant incurred under sec-
tions 4041(a)(1) and 4081 during the
term of the bond and for penalties and
interest with respect to that tax.
(ii)Other bonds. A bond (other than
a surety bond) given to the district
director may be returned to the bonded
registrant only after the earlier of—
(A)The district director’s determina-
tion that the bonded registrant has paid
all taxes that the bonded registrant

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incurred under sections 4041(a)(1) and
4081 during the period covered by the
bond and any penalties and interest
with respect to the taxes;
(B)The expiration of the period for
assessment of the taxes that the bonded
registrant incurred under sections
4041(a)(1) and 4081 taxes during the
period covered by the bond, as deter-
mined under the provisions of subchap-
ter A of chapter 66 of the Internal
Revenue Code; or
(C)The date that the district director
receives from the registrant a substitute
bond given under this paragraph (j).
(5)Determination that bond is no
longer required. If the district director
determines that the bonded registrant
meets the adequate security test of
paragraph (f)(4) of this section without
a bond, the registrant is to be released
from the obligation to give a bond as a
condition of registration under section
4101.
(k)Cross references. For a rule
relating to the filing of monthly and
semimonthly returns by certain persons
that are registered under section 4101,
see §40.6011(a)–1(b)(2) of this chapter.
For rules relating to the tax on taxable
f u e l , s e e § § 4 8 . 4 0 8 1 – 1 t h r o u g h
48.4083–1. For rules relating to claims
by registered ultimate vendors, see
§48.6427–9.
(l)Effective dates. (1) Except as
otherwise provided in this paragraph
(l), this section is applicable as of
January 1, 1994.
(2)Paragraph (c)(1) of this section
(relating to persons required to be
registered) is applicable as of January
1, 1995.
(3)Paragraph (h)(3)(iii) of this sec-
tion (relating to certain recordkeeping
requirements) is applicable as of July
1, 1996.
Par. 30. Section 48.4101–2 is added
to read as follows:
§48.4101–2 Information reporting.
(a)In general—(1) Taxable fuel reg-
istrants. Each taxable fuel registrant
must make a return showing—
(i)The name and registration num-
ber (if any) of each person that is a
position holder at each terminal it
operates;
(ii)The amount of taxable fuel
received at each terminal it operates;
(iii)The identity of each position
holder with respect to—
(A)All rack removals of taxable fuel
from each terminal it operates, and the
volume and dates of the removals; and
(B)In the case of rack removals of
diesel fuel, whether the fuel was dyed
and marked at the operator’s terminal
in accordance with §48.4082–1;
(iv)The amount of taxable fuel
stored at each terminal it operates;
(v)The destination (by state) of all
taxable fuel removed at a terminal rack
of each terminal it operates, to the
extent such information has been
provided to the registrant;
(vi)The name and registration num-
ber (if any) of the operator of each
terminal at which it is a position
holder;
(vii)The volume and date of the
removal with respect to all rack re-
movals of taxable fuel for which it is
the position holder;
(viii)In the case of nonbulk re-
movals and entries of gasoline
blendstocks for which it would be
liable for tax but for the special rule in
§48.4081–4(c), the name and registra-
tion number of each operator of each
refinery and terminal where the gas-
oline blendstocks are received;
(ix)The name and registration num-
ber (if any) of each person to which it
sells (within the meaning of §48.4081–
1) taxable fuel located in the bulk
transfer/terminal system;
(x)The name and registration num-
ber of each person from which it
receives a certificate described in
§48.4081–6(c) (relating to certificate of
registered gasohol blender);
(xi)With respect to any liability
incurred under §48.4081–3(e) (relating
to tax on bulk transfers not received at
an approved terminal or refinery)—
(A)The date on which the removal
of the taxable fuel from a pipeline or
vessel gave rise to the liability; and
(B)The location of the taxable fuel
at the time of the removal; and
(xii)Any other information required
by the Commissioner.
(2)Gasohol blenders. Each regis-
tered gasohol blender must make a
return showing, with respect to each
batch of gasohol it produced from
gasoline it bought at the gasohol
production tax rate—
(i)The name and registration num-
ber of the person that sold it the
gasoline;
(ii)The date and location of the pur-
chase of the gasoline;
(iii)The volume of the gasoline;
(iv)The name, address, and em-
ployer identification number of the
person that sold it the alcohol;
(v)The date and location of the
purchase of the alcohol;
(vi)The volume and type of the
alcohol; and
(vii)Any other information required
by the Commissioner.
(3)Pipeline and vessel operators.
Each operator of a pipeline or vessel
that makes a bulk transfer of taxable
fuel to a terminal or refinery must
make a return showing—
(i)The location of the terminal or
refinery where the taxable fuel was
delivered;
(ii)The date of the delivery; and
(iii)Any other information required
by the Commissioner.
(b)Form and time of return. Each
return required under this section must
be made at the time and in the form
required by the Commissioner.
(c)Consequences for failure to make
a return. For the consequences for fail-
ing to make an information return re-
quired by this section, see §48.4101–
1(i) (relating to adverse actions against
a registrant) and section 6721 (relating
to a penalty for failure to file an
information return).
(d)Effective date. This section is
applicable as of April 1, 1996.
§§48.4101–2T, 48.4101–3, 48.4101–
3T, and 48.4101–4T [Removed]
Par. 31. Sections 48.4101–2T,
48.4101–3, 48.4101–3T, and 48.4101–
4T are removed.
Par. 32. Section 48.4102–1 is
amended as follows:
1.Paragraph (a) is revised.
2.Paragraph (b)(1) is amended by
removing the language ‘‘on the sale or
use of gasoline or lubricating oil,
respectively,’’.
3.Paragraph (b)(2) is amended by re-
moving ‘‘gasoline or lubricating oil’’
each place it appears and adding ‘‘tax-
able fuel or aviation fuel’’ in its place.
The revision reads as follows:
§48.4102–1 Inspection of records by
State or local tax officers.
(a)Inspection of records maintained
by taxpayer. The records that a tax-

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payer is required to keep with respect
to the taxes imposed by section 4081 or
4091 must be open to inspection by
any officer of any State or political
subdivision thereof, or of the District
of Columbia, who is charged with the
enforcement or collection of any tax on
taxable fuel or aviation fuel.
******
§48.4221 [Removed]
Par. 33. Section 48.4221 is removed.
Par. 34. Section 48.4221–1 is
amended as follows:
1.Paragraph (a) is revised.
2.Paragraph (b)(2)(iv) is amended
by adding ‘‘and’’ at the end.
3.Paragraph (b)(2)(v) is revised.
4. Paragraphs (b)(2)(vi) through
(b)(2)(xii) are removed.
5.Paragraph (b)(3) is removed and
paragraphs (b)(4) and (b)(5) are re-
designated as paragraphs (b)(3) and
(b)(4), respectively.
The revised provisions read as
follows:
§48.4221–1 Tax-free sales; general
rule.
(a)Application of regulations under
section 4221—(1) In general. The
regulations under section 4221 provide
rules under which the manufacturer,
producer, or importer of an article
subject to tax under chapter 32 (or the
retailer of an article subject to tax
under subchapter A or C of chapter 31)
may sell the article tax free under
section 4221.
(2)Limitations. The following re-
strictions must be taken into account in
applying the regulations under section
4221:
(i)The exemptions under section
4221(a)(4) and (a)(5) do not apply to
the tax imposed by section 4064 (gas
guzzler tax).
(ii)The exemptions under section
4221 do not apply to the tax imposed
by section 4081 (gasoline and diesel
fuel tax).
(iii)The exemptions under section
4221 do not apply to the tax imposed
by section 4091 (aviation fuel tax). For
rules relating to tax-free sales of
aviation fuel, see section 4092 and the
regulations thereunder.
(iv)The exemptions under section
4221 do not apply to the tax imposed
by section 4121 (coal tax).
(v)The exemptions under section
4221(a)(3) through (a)(5) do not apply
to the tax imposed by section 4131
(vaccine tax). In addition, the exemp-
tion under section 4221(a)(2) applies to
the vaccine tax only to the extent
provided in §48.4221–3(e) (relating to
tax-free sales of vaccine for export).
(vi)The exemptions under section
4221(a) apply only in those cases
where the exportation or use referred to
is to occur before any other use.
(b) * * *
(2) * * *
(v)Section 4221(e)(3) relating to the
sale of tires used on intercity, local, or
school buses (see §48.4221–8).
******
Par. 35. Section 48.4221–2 is
amended by:
1.Removing from the first sentence
of paragraph (a)(1) the language
‘‘(other than a tire or inner tube taxable
under section 4071, which are given
special treatment under sections
4221(e)(2) and (4), and §§48.4221–7
and 48.4221–8)’’ and adding ‘‘(other
than a tire taxable under section 4071,
which is given special treatment under
section 4221(e)(2) and §48.4221–7)’’
in its place.
2.Removing paragraph (a)(2) and
redesignating paragraph (a)(3) as para-
graph (a)(2).
3.Revising paragraph (b).
The revision reads as follows:
§48.4221–2 Tax-free sale of articles
to be used for, or resold for, further
manufacture.
******
(b)Circumstances under which an
article is considered to have been sold
for use in further manufacture. (1) An
article shall be treated as sold for use
in further manufacture if the article is
sold for use by the buyer as material in
the manufacture or production of, or as
a component part of, another article
taxable under chapter 32 of the Internal
Revenue Code.
(2)An article is used as material in
the manufacture or production of, or as
a component of, another article if it is
incorporated in, or is a part or ac-
cessory of, the other article when the
other article is sold by the manufac-
turer. In addition, an article is consid-
ered to be used as material in the
manufacture of another article if it is
consumed in whole or in part in testing
such other article. However, an article
that is consumed in the manufacturing
process other than in testing, so that it
is not a physical part of the manufac-
tured article, is not considered to have
been used as material in the manufac-
ture of, or as a component part of,
another article.
******
Par. 36. Section 48.4221–5 is
amended as follows:
1.Paragraph (c)(1) is amended by:
a.Removing the first sentence.
b.Removing the language ‘‘If a
State or local government is not
registered, the’’ and adding ‘‘The’’ in
its place in the new first sentence.
2.In paragraph (d), the first sen-
tence is amended by:
a.Removing the language ‘‘(whether
on the basis of a registration number or
an exemption certificate)’’.
b.Removing the language ‘‘(such as
gasoline that is’’ and adding ‘‘(such as
tires that are’’ in its place.
§§48.4221–8, 48.4221–9, 48.4221–10
[Removed]
P a r . 3 7 . S e c t i o n s 4 8 . 4 2 2 1 – 8 ,
4 8 . 4 2 2 1 – 9 , a n d 4 8 . 4 2 2 1 – 1 0 a r e
removed.
§48.4221–11 [Redesignated as
§48.4221–8]
Par. 38. Section 48.4221–11 is re-
designated as §48.4221–8.
§48.4221–12 [Removed]
Par. 39. Section 48.4221–12 is
removed.
Par. 40. In §48.4222(a)–1, para-
graphs (a) and (b) are revised to read
as follows:
§48.4222(a)–1 Registration.
(a)General rule. Except as provided
in §48.4222(b)–1, tax-free sales under
section 4221 may be made only if the
manufacturer, first purchaser, and sec-
ond purchaser, as the case may be,
have been registered by the Internal
Revenue Service.
(b)Application instructions. Ap-
plication for registration under section
4222 must be made in accordance with

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instructions for Form 637 (or such
other form as the Commissioner may
designate).
******
Par. 41. In §48.4222(b)–1, paragraph
(a) is revised to read as follows:
§48.4222(b)–1 Exceptions to the
requirement for registration.
(a)State and local governments. The
Internal Revenue Service will not regis-
ter State or local governments under
section 4222. To establish the right to
sell articles tax free to a State or local
government, the manufacturer must
obtain the information described in
§48.4221–5(c).
******
§48.4222(d)–1 [Amended]
Par. 42. Section 48.4222(d)–1 is
amended by:
1.Removing paragraphs (a), (b), and
(c).
2.Redesignating paragraph (d) as
paragraph (a).
3.Removing paragraphs (e) and (f).
4.Redesignating paragraph (g) as
paragraph (b).
§48.6206–1 [Removed]
Par. 43. Section 48.6206–1 is
removed.
§48.6416(b)(2)–2 [Amended]
Par. 44. In §48.6416(b)(2)–2, para-
graphs (g) through (k) are removed.
§48.6416(g)–1 [Removed]
Par. 45. Section 48.6416(g)–1 is
removed.
§48.6421–3 [Amended]
Par. 46. In §48.6421–3, paragraph
(d)(2) is amended by removing from
the first sentence the language ‘‘Form
843’’ and adding ‘‘Form 8849 (or on
such other form as the Commissioner
may designate)’’ in its place.
§§6424–0 through 48.6424–6
[Removed]
Par. 47. Sections 48.6424–0 through
48.6424–6 are removed.
§48.6427–3 [Amended]
Par. 48. In §48.6427–3, paragraph
(d)(2) is amended by removing from
the first sentence the language ‘‘Form
843’’ and adding ‘‘Form 8849 (or on
such other form as the Commissioner
may designate)’’ in its place.
§48.6427–7 [Amended]
Par. 49. In §48.6427–7, paragraph
(g)(4) is amended by removing the
language ‘‘Form 843 (Claim)’’ and
adding ‘‘Form 8849 (or such other
form as the Commissioner may desig-
nate)’’ in its place.
Par. 50. Sections 48.6427–8 and
48.6427–9 are added to read as
follows:
§48.6427–8 Claims by ultimate
purchasers with respect to diesel fuel
taxed after December 31, 1993.
(a)Overview. This section provides
the rules for obtaining a credit or
payment with respect to undyed diesel
fuel that was taxed after December 31,
1993, and that was used in a nontax-
able use (other than on a farm for
farming purposes or by a State). A
credit or payment for undyed diesel
fuel used on a farm for farming
purposes or by a State is allowable
only to a registered ultimate vendor
under the rules of §48.6427–9.
(b)Conditions to allowance of credit
or payment—(1) In general. Except as
provided in section 6427(l)(5), a claim
for credit or payment with respect to
diesel fuel is allowable under section
6427(l) only if—
(i)Tax was imposed by section 4081
on the diesel fuel to which the claim
relates;
(ii)The claimant produced or bought
the fuel and did not resell it in the
United States;
(iii)The claimant has filed a timely
claim for a credit or payment that
contains the information required under
paragraph (d) of this section;
(iv)The fuel was not bought under a
certificate described in §48.6427–9(e)-
(2) (relating to certificate of farmer or
State to support claim of ultimate
vendor);
(v)The fuel was not used on a farm
for farming purposes (as defined in
§48.6420–4) or by a State; and
(vi)The fuel was either—
(A)Used in a use described in
§48.4082–4(c)(3) through (c)(10);
(B)Exported;
(C)Used other than as a fuel in a
propulsion engine of a diesel-powered
highway vehicle or diesel-powered
boat;
(D)Used as a fuel in a propulsion
engine of a diesel-powered train; or
(E)Used as a fuel in the propulsion
engine of a diesel-powered bus if the
bus was used in a use described in
section 6427(b)(1) (after the application
of section 6427(b)(3)).
(2)Examples. The following exam-
ples illustrate this paragraph (b).
Example 1. (i) In September 1996, F bought
250 gallons of undyed diesel fuel. In October
1996, F used 200 gallons of the fuel in a farm
tractor. This use qualifies as use on a farm for
farming purposes (as defined in §48.6420–4).
The farm tractor is not a diesel-powered highway
vehicle (as defined in §48.4081–1(h)). F used the
remaining 50 gallons to heat F’s residence. F
filed a complete and timely claim for a credit
relating to the 250 gallons.
(ii)A credit or payment is not allowable to F
with respect to the 200 gallons of diesel fuel
used in the farm tractor. Even though this fuel
was used other than as a fuel in a propulsion
engine of a diesel-powered highway vehicle (thus
meeting the condition in paragraph (b)(1)(vi)(C)
of this section), the condition in paragraph
(b)(1)(v) of this section is not satisfied because
the fuel was used on a farm for farming
purposes.
(iii)A credit is allowable to F with respect to
the 50 gallons F used for heating purposes
because the conditions in paragraph (b)(1) of this
section have been met. F used this fuel other
than as a fuel in a propulsion engine of a diesel-
powered highway vehicle and the use of the fuel
for residential heating is not use on a farm for
farming purposes.
Example 2. (i) In September 1996, W, a
wholesale distributor, sold 3,500 gallons of
diesel fuel on which tax has been imposed to C,
a construction company located in the United
States. W’s selling price to C did not include an
amount equal to the federal excise tax on the
fuel. C used the fuel other than as a fuel in a
propulsion engine of a diesel-powered highway
vehicle or diesel-powered boat. Both W and C
file a complete and timely claim for a credit
relating to the fuel.
(ii)Because W resold the fuel in the United
States, the condition of paragraph (b)(1)(ii) of
this section is not met. Thus, W is not allowed a
credit or payment with respect to the fuel.
(iii)C is eligible for a credit or payment with
respect to the fuel because the conditions to
allowance in paragraph (b)(1) of this section
have been met. The conditions to allowance do
not include a requirement that C buy the fuel at a
price that includes the amount of the tax.
(c)Form of claim. Each claim for an
income tax credit under this section
must be made on Form 4136 (or on
such other form as the Commissioner

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may designate) in accordance with the
instructions for that form. Each claim
for a payment under this section must
be made on Form 8849 (or on such
other form as the Commissioner may
designate) in accordance with the in-
structions for that form.
(d)Content of claim. Each claim for
a credit or payment under this section
must contain the following information
with respect to all the diesel fuel
covered by the claim:
(1)The total number of gallons
covered by the claim.
(2)A statement by the claimant that
tax has been imposed on the diesel fuel
covered by the claim.
(3)The use made of the diesel fuel
covered by the claim described by
reference to specific categories listed in
paragraph (b)(1)(vi) of this section
(such as use in a boat employed in
commercial fishing or the exclusive use
of a nonprofit educational organiza-
tion).
(4)If the diesel fuel covered by the
claim was exported, a declaration that
the claimant has proof of exportation
(as described in §48.4221–3(d)(1)).
(5)A declaration that the claimant
has in its possession the name and
address of the person(s) that sold the
diesel fuel to the claimant and the
date(s) of the purchase(s).
(e)Time and place for filing claim.
For rules relating to the time for filing
a claim under section 6427, see section
6427(i). A claim under this section is
not filed unless it contains all the
information required by paragraph (d)
of this section and is filed at the place
required by the form.
(f)Effective date. This section is
effective January 1, 1994, except for
paragraph (b)(1)(v) of this section,
which is effective for diesel fuel
bought by ultimate purchasers after
June 30, 1994.
§48.6427–9 Claims by registered
ultimate vendors with respect to
diesel fuel taxed after December 31,
1993.
(a)Overview. This section provides
the rules for obtaining a credit or
payment with respect to undyed diesel
fuel that was taxed after December 31,
1993, and that was used on a farm for
farming purposes or by a State.
(b)Definitions. (1) An ultimate
vendor, as used in this section, is a
person that sells undyed diesel fuel
to—
(i)The owner, tenant, or operator of
a farm for use by such person on a
farm for farming purposes (as defined
in §48.6420–4);
(ii)A person other than the owner,
tenant, or operator of a farm for use by
such person for any of the purposes
described in §48.6420–4(d) (relating to
cultivating, raising, or harvesting); or
(iii)Any State for its exclusive use.
(2) A registered ultimate vendor
is—
(i)An ultimate vendor that is regis-
tered under section 4101 as an ultimate
vendor; or
(ii)With respect to a claim filed
before January 1, 1995, an ultimate
vendor that is registered as a producer
of diesel fuel on December 31, 1993, if
the registration has not been revoked or
suspended.
(c)Conditions to allowance of credit
or payment. A claim for a credit or
payment with respect to diesel fuel is
allowable under section 6427(l)(5) only
if—
(1)Tax was imposed by section
4081 on the diesel fuel to which the
claim relates;
(2)The claimant sold the diesel fuel
to—
(i)The owner, tenant, or operator of
a farm for use by such person on a
farm for farming purposes (as defined
in §48.6420–4);
(ii)A person other than the owner,
tenant, or operator of a farm for use by
such person for any of the purposes
described in §48.6420–4(d) (relating to
cultivating, raising, or harvesting); or
(iii)Any State for its exclusive use;
(3)The claimant is a registered
ultimate vendor; and
(4)The claimant has filed a timely
claim for a credit or payment that
contains the information required under
paragraph (e) of this section.
(d)Form of claim. Each claim for an
income tax credit under this section
must be made on Form 4136 (or on
such other form as the Commissioner
may designate) in accordance with the
instructions for that form. Each claim
for a payment under this section must
be made on Form 8849 (or on such
other form as the Commissioner may
designate) in accordance with the in-
structions for that form.
(e)Content of claim—(1) In general.
Each claim for credit or payment under
this section must contain the following
information with respect to all the
diesel fuel covered by the claim:
(i)The total number of gallons
covered by the claim.
(ii)A statement by the claimant that
tax has been imposed on the diesel fuel
covered by the claim.
(iii) The claimant’s registration
number.
(iv)The name and taxpayer identi-
fication number of each person that
bought diesel fuel from the claimant in
a transaction described in paragraph
(c)(2) of this section and the number of
gallons that the claimant sold to that
person.
(v)A statement that the claimant—
(A)Has not included the amount of
the tax in its sales price of the diesel
fuel and has not collected the amount
of tax from its buyer;
(B)Has repaid the amount of the tax
to the ultimate purchaser of the fuel; or
(C)Has obtained the written consent
of its buyer to the allowance of the
claim.
(vi)For claims relating to sales by
the claimant after March 31, 1994, a
statement that the claimant has in its
possession an unexpired certificate de-
scribed in paragraph (e)(2) of this
section and the claimant has no reason
to believe any information in the
certificate is false.
(vii)For claims relating to sales by
the claimant before April 1, 1994,
either the statement described in para-
graph (e)(1)(vi) of this section or a
statement that—
(A)The claimant has in its posses-
sion an unexpired exemption certificate
relating to tax-free sales of diesel fuel
for use on a farm for farming purposes
or for the exclusive use of a State;
(B) The certificate was received
from the buyer before January 1, 1994;
and
(C)The claimant has no reason to
believe any information in the certifi-
cate is false.
(2)Certificate—(i) In general. The
certificate to be provided to the ulti-
mate vendor consists of a statement
that is signed under penalties of perjury
by a person with authority to bind the
buyer, is in substantially the same form
as the model certificate provided in
paragraph (e)(2)(ii) of this section, and
contains all information necessary to
complete such model certificate. A new
certificate must be given if any infor-

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mation in the current certificate
changes. The certificate may be in-
cluded as part of any business records
normally used to document a sale. The
certificate expires on the earlier of the
following dates:
(A)The date one year after the
effective date of the certificate.
(B)The date a new certificate is
provided to the seller.
(ii)Model certificate.
CERTIFICATE OF FARMING USE OR STATE USE
(To support vendor’s claim for a credit or payment under section 6427 of the Internal Revenue Code.)
Name, address, and employer identification number of vendor
The undersigned buyer (‘‘Buyer’’) hereby certifies the following under penalties of perjury:
Buyer will use the diesel fuel to which this certificate relates—(check one)
On a farm for farming purposes (as defined in §48.6420–4(c) of the Manufacturers and Retailers Excise Tax
Regulations) and Buyer is the owner, tenant, or operator of the farm on which the fuel will be used;
On a farm (as defined in §48.6420–4(c)) for any of the purposes described in paragraph (d) of that section (relating
to cultivating, raising, or harvesting) and Buyer is a person that is not the owner, tenant, or operator of the farm on which
the fuel will be used; or
For the exclusive use of a State or local government, or the District of Columbia.
This certificate applies to the following (complete as applicable):
If this is a single purchase certificate, check here
and enter:
1.Invoice or delivery ticket number
2.(number of gallons)
If this is a certificate covering all purchases under a specified account or order number, check hereand enter:
1.Effective date
2.Expiration date
(period not to exceed 1 year after the effective date)
3.Buyer account or order number
Buyer will provide a new certificate to the vendor if any information in this certificate changes.
If Buyer uses the diesel fuel to which this certificate relates for a purpose other than stated in the certificate Buyer will be
liable for tax.
Buyer understands that the fraudulent use of this certificate may subject Buyer and all parties making such fraudulent use
of this certificate to a fine or imprisonment, or both, together with the costs of prosecution.
Printed or typed name of person signing
Title of person signing
Name of Buyer
Employer identification number
Address of Buyer
Signature and date signed

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(f)Time and place for filing claim.
For rules relating to the time for filing
a claim under section 6427, see section
6427(i). A claim under this section is
not filed unless it contains all the
information required by paragraph (e)
of this section and is filed at the place
required by the form.
(g)Effective date. This section is
effective January 1, 1994.
§§48.6427–8T and 48.6427–9T
[Removed]
Par. 51. Sections 48.6427–8T and
48.6427–9T are removed.
§48.6675–1 [Removed]
Par. 52. Section 48.6675–1 is
removed.
Par. 53. Section 48.6714–1 is added
to read as follows:
§48.6714–1 Penalty for misuse of
dyed diesel fuel.
(a)In general. If any person will-
fully alters, or attempts to alter, the
strength or composition of any dye or
marking done pursuant to §48.4082–1
in any dyed fuel, then section 6714(a)-
(3) provides that such person shall pay
a penalty in addition to any tax. The
penalty imposed by section 6714(a)(3)
will not apply in the following cases:
(1)Diesel fuel that satisfies the
dyeing and marking requirements of
§48.4082–1(b) and (c) is blended with
any undyed liquid and the resulting
product satisfies the dyeing and mark-
ing requirements of §48.4082–1(b) and
(c).
(2)Diesel fuel that satisfies the
dyeing and marking requirements of
§48.4082–1(b) and (c) is blended with
any other liquid (other than diesel fuel)
that contains the type and amount of
dye and marker required for diesel fuel
dyed and marked in accordance with
§48.4082–1(b) and (c).
(3)Diesel fuel that is dyed one color
in accordance with §48.4082–1(b) is
blended with diesel fuel that is dyed
another color in accordance with
§48.4082–1(b).
(4)Diesel fuel that does not satisfy
the dyeing and marking requirements
of §48.4082–1(b) and (c) is blended
with diesel fuel that satisfies the dyeing
and marking requirements of §48.4082–
1(b) and (c) and the blending occurs as
part of a use described in §48.4082–
4(c) or §48.6427–8(b)(vi)(C), (D), or
(E).
(b)Effective date. This section is
effective January 1, 1994.
PART 602—OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT
Par. 54. The authority citation for
part 602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 55. In §602.101, paragraph (c) is
amended as follows:
1.Removing the following entries
from the table:
§602.101 OMB Control numbers.
******
(c) * * *
CFR part or sectionCurrent OMB
where identifiedcontrol number
and described
******
42.5(b)................. 1545–1206
******
48.4041–2T............. 1545–0143
******
48.4082–2T............. 1545–1418
48.4101–1.............. 1545–0023
1545–0725
1545–0014
48.4101–2T............. 1545–0725
48.4101–3T............. 1545–1418
48.4101–4T............. 1545–1418
******
48.6427–8T............. 1545–1418
48.6427–9T............. 1545–1418
******
2.Adding entries in numerical order
to the table to read as follows:
§602.101 OMB Control numbers.
******
(c) * * *
CFR part or sectionCurrent OMB
where identifiedcontrol number
and described
******
48.4082–2.............. 1545–1418
48.4101–1.............. 1545–1418
48.4101–2.............. 1545–1418
******
48.6427–8.............. 1545–1418
48.6427–9.............. 1545–1418
******
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved December 18, 1995.
Leslie Samuels,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on
March 13, 1996, 8:45 a.m., and published in
the issue of the Federal Register for March 14,
1996, 61 F.R. 10450)

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Part III. Administrative, Procedural, and Miscellaneous
Debt Instruments Subject to Both
§ 475 and the Principal-Reduction
Method of Accounting
Notice 96–23
The Internal Revenue Service is con-
cerned that the principal-reduction
method of accounting for de minimis
original issue discount (OID) on loans
originated by the taxpayer, see Rev.
Proc. 94–29, 1994–1 C.B. 616, may be
used to claim inappropriate tax treat-
ment under the mark-to-market rules of
§ 475 of the Internal Revenue Code.
Accordingly, the Internal Revenue
Service requests comments regarding
the proper accounting for loans that are
subject to both the principal-reduction
method of accounting and the mark-to-
market rules.
BACKGROUND
A loan is originated with a de
minimis amount of OID if the loan’s
stated redemption price at maturity
exceeds the issue price of the loan by
less than a certain amount (for exam-
ple, 0.25 percent of a loan’s stated
redemption price at maturity multiplied
by the number of complete years from
its issue date to its maturity date).
Section 1273(a)(3) and §1.1273–1(d)
of the Income Tax Regulations.
If a loan is originated with a de
minimis amount of OID, the lender
generally includes the de minimis OID
(other than any de minimis OID treated
as qualified stated interest) in income
as principal payments are made.
§ 1.1273–1(d)(5). As a matter of tax-
payer convenience, Rev. Proc. 94–29
authorizes the use of an aggregate
method of accounting (the principal-
reduction method) for de minimis OID
on certain loans originated by a tax-
payer. In general, under the principal-
reduction method, the portion of the
aggregate de minimis OID that is taken
into account in a taxable year is
determined on a monthly basis. The
portion is the ratio of the stated
principal that is recovered during each
month to the sum of the stated
principal that is outstanding at the start
of the month plus the stated principal
on loans originated during the month.
Principal is treated as recovered when
principal payments are made, when
loans are written off in whole or in
part, and when loans are sold or
exchanged.
A taxpayer’s unadjusted basis in a
loan originated with a de minimis
amount of OID generally is the issue
price of the loan. If the loan is
accounted for under the principal-
reduction method, however, the tax-
payer’s unadjusted basis in the loan is
deemed to be the loan’s stated principal
amount, which is greater than the
loan’s issue price. This basis increase
assures that all of the gain represented
by the de minimis OID is recognized
solely under the principal-reduction
method. See section 5.01 of Rev. Proc.
94–29.
Section 475 requires a dealer in
securities to use the mark-to-market
method of accounting for certain se-
curities, including certain loans. Under
this method, a security that is inventory
in the hands of a dealer is included in
inventory at its fair market value. Any
other security subject to §475 is
treated as sold at its fair market value
on the last business day of the taxable
year, with any resulting gain or loss
taken into account by the dealer in the
taxable year of the deemed sale.
The Service is considering the proper
application of the mark-to-market rules
to a loan that is being accounted for
under the principal-reduction method.
As a result of its consideration to date,
the Service has concluded that a
taxpayer may not take the basis in-
crease provided under Rev. Proc. 94–
29 into account for mark-to-market
purposes and, at the same time, treat
the principal on the marked loan as
outstanding at the end of a monthly
computation period (and thus not re-
covered) for purposes of Rev. Proc.
94–29. This approach would distort the
taxpayer’s income by allowing the
taxpayer to create an artificial loss
under §475 or to avoid recognition
under §475 of all or a portion of the
appreciation on the loan. In either case,
this distortion is attributable solely to
the basis increase provided under sec-
tion 5.01 of Rev. Proc. 94–29.
The Service is considering a number
of alternatives for reconciling mark-to-
market accounting and the principal-
reduction method. Under one alterna-
tive, the entire principal on a loan that
is subject to §475 would be treated as
recovered for purposes of Rev. Proc.
94–29 on the first date on which the
loan is required to be marked to
market, and the loan would not thereaf-
ter be treated as outstanding for pur-
poses of the principal-reduction com-
putation under Rev. Proc. 94–29. Under
another alternative, the gain or loss
from marking a loan to market under
§ 475 would be determined without
regard to the basis increase provided
under section 5.01 of Rev. Proc. 94–29.
REQUEST FOR COMMENTS
The Service requests comments on
the most appropriate method of ac-
counting for loans that are subject to
both §475 and the principal-reduction
method of accounting, including
whether an aggregate method of mark-
ing loans to market in this circum-
stance is feasible and desirable.
Written comments should be sent in
duplicate no later than July 15, 1996
to: CC:DOM:FI&P, Room 4300, Inter-
nal Revenue Service, 1111 Constitution
Avenue, N.W., Washington, D.C.
20224. The Service will make these
c o m m e n t s a v a i l a b l e f o r p u b l i c
inspection.
CONTACT PERSON
This notice was drafted in the Office
of Assistant Chief Counsel (Financial
Institutions & Products). For further
information regarding this notice, con-
tact Albert J. Kiss at (202) 622-3940
(not a toll-free call).
Weighted Average Interest Rate
Update
Notice 96–24
Notice 88–73 provides guidelines for
determining the weighted average inter-
est rate and the resulting permissible
range of interest rates used to calculate
current liability for the purpose of the
full funding limitation of §412(c)(7) of
the Internal Revenue Code as amended
by the Omnibus Budget Reconciliation
Act of 1987 and as further amended by
the Uruguay Round Agreements Act,
Pub. L. 103–465 (GATT).
The average yield on the 30-year
Treasury Constant Maturities for March
1996 is 6.60 percent.

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The following rates were determined for the plan years beginning in the month shown below.
MonthYear
Weighted
Average
90% to 108%
Permissible
Range
90% to 110%
Permissible
Range
April19966.956.26 to 7.516.26 to 7.65
Drafting Information
The principal author of this notice is
Donna Prestia of the Employee Plans
Division. For further information re-
garding this notice, call (202) 622-6076
between 2:30 and 4:00 p.m. Eastern
time (not a toll-free number). Ms.
Prestia’s number is (202) 622-7377
(also not a toll-free number).
26 CFR 601.202: Closing agreements.
Rev. Proc. 96–29
SECTION 1. PURPOSE
.01This revenue procedure modifies
Rev. Proc. 94–62, 1994–2 C.B. 778,
which describes the Voluntary Com-
pliance Resolution (VCR) Program, and
Rev. Proc. 94–16, 1994–1 C.B. 576,
which describes the Walk-in Closing
Agreement Program (Walk-in CAP), to
change the definition of when a plan is
ineligible for those programs because it
is under examination. The modification
conforms the definition to that set forth
in Rev. Proc. 95–24, 1995–1 C.B. 694,
which describes the Tax Sheltered
Annuity Voluntary Correction (TVC)
Program.
.02 This revenue procedure also
modifies Rev. Proc. 94–62 to provide
that a plan that is submitted under the
VCR program on or after January 1,
1996, will not be considered ineligible
for the VCR program solely by reason
of its not having received a favorable
determination letter that considers the
Tax Reform Act of 1986 (TRA ’86) if
certain conditions have been met at the
time of the plan’s submission under the
VCR program. These conditions require
that the plan have received a favorable
letter that considers the Tax Equity and
Fiscal Responsibility Act of 1982
(TEFRA), the Deficit Reduction Act of
1984 (DEFRA), and the Retirement
Equity Act of 1984 (REA), and, at the
time of its VCR submission, have been
submitted within the plan’s §401(b)
remedial amendment period for a deter-
mination letter that considers TRA ’86.
Those plans for which the §401(b)
remedial amendment period has not
expired (including adopters of certain
master and prototype plans, regional
prototype plans, volume submitter
plans, governmental plans, and plans
maintained by tax-exempt organiza-
tions), may be submitted for considera-
tion under the VCR program on or
after January 1, 1996, if the plan is the
subject of a favorable letter that con-
siders TEFRA, DEFRA, and REA.
SECTION 2. BACKGROUND
.01The Internal Revenue Service
has developed a number of voluntary
compliance programs over the past
several years for plans, annuities, or
other arrangements (‘‘plans’’) qualified
under § 401(a), or described in
§ 403(b), of the Code. Under each of
these programs, the employer corrects
defects in the plan for all years and the
Service treats the plan as qualified
under § 401(a), or as satisfying
§ 403(b), with respect to those defects.
Plans submitted under these compliance
programs must meet certain eligibility
requirements.
.02Background concerning eligibil-
ity of plans under examination for the
VCR program, Walk-in CAP, and the
TVC program.
(1)VCR program. On November
16, 1992, the Service established the
VCR program as a temporary, experi-
mental program, that was later ex-
tended indefinitely with the publication
of Rev. Proc. 94–62. The VCR pro-
gram permits plan sponsors to pay a
fixed compliance fee and correct opera-
tional qualification defects in their
§ 401(a) plans. Regarding the eligibil-
ity of plans under examination, section
4.07 of Rev. Proc. 94–62 provides in
part that ‘‘[a] plan that is under an
Employee Plans examination (that is,
an examination of a Form 5500 series
return) is not eligible for the VCR
program. A plan that is under an
Employee Plans examination includes
any plan for which the plan sponsor, or
a representative, has received verbal or
written notification from the EP/EO
Division of an impending Employee
Plans examination.’’
(2)Walk-in CAP. On January 31,
1994, the Service established Walk-in
CAP with the publication of Rev. Proc.
94–16. Walk-in CAP permits plan
sponsors of §401(a) plans that are not
eligible for the VCR program to pay a
negotiated, limited, monetary sanction
and correct form and operational
qualification defects. Participation in
Walk-in CAP must be voluntary. Sec-
tion 3.06 of Rev. Proc. 94–16 provides
in part that ‘‘a request is voluntary if it
is made before the plan sponsor, or a
representative, has received verbal or
written notification from the EP/EO
Division of an impending Employee
Plans examination.’’
(3)Voluntary compliance program
for §403(b) plans. On May 1, 1995,
the Service established the TVC pro-
gram as a temporary, experimental
program pursuant to Rev. Proc. 95–24.
The TVC program will sunset on
October 31, 1996. The TVC program
permits plan sponsors to correct defects
in their §403(b) plans, and to pay a
fixed correction fee and a negotiated
sanction. Section 5.04 of Rev. Proc.
95–24 provides in part that ‘‘a 403(b)
plan that is under Employee Plans or
Exempt Organization examination (that
is, an examination of a Form 5500
series, a Form 990 series or other
Employee Plans or Exempt Organiza-
tions examination) is not eligible for
the program. This includes any plan for
which the employer, or a representa-
tive, has received verbal or written
notification from the EP/EO Division
of an impending Employee Plans or
Exempt Organizations examination.’’
.03Background concerning eligibil-
ity for the VCR program of plans that
do not have a favorable determination,
opinion, or notification letter for TRA
’86.
(1)Section 4.02 of Rev. Proc. 94–
62 provides that the VCR program is
available only for an individually de-
signed plan that has reliance on a
favorable determination letter, a plan
that is an adopter of a master or
prototype plan with an opinion letter,

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or a plan that is an adopter of a
regional prototype plan with a notifica-
tion letter. Under section 4.02(2) of
that revenue procedure, for VCR re-
quests submitted on or after January 1,
1996, a plan must have received a
favorable determination, opinion, or
notification letter that takes into ac-
count TRA ’86.
(2)Section 13.05 of Rev. Proc.
94–62 provides that a plan’s VCR
submission must be accompanied by
certain documents. These include a
copy of the determination letter that
considered TEFRA, DEFRA, and REA,
and any subsequent letter. After De-
cember 31, 1995, the letter must have
considered TRA ’86.
(3) Rev. Proc. 95–12, 1995–1
C.B. 508, extends the deadline by
which employers may request deter-
mination letters for certain plans and be
considered to have amended their plans
timely to comply with TRA ’86. Under
Rev. Proc. 95–12, the filing of a
determination letter request for certain
plans within three months after the end
of the plan’s remedial amendment
period (as modified therein) is treated
as having been filed on or before the
end of the plan’s remedial amendment
period. In addition, Rev. Proc. 95–12,
at section 3, extends the remedial
amendment period for adopters of
certain regional prototype, master and
prototype, and volume submitter plans
that comply with TRA ’86 to, in
general, six months after a favorable
letter is issued with respect to the plan.
(4)Announcement 95–48, 1995–
23 I.R.B. 13, extends the remedial
amendment period for governmental
plans described in §414(d) to the last
day of the first plan year beginning on
or after the later of January 1, 1999, or
90 days after the opening of the first
legislative session beginning on or after
January 1, 1999, of the governing body
with authority to amend the plan, if
that body does not meet continuously.
Announcement 95–48 also extends the
remedial amendment period for plans
maintained by organizations exempt
from income tax under §501(a), other
than non-electing church plans de-
scribed in §410(c)(1)(B), to the last
day of the first plan year beginning on
or after January 1, 1997. For non-
electing church plans, Announcement
95–48 extends the remedial amendment
period to the last day of the first plan
year beginning on or after January 1,
1999.
SECTION 3. DEFINITION OF
PLAN UNDER EXAMINATION
.01Section 4.07 of Rev. Proc. 94–62
is hereby modified to read as follows:
.07Plans under examination. If a
plan or plan sponsor is under an
Employee Plans or Exempt Organiza-
tions examination (that is, an examina-
tion of a Form 5500 series, a Form 990
series or other Employee Plans or
Exempt Organizations examination) the
plan is not eligible for the VCR
program.
(1)A plan or plan sponsor that is
under an Employee Plans or Exempt
Organizations examination includes any
plan for which the employer, or a
representative, has received verbal or
written notification from the EP/EO
Division of an impending Employee
Plans or Exempt Organizations ex-
amination, or of an impending referral
for Employee Plans or Exempt Organi-
zations examination, and also includes
any plan that has been under an
Employee Plans or an Exempt Organi-
zations examination and is now in
Appeals or in litigation for issues
raised in the Employee Plans or Ex-
empt Organizations examination.
(2)An Employee Plans examina-
tion also includes a case in which a
plan sponsor has submitted a Form
5310, Application for Determination of
Qualification Upon Termination, and
the EP Agent notifies the plan sponsor,
or a representative, of possible defects,
whether or not the plan sponsor is
officially notified of an ‘‘examina-
tion.’’ For example, if an employer has
applied for a determination letter on
plan termination, and an EP Agent
notifies the employer that there are
partial termination concerns, the plan is
no longer eligible for the VCR
program.
(3)The VCR program is available
with respect to any other plan of the
plan sponsor that is not aggregated for
purposes of satisfying the qualification
requirements of §401(a), or the re-
quirements of §403(b), with the plan
(or plans) under examination. In addi-
tion, the VCR program is available for
a plan that is aggregated with a plan
that is under an Employee Plans
examination with respect to a defect
that is not related to provisions for
which the plans are aggregated. Thus,
for example, a plan sponsor of a plan
aggregated with a plan that is under
examination could request considera-
tion under the VCR program for a
defect arising under the spousal consent
rules of §417, or the vesting rules of
§ 411, but could not ask for considera-
tion of a defect under provisions for
which the plans are aggregated, includ-
ing the nondiscrimination provisions
(§§401(a)(4), 410(b), etc.), §415, or
§ 416. For purposes of this revenue
procedure, the term aggregation does
not include consideration of benefits
provided by various plans for purposes
of the average benefits test set forth in
§ 410(b)(2).
.02Section 3.06 of Rev. Proc. 94–16
is hereby modified to read as follows:
.06 If a plan or plan sponsor is under
an Employee Plans or Exempt Organi-
zations examination (that is, an ex-
amination of a Form 5500 series, a
Form 990 series or other Employee
Plans or Exempt Organizations ex-
amination) the plan is not eligible for
voluntary consideration under CAP.
(1)A request for consideration
under CAP is voluntary if it is made
before the plan sponsor, or a represent-
ative, has received verbal or written
notification from the EP/EO Division
of an impending Employee Plans or
Exempt Organizations examination, or
of an impending referral for Employee
Plans or Exempt Organizations ex-
amination, and also includes any plan
that has been under an Employee Plans
or an Exempt Organizations examina-
tion and is now in Appeals or in
litigation for issues raised in the
Employee Plans or Exempt Organiza-
tions examination.
(2)A request for consideration
under CAP will not be considered
voluntary if it is made as part of a
determination letter application.
(3)An Employee Plans examina-
tion also includes a case in which a
plan sponsor has submitted a Form
5310, Application for Determination of
Qualification Upon Termination, and
the EP Agent notifies the plan sponsor,
or a representative, of possible defects,
whether or not the plan sponsor is
officially notified of an ‘‘examina-
tion.’’ For example, if an employer has
applied for a determination letter on
plan termination, and an EP Agent
notifies the employer that there are
partial termination concerns, a request
for consideration under CAP will not
be considered voluntary.
(4)Walk-in CAP is available with
respect to any other plan of the plan
sponsor that is not aggregated for

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purposes of satisfying the qualification
requirements of §401(a), or the re-
quirements of §403(b), with the plan
(or plans) under examination. In addi-
tion, Walk-in CAP is available for a
plan that is aggregated with a plan that
is under an Employee Plans examina-
tion with respect to a defect that is not
related to provisions for which the
plans are aggregated. Thus, for exam-
ple, a plan sponsor of a plan aggre-
gated with a plan that is under
examination could voluntarily request
consideration under CAP for a defect
arising under the spousal consent rules
of §417, or the vesting rules of §411,
but could not ask for consideration of a
defect under provisions for which plans
are aggregated, including the non-
discrimination provisions (§§401(a)(4),
410(b), etc.), §415, or §416. For pur-
poses of this revenue procedure, the
term aggregation does not include con-
sideration of benefits provided by
various plans for purposes of the
average benefits test set forth in
§ 410(b)(2).
SECTION 4. PLANS THAT HAVE
NOT YET RECEIVED A TRA ’86
LETTER
.01Section 4.02(2) of Rev. Proc.
94–62 is hereby modified to read as
follows:
For VCR requests submitted on or
after January 1, 1996, the plan must (1)
have received a favorable determina-
tion, opinion, or notification letter that
considered TEFRA, DEFRA, and REA,
and, (2) at the time of the request, have
been submitted within the plan’s
§ 401(b) remedial amendment period
for a determination, opinion, or noti-
fication letter that considers TRA ’86
(TRA ’86 remedial amendment period).
This second condition does not apply
in the case of plans for which the TRA
’86 remedial amendment period has not
yet expired, such as adopters of master
and prototype plans, regional prototype
plans, and volume submitter plans,
described in section 3 of Rev. Proc.
95–12; governmental plans described in
Announcement 95–48; and plans main-
tained by tax-exempt organizations,
including non-electing church plans,
described in Announcement 95–48.
.02Section 13.05(3) of Rev. Proc.
94–62 is hereby modified to read as
follows:
(3)A copy of the determination
letter, opinion letter, or notification
letter that considered TEFRA, DEFRA,
and REA, and any subsequent letter.
For VCR requests submitted after
December 31, 1995, either the letter
must have considered TRA ’86 or the
following additional documentation
must be supplied:
(a) For individually designed
plans (including volume submitter
plans) for which the TRA ’86 remedial
amendment period under §401(b) has
expired, but which have not yet re-
ceived a favorable determination letter
that considers TRA ’86, a copy of the
letter acknowledging receipt of the
TRA ’86 determination letter applica-
tion (Form 2693).
(b)For plans for which the
TRA ’86 remedial amendment period
has not yet expired, a statement that
explains the reason why the period has
not yet expired (for example, because
the plan is a governmental plan, or
because it is an adopter of a master or
prototype plan that is still entitled to
continued or interim reliance under
Rev. Proc. 89–9, 1989–1 C.B. 780).
SECTION 5. EFFECTS ON OTHER
DOCUMENTS
Rev. Proc. 94–16 and Rev. Proc. 94–
62 are modified.
SECTION 6. EFFECTIVE DATE
This revenue procedure is effective
on April 15, 1996.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Diane S. Bloom of the
Employee Plans Division. For more
information concerning this revenue
procedure, call the Employee Plans
Division VCR telephone number (202)
622-8165 (not a toll-free number). Ms.
Bloom may be reached at (202)
622-6214 (also not a toll-free number).

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271996–28 I.R.B.
Part IV. Items of General Interest
Notice of Proposed Rulemaking and
Notice of Public Hearing
Gasoline and Diesel Fuel Excise Tax;
Dye Injection Systems and Markers;
Measurement
PS–6–95
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing and notice of public hearing.
SUMMARY: This document contains
proposed regulations relating to the
gasoline and diesel fuel excise tax. The
proposed regulations reflect and imple-
ment certain changes made by the Rev-
enue Reconciliation Act of 1990 and the
Omnibus Budget Reconciliation Act of
1993 (the 1993 Act). They affect certain
enterers, refiners, terminal operators, and
throughputters. This document also
provides a notice of public hearing on
these proposed regulations.
DATES: Written comments and out-
lines of oral comments to be presented
at the public hearing scheduled for
June 20, 1996, must be received by
June 12, 1996.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (PS–6–95), Room
5228, Internal Revenue Service, POB
7604, Ben Franklin Station, Wash-
ington, DC 20044. In the alternative,
submissions may be hand delivered
between the hours of 8 a.m. and 5 p.m.
to: CC:DOM:CORP:R (PS–6–95), Cou-
rier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, NW., Wash-
ington, DC. The public hearing will be
held in the IRS Auditorium, Seventh
Floor, 7400 Corridor, Internal Revenue
Building, 1111 Constitution Avenue,
NW., Washington, DC.
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
regulations, Frank Boland, (202)
622-3130; concerning submissions and
the hearing, Christina Vasquez at (202)
622-7190; (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information con-
tained in this notice of proposed
rulemaking has been submitted to the
Office of Management and Budget for
review in accordance with the Paper-
work Reduction Act of 1995 (44
U.S.C. 3507).
Comments on the collection of infor-
mation should be sent to the Office of
Management and Budget, Attn: Desk
Officer for the Department of the
Treasury, Office of Information and
Regulatory Affairs, Washington, DC
20503, with copies to the Internal
Revenue Service, Attn: IRS Reports
Clearance Officer, T:FP, Washington,
DC 20224. Comments on the collection
of information should be received by
May 13, 1996.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless the collection of information
displays a valid control number.
The collection of information is in
§48.4082–1(c). This information is re-
quired by the IRS to monitor manual
dyeing at terminals. This information
will be used to ensure the collection of
the proper amount of tax imposed by
section 4081. The likely recordkeepers
are business or other for-profit institu-
tions and organizations. Responses to
this collection of information are re-
quired to obtain exemption from the
diesel fuel excise tax.
Books or records relating to a
collection of information must be re-
tained as long as their contents may
become material in the administration
of any internal revenue law. Generally,
tax returns and tax return information
are confidential, as required by 26
U.S.C. 6103.
Estimated total annual recordkeeping
burden: 200 hours.
Estimated average annual burden per
recordkeeper: 1 hour.
Estimated number of recordkeepers:
200.
Background
Section 4081 imposes a tax on
certain removals, entries, and sales of
diesel fuel. However, under section
4082, the tax is not imposed if, among
other conditions, the diesel fuel (1) is
indelibly dyed in accordance with
regulations that the Secretary shall
prescribe, and (2) meets such marking
requirements (if any) as may be pre-
scribed by the Secretary in regulations.
The regulations currently provide
that the section 4082 exemption applies
only to diesel fuel that contains a
prescribed type and amount of dye.
However, the regulations do not pre-
scribe the time or method for adding
the dye to diesel fuel and do not
require the use of a marker.
Dye injection systems
Dyeing methods. Diesel fuel is usu-
ally dyed at a terminal rack by either
manual dyeing or mechanical injection.
At a terminal using a typical manual
dyeing technique, a measured amount
of dye is manually placed into an
empty tank compartment of a transport
trailer while the trailer is at the
terminal rack. Then, as diesel fuel is
pumped into the compartment at the
rack, the dye and the fuel are mixed
together. Further mixing occurs through
the motion of the trailer as it moves on
the highway.
At a terminal using a typical me-
chanical injection system, a measured
amount of dye is automatically injected
into the diesel fuel as the fuel is
delivered into a compartment of a
transport trailer at the terminal rack.
Concerns about manual dyeing. The
Federal government, State govern-
ments, and various segments of the
petroleum industry have long been
concerned with the problem of diesel
fuel tax evasion, and to address this
problem Congress changed the law to
require that untaxed diesel fuel be
indelibly dyed. The IRS is concerned,
however, that tax can still be evaded
through removals at a terminal of
undyed fuel that has been designated as
dyed.
Manual dyeing is inherently difficult
to monitor. It occurs after diesel fuel
has been withdrawn from a terminal
storage tank, generally requires the
work of several people, is imprecise,
and does not automatically create a
reliable record.
Mechanical dye injection, on the
other hand, occurs while the fuel is still
under the control of the terminal
operator, is computer regulated, and
can automatically create a reliable
record of the amount of dye that was
injected and fuel that was dyed. Thus,
dye injection is the preferred method of
combining diesel fuel and dye at a
terminal.

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Explanation of provisions. Diesel
fuel removed from a terminal at the
rack may be dyed before the fuel is
received at the terminal, while the fuel
is in a bulk storage tank at the
terminal, or at the terminal rack. Under
the proposed regulations, as under
existing law, diesel fuel must contain a
prescribed type and amount of dye at
the time of the removal, entry, or sale
that would otherwise be subject to tax.
For example, high-sulfur diesel fuel,
which is required to be dyed at a
refinery under Environmental Protec-
tion Agency regulations, must contain
the prescribed type and amount of dye
at the time of the removal at the
terminal rack even if additional dye
must be added at that point.
Under the proposed regulations, a
terminal operator that dyes diesel fuel
at a terminal generally must use a
prescribed mechanical injection system
or else give a bond to the district
director as a condition of retaining its
registration. The prescribed system
contains calibrated measurement de-
vices, shut-off devices, and locks and
similar equipment to secure these de-
vices. If the system malfunctions at a
particular terminal, the terminal opera-
tor may manually dye the fuel if the
operator notifies the district director of
the malfunction.
The proposed regulations also pre-
scribe the records that the terminal
operator must maintain with respect to
any manual dyeing performed at its
terminals.
Markers
A marker is a material that is placed
in diesel fuel to designate the fuel as
untaxed. Unlike dye, a marker does not
reveal its presence until the fuel into
which it is introduced is subjected to a
special test. Markers are effective even
if diluted and can be detected even if
there is no visual evidence of dye.
The proposed regulations do not
require the use of markers. However,
the IRS expects to issue a notice of
proposed rulemaking with respect to
markers within the next year. In the
meantime, the IRS is interested in
receiving comments relating to the type
and concentration of markers, the cost
of markers, and whether lower con-
centrations of dye could be used in
conjunction with a marker.
Measurement
Existing regulations provide that gal-
lons of taxable fuel may be measured
on the basis of actual volumetric
gallons, gallons adjusted to 60 degrees
Fahrenheit, or any other temperature
adjustment method approved by the
Commissioner.
These proposed regulations modify
this rule by generally providing that
measurement is to be made on the basis
of actual volumetric gallons or gallons
adjusted to 60 degrees Fahrenheit,
whichever is the basis for measurement
under the position holder’s terminaling
agreement with the terminal operator.
Special Analyses
It has been determined that this
notice of proposed rulemaking is not a
significant regulatory action as defined
in EO 12866. Therefore, a regulatory
assessment is not required. It also has
been determined that section 553(b) of
the Administrative Procedure Act (5
U.S.C. chapter 5) and the Regulatory
Flexibility Act (5 U.S.C. chapter 6) do
not apply to these regulations, and,
therefore, a Regulatory Flexibility
Analysis is not required. Pursuant to
section 7805(f) of the Internal Revenue
Code, this notice of proposed rulemak-
ing will be submitted to the Chief
Counsel for Advocacy of the Small
Business Administration for comment
on its impact on small business.
Comments and Public Hearing
Before these proposed regulations
are adopted as final regulations, consid-
eration will be given to any written
comments (a signed original and eight
(8) copies) that are submitted timely to
the IRS. All comments will be avail-
able for public inspection and copying.
A public hearing has been scheduled
for Thursday, June 20, 1996, at 10 a.m.
in the Auditorium, Internal Revenue
Building, 1111 Constitution Avenue
NW., Washington, DC. Because of
access restrictions, visitors will not be
admitted beyond the building lobby
more than 15 minutes before the
hearing starts.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing.
Persons that wish to present oral
comments at the hearing must submit
written comments and an outline of
topics to be discussed and the time to
be devoted to each topic (signed
original and eight (8) copies) by June
12, 1996.
A period of 10 minutes will be
allotted to each person for making
comments.
An agenda showing the scheduling
of the speakers will be prepared after
the deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal author of these regula-
tions is Frank Boland, Office of Assist-
ant Chief Counsel (Passthroughs and
Special Industries). However, other
personnel from the IRS and Treasury
Department participated in their de-
velopment.
******
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 48 is
proposed to be amended as follows:
PART 48—MANUFACTURERS
AND RETAILERS EXCISE TAXES
Paragraph 1. The authority citation
for part 48 continues to read, in part, as
follows:
Authority: 26 U.S.C. 7805 ** *
Par. 2. Section 48.4081–8 is revised
to read as follows:
§48.4081–8 Taxable fuel;
measurement.
(a)Removals from a terminal. For
purposes of the tax imposed under
§§48.4081–2 and 48.4081–3(d), taxable
fuel is measured on the basis of actual
volumetric gallons or gallons adjusted
to 60 degrees Fahrenheit, whichever is
the basis for measurement under the
position holder’s terminaling agreement
with the terminal operator.
(b)Other taxable events. For pur-
poses of the taxes imposed under
§ § 4 8 . 4 0 8 1 – 3 ( b ) , 4 8 . 4 0 8 1 – 3 ( c ) ,
48.4081–3(e), and 48.4082-4, and the
tax imposed on the removal of taxable
fuel under §48.4081–3(g), taxable fuel
is measured on the basis of actual
volumetric gallons or gallons adjusted
to 60 degrees Fahrenheit. For purposes

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of the tax imposed under §48.4081–3(f)
and the tax imposed on the sale of
taxable fuel under §48.4081–3(g), tax-
able fuel is measured on the basis of
actual volumetric gallons or gallons
adjusted to 60 degrees Fahrenheit,
whichever basis is used to invoice the
buyer.
(c)Effective date. This section is
applicable as of October 1, 1996.
Par. 3. Section 48.4082–1 is
amended as follows:
1.In the introductory text of para-
graph (a), the language ‘‘if—’’ is
removed and ‘‘if, at the time of the
removal, entry, or sale—’’ is added in
its place.
2.Paragraph (d) is revised.
The revision reads as follows:
§48.4082–1 Diesel fuel tax;
exemption.
******
(d)Time for adding the dye and
marker—(1) Removals from a terminal
at the terminal rack; in general. With
respect to any removal from a terminal
at the terminal rack, diesel fuel satisfies
the dyeing and marking requirements
of this paragraph (d) only if the dye
and marker required by paragraphs (b)
and (c) of this section are combined
with diesel fuel—
(i)Before the fuel is received at the
terminal;
(ii)While the fuel is in a bulk
storage tank at the terminal; or
(iii)At the terminal rack by means
of—
(A)A mechanical injection system
described in paragraph (d)(2) of this
section; or
(B) Nonconforming dyeing, under
the conditions of paragraph (d)(3) of
this section.
(2)Removals from a terminal at the
terminal rack; mechanical injection
systems. A mechanical injection system
is described in this paragraph (d)(2)
only if the district director has deter-
mined (and such determination has not
been withdrawn) that the system
contains—
(i)Features that automatically inject
a measured amount of dye and marker
into diesel fuel as the fuel is delivered
into the transport compartment of a
truck, trailer, railroad car, or other
means of nonbulk transfer;
(ii)Calibrated devices that accu-
rately measure and record the amount
of dye, marker, and fuel that is
dispensed at the rack for each removal;
(iii)Shut-off devices that prevent the
removal of more than 50 gallons of
undyed diesel fuel in the case of a
system malfunction; and
(iv)Locks or similar security equip-
ment that secure the measurement
devices and shut-off devices.
(3)Removals from a terminal at the
terminal rack; conditions for noncon-
forming dyeing. Nonconforming dyeing
meets the conditions of this paragraph
(d)(3) only if diesel fuel is dyed and
marked in the manner described in
paragraph (d)(4) of this section and—
(i)The terminal operator has given a
bond as a condition of registration
under the provisions of §48.4101–1(f)-
(4)(i); or
(ii)In the case of a terminal con-
taining a mechanical injection system
described in paragraph (d)(2) of this
section—
(A)The accurate mechanical injec-
tion of dye and marker at the terminal
cannot occur because of an equipment
malfunction or a shutdown for mainte-
nance purposes;
(B)Before beginning any noncon-
forming dyeing described in paragraph
(d)(4) of this section, the terminal
operator notifies the district director of
the time, location, and type of malfunc-
tion or maintenance shutdown; and
(C)Immediately after correction of
the malfunction or completion of the
maintenance, the terminal operator no-
tifies the district director that mechan-
ical injection has resumed.
(4)Removals from a terminal at the
terminal rack; description of noncon-
forming dyeing—(i) In general. Diesel
fuel is dyed and marked in a manner
described in this paragraph (d)(4) only
if the diesel fuel is dyed and marked by
means of a mechanical injection system
described in paragraph (d)(4)(ii) of this
section or manual dyeing described in
paragraph (d)(4)(iii) of this section.
(ii)Mechanical injection. Diesel fuel
is dyed and marked in a manner de-
scribed in this paragraph (d)(4)(ii) if
the diesel fuel is dyed and marked by
means of a mechanical injection system
that is not described in paragraph (d)(2)
of this section and, with respect to the
diesel fuel so dyed and marked, the
terminal operator maintains a record
of—
(A)The identity and registration
number of the position holder;
(B)The identity and taxpayer identi-
fication number of the individual that
physically receives the fuel at the
terminal;
(C)The identity and taxpayer identi-
fication number of any individual that
physically operates the mechanical in-
jection equipment; and
(D)The volume of the fuel dyed and
marked and the date and time of the
dyeing.
(iii)Manual dyeing. Diesel fuel is
dyed and marked in a manner described
in this paragraph (d)(4)(iii) if—
(A)The terminal operator places a
dye and marker of the type and
concentration required by paragraphs
(b) and (c) of this section into a
compartment of a truck, trailer, railroad
car, or other means of nonbulk transfer;
(B)The diesel fuel is removed from
the terminal at the rack and is imme-
diately delivered into the compartment
described in paragraph (d)(4)(iii)(A) of
this section; and
(C)With respect to the diesel fuel so
dyed and marked, the terminal operator
maintains a record of—
(1) The identity and registration
number of the position holder;
(2) The identity and taxpayer identi-
fication number of the individual that
physically receives the fuel at the
terminal;
(3) The identity and taxpayer identi-
fication number of the individual that
physically places the dye and marker
into the compartment described in
paragraph (d)(4)(iii)(A) of this section;
and
(4) The volume of the fuel dyed and
marked and the date and time of the
manual dyeing.
(5)Removals from refineries, sales
or entries. With respect to any removal
from a refinery, sale, or entry, diesel
fuel satisfies the dyeing and marking
requirements of this paragraph (d) only
if the dye and marker required by
paragraphs (b) and (c) of this section
are combined with diesel fuel before
the removal, sale, or entry that would
otherwise be subject to the tax imposed
by section 4081. Thus, for example,
diesel fuel that is entered into the
United States by means of nonbulk
transfer (such as in a railroad car) does
not satisfy the requirements of this
paragraph (d)(5) if the required dye and
marker are combined with the diesel
fuel after the fuel has been entered into
the United States.

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(6)Cross reference. For rules allow-
ing inspection of equipment used for
the dyeing of fuel, see section 4083.
(7)Effective date. This paragraph (d)
is applicable as of April 1, 1997.
******
Par. 4. Section §48.4101–1 is
amended as follows:
1.Paragraph (b)(7) is added.
2.Paragraph (f)(4)(i) is amended by
adding a sentence at the end of the
paragraph.
3.In the first sentence of paragraph
(j)(2) introductory text, the language
‘‘A bond’’ is removed and ‘‘Except as
provided in the last sentence of para-
graph (f)(4)(i) of this section, a bond’’
is added in its place.
4.Paragraph (l)(4) is added.
The additions read as follows
§48.4101–1 Registration.
******
(b) * * *
(7)Nonconforming dyeing amount.
The nonconforming dyeing amount is
the product of—
(i)The rate of tax on diesel fuel
provided by section 4081(a)(2); and
(ii)An amount up to the total
number of gallons of diesel fuel
expected to be dyed by nonconforming
dyeing (and removed at terminal racks
of the applicant that do not have a
mechanical injection system described
in §48.4082–1(d)(2)) during a repre-
sentative one-month period (as deter-
mined by the district director).
******
(f) * * *
(4) * ** (i) ** * An applicant that
operates a terminal where diesel fuel is
dyed by nonconforming dyeing (and
removed at a rack that is not equipped
with a mechanical injection system
described in §48.4082–1(d)(2)) meets
the adequate security test only if the
applicant has given a bond (in addition
to any bond given under paragraph (j)
of this section) equal to the noncon-
forming dyeing amount.
******
(l) * * *
(4)The last sentence of paragraph
(f)(4)(i) of this section is applicable as
of April 1, 1997.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
(Filed by the Office of the Federal Register on
March 13, 1996, 8:45 a.m., and published in
the issue of the Federal Register for March 14,
1996, 61 F.R. 10490)
Exempt Organizations; Proposed
Examination Guidelines Regarding
Rural Electric Cooperatives
Announcement 96–24
PURPOSE
The Internal Revenue Service has
d e v e l o p e d p r o p o s e d e x a m i n a t i o n
guidelines for Exempt Organizations
Internal Revenue Agents to use during
the examinations of rural electric coop-
eratives. These guidelines are intended
to provide a framework that agents can
follow in conducting the examination.
Because they address matters that may
have a significant impact on rural
electric cooperatives, the Service is
soliciting public comments on them.
The guidelines will be published in the
Internal Revenue Manual.
BACKGROUND
These guidelines offer suggestions
on issues, documents and techniques
for examining rural electric coopera-
tives. They do not attempt to cover
every issue that might arise in an
examination. They are not intended to
require examiners to exhaustively re-
view all areas described in each rural
electric cooperative examination.
PROPOSED EXAMINATION
GUIDELINES
(12)20 Specific Examination
Guidelines
(12)21 Rural Telephone Cooperatives
[Reserved]
(12)22 Rural Electric Cooperatives
These guidelines offer suggestions
on issues, documents and techniques
for examining rural electric coopera-
tives. They do not attempt to cover
every issue that might arise in an
examination. Conversely, some issues
in these guidelines will not arise in
every examination. Examinations of
generation and transmission coopera-
tives and distribution and transmission
cooperatives, for example, present dif-
ferent issues. Further, these guidelines
are not intended to require examiners
to exhaustively review all areas de-
scribed in examining every rural
electric cooperative. Examiners or case
managers should use their professional
judgment to determine the scope and
depth of each examination.
(12)22.1 Introduction: Electric
Utilities and Rural Electric
Cooperatives
(1)Electric Utilities. Electric utilities
(including rural electric cooperatives)
were once monopolies. Now they con-
front many challenges including in-
creased competition from their own
consumers, independent power pro-
ducers and other electric utilities.
Electricity is becoming a commodity.
Industry and government consumers
demand electricity at the lowest cost
and increasingly, if dissatisfied with
rates from the local electric utility, they
may build their own generating plants
(and bypass the electric utility al-
together) or purchase electricity from
another electric utility (to be transmit-
ted over the local utility’s power lines
(retail wheeling)). Other changes in
economics and technology are chal-
lenging electric utilities. Demand for
electricity is growing, only slowly,
thereby holding down revenues (as are
stranded investments). Further, it re-
mains to be decided what role electric
utilities will play in developing the
information superhighway. Legislatures
and regulatory agencies are responding
to these questions.
(2)Trends. Industry analysts forecast
several trends: more price wars be-
tween competing utilities, more mer-
gers among electric utilities, (including
generation and transmission coopera-
tives (G&Ts)); more joint ventures
between cooperatives and other utilities
to own and operate power generation
plants; and more sharing of services.
This environment will very likely gen-
erate new accounting and tax questions.
(3) Rural Electric Cooperatives.
Rural electric cooperatives (coopera-
tives) provide electric power to mem-
bers and other consumers. G&Ts con-
struct and operate power plants (alone

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or in arrangements with other utilities)
and sell electricity at wholesale to their
member distribution cooperatives,
which in turn, sell electricity retail to
consumers. Distribution cooperatives
are members of G&T cooperatives. The
distribution cooperatives purchase
electricity from their G&T to furnish
electricity to consumers. Each coopera-
tive, in turn, may be a member of other
cooperatives, including cooperative
subsidiaries. To carry out their ac-
tivities, G&Ts and distribution coopera-
tives acquire land and land rights
(including easements, water and power
rights, diversion rights, submersion
rights). They own (or lease) and
operate electric generating plant and
transmission and distribution plant, of-
fice space, furniture and equipment. 7
C.F.R. §1767.16. Cooperatives also
contract for fuel, power supply and
operate power plants jointly with other
utilities. See GAO Reports REA Bor-
rowers’ Investment in Cable and Satel-
lite Television Services, RCED–93–164
(1993); Legislation Needed to Improve
Administration of Tax Exemption Pro-
visions For Electric Cooperatives,
GGD–83–7 (1983). On the history and
background of rural electric coopera-
tives, see Exempt Organizations Hand-
book, ‘‘Local Benevolent Life Insur-
ance Association, Mutual Ditch,
Irrigation and Telephone Companies,
and Like Organizations,’’ ch. 12(00).
(4)Joint Ventures. G&Ts often join
with other electric utilities to build and
operate power generating stations. The
joint venturers may own the station as
tenants in common, operating the sta-
tion and sharing its capacity and energy
according to various operating agree-
ments, station agreements and load
management agreements. These joint
ventures may raise issues bearing on
the 85 percent test. See generally,
Specialized Industry Audit Guidelines—
Public Utilities (Utilities Handbook)
§ 240.
(5)Diversification. Cooperatives are
diversifying, offering water manage-
ment, sewage treatment, venturing into
economic development, offering satel-
lite television service and selling satel-
lite reception equipment (and, less
commonly, offering cable television
service). Many cooperatives belong to
the National Rural Telecommunications
Cooperative (NRTC) which offers
Rural TV programming on the satellite
C-band. NRTC also plans to offer
Direct TV (which uses different re-
ceivers) on the satellite Ku-band. Many
of these satellite and cable television
services are for-profit (noncooperative)
businesses. GAO Report RCED–93–
164.
(12)22.2 Overview—IRC 501(c)(12)
(1)Background on Electric Coopera-
tives. See Exempt Organizations Hand-
book, ‘‘Local Benevolent Life Insur-
ance Association, Mutual Ditch,
Irrigation and Telephone Companies,
and Like Organizations,’’ ch. 12(00);
‘‘Taxation of Cooperatives,’’ ch.
(45)10, Utilities Handbook, including
Exhibits 200–2, Index of Revenue Rul-
ings and 200–3 Index of Court Cases
and Examination Guidelines Handbook,
‘‘Local Benevolent Life Insurance As-
sociation, Mutual Ditch, Irrigation and
Telephone Companies, and Like
Organizations—IRC 501(c)(12),’’ ch.
(12)10.
(2) Requirements for Exemption.
Mutual ditch or irrigation companies,
mutual or cooperative telephone com-
panies and like organizations are ex-
empt from federal income tax under
IRC 501(c)(12) if 85 percent or more
of their income consists of amounts
collected from members for the sole
purpose of meeting losses and expenses
(the 85 percent test). To be exempt,
cooperatives must be:
(a)like organizations;
(b)operate under cooperative
principles; and
(c)meet the 85 percent test.
(1)Like Organizations and Not
Like Organizations. Rural electric
cooperatives and cable television
services operating on a cooperative
basis are like organizations de-
scribed in IRC 501(c)(12). Rev.
Ruls. 67–265, 1967–2 C.B. 205; 83–
170, 1983–2 C.B. 97. See also,
Exempt Organizations Handbook,
Chapter (12)33. The following are
not like organizations:
(a) Cooperative organizations
formed by electric cooperatives to
finance their customers’ purchases
of electrical, water or plumbing
appliances. Consumers Credit Rural
Electric Cooperative Corp. v. Com-
missioner, 319 F.2d 475 (6th Cir.
1963);
(b) Cooperatives whose sole
activity is selling electrical mate-
rials, equipment and supplies and
furnishing equipment manufacturing,
testing and repair services, although
all the members are cooperatives.
Rev. Rul. 65–201, 1965–2 C.B. 170.
(c)Nonprofit automobile clubs
furnishing travel and other services
to members. New Jersey Automobile
Club v. United States, 181 F. Supp.
259 (Cl. Ct. 1960), cert. denied, 366
U.S. 964 (1961);
(d)Housing cooperatives. Rev.
Rul. 65–201, 1965–2 C.B. 170; and
( e ) O r g a n i z a t i o n s s e l l i n g
electrical materials, equipment and
supplies and manufacturing, repair-
ing or testing for members. Rev.
Rul. 65–201, 1965–2 C.B. 170.
(2) Cooperatives Engaged in
IRC 501(c)(12) and Non-IRC
501(c)(12) Activities. If a coopera-
tive engages in activities described
in IRC 501(c)(12) and in activities
not described in IRC 501(c)(12), the
examiner should determine whether
the latter activities are insubstantial
or are conducted incident to and in
furtherance of IRC 501(c)(12)
activities.
(3)Cooperative Principles. Coopera-
tives must operate according to the
following principles:
(a)subordination of capital in
control over the cooperative under-
taking and in ownership of the
financial benefits from ownership
(unlike stockholders who earn a
return on capital invested);
(b)democratic control by the
members of the cooperative;
(c)vesting in and allocation
among the members of all excess of
operating revenues over the ex-
penses incurred to generate revenues
in proportion to their participation in
the cooperative (patronage) (unlike
stockholders who own equal shares
in a corporation’s net worth, regard-
less of how much business they
transact (if any) with the corpora-
tion); and
(d)operation at cost (not oper-
ating for profit or below cost).
Puget Sound Plywood, Inc. v. Com-
missioner, 44 T.C. 305, 308 (1965),
acq., 1966–2 C.B. 6; Mutual Fire
Ins. Co. of Germantown, Inc. v.
United States, 142 F.2d 344 (3d Cir.
1944), cert. denied 323 U.S. 729
(1945); Keystone Auto. Club Cas-
ualty Co. v. Commissioner, 122 F.2d
886 (3d Cir. 1941), cert. denied, 315
U.S. 814 (1942). See generally,
parallel provisions in IRC 521 and
Treas. Reg. §1.521–1.

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(e)Cooperative Principles Ap-
plied to IRC 501(c)(12). Rev. Rul.
72–36, 1972–1 C.B. 151 holds that
IRC 501(c)(12) cooperatives must
comply with fundamental coopera-
tive principles. Because a coopera-
tive must operate at cost, it must not
accumulate cash reserves exceeding
its reasonable needs. Any unneeded
funds must be returned to members
as patronage dividends. The rights
of members in the cooperative’s
patronage capital account (the bal-
ance sheet account approximating
retained earnings) must be deter-
mined on the basis of members’
patronage throughout their years of
membership. The cooperative must
at all times keep records of mem-
bers’ rights to these assets and make
distributions accordingly when the
cooperative retains a reasonable cash
reserve, when a member withdraws
from the cooperative and when the
cooperative realizes gains on sale of
appreciated assets prior to dissolu-
tion. Rev. Rul. 78–238, 1978–1 C.B.
161.
(f)Maintaining Exemption. A
substantial departure from demo-
cratic ownership, operation and con-
trol may warrant revocation of ex-
emption (e.g., activities that would
constitute private inurement or im-
permissible private benefit as de-
fined in IRC 501(c)(3)). Cf. Key-
stone Auto. Club Casualty Co. v.
Commissioner, 122 F.2d 886 (3d
Cir. 1941).
(12)22.3 The 85 Percent Member
Income Test
(1)General Principles. The follow-
ing rules apply:
(a)Annual Testing. The 85 per-
cent test must be computed in each
taxable year. A cooperative may fail
the test one year but meet the test in
a prior or subsequent year. Rev. Rul.
65–99, 1965–1 C.B. 242. The test is
applied using the cooperative’s
method of accounting. Rev. Rul. 68–
18, 1968–1 C.B. 271. See also IRC
451(f) and IRC 166 discussed at
(12)22(16).
(b)Gross Receipts or Gross In-
come. (Safe Harbor Guidelines)
Prop. Treas. Reg. §1.501(c)(12)–2
(49 Fed. Reg. 1244 (January 10,
1984)) would have determined the
income from sale of electricity by
subtracting the cost of goods sold
(computed according to Treas. Reg.
§ 1.471–11) from gross sales. The
preamble to the proposed regulations
stated that the regulations would be
effective for taxable years beginning
after the date of publication of final
regulations and that in prior years,
cooperatives may continue to apply
the 85 percent test using the method
that they consistently used in the
past. The proposed regulations were
withdrawn (58 Fed. Reg. 25587
(April 27, 1993)). Under the Safe
Harbor Guidelines, cooperatives may
continue to use the method they
have consistently used in the past. If
the cooperative computes member
income using the gross receipts
method, the cooperative should use
the same method to compute non-
member income.
(c)No Netting. Gross income
derived from a transaction with a
third party cannot be offset by
amounts owed to that third party.
Rev. Rul. 65–174, 1965–2 C.B. 169;
Rev. Rul. 74–362, 1974–2 C.B. 131,
obsoleted in Rev. Rul. 81–291,
1981–2 C.B. 131.
(d)No Reductions. Rents, divi-
dends and interest must be included
in gross income without reduction.
(2)Members vs. Nonmembers. Co-
operatives may have several types of
members. In general, members are
those entitled to voice in management
of the cooperative and to share in
patronage capital. Rev. Rul. 78–238,
1978–1 C.B. 161. If the cooperative
has more than one type or class of
‘‘members,’’ ascertain which are mem-
bers as defined in IRC 501(c)(12). A
municipal corporation may be a mem-
ber or nonmember. Rev. Rul. 68–75,
1968–1 C.B 271. G&Ts may have
members that are not distribution
cooperatives.
(3)Classifying Income as Member
or Nonmember Income. Each transac-
tion for which income is realized must
be classified as member income, non-
member income or excluded income.
Member income is member-sourced
and derived from activities conducted
according to cooperative principles.
IRC 501(c)(12); Rev. Rul. 72–36,
1972–1 C.B. 151; Rev. Rul. 78–238,
1978–1 C.B. 161; Rev. Rul. 80–86,
1980–1 C.B. 118. Common transactions
include:
(a)Sale of Electricity. Income
from sale of electricity may be
member or nonmember income, de-
pending on the membership status of
the purchaser/consumer.
(b) Power Pooling Arrange-
ments and Power Interchange Agree-
ments. These agreements may gener-
ate member or nonmember income.
Payments received by a cooperative
under an arrangement with a com-
mercial power company to operate
the cooperative’s generator unit con-
stitute income to be considered in
calculating whether the cooperative
meets the 85 percent test. The
cooperative may contend that the
arrangement is merely an inter-
change of power involving no in-
come or revenue for either party.
Rev. Rul. 65–174, 1965–1 C.B. 242.
(c)Income from sale and serv-
ice of appliances to nonmembers
who purchase no electricity from the
cooperative is nonmember income,
even if the sales are made through
a g e n t s o r s u b s i d i a r i e s . ( S e e
(12)22.4(2) for treatment as unre-
lated business taxable income.)
(d)Interest Income. Interest in-
come is often nonmember income
because the source/payor of the
interest is a nonmember. Transac-
tions yielding interest income
include:
(1)Interest Income from the
Installment Sale of an Office Build-
ing. This is nonmember income. Cf.
Rev. Rul. 65–99, 1965–1 C.B. 242
(holding that a cooperative must
account for gain on an installment
sale of property to a nonmember as
nonmember income on a year-by-
year basis).
(2)Interest Income from Sale/
Leaseback of Cooperative’s Assets.
Interest income received by an ex-
empt cooperative in sale/leaseback
transaction (including safe harbor
leases described in former IRC
168(f)(8)) is nonmember income.
(e)Discharge of Indebtedness
Income. This income may be non-
member income or excluded income.
See (12)22.3(4)(c) and (12)22.3-
(3)(g).
(f) Rent. Leasingg a power
generating station to a nonmember
utility from which the cooperative
purchases power results in nonmem-
ber rental income. Rev. Rul. 65–174,
1965–2 C.B. 169. See below for
qualified pole rentals.
(g)Original Issue Discount and
Cancellation of Indebtedness Income

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Resulting from Modification of Debt
Instruments. Cooperatives enter into
agreements under which the terms of
their long-term debt are modified.
For example, under section 12 of the
Rural Electrification Act of 1936,
REA is authorized to allow finan-
cially distressed cooperatives to de-
fer principal and interest payments
on REA loans. If a modification of
the terms of a debt instrument
occurs, it must be determined
whether the modification is signifi-
cantly material to constitute a
deemed exchange of the debt instru-
ment for a new debt instrument
(with the modified terms) under IRC
1001. In general, a significant defer-
ral of interest or principal payments
constitutes a deemed exchange under
IRC 1001.
(1)Original Issue Discount. If
an IRC 1001 exchange occurs, origi-
nal issue discount (OID) is created
on the new debt equal to the dif-
ference between the IRC 1274 issue
price of the new debt and the stated
r e d e m p t i o n p r i c e a t m a t u r i t y
(SRPM) of the new debt. The SRPM
of the new debt is equal to the
stated principal (face) amount of the
new debt plus any interest that is not
paid on a current basis. The IRC
1274 issue price of the new debt is
equal to the lesser of: (A) the face
amount of the new debt and (B) the
present value, as of the date of the
modification, of all payments of
principal and interest due on the
new debt, calculated using a dis-
count rate equal to the Applicable
Federal Rate. OID on the new debt
is amortized by the cooperative over
the term of the new debt on a
constant yield basis.
(2)Cancellation of Indebted-
ness Income. In addition, the coop-
erative recognizes cancellation of
indebtedness income on the ex-
change to the extent the face value
of the old (unmodified) debt (plus
any unamortized premium and less
and unamortized discount) exceeds
the IRC 1274 issue price of the new
debt. Discharge of indebtedness in-
come will generally occur if the old
debt bears an interest rate that is
below the Applicable Federal Rate.
Any discharge of indebtedness in-
come is (nonmember) gross income
in the taxable year realized. See also
(12)22.3(4)(c) on discharge of in-
debtedness income on prepayment of
certain REA loans at a discount. For
additional information on modifica-
tion of debt instruments, contact the
Office of the Assistant Chief Coun-
s e l ( F i n a n c i a l I n s t i t u t i o n s &
Products).
(h)Gains and Losses from Sale
of IRC 1221, 1231, 1245 and 1250
Property. See The Mountain Water
Co. of LaCrescenta v. Commis-
sioner, 35 T.C. 418 (1960), acq. on
other issues, 1961–2 C.B. 5; Cate
Ditch Co. v. United States, 194 F.
Supp. 688 (S.D. Cal. 1961); Rev.
Rul. 65–99, 1965–1 C.B. 242 (gain
on sale of office building). Cf. Rev.
Rul. 74–84, 1974–1 C.B. 244.
(4)Exclusions from the 85 Percent
Test. The following amounts are ex-
cluded in computing the 85 percent test
in Treas. Reg. §1.501(c)(12)–1:
(a)Sale of Excess Fuel at Cost.
Sale of excess fuel, (an inventoriable
item) at cost, yields no gross income
and, therefore, does not enter into
the 85 percent test. Rev. Rul. 80–86,
1980–1 C.B. 118.
(b) Qualified Pole Rentals.
Qualified pole rentals are rental
income from the right to use any
pole (or other structure that supports
wires) that the cooperative uses to
provide electricity to members. IRC
501(c)(12)(C)(i), (D).
(c)Discharge of Indebtedness
Income on Prepayment of Certain
REA Loans at a Discount. Gross
income includes income from dis-
c h a r g e o f i n d e b t e d n e s s . I R C
61(a)(12). The amount of indebted-
ness discharged equals the face
amount of the debt (adjusted for any
unamortized premium or discount)
minus any consideration given by
the taxpayer to effect the discharge.
Discount income is nonmember in-
come. The effect on the 85 percent
test of loan prepayment at a dis-
count, however, depends on when
the loans are prepaid:
(1)Prepayments Between 1986
and 1989. Cooperatives were permit-
ted to prepay at a discount certain
REA loans made pursuant to sec-
tions 306A, 306B or 311 of the
Rural Electrification Act of 1936 (as
in effect on January 1, 1987) (7
U.S.C. §§936a, 936b, 940a). OBRA
1986, Pub. L. No. 99–509 §1101(a)
and Continuing Appropriations for
F/Y 1987, Pub. L. No. 99–591
§ 101(m) (Title IV §623); Food,
Agriculture, Conservation and Trade
Act of 1990, Pub. L. No. 101–624
§ 2387. However, TAMRA 1988 ex-
cludes from the 85 percent test
discharge of indebtedness income
realized from prepayment of loans
from REA or any loans made or
guaranteed by the United States (or
any of its agencies or instrumen-
talities) after December 31, 1986
and before January 1, 1990.
TAMRA 1988, Pub. L. No. 100–647
§ 6203; S. Rep. No. 445, 100th
Cong., 2d Sess. 411, reprinted in
1988 U.S.C.C.A.N. 4918–9; H.
Conf. Rep. No. 1104, 100th Cong.,
2d Sess., 211, 1988–3 C.B. 211.
(2)Prepayments in 1990 and
Later Years. Cooperatives may again
prepay certain REA loans at a
discounted present value. REA Im-
provement Act of 1992, Pub. L. No.
102–428 §2; 7 C.F.R. §1786 (59
Fed. Reg. 13616 (Mar. 22, 1994)).
Loan discounts probably range be-
tween 10 and 15 percent. Any
discharge of indebtedness income
realized from loan prepayments on
or after January, 1, 1990 is non-
member income in computing the 85
percent test.
(5)Consequences of Failing the 85
Percent Test. If, in any taxable year, a
cooperative fails the 85 percent test, it
is a nonexempt cooperative and must
file Form 1120. IRC 501(c)(4) does not
apply. Rev. Rul. 57–494, 1957–2 C.B.
315, nonacq. in United States v.
Pickwick Elec. Mem. Corp., 158 F.2d
272 (6th Cir. 1946).
(12)22.4 Unrelated Business Taxable
Income
(1)For an overview of IRC 511–
514, see Exempt Organizations Hand-
book, ‘‘Taxation of Unrelated Business
Taxable Income,’’ ch. (35)00—(41)00
and annual Technical Instruction Pro-
grams. The following additional issues
may also arise in examination of
cooperatives:
(2)Sales and service of appliances
for nonmembers who purchase no
electricity from the cooperative are
unrelated trade or business. Treas. Reg.
§§1.501(c)(12)–1(a); 1.513–1(a), (d).
(3)Income from debt-financed in-
vestments may be taxable under IRC
514(a) (e.g., arbitrage investments of
REA loan funds). Southwest Tex. Elec.
Coop. v. Commissioner, T.C. Memo.
1994-363 (1994); Kern County Elec.
Pension Fund v. Commissioner, 96

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T.C. 845 (1991), aff’d 988 F.2d 120
(9th Cir. 1993);
(4)IRC 1245 and 1250 depreciation
recapture rules override IRC 512(b)(5).
Treas. Reg. §§1.1245–6(b); 1.1250–
1(c)(2);
(5)Payments from affiliated organi-
zations or subsidiaries may be taxable
under IRC 512(b)(13); and
(6)Qualified pole rentals are not
income from unrelated trade or busi-
ness. IRC 513(g).
(12)22.5 Other Code Sections
Applicable in Examinations of
Cooperatives
(1)IRC 446 and 481. Method of ac-
counting issues and changes in methods
of accounting arise in many examina-
tions of cooperatives. There are nu-
merous differences between book and
tax. See Utilities Handbook §§320–
322, 426, 430–438, 445 and discussion
below. Note that a method of account-
ing (e.g., depreciation and capitaliza-
tion) elected on Form 990 may not be
changed without the consent of the
Commissioner, irrespective of whether
the cooperative files Form 990 or Form
1120 in a subsequent year. Treas. Reg.
§ 1.446–1(e).
(2)IRC 266. Cooperatives may elect
to capitalize certain taxes and carrying
charges (including interest) into the
adjusted basis of property. An election
may affect the amount of gain on a
cooperative’s sale of utility plant, af-
fecting the 85 percent test. On elections
and their consequences, see Treas. Reg.
§ 1.266–1; Rev. Rul. 90–38, 1990–1
C.B. 57.
(3)IRC 118.
(a)Contributions to the capital
of a cooperative are not gross
income to the cooperative. But con-
tributions in aid of construction or
any other contribution as a customer
or potential customer are not contri-
butions to capital. IRC 118(a), (b);
Treas. Reg. §1.118–1; United States
v. Chicago, B. & O. R. Co., 412
U.S. 401 (1973), 1973–2 C.B. 428;
Utilities Handbook §434.
(b)For taxable years beginning
after December 31, 1985, IRC
118(b) was repealed. Consequently,
contributions that a cooperative re-
ceives after December 31, 1985 to
provide or encourage providing serv-
ices or for the benefit of the
contributor must be reported as
income by the cooperative.
(4)IRC 269. If any person(s) ac-
quire, directly or indirectly, control
over a corporation and the principal
purpose of the acquisition is to evade
or avoid federal income tax by securing
the benefit of a deduction, credit or
other allowance, which the acquiring
person(s) or the controlled corporation
would not otherwise enjoy, then the
Service may disallow the deduction,
credit or allowance. IRC 269(a); Treas.
Reg. §1.269–1. ‘‘Allowance’’ is de-
fined very broadly. Treas. Reg.
§ 1.269–1(a). IRC 269 may apply to
cooperatives and/or their subsidiaries
(e.g., in applying the 85 percent test, if
a subsidiary is used as a conduit for
sales to nonmembers).
(5)IRC 483 and 7872. Imputed
interest rules on deferred payments or
below-market loans receivable (e.g.,
installment sales) may affect the com-
putation of interest income, the 85
percent test or unrelated trade or
business taxable income.
(6)IRC 103. [Reserved].
(12)22.6 Deferred Compensation and
Retirement Benefits
(1)Cooperatives may provide sev-
eral types of deferred compensation or
retirement benefits for their employees.
These include qualified plans, and
eligible and ineligible deferred compen-
sation plans under IRC 457. For
additional information on deferred
compensation plans under IRC 457
contact the Office of Associate Chief
Counsel (Employee Benefits & Exempt
Organizations).
(2)Qualified Plans. A qualified plan
is a funded, tax exempt plan. The
employer makes contributions which
are generally held in trust. In some
cases, employees may also contribute.
There is a wide variety of qualified
plan types, including pension and
profit-sharing plans. They are subject
to numerous qualification requirements
under IRC 401. A plan may (but is not
required to) obtain a determination
letter from a key district office. This
letter would constitute a ruling that the
plan met the qualification requirements
in form. It would not assure that the
plan met all of the requirements for
qualification in operation.
(a) Qualified Plan Require-
ments. Qualified plans are subject to
numerous and complex requirements
governing discrimination in favor of
highly compensated employees, lim-
itations on contributions and bene-
fits, coverage of employees, par-
ticipation levels, vesting, funding,
portability, holding of investments,
and other requirements.
( b ) I R C 4 0 1 ( k ) P l a n s . A
qualified plan may include a
‘‘qualified cash or deferred arrange-
ment,’’ often called a ‘‘section
401(k) plan.’’ A cooperative, unlike
other tax-exempt organizations and
state and local government entities,
is allowed to maintain a qualified
cash or deferred arrangement. See
IRC 401(k)(4)(B) (last sentence).
Under a qualified cash or deferred
arrangement, an employee may
choose whether to receive part of his
or her compensation in cash or to
have it contributed to the plan. The
election most commonly takes the
form of a salary reduction arrange-
ment. The contributions are called
‘‘elective deferrals,’’ and are limited
to a dollar amount ($9,240 in 1994),
which is adjusted annually for
changes in the cost of living. Elec-
tive deferrals are subject to a special
nondiscrimination test called the
actual deferral percentage test
(‘‘ADP test’’), in which the average
deferral percentage of highly com-
pensated employees is compared to
that of non-highly compensated
employees. The plan is also subject
to all of the requirements that
generally apply to qualified plans,
and to some special requirements.
(3)Nonqualified Plans. Any other
plans, agreements, or arrangements de-
ferring the receipt of compensation to
some future date or event such as re-
tirement or separation from service are
nonqualified plans. There is a wide
variety of nonqualified deferred com-
pensation plans. These arrangements
may be elective (including salary re-
duction) plans or nonelective plans.
They may be defined benefit or defined
contribution plans. They may be un-
funded plans where the participants
have only a contractual promise from
the employer that future payments will
be made and any assets held to make
payments are reachable by general
creditors of the employer or they may
be funded plans where cash or other
assets are transferred to a trust or other
third party, such as an insurance
company, for payment to participants at
a later date.
(a)Unfunded Plans. The tax
consequences of unfunded plans are

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contained in IRC 457 and the regu-
lations thereunder. An unfunded
plan of a state or local government
or an agency or instrumentality
thereof, or of any other tax exempt
organization is either (A) an eligible
deferred compensation plan, or (B)
an ineligible deferred compensation
plan. The tax consequences differ
significantly.
(1)Eligible Plans. Under IRC
457(a), participants in an eligible
plan, defined in IRC 457(b), are
taxed on deferred amounts when
those amounts are paid or made
available to plan participants follow-
ing separation from service or in the
event of a distribution for an un-
foreseeable emergency.
(2) Ineligible Plans. If the plan
is not an eligible plan, plan partici-
pants are taxed when amounts are
deferred unless there is a substantial
risk of forfeiture. A ‘‘substantial risk
of forfeiture’’ is defined by IRC
457(f)(3)(B) as existing if a ‘‘per-
son’s rights to [the] compensation
are conditioned upon the future
performance of substantial services
by any individual.’’
(3) Participants. All employees
of a state or local government or an
agency or instrumentality thereof
may participate in an IRC 457 plan.
Only a select group of management
or highly compensated employees,
however, may participate in an IRC
457 plan maintained by a tax exempt
employer. (This is necessary to
maintain the plan’s exemption from
the funding requirements of ERISA.)
(4) Maximum Deferrals. Each
participant in an eligible IRC 457
plan may defer up to the lesser of
$7,500, or 33
1
⁄3 percent of includible
compensation (generally meaning
taxable compensation) in a taxable
year. This limit applies to both
elective and nonelective deferred
compensation. It is not indexed.
Under a catch-up provision, a par-
ticipant may defer up to $15,000 in
each of the last three taxable years
before he or she reaches normal re-
tirement age, but the increase over
the normal limit is available only to
the extent of unused portions of the
limitations for previous years. All
eligible IRC 457 plans of an em-
ployer are aggregated, and no indi-
vidual may defer a total of more
than $7,500 ($15,000 if the catch-up
provision applies) in a taxable year
(even under plans of more than one
employer). The same limits apply to
a nonqualified defined benefit plan.
This is a plan that specifies the
benefit that a participant will receive
in the future rather than the amount
that will be added to his or her
account each year. A defined benefit
plan often fixes a benefit based on
factors such as compensation and
length of service, and usually
provides a benefit in the form of an
annuity or payments over a number
of years. Benefits under a defined
benefit plan do not depend on the
performance of any investments ac-
quired by the employer. Applying
the limits to a nonqualified defined
benefit plan is more difficult than
applying them to a defined contribu-
tion plan. The benefit subject to the
limit in any year is the present value
of the increase in the participant’s
accrued benefit during that year.
This present value will usually be
different for each participant, and
will often change from year to year.
Consult an actuary (in Employee
Plans) for assistance in determining
the present values. It is important to
remember that the limit applies to
increases in the participant’s accrued
benefit on a year-by-year basis. A
plan would not satisfy this require-
ment if it merely applied an aggre-
gate limit (based on all of the
participant’s service) to the total
accrued benefit. If an employee
participates in both a nonqualified
defined benefit plan and a non-
qualified defined contribution plan,
the annual limit applies to the sum
of (A) the present value of the
increase in the accrued benefit under
the defined benefit plan, and (B) the
amount deferred under the defined
contribution plan.
(5)Coordination of Deferrals.
IRC 457(c) requires that deferrals
under an eligible IRC 457 plan be
coordinated with certain other plans
such as IRC 401(k) plans. This
means that elective deferrals by the
employee under an IRC 401(k) plan
are subtracted from the $7,500 (or
$15,000 in a catch-up year) limit. As
a result, an employee who elects any
deferrals under an IRC 401(k) plan
will only be able to defer $7,500 (or
$15,000 in a catch-up year) under
the combination of IRC 401(k) and
457 plans, even though a higher
limit might be available under the
IRC 401(k) plan alone.
(6)Plan Administration Consis-
tent with IRC 457(b). A plan that is
consistent with IRC 457(b), but that
is administered in a manner that is
inconsistent with the requirements of
IRC 457(b), may lose its status as an
eligible plan. If the employer is a
state or local government or an
agency or instrumentality thereof,
the plan does not become ineligible
until the beginning of the first plan
year beginning more than 180 days
after notification by the Secretary of
the Treasury of the inconsistent
administration. If the inconsistency
is corrected before the first day of
that plan year, the plan remains an
eligible plan. This grace period for
correcting administrative defects
does not apply to an employer that
is a tax exempt organization other
than a government.
(b)Funded, Nonqualified Plans.
A plan that is funded (e.g., through
a trust, annuity contracts, or other
vehicle insulating the assets from the
general creditors of the employer)
but is not a qualified plan is not
governed by either IRC 401 or IRC
457. The tax consequences of
funded, nonqualified plans are con-
tained in IRC 402(b), 403(c) and 83,
which require that a participant
recognize income when amounts are
paid to a trust or insurance company
unless there is a substantial risk of
forfeiture as defined in IRC 83(c)(1)
and the participant’s interest is
nontransferable.
(4)Tax-Sheltered Annuity. An IRC
403(b) annuity, often called a ‘‘tax-
sheltered annuity,’’ is an annuity con-
tract that may be purchased by an IRC
501(c)(3) organization or educational
institution of a state or local govern-
ment for its employees. Custodial ac-
counts for registered investment com-
pany stock (mutual funds) may also be
treated as annuity contracts for pur-
poses of IRC 403(b), if they meet
certain requirements. Since a coopera-
tive is neither an IRC 501(c)(3) organi-
zation nor an educational institution of
a state or local government, it cannot
maintain an IRC 403(b) annuity plan.
Any plan of a cooperative purporting to
be an IRC 403(b) plan would probably
consist of either nonqualified annuity
contracts or taxable custodial accounts
or trusts, and would be a funded, non-
qualified plan. Contact an Employee
Plans specialist if you encounter such a
plan.

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(12)22.7 Employee Benefits
(1)Cafeteria Plans.
(a)Under present law, compen-
sation generally is includible in
gross income when actually or con-
structively received. An amount is
constructively received by an indi-
vidual if it is made available to the
individual or the individual has an
election to receive such amount.
Under one exception to the general
principle of constructive receipt, no
amount is included in the gross
income of a participant in a cafeteria
plan described in IRC 125 solely
because, under the plan, the partici-
pant may elect among cash and
certain employer-provided qualified
benefits.
(1)Qualified Benefits. In gen-
eral, a qualified benefit is a benefit
that is excludable from an em-
ployee’s gross income by reason of
a specific provision of the Code.
Thus, employer-provided accident or
health coverage, group-term life in-
surance coverage (whether or not
subject to tax by reason of being in
excess of the dollar limit on the
exclusion for such insurance) and
benefits under dependent care assist-
ance programs may be provided
through a cafeteria plan. However, a
cafeteria plan may not provide
qualified scholarships or tuition re-
duction (IRC 117), educational as-
sistance (IRC 127), or miscellaneous
employer-provided fringe benefits
(IRC 132). In addition, a cafeteria
plan may not offer deferred compen-
sation except through a qualified
cash or deferred arrangement (IRC
401(k)).
(2)Cash or Qualified Benefits.
Employer contributions to the caf-
eteria plan are usually made pur-
suant to salary reduction agreements
between the employer and the em-
ployee in which the employee agrees
to contribute a portion of his or her
salary on a pre-tax basis to pay for
the qualified benefits. A salary
reduction agreement is sufficient to
satisfy the ‘‘cash’’ requirement of a
cafeteria plan.
(3)Plan Requirements. A caf-
eteria plan must be in writing, must
include only employees (including
former employees) as participants
and must satisfy certain non-
discrimination requirements. An
employer that maintains a cafeteria
plan is required to file an annual
return relating to such plan.
(b) Employment Taxes. The
cafeteria plan exception from the
principle of constructive receipt gen-
erally also applies for employment
tax (FICA and FUTA) purposes.
(2) Voluntary Employees’ Benefit
Associations (VEBAs). If the coopera-
tive maintains a VEBA or taxable trust
for payment of welfare benefits, it may
be appropriate to include the VEBA in
the examination. See Exempt Organiza-
tions Handbook, ‘‘Voluntary Em-
ployees’ Benefit Associations,’’ ch.
900.
(12)22.8 Employment Taxes
(1)General Considerations. Taxable
compensation paid to employees may
not be properly reflected on Forms 990,
employment tax returns, or Forms
W–2. Determine whether payments to
individuals who are not employees are
properly reported on Forms 1099.
Determine whether the cooperative has
properly classified its workers. Be alert
to efforts to treat employees as inde-
pendent contractors. For a list of the 20
common law factors indicating an em-
ployment relationship, see Rev. Rul.
87–41, 1987–1 C.B. 296. In any ques-
tionable situation, determine whether a
Form SS–8 has been filed by the
cooperative or the worker. See IRM
7(10)(16)4.8.
(2)Section 530. Be sure to raise
employment tax classification issues.
Under section 530 of the Revenue Act
of 1978, a cooperative may be entitled
to relief from employment taxes with
respect to a particular worker if three
requirements are satisfied: the coopera-
tive must have filed all federal tax
returns (including information returns)
required to be filed on a basis consis-
tent with treating the worker as not
being an employee; the cooperative
must not have treated any worker hold-
ing a substantially similar position as
an employee for employment tax pur-
poses after December 31, 1977, and the
cooperative must have a ‘‘reasonable
basis’’ for not treating the worker as an
employee. Reasonable basis may exist
if the cooperative’s treatment of
workers as independent contractors was
in ‘‘reasonable reliance’’ on a past
examination of the cooperative in
which there was no assessment attribu-
table to the treatment for employment
tax purposes of individuals holding
positions substantially similar to the
position held by the worker in question.
The cooperative may be entitled to rely
on a prior examination whether or not
it was an employment tax examination.
See Rev. Proc. 85–18, 1985–1 C.B.
518.
(3)Meal Allowances. See ISP Coor-
dinated Issue: Meal Allowances (1994).
(4) Fringe Benefits.
(a)Overview. A fringe benefit
is any property or service (or cash,
under certain circumstances) that an
employee receives from the coopera-
tive in lieu of or in addition to
regular taxable wages. If a benefit is
not specifically excluded from gross
income by the Code (e.g., IRC 79,
105, 106, 107, 117(d), 119, 127,
129, and 132), its value must be
treated as compensation and reported
as wages in Box 1 of the employee’s
Form W–2. See IRM 7(10)(16)9.81.
In 1989, the Service issued final
regulations under IRC 61 and 132,
setting forth specific rules for valu-
ing fringe benefits and for determin-
ing the applicability of the exclu-
sions in IRC 132 (no-additional-cost
services, qualified employee dis-
counts, working condition fringes
and de minimis fringes). Fringe
benefits can take many forms. See
the User’s Guide to ‘‘More Basics:
The Basics of Fringe Benefits’’,
which was produced by the Office
of Chief Counsel, IRS Technical TV
(January 1994).
(b)Examination of Fringe Ben-
e f i t s . P e r f o r m t h e f o l l o w i n g
procedures:
(1)Review a sampling or list
of Forms 1099 and W–2 issued by
the cooperative. Compare them with
a sample of expense entries to
determine if the cooperative is con-
sistently and properly issuing Forms
1099 and W–2;
(2)If the cooperative has a
plan whereby employees receive
reduced rates for insurance or other
services provided by suppliers to the
cooperative, determine the extent of
the cooperative’s involvement and
whether the reduced rates constitute
a fringe benefit; and
(3)Determine whether the co-
operative provides free or discounted
parking to its employees. Under IRC
132(f), the fair market value of
‘‘qualified parking’’ in excess of the
statutory exclusion is includable in

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an employee’s gross income and
must be reported as wages in Box 1
of Form W–2. See Notice 94–3,
1994–1 C.B. 327, for more infor-
mation.
(12)22.9 Excise Taxes
An excise tax is imposed on sales of
coal taken from mines located in the
United States and on certain fuels.
These are issues which may arise in the
examination of G&Ts. IRC 4121, 4081.
The excise taxes on certain large
vehicles and the highway use tax may
arise in examinations of all coopera-
tives. IRC 4051, 4481. See generally,
Utilities Handbook §448; IRM 4700.
(12)22(10) State and Federal
Regulation of Electric Cooperatives
(1)State Public Utility Commissions
(PUCs). In approximately 21 states, the
state public utility commission (PUC)
regulates rates charged by electric
cooperatives. These and other states
may also restrict or regulate the non-
utility investments of electric coopera-
tives (e.g., no loans from a cooperative
to any affiliated companies without
PUC approval). To ascertain if the
cooperative is regulated by a PUC, see
Utility Regulatory Policy in the United
States and Canada, NARUC (1992). In
these states, the cooperative’s filings
with the PUC and the PUC’s orders
may reveal information useful to the
examiner (e.g., changes in billing pro-
cedures).
(2)Federal Energy Regulatory Com-
mission (FERC). FERC regulates the
rates, terms and condition of wholesale
electric power sales and transmission
services. Certain G&Ts file annual
reports with FERC. (FERC Form 1).
These reports are public information.
(3)Rural Electrification Administra-
tion (REA).
(a)Virtually all electric cooper-
atives finance their utility plant
through loans from or guaranteed by
REA. (Note: Although REA’s name
has been changed to Rural Utilities
Service (RUS), these guidelines re-
fer to ‘‘REA.’’ Pub. L. No. 103–354
§ 232 (1994)). G&Ts generally bor-
row from the Federal Financing
Bank (FFB) or from private lenders
with REA guaranteeing the loans.
(b)Loan Terms. G&Ts’ interest
rate equals Treasury’s cost of funds
plus
1
⁄8 percent. G&Ts also obtain
financing through pollution control
bonds. Distribution cooperatives
generally obtain insured loans from
REA. REA finances 70-90 percent
of the loan amount, with other
lenders (e.g., National Utilities Co-
o p e r a t i v e F i n a n c e C o r p o r a t i o n
(CFC)) financing the balance. The
interest rate is a blended rate of 5
percent on the REA portion and
market rate on the balance. The
interest rate on other loans varies. 7
C.F.R. §1714.2 et seq.
(c)Loan Origination and Docu-
mentation. Cooperatives submit loan
proposals requesting REA financing
for constructing new utility plant or
replacing existing plant. REA lends
only for construction of capital
assets, not for maintenance or re-
pairs. As a result, cooperatives gen-
erally have an economic incentive to
classify disbursements as capital
expenditures (as opposed to current
expenses). Upon approval of the
loan proposal, the cooperative ex-
ecutes a promissory note in favor of
REA and executes the REA Mort-
gage. The cooperative deposits REA
loan proceeds in a special trustee
account and expends its own funds
to construct the new plant. After
REA reviews and approves the co-
operative’s documentation of con-
struction expenditures, the co-
operative may then withdraw the
approved amount from the trustee
account and deposit the funds in its
own cash accounts.
(d)REA Oversight. To ensure
repayment of loans, REA requires
cooperatives to follow its Uniform
System of Accounts and audit proce-
dures (see below). REA holds a first
mortgage on all the cooperative’s
property. The REA Mortgage re-
quires the cooperative to submit
detailed annual financial reports to
REA including certified audits per-
formed by independent certified
public accountants (CPAs) and other
reports. All reports are public infor-
mation. If cooperatives do not com-
ply with these (and other) require-
ments, REA may declare the loan in
default, suspend all future lending to
the cooperative and exercise other
remedies reserved under the REA
Mortgage. To insure that loan funds
are used properly, REA field ac-
countants review cooperatives’ fi-
nancial records, reports and financial
statements prepared by cooperatives’
CPAs at least once every three
years. These REA Field Reports are
public documents.
(12)22(11) REA’s Uniform System of
Accounts
(1)Overview. REA requires detailed
financial information and reporting on
cooperatives’ activities (e.g., corporate
structure, reorganizations and acquisi-
tions, investments in affiliated com-
panies, extraordinary gains and losses).
Cooperatives must keep detailed books
of account using REA’s Uniform Sys-
tem of Accounts (USoA), published at
7 C.F.R. §1767 (58 Fed.Reg. 59822
(1993)), clarifying and modifying the
prior USoA. The USoA is based on
FERC’s accounting system, with some
modifications. Cooperatives must also
follow REA Accounting Principles
(Accounting Principles). 7 C.F.R.
§ 1767.41. Accounting Principles man-
date the entries to book particular
transactions and aid in understanding
the proper accounting treatment of
items. REA also publishes Accounting
Interpretations on the USoA. Because
many accounts and account numbers in
the USoA from prior years remain
unchanged, these examination guide-
lines (citing to the 1994 USoA) can
generally be used to examine taxable
years beginning before 1994.
(2)Recordkeeping and Accounting
Requirements. Cooperatives must keep
books of account and all supporting
books, records, minute books, memo-
randa, etc. to support all entries in
books of account. 7 C.F.R. §1767.15.
Cooperatives must use the accrual
method of accounting (as defined in
Generally Accepted Accounting Princi-
ples (GAAP)). 7 C.F.R. §1767.15(k).
Separate accounting records must be
maintained for each power plant and
for any other utility department (e.g.,
gas or water). 7 C.F.R. §1767.15(l),
(m).
(3)The USoA contains the follow-
ing Accounts:
(a)Balance Sheet Accounts:
100 – 199Assets and Other
Debits
200 – 299L i a b i l i t i e s a n d
Other Credits
300 – 399Plant Accounts
433, 436– 439Retained Earnings
Accounts
(b)Income and Expense Ac-
counts:

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400 – 432;
434 – 435
Income Accounts
(Net Income)
440 – 459R e v e n u e A c -
counts
500 – 599P r o d u c t i o n ,
Transmission and
Distribution Ex-
penses
900 – 949C u s t o m e r A c -
counts, Customer
Service and Infor-
mational, Sales
and General and
A d m i n i s t r a t i v e
Expenses
(c)Note on Accounts. Most
USoA nonbalance sheet accounts are
paired Revenue Accounts and Ex-
pense Accounts. ‘‘Income Ac-
counts’’ (generally, the less signifi-
cant accounts), combine revenue and
expense in a single account. Certain
nonbalance sheet accounts show rev-
enue and expense for transactions
between different departments within
the cooperative. As noted below,
timing differences and permanent
differences abound between REA
accounting and income tax account-
ing. For these and other reasons, in
conducting the examination, it may
be necessary adjust the amounts
shown on the financial statements.
(d)Exhibits. On closing operat-
ing and nonoperating revenue and
expense accounts into patronage
capital accounts at the end of the
fiscal year, see Exhibit 12(20)–1,
‘‘Summary of Accounts Used in
Connection with Recording Pa-
tronage Capital.’’ Exhibit 12(20)–2,
‘‘Applying the 85 Percent Test:
Analysis of REA Uniform System of
Accounts (Selected Revenue, In-
come, Expense and Balance Sheet
Accounts)’’ illustrates the income
tax treatment of certain USoA Ac-
counts.
(e)There is insufficient space
in these guidelines to explore all
aspects of the USoA, GAAP, Gener-
ally Accepted Government Auditing
Standards (GAGAS) relevant to ex-
amination of cooperatives. Review
particular provisions relevant to the
examination. Examiners may contact
REA’s Technical Accounting and
Auditing Staff with questions at
(202) 720-5227.
(4)Entities Covered by Financial
Statements. A cooperative’s financial
statements must comply with FAS No.
94, ‘‘Consolidation of All Majority-
Owned Subsidiaries.’’ If the coopera-
tive owns a majority interest in a
subsidiary (as defined (12)22(21)), the
cooperative must prepare consolidated
financial statements including the sub-
sidiary, together with supplementary
schedules presenting a balance sheet
and income statement for each subsidi-
ary. REA Forms 7 and 12 must be pre-
pared on an unconsolidated basis. Ac-
counting Principle 404, Consolidated
Financial Statements. The REA regula-
tions contain sample financial state-
ments (with accountants’ notes) for an
e l e c t r i c c o o p e r a t i v e . 7 C . F . R .
§§1789.38; 1773 Appendix B, Exhibit
7.
(5)REA Regulations on CPAs’ Au-
dits of REA Borrowers. The CPAs
must prepare and submit the following
annual reports to REA:
(a)Auditor’s Report (on the
cooperative’s financial statements,
including accountants’ notes and
statements of cash flows);
(b)Report on Compliance with
Applicable Laws and Regulations
(as required by SAS No. 63, ‘‘Com-
pliance Auditing Applicable to Gov-
ernmental Entities and Other Recip-
ients of Governmental Financial
Assistance’’ and GAGAS);
(c)Report on Internal Controls;
and
(d)Management Letter (includ-
ing disclosure of material transac-
tions with related parties (e.g., of-
ficers and directors) as required by
SFAS No. 57, ‘‘Related Party Dis-
closures’’).
7 C.F.R. §§1773.30–1773.34.
These reports and the management
letter are public documents.
(e)See 7 C.F.R. §1773 Ap-
pendix A for sample financial state-
ments, auditor’s report, compliance
report and report on internal con-
trols. See 7 C.F.R. §1773, Appen-
dix C for a sample management
letter.
(12)22(12) General Considerations in
Examinations
(1)Coordinated Examinations. Ex-
aminations of cooperatives may use the
coordinated examination procedures,
where appropriate. See IRM 7(10)-
(18)0. If an examination is of limited
scope, the coordinated examination
procedures may be followed to the
extent they are useful, although the
examination has not been approved as a
CEP case.
(2)Assistance from Other Functions.
If, in connection with the examination
of a cooperative, the case manager and
the examiner believe that it is also
necessary to examine an entity not
under the jurisdiction of EP/EO Ex-
amination (e.g., a joint venture operat-
ing a power generating plant), they
should request assistance from the
function responsible for examining that
entity.
(3)Employment Taxes. Follow the
package audit procedures in IRM
7(10)44.5 and, as appropriate, the
employment tax procedures in IRM
7(10)(16)0. For general instructions on
handling employment tax examinations
and assessments of additional tax on
fringe benefits, see IRM 7(10)(16)9.81.
See generally, Utilities Handbook
§§447, 44(14).
(4) Compliance Checks. Utilities
Handbook §460 outlines compliance
checks on certain issues (e.g., unlawful
activities). Consider whether perform-
ing any of these procedures is
appropriate.
(12)22(13) Initial Contact Items
(1)The examiner should consult the
following for assistance in planning
and conducting the examination:
(a)State Public Utility Com-
missions. If one or more PUCs
regulate the cooperative, contact the
PUC(s) concerning the cooperative’s
filings and PUC orders.
(b)Federal Energy Regulatory
Commission. Contact the Office of
Chief Accountant at (202) 219-2600.
(c) Rural Electrification Ad-
ministration. Contact the Director of
Borrower Accounting at (202)
720-9450.
See Utilities Handbook §240.
(12)22(14) Requesting the
Assistance of Specialists
(1) Utilities Industry Specialist/
Media/Communications Industry Spe-
cialist (cable television and direct TV).
The Industry Specialists can assist the
examiner with the following:
(a)identifying unique industry
issues and Service position;
(b) giving insight into the
economic conditions of the industry;

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(c) describing accounting and
business practices; and
(d)suggesting examination proce-
dures and computer programs that may
have potential application.
U t i l i t i e s H a n d b o o k § 1 5 2 ; I R M
42(10)(14)0.
(2)VEBA (Voluntary Employees’
Beneficiary Association) Industry Spe-
cialist. The Industry Specialist can
assist with examination of VEBAs.
(3)Computer Audit Specialist. If the
services of a computer audit specialist
are necessary, obtain a description of
the cooperative’s hardware, software
(including accounting software) and
formats of files and records.
(4)Engineer. All cooperative returns
with assets of $10 million or over must
be referred for engineering action. IRM
42(16)0, 7(10)25.1. This mandated re-
ferral overrides IRM 7(10)25.1(4). In
examination of exempt and nonexempt
cooperatives, the engineer is a valuable
resource (e.g., tax exempt bonds, con-
struction techniques, machinery and
building design, repairs, depreciation,
depletion and valuation of assets). The
engineer should be involved in the
early planning stages of the examina-
tion. See generally, Utilities Handbook
§ 154.
(5)Excise Tax Specialist. Examina-
tions of cooperatives (particularly
G&Ts) often raise excise tax issues
which may require the use of an Excise
Tax Specialist. Utilities Handbook
§§158, 448; IRM 4700.
(6)Employee Plans Specialist. See
IRM 45(10)0 for employee plans ex-
aminations.
(7)Tax Exempt Bonds. [Reserved].
See 7(10)7(11).4.
(12)22(15) Initial Document Requests
(1)Obtain and review the documents
listed below to gain a basic understand-
ing of the cooperative’s activities,
c a p i t a l s t r u c t u r e a n d r e l a t e d
organizations:
(a)Documents to be Requested
from All Electric Cooperatives:
(1) Articles of Incorporation
(and all amendments);
(2) bylaws (and all amend-
ments);
(3)a list of all the names and
addresses of subsidiaries and associ-
ated companies (as defined in
(12)22(21));
(4)names and addresses of all
directors, trustees and officers of the
cooperative and of all subsidiaries
and associated companies;
(5) minutes of meetings of
board of directors and of all board
committees;
(6) annual reports, financial
statements (including statement of
cash flows and accountants’ notes)
and tax returns for all subsidiaries
and associated companies (as de-
fined in (12)22(21));
(7)REA Forms 7 Financial and
Statistical Report, Operating Report
— Financial, Form 12;
(8)REA Field Reports on the
cooperative (from REA field ac-
countants or engineers);
(9)any debt restructuring plan
entered into between the cooperative
and REA;
(10)Methods and Procedures
Manual (procedures to record
transactions);
(11)a chart of accounts cor-
relating general ledger accounts to
USoA Accounts;
(12)the cooperative’s 85 per-
cent test worksheets;
(13) the cooperative’s policy
book on patronage capital and pa-
tronage dividends;
(14)an analysis of income and
expense;
(15)an analysis of deferred
credits and deferred debits with
supporting documentation (this anal-
ysis is required in 7 C.F.R.
§ 1773.34(h)).
(16)all reports filed with REA
(including but not limited to: REA
Forms 7, 12; audited financial state-
ments (including statement of cash
flows and accountants’ notes)); audi-
tor’s report, compliance report, re-
port on internal controls and man-
agement letter;
(17)all reports and other fil-
ings with PUCs and PUC orders (if
applicable);
(18)all agreements between the
cooperative and any subsidiary or
associated company;
(19)qualified employee retire-
ment plans: the official plan and
trust documents, any determination
letters issued to qualified plans,
records of employer and employee
contributions, account balances or
accrued benefits and employee
compensation;
(20)nonqualified deferred com-
pensation plans: employee benefit
plans and related documents (e.g.,
trusts, insurance contracts, private
letter rulings), records of employer
and employee contributions and ac-
count balances or accrued benefits;
(21)all other employee benefit
plans: including accident and health
plans, cafeteria plans and VEBAs,
related documents (including any
trust instruments); See Exempt Or-
ganizations Handbook, ‘‘Voluntary
Employees’ Benefit Associations,’’
ch. 900;
(22)all arrangements for com-
pensation of directors (including
qualified and nonqualified deferred
compensation plans). See also Util-
ities Handbook §132; and
(23)a schedule of all funded
reserves (including any trusts or
VEBAs for payment of welfare
benefits or postretirement benefits).
(2)Documents to be Requested from
G&T Cooperatives:
(a)a list of the names and
addresses of all members;
(b)all reports filed with FERC
(including complete FERC Forms 1)
(If the G&T jointly operates any
generating station with another co-
operative, public utility or govern-
ment agency, also request complete
FERC reports filed by the other
entity or entities);
(c)all power delivery agree-
ments (or power supply agreements)
in effect during the years under
examination;
(d) all power exchange or
power pooling agreements;
(e)all power rate schedules in
effect during the years under
examination;
(f) representative sample in-
voices for excess capacity sales and
for off-peak sales;
(g)for any jointly operated
generating station (as defined
above): all operating agreements,
station agreements, load manage-
ment agreement and all other agree-
ments concerning a jointly operated
station, income and expense anal-
ysis. In some circumstances, the
examiner may also need to request
all documents (including agreements
and correspondence) concerning ac-
quisition, construction and financing
of such stations;
(h) Securities and Exchange
Commission Forms 10-K filed by
the cooperative (if applicable);

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(i)the method used to compute
patronage dividends;
(j)workpapers used to support
claimed patronage dividends;
(k)notification letters to all
members on allocations of patronage
dividends; and
(l)tax exempt bonds. Contact
Headquarters; Chief, Exempt Orga-
nizations Technical Branch 4.
(3)Documents to be Requested from
Distribution Cooperatives:
Newsletters and other communica-
tions to members.
(12)22(16) Examination of Financial
Statements and Reports to Regulatory
Agencies
(1) Methods of Accounting. As
noted, cooperatives must use the ac-
crual method (as defined in GAAP,
with modifications) for REA reporting.
7 C.F.R. §1767.15(k). Although the
basic principles are the same, the
accrual methods for REA accounting
and income tax accounting diverge.
When this occurs, income tax account-
ing rules control. Thor Power Tool Co.
v. Commissioner, 439 U.S. 522 (1979);
Treas. Reg. §1.446(e)–1; Rev. Rul.
90–38, 1990–1 C.B. 57; Rev. Proc. 92–
20, 1992–1 C.B. 685. There are many
differences between REA accounting
and income tax accounting affecting
the timing of income and expense, gain
and loss and raising issues under IRC
61, 118, 451, 1001, 1231, IRC 446 and
481 for changes in methods of account-
ing. This may affect the 85 percent test
in IRC 501(c)(12) and also IRC 461
and 512. Utilities Handbook §§320–
322, 430–438.
(2) IRC 451(f). Accrual basis
electric utilities must recognize income
from sale of electricity to customers
not later than the taxable year in which
the electricity is provided. Utilities may
not accrue income relying on when
they read customers’ meters or when
they bill customers. IRC 451(f), effec-
tive for taxable years beginning after
December 31, 1986. On IRC 481(a)
adjustments resulting from IRC 451(f),
see Pub. L. Nos. 99–514 §821(b)(2),
(3) and 100–647 §1008(h). S. Rep.
No. 313, 99th Cong., 2d Sess., 1986–3
C.B. (Vol. 3) 120–121; H. Conf. Rep.
No. 841, 99th Cong., 2d Sess., 1986–3
C.B. (Vol. 4) II–322–324. For prior
law (cycle billing vs. budget billing),
see Rev. Rul. 72–114, 1972–1 C.B.
124; Utilities Handbook §432. Note
that Account 173, Accrued Utility
Revenue, unlike IRC 451(f), allows
cooperatives to accrue (or not accrue)
estimated revenue for electricity sold
but not billed as of the end of the
taxable year. As a result, adjustments
to the cooperative’s income may be
necessary.
(3) Timing Differences Between
REA Accounting and Income Tax
Accounting.
(a) Distribution cooperatives
generally use cycle billing or budget
billing. Cycle billing is based on
monthly meter reading and billing
cycle. Budget billing is based on an
annual projected budget; customers
are billed a level amount monthly
with an annual adjustment reflecting
actual electricity consumption. Ac-
count 173, Accrued Utility Revenue.
On billing methods, see Rev. Rul.
72–114, 1972–1 C.B. 124; Utilities
Handbook §432. Ascertain whether
the cooperative accrues income con-
sistently and in accord with IRC
451(f).
(b)Accounts 200.1, Member-
ships Issued; 252, Customer Ad-
vances for Construction or 208,
Donated Capital may raise issues
under the 85 percent test and IRC
118, 446 or 481. See Rev. Rul. 75–
557, 1975–2 C.B. 33, clarified in
Rev. Rul. 76–61, 1976–1 C.B. 12;
Utilities Handbook §§434, 435.
(c)Amounts in Account 235,
Customer Deposits typically repre-
sent a security deposit for electricity.
Commissioner v. Indianapolis Power
& Light Co., 493 U.S. 203 (1990);
Rev. Proc. 91–31, 1991–1 C.B. 566;
Rev. Rul. 72–519, 1972–2 C.B. 32;
Utilities Handbook §435.
(d) The following Accounts
may also affect the timing of in-
come, expense, gain or loss: Ac-
count 229, Accumulated Provision
for Rate Refunds; Account 449.1,
Provision for Rate Refunds. See
also, discussion of transfer of utility
plant and other property.
(12)22(17) Analysis of Financial
Statements and Accountants’ Notes
(1)Information on the Cooperative
and its Activities. Initial inquiries that
may affect planning the examination
include the following:
(a)Margin Stabilization Plans.
If the cooperative is operating under
a margin stabilization plan, it will be
necessary to reconstruct the coopera-
tive’s actual income and expense.
(1)Cooperatives must maintain
certain financial ratios (e.g., TIER
(defined in (12)22(21)) of 1.00 for
G&T cooperatives and 1.50 for
distribution cooperatives), or their
REA loans are in default. To more
easily meet the required ratios, some
cooperatives seek to average their
margins in good and bad years
through ‘‘margin stabilization.’’ The
cooperative selects a target margin
(usually REA’s required TIER of
1.00 or 1.50) by which income is to
exceed expenses. The income shown
in financial statements and in the
financial reports to REA is the target
margin, not the actual income and
expense accrued in that year. In a
good year, the cooperative books the
excess of income over expense as a
deferred credit; in a bad year, the
operating loss is booked as a de-
ferred charge. GAAP allows this, if
certain conditions are met. SFAS
No. 71, Accounting for the Effects
of Certain Types of Regulation; No.
90, Regulated Enterprises—Ac-
counting for Abandonments and Dis-
allowances of Plant Costs; or No.
92, Regulated Enterprises—Ac-
counting for Phase-in Plans. REA
also allows margin stabilization
plans if cooperatives meet certain
requirements and disclose the plan
in their financial statements. See 7
C.F.R. §1718 (proposed regula-
tions). The deferred charges and
deferred credits should appear in
Accounts 181–188, 251–253, 255
and 256.
(2)To check for margin stabili-
zation plans, review REA corre-
spondence and accountants’ notes to
financial statements. (Cooperatives
may implement SFAS Nos. 71, 90
or 92 (the basis for margin stabiliza-
tion plans) only with REA’s prior
w r i t t e n a p p r o v a l . 7 C . F . R .
§ 1767.13(d).) REA can verify
whether it approved a cooperative’s
margin stabilization plan. See also
REA Publication 201–1, TIER, line
88 (for distribution cooperatives). If
TIER on line 88 is exactly 1.50, this
may also indicate a margin stabiliza-
tion plan.
(3)These plans raise issues
with respect to the 85 percent test
and Rev. Rul. 72–36. See Technical
Instruction Program for FY 1994,

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‘‘Current Issues Affecting Certain
Cooperatives and Like Organizations
Described Under IRC 501(c)(12)’’,
38, 47–49.
(b)Account 923, Outside Serv-
ices Employed. Entries in this ac-
count may reveal payments to ac-
countants, attorneys, appraisers,
engineers and other consultants for
special reports on financing, con-
struction or rates.
(2)Cooperative Principles, 85 Per-
cent Test and Unrelated Business Tax-
able Income.
(a) Operating Revenue from
Sale of Electricity. A cooperative’s
electricity customers may vary: resi-
dential, commercial, industrial, agri-
cultural, governmental consumers or
other public utilities. Review Ac-
counts 440–456 for the 85 percent
test and possible unrelated trade or
business. To classify sales to mem-
bers and nonmembers, compare in-
formation on members to the per-
sons the cooperative supplies
electricity. For example, on Ac-
counts 444, Public Street and High-
way Lighting and 445, Other Sales
to Public Authorities, ascertain
whether the local, state or federal
government agency is a member of
the cooperative. Ascertain if com-
mercial customers are members or
nonmembers. Review Accounts 447,
Sales for Resale (and all subac-
counts) and 442, Commercial and
I n d u s t r i a l S a l e s f o r m e m b e r /
nonmember income. (Late payment
charges from government customers
booked in Account 450, Forfeited
Discounts, are not exempt under
IRC 103. Kurtz Bros. v. Commis-
sioner, 42 B.T.A. 561 (1940) and
other authorities cited in Utilities
Handbook §437.) The total amount
of the electric operating revenue
accounts is entered in Account 400,
Operating Revenue.
(1) Review Accounts 142, Cus-
tomer Accounts Receivable; 142.1
Customer Accounts Receivable—
Electric; 142.2 Customer Accounts
Receivable—Other; 144.1, Accumu-
lated Provision for Uncollectible
Customer Accounts — Credit and
Account 904, Uncollectible Ac-
counts. REA Accounting Course at
214–215. Taxpayers must use the
specific charge-off method in ac-
counting for losses on bad debts.
Tax Reform Act of 1986, Pub. L.
No. 99–514 §805(a), repealing IRC
166(c) (the reserve method), effec-
tive for taxable years beginning after
December 31, 1986. Utilities are not
barred from charging-off uncollect-
ible accounts merely because they
must continue to serve customers in
arrears on their accounts. H.R. Conf.
Rep. No. 841, 99th Cong., 2d Sess.,
II–314, 1986–3 C.B. (Vol. 4) 314–
316. For the change in method of
accounting from reserve to specific
charge-off and IRC 481(a) adjust-
ment, see Pub. L. No. 99–514
§ 805(d)(2). Analyze customer ac-
counts for member/nonmember
income.
(2) Account 555, Purchased
Power, shows the cost of electricity
purchased for resale and all net
s e t t l e m e n t s f o r e x c h a n g e o f
electricity (including economy
power, off-peak power for on-peak
power and spinning reserve capac-
ity). The cooperative must maintain
records showing, by months, the
demands, demand charges, kilowatt-
hours and prices under each pur-
chase contract and the charges and
credits under each exchange or
power pooling contract.
(b)Income from Interest and
Dividends. Review the following
Accounts:
(1)Cash Accounts. Coopera-
tives must invest cash in income-
producing accounts and should give
primary consideration to safety and
liquidity. 7 C.F.R. §§1715, 1789;
REA Mortgage; REA Bulletin 1–7,
General Funds (12/6/77). Review the
cash accounts, trace earnings to the
appropriate Revenue Accounts or
Income Accounts, ascertain whether
earnings are member or nonmember
and trace to Form 990. See Ac-
c o u n t s 1 3 1 . 1 , C a s h — G e n e r a l ;
Cash—Construction Fund—Trustee;
131.3 Cash—Installation Loan and
Collection Fund (distribution cooper-
atives’ loans to consumers for in-
stallation of appliances). For REA’s
rules on accounting for cash, see
REA Accounting Course at 1–25.
(2) Other Investment Funds.
Review Accounts 124, Other Invest-
ments; 125, Sinking Funds (if appli-
cable); 126 Depreciation Fund; 128,
Other Special Funds; 134, Other
Special Deposits; 136 Temporary
Cash Investments Trace investment
income attributable to these Ac-
counts to appropriate income Ac-
counts and Form 990.
(3) CFC. Many cooperatives
also borrow from the CFC and pay a
membership fee to join CFC. Ac-
count 123.23 Other Investments in
Associated Organizations. As part of
the financing, they execute a sub-
scription agreement with CFC and
agree to purchase interest-bearing
capital term certificates. These trans-
actions are booked in Accounts
123.21, Subscriptions to Capital
Term Certificates—CFC; 224.11,
Other Long-Term Debt Subscrip-
tions; 171, Interest and Dividends
Receivable; 419, Interest and Divi-
dend Income.
(4)Interest and Dividend In-
come. Analyze Accounts 171, Inter-
est and Dividends Receivable and
419, Interest and Dividend Income.
( 5 ) I n t e r e s t I n c o m e f r o m
‘‘Cushion of Credit Accounts.’’ As-
certain whether interest income from
‘‘cushion of credit accounts’’ is
reported. Cooperatives with REA
loans may deposit amounts in
cushion of credit accounts at the
U.S. Department of the Treasury.
These accounts can only be used to
pay principal and interest on REA
loans. They earn interest at 5 per-
cent (a fixed rate, not based on
Treasury’s changing cost of funds).
When interest rates from other in-
vestments fall below 5 percent,
cooperatives often increase deposits
to their cushion of credit accounts.
Transactions in cushion of credit
accounts should be booked as fol-
lows: Deposits are debited to Ac-
count 222.6, Advance Payments
Unapplied—LTD Debt and credited
to Account 131, Cash. Interest in-
come earned is debited to Account
419 and credited to Account 222.4.
Cushion of credit payments (and
interest) applied to REA loans are
debited to Account 224.3, Long-
Term Debt—REA Construction
Notes and credited to Account
224.6. The interest earned on
cushion of credit accounts should be
recorded as interest income and
never as a reduction of interest
expense. See REA Bulletin 20–9;
320–12 Loan Payments and State-
ments; REA Bulletin 181–1. If nec-
essary, the examiner can request a
transcript of REA’s loan receivable
accounts for the cooperative and
analyze deposits and accrued interest
income applied to installments of
principal and interest on REA loans.

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(6)Notes Receivable. Review
Account 141 for amount, timing and
source of interest income.
(7) Premium Income. G&Ts
using pollution control bond financ-
ing or cooperatives borrowing from
FFB may have premium income.
Cooperatives must maintain separate
accounts for premium, discount and
expense for each class and series of
l o n g - t e r m d e b t . 7 C . F . R .
§ 1767.15(q). See Accounts 225,
Unamortized Premium on Long-term
Debt (amortized monthly under Ac-
count 429, (Amortization of Pre-
mium on Debt—Credit); Accounting
Principle 624, Pollution Control
Bonds. See Treas. Reg. §1.61–12.
(c)Forgiveness of Indebtedness
Income from Reacquisition of Long-
Term Debt. When cooperatives reac-
quire or redeem their debt, under the
USoA, the difference between the
amount paid upon reacquisition and
the face value (plus any unamortized
premium less any related unamor-
tized debt expense and reacquisition
expense) less any unamortized dis-
count, related debt expense and
reacquisition expense attributable to
the redeemed debt are booked in
Account 189, Unamortized Loss on
Reacquired Debt or Account 257,
Unamortized Gains on Reacquired
Debt. These amounts are amortized
monthly over the remaining life of
the old original debt (Account 428.1,
Amortization of Loss on Reacquired
Debt; Account 429.1, Amortization
of Gain on Reacquired Debt—
Credit). Accounting Principle 625,
Prepayment of Debt. As stated
above, for income tax purposes,
discharge of indebtedness income is
(nonmember) gross income in the
taxable year realized unless TAMRA
§ 6203 applies. IRC 61(a)(12), 451,
501(c)(12)(C)(ii). Review Accounts
189, 257, 428.1, 429.1.
(d) Rental Income. Analyze
Account 172, Rents Receivable and
418, Nonoperating Rental Income.
Review Accounts 104, Electric Plant
Leased to Others; 412, Revenues
from Electric Plant Leased to Oth-
ers; 413, Expenses of Electric Plant
Leased to Others) for source and
amount of rental income for the 85
percent test (including qualified pole
rentals, if any) and unrelated trade
or business taxable income. Quali-
fied pole rentals are recorded in
Account 454, Rent from Electric
Property. See Utilities Handbook
§ 44(12) on joint use of poles.
(e) Gains and Losses. The
USoA rules on plant accounting and
realization differ from the income
tax rules on adjusted basis and
realization:
(1) Accounting for Utility
Plant. Utility plant is the largest
asset account on the balance sheet.
REA plant accounting differs radi-
cally from income tax accounting in
many ways (e.g., acquisitions, retire-
ments and depreciation reserves).
Utilities Handbook §§230, 426.
(2)Work in progress appears in
Account 107, Construction Work in
P r o g r e s s — E l e c t r i c . 7 C . F . R .
§ 1767.16(a)–(d), (f)–(h) (detailed
discussion of multiple expenditures
covered). On booking additions and
retirement of plant, see 7 C.F.R.
§ 1767.16(j); Account 102, Electric
Plant Purchased or Sold; Accounts
301—399; Account 101, Electric
Plant in Service. Some REA capital-
ization, basis and depreciation rules
diverge from income tax accounting
(e.g., Account 419.1, Allowance for
Funds Used During Construction
(imputed interest income for rate-
making purposes only), booked to
Account 101, must be eliminated to
compute adjusted basis in utility
plant). For equipment, see 7 C.F.R.
§ 1767.16(i). On basis and deprecia-
tion, see Utilities Handbook §§426,
445. The cooperative’s CPA is re-
quired to test utility plant and
depreciation accounts for additions,
replacements, retirements and con-
struction work in process. 7 C.F.R.
§ 1773.39. If appropriate, request
the CPAs’ workpapers.
(3)Transfer of Electric Plant
and Other Property. When electric
plant is transferred, the book cost of
the transferred plant is debited to
Account 102, Electric Plant Pur-
chased or Sold (a suspense account)
and credited to the appropriate plant
account(s) and the accumulated de-
preciation amount (Accounts 108,
115, 119) (and any amount in
Account 252, Customer Advances
for Construction) are charged to
those Accounts. This net amount,
minus the consideration received for
the transferred plant (less expenses
of sale) is then credited to Account
102 and, if a ‘‘significant’’ amount,
closed into Accounts 256, Deferred
Gains from Disposition of Utility
Plant or 187, Deferred Losses from
Sale of Utility Plant and amortized
over five years (generally) in, re-
spectively, Accounts 411.6, Gains
from Disposition of Utility Plant and
411.7, Losses from Disposition of
Utility Plant. Nonsignificant gains
and losses are closed into Accounts
421.1, Gain on Disposition of Prop-
erty or Account 421.2, Loss on
Disposition of Property. 7 C.F.R.
§ 1 7 6 7 . 1 6 ( e ) ; R E A A c c o u n t i n g
Course at 296–297.
(4) Income Tax Accounting.
Gains and losses from disposition or
retirement of utility plant and other
assets is included in gross income in
the taxable year realized and recog-
nized. IRC 1001, 1231, 451; Treas.
Reg. §1.167(a)–11(d) for pre-ACRS
property. Review and reconcile ac-
tivity in these Accounts with income
tax accounting rules. Utilities Hand-
book §§433, 445.
(5)Gains and Losses on Trans-
fers of Other Property. For other
property (e.g., land or land rights),
see Accounts 421.1, Gain on Dis-
position of Property or Account
421.2, Loss on Disposition of Prop-
erty. 7 C.F.R. §1767(e)(5). Ac-
counting Principles 128, Sale of
Property; 129, Gain or Loss on the
Sale of an Office Building.
(f)Transfer of Clean Air Act
Allowances.
(1)The Clean Air Act Amend-
ments of 1990 (the Act). The Act
established a system to issue emis-
sion allowances for airborne pollu-
tants, implemented by the Environ-
mental Protection Agency (EPA).
Electric utilities (including G&Ts)
are issued emission allowances au-
thorizing the emission of a specified
amount of airborne pollutants by the
utility during a specified calendar
year or later period. Starting in
1993, unused allowances may be
sold, traded or held in inventory for
use against emissions in future
years.
(2)Accounting for Allowances.
Account 158.1, Allowance Inven-
tory, includes the cost of allowances
owned by the G&T and not withheld
by the Environmental Protection
Agency. (See Account 158.2, Al-
lowances Withheld, for treatment of
withheld allowances.) Concurrent
with the cooperative’s monthly
emission of sulfur dioxide, Account
158.1 is credited and Account 509,

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Allowances, is debited. Separate
subdivisions of the Account are
maintained to separately account for
allowances usable in the current year
and those used in subsequent years.
The records should be sufficiently
detail to identify each allowance, its
origin, and the acquisition cost, if
any. The cost of allowances owned
by the G&T, but withheld by the
EPA, are included in Account 158.2.
Upon release of the allowance for
use by the G&T, inventory cost is
transferred to Account 158.1.
(3)Gains and Losses. G&Ts
may realize gains and losses from
the disposition of allowances or
options on allowances. Accounting
treatment of dispositions of al-
lowances under the USoA varies
depending on whether the allowance
is held for speculative purposes:
(a)Nonspeculative Gains and
Losses. Gains on dispositions of
allowances not held for speculative
purposes are credited to either: (1)
Account 254, Other Regulatory Lia-
bilities, when there is uncertainty as
to the existence of a regulatory
liability or definite regulatory lia-
bility; or (2) Account 411.8, Gains
from Disposition of Allowances.
Losses that qualify as regulatory
assets are charged to Account 182.3,
Other Regulatory Assets. All other
losses are charged to Account 411.9,
L o s s e s f r o m D i s p o s i t i o n o f
Allowances.
(b) Speculative Gains and
Losses. Gains on disposition of
allowances held for speculative pur-
poses appear in Account 421, Mis-
cellaneous Nonoperating Income.
Losses are charged to Account
426.5, Other Deductions. Costs and
benefits of exchange-traded al-
lowance futures contracts used to
protect a utility from the risk of
unfavorable price changes (hedging
transactions) are deferred in Account
186, Miscellaneous Deferred Debits,
or Account 253, Other Deferred
Credits. The deferred amounts are
included in Account 158.1 in the
month in which the related al-
lowances are acquired, sold or other-
wise disposed of. Where the costs or
benefits of hedging transactions are
not identifiable with specific al-
lowances, amounts are included in
Account 158.1 when the contract
closes.
(4) Income Tax Accounting.
Examine Account 158.1 to ascertain
gains and losses realized from dis-
position of air emission allowances.
Rev. Proc. 92–1, 1992–2 C.B. 503,
discusses the federal income tax
consequences of the air emission
allowance program. Contact the Of-
fice of the Assistant Chief Counsel
(Income Tax and Accounting) for
further assistance in determining the
income tax consequences of transac-
tions involving the sale or exchange
of allowances.
( g ) A s s o c i a t e d ( A f f i l i a t e d )
Companies and Subsidiaries. These
Accounts may raise issues concern-
ing the 85 percent test, operation as
a cooperative, unrelated trade or
business and employment taxes.
(1)A cooperative’s investment
in an associated company embraces
corporations, joint ventures and
funded deferred compensation plans.
Cooperatives must keep accounts
and records to accurately report
transactions with subsidiaries. 7
C.F.R. § 1767.15(n). Accounting
Principle 623, Satellite or Cable
Television Services. The results of
subsidiaries’ operations appear on
the cooperative’s balance sheet in
Accounts 123.11, Investment in Sub-
sidiary Companies; 418.1, Equity in
Earnings of Subsidiary Companies
and 216.1, Unappropriated Un-
distributed Subsidiary. Accounting
Principle 623, Satellite or Cable
Television Services; FAS No. 94.
(2)Review Accounts 123, In-
vestment in Associated Companies;
123.23, Other Investments in Asso-
ciated Organizations; 136, Tempo-
rary Cash Investments; 145, Notes
Receivable from Associated Com-
panies; 233, Notes Payable to Asso-
ciated Companies; 146 Accounts
Receivable from Associated Com-
panies; Accounts Payable to Associ-
ated Companies; 223, Advances
from Associated Companies. These
accounts show the book cost of
investments in securities issued (or
assumed by) each associated com-
pany and joint venture, the coopera-
tive’s investment advancements and
any accrued interest on any debt.
Amortization of discount or pre-
mium on interest-bearing invest-
ments is booked in Account 419,
Interest and Dividend Income.
Write-offs appear in Account 426.5,
Other Deductions.
( h ) E c o n o m i c D e v e l o p m e n t
Loan Fund. Cooperatives are en-
couraged to participate in REA’s
Rural Economic Development Loan
and Grant Program. REA provides
interest-free loans or grants to coop-
eratives to promote rural economic
development and job-creation proj-
ects, through revolving loan funds
and pass-through grants. See 7
C.F.R. §1703, Subpart B (including
final regulations published in 59
Fed. Reg. 11702 (Mar. 14, 1994));
Accounts 131.12, Cash-General-
Economic Development Loan Funds;
224.16, Long-Term Debt—REA
Economic Development Notes Ex-
e c u t e d ; 2 2 4 . 1 7 , R E A N o t e s
E x e c u t e d — E c o n o m i c D e v e l o p -
ment—Debit; Accounting Principle
626, Rural Economic Development
Loan and Grant Program. Analyze
activity in these accounts in connec-
tion with the 85 percent test.
(i) Miscellaneous. Entries in
the following accounts may reveal
member, nonmember or unrelated
trade or business income:
(1) Accounts 105, Electric
Plant Held for Future Use; 121,
Nonutility Property or 389–399,
General Plant (particularly Account
397, Communication Equipment)
may suggest nonmember income
and/or unrelated business (e.g., non-
cooperative cable TV service dealing
with nonmembers) See also, Ac-
counting Principle 623, Satellite or
Cable Television Services.
(2)Sale of Nuclear Materials
(as opposed to reuse): Account 157,
Nuclear Materials Held for Sale is
debited for salvage value; Account
120.5, Accumulated Provision for
Amortization of Nuclear Fuel As-
semblies is credited. Any difference
between salvage value and the
amount realized is credited/debited
to Account 518, Nuclear Fuel Ex-
pense.
(3)Make Ready Charges Re-
ceived from Cable Television Com-
panies. The cooperative and a cable
television company (an affiliate or
an unrelated firm) may agree to
place lines, attachments or apparatus
on the cooperative’s poles for trans-
mission of TV signals. See REA
Bulletin, Joint Use Agreement With
CATV Companies. To make ready
the poles, the cooperative incurs
labor and materials costs. Make
ready charges may be booked in
several ways: as a reimbursement
(Accounting Principle 135, Account-

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ing for Removal or Relocation of
Electric Facilities Resulting from the
Action of Others (Reimbursement));
as contract work (Account 415,
Revenues from Merchandising, Job-
bing and Contract Work) or as
reductions in expenses (Account
142.2, Customer Accounts Re-
ceivable—Other (when the invoice
is paid, cash is credited and mainte-
nance and operation expenses are
debited)).
(4)Sales of Timber, Sand and
Gravel. See 7 C.F.R. §1767.16(g)-
(3). Account 421, Miscellaneous
Nonoperating Income.
(3)Patronage Capital. Cooperatives
must keep detailed records on names
and addresses of members and a
patronage capital ledger. Accounts 200;
201.1. See GAO Reports RCED 93–
164; GGD–83–7.
(a)The Patronage Capital Cy-
cle. As discussed above, coopera-
tives must operate on a cooperative
(nonprofit) basis. The excess of
operating revenues over operating
expenses for each year is considered
to be capital furnished by members
(patrons). Such capital or margins is
to be assigned to members on the
basis of each year’s margins. See
Exhibit 12(20)–1. This is done as
follows:
(1)At the end of each year,
revenue and expense from sale of
electricity (income and expense net-
ted from Accounts 400–408; 412–
414; 423–428; 431) are closed into
Account 219.1, Operating Margins.
Note: Accounts 219.1 and 219.2
cannot be used (unless adjusted) to
check the 85 percent test because
they reflect net income from opera-
tions and because the income ac-
counts do not uniformly parallel
member/nonmember classifications
in IRC 501(c)(12).
(2)The balance in Account
219.1 is then transferred to Account
201.2, Patronage Capital Assignable.
(If the amount in Account 219.1 is a
deficit, the amount is not transferred
to Account 201.2.) Patronage capital
is assigned to individual members
on the basis of patronage, pursuant
to the cooperative’s bylaws.
(3)After the margins are al-
located to members, this amount is
transferred from Account 201.2 to
Account 201.1, Patronage Capital
Credits.
(4)Nonoperating margins from
other activities (Accounts 415–417;
417.1, 418–419; 419; 421, 421.1,
421.2, 422, 434–435) are closed into
Account 219.2, Nonoperating Mar-
gins. If the cooperative’s bylaws
permit, nonoperating margins may
be assigned to members. Accounts
219.1, 219.2, 219.3, Other Margins;
219.4, Other Margins and Equities—
Prior Periods which are assignable
to patrons (members) are transferred
to Account 201.2 and 201.2 (as
above).
(5)When the board of directors
authorizes the return of capital
credits to patrons, the amount au-
thorized is transferred to Account
238.1, Patronage Capital Payable.
See Accounting Principles 501, Pa-
tronage Capital Assignments; 502
Patronage Capital Retirements; 503
Operating and Nonoperating Mar-
gins; 504, Patronage Capital from
G&T Cooperatives, 505, Patronage
Capital Furnished by Other Coopera-
tive Service Organizations.
(6)Forfeited membership fees
appear in Account 208, Donated
Capital. See Accounting Principle
506, Forfeited Membership Fees.
Ascertain whether forfeitures are
treated consistently with Rev. Rul.
72-36, Q&A 4.
(b) The cooperative’s CPAs
must analyze patronage capital ac-
counts and a sample of membership
transactions. 7 C.F.R. §1773.43(b),
(c).
(c)Electric cooperatives are not
required to file Forms 1099 to report
payments of patronage dividends.
Treas. Reg. §301.6044–2(b)(2)(iii).
(d)Review the patronage capi-
tal credits allocated to a distribution
and transmission cooperative by
G&T Cooperatives. Account 123.1,
Patronage Capital from Associated
Cooperatives.
(4)Unrelated Business Taxable In-
come. Entries in the following Ac-
counts may suggest unrelated trade or
business:
(a) Accounts 415, Revenues
from Merchandising, Jobbing and
Contract Work; 416, Costs and
Expenses of Merchandising, Jobbing
and Contract Work; 417 Revenues
from Nonutility Operations (e.g.,
cable TV or furnishing management
or engineering services to others);
417.1, Expenses of Nonutility Oper-
ations; 418, Nonoperating Rental
Income (net income from real prop-
erty, equipment, intangibles (i.e.,
from Nonutility Property in Account
121)); 421, Miscellaneous Non-
operating Income (net gain from
disposition of investments (7 C.F.R.
§ 1767.15(q)); net income from tim-
ber sales (7 C.F.R. §1767.16(g)(3));
net profit on certain contracts); 434
Extraordinary Income; 435, Extraor-
dinary Deductions; 451, Mis-
cellaneous Service Revenues. Ac-
counting Principle 623, Satellite or
Cable Television Services.
(b)Allocation of Expenses. Co-
operatives must keep accurate rec-
ords of payroll distribution by func-
tion. Because REA finances only
capital items (new construction and
replacement) but not operating ex-
pense, the USoA requires detailed
allocations of labor and materials
expense between these functions.
These records may assist the ex-
aminer with allocating expenses un-
der Treas. Reg. §1.512(a)–1(c). 7
C.F.R. §§1767.15(i), (j); 1767.17;
1767.27 (Accounts 500—598); Ac-
counts 163, Stores Expense Un-
distributed. Cooperatives often share
facilities, equipment or labor be-
tween furnishing electricity and tele-
vision services. GAO Report 93–
164.
(5)Retirement or Pension Plans,
Other Deferred Compensation Arrange-
ments and Employee Benefits. The
cooperative may maintain one or more
qualified or nonqualified plans.
(a)Examination of Qualified
Plans. Determine what plans a coop-
erative maintains, and the type of
plan. Where necessary, seek the
assistance of an Employee Plans
Specialist for further analysis of the
plans and to make sure that there are
no problems with participation, dis-
crimination, contributions or benefits
levels, vesting, funding, portability,
or the security of pension invest-
ments. Review Account 228.3, Ac-
cumulated Provisions Pensions and
Benefits and any Account 128 sub-
accounts, Other Special Funds—
Deferred Compensation; Special
Funds Reserve—Deferred Compen-
sation. Accounting Principle 604.
( b ) E x a m i n a t i o n o f N o n -
qualified Plans. Seek the assistance
of a deferred compensation specialist
in the Office of Associate Chief
Counsel (Employee Benefits & Ex-

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empt Organizations) for further anal-
ysis of the plans. To review non-
qualified deferred compensation
plans and other employee benefits,
see Accounts 128, Other Special
Funds and Account 123, Investment
in Associated Companies (and sub-
accounts). See Accounting Principle
604, Deferred Compensation.
(6)Employment Taxes. Employment
taxes paid and accrued appear in
Accounts 236.3, Accrued U.S. Social
Security Tax—F.I.C.A. (employer’s
share of F.I.C.A.); 408.2 Accrued U.S.
Social Security Tax—Unemployment;
408.3, U.S. Social Security Tax—
F.I.C.A.; 236.7, Accrued Taxes—Other;
408.7 Taxes—Other; 241.1, Tax Col-
lections Payable—F.I.C.A. (employee’s
s h a r e o f F . I . C . A . c o l l e c t e d b y
employer). Purchase rebates received
from materials and supplies vendors
may be in the form of package travel
arrangements. The board of directors
decides who receives these benefits.
The contra charge for the reduction in
cost is posted to Account 926,
Employee Pensions and Benefits (for
employees) or to Account 930.2, Mis-
cellaneous General Expenses (for direc-
tors and members). Accounting Princi-
ple 620, Purchase Rebates.
(7)Other Accounts to be Reviewed.
For compliance with the 85 percent test
and employment tax reporting, review
Accounts 143, Other Accounts Receiv-
able (amounts due from employees to
be separately stated); 144.3, Accumu-
lated Provision for Uncollectible Ac-
counts, Officers and Employees—
Credit; Account 904, Uncollectible Ac-
counts, Account 920, Administrative
and General Salaries (salaries, bonuses
and compensation for officers and other
employees not chargeable to a particu-
lar operating function). Compensation
expense for operating functions appear
in other expense accounts. Account
926, Employee Pensions and Benefits,
shows current accrued expense for
qualified employee retirement plans,
nonqualified unfunded plans, life insur-
ance, accident and health benefits,
educational and recreational activities
for the benefit of employees. On
nonqualified deferred compensation
plans maintained by the cooperative,
Account 926 may reflect accrued
employee benefit expense netted
against investment income. The invest-
ment income is included in computing
the 85 percent test. Accounting Princi-
ples 601, Employee Benefits; 602
Compensated Absences; 603, Employee
Retirement and Group Insurance; 604,
Deferred Compensation; 605, Life In-
surance Premium on Life of a Bor-
rower Employee; 606, Pension Costs;
607, Unproductive Time; 608, Training
Costs, Attendance at Meetings, etc.;
627, Postretirement Benefits.
(12)22(18) Analysis of Statement of
Cash Flows
Cooperatives’ financial statements
must include a statement of cash flows.
FAS No. 95, ‘‘Statement of Cash
Flows.’’ The statement provides infor-
mation on the cooperative’s ability to
generate positive cash flows, to pay
patronage dividends and need to bor-
row funds. This statement may assist
the examiner in assessing whether the
cooperative operates according to coop-
erative principles (including the reason-
ableness of cash reserves). See sample
statement of cash flows in 7 C.F.R. §
1789, Appendix A; REA Accounting
Course at 270-281. Analyze the state-
ment of cash flows (or, if a condensed
statement of cash flows is used, a more
detailed cash flows statement). If ap-
propriate, request the underlying work-
papers. See IRM 7(10)44.(10)4.
(12)22(19) COBRA Continuation
Coverage
(1)If a cooperative maintains a
group health plan, the plan may be
subject to the COBRA continuation
coverage requirements under IRC
4980B. Under those requirements,
plans generally must make continuation
coverage available to beneficiaries los-
ing coverage under the plan due to
certain events, such as termination of
employment, death, or divorce. IRC
4980B imposes an excise tax for
failures to comply with the COBRA
continuation coverage requirements.
The excise tax is generally $100 per
day for each beneficiary affected by the
noncompliance. Two exceptions may
apply to plans of cooperatives so that
the excise tax of IRC 4980B would not
apply.
(a)First, if the plan constitutes
a governmental plan under IRC
414(d), then the excise tax would
not apply.
(b) Second, if the employers
maintaining the plan employ in the
a g g r e g a t e f e w e r t h a n t w e n t y
employees (including independent
contractors eligible for coverage un-
der the plan), then the excise tax
does not apply.
(2)For more information on the
excise tax of IRC 4980B, see the
COBRA Employee Benefit Continuation
Coverage Examination User’s Guide
(January 1994).
(12)22(20) Nonexempt Electric
Cooperatives
(1)Overview. If it is necessary to
prepare a Form 1120 for any years
under examination, seek assistance
from the Utilities Industry Specialist
(e.g., Schedule M adjustments, when
utility plant is placed in service,
MACRS, alternative minimum tax)
from the Farmers’ Cooperatives Indus-
try Specialist (e.g., IRC 277) and, if
appropriate, the Media/Communications
Industry Specialist and the VEBA
(Voluntary Employees’ Beneficiary As-
sociation) Industry Specialist (IRC
501(c)(9), 419, 419A (including dif-
ferences in calculations for IRC 419A
and FAS No. 106). Many aspects of the
USoA not covered in these guidelines
(e.g., plant accounts and deferred taxes
accounts) may be useful in preparing
Form 1120. See also Utilities Hand-
book Exhibits.
(2) Patronage Deductions. Nonex-
empt cooperatives not subject to Sub-
chapter T may exclude patronage divi-
dends paid or allocated to patrons,
according to their bylaws. Rev. Rul.
83–135, 1983–2 C.B. 149. Information
from the cooperative will be needed to
analyze patronage and nonpatronage
income and expense (e.g., analysis of
maturity of certificates of deposits.)
(3) IRC 277. Nonexempt electric
cooperatives are subject to IRC 277, a
method of accounting as defined in
IRC 446. Treas. Reg. § 1.446–
1(e)(2)(ii)(a); Concord Consumers
Hous. Coop. v. Commissioner, 89 T.C.
105, 116 (1989); Rev. Rul. 90–38,
1990–1 C.B. 57.
(12)22(21) Definitions
(1)See 7 C.F.R. §§1767.10, 1773.2
for definitions used in the USoA. For
convenience, certain definitions are
reproduced here:
(2)‘‘Associated (or affiliated) com-
panies’’ are persons that are directly or
indirectly (through one or more inter-
mediaries) control or are controlled by,

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or under common control with, the
cooperative. 7 C.F.R. §1767.10.
(3)‘‘Control’’ means the possession,
directly or indirectly, of the power to
direct or cause the direction of the
management and policies of a com-
pany, whether such power is exercised
alone, through one or more intermedi-
ary companies, or in conjunction with
or pursuant to an agreement and
whether such power is established
through a majority or minority owner-
ship or through voting of securities;
common directors, officers or stock-
holders; voting trusts, holding trusts,
associated companies; contracts, or any
other direct or indirect means. 7 C.F.R.
§ 1767.10.
(4)‘‘Subsidiary company’’ is a com-
pany controlled by the cooperative
through ownership of voting stock. 7
C.F.R. § 1767.10.
(5)Financial Ratios. REA tracks
financial ratios on cooperatives’ opera-
tions. Some may interest examiners
(e.g., net working capital in relation to
reasonable cash reserves). See REA
A c c o u n t i n g C o u r s e a t 2 5 7 – 2 8 7 .
‘‘TIER’’ (times interest earned ratio)
equals:
(patronage capital and margins)
+
(interest on long-term debt)
interest on long-term debt
TIER appears on line 88 of REA
Publication 201–1. Patronage capital
and margins appear on line 50; interest
on long-term debt on line 48. Example:
Patronage capital and margins is
$600,000. Interest on long-term debt is
$500,000. TIER is 2.20:
(600,000 + 500,000)
500,000
(12)22(22) Additional References
(1) Internal Revenue Service:
(a)Technical Instruction Program
(1977—current).
(b)ISP Coordinated Issue Papers.
( c )E x e m p t O r g a n i z a t i o n s
Handbook.
( d )S p e c i a l i z e d I n d u s t r y A u d i t
Guidelines—Public Utilities (Util-
ities Handbook).
(e)‘‘More Basics: the Basics of
Fringe Benefits’’ and User Guide
(Chief Counsel Technical TV)
(1994).
(f)COBRA Employee Benefit Con-
tinuation Coverage Examination
User’s Guide (January 1994).
(g)Office of Chief Counsel Tele-
phone Directory and Subject Matter
Directory, Document 7801 (includ-
i n g U t i l i t i e s I S P , M e d i a /
Communications ISP, Farmers’ Co-
operatives ISP and VEBA (Volun-
tary Employees’ Beneficiary Asso-
ciation) ISP).
(2)General Accounting Office:
(a)Generally Accepted Government
Auditing Standards (GAGAS or
Yellow Book) (rules for required
reports on electric and telephone
cooperatives prepared by independ-
ent CPAs).
(b)Legislation Needed to Improve
Administration of Tax Exemption
Provisions For Electric Coopera-
tives, GGD–83–7 (1983).
(c)REA Borrowers’ Investment in
Cable and Satellite Television Serv-
ices, RCED–93–164 (1993).
(d)To order GAO reports, call
(202) 512-6000 or fax (301)
258-4066. The first copy is free.
Additional copies are $2.00.
(3)Federal Energy Regulatory Com-
mission (FERC):
(a)Uniform System of Accounts, 18
C.F.R. §101 et seq.
(b)Glossary of Important Power
and Rate Terms, Abbreviations and
Units of Measurement, Interagency
Committee on Water Resources
(Federal Power Commission 1965).
(4) Rural Electrification Admini-
stration:
(a)Rural Electrification Act of 1936
(With Amendments as Approved
Through December 17, 1993), Infor-
mational Publication 100–1 (1993)
(chronology of amendments, text of
statute and guide to provisions).
(b)Uniform System of Accounts
(Electric), 7 C.F.R. §1767 et seq.
(1994) (58 Fed. Reg. 59822 (1993))
(or see REA Bulletin 1767–B
(1993)) (USoA).
(c)Policy on Audits of REA Bor-
rowers, 7 C.F.R. §1773 (require-
ments for audit of cooperatives by
independent CPA under GAAP and
GAGAS).
(d)Margin Stabilization Plans, Rev-
enue and Expense Deferrals, and
Refunds of Previously Recorded
Revenues, 7 C.F.R. §1718 (pro-
posed regulations) (53 Fed. Reg.
44887 (1988)).
(e)Note on REA regulations: REA
regulations are available in hard
copy (Code of Federal Regulations,
published annually) and on disk in
ASCII. Contact the National Office
for additional information.
(f)REA Forms 7 Financial and
Statistical Report, Operating Report
— Financial, Form 12.
(g)Guide for Preparing Financial
and Statistical Reports for Power
Supply Borrowers and Electric Dis-
tribution Borrowers with Generating
Facilities, Bulletin 1717B–3.
(h)Guide for Preparing Financial
and Statistical Reports for Electric
Distribution Borrowers, Bulletin
1717B–2.
(i)REA Standard Mortgage.
(j)A Brief History of the Rural
Electric and Telephone Programs
and Report of the Administrator,
Fiscal Year 1992 Informational Pub-
lication 100–7.
( k )R E A F i n a n c e d G e n e r a t i n g
Plants, Informational Publication
200–2 (1993).
(l)1992 Statistical Report, Rural
Electric Borrowers, Informational
Publication 201–1.
(m) REA Bulletins (selected):
(1)Evaluation and Enforcement of
Internal Control of Borrowers’ En-
terprises, 182–1 (1/10/65).
(2)Procedures for Computing and
Recording Capital Credits, Section
1951, Issue 2 (7/64).
( 3 ) C a p i t a l C r e d i t s — C o n s u m e r
Benefits, 102–1 (Electric) (7/64, re-
printed 7/28/74).
(4)General Funds, 1–7 (12/6/77)
(cash management guidelines).
(5) Joint Use Agreement With
CATV Companies (joint use of
utility poles), 1726A–125 (9/17/93).
(n)REA Accounting Interpretations.
(o)REA Telephone Directory, Infor-
mational Publication 500–1.
(5)Graduate School, U.S. Department
of Agriculture:
REA Borrower Accounting (Electric),
Correspondence Program course guide
(1991) (REA Accounting Course).
(6)National Association of Regulatory
Utility Commissioners (NARUC):
(a)Utility Regulatory Policy in the
United States and Canada, (1992)
(guide to state rate regulation of
electric cooperatives).
(b)To order NARUC publications,
call (202) 898-2200 or fax (202)
898-2213.

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471996–28 I.R.B.
(7) American Institute of Certified
Public Accountants (AICPA):
(a)Audit and Accounting Guide:
Consideration of Internal Control
Structure in a Financial Statement
Audit (1990).
(b)Audit Risk Alerts (matters of
interest to CPAs in planning audits,
issued annually).
(8)Treatises:
(a)J. Bonbright, Principles of Pub-
lic Utility Rates (1988).
(b)R. Hahne, G. Aliff, Accounting
for Public Utilities (1993).
(c)M. Reeser, Introduction to Pub-
lic Utility Accounting (1984).
(d)Pacific Gas and Electric, Re-
source: An Encyclopedia of Utility
Industry Terms (1984).
(e)Glossary of Cable & TV Terms,
National Cable Television Associa-
tion, A.C. Nielsen Co. (1981).
(f) M. Abrahamsen, Cooperative
Business Enterprise (1976).
(g)I. Packel, The Organization and
Operation of Cooperatives (4th ed.
1970).
(h)G. Bauernfeind, Income Taxa-
tion: Accounting Methods and Peri-
ods (1992).
(9)Periodicals:
(a)The Cooperative Accountant
National Society of Accountants
for Cooperatives.
(b)Journal of Accountancy
AICPA.
(c)Electric Utility Week
McGraw-Hill.
(d)Electrical World
McGraw-Hill.
(e)The Energy Daily
King Publications Group.
(f)Fortnightly (formerly Public
Utilities Fortnightly) Public Util-
ities Reports.
(g)Rural Electrification
National Rural Electric Coopera-
tive Association (NRECA).
(h)NRECA’s Power Supply Report.
(i)Rural Electric Newsletter
NRECA.
(j)Electric Power Alert
Inside Washington Publishers.
(k)Broadcasting & Cable
Cahners Publishing Co./Reed
Publishing.
(l)Cablevision
Diversified Publishing Group.
(m)Telecommunications Policy
BRP Publications, Inc.
(12)22(23) Exhibits
Exhibit 12(20)–1, ‘‘Summary of Ac-
counts Used in Connection with Rec-
ording Patronage Capital’’ (reproduced
with the compliments of the Graduate
School, U.S. Department of Agricul-
ture, from the Correspondence Program
course REA Borrower Accounting
(Electric), copyright (c) 1991).
Exhibit 12(20)–2, ‘‘Applying the 85
Percent Test: Analysis of REA Uniform
System of Accounts (Selected Revenue,
Income, Expense and Balance Sheet
Accounts).’’

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EXHIBIT 12 (20)–1

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491996–28 I.R.B.
Exhibit 12(20)–2
Applying the 85 Percent Test: Analysis of REA Uniform System of Accounts (Selected Revenue, Income, Expense and
Balance Sheet Accounts)
1
USoAAccount Name
Non-
MemberMemberExcluded
411.6Gains from Disposition of Utility Plant [1]X
411.7Losses from Disposition of Utility Plant [1]X
411.8Gains from Disposition of Allowances [1]X
411.9Losses from Disposition of Allowances [1]X
412Revenues from Electric Plant Leased to OthersX
414Other Utility Operating Income [2]XX
415Revenues from Merchandising, Jobbing and Contract WorkXX
418Nonoperating Rental Income [2]X
418.1Equity in Earnings of Subsidiaries [1]XX
419Interest and Dividend Income [2]X
419.1Allowance for Funds Used During Construction [1]N/AN/AN/A
421Misc. Nonoperating Income [2], [4]X
421.1Gain on Disposition of Property [1]X
421.2Loss on Disposition of Property [1]X
428.1Amortization of Loss on Reacquired Debt [1]X
429Amortization of Premium on Debt — Credit [1]X
429.1Amortization of Gain on Reacquired Debt [1], [4]XX
434Extraordinary Income [2]X
440Residential Sales [3]XX
440.1Residential Sales—Excluding Seasonal [3]XX
440.2Residential Sales—Seasonal [3]XX
441Irrigation Sales [3]XX
442Commercial and Industrial Sales [3]XX
442.1Commercial and Industrial Sales—1000 kVA or Less [3]XX
442.2Commercial and Industrial Sales—Over 1000 kVA [3]XX
444Public Street and Highway Lighting [3]XX
445Other Sales to Public Authorities [3]XX
446Sales to Railroads and Railways [3]XX
447Sales for Resale [3]XX
447.1Sales for Resale to REA Borrowers [3]XX
447.2Sales for Resale—Others [3]XX
448Interdepartmental Sales [1]N/AN/AN/A
449.1Provision for Rate Refunds [4]XX
450Forfeited Discounts [4]XX
451Misc. Service RevenueXX
453Sales of Water and Water PowerXX
454Rent from Electric PropertyXXX
456Other Electric RevenueX
158.1Allowance InventoryX
Legend:
[1]: This Account requires an adjustment for differences between regulatory
and income tax accounting.
[2]: This Account combines revenue and expense.
[3]: This Account may require an adjustment to comply with IRC 451(f).
[4]: This Account may require an adjustment for other timing differences
between regulatory and income tax accounting.
N/A: Not applicable.
1
This Exhibit is a general guide to the range of classification of USoA revenue and income accounts for purposes of IRC 501(c)(12)(A),
(C). Some Accounts may contain member, nonmember or excluded income (alone or in combination), depending upon the nature of the
transactions, the parties thereto and/or in what taxable year the transactions occurred.

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501996–28 I.R.B.
PUBLIC COMMENTS
These proposed examination guide-
lines address specific issues relating to
rural electric cooperatives. Because
they address matters that may have a
significant impact on these coopera-
tives, the Service is soliciting public
comments on them.
Comments should be submitted in
writing on or before June 14, 1996.
Comments should be sent to the
following address:
Internal Revenue Service
Assistant Commissioner
(Employee Plans and Exempt
Organizations) Attn:
CP:E:EO:T:3, Rm. 6137
Washington, DC 20224
If warranted, after consideration of
the comments received, the Service will
schedule a public hearing to discuss
these proposed guidelines before they
are finalized.
DRAFTING INFORMATION
The person to contact regarding this
announcement is Edward Karcher of
the Exempt Organizations Division. For
further information you can contact Mr.
Karcher on (202) 622-8120 (not a toll-
free number).

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51
Announcement of the Disbarment, Suspension, or Consent to Voluntary
Suspension of Attorneys, Certified Public Accountants, Enrolled Agents and
Enrolled Actuaries From Practice Before the Internal Revenue Service
Under 31 Code of Federal Regula-
tions, Part 10, an attorney, certified
public accountant, enrolled agent or en-
rolled actuary, in order to avoid the in-
stitution or conclusion of a proceeding
for his disbarment or suspension from
practice before the Internal Revenue
Service, may offer his consent to
suspension from such practice. The
Director of Practice, in his discretion,
may suspend an attorney, certified
public accountant, enrolled agent or
enrolled actuary in accordance with the
consent offered.
Attorneys, certified public account-
ants, enrolled agents and enrolled actu-
aries are prohibited in any Internal
Revenue Service matter from directly
or indirectly employing, accepting
assistance from, being employed by,
or sharing fees with, any practi-
tioner disbarred or suspended from
practice before the Internal Revenue
Service.
To enable attorneys, certified public
accountants, enrolled agents and en-
rolled actuaries to identify practitioners
under consent suspension from practice
before the Internal Revenue Service,
the Director of Practice will announce
in the Internal Revenue Bulletin the
names and addresses of practitioners
who have been suspended from such
practice, their designation as attor-
ney, certified public accountant, en-
rolled agent or enrolled actuary and
date or period of suspension. This an-
nouncement will appear in the weekly
Bulletin at the earliest practicable date
after such action and will continue to
appear in the weekly Bulletins for five
successive weeks or for as many weeks
as is practicable for each attorney,
certified public accountant, enrolled
agent or enrolled actuary so suspended
and will be consolidated and published
in the Cumulative Bulletin.
The following individuals have been
placed under consent suspension from
practice before the Internal Revenue
Service:
NameAddressDesignationDate of Suspension
Miller, Gorden A.Mineral Wells, WVCPAFebruary 1, 1996 to April 30, 1996
Barnes, Charles E.Louisville, KYEnrolled
Agent
Indefinite from February 1, 1996
Polizzi, Angelo J.Grosse Point, MIAttorneyIndefinite from February 6, 1996
Pegler, Charles R.Islandia, NYCPAIndefinite from February 7, 1996
Foster, David M.Birmingham, MIAttorneyIndefinite from February 9, 1996
Smith, Jerry A.Evansville, INCPAFebruary 9, 1996 to November 8, 1996
Penn, Michael J.Dearborn, MICPAFebruary 9, 1996 to February 8, 1997
Mueller, E. LairdSeal Beach, CACPAFebruary 12, 1996 to June 11, 1996
Zezima, Paul P.Norwalk, CTCPAApril 1, 1996 to May 31, 1996
Van Houten, Robert R.Danbury, CTCPAMay 1, 1996 to April 30, 1997
Under Section 330, Title 31 of the
United States Code, the Secretary of
the Treasury, after due notice and
opportunity for hearing, is authorized
to suspend or disbar from practice
before the Internal Revenue Service
any person who has violated the rules
and regulations governing the recogni-
tion of attorneys, certified public ac-
countants, enrolled agents or enrolled
actuaries to practice before the Internal
Revenue Service.
Attorneys, certified public account-
ants, enrolled agents, and enrolled
actuaries are prohibited in any Internal
Revenue Service matter from directly
or indirectly employing, accepting as-
sistance from, being employed by or
sharing fees with, any practitioner
disbarred or under suspension from
practice before the Internal Revenue
Service.
To enable attorneys, certified public
accountants, enrolled agents and
enrolled actuaries to identify such
disbarred or suspended practitioners,
the Director of Practice will announce
in the Internal Revenue Bulletin the
names and addresses of practitioners
who have been suspended from such
practice, their designation as attorney,
certified public accountant, enrolled
agent or enrolled actuary, and the date
of disbarment or period of suspension.
This announcement will appear in the
weekly Bulletin for five successive
weeks or as long as it is practicable for
each attorney, certified public account-
ant, enrolled agent or enrolled actuary
so suspended or disbarred and will be
consolidated and published in the
Cumulative Bulletin.
After due notice and opportunity
for hearing before an administrative
law judge, the following individuals
have been disbarred from further prac-
tice before the Internal Revenue
Service:

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52
NameAddressDesignationEffective Date
Gimbel, StephenColumbia, SCCPAJanuary 20, 1996
Tropsa, Donna C.Stamford, CTAttorneyJanuary 20, 1996
Seifert, Frank J.Birmingham, ALCPAJanuary 20, 1996
Hansen, Joe B.Lubbock, TXCPAMarch 2, 1996
Announcement of the Expedited Suspension of Attorneys, Certified Public
Accountants, Enrolled Agents, and Enrolled Actuaries From Practice Before the
Internal Revenue Service
Under title 31 of the Code of Federal
Regulations, section 10.76, the Director
of Practice is authorized to immediately
suspend from practice before the Inter-
nal Revenue Service any practitioner
who, within five years, from the date
the expedited proceeding is instituted,
(1) has had a license to practice as an
attorney, certified public accountant, or
actuary suspended or revoked for
cause; or (2) has been convicted of any
crime under title 26 of the United
States Code or, of a felony under title
18 of the United States Code involving
dishonesty or breach of trust.
Attorneys, certified public account-
ants, enrolled agents, and enrolled ac-
tuaries are prohibited in any Internal
Revenue Service matter from directly
or indirectly employing, accepting as-
sistance from, being employed by, or
sharing fees with, any practitioner
disbarred or suspended from practice
before the Internal Revenue Service.
To enable attorneys, certified public
accountants, enrolled agents, and en-
rolled actuaries to identify practitioners
under expedited suspension from prac-
tice before the Internal Revenue Serv-
ice, the Director of Practice will an-
nounce in the Internal Revenue Bulletin
the names and addresses of practition-
ers who have been suspended from such
practice, their designation as attorney,
certified public accountant, enrolled
agent, or enrolled actuary, and date or
period of suspension. This announce-
ment will appear in the weekly Bulletin
at the earliest practicable date after
such action and will continue to appear
in the weekly Bulletins for five succes-
sive weeks or for as many weeks as is
practicable for each attorney, certified
public accountant, enrolled agent, or
enrolled actuary so suspended and will
be consolidated and published in the
Cumulative Bulletin.
The following individuals have been
placed under suspension from practice
before the Internal Revenue Service by
virtue of the expedited proceeding
provisions of the applicable regulations:
NameAddressDesignationDate of Suspension
Ginsberg, Melvin R.Univ. Heights, OHAttorneyIndefinite from January 24, 1996
Lahey, Charles W.South Bend, INAttorneyIndefinite from January 24, 1996
DePiano, RobertVenice, CAAttorneyIndefinite from January 24, 1996
Kraig, Jerry B.Shaker Hgts, OHAttorneyIndefinite from January 29, 1996
Brown, David M.Los Angeles, CAAttorneyIndefinite from January 29, 1996
Hanke Jr., Dale L.Duluth, MNAttorneyIndefinite from February 1, 1996
Guillory, Patrick R.San Francisco, CAAttorneyIndefinite from February 1, 1996
Miller, Brian R.Grove, OKCPAIndefinite from February 23, 1996
McLeod, Timothy R.Saginaw, MIAttorneyIndefinite from February 26, 1996
Simone, Robert F.Philadelphia, PAAttorneyIndefinite from February 26, 1996
Bowen, David LeeFrisco City, ALCPAIndefinite from February 27, 1996
Lindley, ClarksonWayazata, MNAttorneyIndefinite from February 27, 1996

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Definition of Terms
Revenue rulings and revenue proce-
dures (hereinafter referred to as ‘‘rul-
ings’’) that have an effect on previous
rulings use the following defined terms
to describe the effect:
Amplified describes a situation where
no change is being made in a prior
published position, but the prior posi-
tion is being extended to apply to a
variation of the fact situation set forth
therein. Thus, if an earlier ruling held
that a principle applied to A, and the
new ruling holds that the same princi-
ple also applies to B, the earlier ruling
is amplified. (Compare with modified,
below).
Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in
a prior ruling is being changed.
Distinguished describes a situation
where a ruling mentions a previously
published ruling and points out an
essential difference between them.
Modified is used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to A but
not to B, and the new ruling holds that
it applies to both A and B, the prior
ruling is modified because it corrects a
published position. (Compare with am-
plified and clarified, above).
Obsoleted describes a previously
published ruling that is not considered
determinative with respect to future
transactions. This term is most com-
monly used in a ruling that lists
previously published rulings that are
obsoleted because of changes in law or
regulations. A ruling may also be
obsoleted because the substance has
been included in regulations subse-
quently adopted.
Revoked describes situations where
the position in the previously published
ruling is not correct and the correct
position is being stated in the new
ruling.
Superseded describes a situation
where the new ruling does nothing
more than restate the substance and
situation of a previously published
ruling (or rulings). Thus, the term is
used to republish under the 1986 Code
and regulations the same position pub-
lished under the 1939 Code and regula-
tions. The term is also used when it is
desired to republish in a single ruling a
series of situations, names, etc., that
were previously published over a
period of time in separate rulings.
If the new ruling does more than
restate the substance of a prior ruling, a
combination of terms is used. For
example, modified and superseded de-
scribes a situation where the substance
of a previously published ruling is
being changed in part and is continued
without change in part and it is desired
to restate the valid portion of the
previously published ruling in a new
ruling that is self contained. In this
case the previously published ruling is
first modified and then, as modified, is
superseded.
Supplemented is used in situations in
which a list, such as a list of the names
of countries, is published in a ruling
and that list is expanded by adding
further names in subsequent rulings.
After the original ruling has been
supplemented several times, a new
ruling may be published that includes
the list in the original ruling and the
additions, and supersedes all prior
rulings in the series.
Suspended is used in rare situations
to show that the previous published
rulings will not be applied pending
some future action such as the issuance
of new or amended regulations, the
outcome of cases in litigation, or the
outcome of a Service study.
Abbreviations
The following abbreviations in current use and
formerly used will appear in material published
in the Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C.—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contribution Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign Corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.

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Numerical Finding List
1
Bulletins 1996–1 through 1996–15
Announcements:
96–1, 1996–2 I.R.B. 57
96–2, 1996–2 I.R.B. 57
96–3, 1996–2 I.R.B. 57
96–4, 1996–3 I.R.B. 50
96–5, 1996–4 I.R.B. 99
96–6, 1996–5 I.R.B. 43
96–7, 1996–5 I.R.B. 44
96–8, 1996–7 I.R.B. 56
96–9, 1996–8 I.R.B. 30
96–10, 1996–8 I.R.B. 30
96–11, 1996–9 I.R.B. 11
96–12, 1996–11 I.R.B. 30
96–13, 1996–12 I.R.B. 33
96–14, 1996–12 I.R.B. 35
96–15, 1996–11 I.R.B. 9
96–16, 1996–13 I.R.B. 22
96–17, 1996–13 I.R.B. 22
96–18, 1996–15 I.R.B. 15
96–19, 1996–15 I.R.B. 15
96–20, 1996–15 I.R.B. 15
96–21, 1996–15 I.R.B. 15
96–22, 1996–15 I.R.B. 16
Delegations Orders:
232 (Rev. 2), 1996–7 I.R.B. 49
239 (Rev. 1), 1996–7 I.R.B. 49
Notices:
96–2, 1996–2 I.R.B. 15
96–1, 1996–3 I.R.B. 30
96–4, 1996–4 I.R.B. 69
96–5, 1996–6 I.R.B. 22
96–6, 1996–5 I.R.B. 27
96–7, 1996–6 I.R.B. 22
96–8, 1996–6 I.R.B. 23
96–9, 1996–6 I.R.B. 26
96–10, 1996–7 I.R.B. 47
96–11, 1996–8 I.R.B. 19
96–12, 1996–10 I.R.B. 29
96–13, 1996–10 I.R.B. 29
96–14, 1996–12 I.R.B. 11
96–15, 1996–13 I.R.B. 19
96–16, 1996–13 I.R.B. 20
96–17, 1996–13 I.R.B. 20
96–18, 1996–14 I.R.B. 27
96–19, 1996–14 I.R.B. 28
96–20, 1996–14 I.R.B. 30
96–21, 1996–14 I.R.B. 30
96–22, 1996–14 I.R.B. 30
Proposed Regulations:
DL–1–95, 1996–6 I.R.B. 28
1
A cumulative list of all Revenue Rulings,
Revenue Procedures, Treasury Decisions, etc.,
published in Internal Revenue Bulletins 1995–27
through 1995–52 will be found in Internal
Revenue Bulletin 1996–1, dated January 2, 1996.
Proposed Regulations—Continued
EE–20–95, 1996–5 I.R.B. 15
EE–34–95, 1996–3 I.R.B. 49
EE–35–95, 1996–5 I.R.B. 19
EE–53–95, 1996–5 I.R.B. 23
EE–55–95, 1996–12 I.R.B. 12
EE–106–82, 1996–10 I.R.B. 31
EE–142–87, 1996–12 I.R.B. 13
EE–148–81, 1996–11 I.R.B. 29
IA–33–95, 1996–4 I.R.B. 99
IA–41–93, 1996–11 I.R.B. 29
INTL–3–95, 1996–6 I.R.B. 29
INTL–9–95, 1996–5 I.R.B. 25
INTL–54–95, 1996–14 I.R.B. 39
PS–2–95, 1996–7 I.R.B. 50
Revenue Procedures:
96–1, 1996–1 I.R.B. 8
96–2, 1996–1 I.R.B. 60
96–3, 1996–1 I.R.B. 82
96–4, 1996–1 I.R.B. 94
96–5, 1996–1 I.R.B. 129
96–6, 1996–1 I.R.B. 151
96–7, 1996–1 I.R.B. 185
96–8, 1996–1 I.R.B. 187
96–8A, 1996–9 I.R.B. 10
96–9, 1996–2 I.R.B. 15
96–10, 1996–2 I.R.B. 17
96–11, 1996–2 I.R.B. 18
96–12, 1996–3 I.R.B. 30
96–13, 1996–3 I.R.B. 31
96–14, 1996–3 I.R.B. 41
96–15, 1996–3 I.R.B. 41
96–16, 1996–3 I.R.B. 45
96–17, 1996–4 I.R.B. 69
96–18, 1996–4 I.R.B. 73
96–19, 1996–4 I.R.B. 80
96–20, 1996–4 I.R.B. 88
96–21, 1996–4 I.R.B. 96
96–22, 1996–5 I.R.B. 27
96–23, 1996–5 I.R.B. 27
96–24, 1996–5 I.R.B. 28
96–24A, 1996–15 I.R.B. 12
96–25, 1996–8 I.R.B. 19
96–26, 1996–8 I.R.B. 22
96–27, 1996–11 I.R.B. 27
96–28, 1996–14 I.R.B. 31
Revenue Rulings:
96–1, 1996–1 I.R.B. 7
96–2, 1996–2 I.R.B. 5
96–3, 1996–2 I.R.B. 14
96–6, 1996–2 I.R.B. 8
96–4, 1996–3 I.R.B. 16
96–5, 1996–3 I.R.B. 29
96–7, 1996–3 I.R.B. 12
96–8, 1996–4 I.R.B. 62
Revenue Rulings—Continued
96–9, 1996–4 I.R.B. 5
96–10, 1996–4 I.R.B. 27
96–11, 1996–4 I.R.B. 28
96–12, 1996–9 I.R.B. 4
96–13, 1996–10 I.R.B. 19
96–14, 1996–6 I.R.B. 20
96–15, 1996–11 I.R.B. 9
96–16, 1996–11 I.R.B. 4
96–17, 1996–13 I.R.B. 5
96–18, 1996–13 I.R.B. 4
96–19, 1996–14 I.R.B. 24
96–20, 1996–15 I.R.B. 5
96–21, 1996–15 I.R.B. 7
96–22, 1996–15 I.R.B. 9
96–23, 1996–15 I.R.B. 11
Treasury Decisions:
8630, 1996–3 I.R.B. 19
8631, 1996–3 I.R.B. 7
8632, 1996–4 I.R.B. 6
8633, 1996–4 I.R.B. 20
8634, 1996–3 I.R.B. 17
8635, 1996–3 I.R.B. 5
8636, 1996–4 I.R.B. 64
8637, 1996–4 I.R.B. 29
8638, 1996–5 I.R.B. 5
8639, 1996–5 I.R.B. 12
8640, 1996–2 I.R.B. 10
8641, 1996–6 I.R.B. 4
8642, 1996–7 I.R.B. 4
8643, 1996–11 I.R.B. 4
8644, 1996–7 I.R.B. 16
8645, 1996–8 I.R.B. 4
8646, 1996–8 I.R.B. 10
8647, 1996–9 I.R.B. 7
8648, 1996–10 I.R.B. 23
8649, 1996–9 I.R.B. 5
8650, 1996–10 I.R.B. 5
8651, 1996–11 I.R.B. 24
8652, 1996–11 I.R.B. 11
8653, 1996–12 I.R.B. 4
8654, 1996–11 I.R.B. 14
8655, 1996–12 I.R.B. 9
8656, 1996–13 I.R.B. 9
8657, 1996–14 I.R.B. 4
8658, 1996–14 I.R.B. 13