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1040 1. 1040   Fuel Taxes Table of Contents Definitions Information Returns Registration RequirementsAdditional information. 1040 Gasoline and Aviation GasolineTaxable Events Gasoline Blendstocks Diesel Fuel and KeroseneTaxable Events Dyed Diesel Fuel and Dyed Kerosene Alaska and Feedstocks Back-up Tax Diesel-Water Fuel Emulsion Kerosene for Use in AviationTaxable Events Liability For Tax Surtax on any liquid used in a fractional ownership program aircraft as fuel Certificate for Commercial Aviation and Exempt UsesExempt use. 1040 Reseller statement. 1040 Other Fuels (Including Alternative Fuels)Taxable Events Compressed Natural Gas (CNG)Taxable Events Fuels Used on Inland WaterwaysFishing vessels. 1040 Deep-draft ocean-going vessels. 1040 Passenger vessels. 1040 Ocean-going barges. 1040 State or local governments. 1040 Cellulosic or Second Generation Biofuel Not Used as Fuel Biodiesel Sold as But Not Used as Fuel Definitions Excise taxes are imposed on all the following fuels. 1040 Gasoline, including aviation gasoline and gasoline blendstocks. 1040 Diesel fuel, including dyed diesel fuel. 1040 Diesel-water fuel emulsion. 1040 Kerosene, including dyed kerosene and kerosene used in aviation. 1040 Other Fuels (including alternative fuels). 1040 Compressed natural gas (CNG). 1040 Fuels used in commercial transportation on inland waterways. 1040 Any liquid used in a fractional ownership program aircraft as fuel. 1040 The following terms are used throughout the discussion of fuel taxes. 1040 Other terms are defined in the discussion of the specific fuels to which they pertain. 1040 Agri-biodiesel. 1040   Agri-biodiesel means biodiesel derived solely from virgin oils, including esters derived from virgin vegetable oils from corn, soybeans, sunflower seeds, cottonseeds, canola, crambe, rapeseeds, safflowers, flaxseeds, rice bran, mustard seeds, and camelina, and from animal fats. 1040 Approved terminal or refinery. 1040   This is a terminal operated by a registrant that is a terminal operator or a refinery operated by a registrant that is a refiner. 1040 Biodiesel. 1040   Biodiesel means the monoalkyl esters of long chain fatty acids derived from plant or animal matter that meet the registration requirements for fuels and fuel additives established by the Environmental Protection Agency (EPA) under section 211 of the Clean Air Act, and the requirements of the American Society of Testing Materials (ASTM) D6751. 1040 Blended taxable fuel. 1040   This means any taxable fuel produced outside the bulk transfer/terminal system by mixing taxable fuel on which excise tax has been imposed and any other liquid on which excise tax has not been imposed. 1040 This does not include a mixture removed or sold during the calendar quarter if all such mixtures removed or sold by the blender contain less than 400 gallons of a liquid on which the tax has not been imposed. 1040 Blender. 1040   This is the person that produces blended taxable fuel. 1040 Bulk transfer. 1040   This is the transfer of taxable fuel by pipeline or vessel. 1040 Bulk transfer/terminal system. 1040   This is the taxable fuel distribution system consisting of refineries, pipelines, vessels, and terminals. 1040 Fuel in the supply tank of any engine, or in any tank car, railcar, trailer, truck, or other equipment suitable for ground transportation is not in the bulk transfer/terminal system. 1040 Cellulosic biofuel. 1040   Cellulosic biofuel means any liquid fuel produced from any lignocellulosic or hemicellulosic matter that is available on a renewable or recurring basis that meets the registration requirements for fuels and fuel additives established by the EPA under section 211 of the Clean Air Act. 1040 Cellulosic biofuel does not include any alcohol with a proof of less than 150 (without regard to denaturants). 1040 For fuels sold or used after December 31, 2009, cellulosic biofuel does not include fuel of which more than 4% (determined by weight) is any combination of water and sediment, fuel of which the ash content is more than 1%, or fuel that has an acid number greater than 25. 1040 Also see Second generation biofuel below. 1040 Diesel-water fuel emulsion. 1040   A diesel-water fuel emulsion means an emulsion at least 14% of which is water. 1040 The emulsion additive used to produce the fuel must be registered by a United States manufacturer with the EPA under section 211 of the Clean Air Act as in effect on March 31, 2003. 1040 Dry lease aircraft exchange. 1040   See later, under Surtax on any liquid used in a fractional ownership program aircraft as fuel. 1040 Enterer. 1040   This is the importer of record (under customs law) for the taxable fuel. 1040 However, if the importer of record is acting as an agent, such as a customs broker, the person for whom the agent is acting is the enterer. 1040 If there is no importer of record, the owner at the time of entry into the United States is the enterer. 1040 Entry. 1040   Taxable fuel is entered into the United States when it is brought into the United States and applicable customs law requires that it be entered for consumption, use, or warehousing. 1040 This does not apply to fuel brought into Puerto Rico (which is part of the U. 1040 S. 1040 customs territory), but does apply to fuel brought into the United States from Puerto Rico. 1040 Fractional ownership aircraft program and fractional program aircraft. 1040   See later, under Surtax on any liquid used in a fractional ownership program aircraft as fuel. 1040 Measurement of taxable fuel. 1040   Volumes of taxable fuel can be measured on the basis of actual volumetric gallons or gallons adjusted to 60 degrees Fahrenheit. 1040 Other fuels. 1040   See Other Fuels (Including Alternative Fuels), later, and Alternative Fuel Credit and Alternative Fuel Mixture Credit in chapter 2. 1040 Pipeline operator. 1040   This is the person that operates a pipeline within the bulk transfer/terminal system. 1040 Position holder. 1040   This is the person that holds the inventory position in the taxable fuel in the terminal, as reflected in the records of the terminal operator. 1040 You hold the inventory position when you have a contractual agreement with the terminal operator for the use of the storage facilities and terminaling services for the taxable fuel. 1040 A terminal operator that owns taxable fuel in its terminal is a position holder. 1040 Rack. 1040   This is a mechanism capable of delivering fuel into a means of transport other than a pipeline or vessel. 1040 Refiner. 1040   This is any person that owns, operates, or otherwise controls a refinery. 1040 Refinery. 1040   This is a facility used to produce taxable fuel and from which taxable fuel may be removed by pipeline, by vessel, or at a rack. 1040 However, this term does not include a facility where only blended fuel, and no other type of fuel, is produced. 1040 For this purpose, blended fuel is any mixture that would be blended taxable fuel if produced outside the bulk transfer/terminal system. 1040 Registrant. 1040   This is a taxable fuel registrant (see Registration Requirements, later). 1040 Removal. 1040   This is any physical transfer of taxable fuel. 1040 It also means any use of taxable fuel other than as a material in the production of taxable fuel or Other Fuels. 1040 However, taxable fuel is not removed when it evaporates or is otherwise lost or destroyed. 1040 Renewable diesel. 1040   See Renewable Diesel Credits in chapter 2. 1040 Sale. 1040   For taxable fuel not in a terminal, this is the transfer of title to, or substantial incidents of ownership in, taxable fuel to the buyer for money, services, or other property. 1040 For taxable fuel in a terminal, this is the transfer of the inventory position if the transferee becomes the position holder for that taxable fuel. 1040 Second generation biofuel. 1040   This is any liquid fuel derived by, or from, qualified feedstocks, and meets the registration requirements for fuels and fuel additives established by the Environmental Protection Agency under section 211 of the Clean Air Act (42 U. 1040 S. 1040 C. 1040 7545). 1040 It also includes certain liquid fuel which is derived by, or from, any cultivated algae, cyanobacteria, or lemna. 1040 It is not alcohol of less than 150 proof (disregard any added denaturants). 1040 See Form 6478 for more information. 1040 State. 1040   This includes any state, any of its political subdivisions, the District of Columbia, and the American Red Cross. 1040 An Indian tribal government is treated as a state only if transactions involve the exercise of an essential tribal government function. 1040 Taxable fuel. 1040   This means gasoline, diesel fuel, and kerosene. 1040 Terminal. 1040   This is a storage and distribution facility supplied by pipeline or vessel, and from which taxable fuel may be removed at a rack. 1040 It does not include a facility at which gasoline blendstocks are used in the manufacture of products other than finished gasoline if no gasoline is removed from the facility. 1040 A terminal does not include any facility where finished gasoline, diesel fuel, or kerosene is stored if the facility is operated by a registrant and all such taxable fuel stored at the facility has been previously taxed upon removal from a refinery or terminal. 1040 Terminal operator. 1040   This is any person that owns, operates, or otherwise controls a terminal. 1040 Throughputter. 1040   This is any person that is a position holder or that owns taxable fuel within the bulk transfer/terminal system (other than in a terminal). 1040 Vessel operator. 1040   This is the person that operates a vessel within the bulk transfer/terminal system. 1040 However, vessel does not include a deep draft ocean-going vessel. 1040 Information Returns Form 720-TO and Form 720-CS are information returns used to report monthly receipts and disbursements of liquid products. 1040 A liquid product is any liquid transported into storage at a terminal or delivered out of a terminal. 1040 For a list of products, see the product code table in the Instructions for Forms 720-TO and 720-CS. 1040 The returns are due the last day of the month following the month in which the transaction occurs. 1040 Generally, these returns can be filed on paper or electronically. 1040 For information on filing electronically, see Publication 3536, Motor Fuel Excise Tax EDI Guide. 1040 Publication 3536 is only available on the IRS website. 1040 Form 720-TO. 1040   This information return is used by terminal operators to report receipts and disbursements of all liquid products to and from all approved terminals. 1040 Each terminal operator must file a separate form for each approved terminal. 1040 Form 720-CS. 1040   This information return must be filed by bulk transport carriers (barges, vessels, and pipelines) who receive liquid product from an approved terminal or deliver liquid product to an approved terminal. 1040 Registration Requirements The following discussion applies to excise tax registration requirements for activities relating to fuels only. 1040 See Form 637 for other persons who must register and for more information about registration. 1040 Persons that are required to be registered. 1040   You are required to be registered if you are a: Blender; Enterer; Pipeline operator; Position holder; Refiner; Terminal operator; Vessel operator; Producer or importer of alcohol, biodiesel, agri-biodiesel, and renewable diesel; or Producer of cellulosic or second generation biofuel. 1040 Persons that may register. 1040   You may, but are not required to, register if you are a: Feedstock user, Industrial user, Throughputter that is not a position holder, Ultimate vendor, Diesel-water fuel emulsion producer, Credit card issuer, or Alternative fuel claimant. 1040 Ultimate vendors, credit card issuers, and alternative fuel claimants do not need to be registered to buy or sell fuel. 1040 However, they must be registered to file claims for certain sales and uses of fuel. 1040 See Form 637 for more information. 1040 Taxable fuel registrant. 1040   This is an enterer, an industrial user, a refiner, a terminal operator, or a throughputter who received a Letter of Registration under the excise tax registration provisions and whose registration has not been revoked or suspended. 1040 The term registrant as used in the discussions of these fuels means a taxable fuel registrant. 1040 Additional information. 1040   See the Form 637 instructions for the information you must submit when you apply for registration. 1040 Failure to register. 1040   The penalty for failure to register if you must register, unless due to reasonable cause, is $10,000 for the initial failure, and then $1,000 each day thereafter you fail to register. 1040 Gasoline and Aviation Gasoline Gasoline. 1040   Gasoline means all products commonly or commercially known or sold as gasoline with an octane rating of 75 or more that are suitable for use as a motor fuel. 1040 Gasoline includes any gasoline blend other than: Qualified ethanol and methanol fuel (at least 85 percent of the blend consists of alcohol produced from coal, including peat), Partially exempt ethanol and methanol fuel (at least 85 percent of the blend consists of alcohol produced from natural gas), or Denatured alcohol. 1040 Gasoline also includes gasoline blendstocks, discussed later. 1040 Aviation gasoline. 1040   This means all special grades of gasoline suitable for use in aviation reciprocating engines and covered by ASTM specification D910 or military specification MIL-G-5572. 1040 Taxable Events The tax on gasoline is $. 1040 184 per gallon. 1040 The tax on aviation gasoline is $. 1040 194 per gallon. 1040 When used in a fractional ownership program aircraft, gasoline also is subject to a surtax of $. 1040 141 per gallon. 1040 See Surtax on any liquid used in a fractional ownership program aircraft as fuel, later. 1040 Tax is imposed on the removal, entry, or sale of gasoline. 1040 Each of these events is discussed later. 1040 Also, see the special rules that apply to gasoline blendstocks, later. 1040 If the tax is paid on the gasoline in more than one event, a refund may be allowed for the “second” tax paid. 1040 See Refunds of Second Tax in chapter 2. 1040 Removal from terminal. 1040   All removals of gasoline at a terminal rack are taxable. 1040 The position holder for that gasoline is liable for the tax. 1040 Two-party exchanges. 1040   In a two-party exchange, the receiving person, not the delivering person, is liable for the tax imposed on the removal of taxable fuel from the terminal at the terminal rack. 1040 A two-party exchange means a transaction (other than a sale) where the delivering person and receiving person are both taxable fuel registrants and all of the following apply. 1040 The transaction includes a transfer from the delivering person, who holds the inventory position for the taxable fuel in the terminal as reflected in the records of the terminal operator. 1040 The exchange transaction occurs before or at the same time as removal across the rack by the receiving person. 1040 The terminal operator in its records treats the receiving person as the person that removes the product across the terminal rack for purposes of reporting the transaction on Form 720-TO. 1040 The transaction is subject to a written contract. 1040 Terminal operator's liability. 1040   The terminal operator is jointly and severally liable for the tax if the position holder is a person other than the terminal operator and is not a registrant. 1040   However, a terminal operator meeting all the following conditions at the time of the removal will not be liable for the tax. 1040 The terminal operator is a registrant. 1040 The terminal operator has an unexpired notification certificate (discussed later) from the position holder. 1040 The terminal operator has no reason to believe any information on the certificate is false. 1040 Removal from refinery. 1040   The removal of gasoline from a refinery is taxable if the removal meets either of the following conditions. 1040 It is made by bulk transfer and the refiner, the owner of the gasoline immediately before the removal, or the operator of the pipeline or vessel is not a registrant. 1040 It is made at the refinery rack. 1040 The refiner is liable for the tax. 1040 Exception. 1040   The tax does not apply to a removal of gasoline at the refinery rack if all the following requirements are met. 1040 The gasoline is removed from an approved refinery not served by pipeline (other than for receiving crude oil) or vessel. 1040 The gasoline is received at a facility operated by a registrant and located within the bulk transfer/terminal system. 1040 The removal from the refinery is by railcar. 1040 The same person operates the refinery and the facility at which the gasoline is received. 1040 Entry into the United States. 1040   The entry of gasoline into the United States is taxable if the entry meets either of the following conditions. 1040 It is made by bulk transfer and the enterer or the operator of the pipeline or vessel is not a registrant. 1040 It is not made by bulk transfer. 1040 The enterer is liable for the tax. 1040 Importer of record's liability. 1040   The importer of record is jointly and severally liable for the tax with the enterer if the importer of record is not the enterer of the taxable fuel and the enterer is not a taxable fuel registrant. 1040   However, an importer of record meeting both of the following conditions at the time of the entry will not be liable for the tax. 1040 The importer of record has an unexpired notification certificate (discussed later) from the enterer. 1040 The importer of record has no reason to believe any information in the certificate is false. 1040 Customs bond. 1040   The customs bond will not be charged for the tax imposed on the entry of the gasoline if at the time of entry the surety has an unexpired notification certificate from the enterer and has no reason to believe any information in the certificate is false. 1040 Removal from a terminal by unregistered position holder or unregistered pipeline or vessel operator. 1040   The removal by bulk transfer of gasoline from a terminal is taxable if the position holder for the gasoline or the operator of the pipeline or vessel is not a registrant. 1040 The position holder is liable for the tax. 1040 The terminal operator is jointly and severally liable for the tax if the position holder is a person other than the terminal operator. 1040 However, see Terminal operator's liability under Removal from terminal, earlier, for an exception. 1040 Bulk transfers not received at approved terminal or refinery. 1040   The removal by bulk transfer of gasoline from a terminal or refinery, or the entry of gasoline by bulk transfer into the United States, is taxable if the following conditions apply. 1040 No tax was previously imposed (as discussed earlier) on any of the following events. 1040 The removal from the refinery. 1040 The entry into the United States. 1040 The removal from a terminal by an unregistered position holder. 1040 Upon removal from the pipeline or vessel, the gasoline is not received at an approved terminal or refinery (or at another pipeline or vessel). 1040   The owner of the gasoline when it is removed from the pipeline or vessel is liable for the tax. 1040 However, an owner meeting all the following conditions at the time of the removal will not be liable for the tax. 1040 The owner is a registrant. 1040 The owner has an unexpired notification certificate (discussed later) from the operator of the terminal or refinery where the gasoline is received. 1040 The owner has no reason to believe any information on the certificate is false. 1040 The operator of the facility where the gasoline is received is liable for the tax if the owner meets these conditions. 1040 The operator is jointly and severally liable if the owner does not meet these conditions. 1040 Sales to unregistered person. 1040   The sale of gasoline located within the bulk transfer/terminal system to a person that is not a registrant is taxable if tax was not previously imposed under any of the events discussed earlier. 1040   The seller is liable for the tax. 1040 However, a seller meeting all the following conditions at the time of the sale will not be liable for the tax. 1040   The seller is a registrant. 1040 The seller has an unexpired notification certificate (discussed later) from the buyer. 1040 The seller has no reason to believe any information on the certificate is false. 1040 The buyer of the gasoline is liable for the tax if the seller meets these conditions. 1040 The buyer is jointly and severally liable if the seller does not meet these conditions. 1040 Exception. 1040   The tax does not apply to a sale if all of the following apply. 1040 The buyer's principal place of business is not in the United States. 1040 The sale occurs as the fuel is delivered into a transport vessel with a capacity of at least 20,000 barrels of fuel. 1040 The seller is a registrant and the exporter of record. 1040 The fuel was exported. 1040 Removal or sale of blended gasoline. 1040   The removal or sale of blended gasoline by the blender is taxable. 1040 See Blended taxable fuel under Definitions, earlier. 1040   The blender is liable for the tax. 1040 The tax is figured on the number of gallons not previously subject to the tax on gasoline. 1040   Persons who blend alcohol with gasoline to produce an alcohol fuel mixture outside the bulk transfer/terminal system must pay the gasoline tax on the volume of alcohol in the mixture. 1040 See Form 720 to report this tax. 1040 You also must be registered with the IRS as a blender. 1040 See Form 637. 1040   However, if an untaxed liquid is sold as taxed taxable fuel and that untaxed liquid is used to produce blended taxable fuel, the person that sold the untaxed liquid is jointly and severally liable for the tax imposed on the blender's sale or removal of the blended taxable fuel. 1040 Notification certificate. 1040   The notification certificate is used to notify a person of the registration status of the registrant. 1040 A copy of the registrant's letter of registration cannot be used as a notification certificate. 1040 A model notification certificate is shown in the Appendix as Model Certificate C. 1040 A notification certificate must contain all information necessary to complete the model. 1040   The certificate may be included as part of any business records normally used for a sale. 1040 A certificate expires on the earlier of the date the registrant provides a new certificate, or the date the recipient of the certificate is notified that the registrant's registration has been revoked or suspended. 1040 The registrant must provide a new certificate if any information on a certificate has changed. 1040 Additional persons liable. 1040   When the person liable for the tax willfully fails to pay the tax, joint and several liability for the tax is imposed on: Any officer, employee, or agent of the person who is under a duty to ensure the payment of the tax and who willfully fails to perform that duty, or Anyone who willfully causes the person to fail to pay the tax. 1040 Gasoline Blendstocks Gasoline blendstocks may be subject to $. 1040 001 per gallon LUST tax as discussed below. 1040 Gasoline includes gasoline blendstocks. 1040 The previous discussions apply to these blendstocks. 1040 However, if certain conditions are met, the removal, entry, or sale of gasoline blendstocks are taxed at $. 1040 001 per gallon or are not subject to the excise tax. 1040 Blendstocks. 1040   Gasoline blendstocks are: Alkylate, Butane, Butene, Catalytically cracked gasoline, Coker gasoline, Ethyl tertiary butyl ether (ETBE), Hexane, Hydrocrackate, Isomerate, Methyl tertiary butyl ether (MTBE), Mixed xylene (not including any separated isomer of xylene), Natural gasoline, Pentane, Pentane mixture, Polymer gasoline, Raffinate, Reformate, Straight-run gasoline, Straight-run naphtha, Tertiary amyl methyl ether (TAME), Tertiary butyl alcohol (gasoline grade) (TBA), Thermally cracked gasoline, and Toluene. 1040   However, gasoline blendstocks do not include any product that cannot be used without further processing in the production of finished gasoline. 1040 Not used to produce finished gasoline. 1040   Gasoline blendstocks not used to produce finished gasoline are not taxable (other than LUST) if the following conditions are met. 1040 Removals and entries not connected to sale. 1040   Nonbulk removals and entries are not taxable if the person otherwise liable for the tax (position holder, refiner, or enterer) is a registrant. 1040 Removals and entries connected to sale. 1040   Nonbulk removals and entries are not taxable if the person otherwise liable for the tax (position holder, refiner, or enterer) is a registrant, and at the time of the sale, meets the following requirements. 1040 The person has an unexpired certificate (discussed later) from the buyer. 1040 The person has no reason to believe any information in the certificate is false. 1040 Sales after removal or entry. 1040   The sale of a gasoline blendstock that was not subject to tax on its nonbulk removal or entry, as discussed earlier, is taxable. 1040 The seller is liable for the tax. 1040 However, the sale is not taxable if, at the time of the sale, the seller meets the following requirements. 1040 The seller has an unexpired certificate (discussed next) from the buyer. 1040 The seller has no reason to believe any information in the certificate is false. 1040 Certificate of buyer. 1040   The certificate from the buyer certifies the gasoline blendstocks will not be used to produce finished gasoline. 1040 The certificate may be included as part of any business records normally used for a sale. 1040 A model certificate is shown in the Appendix as Model Certificate D. 1040 The certificate must contain all information necessary to complete the model. 1040   A certificate expires on the earliest of the following dates. 1040 The date 1 year after the effective date (not earlier than the date signed) of the certificate. 1040 The date a new certificate is provided to the seller. 1040 The date the seller is notified that the buyer's right to provide a certificate has been withdrawn. 1040 The buyer must provide a new certificate if any information on a certificate has changed. 1040   The IRS may withdraw the buyer's right to provide a certificate if that buyer uses the gasoline blendstocks in the production of finished gasoline or resells the blendstocks without getting a certificate from its buyer. 1040 Received at approved terminal or refinery. 1040   The nonbulk removal or entry of gasoline blendstocks received at an approved terminal or refinery is not taxable if the person otherwise liable for the tax (position holder, refiner, or enterer) meets all the following requirements. 1040 The person is a registrant. 1040 The person has an unexpired notification certificate (discussed earlier) from the operator of the terminal or refinery where the gasoline blendstocks are received. 1040 The person has no reason to believe any information on the certificate is false. 1040 Bulk transfers to registered industrial user. 1040   The removal of gasoline blendstocks from a pipeline or vessel is not taxable (other than LUST) if the blendstocks are received by a registrant that is an industrial user. 1040 An industrial user is any person that receives gasoline blendstocks by bulk transfer for its own use in the manufacture of any product other than finished gasoline. 1040 Credits or Refunds. 1040   A credit or refund of the gasoline tax may be allowable if gasoline is used for a nontaxable purpose or exempt use. 1040 For more information, see chapter 2. 1040 Diesel Fuel and Kerosene Generally, diesel fuel and kerosene are taxed in the same manner as gasoline (discussed earlier). 1040 However, special rules (discussed later) apply to dyed diesel fuel and dyed kerosene, and to undyed diesel fuel and undyed kerosene sold or used in Alaska for certain nontaxable uses and undyed kerosene used for a feedstock purpose. 1040 Diesel fuel means: Any liquid that without further processing or blending is suitable for use as a fuel in a diesel-powered highway vehicle or train, and Transmix. 1040 A liquid is suitable for this use if the liquid has practical and commercial fitness for use in the propulsion engine of a diesel-powered highway vehicle or diesel-powered train. 1040 A liquid may possess this practical and commercial fitness even though the specified use is not the predominant use of the liquid. 1040 However, a liquid does not possess this practical and commercial fitness solely by reason of its possible or rare use as a fuel in the propulsion engine of a diesel-powered highway vehicle or diesel-powered train. 1040 Diesel fuel does not include gasoline, kerosene, excluded liquid, No. 1040 5 and No. 1040 6 fuel oils covered by ASTM specification D396, or F-76 (Fuel Naval Distillate) covered by military specification MIL-F-16884. 1040 An excluded liquid is either of the following. 1040 A liquid that contains less than 4% normal paraffins. 1040 A liquid with all the following properties. 1040 Distillation range of 125 degrees Fahrenheit or less. 1040 Sulfur content of 10 ppm or less. 1040 Minimum color of +27 Saybolt. 1040 Transmix means a by-product of refined products created by the mixing of different specification products during pipeline transportation. 1040 Kerosene. 1040   This means any of the following liquids. 1040 One of the two grades of kerosene (No. 1040 1-K and No. 1040 2-K) covered by ASTM specification D3699. 1040 Kerosene-type jet fuel covered by ASTM specification D1655 or military specification MIL-DTL-5624T (Grade JP-5) or MIL-DTL-83133E (Grade JP-8). 1040 See Kerosene for Use in Aviation, later. 1040   However, kerosene does not include excluded liquid, discussed earlier. 1040   Kerosene also includes any liquid that would be described above but for the presence of a dye of the type used to dye kerosene for a nontaxable use. 1040 Diesel-powered highway vehicle. 1040   This is any self-propelled vehicle designed to carry a load over public highways (whether or not also designed to perform other functions) and propelled by a diesel-powered engine. 1040 Specially designed mobile machinery for nontransportation functions and vehicles specially designed for off-highway transportation are generally not considered diesel-powered highway vehicles. 1040 For more information about these vehicles and for information about vehicles not considered highway vehicles, see Off-Highway Business Use (No. 1040 2) in chapter 2. 1040 Diesel-powered train. 1040   This is any diesel-powered equipment or machinery that rides on rails. 1040 The term includes a locomotive, work train, switching engine, and track maintenance machine. 1040 Taxable Events The tax on diesel fuel and kerosene is $. 1040 244 per gallon. 1040 It is imposed on the removal, entry, or sale of diesel fuel and kerosene. 1040 Each of these events is discussed later. 1040 Only the $. 1040 001 LUST tax applies to dyed diesel fuel and dyed kerosene, discussed later. 1040 If the tax is paid on the diesel fuel or kerosene in more than one event, a refund may be allowed for the “second” tax paid. 1040 See Refunds of Second Tax in chapter 2. 1040 Use in certain intercity and local buses. 1040   Dyed diesel fuel and dyed kerosene cannot be used in certain intercity and local buses. 1040 A claim for $. 1040 17 per gallon may be made by the registered ultimate vendor (under certain conditions) or the ultimate purchaser for undyed diesel fuel or undyed kerosene sold for use in certain intercity or local buses. 1040 An intercity or local bus is a bus engaged in furnishing (for compensation) passenger land transportation available to the general public. 1040 The bus must be engaged in one of the following activities. 1040 Scheduled transportation along regular routes regardless of the size of the bus. 1040 Nonscheduled transportation if the seating capacity of the bus is at least 20 adults (not including the driver). 1040 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. 1040 Removal from terminal. 1040   All removals of diesel fuel and kerosene at a terminal rack are taxable. 1040 The position holder for that fuel is liable for the tax. 1040 Two-party exchanges. 1040   In a two-party exchange, the receiving person, not the delivering person, is liable for the tax imposed on the removal of taxable fuel from the terminal at the terminal rack. 1040 A two-party exchange means a transaction (other than a sale) where the delivering person and receiving person are both taxable fuel registrants and all of the following apply. 1040 The transaction includes a transfer from the delivering person, who holds the inventory position for the taxable fuel in the terminal as reflected in the records of the terminal operator. 1040 The exchange transaction occurs before or at the same time as completion of removal across the rack by the receiving person. 1040 The terminal operator in its records treats the receiving person as the person that removes the product across the terminal rack for purposes of reporting the transaction on Form 720-TO. 1040 The transaction is subject to a written contract. 1040 Terminal operator's liability. 1040   The terminal operator is jointly and severally liable for the tax if the terminal operator provides any person with any bill of lading, shipping paper, or similar document indicating that diesel fuel or kerosene is dyed (discussed later). 1040   The terminal operator is jointly and severally liable for the tax if the position holder is a person other than the terminal operator and is not a registrant. 1040 However, a terminal operator will not be liable for the tax in this situation if, at the time of the removal, the following conditions are met. 1040 The terminal operator is a registrant. 1040 The terminal operator has an unexpired notification certificate (discussed under Gasoline) from the position holder. 1040 The terminal operator has no reason to believe any information on the certificate is false. 1040 Removal from refinery. 1040   The removal of diesel fuel or kerosene from a refinery is taxable if the removal meets either of the following conditions. 1040 It is made by bulk transfer and the refiner, the owner of the fuel immediately before the removal, or the operator of the pipeline or vessel is not a registrant. 1040 It is made at the refinery rack. 1040 The refiner is liable for the tax. 1040 Exception. 1040   The tax does not apply to a removal of diesel fuel or kerosene at the refinery rack if all the following conditions are met. 1040 The diesel fuel or kerosene is removed from an approved refinery not served by pipeline (other than for receiving crude oil) or vessel. 1040 The diesel fuel or kerosene is received at a facility operated by a registrant and located within the bulk transfer/terminal system. 1040 The removal from the refinery is by: Railcar and the same person operates the refinery and the facility at which the diesel fuel or kerosene is received, or For diesel fuel only, a trailer or semi-trailer used exclusively to transport the diesel fuel from a refinery (described in (1)) to a facility (described in (2)) less than 20 miles from the refinery. 1040 Entry into the United States. 1040   The entry of diesel fuel or kerosene into the United States is taxable if the entry meets either of the following conditions. 1040 It is made by bulk transfer and the enterer or the operator of the pipeline or vessel is not a registrant. 1040 It is not made by bulk transfer. 1040 The enterer is liable for the tax. 1040 Importer of record's liability. 1040   The importer of record is jointly and severally liable for the tax with the enterer if the importer of record is not the enterer of the taxable fuel and the enterer is not a taxable fuel registrant. 1040   However, an importer of record meeting both of the following conditions at the time of the entry will not be liable for the tax. 1040 The importer of record has an unexpired notification certificate (discussed under Gasoline) from the enterer. 1040 The importer of record has no reason to believe any information in the certificate is false. 1040 Customs bond. 1040   The customs bond will not be charged for the tax imposed on the entry of the diesel fuel or kerosene if at the time of entry the surety has an unexpired notification certificate from the enterer and has no reason to believe any information in the certificate is false. 1040 Removal from a terminal by unregistered position holder or unregistered pipeline or vessel operator. 1040   The removal by bulk transfer of diesel fuel or kerosene from a terminal is taxable if the position holder for that fuel or the operator of the pipeline or vessel is not a registrant. 1040 The position holder is liable for the tax. 1040 The terminal operator is jointly and severally liable for the tax if the position holder is a person other than the terminal operator. 1040 However, see Terminal operator's liability under Removal from terminal, earlier, for an exception. 1040 Bulk transfers not received at approved terminal or refinery. 1040   The removal by bulk transfer of diesel fuel or kerosene from a terminal or refinery or the entry of diesel fuel or kerosene by bulk transfer into the United States is taxable if the following conditions apply. 1040 No tax was previously imposed (as discussed earlier) on any of the following events. 1040 The removal from the refinery. 1040 The entry into the United States. 1040 The removal from a terminal by an unregistered position holder. 1040 Upon removal from the pipeline or vessel, the diesel fuel or kerosene is not received at an approved terminal or refinery (or at another pipeline or vessel). 1040   The owner of the diesel fuel or kerosene when it is removed from the pipeline or vessel is liable for the tax. 1040 However, an owner meeting all the following conditions at the time of the removal will not be liable for the tax. 1040 The owner is a registrant. 1040 The owner has an unexpired notification certificate (discussed under Gasoline) from the operator of the terminal or refinery where the diesel fuel or kerosene is received. 1040 The owner has no reason to believe any information on the certificate is false. 1040 The operator of the facility where the diesel fuel or kerosene is received is liable for the tax if the owner meets these conditions. 1040 The operator is jointly and severally liable if the owner does not meet these conditions. 1040 Sales to unregistered person. 1040   The sale of diesel fuel or kerosene located within the bulk transfer/terminal system to a person that is not a registrant is taxable if tax was not previously imposed under any of the events discussed earlier. 1040   The seller is liable for the tax. 1040 However, a seller meeting all the following conditions at the time of the sale will not be liable for the tax. 1040 The seller is a registrant. 1040 The seller has an unexpired notification certificate (discussed under Gasoline) from the buyer. 1040 The seller has no reason to believe any information on the certificate is false. 1040 The buyer of the diesel fuel or kerosene is liable for the tax if the seller meets these conditions. 1040 The buyer is jointly and severally liable if the seller does not meet these conditions. 1040 Exception. 1040   The tax does not apply to a sale if all of the following apply. 1040 The buyer's principal place of business is not in the United States. 1040 The sale occurs as the fuel is delivered into a transport vessel with a capacity of at least 20,000 barrels of fuel. 1040 The seller is a registrant and the exporter of record. 1040 The fuel was exported. 1040 Removal or sale of blended diesel fuel or kerosene. 1040   The removal or sale of blended diesel fuel or blended kerosene by the blender is taxable. 1040 Blended taxable fuel produced using biodiesel is subject to the tax. 1040 See Blended taxable fuel under Definitions, earlier. 1040   The blender is liable for the tax. 1040 The tax is figured on the number of gallons not previously subject to the tax. 1040   Persons who blend biodiesel with undyed diesel fuel to produce and sell or use a biodiesel mixture outside the bulk transfer/terminal system must pay the diesel fuel tax on the volume of biodiesel in the mixture. 1040 Generally, the biodiesel mixture must be diesel fuel (defined earlier). 1040 See Form 720 to report this tax. 1040 You also must be registered by the IRS as a blender. 1040 See Form 637 for more information. 1040   However, if an untaxed liquid is sold as taxable fuel and that untaxed liquid is used to produce blended taxable fuel, the person that sold the untaxed liquid is jointly and severally liable for the tax imposed on the blender's sale or removal of the blended taxable fuel. 1040 Additional persons liable. 1040   When the person liable for the tax willfully fails to pay the tax, joint and several liability for the tax applies to: Any officer, employee, or agent of the person who is under a duty to ensure the payment of the tax and who willfully fails to perform that duty; or Anyone who willfully causes the person to fail to pay the tax. 1040 Credits or Refunds. 1040   A credit or refund is allowable for the tax on undyed diesel fuel or undyed kerosene used for a nontaxable use. 1040 For more information, see chapter 2. 1040 Dyed Diesel Fuel and Dyed Kerosene Dyed diesel fuel and dyed kerosene are subject to $. 1040 001 per gallon LUST tax as discussed below, unless the fuel is for export. 1040 The excise tax is not imposed on the removal, entry, or sale of diesel fuel or kerosene (other than the LUST tax) if all the following tests are met. 1040 The person otherwise liable for tax (for example, the position holder) is a registrant. 1040 In the case of a removal from a terminal, the terminal is an approved terminal. 1040 The diesel fuel or kerosene satisfies the dyeing requirements (described next). 1040 Dyeing requirements. 1040   Diesel fuel or kerosene satisfies the dyeing requirements only if it satisfies the following requirements. 1040 It contains the dye Solvent Red 164 (and no other dye) at a concentration spectrally equivalent to at least 3. 1040 9 pounds of the solid dye standard Solvent Red 26 per thousand barrels of fuel or any dye of a type and in a concentration that has been approved by the Commissioner. 1040 Is indelibly dyed by mechanical injection. 1040 See section 6 of Notice 2005-80 for transition rules that apply until final regulations are issued by the IRS. 1040 Notice required. 1040   A legible and conspicuous notice stating either: DYED DIESEL FUEL, NONTAXABLE USE ONLY, PENALTY FOR TAXABLE USE or DYED KEROSENE, NONTAXABLE USE ONLY, PENALTY FOR TAXABLE USE must be: Provided by the terminal operator to any person that receives dyed diesel fuel or dyed kerosene at a terminal rack of that operator, and Posted by a seller on any retail pump or other delivery facility where it sells dyed diesel fuel or dyed kerosene for use by its buyer. 1040   The notice under item (1) must be provided by the time of the removal and must appear on all shipping papers, bills of lading, and similar documents accompanying the removal of the fuel. 1040   Any seller that fails to post the required notice under item (2) is presumed to know that the fuel will be used for a taxable use (a use other than a nontaxable use listed later). 1040 That seller is subject to the penalty described next. 1040 Penalty. 1040   A penalty is imposed on a person if any of the following situations apply. 1040 Any dyed fuel is sold or held for sale by the person for a use the person knows or has reason to know is not a nontaxable use of the fuel. 1040 Any dyed fuel is held for use or used by the person for a use other than a nontaxable use and the person knew, or had reason to know, that the fuel was dyed. 1040 The person willfully alters, chemically or otherwise, or attempts to so alter, the strength or composition of any dye in dyed fuel. 1040 The person has knowledge that a dyed fuel that has been altered, as described in (3) above, sells or holds for sale such fuel for any use for which the person knows or has reason to know is not a nontaxable use of the fuel. 1040   The penalty is the greater of $1,000 or $10 per gallon of the dyed diesel fuel or dyed kerosene involved. 1040 After the first violation, the $1,000 portion of the penalty increases depending on the number of violations. 1040   This penalty is in addition to any tax imposed on the fuel. 1040   If the penalty is imposed, each officer, employee, or agent of a business entity who willfully participated in any act giving rise to the penalty is jointly and severally liable with that entity for the penalty. 1040   There is no administrative appeal or review allowed for the third and subsequent penalty imposed by section 6715 on any person except for: Fraud or a mistake in the chemical analysis, or Mathematical calculation of the penalty. 1040   If you are liable for the penalty, you may also be liable for the back-up tax, discussed later. 1040 However, the penalty applies only to dyed diesel fuel and dyed kerosene, while the back-up tax may apply to other fuels. 1040 The penalty may apply if the fuel is held for sale or use for a taxable use while the back-up tax does not apply unless the fuel is delivered into a fuel supply tank. 1040 Exception to penalty. 1040   The penalty under item (3) will not apply in any of the following situations. 1040 Diesel fuel or kerosene meeting the dyeing requirements (described earlier) is blended with any undyed liquid and the resulting product meets the dyeing requirements. 1040 Diesel fuel or kerosene meeting the dyeing requirements (described earlier) is blended with any other liquid (other than diesel fuel or kerosene) that contains the type and amount of dye required to meet the dyeing requirements. 1040 The alteration or attempted alteration occurs in an exempt area of Alaska. 1040 See Removal for sale or use in Alaska, later. 1040 Diesel fuel or kerosene meeting the dyeing requirements (described earlier) is blended with diesel fuel or kerosene not meeting the dyeing requirements and the blending occurs as part of a nontaxable use (other than export), discussed later. 1040 Alaska and Feedstocks Tax of $. 1040 001 per gallon is imposed on: Undyed diesel fuel or undyed kerosene sold or used in Alaska for certain nontaxable uses (see Later sales on page 10). 1040 Undyed kerosene used for feedstock purposes. 1040 Removal for sale or use in Alaska. 1040   No tax is imposed on the removal, entry, or sale of diesel fuel or kerosene in Alaska for ultimate sale or use in certain areas of Alaska for certain nontaxable uses. 1040 The removal or entry of any diesel fuel or kerosene is not taxed if all the following requirements are satisfied. 1040 The person otherwise liable for the tax (position holder, refiner, or enterer): Is a registrant, Can show satisfactory evidence of the nontaxable nature of the transaction, and Has no reason to believe the evidence is false. 1040 In the case of a removal from a terminal, the terminal is an approved terminal. 1040 The owner of the fuel immediately after the removal or entry holds the fuel for its own use in a nontaxable use (discussed later) or is a qualified dealer. 1040   If all three of the requirements above are not met, then tax is imposed at $. 1040 244 per gallon. 1040   A qualified dealer is any person that holds a qualified dealer license from the state of Alaska or has been registered by the IRS as a qualified retailer. 1040 Satisfactory evidence may include copies of qualified dealer licenses or exemption certificates obtained for state tax purposes. 1040 Later sales. 1040   The excise tax applies to diesel fuel or kerosene sold by a qualified dealer after the removal or entry. 1040 The tax is imposed at the time of the sale and the qualified dealer is liable for the tax. 1040 However, the sale is not taxable (other than the LUST tax at $. 1040 001 per gallon) if all the following requirements are met. 1040 The fuel is sold in Alaska for certain nontaxable uses. 1040 The buyer buys the fuel for its own use in a nontaxable use or is a qualified dealer. 1040 The seller can show satisfactory evidence of the nontaxable nature of the transaction and has no reason to believe the evidence is false. 1040 Feedstock purposes. 1040   The $. 1040 001 per gallon LUST tax is imposed on the removal or entry of undyed kerosene if all the following conditions are met. 1040 The person otherwise liable for tax (position holder, refiner, or enterer) is a registrant. 1040 In the case of a removal from a terminal, the terminal is an approved terminal. 1040 Either: The person otherwise liable for tax uses the kerosene for a feedstock purpose, or The kerosene is sold for use by the buyer for a feedstock purpose and, at the time of the sale, the person otherwise liable for tax has an unexpired certificate (described later) from the buyer and has no reason to believe any information on the certificate is false. 1040   If all of the requirements above are not met, then tax is imposed at $. 1040 244 per gallon. 1040   Kerosene is used for a feedstock purpose when it is used for nonfuel purposes in the manufacture or production of any substance other than gasoline, diesel fuel, or Other Fuels. 1040 For example, kerosene is used for a feedstock purpose when it is used as an ingredient in the production of paint, but is not used for a feedstock purpose when it is used to power machinery at a factory where paint is produced. 1040 A feedstock user is a person that uses kerosene for a feedstock purpose. 1040 A registered feedstock user is a person that has been registered by the IRS as a feedstock user. 1040 See Registration Requirements, earlier. 1040 Later sales. 1040   The excise tax ($. 1040 244 per gallon) applies to kerosene sold for use by the buyer for a feedstock purpose (item (3)(b) above) if the buyer in that sale later sells the kerosene. 1040 The tax is imposed at the time of the later sale and that seller is liable for the tax. 1040 Certificate. 1040   The certificate from the buyer certifies the buyer is a registered feedstock user and the kerosene will be used by the buyer for a feedstock purpose. 1040 The certificate may be included as part of any business records normally used for a sale. 1040 A model certificate is shown in the Appendix as Model Certificate G. 1040 Your certificate must contain all information necessary to complete the model. 1040   A certificate expires on the earliest of the following dates. 1040 The date 1 year after the effective date (not earlier than the date signed) of the certificate. 1040 The date the seller is provided a new certificate or notice that the current certificate is invalid. 1040 The date the seller is notified the buyer's registration has been revoked or suspended. 1040   The buyer must provide a new certificate if any information on a certificate has changed. 1040 Back-up Tax Tax is imposed on the delivery of any of the following into the fuel supply tank of a diesel-powered highway vehicle. 1040 Any dyed diesel fuel or dyed kerosene for other than a nontaxable use. 1040 Any undyed diesel fuel or undyed kerosene on which a credit or refund (for fuel used for a nontaxable purpose) has been allowed. 1040 Any liquid other than gasoline, diesel fuel, or kerosene. 1040 Generally, this back-up tax is imposed at a rate of $. 1040 244 per gallon. 1040 Liability for tax. 1040   Generally, the operator of the vehicle into which the fuel is delivered is liable for the tax. 1040 In addition, the seller of the diesel fuel or kerosene is jointly and severally liable for the tax if the seller knows or has reason to know that the fuel will be used for other than a nontaxable use. 1040 Exemptions from the back-up tax. 1040   The back-up tax does not apply to a delivery of diesel fuel or kerosene for uses 1, 2, 6, 7, 12, 13, 14, and 15 listed under Definitions of Nontaxable Uses in chapter 2. 1040   In addition, since the back-up tax is imposed only on the delivery into the fuel supply tank of a diesel-powered vehicle or train, the tax does not apply to diesel fuel or kerosene used as heating oil or in stationary engines. 1040 Diesel-Water Fuel Emulsion Diesel-water fuel emulsion means diesel fuel at least 14% of which is water and for which the emulsion additive is registered by a United States manufacturer with the EPA under section 211 of the Clean Air Act as in effect on March 31, 2003. 1040 A reduced tax rate of $. 1040 198 per gallon is imposed on a diesel-water fuel emulsion. 1040 To be eligible for the reduced rate, the person who sells, removes, or uses the diesel-water fuel emulsion must be registered by the IRS. 1040 If the diesel-water fuel emulsion does not meet the requirements above, or if the person who sells, removes, or uses the fuel is not registered, the diesel-water fuel emulsion is taxed at $. 1040 244 per gallon. 1040 Credits or refunds. 1040   The allowance for a credit or refund on a diesel-water fuel emulsion is discussed in chapter 2. 1040 Kerosene for Use in Aviation Taxable Events Generally, kerosene is taxed at $. 1040 244 per gallon unless a reduced rate applies (see Diesel Fuel and Kerosene, earlier). 1040 For kerosene removed directly from a terminal into the fuel tank of an aircraft for use in noncommercial aviation, the tax rate is $. 1040 219. 1040 The rate of $. 1040 219 also applies if kerosene is removed into any aircraft from a qualified refueler truck, tanker, or tank wagon that is loaded with the kerosene from a terminal that is located within an airport. 1040 The airport terminal does not need to be a secured airport terminal for this rate to apply. 1040 However, the refueler truck, tanker, or tank wagon must meet the requirements discussed under Certain refueler trucks, tankers, and tank wagons, treated as terminals, later. 1040 For kerosene removed directly into the fuel tank of an aircraft for use in commercial aviation, the rate of tax is $. 1040 044 per gallon. 1040 For kerosene removed into an aircraft from a qualified refueler truck, tanker, or tank wagon, the $. 1040 044 rate applies only if the truck, tanker, or tank wagon is loaded at a terminal that is located in a secured area of the airport. 1040 See Terminal located within a secured area of an airport, later. 1040 In addition, the operator must provide the position holder with a certificate similar to Model Certificate K in the Appendix. 1040 For kerosene removed directly into the fuel tank of an aircraft for a use exempt from tax under section 4041(c) (such as use in an aircraft for the exclusive use of a state or local government), the rate of tax is $. 1040 001. 1040 There is no tax on kerosene removed directly into the fuel tank of an aircraft for use in foreign trade. 1040 The kerosene must be removed from a qualifying refueler truck, tanker, or tank wagon loaded at a terminal located within a secured area of an airport. 1040 See Terminal located within a secured area of an airport, later. 1040 In addition, the operator must provide the position holder with a certificate similar to Model Certificate K in the Appendix. 1040 The position holder is liable for the $. 1040 001 per gallon tax. 1040 For kerosene removed directly from a terminal into the fuel tank of an fractional ownership program aircraft after March 31, 2012, a surtax of $. 1040 141 per gallon applies. 1040 Certain refueler trucks, tankers, and tank wagons treated as terminals. 1040   For purposes of the tax imposed on kerosene for use in aviation removed directly into the fuel tank of an aircraft for use in commercial aviation, certain refueler trucks, tankers, and tank wagons are treated as part of a terminal if the following conditions are met. 1040 Such terminal is located within an area of an airport. 1040 Any kerosene for use in aviation that is loaded in a refueler truck, tanker, or tank wagon at a terminal is for delivery into aircraft at the airport in which the terminal is located. 1040 Except in exigent circumstances, such as those identified in Notice 2005-80, no vehicle registered for highway use is loaded with kerosene for use in aviation at the terminal. 1040 The refueler truck, tanker, or tank wagon meets the following requirements: Has storage tanks, hose, and coupling equipment designed and used for fueling aircraft, Is not registered for highway use, and Is operated by the terminal operator or a person that makes a daily accounting to the terminal operator of each delivery of fuel from the refueler truck, tanker, or tank wagon. 1040 Information reporting will be required by terminal operators regarding this provision. 1040 Until the format of this information reporting is issued, taxpayers are required to retain records regarding the daily accounting, but are not required to report such information. 1040 Terminal located within a secured area of an airport. 1040   See Notice 2005-4 and Notice 2005-80 for the list of terminals located within a secured area of an airport. 1040 This list refers to fueling operations at airport terminals as it applies to the federal excise tax on kerosene for use in aviation, and has nothing to do with the general security of airports either included or not included in the list. 1040 Liability For Tax If the kerosene is removed directly into the fuel tank of an aircraft for use in commercial aviation, the operator of the aircraft in commercial aviation is liable for the tax on the removal at the rate of $. 1040 044 per gallon. 1040 However, the position holder is liable for the LUST tax for kerosene for use in aviation removed directly into the fuel tank of an aircraft for use exempt from tax under section 4041(c) (except foreign trade). 1040 For example, for kerosene removed directly into the aircraft for use in military aircraft, the position holder is liable for the tax. 1040 For the aircraft operator to be liable for the tax $. 1040 044 rate, the position holder must meet the following requirements: Is a taxable fuel registrant, Has an unexpired certificate (a model certificate is shown in the Appendix as Model Certificate K) from the operator of the aircraft, and Has no reason to believe any of the information in the certificate is false. 1040 Commercial aviation. 1040   Commercial aviation is any use of an aircraft in the business of transporting persons or property by air for pay. 1040 However, commercial aviation does not include any of the following uses. 1040 Any use exclusively for the purpose of skydiving. 1040 Certain air transportation by seaplane. 1040 See Seaplanes under Transportation of Persons by Air in chapter 4. 1040 Any use of an aircraft owned or leased by a member of an affiliated group and unavailable for hire by nonmembers. 1040 For more information, see Aircraft used by affiliated corporations under Special Rules on Transportation Taxes in chapter 4. 1040 Any use of an aircraft that has a maximum certificated takeoff weight of 6,000 pounds or less, unless the aircraft is operated on an established line. 1040 For more information, see Small aircraft under Special Rules on Transportation Taxes in chapter 4. 1040 Any use where the surtax on fuel used in a fractional ownership program aircraft is imposed. 1040 See Surtax on any liquid used in a fractional ownership program aircraft as fuel below. 1040 Surtax on any liquid used in a fractional ownership program aircraft as fuel Fuel used in a fractional ownership program aircraft (as defined below) after March 31, 2012, is subject to a surtax of $. 1040 141 per gallon. 1040 The fractional ownership program manager is liable for the tax. 1040 The surtax applies in addition to any other taxes imposed on the removal, entry, use, or sale of the fuel. 1040 If the surtax is imposed, the following air transportation taxes do not apply. 1040 Transportation of persons by air. 1040 Transportation of property by air. 1040 Use of international air travel facilities. 1040 These taxes are described under Air Transportation Taxes, later. 1040 A fractional ownership program aircraft flight is considered noncommercial aviation, for the rules for kerosene used in noncommercial aviation, see Kerosene for Use in Aviation above. 1040 Fractional ownership aircraft program    is a program under which:  A single fractional ownership program manager provides fractional ownership program management services on behalf of the fractional owners; There are one or more fractional owners per fractional program aircraft, with at least one fractional program aircraft having more than one owner; For at least two fractional program aircraft, none of the ownership interests in the aircraft are less than the minimum fractional ownership interest or held by the program manager; There exists a dry-lease aircraft exchange arrangement among all of the fractional owners; and There are multi-year program agreements covering the fractional ownership, fractional ownership program management services, and dry-lease aircraft exchange aspects of the program. 1040 Fractional program aircraft. 1040   Any aircraft that, in any fractional ownership aircraft program, is listed as a fractional program aircraft in the management specifications issued to the manager of such program by Federal Aviation Administration under subpart K of part 91 title 14, Code of Federal Regulations, and is registered in the U. 1040 S. 1040   Fractional program aircraft are not considered used for transportation of a qualified fractional owner, or on account of such qualified fractional owner when they are used for flight demonstration, maintenance or crew training. 1040 In such situations, the flight is not commercial aviation. 1040 Instead, the tax on the fuel used in the flight is imposed at the non-commercial aviation rate. 1040 Fractional owner. 1040   Any person owning any interest (including the entire interest) in a fractional program aircraft. 1040 Dry lease aircraft exchange. 1040   An agreement, documented by the written program agreements, under which the fractional program aircraft are available, on an as-needed basis without crew, to each fractional owner. 1040 Special rule relating to deadhead service. 1040   A fractional program aircraft will not be considered to be used on account of a qualified fractional owner when it is used in deadhead service and a person other than a qualified fractional owner is separately charged for such service. 1040 More information. 1040   See section 4043 for more information on the surtax. 1040 Certificate for Commercial Aviation and Exempt Uses A certificate is required from the aircraft operator: To support aircraft operator liability for tax on removal of kerosene for use in aviation directly into the fuel tank of an aircraft in commercial aviation, or For exempt uses. 1040 Certificate. 1040   The certificate may be included as part of any business records normally used for a sale. 1040 See Model Certificate K in the Appendix. 1040   A certificate expires on the earliest of the following dates. 1040 The date 1 year after the effective date (not earlier than the date signed) of the certificate. 1040 The date the buyer provides the seller a new certificate or notice that the current certificate is invalid. 1040 The date the IRS or the buyer notifies the seller that the buyer's right to provide a certificate has been withdrawn. 1040   The buyer must provide a new certificate if any information on a certificate has changed. 1040   The IRS may withdraw the buyer's right to provide a certificate if the buyer uses the kerosene for use in aviation to which a certificate relates other than as stated in the certificate. 1040 Exempt use. 1040   The rate on kerosene for use in aviation is $. 1040 001 (LUST tax) if it is removed from any refinery or terminal directly into the fuel tank of an aircraft for an exempt use. 1040 An exempt use includes kerosene for the exclusive use of a state or local government. 1040 There is no tax on kerosene removed directly into the fuel tank of an aircraft for use in foreign trade. 1040 Flash title transaction. 1040   A position holder is not liable for tax if, among other conditions, it obtains a certificate (described above) from the operator of the aircraft into which the kerosene is delivered. 1040 In a “flash title transaction” the position holder sells the kerosene to a wholesale distributor (reseller) that in turn sells the kerosene to the aircraft operator as the kerosene is being removed from a terminal into the fuel tank of an aircraft. 1040 In this case, the position holder will be treated as having a certificate from the operator of the aircraft if: The aircraft operator puts the reseller's name, address, and EIN on the certificate in place of the position holder's information; and The reseller provides the position holder with a statement of the kerosene reseller. 1040 Reseller statement. 1040   This is a statement that is signed under penalties of perjury by a person with authority to bind the reseller; is provided at the bottom or on the back of the certificate (or in an attached document); and contains: The reseller's name, address, and EIN; The position holder's name, address, and EIN; and A statement that the reseller has no reason to believe that any information in the accompanying aircraft operator's certificate is false. 1040 Credits or Refunds. 1040   A claim may be made by the ultimate purchaser (the operator) for taxed kerosene for use in aviation used in commercial aviation (other than foreign trade) and noncommercial aviation (other than nonexempt, noncommercial aviation and exclusive use by a state, political subdivision of a state, or the District of Columbia). 1040 A claim may be made by a registered ultimate vendor for certain sales. 1040 For more information, see chapter 2. 1040 Other Fuels (Including Alternative Fuels) Other Fuels means any liquid except gas oil, fuel oil, or any product taxable under section 4081. 1040 Other Fuels include alternative fuels. 1040 Alternative fuels are: Liquefied petroleum gas (LPG), “P Series” fuels, Compressed natural gas (CNG) (discussed later), Liquefied hydrogen, Any liquid fuel derived from coal (including peat) through the Fischer-Tropsch process, Liquid fuel derived from biomass, Liquefied natural gas (LNG), and Liquefied gas derived from biomass. 1040 Liquefied petroleum gas includes propane, butane, pentane, or mixtures of those products. 1040 Qualified methanol and ethanol fuels. 1040   Qualified ethanol and methanol means any liquid at least 85 percent of which consists of alcohol produced from coal, including peat. 1040 The tax rates are listed in the Instructions for Form 720. 1040 Partially exempt methanol and ethanol fuels. 1040   A reduced tax rate applies to these fuels. 1040 Partially exempt ethanol and methanol means any liquid at least 85 percent of which consists of alcohol produced from natural gas. 1040 The tax rates are listed in the Instructions for Form 720. 1040 Motor vehicles. 1040   Motor vehicles include all types of vehicles, whether or not registered (or required to be registered) for highway use, that have both the following characteristics. 1040 They are propelled by a motor. 1040 They are designed for carrying or towing loads from one place to another, regardless of the type of material or load carried or t
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Consumer Protection Offices

City, county, regional, and state consumer offices offer a variety of important services. They might mediate complaints, conduct investigations, prosecute offenders of consumer laws, license and regulate professional service providers, provide educational materials and advocate for consumer rights. To save time, call before sending a written complaint. Ask if the office handles the type of complaint you have and if complaint forms are provided.

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California Department of Consumer Affairs

Website: California Department of Consumer Affairs

Address: California Department of Consumer Affairs
Consumer Information Division
1625 N. Market Blvd., Suite N 112
Sacramento, CA 95834

Phone Number: 916- 445-1254

Toll-free: 1-800-952-5210

TTY: 916-928-1227; 1-800-326-2297

California Office of the Attorney General

Website: California Office of the Attorney General

Address: California Office of the Attorney General
Public Inquiry Unit
PO Box 944255
Sacramento, CA 94244-2550

Phone Number: 916-322-3360

Toll-free: 1-800-952-5225 (CA)

TTY: 1-800-735-2929

Contractors State License Board

Website: Contractors State License Board

Address: Contractors State License Board
9821 Business Park Dr.
Sacramento, CA 95827

Phone Number: 916-255-3900 (Headquarters) 916-255-2924 (Northern CA.) 562-345-7600 (Southern CA.)

Toll-free: 1-800-321-2752

California Bureau of Automotive Repair

Website: California Bureau of Automotive Repair

Address: California Bureau of Automotive Repair
Department of Consumer Affairs
10949 N. Mather Blvd.
Rancho Cordova, CA 95670

Toll-free: 1-800-952-5210 (Consumer Questions) 1-866-799-3811 (Complaint Intake)

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County Consumer Protection Offices

Stanislaus County District Attorney's Office

Website: Stanislaus County District Attorney's Office

Address: Stanislaus County District Attorney's Office
Consumer Protection Unit
832 12th St., Suite 300
Modesto, CA 95354

Phone Number: 209-525-5550

Ventura County District Attorney's Office

Website: Ventura County District Attorney's Office

Address: Ventura County District Attorney's Office
Consumer Mediation Section
800 S. Victoria Ave.
Ventura, CA 93009

Phone Number: 805-654-3110

Toll-free: 1-800-660-5474 ext 3110 (Ventura)

Contra Costa County District Attorneys Office

Website: Contra Costa County District Attorneys Office (Consumer protection division of Contra Costa)

Address: Contra Costa County District Attorneys Office
Special Operations Division- Consumer Division
900 Ward St., 4th Floor
Martinez, CA 94553

Phone Number: 925-957-8604

Fresno County District Attorney's Office

Website: Fresno County District Attorney's Office

Address: Fresno County District Attorney's Office
Consumer Protection Division
929 L St.
Fresno, CA 93721

Phone Number: 559-600-3156

Kern County District Attorney's Office

Website: Kern County District Attorney's Office

Address: Kern County District Attorney's Office
Consumer Protection Unit
Justice Building

1215 Truxtun Ave., 4th Floor
Bakersfield, CA 93301

Phone Number: 661-868-7600

Los Angeles County Department of Consumer Affairs

Website: Los Angeles County Department of Consumer Affairs

Address: Los Angeles County Department of Consumer Affairs
500 W. Temple St., Room B-96
Los Angeles, CA 90012-2722

Phone Number: 213-974-1452

Toll-free: 1-800-593-8222 (L.A. County)

TTY: 213-626-0913

Marin County District Attorney's Office

Website: Marin County District Attorney's Office

Address: Marin County District Attorney's Office
Consumer Protection Unit
Hall of Justice, Room 130
3501 Civic Center Dr.
San Rafael, CA 94903

Phone Number: 415-473-6450 415-473-6495 (Mediation)

Monterey County District Attorney's Office

Website: Monterey County District Attorney's Office (District attorneys page)

Address: Monterey County District Attorney's Office
Consumer Protection Division
1200 Aguajito Rd., Room 301
Monterey, CA 93940

Phone Number: 831-755-5073 (Salinas) 831-647-7770 (Monterey) 831-385-8373 (King City)

Napa County District Attorney's Office

Website: Napa County District Attorney's Office (Napa County website)

Address: Napa County District Attorney's Office
Consumer Affairs
931 Parkway Mall
Napa, CA 94559

Phone Number: 707-253-4059 (Hotline)

Orange County District Attorney's Office

Website: Orange County District Attorney's Office

Address: Orange County District Attorney's Office
Consumer Protection Unit
401 Civic Center Dr., W
Santa Ana, CA 92701

Phone Number: 714-834-6553

San Diego County District Attorney's Office

Website: San Diego County District Attorney's Office

Address: San Diego County District Attorney's Office
Consumer Protection Unit
330 W. Broadway
San Diego, CA 92101

Phone Number: 619-531-4040 619-531-3507 (Consumer Fraud Hotline)

San Francisco County District Attorney's Office

Website: San Francisco County District Attorney's Office

Address: San Francisco County District Attorney's Office
Special Operations Division- Consumer Protection Unit
732 Brannan St.
San Francisco, CA 94102

Phone Number: 415-551-9595 (Hotline)

San Luis Obispo County District Attorneys Office

Website: San Luis Obispo County District Attorneys Office

Address: San Luis Obispo County District Attorneys Office
Economic Crime Unit
Consumer Advisory

County Courthouse Annex
1050 Monterey St., Room 223
San Luis Obispo, CA 93408

Phone Number: 805-781-5856

San Mateo County District Attorneys Office

Website: San Mateo County District Attorneys Office

Address: San Mateo County District Attorneys Office
Consumer Environmental & Protection Unit
Hall of Justice and Records
400 County Center, 3rd Floor
Redwood City, CA 94063

Phone Number: 650-363-4651 650-363-4636 (Complaints)

Santa Barbara County District Attorney's Office

Website: Santa Barbara County District Attorney's Office

Address: Santa Barbara County District Attorney's Office
Consumer Mediation Services
1112 Santa Barbara St.
Santa Maria, CA 93101

Phone Number: 805-568-2300

Santa Clara County District Attorney's Office

Website: Santa Clara County District Attorney's Office

Address: Santa Clara County District Attorney's Office
Consumer Protection Unit
70 W. Hedding St.
West Wing
San Jose, CA 95110

Phone Number: 408-792-2880

Santa Cruz County District Attorney's Office

Website: Santa Cruz County District Attorney's Office

Address: Santa Cruz County District Attorney's Office
Consumer Affairs Unit
701 Ocean St., Room 200
Santa Cruz, CA 95060

Phone Number: 831-454-2050

TTY: 831-454-2123

Solano County District Attorney's Office

Website: Solano County District Attorney's Office

Phone Number: 707-784-6859

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City Consumer Protection Offices

Los Angeles City Attorney's Office

Website: Los Angeles City Attorney's Office

Address: Los Angeles City Attorney's Office
Consumer Protection Unit
200 N. Main St.,
800 City Hall East
Los Angeles, CA 90012

Phone Number: 213-978-8070

TTY: 213-978-8310

San Diego City Attorney's Office

Website: San Diego City Attorney's Office

Address: San Diego City Attorney's Office
Consumer and Environmental Protection Unit
1200 Third Ave., #1620
San Diego, CA 92101

Phone Number: 619-533-5600

TTY: 619-702-7198

Santa Monica City Attorneys Office

Website: Santa Monica City Attorneys Office

Address: Santa Monica City Attorneys Office
Consumer Protection Unit
1685 Main St., 3rd Floor
Santa Monica, CA 90401

Phone Number: 310-458-8336

TTY: 310-458-8696

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Banking Authorities

The officials listed in this section regulate and supervise state-chartered banks. Many of them handle or refer problems and complaints about other types of financial institutions as well. Some also answer general questions about banking and consumer credit. If you are dealing with a federally chartered bank, check Federal Agencies.

Department of Business Oversight

Website: Department of Business Oversight

Address: Department of Business Oversight
Consumer Services
1515 K St., Suite 200
Sacramento, CA 95814

Phone Number: 916-327-7585

Toll-free: 1-866-275-2677 (CA)

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Insurance Regulators

Each state has its own laws and regulations for each type of insurance. The officials listed in this section enforce these laws. Many of these offices can also provide you with information to help you make informed insurance buying decisions.

Department of Insurance

Website: Department of Insurance

Address: Department of Insurance
Consumer Services Division
300 S. Spring St., South Tower
Los Angeles, CA 90013

Phone Number: 213-897-8921

Toll-free: 1-800-927-4357 (CA)

TTY: 1-800-482-4833

Department of Managed Health Care, California HMO Help Center

Website: Department of Managed Health Care, California HMO Help Center

Address: Department of Managed Health Care, California HMO Help Center
980 9th St., Suite 500
Sacramento, CA 95814-2725

Toll-free: 1-888-466-2219

TTY: 1-877-688-9891

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Securities Administrators

Each state has its own laws and regulations for securities brokers and securities - including stocks, mutual funds, commodities, real estate, etc. The officials and agencies listed in this section enforce these laws and regulations. Many of these offices can also provide information to help you make informed investment decisions.

Department of Business Oversight

Website: Department of Business Oversight

Address: Department of Business Oversight
Consumer Services
1515 K St., Suite 200
Sacramento, CA 95814

Toll-free: 1-866-275-2677

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Utility Commissions

State Utility Commissions regulate services and rates for gas, electricity and telephones within your state. In some states, the utility commissions regulate other services such as water, transportation, and the moving of household goods. Many utility commissions handle consumer complaints. Sometimes, if a number of complaints are received about the same utility matter, they will conduct investigations.

Public Utilities Commission

Website: Public Utilities Commission

Address: Public Utilities Commission
Consumer Affairs Branch
505 Van Ness Ave.
San Francisco, CA 94102

Phone Number: 415-703-2782

Toll-free: 1-800-649-7570 (CA)

TTY: 1-866-836-7825

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The 1040

1040 10. 1040   Installment Sales Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Installment Sale of a Farm Installment MethodWhen to elect out. 1040 Revoking the election. 1040 More information. 1040 Figuring Installment Sale Income Payments Received or Considered Received ExampleSection 1231 gains. 1040 Summary. 1040 Introduction An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. 1040 If you realize a gain on an installment sale, you may be able to report part of your gain when you receive each payment. 1040 This method of reporting gain is called the installment method. 1040 You cannot use the installment method to report a loss. 1040 You can choose to report all of your gain in the year of sale. 1040 Installment obligation. 1040   The buyer's obligation to make future payments to you can be in the form of a deed of trust, note, land contract, mortgage, or other evidence of the buyer's debt to you. 1040 Topics - This chapter discusses: The general rules that apply to using the installment method Installment sale of a farm Useful Items - You may want to see: Publication 523 Selling Your Home 535 Business Expenses 537 Installment Sales 538 Accounting Periods and Methods 544 Sales and Other Dispositions of Assets Form (and Instructions) 4797 Sales of Business Property 6252 Installment Sale Income See chapter 16 for information about getting publications and forms. 1040 Installment Sale of a Farm The installment sale of a farm for one overall price under a single contract is not the sale of a single asset. 1040 It generally includes the sale of real property and personal property reportable on the installment method. 1040 It may also include the sale of property for which you must maintain an inventory, which cannot be reported on the installment method. 1040 See Inventory , later. 1040 The selling price must be allocated to determine the amount received for each class of asset. 1040 The tax treatment of the gain or loss on the sale of each class of assets is determined by its classification as a capital asset, as property used in the business, or as property held for sale and by the length of time the asset was held. 1040 (See chapter 8 for a discussion of capital assets and chapter 9 for a discussion of property used in the business. 1040 ) Separate computations must be made to figure the gain or loss for each class of asset sold. 1040 See Sale of a Farm in chapter 8. 1040 If you report the sale of property on the installment method, any depreciation recapture under section 1245 or 1250 of the Internal Revenue Code is generally taxable as ordinary income in the year of sale. 1040 See Depreciation recapture , later. 1040 This applies even if no payments are received in that year. 1040 Installment Method An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. 1040 A farmer who is not required to maintain an inventory can use the installment method to report gain from the sale of property used or produced in farming. 1040 See Inventory , later, for information on the sale of farm property where inventory items are included in the assets sold. 1040 If a sale qualifies as an installment sale, the gain must be reported under the installment method unless you elect out of using the installment method. 1040 Electing out of the installment method. 1040   If you elect not to use the installment method, you generally report the entire gain in the year of sale, even though you do not receive all the sale proceeds in that year. 1040   To make this election, do not report your sale on Form 6252. 1040 Instead, report it on Schedule D (Form 1040), Form 4797, or both. 1040 When to elect out. 1040   Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place. 1040   However, if you timely file your tax return for the year the sale takes place without making the election, you still can make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). 1040 Write “Filed pursuant to section 301. 1040 9100-2” at the top of the amended return and file it where the original return was filed. 1040 Revoking the election. 1040   Once made, the election can be revoked only with IRS approval. 1040 A revocation is retroactive. 1040 More information. 1040   See Electing Out of the Installment Method in Publication 537 for more information. 1040 Inventory. 1040   The sale of farm inventory items cannot be reported on the installment method. 1040 All gain or loss on their sale must be reported in the year of sale, even if you receive payment in later years. 1040   If inventory items are included in an installment sale, you may have an agreement stating which payments are for inventory and which are for the other assets being sold. 1040 If you do not, each payment must be allocated between the inventory and the other assets sold. 1040 Sale at a loss. 1040   If your sale results in a loss, you cannot use the installment method. 1040 If the loss is on an installment sale of business assets, you can deduct it only in the tax year of sale. 1040 Figuring Installment Sale Income Each payment on an installment sale usually consists of the following three parts. 1040 Interest income. 1040 Return of your adjusted basis in the property. 1040 Gain on the sale. 1040 In each year you receive a payment, you must include in income both the interest part and the part that is your gain on the sale. 1040 You do not include in income the part that is the return of your basis in the property. 1040 Basis is the amount of your investment in the property for installment sale purposes. 1040 Interest income. 1040   You must report interest as ordinary income. 1040 Interest is generally not included in a down payment. 1040 However, you may have to treat part of each later payment as interest, even if it is not called interest in your agreement with the buyer. 1040 Interest provided in the agreement is called stated interest. 1040 If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount. 1040 See Unstated interest , later. 1040    You must continue to report the interest income on payments you receive in subsequent years as interest income. 1040 Adjusted basis and installment sale income (gain on sale). 1040   After you have determined how much of each payment to treat as interest, you treat the rest of each payment as if it were made up of two parts. 1040 A tax-free return of your adjusted basis in the property, and Your gain (referred to as “installment sale income” on Form 6252). 1040 Figuring adjusted basis for installment sale purposes. 1040   You can use Worksheet 10-1 to figure your adjusted basis in the property for installment sale purposes. 1040 When you have completed the worksheet, you will also have determined the gross profit percentage necessary to figure your installment sale income (gain) for this year. 1040    Worksheet 10-1. 1040 Figuring Adjusted Basis and Gross Profit Percentage 1. 1040 Enter the selling price for the property   2. 1040 Enter your adjusted basis for the property     3. 1040 Enter your selling expenses     4. 1040 Enter any depreciation recapture     5. 1040 Add lines 2, 3, and 4. 1040  This is your adjusted basis  for installment sale purposes   6. 1040 Subtract line 5 from line 1. 1040 If zero or less, enter -0-. 1040  This is your gross profit     If the amount entered on line 6 is zero, Stop here. 1040 You cannot use the installment method. 1040   7. 1040 Enter the contract price for the property   8. 1040 Divide line 6 by line 7. 1040 This is your gross profit percentage   Selling price. 1040   The selling price is the total cost of the property to the buyer and includes the following. 1040 Any money you are to receive. 1040 The fair market value (FMV) of any property you are to receive (FMV is discussed at Property used as a payment under Payments Received or Considered Received ). 1040 Any existing mortgage or other debt the buyer pays, assumes, or takes (a note, mortgage, or any other liability, such as a lien, accrued interest, or taxes you owe on the property). 1040 Any of your selling expenses the buyer pays. 1040 Do not include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or original issue discount. 1040 Adjusted basis for installment sale purposes. 1040   Your adjusted basis is the total of the following three items. 1040 Adjusted basis. 1040 Selling expenses. 1040 Depreciation recapture. 1040 Adjusted basis. 1040   Basis is your investment in the property for installment sale purposes. 1040 The way you figure basis depends on how you acquire the property. 1040 The basis of property you buy is generally its cost. 1040 The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently. 1040   While you own property, various events may change your original basis. 1040 Some events, such as adding rooms or making permanent improvements, increase basis. 1040 Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. 1040 The result is adjusted basis. 1040 See chapter 6 and Publication 551, Basis of Assets, for more information. 1040 Selling expenses. 1040   Selling expenses relate to the sale of the property. 1040 They include commissions, attorney fees, and any other expenses paid on the sale. 1040 Selling expenses are added to the basis of the sold property. 1040 Depreciation recapture. 1040   If the property you sold was depreciable property, you may need to recapture part of the gain on the sale as ordinary income. 1040 See Depreciation Recapture in chapter 9 and Depreciation Recapture Income in Publication 537. 1040 Gross profit. 1040   Gross profit is the total gain you report on the installment method. 1040   To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. 1040 If the property you sold was your home, subtract from the gross profit any gain you can exclude. 1040 Contract price. 1040   Contract price equals: The selling price, minus The mortgages, debts, and other liabilities assumed or taken by the buyer, plus The amount by which the mortgages, debts, and other liabilities assumed or taken by the buyer exceed your adjusted basis for installment sale purposes. 1040 Gross profit percentage. 1040   A certain percentage of each payment (after subtracting interest) is reported as installment sale income. 1040 This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price. 1040   The gross profit percentage generally remains the same for each payment you receive. 1040 However, see the example under Selling price reduced , later, for a situation where the gross profit percentage changes. 1040 Amount to report as installment sale income. 1040   Multiply the payments you receive each year (less interest) by the gross profit percentage. 1040 The result is your installment sales income for the tax year. 1040 In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. 1040 A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. 1040 For a detailed discussion, see Payments Received or Considered Received , later. 1040 Selling price reduced. 1040   If the selling price is reduced at a later date, the gross profit on the sale also will change. 1040 You then must refigure the gross profit percentage for the remaining payments. 1040 Refigure your gross profit using Worksheet 10-2. 1040 New Gross Profit Percentage — Selling Price Reduced. 1040 You will spread any remaining gain over future installments. 1040    Worksheet 10-2. 1040 New Gross Profit Percentage — Selling Price Reduced 1. 1040 Enter the reduced selling  price for the property   2. 1040 Enter your adjusted  basis for the  property     3. 1040 Enter your selling  expenses     4. 1040 Enter any depreciation  recapture     5. 1040 Add lines 2, 3, and 4. 1040   6. 1040 Subtract line 5 from line 1. 1040  This is your adjusted  gross profit   7. 1040 Enter any installment sale  income reported in  prior year(s)   8. 1040 Subtract line 7 from line 6   9. 1040 Future installments     10. 1040 Divide line 8 by line 9. 1040  This is your new  gross profit percentage*. 1040   * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. 1040 Example. 1040 In 2011, you sold land with a basis of $40,000 for $100,000. 1040 Your gross profit was $60,000. 1040 You received a $20,000 down payment and the buyer's note for $80,000. 1040 The note provides for monthly payments of $1,953 each, figured at 8% interest, amortized over four years, beginning in January 2012. 1040 Your gross profit percentage was 60%. 1040 You received the down payment of $20,000 in 2011 and total payments of $23,436 in 2012, of which $17,675 was principal and $5,761 was interest according to the amortization schedule. 1040 You reported a gain of $12,000 on the down payment received in 2011 and $10,605 ($17,675 X 60% (. 1040 60)) in 2012. 1040 In January 2013, you and the buyer agreed to reduce the purchase price to $85,000 and payments during 2013, 2014, and 2015 are reduced to $1,483 a month amortized over the remaining three years. 1040 The new gross profit percentage, 47. 1040 32%, is figured in Example — Worksheet 10-2. 1040 Example — Worksheet 10-2. 1040 New Gross Profit Percentage — Selling Price Reduced 1. 1040 Enter the reduced selling  price for the property 85,000 2. 1040 Enter your adjusted  basis for the  property 40,000   3. 1040 Enter your selling  expenses -0-   4. 1040 Enter any depreciation  recapture -0-   5. 1040 Add lines 2, 3, and 4. 1040 40,000 6. 1040 Subtract line 5 from line 1. 1040  This is your adjusted  gross profit 45,000 7. 1040 Enter any installment sale  income reported in  prior year(s) 22,605 8. 1040 Subtract line 7 from line 6 22,395 9. 1040 Future installments   47,325 10. 1040 Divide line 8 by line 9. 1040  This is your new  gross profit percentage*. 1040 47. 1040 32% * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. 1040 You will report installment sale income of $6,878 (47. 1040 32% of $14,535) in 2013, $7,449 (47. 1040 32% of $15,742) in 2014, and $8,067 (47. 1040 32% of $17,048) in 2015. 1040 Form 6252. 1040   Use Form 6252 to report an installment sale in the year it takes place and to report payments received, or considered received because of related party resales, in later years. 1040 Attach it to your tax return for each year. 1040 Disposition of Installment Obligation If you are using the installment method and you dispose of the installment obligation, generally you will have a gain or loss to report. 1040 It is considered gain or loss on the sale of the property for which you received the installment obligation. 1040 Cancellation. 1040   If an installment obligation is canceled or otherwise becomes unenforceable, it is treated as a disposition other than a sale or exchange. 1040 Your gain or loss is the difference between your basis in the obligation and its fair market value (FMV) at the time you cancel it. 1040 If the parties are related, the FMV of the obligation is considered to be no less than its full face value. 1040 Transfer due to death. 1040   The transfer of an installment obligation (other than to a buyer) as a result of the death of the seller is not a disposition. 1040 Any unreported gain from the installment obligation is not treated as gross income to the decedent. 1040 No income is reported on the decedent's return due to the transfer. 1040 Whoever receives the installment obligation as a result of the seller's death is taxed on the installment payments the same as the seller would have been had the seller lived to receive the payments. 1040   However, if the installment obligation is canceled, becomes unenforceable, or is transferred to the buyer because of the death of the holder of the obligation, it is a disposition. 1040 The estate must figure its gain or loss on the disposition. 1040 If the holder and the buyer were related, the FMV of the installment obligation is considered to be no less than its full face value. 1040 More information. 1040   For more information on the disposition of an installment obligation, see Publication 537. 1040 Sale of depreciable property. 1040   You generally cannot report gain from the sale of depreciable property to a related person on the installment method. 1040 See Sale to a Related Person in Publication 537. 1040   You cannot use the installment method to report any depreciation recapture income up to the gain on the sale. 1040 However, report any gain greater than the recapture income on the installment method. 1040   The recapture income reported in the year of sale is included in your installment sale basis to determine your gross profit on the installment sale. 1040   Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. 1040 Report the depreciation recapture income in Part II of Form 4797 as ordinary income in the year of sale. 1040    If you sell depreciable business property, prepare Form 4797 first in order to figure the amount to enter on line 12 of Part I, Form 6252. 1040 See the Form 6252 instructions for details. 1040   For more information on the section 179 deduction, see Section 179 Expense Deduction in chapter 7. 1040 For more information on depreciation recapture, see Depreciation Recapture in  chapter 9. 1040 Payments Received or Considered Received You must figure your gain each year on the payments you receive, or are treated as receiving, from an installment sale. 1040 In certain situations, you are considered to have received a payment, even though the buyer does not pay you directly. 1040 These situations occur when the buyer assumes or pays any of your debts, such as a loan, or pays any of your expenses, such as a sales commission. 1040 However, as discussed later, the buyer's assumption of your debt is treated as a recovery of basis, rather than as a payment, in many cases. 1040 Buyer pays seller's expenses. 1040   If the buyer pays any of your expenses related to the sale of your property, it is considered a payment to you in the year of sale. 1040 Include these expenses in the selling and contract prices when figuring the gross profit percentage. 1040 Buyer assumes mortgage. 1040   If the buyer assumes or pays off your mortgage, or otherwise takes the property subject to the mortgage, the following rules apply. 1040 Mortgage less than basis. 1040   If the buyer assumes a mortgage that is not more than your installment sale basis in the property, it is not considered a payment to you. 1040 It is considered a recovery of your basis. 1040 The contract price is the selling price minus the mortgage. 1040 Example. 1040 You sell property with an adjusted basis of $19,000. 1040 You have selling expenses of $1,000. 1040 The buyer assumes your existing mortgage of $15,000 and agrees to pay you $10,000 (a cash down payment of $2,000 and $2,000 (plus 8% interest) in each of the next 4 years). 1040 The selling price is $25,000 ($15,000 + $10,000). 1040 Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). 1040 The contract price is $10,000 ($25,000 − $15,000 mortgage). 1040 Your gross profit percentage is 50% ($5,000 ÷ $10,000). 1040 You report half of each $2,000 payment received as gain from the sale. 1040 You also report all interest you receive as ordinary income. 1040 Mortgage more than basis. 1040   If the buyer assumes a mortgage that is more than your installment sale basis in the property, you recover your entire basis. 1040 The part of the mortgage greater than your basis is treated as a payment received in the year of sale. 1040   To figure the contract price, subtract the mortgage from the selling price. 1040 This is the total amount (other than interest) you will receive directly from the buyer. 1040 Add to this amount the payment you are considered to have received (the difference between the mortgage and your installment sale basis). 1040 The contract price is then the same as your gross profit from the sale. 1040    If the mortgage the buyer assumes is equal to or more than your installment sale basis, the gross profit percentage always will be 100%. 1040 Example. 1040 The selling price for your property is $9,000. 1040 The buyer will pay you $1,000 annually (plus 8% interest) over the next 3 years and assume an existing mortgage of $6,000. 1040 Your adjusted basis in the property is $4,400. 1040 You have selling expenses of $600, for a total installment sale basis of $5,000. 1040 The part of the mortgage that is more than your installment sale basis is $1,000 ($6,000 − $5,000). 1040 This amount is included in the contract price and treated as a payment received in the year of sale. 1040 The contract price is $4,000: Selling price $9,000 Minus: Mortgage (6,000) Amount actually received $3,000 Add difference:   Mortgage $6,000   Minus: Installment sale basis 5,000 1,000 Contract price $4,000   Your gross profit on the sale is also $4,000: Selling price $9,000 Minus: Installment sale basis (5,000) Gross profit $4,000   Your gross profit percentage is 100%. 1040 Report 100% of each payment (less interest) as gain from the sale. 1040 Treat the $1,000 difference between the mortgage and your installment sale basis as a payment and report 100% of it as gain in the year of sale. 1040 Buyer assumes other debts. 1040   If the buyer assumes any other debts, such as a loan or back taxes, it may be considered a payment to you in the year of sale. 1040   If the buyer assumes the debt instead of paying it off, only part of it may have to be treated as a payment. 1040 Compare the debt to your installment sale basis in the property being sold. 1040 If the debt is less than your installment sale basis, none of it is treated as a payment. 1040 If it is more, only the difference is treated as a payment. 1040 If the buyer assumes more than one debt, any part of the total that is more than your installment sale basis is considered a payment. 1040 These rules are the same as the rules discussed earlier under Buyer assumes mortgage . 1040 However, they apply only to the following types of debt the buyer assumes. 1040 Those acquired from ownership of the property you are selling, such as a mortgage, lien, overdue interest, or back taxes. 1040 Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased. 1040   If the buyer assumes any other type of debt, such as a personal loan or your legal fees relating to the sale, it is treated as if the buyer had paid off the debt at the time of the sale. 1040 The value of the assumed debt is then considered a payment to you in the year of sale. 1040 Property used as a payment. 1040   If you receive property rather than money from the buyer, it is still considered a payment in the year received. 1040 However, see Trading property for like-kind property , later. 1040 Generally, the amount of the payment is the property's FMV on the date you receive it. 1040 Exception. 1040   If the property the buyer gives you is payable on demand or readily tradable (see examples later), the amount you should consider as payment in the year received is: The FMV of the property on the date you receive it if you use the cash method of accounting, The face amount of the obligation on the date you receive it if you use an accrual method of accounting, or The stated redemption price at maturity less any original issue discount (OID) or, if there is no OID, the stated redemption price at maturity appropriately discounted to reflect total unstated interest. 1040 See Unstated interest , later. 1040 Examples. 1040 If you receive a note from the buyer as payment, and the note stipulates that you can demand payment from the buyer at any time, the note is payable on demand. 1040 If you receive marketable securities from the buyer as payment, and you can sell the securities on an established securities market (such as the New York Stock Exchange) at any time, the securities are readily tradable. 1040 In these examples, use the above rules to determine the amount you should consider as payment in the year received. 1040 Debt not payable on demand. 1040   Any evidence of debt you receive from the buyer that is not payable on demand is not considered a payment. 1040 This is true even if the debt is guaranteed by a third party, including a government agency. 1040 Fair market value (FMV). 1040   This is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge of all the necessary facts. 1040 Third-party note. 1040   If the property the buyer gives you is a third-party note (or other obligation of a third party), you are considered to have received a payment equal to the note's FMV. 1040 Because the FMV of the note is itself a payment on your installment sale, any payments you later receive from the third party are not considered payments on the sale. 1040 The excess of the note's face value over its FMV is interest. 1040 Exclude this interest in determining the selling price of the property. 1040 However, see Exception under Property used as a payment , earlier. 1040 Example. 1040 You sold real estate in an installment sale. 1040 As part of the down payment, the buyer assigned to you a $50,000, 8% third-party note. 1040 The FMV of the third-party note at the time of the sale was $30,000. 1040 This amount, not $50,000, is a payment to you in the year of sale. 1040 The third-party note had an FMV equal to 60% of its face value ($30,000 ÷ $50,000), so 60% of each principal payment you receive on this note is a nontaxable return of capital. 1040 The remaining 40% is interest taxed as ordinary income. 1040 Bond. 1040   A bond or other evidence of debt you receive from the buyer that is payable on demand or readily tradable in an established securities market is treated as a payment in the year you receive it. 1040 For more information on the amount you should treat as a payment, see Exception under Property used as a payment , earlier. 1040   If you receive a government or corporate bond for a sale before October 22, 2004, and the bond has interest coupons attached or can be readily traded in an established securities market, you are considered to have received payment equal to the bond's FMV. 1040 However, see Exception under Property used as a payment , earlier. 1040 Buyer's note. 1040   The buyer's note (unless payable on demand) is not considered payment on the sale. 1040 However, its full face value is included when figuring the selling price and the contract price. 1040 Payments you receive on the note are used to figure your gain in the year received. 1040 Sale to a related person. 1040   If you sell depreciable property to a related person and the sale is an installment sale, you may not be able to report the sale using the installment method. 1040 For information on these rules, see the Instructions for Form 6252 and Sale to a Related Person in Publication 537. 1040 Trading property for like-kind property. 1040   If you trade business or investment property solely for the same kind of property to be held as business or investment property, you can postpone reporting the gain. 1040 See Like-Kind Exchanges in chapter 8 for a discussion of like-kind property. 1040   If, in addition to like-kind property, you receive an installment obligation in the exchange, the following rules apply to determine installment sale income each year. 1040 The contract price is reduced by the FMV of the like-kind property received in the trade. 1040 The gross profit is reduced by any gain on the trade that can be postponed. 1040 Like-kind property received in the trade is not considered payment on the installment obligation. 1040 Unstated interest. 1040   An installment sale contract may provide that each deferred payment on the sale will include interest or that there will be an interest payment in addition to the principal payment. 1040 Interest provided in the contract is called stated interest. 1040   If an installment sale contract does not provide for adequate stated interest, part of the stated principal amount of the contract may be recharacterized as interest. 1040 If Internal Revenue Code section 483 applies to the contract, this interest is called unstated interest. 1040   If Internal Revenue Code section 1274 applies to the contract, this interest is called original issue discount (OID). 1040   Generally, if a buyer gives a debt in consideration for personal use property, the unstated interest rules do not apply. 1040 Therefore, the buyer cannot deduct the unstated interest. 1040 The seller must report the unstated interest as income. 1040 Personal-use property is any property in which substantially all of its use by the buyer is not in connection with a trade or business or an investment activity. 1040   If the debt is subject to the Internal Revenue Code section 483 rules and is also subject to the below-market loan rules, such as a gift loan, compensation-related loan or corporation-shareholder loan, then both parties are subject to the below-market loan rules rather than the unstated interest rules. 1040   Unstated interest reduces the stated selling price of the property and the buyer's basis in the property. 1040 It increases the seller's interest income and the buyer's interest expense. 1040   In general, an installment sale contract provides for adequate stated interest if the stated interest rate (based on an appropriate compounding period) is at least equal to the applicable federal rate (AFR). 1040    The AFRs are published monthly in the Internal Revenue Bulletin (IRB). 1040 You can get this information by contacting an IRS office. 1040 IRBs are also available at IRS. 1040 gov. 1040 More information. 1040   For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. 1040 Example. 1040 You sell property at a contract price of $6,000 and your gross profit is $1,500. 1040 Your gross profit percentage is 25% ($1,500 ÷ $6,000). 1040 After subtracting interest, you report 25% of each payment, including the down payment, as installment sale income from the sale for the tax year you receive the payment. 1040 The remainder (balance) of each payment is the tax-free return of your adjusted basis. 1040 Example On January 3, 2013, you sold your farm, including the home, farm land and buildings. 1040 You received $50,000 down and the buyer's note for $200,000. 1040 In addition, the buyer assumed an outstanding $50,000 mortgage on the farm land. 1040 The total selling price was $300,000. 1040 The note payments of $25,000 each, plus adequate interest, are due every July 1 and January 1, beginning in July 2013. 1040 Your selling expenses were $15,000. 1040 Adjusted basis and depreciation. 1040   The adjusted basis and depreciation claimed on each asset sold are as follows:   Depreciation Adjusted Asset Claimed Basis Home* -0- $33,743 Farm land -0- 73,610 Buildings $31,500 35,130 * Owned and used as main home for at least 2 of the 5 years prior to the sale Gain on each asset. 1040   The following schedule shows the assets included in the sale, each asset's selling price based on its respective value, the selling expense allocated to each asset, the adjusted basis of each asset, and the gain on each asset. 1040 The selling expense for each asset is 5% of the selling price ($15,000 selling expense ÷ $300,000 selling price). 1040   Selling Selling Adjusted     Price Expense Basis Gain Home* $60,000 $3,000 $33,743 $23,257 Farm land  165,000  8,250  73,610  83,140 Buildings 75,000 3,750 35,130 36,120   $300,000 $15,000 $142,483 $142,517 * Owned and used as main home for at least 2 of the 5 years prior to the sale Depreciation recapture. 1040   The buildings are section 1250 property. 1040 There is no depreciation recapture income for them because they were depreciated using the straight line method. 1040 See chapter 9 for more information on depreciation recapture. 1040   Special rules may apply when you sell section 1250 assets depreciated under the straight line method. 1040 See the Unrecaptured Section 1250 Gain Worksheet in the Instructions for Schedule D (Form 1040). 1040 See chapter 3 of Publication 544, Sales and Other Dispositions of Assets, for more information on section 1250 assets. 1040 Installment sale basis and gross profit. 1040   The following table shows each asset reported on the installment method, its selling price, installment sale basis, and gross profit. 1040     Installment     Selling Sale Gross   Price Basis Profit Farm land $165,000 $73,610 $83,140 Buildings 75,000 35,130 36,120   $240,000 $108,740 $119,260 Section 1231 gains. 1040   The gain on the farm land and buildings is reported as section 1231 gains. 1040 See Section 1231 Gains and Losses in chapter 9. 1040 Contract price and gross profit percentage. 1040   The contract price is $250,000 for the part of the sale reported on the installment method. 1040 This is the selling price ($300,000) minus the mortgage assumed ($50,000). 1040   Gross profit percentage for the sale is 47. 1040 70% ($119,260 gross profit ÷ $250,000 contract price). 1040 The gross profit percentage for each asset is figured as follows:   Percent Farm land ($83,140 ÷ $250,000) 33. 1040 256 Buildings ($36,120 ÷ $250,000) 14. 1040 448 Total 47. 1040 70 Figuring the gain to report on the installment method. 1040   One hundred percent (100%) of each payment is reported on the installment method. 1040 The total amount received on the sale in 2013 is $75,000 ($50,000 down payment + $25,000 payment on July 1). 1040 The installment sale part of the total payments received in 2013 is also $75,000. 1040 Figure the gain to report for each asset by multiplying its gross profit percentage times $75,000. 1040   Income Farm land—33. 1040 256% × $75,000 $24,942 Buildings—14. 1040 448% × $75,000 10,836 Total installment income for 2013 $35,778 Reporting the sale. 1040   Report the installment sale on Form 6252. 1040 Then report the amounts from Form 6252 on Form 4797 and Schedule D (Form 1040). 1040 Attach a separate page to Form 6252 that shows the computations in the example. 1040 If you sell depreciable business property, prepare Form 4797 first in order to figure the amount to enter on line 12 of Part I, Form 6252. 1040 Section 1231 gains. 1040   The gains on the farm land and buildings are section 1231 gains. 1040 They may be reported as either capital or ordinary gain depending on the net balance when combined with other section 1231 losses. 1040 A net 1231 gain is capital gain and a net 1231 loss is an ordinary loss. 1040 Installment income for years after 2013. 1040   You figure installment income for the years after 2013 by applying the same gross profit percentages to the payments you receive each year. 1040 If you receive $50,000 during the year, the entire $50,000 is considered received on the installment sale (100% × $50,000). 1040 You realize income as follows:   Income Farm land—33. 1040 256% × $50,000 $16,628 Buildings—14. 1040 448% × $50,000 7,224 Total installment income $23,852   In this example, no gain ever is recognized from the sale of your home. 1040 You will combine your section 1231 gains from this sale with section 1231 gains and losses from other sales in each of the later years to determine whether to report them as ordinary or capital gains. 1040 The interest received with each payment will be included in full as ordinary income. 1040 Summary. 1040   The installment income (rounded to the nearest dollar) from the sale of the farm is reported as follows: Selling price $190,000 Minus: Installment basis (108,740) Gross profit $81,260     Gain reported in 2012 (year of sale) $35,778 Gain reported in 2013:   $50,000 × 47. 1040 70% 23,850 Gain reported in 2014:   $50,000 × 47. 1040 70% 23,850 Gain reported in 2015:   $50,000 × 47. 1040 70% 23,850 Gain reported in 2016:   $25,000 × 47. 1040 70% 11,925 Total gain reported $119,253 Prev  Up  Next   Home   More Online Publications