Exceptions from the commercial rules are provided in the case of certain small aircraft and aircraft used by affiliated corporations under certain circumstances. In order to avoid the need for detailed record keeping, the use of such aircraft will not be subject to the passenger and cargo taxes but will be subject to the fuels taxes. These exceptions are designed to assure that the taxpayer is not subject to both sets of taxes for the same flight and also to assure that the taxpayer is subjected to one set of taxes. Id. at 381. [Emphasis added.]

The Senate Finance Committee also adopted Section 4282 in their version of the legislation. After reciting the same concerns as those expressed by the Ways and Means Committee, the Finance Committee went further to describe in the same paragraph its views on how flights carrying passengers from groups that were not affiliated with the company owning and operating the aircraft:

The special treatment for affiliated groups and small aircraft not on established lines is provided to more efficiently carry out the overall approach of the bill, i.e., to have the use of aircraft be subject either to the taxes on the transportation of persons and freight or else to the fuel taxes, but not to both as to any one trip. These two categories of aircraft are exempted from the taxes on the transportation of persons and freight but are made subject to the fuel taxes for all of their flights. It is expected that this will substantially simplify record keeping for those taxpayers and also facilitate administration of the taxes. In the case of other aircraft not specifically exempted from the taxes on the transportation of persons and freight (e.g., air taxis sometimes on established lines, company planes used for groups that are not affiliated, and aircraft used sometimes for hire and sometimes for non-business purposes), the passenger and cargo taxes will apply at some times and the fuel taxes at other times. For example, a company plane used by a group of corporations not considered to be "affiliated" will pay the fuel taxes on all flights not determined to be "for hire" (for secs. 4261 and 4271 taxes), but will receive a refund or credit with respect to the fuel taxes for those flights where persons or property are transported by air for hire and the taxes on the transportation of persons or property apply. [Emphasis added.] Senate Finance Committee Report to accompany the Aircraft and Airway Revenue Act of 1970, S. Rep. No. 706, 91st Cong., 2nd Sess. (1970), 1970-1 C.B. 386 at 396-7. [Emphasis added.]

A reasonable reading of the description of the affiliated group exception in context would not lead to the conclusion that there was any intent to limit the flight-byflight approach in the case of businesses operating in the form of an affiliated group. Rather, the affiliated group exception was intended merely to clarify that only the fuel tax would apply on flights carrying employees of the affiliated group. On the other hand, if a company plane is used by a group of corporations not affiliated with the company owning or leasing the plane, Section 4261 would apply for that flight. A review of the statute itself also indicates that the Service's position is incorrect and that the determination of the applicability of Section 4282 should be made on a flight-by-flight basis, just as the basic choice between Sections 4261 and 4041(c) is determined on a flight-by-flight basis.

Section 4041(c)(4), which provides the cross reference to Section 4282, provides: The term [noncommercial aviation] also includes any use of an aircraft, in a business described in the preceding sentence [transporting persons for compensation], which is properly allocable to any transportation exempt from the taxes imposed by sections 4261 and 4271 by reason of sections 4281 [small aircraft] and 4282. [Emphasis added.]

Use of the "properly allocable" terminology clearly contemplates that some portion of an aircraft's operations might not be transportation exempt under Section 4282. The "properly allocable" terminology is paralleled in the definition for "noncommercial aviation" in the regulations. Treas. Reg. Section 48.4041-8.

Thus, there is substantial support for the conclusion that Congress intended that the Section 4282 limitation be applied on a flight-by-flight basis and no reasonable basis in the legislative history for the Service's position as expressed in Revenue Ruling 77-405.

This interpretation is consistent with the concept that like situated businesses should be treated the same. It should not matter whether different operations are operated in separate divisions of the same corporation or in separate affiliated corporations. NBAA and GAMA urge that the Committee, as it did in 1992, clarify that that the Internal Revenue Service must apply Section 4282 on a flight-by-flight basis.

Re: July 18, 1995, Hearings on Proposals Related to Fuel Excise Taxes

Dear Mr. Chairman: As Director of Federal Government Relations for the National Marine Manufacturers Association, I am writing regarding the above-referenced hearings. This letter and the attached statement are submitted on behalf of the members of the National Marine Manufacturers Association. I respectfully request that this letter and the attached statement be included in the official published record of the hearings.

The National Marine Manufacturers Association is the nation's leading trade association representing over 1600 members that manufacture recreational boats, engines, and related products. Many members also own and operate marinas that sell diesel fuel. Our members range from small proprietorships to Fortune 500 companies.

For the reasons set forth in the attached statement, the National Marine Manufacturers Association strongly supports the bill introduced this month by Senators Breaux and Chafee (S. 1034). S. 1034 would ultimately lead to improved collection of the diesel fuel tax, prevent a potentially serious safety hazard to recreational boaters, and improve the economic viability of many marina operators. I believe that this legislation is necessary immediately and respectfully ask that the Committee move S. 1034 forward to enactment as soon as possible.

Respectfully submitted,

Enclosure.

JACQUE JOHNSON, Director, Federal
Government Relations.

ADDITIONAL STATEMENT OF JACQUE JOHNSON

On behalf of the members of the National Marine Manufacturers Association (NMMA), I want to bring to the Committee's attention the significant unintended problems created for marina operators and recreational boaters by the current diesel fuel tax scheme. These problems are national in scope and affect every area of the country with significant boating activity. The Chairman and Members of the Committee deserve much credit for considering ways to improve the federal diesel fuel excise tax law, and we are grateful for the opportunity to present our views on this serious and continuing problem.

NMMA is the nation's leading trade association representing over 1600 members that manufacture recreational boats, engines, and related products. Many members also own and operate marinas that sell diesel fuel. Our members range from small proprietorships to Fortune 500 companies.

We offer the following comments regarding the current scheme for collecting the excise tax on diesel fuel used in recreational boats and the legislative solutions proposed to address the problems created by the current scheme:

DESCRIPTION OF THE CURRENT SCHEME

The current scheme for the collection of the excise tax on diesel fuel used by recreational boaters resulted from provisions of the Omnibus Reconciliation Act of 1993. These provisions (1) moved the point of collection of the diesel fuel excise tax to the point at which the diesel fuel is removed from registered terminal facilities, (2) repealed the exemption from the federal excise tax on diesel fuel for recreational motorboat use, and (3) prohibited a fuel retailer from selling or holding for sale dyed (untaxed) diesel fuel for a taxable use, even if the retailer intended to collect the tax from taxable customers, such as recreational boaters, and remit it to the Internal Revenue Service.

PROBLEMS CAUSED BY THE CURRENT SCHEME

The current scheme for the collection of the excise tax on diesel fuel used by recreational boaters has created very serious unintended consequences for marine fuel retailers, such as marina operators, and recreational boat users. Marina operators

have been forced to choose either (1) to incur the significant costs and regulatory burdens of having separate fuel storage tanks from which to pump untaxed (dyed) and taxed (undyed) diesel fuel or (2) to pump only one type of diesel fuel (either dyed or undyed). Many marina operators can only afford to maintain one fuel storage tank and have chosen to sell only untaxed (dyed) diesel fuel to commercial boat

ers.

Under the current scheme, recreational boaters are not allowed to purchase the untaxed (dyed) diesel fuel carried as the only diesel fuel by many marina operators; therefore, diesel fuel has become unavailable to recreational boaters along major stretches of the nation's waterways. With fuel unavailable, there is a serious threat that boaters may run out of fuel and become stranded before they are able to find a marina that sells taxed (undyed) diesel fuel. Indeed, the Committee has received testimony that many recreational boaters have had to travel for hours and longer to find a marina selling taxed (undyed) diesel fuel.

In addition to the loss of revenue which results from not being able to sell fuel to the recreational boaters, there is another significant unintended consequence of the dyeing scheme to marina operators, who are mostly small business people. It also affects their non-fuel sales activities. Often when recreational boaters stop to purchase fuel at a marina, they will also purchase incidental items, such as groceries and boating and fishing related products. Additionally, recreational boaters on longer voyages may rent transient slips from marinas. According to our member operators this aspect of their business can contribute up to a third of their revenue. When recreational boaters bypass marinas who can not accommodate their fuel needs, those marinas are denied the opportunity to engage in essential activities often critical to their continued profitability and even commercial existence.

LEGISLATIVE SOLUTIONS PROPOSED

We support H.R. 1956 introduced by Representative Clay Shaw earlier this month. This bill addresses the problems created by the current scheme in a practical manner by:

• Having the Treasury Department, in consultation with the affected industries, assess the effectiveness of various procedures for collecting excise taxes on diesel fuel sold for use, or used, in recreational boats and report to Congress within 18 months the results of the study, including any recommendations.

• Suspending collection of the tax for two years while the Treasury Department conducts this study.

• Re-instituting the current collection procedure at the end of the two-year suspension period if Congress has not enacted legislation to create a new collection procedure.

There are other legislative proposals that have been introduced that are intended to address the problems with the current collection scheme. These proposals would require marina operators to ascertain the taxable status of each diesel fuel purchaser. For a number of reasons, we believe that solution could unintentionally create as many problems as it seeks to eliminate. That type of collection scheme, along with others, is included within the scope of the study which would be required under H.R. 1956.

NMMA believes that the only way to completely address this issue and avoid adopting a solution fraught with unintended problems is to suspend the collection of the tax while the Treasury studies the issue. This approach would make diesel fuel available once again to recreational boaters while at the same time requiring a complete study of the problem before adopting a solution.

CONCLUSION

We believe that legislation is necessary immediately to ensure that diesel fuel is available to recreational boaters across the country. H.R. 1956 would ultimately lead to improved collection of the diesel fuel tax, prevent a potentially serious safety hazard to recreational boaters, and improve the economic viability of many marina operators. Therefore, we respectfully ask that the Committee move H.R. 1956 forward as expeditiously as possible so that it can be enacted into law prior to the end of the 1995 boating season.

STATEMENT OF PHIBRO USA, INC.

(SUBMITTED BY ROSS A. BENAVIDES, TAX DIRECTOR)

Members of the Committee: Phibro Energy USA, Inc. (PEUSA) is an independent
refiner and marketer based in Houston, TX. PEUSA appreciates the opportunity to
express its views on the current regulatory requirements to dye certain diesel fuels.
PEUSA generally supports the current regulations requiring diesel fuel dying as
a tool to enhance enforcement of the diesel fuel tax. However, it is the position of
PEUSA that the dying of certain diesel fuels is costly, impracticable and does not
contribute to enforcement of the diesel fuel tax.

PEUSA produces and markets Marine Diesel Oil (MDO) for marine fuel use. This
fuel technically meets the definition of "diesel fuel" under Treas. Reg. §48.4081-
10T(a). Accordingly, MDO is subject to the same dying requirements as are other
high sulphur diesel fuels. PEUSA urges that the inclusion of MDO and other heavy
petroleum distillate products in the definition of diesel fuel serves no relevant pur-
pose and is unreasonable.

The following support is offered:

Road Use Not Practical-The use of MDO in trucks on the public highway is
not a source of significant avoidance of the diesel fuel tax. Our experts advise that,
while it is possible for a highway use motor vehicle to operate using MDO for a very
short period of time, damage to engines and fuel filters from cetane levels and sedi-
ment would prevent continued use and would far offset any tax benefit gained. At-
tachment "A" reflects the cetane and sediment levels of MDO.

Color Not Conducive to Visual Inspection-MDO is a "black" fuel. Its dark
color prevents the visual detection of colored dyes in the fuel. Further, the dark
color of MDO itself serves as a marker distinguishing it from other diesel fuels.
While blending with clean fuels has a remote potential for abuse, our experts advise
that this is not practical. They compare it to adding gallons of white paint to a gal-
lon of black paint. The volume of clean fuels necessary to make undyed MDO appear
to be a clean fuel is so great as to make such blending simply impracticable.

EPA does not require dying-The EPA has ruled that certain heavy fuels are
unsuitable for dying and are thus exempt from EPA dying requirements due to their
normal dark color and because their high viscosity and instability make them un-
suitable for use in on-highway motor vehicles. See Attachment "B."

Not cost effective-The incremental costs for PEUSA to dye MDO is approxi-
mately $.08/bbl. The marine diesel fuels market is very competitive. While it is the
policy of PEUSA to comply with the diesel fuel dying requirements, PEUSA is con-
cerned that other producers in the market may be obtaining a competitive advan-
tage by not dying such fuels. PEUSA is further concerned that such producers may
be encouraged to do so by the fact that the dying requirements are a regulatory bur-
den that does not contribute to the objectives of the regulations.

For the foregoing reasons, PEUSA urges the Committee to encourage the Treas-
ury Department to revise Treas. Reg. $48.4081-10T(a) to exempt MDO and other
heavy distillate fuels from the diesel fuel dying requirements. The regulatory bur-
den imposed is costly and does not contribute to the objectives of the dying require-
ments.

Thank you for your consideration.