Legal Advice

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LEXSTAT 2007 TNT 103-28
Copyright © 2007 Tax Analysts
Tax Notes Today
MAY 29, 2007 TUESDAY
DEPARTMENT: Administrative Rulings; IRS Generic Legal Advice
CITE: 2007 TNT 103-28
LENGTH: 1475 words
HEADLINE: #28 2007 TNT 103-28 KEROSENE USED IN COMMERCIAL AIRCRAFT'S APU ISN'T FUEL USED
IN COMMERCIAL AVIATION. (Section 6427 -- Nontaxable Fuels;) (AM 2007-0011) (Release Date: MAY 25, 2007)
(Doc 2007-12796)
CODE: Section 6427 -- Nontaxable Fuels;
Section 4081 -- Gasoline Tax;
Section 4041 -- Special Fuels Tax
ABSTRACT: In generic legal advice, the Service has concluded that kerosene used in a commercial aircraft's auxiliary
power units isn't fuel used in commercial aviation under section 6427(l)(4)(A) because the kerosene isn't used in the
aircraft's propulsion system.
SUMMARY:
Published by Tax AnalystsTM
In generic legal advice, the Service has concluded that kerosene used in a commercial aircraft's auxiliary power
units (APU) isn't fuel used in commercial aviation under section 6427(l)(4)(A) because the kerosene isn't used in the
aircraft's propulsion system.
The Service addressed the matter because several commercial airlines have filed large refund claims for the amount
of excise tax imposed on kerosene used to operate APU on their aircrafts.
Section 4081(a) imposes a tax on certain removals, entries, and sales of taxable fuel, including kerosene. The rate
of tax varies depending on whether the kerosene is removed from a refinery or terminal directly into the fuel tank of an
aircraft or not, and whether the kerosene is to be used in general or commercial aviation.
Section 6427(l)(1) allows for payments and credits to the ultimate purchaser of taxable kerosene, in the amount of
the tax less any payment to the ultimate vendor, if some of the fuel is used for a nontaxable use. The section limits the
amount of credit or payment for kerosene used in commercial aviation. Under rules governing dual use of taxable fuel,
tax applies on the sale of all liquid fuel used to propel an aircraft, but doesn't apply to liquid fuel sold for use or used in
a separate motor to operate special equipment.
The Service found that the kerosene used to operate the APU is used in a separate motor operating the APU rather
than in the aircraft's propulsion system, and that the APU is special equipment providing power for the aircraft's electrical and air conditioning systems and for starting its propulsion engines. Because the kerosene isn't used in the propulsion system, it isn't deemed used in commercial aviation. Accordingly, the kerosene powering the APU is considered a
nontaxable use under section 6427, without the limitations of section 6427(l)(4).
AUTHOR: Internal Revenue Service
GEOGRAPHIC: United States

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© 2007, Tax Analysts, Tax Notes Today, MAY 29, 2007

REFERENCES: Subject Area:
Credits;
Excise taxation;
Incentives;
Tax policy issues
TEXT:

Release Date: MAY 25, 2007
Published by Tax AnalystsTM
UILC: 6427.00-00, 6427.01-00
Release Date: 5/25/07
Date: March 30, 2007
Refer Reply to: CC:PSI:B08:DKaret - POSTN-104967-07
to:
W. Ricky Stiff
Chief, Excise Tax Program
from:
William P. O'Shea
Associate Chief Counsel
(Passthroughs & Special Industries)
subject:
Request for non-taxpayer specific legal advice; auxiliary power units
(APU)
This memorandum responds to your request for guidance on an issue affecting multiple taxpayers in the commercial airline industry. Specifically, this memorandum provides legal advice regarding the rules for a payment or credit
related to kerosene used in a commercial aircraft's auxiliary power unit (APU) that draws its fuel from the same tank
that supplies fuel to the propulsion system of an aircraft.
This memorandum may not be used or cited as precedent. It is intended only for use by the office that requested it.
ISSUE
Whether kerosene used in a commercial aircraft's APU is fuel "used in commercial aviation" for purposes of section 6427(l)(4)(A) of the Internal Revenue Code?
CONCLUSION
Kerosene used in a commercial aircraft's APU is not fuel used in commercial aviation for purposes of section
6427(l)(4)(A) because the kerosene is not used in the propulsion system of an aircraft. When that kerosene is drawn
from the same tank that supplies fuel to the propulsion system of an aircraft, a reasonable determination of the quantity
of fuel used by the APU is acceptable for purposes of computing the payment or credit, in accordance with the rules
provided in section 48.6427-1(d) of the Manufacturers and Retailers Excise Tax Regulations.
FACTS
Numerous commercial airlines have filed substantial refund claims for the amount of excise tax imposed on the
kerosene used to operate the APU on their aircrafts. You have requested advice to determine whether to allow these
claims.

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© 2007, Tax Analysts, Tax Notes Today, MAY 29, 2007

The APU is a small generator that is usually located in the tail section of a jet aircraft. The device provides power
for an aircraft's electrical and air conditioning systems and for starting the propulsion engines of the aircraft (or restarting them in case of a shutdown during flight). The APU does not propel the aircraft. The APU does, however, operate
on kerosene that it draws from the fuel tank of the aircraft that also supplies the aircraft's propulsion engines.
LAW AND ANALYSIS
Section 4081(a) imposes a tax on certain removals, entries, and sales of taxable fuel, including kerosene.
Under section 4081(a)(2)(A), the rate of tax on kerosene is $ .244 per gallon. However, section 4081(a)(2)(C) provides that the rate of tax on kerosene removed from any refinery or terminal directly into the fuel tank of an aircraft is $
.219 per gallon if the kerosene is for use in general aviation, and $ .044 per gallon if the kerosene is for use in commercial aviation.
Section 4041(a)(1) imposes a tax on any liquid other than gasoline sold for use or used in a diesel-powered highway vehicle or a diesel-powered train for use as a fuel in such vehicle or train. An exception to the tax imposed by section 4041(a)(1) exists for any liquid taxed under section 4081 (other than at the Leaking Underground Storage Tank
trust fund rate) that is not credited or refunded.
Section 4083(b) provides that commercial aviation means any use of an aircraft in a business of transporting persons or property for compensation or hire by air, unless properly allocable to transportation exempt from taxes imposed
by sections 4261 and 4271 by reason of section 4281 or section 4282 or by reason of section 4261(h) or (i).
Section 6427(l)(1) generally provides that if any kerosene on which tax is imposed is used by any person in a nontaxable use, the Secretary shall pay (without interest) to the ultimate purchaser of such fuel an amount equal to the tax
imposed under section 4041 or 4081, reduced by any payment to the ultimate vendor. Nontaxable use means any use
that is exempt from the tax imposed by section 4041(a)(1) other than by reason of a prior imposition of tax.
Section 6427(l)(4)(A) limits the amount of credit or payment under section 6427(l)(1) for kerosene used in commercial aviation. If tax was imposed at the rate of $ .244, the credit or payment amount is $ .20; if tax was imposed at
the rate of $ .219, the credit or payment is $ .175; and if tax was imposed at the rate of $ .044, the credit or payment
amount is zero.
Section 48.4041-7 provides rules for dual use of taxable liquid fuel under section 4041. The rules provide, in pertinent part, that while tax applies to all taxable liquid fuel sold for use or used as a fuel in the motor that is used to propel
a motor vehicle, motorboat, or aircraft, tax does not apply to liquid fuel sold for use or used in a separate motor to operate special equipment (whether or not the equipment is mounted on the vehicle).
Section 48.6427-1(d) indicates that the principles set forth in section 48.4041-7 are equally applicable in determining whether a credit or payment is to be allowed under section 6427. Thus, if diesel fuel or special motor fuel used in a
separate motor is drawn from the same tank as the one that supplies fuel for the propulsion system of a vehicle, a reasonable determination of the quantity of the fuel used in the separate motor will be acceptable for purposes of computing the payment or credit. The determination must be based, however, on the operating experience of the person using
the fuel, and a statement, signed by the person, evidencing the operating experience must be maintained as part of the
records of the person claiming the payment or credit.
Fuel is "used in commercial aviation" only if, among other conditions, it is also "used in an aircraft." The principles
of section 48.4041-7 relating to dual use of taxable liquid fuel used in a separate motor apply to the kerosene used in an
aircraft's APU. The kerosene used to operate the APU is not used in the propulsion system of the aircraft; rather, it is
used in a separate motor operating the APU. The APU is special equipment that provides power for an aircraft's electrical and air conditioning systems and for starting the propulsion engines of the aircraft (or restarting them in case of a
shutdown during flight). Because the kerosene is not used in the propulsion system of the aircraft, the kerosene is not
"used in an aircraft" and thus not "used in commercial aviation."
Accordingly, only kerosene used in the propulsion system of the aircraft is considered to be used in commercial
aviation. The kerosene used in the APU is used in a nontaxable use under section 6427(l)(2), without the limitation of
section 6427(l)(4).
This analysis also applies to: (1) kerosene used in an APU in an aircraft that is not engaged in commercial aviation;
and (2) aviation gasoline used in an APU in an aircraft, whether or not the aircraft is engaged in commercial aviation.

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© 2007, Tax Analysts, Tax Notes Today, MAY 29, 2007

Please call Deborah Karet at (202) 622-3130 if you have any further questions.
CC: Thomas R. Thomas
Division Counsel
Small Business/Self-Employed
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