DESCRIPTION OF THE 

“AMERICAN INFRASTRUCTURE INVESTMENT 

AND IMPROVEMENT ACT” 

Scheduled for Markup 

By the 

SENATE COMMITTEE ON FINANCE 

on September 20, 2007 

Prepared by the Staff 

of the 

JOINT COMMITTEE ON TAXATION 

September 18, 2007 

JCX-79-07
i 

CONTENTS 

Page

INTRODUCTION .......................................................................................................................... 1 

I. AVIATION TRUST FUND EXTENSION.............................................................................. 2 

A. Extension of Airport and Airway Trust Fund Tax and Expenditure Provisions................. 3 

B. Taxation of Kerosene for Use in Aviation........................................................................ 10 

C. Subject Fuel Consumed During Wholly Domestic Segments of International Flights 

to Tax at the Domestic Commercial Aviation Rate.......................................................... 15 

D. Use of International Air Facilities Tax ............................................................................. 17 

E. Air Traffic Control System Modernization Sub-Account ................................................ 18 

F. Treatment of Fractional Aircraft Ownership Programs.................................................... 19 

G. Repeal Exemption for Small Aircraft Operating on Nonestablished Lines...................... 21 

II. INCREASED FUNDING FOR THE HIGHWAY TRUST FUND ....................................... 22 

A. Replenish Emergency Spending From the Highway Trust Fund ..................................... 22 

B. Suspension of Transfers from Highway Trust Fund for Certain Repayments and 

Credit................................................................................................................................. 23 

C. Impose Excise Tax on Certain Removals of Taxable Fuel from Foreign Trade Zones ... 24 

D. Clarification of Penalty for Sale of Fuel Failing to Meet EPA Regulations..................... 27 

E. Clarification of Eligibility for Certain Fuel Credits for Fuel With Insufficient Nexus 

to the United States ........................................................................................................... 28 

F. Treatment of Qualified Alcohol Fuel Mixtures and Qualified Biodiesel Fuel Mixtures 

as Taxable Fuel ................................................................................................................. 29 

G. Excluding Volume of Denaturants from the Alcohol Fuels Credit .................................. 31 

H. Tax Finished Gasoline at the Refinery Gate..................................................................... 32 

I. Oil Spill Liability Trust Fund Tax .................................................................................... 33 

J. Tax Treatment of Certain Inverted Corporate Entities ..................................................... 34 
1 

INTRODUCTION 

The Airport and Airway Trust Fund (“AATF”) provides funding for capital 

improvements to the U.S. airport and airway system and funding for Federal Aviation 

Administration (“FAA”) operations and programs, among other purposes. The Internal Revenue 

Code (the “Code”) contains the provisions that dedicate revenues from certain excise taxes to the 

AATF, provide the relevant expenditure provisions governing the purposes for which AATF 

monies may be spent, and set the period for when those expenditures may occur. The excise 

taxes imposed to finance the AATF are:1

• ticket taxes imposed on commercial, domestic passenger transportation by air; 

• a use of international air facilities tax; 

• a cargo tax imposed on freight transportation by air; 

• fuels taxes imposed on gasoline used in commercial aviation and noncommercial 

aviation; and 

• fuels taxes imposed on (kerosene) jet fuel and other aviation fuels used in commercial 

aviation and noncommercial aviation. 

Domestic commercial aviation (the use of an aircraft in a business of transporting persons or 

property for compensation) is subject to the ticket tax and air cargo tax, as well as a 4.4-cent-pergallon fuel tax.2

 Noncommercial aviation is subject only to the fuel taxes, but at higher rates. 

With the exception of 4.4 cents per gallon of the fuel tax rates, the taxes imposed and 

dedicated to the AATF do not apply after September 30, 2007. The AATF expenditure 

authority expires on October 1, 2007. The purposes for which AATF funds may be expended are 

fixed as of the date of enactment of the Vision 100─Century of Aviation Reauthorization Act 

(Pub. L. No. 108-176, December 12, 2003). As a result, the Code provisions must be amended 

to permit the expenditure of AATF monies for those purposes as provided for in any new 

reauthorization bill, as well as to authorize the imposition of the dedicated taxes beyond 

September 30, 2007. 

The Senate Committee on Commerce, Science, and Transportation has considered and 

reported favorably with amendments S. 1300, the “Aviation Investment and Modernization Act 

 1

 Sec. 9502(b)(1). The AATF also is credited with interest under sec. 9602(b). Unless otherwise 

stated, all section references are to the Internal Revenue Code of 1986, as amended. 

2

 As described below, the fuel tax consists of two components: 4.3 cents per gallon dedicated to 

the AATF and 0.1 cent per gallon dedicated to the Leaking Underground Storage Tank Trust Fund. The 

higher fuel tax imposed on noncommercial aviation similarly consists of an AATF component (21.8 cents 

per gallon for jet fuel, 19.3 cents for aviation gasoline) plus 0.1 cent per gallon for the Leaking 

Underground Storage Tank Trust Fund. 
2 

of 2007.” That bill authorizes appropriations for the FAA for fiscal years 2008 through 2011, 

among other provisions.3

The Senate Committee on Finance has scheduled a markup of a bill relating to the AATF 

reauthorization for September 20, 2007. This document,4

 prepared by the staff of the Joint 

Committee on Taxation, provides a description of the present-law taxes dedicated to the AATF, a 

summary of the AATF expenditure purposes, and a description of the bill. That bill reauthorizes 

the taxes and amends the purposes for which AATF funds may be expended to include the 

reauthorization bill, increases the taxes on aviation-grade kerosene for use in noncommercial 

aviation, imposes a tax at the domestic commercial aviation rate to fuel consumed during wholly 

domestic segments of international flights, increases the tax on the use of international air 

facilities, creates a new sub-account within the AATF for air traffic control modernization, 

creates a new tax regime for fractional ownership aircraft programs, and repeals the exemption 

for small aircraft operating on nonestablished lines (other than exclusively for sightseeing). The 

bill also provides for increased funding for the Highway Trust Fund.

 3

 A complete description of S.1300 can be found in S. Rept. 110-144 (110th Cong. 1st 

Sess.)(August 3, 2007). 

4

 This document may be cited as follows: Joint Committee on Taxation, Description of the 

“American Infrastructure Investment and Improvement Act” (JCX-79-07), September 18, 2007. This 

document can be found on our website at www.house.gov/jct. 
3 

I. AVIATION TRUST FUND EXTENSION 

A. Extension of Airport and Airway Trust Fund Tax 

and Expenditure Provisions 

Present Law

Taxes on transportation of persons by air

The Code imposes an excise tax on both domestic and certain international transportation 

of passengers by air. The AATF is credited with amounts equivalent to these taxes. The taxes 

do not apply after September 30, 2007.5

Domestic air passenger excise tax

Domestic air passenger transportation generally is subject to a two-part excise tax. The 

first component is an ad valorem tax imposed at the rate of 7.5 percent of the amount paid for the 

transportation. The second component is a flight segment tax. For 2007, the flight segment tax 

rate is $3.40.6

 A flight segment is defined as transportation involving a single take-off and a 

single landing. For example, travel from New York to San Francisco, with an intermediate stop 

in Chicago, consists of two flight segments (without regard to whether the passenger changes 

aircraft in Chicago). 

The flight segment component of the tax does not apply to segments to or from qualified 

“rural airports.” For any calendar year, a rural airport is defined as an airport that in the second 

preceding calendar year had fewer than 100,000 commercial passenger departures, and meets 

one of the following three additional requirements (1) the airport is not located within 75 miles 

of another airport that had more than 100,000 such departures in that year, (2) the airport is 

receiving payments under the Federal “essential air service” program, or (3) the airport is not 

connected by paved roads to another airport.7

The domestic air passenger excise tax applies to “taxable transportation.” Taxable 

transportation means transportation by air that begins in the United States or in the portion of 

Canada or Mexico that is not more than 225 miles from the nearest point in the continental 

United States and ends in the United States or in such 225-mile zone. If the domestic 

 5

 Sec. 4261(j)(1)(A)(ii). The person making the payment (generally the passenger) is liable for 

the tax; airlines and others receiving payments are liable for remitting tax and are primarily liable if they 

fail to collect the tax. Secs. 4261(d) and 4263(c). 

6

 Sec. 4261(b)(1) and 4261(d)(4). The Code provides for a $3 tax indexed annually for inflation, 

effective each January 1st, resulting in the current rate of $3.40. 

7

 In the case of an airport qualifying as “rural” because it is not connected by paved roads to 

another airport, only departures for flight segments of 100 miles or more are considered in calculating 

whether the airport has fewer than 100,000 commercial passenger departures. The Department of 

Transportation has published a list of airports that meet the definition of rural airports. See Rev. Proc. 

2005-45. 
4 

transportation is paid for outside of the United States, it is taxable only if it begins and ends in 

the United States. 

For purposes of the domestic air passenger excise tax, taxable transportation does not 

include “uninterrupted international air transportation.” Uninterrupted international air 

transportation is any transportation that does not both begin and end in the United States or in the 

225-mile zone and does not have a layover time of more than 12 hours. The tax on international 

air passenger transportation is discussed below. 

Use of international air facilities

For 2007, international air passenger transportation is subject to a tax of $15.10 per 

arrival or departure in lieu of the taxes imposed on domestic air passenger transportation if the 

transportation begins or ends in the United States.8

 The definition of international transportation 

includes certain purely domestic transportation that is associated with an international journey. 

Under these rules, a passenger traveling on separate domestic segments integral to international 

travel is exempt from the domestic passenger taxes on those segments if the stopover time at any 

point within the United States does not exceed 12 hours. 

In the case of a domestic segment beginning or ending in Alaska or Hawaii, the tax 

applies to departures only and is $7.50 for calendar year 2007. 

“Free” travel

Both the domestic air passenger tax and the use of international air facilities tax apply 

only to transportation for which an amount is paid. Thus, free travel, such as that awarded in 

“frequent flyer” programs and nonrevenue travel by airline industry employees, is not subject to 

tax. However, amounts paid to air carriers (in cash or in kind) for the right to award free or 

reduced-fare transportation are treated as amounts paid for taxable air transportation and are 

subject to the 7.5 percent ad valorem tax (but not the flight segment tax or the use of 

international air facilities tax). Examples of such payments are purchases of miles by credit card 

companies and affiliates (including airline affiliates) for use as “rewards” to cardholders. 

Disclosure of air passenger transportation taxes on tickets and in advertising

Transportation providers are subject to special penalties if they do not separately disclose 

the amount of the passenger taxes on tickets and in advertising. Failure to satisfy these 

disclosure requirements is a misdemeanor, upon conviction of which the guilty party is fined not 

more than $100 per violation.9

 

 8

 Secs. 4261(c) and 4261(d)(4). The international air facilities tax rate of $12 is indexed annually 

for inflation, effective each January 1, resulting in the current rate of $15.10. 

9

 Sec. 7275. 
5 

Tax on transportation of property (cargo) by air

The AATF is credited with amounts equivalent to the taxes received from the 

transportation of property by air. Domestic air cargo transportation is subject to a 6.25 percent 

ad valorem excise tax on the amount paid for the transportation.10 The tax applies only to 

transportation that both begins and ends in the United States. Unlike the air passenger taxes, 

only shippers (the persons paying for the transportation) are liable for payment of the air cargo 

tax. There is no disclosure requirement for the air cargo tax. This tax does not apply after 

September 30, 2007.11

Aviation fuel taxes 

The Code imposes excise taxes on gasoline used in commercial aviation and 

noncommercial aviation, and on jet fuel (kerosene) and other aviation fuels used in commercial 

aviation and noncommercial aviation. Amounts equivalent to these taxes are credited to the 

AATF. With the exception of 4.4 cents per gallon, the fuel taxes will not apply after 

September 30, 2007. Table 1 below summarizes the taxes on fuel used in aviation: 

Table 1.–Taxes on Fuel Used in Aviation 

Fuel Type 

Tax Rate 

(including 0.1 cent for Leaking 

Underground Storage Tank Trust 

Fund Tax) 

Jet fuel and liquids other than aviation gasoline

Commercial aviation ............................................... 4.4 cents per gallon 

Noncommercial aviation......................................... 21.9 cents per gallon 

Exempt use.............................................................. 0.1 cent per gallon 

Aviation gasoline

Commercial............................................................. 4.4 cents per gallon 

Noncommercial ...................................................... 19.4 cents per gallon 

Exempt use.............................................................. 0.1 cent per gallon 

Trust Fund expenditure provisions

In general

The AATF was created in 1970 to finance a major portion of the Federal expenditures on 

national aviation programs. Prior to that time, these expenditures had been financed with 

 10 Sec. 4271. 

11 Sec. 4271(d). 
6 

General Fund monies. The statutory provisions relating to the AATF were placed in the Code in 

1982.12

Expenditures from the fund support the FAA and the majority of the FAA’s programs 

and activities. The FAA budget has four major components: (1) operations and maintenance; (2) 

facilities and equipment; (3) research, engineering, and development; and (4) the airport 

improvement program.13 Operations and maintenance are the only segments of the FAA budget 

that are funded by both a trust fund contribution and a General Fund contribution.14 The 

remaining three items receive all their funding from the AATF. 

The current expenditure purposes for the AATF are: 

1. obligations incurred under provisions of previous aviation authorizing legislation 

enacted since 1970, as those provisions were in effect on the date of enactment of the 

Vision 100–Century of Aviation Reauthorization Act (December 12, 2003);15

2. obligations incurred under part A of subtitle VII of Title 49, United States Code 

(generally, FAA programmatic provisions), which are attributable to planning, 

research and development, construction, or operation and maintenance of– 

(a) air traffic control, 

(b) air navigation, 

(c) communications, or 

 12 Sec. 9502. 

13 Congressional Research Service, Aviation Taxes and the Airport and Airway Trust Fund, CRS 

Report 97-657E at CRS-2 (1997). The airport improvement program is only for airports in the National 

Plan of Integrated Airport Systems. 

14 Id. 

15 The Acts (or provisions of Acts) pursuant to which aviation trust fund expenditures are 

allowed are Title I of the Airport and Airway Development Act of 1970; the Airport and Airway 

Development Act Amendments of 1976; the Aviation Safety and Noise Abatement Act of 1979; the 

Fiscal Year 1981 Airport Development Authorization Act; the provisions of the Airport and Airway 

Improvement Act of 1982; the Airport and Airway Safety and Capacity Expansion Act of 1987; the 

Federal Aviation Administration Research, Engineering, and Development Authorization Act of 1990; the 

Aviation Safety and Capacity Expansion Act of 1990; the Airport and Airway Safety, Capacity, Noise 

Improvement, and Intermodal Transportation Act of 1992; the Airport Improvement Program Temporary 

Extension Act of 1994; Federal Aviation Administration Authorization Act of 1994; Federal Aviation 

Reauthorization Act of 1996; the provisions of the Omnibus Consolidated and Emergency Supplemental 

Appropriations Act, 1999 providing for payments from the Airport and Airway Trust Fund; the Interim 

Federal Aviation Administration Authorization Act; section 6002 of the 1999 Emergency Supplemental 

Appropriations Act; Public Law 106-59; the Wendell H. Ford Aviation Investment and Reform Act for 

the 21st Century; the Aviation and Transportation Security Act; and the Vision 100─Century of Aviation 

Reauthorization Act. 
7 

(d) supporting services for the airway system; and 

3. obligations incurred for administrative expenses of the Department of Transportation 

that are attributable to activities described in items (1) and (2). 

No expenditures are permitted to be made from the AATF after September 30, 2007. 

Because the purposes for which AATF funds are permitted to be expended are fixed as of the 

date of enactment of the Vision 100─Century of Aviation Reauthorization Act (December 12, 

2003), the Code must be amended in order to accommodate new purposes. In addition, the Code 

contains a special enforcement provision to prevent expenditure of AATF monies for purposes 

not authorized in section 9502.16 This provision provides that, should such unapproved 

expenditures occur, no further excise tax receipts will be transferred to the AATF. Rather, the 

taxes will continue to be imposed but the receipts will be retained in the General Fund. This 

enforcement provision provides specifically that it applies not only to unauthorized expenditures 

under the current Code provisions, but also to expenditures pursuant to future legislation that 

may provide for them unless either the legislation providing for the expenditure amends section 

9502’s expenditure authorization provisions or otherwise authorizes the expenditure as part of a 

revenue Act. 

Specific AATF expenditure programs

Authorized expenditures for the following airport and airway programs are included 

under the general purposes described above. 

1. Airport Improvement Program (AIP).– 

(a) Airport planning.–Planning for airport systems for airport master plans; also, 

airport noise compatibility planning for air carrier airports eligible for terminal 

development costs. 

(b) Airport construction.–Construction, improvement, or repair of a public airport 

(includes removal of airport hazards and construction of physical barriers and 

landscaping to diminish noise).17

(c) Airport terminal facilities.–Non-revenue-producing public-use areas that are 

directly related to movement of passengers and baggage at certified air carrier 

airports; also, development of revenue-producing areas and construction of nonrevenue-producing parking lots for nonhub airports (subject to certification that 

the grant will not defer needed development with respect to safety, security, or 

capacity). 

 16 Sec. 9502(f)(1). 

17 Airport construction is usually limited to construction or improvements related to aircraft 

operations, such as runways, taxiways, etc. 
8 

(d) Land acquisition.–Includes land or property interests for airport noise control 

purposes; also includes acquisition of land for, or work necessary to construct, 

pads suitable for aircraft deicing (subject to certain limitations). 

(e) Airport-related equipment.–Airport security equipment required by Department of 

Transportation regulations, snow removal equipment, noise suppressing 

equipment, firefighting equipment, navigation aids, and safety equipment required 

for airport certification; also includes construction or purchase of capital 

equipment necessary for compliance by an airport with the Americans with 

Disabilities Act, the Clean Air Act, or the Federal Water Pollution Control Act, 

other than capital equipment that would primarily benefit a revenue-producing 

area of the airport used by a nonaeronautical business. 

(f) Airport noise compatibility programs.–Includes sound-proofing of public 

buildings; local governmental units are eligible for project grants as well as 

airports. 

2. Facilities and Equipment Program (F&E).–Costs of acquiring, establishing, and 

improving air navigation facilities. 

3. Research, Engineering, Development, and Demonstration Program (R&D).–

Projects in connection with FAA research and development activities. 

4. Operations and Maintenance Programs (O&M).–Operations and maintenance of air 

navigation facilities, including air traffic control and flight checks; services 

provided under international agreements relating to the U.S. share of joint provision 

of air navigation services; weather reporting services provided to the FAA by the 

National Oceanic and Atmospheric Administration. 

5. Small Community Air Service Development Pilot Program.–For payments to 

ensure that eligible localities receiving airline service at the time of deregulation 

continue to have airline service. 

6. Vocational Technical Institutions.–Grants to up to four vocational technical 

institutions for the acquisition of facilities for the advanced training of maintenance 

technicians for air carrier aircraft. 

7. Airway Science Curriculum Grants.–Grants for higher education airway science 

study programs, including equipment, buildings, and associated facilities. 

8. Civil Aircraft Security Research and Development.–Grants relating to technologies 

and procedures to counteract terrorist activities against civil aviation. 

Description of Proposal

The proposal extends the taxes imposed on the transportation of persons by air and on the 

transportation of property by air through September 30, 2011. The proposal extends the taxes 

imposed on aviation fuels through September 30, 2011. The proposal extends the expenditure 
9 

authority for the AATF through September 30, 2011, and conforms the purposes for which 

AATF funds are permitted to be expended to include those obligations authorized by S. 1300. 

Effective Date

The proposal is effective on the date of enactment. 
10 

B. Taxation of Kerosene for Use in Aviation 

Present Law

In general

Under section 4081, an excise tax is imposed upon (1) the removal of any taxable fuel 

from a refinery or terminal,18 (2) the entry of any taxable fuel into the United States, or (3) the 

sale of any taxable fuel to any person who is not registered with the IRS to receive untaxed fuel, 

unless there was a prior taxable removal or entry.19 The tax does not apply to any removal or 

entry of taxable fuel transferred in bulk by pipeline or vessel to a terminal or refinery if the 

person removing or entering the taxable fuel, the operator of such pipeline or vessel (excluding 

deep draft vessels), and the operator of such terminal or refinery are registered with the 

Secretary.20 If the bulk transfer exception applies, tax is not imposed until the fuel “breaks 

bulk,” i.e., when it is removed from the terminal, typically by rail car or truck, for delivery to a 

smaller wholesale facility or retail outlet, or removed directly from the terminal into the fuel tank 

of an aircraft.21 

The term “taxable fuel” means gasoline, diesel fuel (including any liquid, other than 

gasoline, that is suitable for use as a fuel in a diesel-powered highway vehicle or train), and 

kerosene.22 The term includes kerosene used in aviation (jet fuel) as well as aviation gasoline. 

Section 4041(c) provides a back-up tax for liquids (other than aviation gasoline) that are 

sold for use as a fuel in aircraft and that have not been previously taxed under section 4081.23 

 18 A “terminal” is a taxable fuel storage and distribution facility that is supplied by pipeline or 

vessel and from which taxable fuel may be removed at a rack. A “rack” is a mechanism capable of 

delivering taxable fuel into a means of transport other than a pipeline or vessel. A terminal can be located 

at an airport, or fuel may be delivered to the airport from a terminal located off the airport grounds. 

19 Sec. 4081(a)(1). 

20 Sec. 4081(a)(1)(B). 

21 In general, the party liable for payment of the taxes when the fuel breaks bulk at the terminal is 

the “position holder,” the person shown on the records of the terminal facility as holding the inventory 

position in the fuel. However, when fuel is removed directly into the fuel tank of an aircraft for use in 

commercial aviation, the person who uses the fuel is liable for the tax. The fuel is treated as used when 

such fuel is removed into the fuel tank. Sec. 4081(a)(4). 

22 Sec. 4083(a). 

23 Sec. 4041(c). 
11 

Kerosene for use in aviation

In general

Present law generally imposes a tax of 24.4 cents per gallon on kerosene. However, 

reduced rates apply for kerosene removed directly from a terminal into the fuel tank of an 

aircraft.24 For kerosene removed directly from a terminal into the fuel tank of an aircraft for use 

in commercial aviation, the tax rate is 4.4 cents per gallon.25 For kerosene removed directly 

from a terminal into the fuel tank of an aircraft for use in noncommercial aviation, the tax rate is 

21.9 cents per gallon. All of these tax rates include a 0.1 cent per gallon component for the 

Leaking Underground Storage Tank Trust Fund. For kerosene removed directly from a terminal 

into the fuel tank of an aircraft for an exempt use (such as foreign trade or for the exclusive use 

of a State or local government), only the Leaking Underground Storage Tank Trust Fund tax of 

0.1 cent per gallon applies. 

“Commercial aviation” generally means any use of an aircraft in the business of 

transporting by air persons or property for compensation or hire.26 Commercial aviation does not 

include transportation exempt from the ticket taxes and air cargo taxes by reason of sections 

4281 or 4282 or by reason of section 4261(h) or 4261(i). Thus, small aircraft operating on 

nonestablished lines (sec. 4281), air transportation for affiliated group members (sec. 4282), air 

transportation for skydiving (sec. 4261(h)), and certain air transportation by seaplane (sec. 

4261(i)) are excluded from the definition of commercial aviation, and accordingly are subject to 

the tax regime applicable to noncommercial aviation. 

 24 If certain conditions are met, present law permits the removal of kerosene from a refueler 

truck, tanker, or tank wagon to be treated as a removal from a terminal for purposes of determining 

whether kerosene is removed directly into the fuel tank of an aircraft. A refueler truck, tanker, or tank 

wagon is treated as part of a terminal if: (1) the terminal is located within an airport, (2) any kerosene 

which is loaded in such truck, tanker, or wagon at such terminal is for delivery only into aircraft at the 

airport in which such terminal is located, and (3) no vehicle licensed for highway use is loaded with 

kerosene at such terminal, except in exigent circumstances identified by the Secretary in regulations. In 

order to qualify for the special rule, a refueler truck, tanker, or tank wagon must: (1) have storage tanks, 

hose, and coupling equipment designed and used for the purposes of fueling aircraft; (2) not be registered 

for highway use; and (3) be operated by the terminal operator (who operates the terminal rack from which 

the fuel is unloaded) or by a person that makes a daily accounting to such terminal operator of each 

delivery of fuel from such truck, tanker, or tank wagon. Sec. 4081(a)(3). 

25 Tax is imposed at this rate if the commercial aircraft operator is registered with the IRS, and 

the fuel terminal is located within a secured area of an airport. The IRS has published a list of airports 

with secured areas in which a terminal is located. See Notice 2005-4, 2005-1 C.B. 289, at sec. 4(d)(2)(ii) 

(2005) (adopting the list from H.R. Conf. Rep. No. 755, 108th Cong., 2d Sess. 692 n. 718 (2004) with 

modifications) and Notice 2005-80, 2005-2 C.B. 953, at sec. 3(c)(2) (2005). If the fuel terminal is located 

at an unsecured airport, the fuel is taxed at 21.9 cents per gallon if the fuel is removed directly from the 

terminal into the fuel tank of an aircraft. 

26 Sec. 4083(b). 
12 

Refunds and credits to obtain the appropriate aviation tax rate

If the kerosene is not removed directly into the fuel tank of an aircraft, the fuel is taxed at 

24.4 cents per gallon. (This is generally the rate applied to diesel fuel and kerosene used in 

highway vehicles). A claim for credit or payment may be made for the difference between the 

tax paid and the appropriate aviation rate (21.9 cents per gallon for noncommercial aviation, 4.4 

cents per gallon for commercial aviation, and 0.1 cent per gallon for an exempt use).27 

For noncommercial aviation, other than for exempt use, only the registered ultimate 

vendor may make the claim for the 2.5-cent-per-gallon difference between the 24.4 cents per 

gallon rate and the noncommercial aviation rate of 21.9 cents per gallon.28 For commercial 

aviation and exempt use (other than State and local government use), the ultimate purchaser may 

make a claim for the difference in tax rates, or the ultimate purchaser may waive the right to 

make the claim for payment to the ultimate vendor.29 For State and local government use, the 

registered ultimate vendor is the proper claimant.30

Commercial aviation claimants are permitted to credit their fuel tax claims against their 

other excise tax liabilities, thereby reducing the amount of excise tax to be paid with the excise 

tax return. 

Transfers between the Highway Trust Fund and the AATF to account for aviation use

Kerosene that is not removed directly from the terminal into an airplane (e.g., the jet fuel 

is transferred from the terminal by highway vehicle to the airport) is taxed at the highway fuel 

rate of 24.4 cents per gallon. The Highway Trust Fund is credited with 24.3 cents per gallon of 

the 24.4 cents per gallon imposed. The remaining 0.1 cent is credited to the Leaking 

Underground Storage Tank Trust Fund. If a claim for payment is later made indicating that the 

fuel was used in aviation, the Secretary then transfers to the AATF 4.3 cents per gallon for 

commercial aviation use and 21.8 cents per gallon for noncommercial aviation use. These 

transfers initially are based on estimates, and proper adjustments are made in amounts 

subsequently transferred to the extent prior estimates were in excess of or less than the amounts 

required to be transferred. Thus, to the extent claims for credit or payment are not made for the 

difference between the highway rate and the aviation rate, the AATF will not be credited for fuel 

used in aviation that was taxed at the 24.4 cents per gallon rate. 

Aviation gasoline

The tax on aviation gasoline is 19.4 cents per gallon (including 0.1 cent per gallon 

Leaking Underground Storage Tank Trust Fund component). If aviation gasoline is used in 

 27 Sec. 6427(l)(4). 

28 Sec. 6427(l)(4)(C)(ii). 

29 Sec. 6427(l)(4)(C)(i). 

30 See secs. 6427(l)(5). Special rules apply if the kerosene is purchased with a credit card issued 

to a State or local government. 
13 

commercial aviation, the ultimate purchaser may obtain a credit or payment in the amount of 15 

cents per gallon, such that the tax rate on such gasoline is 4.4 cents per gallon.31 If aviation 

gasoline is sold for an exempt use, a credit or refund is allowable for all but the Leaking 

Underground Storage Tank Trust Fund tax (0.1 cent per gallon).32

Description of Proposal

The proposal creates a separate category of kerosene for tax purposes: aviation-grade 

kerosene.33 Aviation-grade kerosene is taxed at 35.9 cents per gallon plus 0.1 cent per gallon for 

the Leaking Underground Storage Tank Trust Fund. Under the proposal, aviation-grade 

kerosene used in noncommercial aviation will bear the full rate of tax. The rate of tax for 

aviation-grade kerosene used in commercial aviation and exempt use remains unchanged.34 

Because the tax on aviation-grade kerosene used in noncommercial aviation is equal to 

the applicable rate of tax collected, the proposal repeals the ultimate vendor refund provisions for 

noncommercial aviation. In addition, the proposal eliminates the inter-fund transfers from the 

Highway Trust Fund to the AATF for kerosene used in aviation. Instead, the taxes imposed on 

aviation-grade kerosene will be credited to the AATF only. As a result, the AATF, rather than 

the Highway Trust Fund, will reimburse the General Fund for any amounts paid with respect to 

the use of aviation-grade kerosene for a nontaxable use. The proposal also provides a refund 

mechanism for aviation-grade kerosene used for a taxable purpose other than in an aircraft and 

the related-trust fund accounting. 

In the case of aviation-grade kerosene held on January 1, 2008, by any person, a floor 

stocks tax is imposed equal to the tax that would have been imposed if the increased rates had 

been in effect before such date, less (1) the tax actually imposed on such fuel and (2) for fuel 

held by a person for his own use, the amount that such person would reasonably expect to be 

paid as a refund. The tax is to be paid at such time and in such manner as the Secretary shall 

prescribe. 

The floor stocks tax does not apply to fuel held in the fuel tank of an aircraft on 

January 1, 2008. Nor does it apply to fuel held exclusively for any use to the extent a refund or 

credit of tax is allowable under the Code. The floor stocks tax does not apply if the amount of 

fuel held by a person does not exceed 2,000 gallons. 

For purposes of the floor stocks tax, a controlled group is treated as one person. 

“Controlled group” for these purposes means a parent-subsidiary, brother-sister, or combined 

 31 Sec. 6421(f)(2). 

32 Sec. 6416(a); sec. 6420 (farming purposes); sec. 6421(c); and sec. 6430. 

33 Aviation-grade kerosene means, as defined by the Internal Revenue Service, kerosene-type jet 

fuel covered by ASTM specification D1655, or military specification MIL-DTL-5624 (Grade JP-5) or 

MIL-DTL-83133E (Grade JP-8). See section 4(b) of Notice 2005-4. 

34 Accordingly, commercial aviation use will continue to be subject to a tax of 4.4 cents per 

gallon and exempt use will be subject to 0.1 cent per gallon. 
14 

corporate group with more than 50-percent ownership with respect to either combined voting 

power or total value. Under regulations, similar principles may apply to a group of persons 

under common control where one or more persons are not a corporation. 

All provisions of law, including penalties, applicable with respect to the taxes imposed by 

section 4081 also apply to the floor stocks taxes to the extent not inconsistent with the provisions 

of the proposal. For purposes of determining receipts to the AATF, the floor stocks tax is treated 

as if it were a tax listed in section 9502(b)(1) (governing transfers to the AATF). 

Effective Date

The proposal is generally effective for fuel removed, entered, or sold after December 31, 

2007. The floor stocks tax is effective January 1, 2008. 
15 

C. Subject Fuel Consumed During Wholly Domestic Segments 

of International Flights to 

Tax at the Domestic Commercial Aviation Rate 

Present Law

Aviation fuel that is sold for use or used as “supplies for vessels or aircraft” is a 

nontaxable use for purposes of the fuel taxes (other than the Leaking Underground Storage Tank 

Trust Fund tax). Under section 4221(d)(3) of the Code, the term “supplies for vessels and 

aircraft” includes fuel supplies, ships' stores, sea stores, or legitimate equipment on vessels 

actually engaged in foreign trade or trade between the United States and any of its possessions. 

For purposes of the preceding sentence, the term “vessels” includes civil aircraft employed in 

foreign trade or trade between the United States any of its possessions.35 The term “trade” 

includes the transportation of persons or property for hire and the making of the necessary 

preparations for the transportation.36 

An aircraft that flies a person for hire between the United States and a foreign country is 

actually engaged in foreign trade within the meaning of section 4221(d)(3). Once an aircraft is 

actually engaged in foreign trade the aircraft remains so engaged even though it makes 

intermediate stops in the United States.37 Under Revenue Ruling 2002-50, that aircraft is also 

actually engaged in foreign trade when flying a person from a city in the United States to another 

city in the United States as part of the transportation between the United States and the foreign 

country. Therefore, only the Leaking Underground Storage Tank Trust Fund tax applies to fuel 

used in such flights, including fuel consumed between domestic intermediate stops. For 

example, if an airline carries at least one passenger from Los Angeles to London, with an 

intermediate stop in New York, the entire flight including the Los Angeles to New York 

segment, is treated as an international flight subject only Leaking Underground Storage Tank 

Trust Fund tax even if all the other passengers are flying only from Los Angeles to New York. If 

the flight were purely domestic, i.e., Los Angeles to New York, the fuel would be taxed at the 

commercial aviation rate of 4.3 cents per gallon plus 0.1 cent per gallon for Leaking 

Underground Storage Tank Trust Fund, for a total of 4.4 cents per gallon. 

 35 In the case of civil aircraft employed in foreign trade or trade between the U.S. and its 

possessions and registered in a foreign country, the exemption from tax is allowed only if the Secretary 

has been advised by the Secretary of Commerce that such foreign country allows, or will allow, 

substantially reciprocal privileges in respect of aircraft registered in the United States. If the Secretary 

has been advised that a foreign country has discontinued or will discontinue the allowance of such 

privileges, the exemption will not apply thereafter in respect of civil aircraft registered in that foreign 

country and employed in foreign trade or trade between the United States and any of its possessions. Sec. 

4221(e). 

36 Treas. Reg. sec. 48.4221-4(b)(8). 

37 Treas. Reg. sec. 48.4221-4(b)(2). 
16 

Description of Proposal

The proposal taxes the fuel consumed during the wholly domestic segments of an 

international flight at the commercial aviation rate of 4.4 cents per gallon. 

Effective Date

The proposal is effective on January 1, 2008. 
17 

D. Use of International Air Facilities Tax 

Present Law

For 2007, international air passenger transportation is subject to a tax of $15.10 per 

arrival or departure in lieu of the taxes imposed on domestic air passenger transportation if the 

transportation begins or ends in the United States.38 The definition of international transportation 

includes certain purely domestic transportation that is associated with an international journey. 

Under these rules, a passenger traveling on separate domestic segments integral to international 

travel is exempt from the domestic passenger taxes on those segments if the stopover time at any 

point within the United States does not exceed 12 hours. 

In the case of a domestic segment beginning or ending in Alaska or Hawaii, the tax 

applies to departures only and is $7.50 for calendar year 2007. 

Description of Proposal

Beginning January 1, 2008, the proposal increases the tax on the use of international 

facilities to $16.50. This amount is indexed as under present law. The special rule for Alaska 

and Hawaii is unchanged by the proposal. 

Effective Date

The proposal is effective on January 1, 2008. 

 38 Sec. 4261(c) and 4261(d)(4). The international air facilities tax rate of $12 is indexed annually 

for inflation, effective each January 1, resulting in the current rate of $15.10. 
18 

E. Air Traffic Control System Modernization Sub-Account 

Present Law

Under present law, there is no special sub-account of the AATF to which funds are 

dedicated for air traffic control systems modernization. 

Description of Proposal

The proposal creates an Air Traffic Modernization Sub-Account within the AATF to 

ensure sufficient funding is provided for modernization of the air traffic control system. The 

Modernization Sub-Account is supported through annual transfers of approximately $400 million 

from the parent Trust Fund. The funds are made available to the FAA through mandatory 

spending specifically dedicated to modernization costs approved by the Air Traffic Control 

Modernization Oversight Board. Use of the funds also may include FAA’s Facility and 

Equipment account expenditures. 

Effective Date

The proposal is effective on the date of enactment. 
19 

F. Treatment of Fractional Aircraft Ownership Programs 

Present Law

For excise tax purposes, fractional ownership flights are treated as commercial aviation. 

As commercial aviation, such flights are subject to the ad valorem tax of 7.5 percent of the 

amount paid for the transportation, a $3.40 segment tax, and tax of 4.4 cents per gallon on fuel. 

For international flights, fractional ownership flights pay the $15.10 international travel facilities 

use tax and a fuel tax of 0.1 cents per gallon. 

For purposes of the FAA safety regulations, fractional aircraft ownership programs are 

treated as a special category of general aviation.39

Description of Proposal

Under the proposal, special rules apply to flights on aircraft that are part of a “fractional 

ownership aircraft program.” For this purpose, fractional ownership aircraft program is defined 

as a program in which: 

• A single fractional ownership program manager provides fractional ownership 

program management services on behalf of the fractional owners; 

• Two or more airworthy aircraft are part of the program; 

• There are one or more fractional owners per program aircraft, with at least one 

program aircraft having more than one owner; 

• Each fractional owner possesses at least a minimum fractional ownership interest 

in one or more program aircraft;40

• There exists a dry-lease exchange arrangement among all of the fractional 

owners;41

• There are multi-year program agreements covering the fractional ownership, 

fractional ownership program management services, and dry-lease aircraft 

exchange aspects of the program. 

 39 14 C.F.R. Part 91, subpart k. 

40 A minimum fractional ownership interest means: (1) A fractional ownership interest equal to 

or greater than one-sixteenth of at least one subsonic, fixed wing or powered lift program aircraft; [or (2) 

a fractional ownership interest equal to, or greater than one-thirty-second of a least one rotorcraft program 

aircraft.] 

41 A “dry-lease aircraft exchange” means an agreement, documented by the written program 

agreements, under which the program aircraft are available, on an as needed basis without crew, to each 

fractional owner. 
20 

Under the proposal, in lieu of the present-law taxes on domestic commercial aviation and 

international flights, every flight on an aircraft that is part of a fractional ownership aircraft 

program is subject to a $58 departure tax and a fuel tax of 36 cents per gallon. The presence or 

absence of the fractional owner during the flight has no bearing on the amount of tax imposed on 

the flight. Thus, positioning the aircraft for the owner, as well as charter flights for non-owners 

are subject to the new tax regime. 

Effective Date

The proposal is effective for transportation beginning after, and fuel sold or used after, 

December 31, 2007. 
21 

G. Repeal Exemption for Small Aircraft Operating 

on Nonestablished Lines 

Present Law

Under present law, transportation by aircraft with a certificated maximum takeoff weight 

of 6,000 pounds or less is exempt from the excise taxes imposed on the transportation of persons 

by air and the transportation of cargo by air when operating on a nonestablished line. Similarly, 

when such aircraft are operating on a flight for the sole purpose of sightseeing, the taxes imposed 

on the transportation or persons or cargo by air do not apply. 

Description of Proposal

The proposal repeals the exemption for transportation by small aircraft operating on 

nonestablished lines. The present-law exemption for flights operated for the sole purposes of 

sightseeing is unchanged by the proposal. 

Effective Date

The proposal is effective for transportation beginning after December 31, 2007. 

 
22 

II. INCREASED FUNDING FOR THE HIGHWAY TRUST FUND 

A. Replenish Emergency Spending From the Highway Trust Fund 

Present Law

Certain trust funds defined under the Code receive amounts equivalent to the receipts 

from taxes dedicated to such trust funds, e.g., the Airports and Airways Trust Fund and the 

Highway Trust Fund. Receipts from undedicated taxes are deposited in the General Fund of the 

Treasury. 

The Safe, Accountable, Flexible, and Efficient Transportation Equity Act: A Legacy for 

Users (“SAFETEA”) and previous legislation specifically allowed emergency relief to be paid 

out of the Highway Trust Fund. Since 1998, there have been six emergency appropriations 

(excluding regular annual appropriations of $100 million for emergencies) from the Highway 

Trust Fund including responses to disaster relief from terrorism and from natural disasters. 42 

Infrastructure otherwise benefited by trust funds has previously received its disaster relief from 

the General Fund. 

Description of Proposal

 The proposal would replenish the Highway Trust Fund for emergency appropriations 

since 1998, through the previous reauthorization period by transferring $3.4 billion from the 

General Fund of the Treasury to the Highway Trust Fund. 

Effective Date

The proposal is effective on the date of enactment. 

 42 See Pub. L. No. 105-174 ($259 million), Pub. L. No. 106-346 ($720 million), Pub. L. No. 107-

117 ($175 million), Pub. L. No. 107-206 ($265 million), Pub. L. No. 324 ($1.2 billion), and Pub. L. No. 

108-447 ($741 million). 
23 

B. Suspension of Transfers from Highway Trust Fund 

for Certain Repayments and Credit 

Present Law

Under sec. 9503(c)(2), certain transfers are made from the Highway Trust Fund to 

reimburse the General Fund for amounts paid in respect of gasoline used on farms43, amounts 

paid in respect of gasoline used for certain nonhighway purposes or by local transit systems44, 

amounts relating to fuels not used for taxable purposes45, and income tax credits allowed with 

respect to the nontaxable uses of fuels.46

Description of Proposal

Section 9503(c)(2), relating to certain transfers from the Highway Trust Fund to the 

General Fund, is suspended on the date of enactment and for six months thereafter. 

Effective Date 

The proposal applies to amounts paid for which no transfer has been made before the date 

of enactment. 

 43 Sec. 6420. 

44 Sec. 6421. 

45 Sec. 6427. 

46 Sec. 34. 
24 

C. Impose Excise Tax on Certain Removals of Taxable 

Fuel from Foreign Trade Zones 

Present Law

In general

Generally, excise taxes are imposed on gasoline, diesel fuel and kerosene (collectively 

referred to as “taxable fuel”) when taxable fuel is removed from a refinery or terminal or upon its 

entry into the United States.47 The tax does not apply to any removal or entry of taxable fuel 

transferred in bulk by pipeline or vessel to a terminal or refinery, if the person removing or 

entering the fuel, the pipeline or vessel operator, and the terminal or refinery operator are all 

registered with the IRS.48

The Code generally permits the Secretary of the Treasury to require persons to register 

with respect to taxable fuel.49 The American Jobs Creation Act of 2004 requires persons that 

operate a terminal or refinery within a foreign trade zone or within a customs bonded storage 

facility, or that hold an inventory position with respect to taxable fuel in such a terminal, to 

register with the Secretary of the Treasury.50 Treasury Regulations require blenders, enterers, 

pipeline operators, position holders, refiners, terminal operators, and vessel operators, among 

others, to register.51 

The Code also provides that the Secretary may require information reporting from any 

registered person.52 A Department of Treasury fuel information reporting program, the Excise 

Summary Terminal Activity Reporting System (“ExSTARS”), requires terminal operators and 

bulk transport carriers to report monthly on the movement of any liquid product into or out of an 

approved terminal. Terminal operators file Form 720-TO - Terminal Operator Report, which 

shows the monthly receipts and disbursements of all liquid products to and from an approved 

terminal.53 Bulk transport carriers (vessels and pipelines) that receive liquid product from an 

approved terminal or deliver liquid product to an approved terminal file Form 720-CS - Carrier 

Summary Report, which details such receipts and disbursements. 

 47 Sec. 4081(a)(1)(A). 

48 Sec. 4081(a)(1)(B)(i). A vessel operator is not required to be registered with respect to certain 

deep draft ocean-going vessels. Sec. 4081(a)(1)(B)(ii). 

49 Sec. 4101(a). 

50 See Sec. 4101(a)(2), added by the American Jobs Creation Act of 2004, Pub. L. 108-357, sec. 

861(a)(2). 

51 Treas. Reg. sec. 48.4101-1(c)(1). 

52 Sec. 4101(d)(1). See also Treas. Reg. sec. 48.4101-2. The reports are required to be filed by 

the end of the month following the month to which the report relates. 

53 See Announcement 2001-48, 2001 C.B. An approved terminal is a terminal that is operated by 

a taxable fuel registrant that is a terminal operator. Treas. Reg. sec. 48.4081-1(b). 
25 

Foreign trade zones

Foreign trade zones are established under chapter 1A of title 19 of the United States 

Code. Customs regulations issued pursuant to title 19 provide that merchandise taken into a 

foreign trade zone for the sole purpose of exportation or storage will be given “zone restricted” 

status on proper application and be considered exported for purposes of customs law. If 

merchandise is to be considered exported for the purpose of any Federal law other than customs 

laws, the port director shall be satisfied that all pertinent laws, regulations, and rules 

administered by the Federal agency concerned have been complied with before the application is 

approved. In general, zone restricted merchandise may not be returned to the customs territory 

of the United States for domestic consumption.54

Rev. Rul. 59-318 holds that an article subject to a manufacturers excise tax is “exported” 

when it is shipped to a foreign trade zone for the sole purpose of exportation.55 Consequently, 

any later removal from such a refinery or terminal in a foreign trade zone for “actual” export is 

not considered a taxable event.56 In contrast, if the terminal is located outside of a foreign trade 

zone, the removal for export is a taxable event unless certain conditions are met.57 

Many petroleum refineries and terminals are located within foreign trade zones or 

subzones58 or bonded warehouses. When taxable fuel is removed by truck or rail from such 

refinery or terminal, excise taxes may or may not be due at the rack, depending on the mode of 

removal, as follows. If the taxable fuel is entered into the United States upon such removal, 

excise taxes and duties are generally due at that point. However, the fuel may be removed under 

bonded transport without immediate tax or duties. Such transported fuel can be destined for 

export, for entry into another foreign trade zone (or subzone) or bonded warehouse, or may be 

entered into the United States at its destination. Excise tax only applies if and when the fuel is 

entered into the United States. No tax is due if the fuel is exported or re-entered into a foreign 

trade zone or subzone or bonded warehouse. 

U.S. Customs enforcement procedures, which may include forfeiture of the full value of 

the goods, are triggered if fuel removed under bonded transport is not reported within 30 days as 

exported, entered into another foreign trade zone or subzone or bonded warehouse, or entered 

 54 19 C.F.R. sec. 146.44. 

55 1959-2 C.B. 310. Under Rev. Rul. 59-318, a bill of lading containing the statement “Shipped 

into Foreign-Trade Zone for Export” is acceptable as proof of exportation. 

56 See, e.g., Priv. Ltr. Rul. 9351006 (Sept. 17, 1993), Transaction 4. 

57 For example, regulations provide that the tax does not apply if the buyer is outside the United 

States, the sale occurs as the fuel is delivered into a vessel with a capacity of at least 20,000 barrels, the 

seller is registered and is the exporter of record, and the fuel is exported in due course. Treas. Reg. sec. 

48.4081-3(f)(2). 

58 A subzone is a special-purpose zone established as an adjunct to a zone project for a limited 

purpose. The rules and regulations applicable to foreign trade zones apply equally to subzones. 15 

C.F.R. sec. 400.2(n)-(o). 
26 

into the United States.59 Customs also tracks all entries and removals from foreign trade zones 

and subzones. 

Refineries in general, and terminals within foreign trade zones or subzones or bonded 

warehouses, are not currently required to report under Ex-STARS. 

Description of Proposal

Under the proposal, excise tax is generally due on the non-bulk removal (i.e., removal by 

truck or train) of taxable fuel from terminals or refineries within a foreign trade zone or subzone 

or bonded warehouse at the same time and in the same manner as if such terminal or refinery 

were not located in such foreign trade zone or subzone or bonded warehouse, notwithstanding 

any Customs statute, rule, or regulation. Tax is due upon such removal even if the fuel is entered 

into another foreign trade zone or subzone or bonded warehouse or is eventually exported. If 

such taxable fuel is later exported, a credit or refund may be claimed. No interest shall be due on 

such credits or refunds. 

Under the proposal, a removal from a refinery or terminal in a foreign trade zone or 

subzone or bonded warehouse is not treated any worse than would be the case if the refinery or 

terminal were not in such a foreign trade zone or subzone or bonded warehouse. Consequently, 

any removal that would be exempt if the refinery or terminal were not in a foreign trade zone or 

subzone or bonded warehouse will be exempt where the refinery or terminal is in a foreign trade 

zone or subzone or bonded warehouse. 

The present-law rules continue to apply to any removal by pipeline or vessel of taxable 

fuel from a terminal or refinery located in a foreign trade zone or subzone or bonded warehouse. 

It is intended that the Secretary of the Treasury will require owners and operators of 

terminals within a foreign trade zone or subzone or bonded warehouse to electronically report 

monthly all removals of taxable fuel, to the same extent as if such terminal were not located in a 

foreign trade zone or subzone or bonded warehouse, and it is anticipated that such reporting will 

be required to be done through Ex-STARS or in some other reasonable form. 

Effective Date

The proposal is effective for removals and entries after December 31, 2007.

 59 See, e.g., 19 C.F.R. secs. 18.25 and 18.26. 
27 

D. Clarification of Penalty for Sale of Fuel Failing to Meet EPA Regulations 

Present Law

Under the present law, any person other than a retailer who knowingly transfers for 

resale, sells for resale, or holds out for resale for use in a diesel-powered highway vehicle (or 

train) any liquid that does not meet applicable Environmental Protection Agency ("EPA") 

regulations (as defined in section 45H(c)(3)) is subject to a penalty of $10,000 for each such 

transfer, sale, or holding out for resale, in addition to the tax on such liquid, if any.60 Any retailer 

who knowingly holds out for sale (other than for resale) any such liquid, is subject to a $10,000 

penalty for each such holding out for sale, in addition to the tax on such liquid, if any. 

Description of Proposal

The proposal expands the penalty to include any fuel which does not meet EPA standards 

for distribution to the public. The proposal reaffirms that the Secretary is authorized to make the 

determination that the fuel does not comply with the applicable EPA regulations and standards 

for purposes of asserting the penalty. 

Effective Date

The proposal is effective on the date of enactment. 

 60 Sec. 6720A. 
28 

E. Clarification of Eligibility for Certain Fuel Credits for Fuel 

With Insufficient Nexus to the United States 

Present Law

The Code provides per-gallon incentives relating to the following qualified fuels: alcohol 

(including ethanol), biodiesel (including agri-biodiesel), renewable diesel, and certain alternative 

fuels.61 The incentives may be taken as an income tax credit, excise tax credit or payment. The 

provisions are coordinated so that a gallon of qualified fuel is only taken into account once. If 

the qualified fuel is part of a qualified fuel mixture, the incentives apply only to the amount of 

qualified fuel in the mixture. 

For alcohol, other than ethanol, the amount of the credit is 60 cents per gallon. For 

ethanol, the credit is 51 cents per gallon. The alcohol incentives expire after December 31, 2010. 

The amount of the credit for biodiesel is 50 cents. For agri-biodiesel and renewable diesel, the 

credit amount is $1.00 per gallon. The biodiesel, agri-biodiesel and renewable diesel incentives 

expire after December 31, 2008. The credit amount for alternative fuels is 50 cents per gallon. 

The incentives for alternative fuels expire after September 30, 2009 (after September 30, 2014, 

in the case of liquefied hydrogen). Present law also provides a separate 10-cents-per-gallon 

incentive to small producers of ethanol and to small producers of agri-biodiesel for up to 15 

million gallons. 

The Code is silent as to the geographic limitations on where the fuel must be produced, 

used, or sold. For imported ethanol, there is an offsetting tariff of 54 cents per gallon. This tariff 

expires January 1, 2009. 

Description of Proposal

On a prospective basis, the proposal limits the per-gallon tax incentives for alcohol fuels, 

biodiesel (including agri-biodiesel), renewable diesel, and alternative fuels to fuels that are 

consumed or sold for consumption in the United States. Thus, foreign-produced fuel must be 

entered into the United States for consumption in the United States. Similarly, domestically 

produced fuel sold for export will not qualify for the credit. However, these restrictions do not 

apply to the small ethanol producer credit or the small agri-biodiesel producer credit. 

Effective Date

The proposal is effective for fuels sold or used after the date of enactment. 

 61 See secs. 40, 40A, 6426, and paragraph (e) of section 6427. 
29 

F. Treatment of Qualified Alcohol Fuel Mixtures and Qualified 

Biodiesel Fuel Mixtures as Taxable Fuel 

Present Law

An excise tax is imposed upon (1) the removal of any taxable fuel from a refinery or 

terminal, (2) the entry of any taxable fuel into the United States, or (3) the sale of any taxable 

fuel to any person who is not registered with the IRS to receive untaxed fuel, unless there was a 

prior taxable removal or entry.62 The tax does not apply to any removal or entry of taxable fuel 

transferred in bulk by pipeline or vessel to a terminal or refinery if the person removing or 

entering the taxable fuel, the operator of such pipeline or vessel (excluding deep draft vessels) 

and the operator of such terminal or refinery are registered with the Secretary.63 The term 

“taxable fuel” means gasoline, diesel fuel, and kerosene.64

Diesel fuel is (1) any liquid suitable for use in a diesel powered highway vehicle or diesel 

powered train, (2) transmix, and (3) diesel fuel blendstocks identified by the Secretary.65 By 

regulation, diesel fuel does not include kerosene, gasoline, No. 5 and No. 6 fuel oils (as 

described in ASTM Specification D 396), or F-76 (Fuel Naval Distillates MIL-F-16884) any 

liquid that contains less than four percent normal parafins, or any liquid that has a distillation 

range of 125 degrees Fahrenheit or less, sulfur content of 10 ppm or less and minimum color of 

+27 Saybolt.66 

Biodiesel is not a taxable fuel because it has less than four percent paraffin content. 

Ethanol and other fuel alcohols also are not treated as taxable fuel. However, such fuels are 

subject to the backup tax under section 4041 if sold for use or used as a fuel in a diesel powered 

highway vehicle or diesel powered train and not for a nontaxable use. 

In addition, such fuels are taxable if used in the production of a blended taxable fuel.67

The Code provides per-gallon tax incentives relating to biodiesel fuel used in a qualified 

mixture. The taxpayer has the option of taking the credit amount as an income tax credit, excise 

tax credit against the tax imposed on taxable fuels ("section 4081 liability") or as a payment from 

the Secretary in the amount of the credit. The credit is 50 cents for each gallon of biodiesel used 

 62 Sec. 4081(a)(1). 

63 Sec. 4081(a)(1)(B). 

64 Sec. 4083(a). 

65 Sec. 4083(a)(3). 

66 Treas. Reg. sec. 48.4081-1(c)(2)(ii). 

67 Under Treas. Reg. sec. 48.4081-1(c), blended taxable fuel generally means any taxable fuel 

that (1) is produced outside the bulk transfer/terminal system and (2) by mixing taxable fuel with respect 

to which tax has been imposed under sec. 4081(a) (gasoline, diesel fuel or kersosene) with any other 

liquid on which tax has not been imposed under sec. 4081. 
30 

by the taxpayer in producing a biodiesel mixture for sale or use in a trade or business of the 

taxpayer. In the case of agri-biodiesel, the credit is $1.00 per gallon. 

A qualified biodiesel mixture is a mixture of biodiesel and diesel fuel that is (1) sold by 

the taxpayer producing such mixture to any person for use as a fuel, or (2) is used as a fuel by the 

taxpayer producing such mixture. Pursuant to Treasury Notice, a mixture of 99.9 percent 

biodiesel and diesel fuel is considered a mixture but such mixture is not a blended taxable fuel 

because it contains less than four percent paraffin content. Thus, while eligible for the biodiesel 

fuel mixture tax credit and payment provisions, such fuel would not be subject to tax until put in 

a motor vehicle for a taxable use. 

The Code also provides per-gallon tax incentives relating to alcohol used in a qualified 

mixture. A qualified mixture means a mixture of alcohol and gasoline, (or of alcohol and a 

special fuel) sold by the taxpayer as fuel, or used as fuel by the taxpayer producing such mixture. 

The credit is 51 cents if the alcohol is ethanol (60 cents in the case of other alcohols). 

Description of Proposal

The proposal adds qualified alcohol fuel mixtures and qualified biodiesel fuel mixtures to 

the definition of taxable fuel as a type of diesel fuel. 

Effective Date

The proposal is effective for fuels removed, entered, or sold after December 31, 2007. 
31 

G. Excluding Volume of Denaturants from the Alcohol Fuels Credit 

Present Law

The Code provides a per-gallon credit for the volume of alcohol used as a fuel or in a 

qualified mixture. For purposes of determining the number of gallons of alcohol with respect to 

which the credit is allowable, the volume of alcohol includes any denaturant, including 

gasoline.68 The denaturant must be added under a formula approved by the Secretary and the 

denaturant cannot exceed five percent of the volume of such alcohol (including denaturants). 

Description of Proposal

The proposal provides that the volume of alcohol eligible for the credit does not include 

the volume of any denaturant. 

Effective Date

The proposal is effective January 1, 2008. 

 68 Sec. 40(d)(4). 
32 

H. Tax Finished Gasoline at the Refinery Gate 

Present Law

An excise tax is imposed upon (1) the removal of any taxable fuel from a refinery or 

terminal, (2) the entry of any taxable fuel into the United States, or (3) the sale of any taxable 

fuel to any person who is not registered with the IRS to receive untaxed fuel, unless there was a 

prior taxable removal or entry.69 The tax does not apply to any removal or entry of taxable fuel 

transferred in bulk by pipeline or vessel to a terminal or refinery if the person removing or 

entering the taxable fuel, the operator of such pipeline or vessel (excluding deep draft vessels), 

and the operator of such terminal or refinery are registered with the Secretary.70 The term 

“taxable fuel” means gasoline, diesel fuel (including any liquid, other than gasoline, which is 

suitable for use as a fuel in a diesel-powered highway vehicle or train), and kerosene.71

Description of Proposal

The proposal imposes a tax on finished gasoline upon removal from the refinery or entry 

into the United States. The bulk transfer exception would not apply. Only the increased volume 

resulting from the addition of oxygenates, detergents and other untaxed liquids after the gasoline 

leaves the refinery would be subject to a subsequent tax. 

Effective Date

The proposal is effective for fuel removed, entered, or sold after December 31, 2007.

 69 Sec. 4081(a)(1). 

70 Sec. 4081(a)(1)(B). 

71 Sec. 4083(a). 
33

I. Oil Spill Liability Trust Fund Tax 

Present Law

The Oil Spill Liability Trust Fund financing rate (“oil spill tax”) was reinstated effective 

April 1, 2006.72 The oil spill tax rate is five cents per barrel and generally applies to crude oil 

received at a U.S. refinery and to petroleum products entered into the United States for 

consumption, use, or warehousing.73 

The oil spill tax also applies to certain uses and the exportation of domestic crude oil.74 If 

any domestic crude oil is used in or exported from the United States, and before such use or 

exportation no oil spill tax was imposed on such crude oil, then the oil spill tax is imposed on 

such crude oil. The tax does not apply to any use of crude oil for extracting oil or natural gas on 

the premises where such crude oil was produced. 

For crude oil received at a refinery, the operator of the United States refinery is liable for 

the tax. For imported petroleum products, the person entering the product for consumption, use 

or warehousing is liable for the tax. For certain uses and exports, the person using or exporting 

the crude oil is liable for the tax. No tax is imposed with respect to any petroleum product if the 

person who would be liable for such tax establishes that a prior oil spill tax has been imposed 

with respect to such product. 

The imposition of the tax is dependent in part on the balance of the Oil Spill Liability 

Trust Fund. The oil spill tax does not apply during a calendar quarter if the Secretary estimates 

that, as of the close of the preceding calendar quarter, the unobligated balance of the Oil Spill 

Liability Trust Fund exceeds $2.7 billion. If the Secretary estimates the unobligated balance in 

the Oil Spill Liability Trust Fund is less than $2 billion at close of any calendar quarter, the oil 

spill tax will apply on the date that is 30 days from the last day of that quarter. The tax does not 

apply to any periods after December 31, 2014. 

Description of Proposal

The proposal extends the oil spill tax through December 31, 2017. The proposal increases 

the tax rate from five cents to 10 cents per barrel. The proposal also repeals the requirement that 

the tax be suspended when the unobligated balance exceeds $2.7 billion. 

Effective Date

The proposal is effective beginning the first quarter that is more than 60 days after the 

date of enactment. 

 72 Sec. 4611(f) 

73 The term “crude oil” includes crude oil condensates and natural gasoline. The term 

“petroleum product” includes crude oil. 

74 The term “domestic crude oil” means any crude oil produced from a well located in the United 

States. 
34

J. Tax Treatment of Certain Inverted Corporate Entities 

Present Law

Determination of corporate residence

The U.S. tax treatment of a multinational corporate group depends significantly on 

whether the parent corporation of the group is domestic or foreign. For purposes of U.S. tax law, 

a corporation is treated as domestic if it is incorporated under the law of the United States or of 

any State. Other corporations (i.e., those incorporated under the laws of foreign countries or 

U.S. possessions) generally are treated as foreign. 

U.S. taxation of domestic corporations

The United States employs a “worldwide” tax system under which domestic corporations 

generally are taxed on all income, whether derived in the United States or abroad. In order to 

mitigate the double taxation that may arise from taxing the foreign-source income of a domestic 

corporation, a foreign tax credit for income taxes paid to foreign countries is provided to reduce 

or eliminate the U.S. tax owed on such income, subject to certain limitations. 

Income earned by a domestic parent corporation from foreign operations conducted by 

foreign corporate subsidiaries generally is subject to U.S. tax when the income is distributed as a 

dividend to the domestic corporation. Until such repatriation, the U.S. tax on such income 

generally is deferred, and U.S. tax is imposed on such income when repatriated. However, 

certain anti-deferral regimes may cause the domestic parent corporation to be taxed on a current 

basis in the United States with respect to certain categories of passive or highly mobile income 

earned by its foreign subsidiaries, regardless of whether the income has been distributed as a 

dividend to the domestic parent corporation. The main anti-deferral regimes in this context are 

the controlled foreign corporation rules of subpart F75 and the passive foreign investment 

company rules.76 A foreign tax credit is generally available to offset, in whole or in part, the 

U.S. tax owed on this foreign-source income, whether such income is repatriated as an actual 

dividend or included under one of the anti-deferral regimes. 

U.S. taxation of foreign corporations

The United States taxes foreign corporations only on income that has a sufficient nexus to 

the United States. Thus, a foreign corporation is generally subject to U.S. tax only on income 

that is “effectively connected” with the conduct of a trade or business in the United States. Such 

“effectively connected income” generally is taxed in the same manner and at the same rates as 

the income of a U.S. corporation. An applicable tax treaty may limit the imposition of U.S. tax 

on business operations of a foreign corporation to cases in which the business is conducted 

through a “permanent establishment” in the United States. 

 75 Secs. 951-964. 

76 Secs. 1291-1298. 
35

In addition, foreign corporations generally are subject to a gross-basis U.S. tax at a flat 

30-percent rate on the receipt of interest, dividends, rents, royalties, and certain similar types of 

income derived from U.S. sources, subject to certain exceptions. The tax generally is collected 

by means of withholding by the person making the payment. This tax may be reduced or 

eliminated under an applicable tax treaty. 

U.S. tax treatment of inversion transactions prior to the AJCA

Prior to the AJCA, a U.S. corporation could reincorporate in a foreign jurisdiction and 

thereby replace the U.S. parent corporation of a multinational corporate group with a foreign 

parent corporation. These transactions were commonly referred to as inversion transactions. 

Inversion transactions could take many different forms, including stock inversions, asset 

inversions, and various combinations of and variations on the two. Most of the known 

transactions were stock inversions. In one example of a stock inversion, a U.S. corporation 

forms a foreign corporation, which in turn forms a domestic merger subsidiary. The domestic 

merger subsidiary then merges into the U.S. corporation, with the U.S. corporation surviving, 

now as a subsidiary of the new foreign corporation. The U.S. corporation’s shareholders receive 

shares of the foreign corporation and are treated as having exchanged their U.S. corporation 

shares for the foreign corporation shares. An asset inversion could be used to reach a similar 

result, but through a direct merger of the top-tier U.S. corporation into a new foreign corporation, 

among other possible forms. An inversion transaction could be accompanied or followed by 

further restructuring of the corporate group. For example, in the case of a stock inversion, in 

order to remove income from foreign operations from the U.S. taxing jurisdiction, the U.S. 

corporation could transfer some or all of its foreign subsidiaries directly to the new foreign 

parent corporation or other related foreign corporations. 

In addition to removing foreign operations from U.S. taxing jurisdiction, the corporate 

group could seek to derive further advantage from the inverted structure by reducing U.S. tax on 

U.S.-source income through various earnings stripping or other transactions. For example, the 

corporate group could engage in earnings stripping through payment by a U.S. corporation of 

deductible amounts such as interest, royalties, rents, or management service fees to the new 

foreign parent or other foreign affiliates. In this respect, the post-inversion structure could 

enable the group to employ the same tax-reduction strategies that are available to other 

multinational corporate groups with foreign parents and U.S. subsidiaries, subject to the same 

limitations (e.g., sections 163(j) and 482). 

Inversion transactions could give rise to immediate U.S. tax consequences at the 

shareholder and/or the corporate level, depending on the type of inversion. In stock inversions, 

the U.S. shareholders generally recognized gain (but not loss) under section 367(a), based on the 

difference between the fair market value of the foreign corporation shares received and the 

adjusted basis of the domestic corporation stock exchanged. To the extent that a corporation’s 

share value had declined, and/or it had many foreign or tax-exempt shareholders, the impact of 

this section 367(a) “toll charge” was reduced. The transfer of foreign subsidiaries or other assets 

to the foreign parent corporation also could give rise to U.S. tax consequences at the corporate 

level (e.g., gain recognition and earnings and profits inclusions under sections 1001, 311(b), 304, 

367, 1248, or other provisions). The tax on any income recognized as a result of these 
36

restructurings could be reduced or eliminated through the use of net operating losses, foreign tax 

credits, and other tax attributes. 

In asset inversions, the U.S. corporation generally recognized gain (but not loss) under 

section 367(a) as though it had sold all of its assets, but the shareholders generally did not 

recognize gain or loss, assuming the transaction met the requirements of a reorganization under 

section 368. 

U.S. tax treatment of inversion transactions under AJCA

In general

AJCA added new section 7874 to the Code, which defines two different types of 

corporate inversion transactions and establishes a different set of consequences for each type. 

Certain partnership transactions also are covered. 

Transactions involving at least 80 percent identity of stock ownership

The first type of inversion is a transaction in which, pursuant to a plan77 or a series of 

related transactions: (1) a U.S. corporation becomes a subsidiary of a foreign-incorporated entity 

or otherwise transfers substantially all of its properties to such an entity in a transaction 

completed after March 4, 2003; (2) the former shareholders of the U.S. corporation hold (by 

reason of holding stock in the U.S. corporation) 80 percent or more (by vote or value) of the 

stock of the foreign-incorporated entity after the transaction; and (3) the foreign-incorporated 

entity, considered together with all companies connected to it by a chain of greater than 50 

percent ownership (i.e., the “expanded affiliated group”), does not have substantial business 

activities in the entity’s country of incorporation, compared to the total worldwide business 

activities of the expanded affiliated group. The provision denies the intended tax benefits of this 

type of inversion (“80-percent inversion”) by deeming the top-tier foreign corporation to be a 

domestic corporation for all purposes of the Code.78 

In determining whether a transaction meets the definition of an inversion under the 

provision, stock held by members of the expanded affiliated group that includes the foreign 

incorporated entity is disregarded. For example, if the former top-tier U.S. corporation receives 

stock of the foreign incorporated entity (e.g., so-called “hook” stock), the stock would not be 

considered in determining whether the transaction meets the definition. Similarly, if a U.S. 

parent corporation converts an existing wholly owned U.S. subsidiary into a new wholly owned 

controlled foreign corporation, the stock of the new foreign corporation would be disregarded, 

with the result that the transaction would not meet the definition of an inversion under the 

 77 Acquisitions with respect to a domestic corporation or partnership are deemed to be “pursuant 

to a plan” if they occur within the four-year period beginning on the date that is two years before the 

ownership threshold under the provision is met with respect to such corporation or partnership. 

78 Since the top-tier foreign corporation is treated for all purposes of the Code as domestic, the 

shareholder-level “toll charge” of section 367(a) does not apply to these inversion transactions. 
37

provision. Stock sold in a public offering related to the transaction also is disregarded for these 

purposes. 

Transfers of properties or liabilities as part of a plan a principal purpose of which is to 

avoid the purposes of the provision are disregarded. In addition, the Treasury Secretary is to 

provide regulations to carry out the provision, including regulations to prevent the avoidance of 

the purposes of the provision, including avoidance through the use of related persons, passthrough or other noncorporate entities, or other intermediaries, and through transactions designed 

to qualify or disqualify a person as a related person or a member of an expanded affiliated group. 

Similarly, the Treasury Secretary has the authority to treat certain nonstock instruments as stock, 

and certain stock as not stock, where necessary to carry out the purposes of the provision. 

Transactions involving at least 60 percent but less than 80 percent identity of stock 

ownership

The second type of inversion is a transaction that would meet the definition of an 

inversion transaction described above, except that the 80-percent ownership threshold is not met. 

In such a case, if at least a 60-percent ownership threshold is met, then a second set of rules 

applies to the inversion. Under these rules, the inversion transaction is respected (i.e., the foreign 

corporation is treated as foreign), but any applicable corporate-level “toll charges” for 

establishing the inverted structure are not offset by tax attributes such as net operating losses or 

foreign tax credits. Specifically, any applicable corporate-level income or gain required to be 

recognized under sections 304, 311(b), 367, 1001, 1248, or any other provision with respect to 

the transfer of controlled foreign corporation stock or the transfer or license of other assets by a 

U.S. corporation as part of the inversion transaction or after such transaction to a related foreign 

person is taxable, without offset by any tax attributes (e.g., net operating losses or foreign tax 

credits). This rule does not apply to certain transfers of inventory and similar property. These 

measures generally apply for a 10-year period following the inversion transaction. 

Other rules

Under section 7874, inversion transactions include certain partnership transactions. 

Specifically, the provision applies to transactions in which a foreign-incorporated entity acquires 

substantially all of the properties constituting a trade or business of a domestic partnership, if 

after the acquisition at least 60 percent (or 80 percent, as the case may be) of the stock of the 

entity is held by former partners of the partnership (by reason of holding their partnership 

interests), provided that the other terms of the basic definition are met. For purposes of applying 

this test, all partnerships that are under common control within the meaning of section 482 are 

treated as one partnership, except as provided otherwise in regulations. In addition, the modified 

“toll charge” rules apply at the partner level. 

A transaction otherwise meeting the definition of an inversion transaction is not treated as 

an inversion transaction if, on or before March 4, 2003, the foreign-incorporated entity had 

acquired directly or indirectly more than half of the properties held directly or indirectly by the 

domestic corporation, or more than half of the properties constituting the partnership trade or 

business, as the case may be. 
38

Description of Proposal

The proposal generally extends the 80-percent inversion regime of section 7874 to 80-

percent inversions completed after March 20, 2002, but on or before March 4, 2003, with certain 

modifications as described below. A transaction otherwise meeting the definition of an 80-

percent inversion under the proposal (i.e., one completed after March 20, 2002, but on or before 

March 4, 2003) is not treated as an 80-percent inversion if, on or before March 20, 2002, the 

foreign-incorporated entity had acquired directly or indirectly more than half the properties held 

directly or indirectly by the domestic corporation, or more than half the properties constituting 

the partnership trade or business, as the case may be. 

Under the proposal, an 80-percent inversion that is completed after March 20, 2002, but 

on or before March 4, 2003, is respected until the end of the last day of the foreign-incorporated 

entity’s first taxable year ending after the date of enactment. At the end of that day, the inverted 

foreign-incorporated entity that completed the 80-percent inversion (or, if relevant, any successor 

entity) is deemed to have transferred all of its assets and liabilities to a domestic corporation in a 

transaction that is generally treated as a nontaxable inbound reorganization (“repatriation”). The 

basis of the assets of the foreign-incorporated entity generally remains the same in the hands of 

the domestic corporation, subject to any special adjustments for importing built-in losses (e.g., 

section 362(e)). Shareholders of the domestic corporation inherit the respective bases of their 

shares of the foreign-incorporated entity. 

On the day of the repatriation, the earnings and profits of the inverted foreignincorporated entity transfer over to the domestic corporation. The transfer of such earnings and 

profits is not a deemed dividend and does not result in a tax upon the domestic corporation or its 

shareholders. In addition, any foreign taxes attributable to such earnings and profits are not 

creditable. However, shareholders may be subject to tax on distributions of such earnings and 

profits. 

Beginning on the day after the repatriation, the inverted foreign-incorporated entity is 

treated for all tax purposes as a domestic corporation. Thus, any income earned by the inverted 

foreign-incorporated entity after the date of repatriation is deemed to be earned by a domestic 

corporation, and, therefore, is fully taxable at U.S. corporate income tax rates. As a further 

consequence of the repatriation of the inverted foreign-incorporated entity, foreign subsidiaries 

become controlled foreign corporations, subject to the rules of subpart F. 

It is intended that the Treasury Secretary will prescribe regulations that are necessary or 

appropriate to carry out the proposal, including, but not limited to, regulations to prevent the 

avoidance of the purposes of the proposal. 

Effective Date

The proposal is effective for taxable years beginning after the date of enactment.