Part I. Rulings — Internal Revenue Bulletin 2002-46

Section 1.—Tax Imposed

The Service provides inflation adjustments to the tax rate tables for individuals, trusts, and estates for taxable years beginning in 2003. In addition, the amounts of certain reductions allowed against the unearned income of minor children in computing the “kiddie tax” are adjusted. Also adjusted are the amounts used to determine whether a parent may elect to report the “kiddie tax” on the parent’s return. See Rev. Proc. 2002–70, page 845.

Section 23.—Adoption Ex- penses

The Service provides inflation adjustments to the adoption credit allowed for the adoption of a child for taxable years beginning in 2003. The Service also provides inflation adjustments to the value used in calculating the modified adjusted gross income limitations used to determine the amount of adoption credit that is allowed in taxable years beginning in 2003. See Rev. Proc. 2002–70, page 845.

Section 24.—Child Tax Credit

The Service provides inflation adjustments for the value used in determining the amount of the credit that may be refundable beginning in 2003. See Rev. Proc. 2002–70, page 845.

Section 25A.—Hope and Life- time Learning Credits

The Service provides inflation adjustments for the amount of qualified tuition and related expenses that are taken into account in determining the amount of the Hope Scholarship Credit for taxable years beginning in 2003, and for the amount of a taxpayer’s modified adjusted gross income that is taken into account in determining the reduction in the amount of the Hope Scholarship and Lifetime Learning Credits otherwise available. See Rev. Proc. 2002–70, page 845.

Section 32.—Earned Income

The Service provides inflation adjustments to the limitations on the earned income credit for taxable years beginning in 2003. See Rev. Proc. 2002–70, page 845.

Section 42.—Low-Income Housing Credit

The Service provides inflation adjustments to the amounts used to calculate the State housing credit ceiling used in determining the low-income housing credit for calendar year 2003. See Rev. Proc. 2002–70, page 845.

Section 59.—Other Defini- tions and Special Rules

The Service provides an inflation adjustment to the exemption amount used in computing the alternative minimum tax for a minor child subject to the “kiddie tax” for taxable years beginning in 2003. See Rev. Proc. 2002–70, page 845.

Section 63.—Taxable Income Defined

The Service provides inflation adjustments to the standard deduction amounts (including the limitation in the case of certain dependents, and the additional standard deduction for the aged or blind) for taxable years beginning in 2003. See Rev. Proc. 2002– 70, page 845.

Section 68.—Overall Limita- tion on Itemized Deductions

The Service provides inflation adjustments to the overall limitation on itemized deductions for taxable years beginning in 2003. See Rev. Proc. 2002– 70, page 845.

Section 103.—Interest on State and Local Bonds

The Service clarifies the circumstances in which a state or local bond is treated as issued by the New York City Water Finance Authority or the Metropolitan Transportation Authority for purposes of § 1400L(e)(2)(B). See Notice 2002–73, page 844.

Section 132.—Certain Fringe Benefits

The Service provides inflation adjustments to the limitations on the exclusion of income for a qualified transportation fringe benefit for taxable years beginning in 2003. See Rev. Proc. 2002–70, page 845.

Section 135.—Income From United States Savings Bonds Used to Pay Higher Education Tuition and Fees

The Service provides inflation adjustments to the limitation on the exclusion of income from United States savings bonds for taxpayers who pay qualified higher education expenses for taxable years beginning in 2003. See Rev. Proc. 2002–70, page 845.

Section 137.—Adoption Assistance Programs

The Service provides inflation adjustments to the maximum amount that can be excluded from an employee’s gross income in connection with a qualified adoption assistance program for taxable years beginning in 2003. The Service also provides inflation adjustments to the amount used to calculate the modified adjusted gross income limitations used to determine the amount that can be excluded from an employee’s gross income for taxable years beginning in 2003. See Rev. Proc. 2002–70, page 845.

Section 146.—Volume Cap

The Service provides inflation adjustments to the amounts used to determine the State ceiling for the volume cap of private activity bonds for calendar year 2003. See Rev. Proc. 2002–70, page 845.

Section 151.—Allowance of Deductions for Personal Ex- emptions

The Service provides inflation adjustments to the personal exemption and to the threshold amounts of adjusted gross income above which the exemption amount phases out for taxable years beginning in 2003. See Rev. Proc. 2002–70, page 845.

2002–46 I.R.B. 839 November 18, 2002

Section 170.—Charitable, etc., Contributions and Gifts

The Service provides inflation adjustments to the “insubstantial benefit” guidelines for calendar year 2003. Under the guidelines, a charitable contribution is fully deductible even though the contributor receives “insubstantial benefits” from the charity. See Rev. Proc. 2002–70, page 845.

Section 213.—Medical, Den- tal, etc., Expenses

The Service provides inflation adjustments to the limitation on the amount of eligible long-term care premiums includible in the term “medical care” for taxable years beginning in 2003. See Rev. Proc. 2002– 70, page 845.

Section 220.—Archer MSAs

The Service provides inflation adjustments to the amounts used to determine whether a health plan is a “high deductible health plan” for purposes of determining whether an individual is eligible for a deduction for cash paid to a medical savings account for taxable years beginning in 2003. See Rev. Proc. 2002– 70, page 845.

Section 221.—Interest on Education Loans

The Service provides inflation adjustments to the income limitations used to determine the allowable deduction for interest on education loans for taxable years beginning in 2003. See Rev. Proc. 2002–70, page 845.

Section 512.—Unrelated Business Taxable Income

The Service provides an inflation adjustment to the maximum amount of annual dues that can be paid to certain agricultural or horticultural organizations without any portion being treated as unrelated trade or business income by reason of any benefits or privileges available to members for taxable years beginning in 2003. See Rev. Proc. 2002–70, page 845.

Section 513.—Unrelated Trade or Business

The Service provides inflation adjustments to the maximum amount of a “low cost article” for taxable years beginning in 2003. Funds raised through a charity’s distribution of “low cost articles” will not be treated as unrelated business income to the charity. See Rev. Proc. 2002–70, page 845.

Section 685.—Treatment of Funeral Trusts

The Service provides an inflation adjustment to the maximum amount of contributions that may be made to a qualified funeral trust for contracts entered in calendar year 2003. See Rev. Proc. 2002–70, page 845.

Section 877.—Expatriation to Avoid Tax

The Service provides inflation adjustments to amounts used to determine whether an individual’s loss of United States citizenship had the avoidance of United States tax as one of its principal purposes for calendar year 2003. See Rev. Proc. 2002–70, page 845.

Section 1400L.—Tax Benefits for New York Liberty Zone

Section 2032A.—Valuation of Certain Farm, etc., Real Prop- erty

The Service provides an inflation adjustment to the maximum amount by which the value of certain farm and other qualified real property included in a decedent’s gross estate may be decreased for purposes of valuing the estate of a decedent dying in calendar year 2003. See Rev. Proc. 2002–70, page 845.

Section 2503.—Taxable Gifts

The Service provides an inflation adjustment to the amount of gifts that may be made to a person in a calendar year without including the amount in taxable gifts for calendar year 2003. See Rev. Proc. 2002– 70, page 845.

Section 2523.—Gift to Spouse

The Service provides an inflation adjustment to the amount of gifts that may be made in a calendar year to a spouse who is not a citizen of the United States without including the amount in taxable gifts for calendar year 2003. See Rev. Proc. 2002–70, page 845.

Section 2631.—GST Exemp- tion

The Service provides an inflation adjustment to the amount of the generation-skipping transfer tax exemption for calendar year 2003. See Rev. Proc. 2002– 70, page 845.

Section 4041.—Imposition of Tax

Biodiesel. Rules related to biodiesel are described. See Rev. Rul. 2002–76, on this page.

Section 4081.—Imposition of Tax

26 CFR 48.4081–1: Taxable fuel; definitions.

(Also §§ 4041, 4082, 4083.)

Biodiesel. Biodiesel is not taxable fuel for purposes of the tax imposed by section 4081(a)(1). Subject to the exemptions in section 4082, tax is imposed by section 4081(b)(1) on the removal or sale of blended taxable fuel produced using biodiesel. Subject to the exemption in section 4041, tax is imposed by section 4041(a)(1) on biodiesel sold for use or used as a fuel in a diesel-powered highway vehicle or diesel-powered train.

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Rev. Rul. 2002–76

ISSUES

(1) Is biodiesel taxable fuel for purposes of the tax imposed by § 4081(a)(1) of the Internal Revenue Code?

(2) If biodiesel is not taxable fuel, is tax imposed by § 4081(b)(1) on the removal or sale of blended taxable fuel produced using biodiesel?

(3) If biodiesel is not taxable fuel, is tax imposed by § 4041(a)(1) on biodiesel sold for use or used as a fuel in a diesel-powered highway vehicle or a diesel-powered train?

FACTS

Biodiesel is a liquid composed of monoalkyl esters of long chain fatty acids derived from vegetable oils or animal fats that is covered by ASTM specification D 6751. Biodiesel does not contain any paraffins.

Biodiesel is suitable for use as a fuel in a diesel-powered highway vehicle or dieselpowered train and is sometimes delivered directly into the fuel supply tank of a vehicle or train for that use. However, the most common fuel-related use of biodiesel is in the production of a mixture containing 20 percent biodiesel and 80 percent diesel fuel.

LAW

Section 4081(a)(1) imposes tax on certain removals, entries, and sales of taxable fuel. Section 4083 defines taxable fuel as diesel fuel, gasoline, and kerosene. Section 48.4081–1(c)(2)(i) of the Manufacturers and Retailers Excise Tax Regulations defines diesel fuel as any liquid that, without further processing or blending, is suitable for use as a fuel in a diesel-powered highway vehicle or diesel-powered train. However, under § 48.4081–1(c)(2)(ii), diesel fuel does not include “excluded liquid.” The definition of excluded liquid in § 48.4081–1(b) includes any liquid that contains less than four percent normal paraffins.

Section 4081(b)(1) imposes tax on taxable fuel removed or sold by the blender thereof. Section 4082 provides exemptions from this tax. Under § 48.4081–1(c), blended taxable fuel generally means any taxable fuel that is produced outside the bulk transfer/terminal system by mixing tax

able fuel with respect to which tax has been imposed under § 4081(a) and any other liquid on which tax has not been imposed under § 4081.

Section 4041(a)(1) imposes tax on any liquid other than gasoline sold for use or used as a fuel in a diesel-powered highway vehicle or diesel-powered train unless tax was imposed on the liquid by § 4081 and not credited or refunded. Other subsections of § 4041 provide additional exemptions from this tax.

ANALYSIS

Biodiesel, although suitable for use as a fuel in a diesel-powered highway vehicle or diesel-powered train, contains less than four percent normal paraffins and, therefore, is excluded liquid for purposes of the definition of diesel fuel provided in § 48.4081–1(c)(2). Accordingly, biodiesel is not taxable fuel for purposes of § 4081(a)(1). However, subject to the exemptions in § 4082, if biodiesel is used in the production of blended taxable fuel, tax is imposed by § 4081(b)(1) on the removal or sale of the blended taxable fuel. Further, subject to the exemptions in § 4041, if biodiesel is sold for use or used as a fuel in a diesel-powered highway vehicle or a diesel-powered train, tax is imposed by § 4041(a)(1).

HOLDINGS

(1) Biodiesel is not taxable fuel for purposes of the tax imposed by § 4081(a)(1).

(2) Subject to the exemptions in § 4082, tax is imposed by § 4081(b)(1) on the removal or sale of blended taxable fuel produced using biodiesel.

(3) Subject to the exemptions in § 4041, tax is imposed by § 4041(a)(1) on biodiesel sold for use or used as a fuel in a dieselpowered highway vehicle or a dieselpowered train.

DRAFTING INFORMATION

The principal author of this revenue ruling is Susan Athy of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling, contact Susan Athy at (202) 622–3130 (not a toll-free call).

Section 4082.—Exemptions for Diesel Fuel and Kerosene

Biodiesel. Rules related to biodiesel are described. See Rev. Rul. 2002–76, page 840.

Section 4083.—Definitions; Special Rule; Administrative Authority

Biodiesel. Rules related to biodiesel are described. See Rev. Rul. 2002–76, page 840.

Section 4261.—Imposition of Tax

The Service provides inflation adjustments to the amounts of the excise taxes on passenger air transportation beginning or ending in the United States and for each domestic segment of air transportation for calendar year 2003. See Rev. Proc. 2002–70, page 845.

Section 6033.—Returns by Exempt Organizations

The Service provides an inflation adjustment to the amount of dues certain exempt organizations with nondeductible lobbying expenditures can charge and still be excepted from reporting requirements for taxable years beginning in 2003. See Rev. Proc. 2002–70, page 845.

Section 6039F.—Notice of Large Gifts Received From Foreign Persons

The Service provides an inflation adjustment to the amount of gifts received, in a taxable year from foreign persons, that triggers a reporting requirement for a United States person for taxable years beginning in 2003. See Rev. Proc. 2002–70, page 845.

Section 6323.—Validity and Priority Against Certain Per- sons

The Service provides inflation adjustments for calendar year 2003 to (1) the maximum amount of a casual sale of personal property below which a federal tax lien will not be valid against a purchaser of the property and (2) the maximum amount of a contract for the repair or improvement of certain residential property at or below which a federal tax lien will not be valid against a mechanic’s lienor. See Rev. Proc. 2002–70, page 845.

2002–46 I.R.B. 841 November 18, 2002

Section 6334.—Property Ex- empt From Levy

The Service provides inflation adjustments to the value of certain property exempt from levy (fuel, provisions, furniture, household personal effects, arms for personal use, livestock, poultry, and books and tools of a trade, business, or profession) for calendar year 2003. See Rev. Proc. 2002–70, page 845.

Section 6601.—Interest on Underpayment, Nonpayment, or Extensions of Time for Pay- ment, of Tax

The Service provides an inflation adjustment to the amount used to determine the amount of interest charged on a certain portion of the estate tax payable in installments for the estate of a decedent dying in calendar year 2003. See Rev. Proc. 2002–70, page 845.

Section 7430.—Awarding of Costs and Certain Fees

The Service provides an inflation adjustment to the hourly limit on attorney fees that may be awarded in a judgment or settlement of an administrative or judicial proceeding concerning the determination, collection, or refund of tax, interest, or penalty for calendar year 2003. See Rev. Proc. 2002–70, page 845.

Section 7702B.—Treatment of Qualified Long-Term Care Insurance

The Service provides an inflation adjustment to the sate dollar amount of the per diem limitation regarding periodic payments received under a qualified longterm care insurance contract or periodic payments received under a life insurance contract that are treated as paid by reason of the death of a chronically ill individual for calendar year 2003. See Rev. Proc. 200270, page 845.

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