SECTION 2. BACKGROUND

(a) Overview . Sections 34, 40(a), 6426(a), and 6427(e) provide tax incentives for alcohol and alcohol fuel mixtures that are sold for use or used as a fuel in certain specified transactions. For these purposes, § 2(b) of Notice 2005–4, 2005–1 C.B. 289, provides that alcohol has the meaning given to the term in § 48.4081–6(b)(1) of the Manufacturers and Retailers Excise Tax Regulations except that, for purposes of the credit allowed by § 40, alcohol also includes alcohol with a proof of at least 150.

(b) Calculation of the volume of alco- hol —(1) Before January 1, 2009 . Before January 1, 2009, § 40(d)(4) provides that for purposes of determining the number of gallons of alcohol with respect to which a credit is allowable, the volume of alcohol shall include the volume of any denaturant (including gasoline) which is added under any formulas approved by the Secretary to the extent that such denaturants do not exceed 5 percent of the volume of such alcohol (including denaturants). A similar rule applies to alcohol fuel mixtures. See § 48.4081–6(b)(1) and Notice 2005–4.

(2) After December 31, 2008 . Effective for fuel sold or used after December 31, 2008, the Food Act amended § 40(d)(4) to provide that denaturants included in the volume of alcohol may not exceed 2 percent of the volume of such alcohol (including denaturants). The Food Act also added section 6426(b)(5) to apply the same 2-percent limit to claims related to alcohol fuel mixtures under § 34, 6426, or 6427.

(c) Proof . Except as provided in section 2(a) of this notice, alcohol with a proof of less than 190 does not qualify for a credit or payment. The determination of proof is made without regard to added denaturants. See § 40(d)(1)(B) and 6426(b)(4)(A)(ii). Under the 5-percent limit, the amount of pure alcohol contained in each gallon qualifying as 190-proof alcohol may be as little

January 21, 2009 311 2009–3 I.R.B.

Chief Counsel (Passthroughs & Special Industries). For further information regarding this notice, contact Taylor Cortright at (202) 622–3130 (not a toll-free call).

Transaction of Interest — Subpart F Income Partnership Blocker

Notice 2009–7

The Internal Revenue Service (IRS) and the Treasury Department are aware of a type of transaction, described more fully below, in which a U.S. taxpayer that owns controlled foreign corporations (CFCs) that hold stock of a lower-tier CFC through a domestic partnership takes the position that subpart F income of the lower-tier CFC or an amount determined under section 956(a) of the Internal Revenue Code (Code) related to holdings of United States property by the lower-tier CFC does not result in income inclusions under section 951(a) for the U.S. taxpayer. The IRS and Treasury Department believe this transaction (which includes taking the position that the U.S. taxpayer has no income inclusion under section 951(a)) has the potential for tax avoidance or evasion, but lack enough information to determine whether the transaction should be identified specifically as a tax avoidance transaction. This notice identifies this transaction and substantially similar transactions as transactions of interest for purposes of § 1.6011–4(b)(6) of the Income Tax Regulations and sections 6111 and 6112 of the Code. This notice also alerts persons involved in these transactions to certain responsibilities that may arise from their involvement with these transactions.

FACTS

In a typical transaction, a U.S. taxpayer (Taxpayer) wholly owns two CFCs, (CFC1 and CFC2). CFC1 and CFC2 are partners in a domestic partnership (USPartnership). USPartnership owns 100 percent of the stock of another CFC (CFC3). Some or all of the income of CFC3 is subpart F income (as defined in section 952). As part of the transaction, Taxpayer takes the position that the subpart F income

as 90.25 percent of its total volume. Under the 2-percent limit, the amount of pure alcohol contained in each gallon qualifying as 190-proof alcohol is increased to 93.1 percent of its total volume.

(d) TTB Requirements . Regulations promulgated by the Alcohol and Tobacco Tax and Trade Bureau of the Department of Treasury (TTB) in 27 CFR § 19.1005 provide that alcohol eligible for withdrawal as fuel alcohol must contain 2 gallons of denaturant for each 100 gallons of distilled spirits. To satisfy the TTB rule, denaturants included in the volume of fuel alcohol must exceed 1.96 percent of the volume of the fuel alcohol.

(e) Public comments —(1) Commentators have expressed concern about the ability to meet TTB’s 1.96-percent minimum requirement while not exceeding the Food Act’s maximum 2-percent denaturant allowance. The commentators indicate that existing denaturing equipment does not allow for denaturing within this 0.04-percent range on a consistent basis. They also indicate that there is no test procedure to accurately measure the amount of denaturant in alcohol after it has been denatured. As a result, ethanol producers and blenders will have no reliable means of determining when denaturants exceed the 2-percent limit. Concerns have also been expressed about alcohol containing 5 percent denaturant that is in transit or stored by alcohol fuel blenders on January 1, 2009.

(2) Because of concerns regarding the accurate measurement of denaturants in alcohol, this notice adopts a temporary safe harbor to allow time to study the problem and determine if there are effective means to test the volume of denaturant in alcohol. Under this safe harbor, the Service will not challenge a claim with respect to denaturants included in alcohol unless the denaturants clearly exceed the Food Act limit. For this purpose, the Service will treat denaturants as not clearly exceeding the Food Act limit unless there is clear evidence establishing that denaturants exceed 2.5 percent of volume (including denaturants). The safe harbor is available only if no more than 2 percent of the alcohol’s volume is disregarded under the rule providing that proof is determined without regard to added denaturants. This will ensure that the amount of pure alcohol provided for fuel use is increased in the amount required by the reduced denaturant

limit. This notice also adopts a transition rule for January 2009 to provide relief for alcohol already produced and shipped.