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Irs free file 8. Irs free file   Gains and Losses Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Sales and ExchangesDetermining Gain or Loss Like-Kind Exchanges Transfer to Spouse Ordinary or Capital Gain or LossCapital Assets Noncapital Assets Hedging (Commodity Futures) Livestock Converted Wetland and Highly Erodible Cropland Timber Sale of a Farm Foreclosure or Repossession Abandonment Introduction This chapter explains how to figure, and report on your tax return, your gain or loss on the disposition of your property or debt and whether such gain or loss is ordinary or capital. Irs free file Ordinary gain is taxed at the same rates as wages and interest income while capital gain is generally taxed at lower rates. Irs free file Dispositions discussed in this chapter include sales, exchanges, foreclosures, repossessions, canceled debts, hedging transactions, and elections to treat cutting of timber as a sale or exchange. Irs free file Topics - This chapter discusses: Sales and exchanges Ordinary or capital gain or loss Useful Items - You may want to see: Publication 334 Tax Guide for Small Business 523 Selling Your Home 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 908 Bankruptcy Tax Guide Form (and Instructions) 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) Sch D (Form 1040) Capital Gains and Losses Sch F (Form 1040) Profit or Loss From Farming 1099-A Acquisition or Abandonment of Secured Property 1099-C Cancellation of Debt 4797 Sales of Business Property 8949 Sales and Other Dispositions of Capital Assets See chapter 16 for information about getting publications and forms. Irs free file Sales and Exchanges If you sell, exchange, or otherwise dispose of your property, you usually have a gain or a loss. Irs free file This section explains certain rules for determining whether any gain you have is taxable, and whether any loss you have is deductible. Irs free file A sale is a transfer of property for money or a mortgage, note, or other promise to pay money. Irs free file An exchange is a transfer of property for other property or services. Irs free file Determining Gain or Loss You usually realize a gain or loss when you sell or exchange property. Irs free file If the amount you realize from a sale or exchange of property is more than its adjusted basis, you will have a gain. Irs free file If the adjusted basis of the property is more than the amount you realize, you will have a loss. Irs free file Basis and adjusted basis. Irs free file   The basis of property you buy is usually its cost. Irs free file The adjusted basis of property is basis plus certain additions and minus certain deductions. Irs free file See chapter 6 for more information about basis and adjusted basis. Irs free file Amount realized. Irs free file   The amount you realize from a sale or exchange is the total of all money you receive plus the fair market value (FMV) (defined in chapter 6) of all property or services you receive. Irs free file The amount you realize also includes any of your liabilities assumed by the buyer and any liabilities to which the property you transferred is subject, such as real estate taxes or a mortgage. Irs free file   If the liabilities relate to an exchange of multiple properties, see Multiple Property Exchanges in chapter 1 of Publication 544. Irs free file Amount recognized. Irs free file   Your gain or loss realized from a sale or exchange of certain property is usually a recognized gain or loss for tax purposes. Irs free file A recognized gain is a gain you must include in gross income and report on your income tax return. Irs free file A recognized loss is a loss you deduct from gross income. Irs free file However, your gain or loss realized from the exchange of certain property may not be recognized for tax purposes. Irs free file See Like-Kind Exchanges next. Irs free file Also, a loss from the disposition of property held for personal use is not deductible. Irs free file Like-Kind Exchanges Certain exchanges of property are not taxable. Irs free file This means any gain from the exchange is not recognized, and any loss cannot be deducted. Irs free file Your gain or loss will not be recognized until you sell or otherwise dispose of the property you receive. Irs free file The exchange of property for the same kind of property is the most common type of nontaxable exchange. Irs free file To qualify for treatment as a like-kind exchange, the property traded and the property received must be both of the following. Irs free file Qualifying property. Irs free file Like-kind property. Irs free file These two requirements are discussed later. Irs free file Multiple-party transactions. Irs free file   The like-kind exchange rules also apply to property exchanges that involve three and four-party transactions. Irs free file Any part of these multiple-party transactions can qualify as a like-kind exchange if it meets all the requirements described in this section. Irs free file Receipt of title from third party. Irs free file   If you receive property in a like-kind exchange and the other party who transfers the property to you does not give you the title, but a third party does, you can still treat this transaction as a like-kind exchange if it meets all the requirements. Irs free file Basis of property received. Irs free file   If you receive property in a like-kind exchange, the basis of the property will be the same as the basis of the property you gave up. Irs free file See chapter 6 for more information. Irs free file Money paid. Irs free file   If, in addition to giving up like-kind property, you pay money in a like-kind exchange, you still have no recognized gain or loss. Irs free file The basis of the property received is the basis of the property given up, increased by the money paid. Irs free file Example. Irs free file You traded an old tractor with an adjusted basis of $15,000 for a new one. Irs free file The new tractor costs $300,000. Irs free file You were allowed $80,000 for the old tractor and paid $220,000 cash. Irs free file You have no recognized gain or loss on the transaction regardless of the adjusted basis of your old tractor and the basis of the new tractor is $235,000, the adjusted basis of the old tractor plus the cash paid ($15,000 + $220,000). Irs free file If you had sold the old tractor to a third party for $80,000 and bought a new one, you would have a recognized gain or loss on the sale of your old tractor equal to the difference between the amount realized and the adjusted basis of the old tractor. Irs free file In this case, the taxable gain would be $65,000 ($80,000 − $15,000) and the basis of the new tractor would be $300,000. Irs free file Reporting the exchange. Irs free file   Report the exchange of like-kind property, even though no gain or loss is recognized, on Form 8824, Like-Kind Exchanges. Irs free file The Instructions for Form 8824 explain how to report the details of the exchange. Irs free file   If you have any recognized gain because you received money or unlike property, report it on Schedule D (Form 1040) or Form 4797, whichever applies. Irs free file You may also have to report the recognized gain as ordinary income because of depreciation recapture on Form 4797. Irs free file See chapter 9 for more information. Irs free file Qualifying property. Irs free file   In a like-kind exchange, both the property you give up and the property you receive must be held by you for investment or for productive use in your trade or business. Irs free file Machinery, buildings, land, trucks, breeding livestock, rental houses, and certain mutual ditch, reservoir, or irrigation company stock are examples of property that may qualify. Irs free file Nonqualifying property. Irs free file   The rules for like-kind exchanges do not apply to exchanges of the following property. Irs free file Property you use for personal purposes, such as your home and family car. Irs free file Stock in trade or other property held primarily for sale, such as crops and produce. Irs free file Stocks, bonds, or notes. Irs free file However, see Qualifying property above. Irs free file Other securities or evidences of indebtedness, such as accounts receivable. Irs free file Partnership interests. Irs free file However, you may have a nontaxable exchange under other rules. Irs free file See Other Nontaxable Exchanges in chapter 1 of Publication 544. Irs free file Like-kind property. Irs free file   To qualify as a nontaxable exchange, the properties exchanged must be of like kind. Irs free file Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. Irs free file Generally, real property exchanged for real property qualifies as an exchange of like-kind property. Irs free file For example, an exchange of city property for farm property or improved property for unimproved property is a like-kind exchange. Irs free file   An exchange of a tractor for a new tractor is an exchange of like-kind property, and so is an exchange of timber land for crop acreage. Irs free file An exchange of a tractor for acreage, however, is not an exchange of like-kind property. Irs free file The exchange of livestock of one sex for livestock of the other sex is not a like-kind exchange. Irs free file For example, the exchange of a bull for a cow is not a like-kind exchange. Irs free file An exchange of the assets of a business for the assets of a similar business cannot be treated as an exchange of one property for another property. Irs free file    Note. Irs free file Whether you engaged in a like-kind exchange depends on an analysis of each asset involved in the exchange. Irs free file Personal property. Irs free file   Depreciable tangible personal property can be either like kind or like class to qualify for nontaxable exchange treatment. Irs free file Like-class properties are depreciable tangible personal properties within the same General Asset Class or Product Class. Irs free file Property classified in any General Asset Class may not be classified within a Product Class. Irs free file Assets that are not in the same class will qualify as like-kind property if they are of the same nature or character. Irs free file General Asset Classes. Irs free file   General Asset Classes describe the types of property frequently used in many businesses. Irs free file They include, but are not limited to, the following property. Irs free file Office furniture, fixtures, and equipment (asset class 00. Irs free file 11). Irs free file Information systems, such as computers and peripheral equipment (asset class 00. Irs free file 12). Irs free file Data handling equipment except computers (asset class 00. Irs free file 13). Irs free file Automobiles and taxis (asset class 00. Irs free file 22). Irs free file Light general purpose trucks (asset class 00. Irs free file 241). Irs free file Heavy general purpose trucks (asset class 00. Irs free file 242). Irs free file Tractor units for use over-the-road (asset class 00. Irs free file 26). Irs free file Trailers and trailer-mounted containers (asset class 00. Irs free file 27). Irs free file Industrial steam and electric generation and/or distribution systems (asset class 00. Irs free file 4). Irs free file Product Classes. Irs free file   Product Classes include property listed in a 6-digit product class in sectors 31 through 33 of the North American Industry Classification System (NAICS) of the Executive Office of the President, Office of Management and Budget, United States, (NAICS Manual). Irs free file The latest version of the manual can be accessed at www. Irs free file census. Irs free file gov/eos/www/naics/. Irs free file Copies of the printed manual may be purchased from the National Technical Information Service (NTIS) at  www. Irs free file ntis. Irs free file gov/products/naics. Irs free file aspx or by calling 1-800-553-NTIS (1-800-553-6847) or (703) 605-6000. Irs free file A CD-ROM version with search and retrieval software is also available from NTIS. Irs free file    NAICS class 333111, Farm Machinery and Equipment Manufacturing, includes most machinery and equipment used in a farming business. Irs free file Partially nontaxable exchange. Irs free file   If, in addition to like-kind property, you receive money or unlike property in an exchange on which you realize gain, you have a partially nontaxable exchange. Irs free file You are taxed on the gain you realize, but only to the extent of the money and the FMV of the unlike property you receive. Irs free file A loss is not deductible. Irs free file Example 1. Irs free file You trade farmland that cost $30,000 for $10,000 cash and other land to be used in farming with a FMV of $50,000. Irs free file You have a realized gain of $30,000 ($50,000 FMV of new land + $10,000 cash − $30,000 basis of old farmland = $30,000 realized gain). Irs free file However, only $10,000, the cash received, is recognized (included in income). Irs free file Example 2. Irs free file Assume the same facts as in Example 1, except that, instead of money, you received a tractor with a FMV of $10,000. Irs free file Your recognized gain is still limited to $10,000, the value of the tractor (the unlike property). Irs free file Example 3. Irs free file Assume in Example 1 that the FMV of the land you received was only $15,000. Irs free file Your $5,000 loss is not recognized. Irs free file Unlike property given up. Irs free file   If, in addition to like-kind property, you give up unlike property, you must recognize gain or loss on the unlike property you give up. Irs free file The gain or loss is the difference between the FMV of the unlike property and the adjusted basis of the unlike property. Irs free file Like-kind exchanges between related persons. Irs free file   Special rules apply to like-kind exchanges between related persons. Irs free file These rules affect both direct and indirect exchanges. Irs free file Under these rules, if either person disposes of the property within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. Irs free file The gain or loss on the original exchange must be recognized as of the date of the later disposition. Irs free file The 2-year holding period begins on the date of the last transfer of property that was part of the like-kind exchange. Irs free file Related persons. Irs free file   Under these rules, related persons include, for example, you and a member of your family (spouse, brother, sister, parent, child, etc. Irs free file ), you and a corporation in which you have more than 50% ownership, you and a partnership in which you directly or indirectly own more than a 50% interest of the capital or profits, and two partnerships in which you directly or indirectly own more than 50% of the capital interests or profits. Irs free file   For the complete list of related persons, see Related persons in chapter 2 of Publication 544. Irs free file Example. Irs free file You used a grey pickup truck in your farming business. Irs free file Your sister used a red pickup truck in her landscaping business. Irs free file In December 2012, you exchanged your grey pickup truck, plus $200, for your sister's red pickup truck. Irs free file At that time, the FMV of the grey pickup truck was $7,000 and its adjusted basis was $6,000. Irs free file The FMV of the red pickup truck was $7,200 and its adjusted basis was $1,000. Irs free file You realized a gain of $1,000 (the $7,200 FMV of the red pickup truck, minus the grey pickup truck's $6,000 adjusted basis, minus the $200 you paid). Irs free file Your sister realized a gain of $6,200 (the $7,000 FMV of the grey pickup truck plus the $200 you paid, minus the $1,000 adjusted basis of the red pickup truck). Irs free file However, because this was a like-kind exchange, you recognized no gain. Irs free file Your basis in the red pickup truck was $6,200 (the $6,000 adjusted basis of the grey pickup truck plus the $200 you paid). Irs free file She recognized gain only to the extent of the money she received, $200. Irs free file Her basis in the grey pickup truck was $1,000 (the $1,000 adjusted basis of the red pickup truck minus the $200 received, plus the $200 gain recognized). Irs free file In 2013, you sold the red pickup truck to a third party for $7,000. Irs free file Because you sold it within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. Irs free file On your tax return for 2013, you must report your $1,000 gain on the 2012 exchange. Irs free file You also report a loss on the sale as $200 (the adjusted basis of the red pickup truck, $7,200 (its $6,200 basis plus the $1,000 gain recognized), minus the $7,000 realized from the sale). Irs free file In addition, your sister must report on her tax return for 2013 the $6,000 balance of her gain on the 2012 exchange. Irs free file Her adjusted basis in the grey pickup truck is increased to $7,000 (its $1,000 basis plus the $6,000 gain recognized). Irs free file Exceptions to the rules for related persons. Irs free file   The following property dispositions are excluded from these rules. Irs free file Dispositions due to the death of either related person. Irs free file Involuntary conversions. Irs free file Dispositions where it is established to the satisfaction of the IRS that neither the exchange nor the disposition has, as a main purpose, the avoidance of federal income tax. Irs free file Multiple property exchanges. Irs free file   Under the like-kind exchange rules, you must generally make a property-by-property comparison to figure your recognized gain and the basis of the property you receive in the exchange. Irs free file However, for exchanges of multiple properties, you do not make a property-by-property comparison if you do either of the following. Irs free file Transfer and receive properties in two or more exchange groups. Irs free file Transfer or receive more than one property within a single exchange group. Irs free file   For more information, see Multiple Property Exchanges in chapter 1 of Publication 544. Irs free file Deferred exchange. Irs free file   A deferred exchange for like-kind property may qualify for nonrecognition of gain or loss. Irs free file A deferred exchange is an exchange in which you transfer property you use in business or hold for investment and later receive like-kind property you will use in business or hold for investment. Irs free file The property you receive is replacement property. Irs free file The transaction must be an exchange of property for property rather than a transfer of property for money used to buy replacement property. Irs free file In addition, the replacement property will not be treated as like-kind property unless certain identification and receipt requirements are met. Irs free file   For more information see Deferred Exchanges in chapter 1 of Publication 544. Irs free file Transfer to Spouse No gain or loss is recognized on a transfer of property from an individual to (or in trust for the benefit of) a spouse, or a former spouse if incident to divorce. Irs free file This rule does not apply if the recipient is a nonresident alien. Irs free file Nor does this rule apply to a transfer in trust to the extent the liabilities assumed and the liabilities on the property are more than the property's adjusted basis. Irs free file Any transfer of property to a spouse or former spouse on which gain or loss is not recognized is not considered a sale or exchange. Irs free file The recipient's basis in the property will be the same as the adjusted basis of the giver immediately before the transfer. Irs free file This carryover basis rule applies whether the adjusted basis of the transferred property is less than, equal to, or greater than either its FMV at the time of transfer or any consideration paid by the recipient. Irs free file This rule applies for determining loss as well as gain. Irs free file Any gain recognized on a transfer in trust increases the basis. Irs free file For more information on transfers of property incident to divorce, see Property Settlements in Publication 504, Divorced or Separated Individuals. Irs free file Ordinary or Capital Gain or Loss Generally, you will have a capital gain or loss if you sell or exchange a capital asset (defined below). Irs free file You may also have a capital gain if your section 1231 transactions result in a net gain. Irs free file See Section 1231 Gains and Losses in  chapter 9. Irs free file To figure your net capital gain or loss, you must classify your gains and losses as either ordinary or capital (and your capital gains or losses as either short-term or long-term). Irs free file Your net capital gains may be taxed at a lower tax rate than ordinary income. Irs free file See Capital Gains Tax Rates , later. Irs free file Your deduction for a net capital loss may be limited. Irs free file See Treatment of Capital Losses , later. Irs free file Capital Assets Almost everything you own and use for personal purposes or investment is a capital asset. Irs free file The following items are examples of capital assets. Irs free file A home owned and occupied by you and your family. Irs free file Household furnishings. Irs free file A car used for pleasure. Irs free file If your car is used both for pleasure and for farm business, it is partly a capital asset and partly a noncapital asset, defined later. Irs free file Stocks and bonds. Irs free file However, there are special rules for gains on qualified small business stock. Irs free file For more information on this subject, see Gains on Qualified Small Business Stock and Losses on Section 1244 (Small Business) Stock in chapter 4 of Publication 550. Irs free file Personal-use property. Irs free file   Gain from a sale or exchange of personal-use property is a capital gain and is taxable. Irs free file Loss from the sale or exchange of personal-use property is not deductible. Irs free file You can deduct a loss relating to personal-use property only if it results from a casualty or theft. Irs free file For information on casualties and thefts, see chapter 11. Irs free file Long and Short Term Where you report a capital gain or loss depends on how long you own the asset before you sell or exchange it. Irs free file The time you own an asset before disposing of it is the holding period. Irs free file If you hold a capital asset 1 year or less, the gain or loss resulting from its disposition is short term. Irs free file Report it in Part I of Schedule D (Form 1040). Irs free file If you hold a capital asset longer than 1 year, the gain or loss resulting from its disposition is long term. Irs free file Report it in Part II of Schedule D (Form 1040). Irs free file Holding period. Irs free file   To figure if you held property longer than 1 year, start counting on the day after the day you acquired the property. Irs free file The day you disposed of the property is part of your holding period. Irs free file Example. Irs free file If you bought an asset on June 19, 2012, you should start counting on June 20, 2012. Irs free file If you sold the asset on June 19, 2013, your holding period is not longer than 1 year, but if you sold it on June 20, 2013, your holding period is longer than 1 year. Irs free file Inherited property. Irs free file   If you inherit property, you are considered to have held the property longer than 1 year, regardless of how long you actually held it. Irs free file This rule does not apply to livestock used in a farm business. Irs free file See Holding period under Livestock , later. Irs free file Nonbusiness bad debt. Irs free file   A nonbusiness bad debt is a short-term capital loss, deductible in the year the debt becomes worthless. Irs free file See chapter 4 of Publication 550. Irs free file Nontaxable exchange. Irs free file   If you acquire an asset in exchange for another asset and your basis for the new asset is figured, in whole or in part, by using your basis in the old property, the holding period of the new property includes the holding period of the old property. Irs free file That is, it begins on the same day as your holding period for the old property. Irs free file Gift. Irs free file   If you receive a gift of property and your basis in it is figured using the donor's basis, your holding period includes the donor's holding period. Irs free file Real property. Irs free file   To figure how long you held real property, start counting on the day after you received title to it or, if earlier, on the day after you took possession of it and assumed the burdens and privileges of ownership. Irs free file   However, taking possession of real property under an option agreement is not enough to start the holding period. Irs free file The holding period cannot start until there is an actual contract of sale. Irs free file The holding period of the seller cannot end before that time. Irs free file Figuring Net Gain or Loss The totals for short-term capital gains and losses and the totals for long-term capital gains and losses must be figured separately. Irs free file Net short-term capital gain or loss. Irs free file   Combine your short-term capital gains and losses. Irs free file Do this by adding all of your short-term capital gains. Irs free file Then add all of your short-term capital losses. Irs free file Subtract the lesser total from the greater. Irs free file The difference is your net short-term capital gain or loss. Irs free file Net long-term capital gain or loss. Irs free file   Follow the same steps to combine your long-term capital gains and losses. Irs free file The result is your net long-term capital gain or loss. Irs free file Net gain. Irs free file   If the total of your capital gains is more than the total of your capital losses, the difference is taxable. Irs free file However, part of your gain (but not more than your net capital gain) may be taxed at a lower rate than the rate of tax on your ordinary income. Irs free file See Capital Gains Tax Rates , later. Irs free file Net loss. Irs free file   If the total of your capital losses is more than the total of your capital gains, the difference is deductible. Irs free file But there are limits on how much loss you can deduct and when you can deduct it. Irs free file See Treatment of Capital Losses next. Irs free file Treatment of Capital Losses If your capital losses are more than your capital gains, you must claim the difference even if you do not have ordinary income to offset it. Irs free file For taxpayers other than corporations, the yearly limit on the capital loss you can deduct is $3,000 ($1,500 if you are married and file a separate return). Irs free file If your other income is low, you may not be able to use the full $3,000. Irs free file The part of the $3,000 you cannot use becomes part of your capital loss carryover (discussed next). Irs free file Capital loss carryover. Irs free file   Generally, you have a capital loss carryover if either of the following situations applies to you. Irs free file Your net loss on Schedule D (Form 1040), is more than the yearly limit. Irs free file Your taxable income without your deduction for exemptions is less than zero. Irs free file If either of these situations applies to you for 2013, see Capital Losses under Reporting Capital Gains and Losses in chapter 4 of Publication 550 to figure the amount you can carry over to 2014. Irs free file    To figure your capital loss carryover from 2013 to 2014, you will need a copy of your 2013 Form 1040 and Schedule D (Form 1040). Irs free file Capital Gains Tax Rates The tax rates that apply to a net capital gain are generally lower than the tax rates that apply to other income. Irs free file These lower rates are called the maximum capital gains rates. Irs free file The term “net capital gain” means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss. Irs free file See Schedule D (Form 1040) and the Instructions for Schedule D (Form 1040). Irs free file Also see Publication 550. Irs free file Noncapital Assets Noncapital assets include property such as inventory and depreciable property used in a trade or business. Irs free file A list of properties that are not capital assets is provided in the Instructions for Schedule D (Form 1040). Irs free file Property held for sale in the ordinary course of your farm business. Irs free file   Property you hold mainly for sale to customers, such as livestock, poultry, livestock products, and crops, is a noncapital asset. Irs free file Gain or loss from sales or other dispositions of this property is reported on Schedule F (Form 1040) (not on Schedule D (Form 1040) or Form 4797). Irs free file The treatment of this property is discussed in chapter 3. Irs free file Land and depreciable properties. Irs free file   Land and depreciable property you use in farming are not capital assets. Irs free file Noncapital assets also include livestock held for draft, breeding, dairy, or sporting purposes. Irs free file However, your gains and losses from sales and exchanges of your farmland and depreciable properties must be considered together with certain other transactions to determine whether the gains and losses are treated as capital or ordinary gains and losses. Irs free file The sales of these business assets are reported on Form 4797. Irs free file See chapter 9 for more information. Irs free file Hedging (Commodity Futures) Hedging transactions are transactions that you enter into in the normal course of business primarily to manage the risk of interest rate or price changes, or currency fluctuations, with respect to borrowings, ordinary property, or ordinary obligations. Irs free file Ordinary property or obligations are those that cannot produce capital gain or loss if sold or exchanged. Irs free file A commodity futures contract is a standardized, exchange-traded contract for the sale or purchase of a fixed amount of a commodity at a future date for a fixed price. Irs free file The holder of an option on a futures contract has the right (but not the obligation) for a specified period of time to enter into a futures contract to buy or sell at a particular price. Irs free file A forward contract is generally similar to a futures contract except that the terms are not standardized and the contract is not exchange traded. Irs free file Businesses may enter into commodity futures contracts or forward contracts and may acquire options on commodity futures contracts as either of the following. Irs free file Hedging transactions. Irs free file Transactions that are not hedging transactions. Irs free file Futures transactions with exchange-traded commodity futures contracts that are not hedging transactions, generally, result in capital gain or loss and are subject to the mark-to-market rules discussed in Publication 550. Irs free file There is a limit on the amount of capital losses you can deduct each year. Irs free file Hedging transactions are not subject to the mark-to-market rules. Irs free file If, as a farmer-producer, to protect yourself from the risk of unfavorable price fluctuations, you enter into commodity forward contracts, futures contracts, or options on futures contracts and the contracts cover an amount of the commodity within your range of production, the transactions are generally considered hedging transactions. Irs free file They can take place at any time you have the commodity under production, have it on hand for sale, or reasonably expect to have it on hand. Irs free file The gain or loss on the termination of these hedges is generally ordinary gain or loss. Irs free file Farmers who file their income tax returns on the cash method report any profit or loss on the hedging transaction on Schedule F, line 8. Irs free file Gains or losses from hedging transactions that hedge supplies of a type regularly used or consumed in the ordinary course of your trade or business may be ordinary gains or losses. Irs free file Examples include fuel and feed. Irs free file If you have numerous transactions in the commodity futures market during the year, you must be able to show which transactions are hedging transactions. Irs free file Clearly identify a hedging transaction on your books and records before the end of the day you entered into the transaction. Irs free file It may be helpful to have separate brokerage accounts for your hedging and speculation transactions. Irs free file Retain the identification of each hedging transaction with your books and records. Irs free file Also, identify the item(s) or aggregate risk that is being hedged in your records. Irs free file Although the identification of the hedging transaction must be made before the end of the day it was entered into, you have 35 days after entering into the transaction to identify the hedged item(s) or risk. Irs free file For more information on the tax treatment of futures and options contracts, see Commodity Futures and Section 1256 Contracts Marked to Market in Publication 550. Irs free file Accounting methods for hedging transactions. Irs free file   The accounting method you use for a hedging transaction must clearly reflect income. Irs free file This means that your accounting method must reasonably match the timing of income, deduction, gain, or loss from a hedging transaction with the timing of income, deduction, gain, or loss from the item or items being hedged. Irs free file There are requirements and limits on the method you can use for certain hedging transactions. Irs free file See Regulations section 1. Irs free file 446-4(e) for those requirements and limits. Irs free file   Hedging transactions must be accounted for under the rules stated above unless the transaction is subject to mark-to-market accounting under section 475 or you use an accounting method other than the following methods. Irs free file Cash method. Irs free file Farm-price method. Irs free file Unit-livestock-price method. Irs free file   Once you adopt a method, you must apply it consistently and must have IRS approval before changing it. Irs free file   Your books and records must describe the accounting method used for each type of hedging transaction. Irs free file They must also contain any additional identification necessary to verify the application of the accounting method you used for the transaction. Irs free file You must make the additional identification no more than 35 days after entering into the hedging transaction. Irs free file Example of a hedging transaction. Irs free file   You file your income tax returns on the cash method. Irs free file On July 2 you anticipate a yield of 50,000 bushels of corn this year. Irs free file The December futures price is $5. Irs free file 75 a bushel, but there are indications that by harvest time the price will drop. Irs free file To protect yourself against a drop in the price, you enter into the following hedging transaction. Irs free file You sell ten December futures contracts of 5,000 bushels each for a total of 50,000 bushels of corn at $5. Irs free file 75 a bushel. Irs free file   The price did not drop as anticipated but rose to $6 a bushel. Irs free file In November, you sell your crop at a local elevator for $6 a bushel. Irs free file You also close out your futures position by buying ten December contracts for $6 a bushel. Irs free file You paid a broker's commission of $1,400 ($70 per contract) for the complete in and out position in the futures market. Irs free file   The result is that the price of corn rose 25 cents a bushel and the actual selling price is $6 a bushel. Irs free file Your loss on the hedge is 25 cents a bushel. Irs free file In effect, the net selling price of your corn is $5. Irs free file 75 a bushel. Irs free file   Report the results of your futures transactions and your sale of corn separately on Schedule F. Irs free file See the instructions for the 2013 Schedule F (Form 1040). Irs free file   The loss on your futures transactions is $13,900, figured as follows. Irs free file July 2 - Sold December corn futures (50,000 bu. Irs free file @$5. Irs free file 75) $287,500 November 6 - Bought December corn futures (50,000 bu. Irs free file @$6 plus $1,400 broker's commission) 301,400 Futures loss ($13,900) This loss is reported as a negative figure on Schedule F, Part I, line 8, as other income. Irs free file   The proceeds from your corn sale at the local elevator are $300,000 (50,000 bu. Irs free file × $6). Irs free file Report it on Schedule F, Part I, line 2, as income from sales of products you raised. Irs free file   Assume you were right and the price went down 25 cents a bushel. Irs free file In effect, you would still net $5. Irs free file 75 a bushel, figured as follows. Irs free file Sold cash corn, per bushel $5. Irs free file 50 Gain on hedge, per bushel . Irs free file 25 Net price, per bushel $5. Irs free file 75       The gain on your futures transactions would have been $11,100, figured as follows. Irs free file July 2 - Sold December corn futures (50,000 bu. Irs free file @$5. Irs free file 75) $287,500 November 6 - Bought December corn futures (50,000 bu. Irs free file @$5. Irs free file 50 plus $1,400 broker's commission) 276,400 Futures gain $11,100 The $11,100 is reported on Schedule F, Part I, line 8, as other income. Irs free file   The proceeds from the sale of your corn at the local elevator, $275,000, are reported on Schedule F, Part I, line 2, as income from sales of products you raised. Irs free file Livestock This part discusses the sale or exchange of livestock used in your farm business. Irs free file Gain or loss from the sale or exchange of this livestock may qualify as a section 1231 gain or loss. Irs free file However, any part of the gain that is ordinary income from the recapture of depreciation is not included as section 1231 gain. Irs free file See chapter 9 for more information on section 1231 gains and losses and the recapture of depreciation under section 1245. Irs free file The rules discussed here do not apply to the sale of livestock held primarily for sale to customers. Irs free file The sale of this livestock is reported on Schedule F. Irs free file See chapter 3. Irs free file Also, special rules apply to sales or exchanges caused by weather-related conditions. Irs free file See chapter 3. Irs free file Holding period. Irs free file   The sale or exchange of livestock used in your farm business (defined below) qualifies as a section 1231 transaction if you held the livestock for 12 months or more (24 months or more for horses and cattle). Irs free file Livestock. Irs free file   For section 1231 transactions, livestock includes cattle, hogs, horses, mules, donkeys, sheep, goats, fur-bearing animals, and other mammals. Irs free file Also, for section 1231 transactions, livestock does not include chickens, turkeys, pigeons, geese, emus, ostriches, rheas, or other birds, fish, frogs, reptiles, etc. Irs free file Livestock used in farm business. Irs free file   If livestock is held primarily for draft, breeding, dairy, or sporting purposes, it is used in your farm business. Irs free file The purpose for which an animal is held ordinarily is determined by a farmer's actual use of the animal. Irs free file An animal is not held for draft, breeding, dairy, or sporting purposes merely because it is suitable for that purpose, or because it is held for sale to other persons for use by them for that purpose. Irs free file However, a draft, breeding, or sporting purpose may be present if an animal is disposed of within a reasonable time after it is prevented from its intended use or made undesirable as a result of an accident, disease, drought, or unfitness of the animal. Irs free file Example 1. Irs free file You discover an animal that you intend to use for breeding purposes is sterile. Irs free file You dispose of it within a reasonable time. Irs free file This animal was held for breeding purposes. Irs free file Example 2. Irs free file You retire and sell your entire herd, including young animals that you would have used for breeding or dairy purposes had you remained in business. Irs free file These young animals were held for breeding or dairy purposes. Irs free file Also, if you sell young animals to reduce your breeding or dairy herd because of drought, these animals are treated as having been held for breeding or dairy purposes. Irs free file See Sales Caused by Weather-Related Conditions in chapter 3. Irs free file Example 3. Irs free file You are in the business of raising hogs for slaughter. Irs free file Customarily, before selling your sows, you obtain a single litter of pigs that you will raise for sale. Irs free file You sell the brood sows after obtaining the litter. Irs free file Even though you hold these brood sows for ultimate sale to customers in the ordinary course of your business, they are considered to be held for breeding purposes. Irs free file Example 4. Irs free file You are in the business of raising registered cattle for sale to others for use as breeding cattle. Irs free file The business practice is to breed the cattle before sale to establish their fitness as registered breeding cattle. Irs free file Your use of the young cattle for breeding purposes is ordinary and necessary for selling them as registered breeding cattle. Irs free file Such use does not demonstrate that you are holding the cattle for breeding purposes. Irs free file However, those cattle you held as additions or replacements to your own breeding herd to produce calves are considered to be held for breeding purposes, even though they may not actually have produced calves. Irs free file The same applies to hog and sheep breeders. Irs free file Example 5. Irs free file You breed, raise, and train horses for racing purposes. Irs free file Every year you cull horses from your racing stable. Irs free file In 2013, you decided that to prevent your racing stable from getting too large to be effectively operated, you must cull six horses that had been raced at public tracks in 2012. Irs free file These horses are all considered held for sporting purposes. Irs free file Figuring gain or loss on the cash method. Irs free file   Farmers or ranchers who use the cash method of accounting figure their gain or loss on the sale of livestock used in their farming business as follows. Irs free file Raised livestock. Irs free file   Gain on the sale of raised livestock is generally the gross sales price reduced by any expenses of the sale. Irs free file Expenses of sale include sales commissions, freight or hauling from farm to commission company, and other similar expenses. Irs free file The basis of the animal sold is zero if the costs of raising it were deducted during the years the animal was being raised. Irs free file However, see Uniform Capitalization Rules in chapter 6. Irs free file Purchased livestock. Irs free file   The gross sales price minus your adjusted basis and any expenses of sale is the gain or loss. Irs free file Example. Irs free file A farmer sold a breeding cow on January 8, 2013, for $1,250. Irs free file Expenses of the sale were $125. Irs free file The cow was bought July 2, 2009, for $1,300. Irs free file Depreciation (not less than the amount allowable) was $867. Irs free file Gross sales price $1,250 Cost (basis) $1,300   Minus: Depreciation deduction 867   Unrecovered cost (adjusted basis) $ 433   Expense of sale 125 558 Gain realized $ 692 Converted Wetland and Highly Erodible Cropland Special rules apply to dispositions of land converted to farming use after March 1, 1986. Irs free file Any gain realized on the disposition of converted wetland or highly erodible cropland is treated as ordinary income. Irs free file Any loss on the disposition of such property is treated as a long-term capital loss. Irs free file Converted wetland. Irs free file   This is generally land that was drained or filled to make the production of agricultural commodities possible. Irs free file It includes converted wetland held by the person who originally converted it or held by any other person who used the converted wetland at any time after conversion for farming. Irs free file   A wetland (before conversion) is land that meets all the following conditions. Irs free file It is mostly soil that, in its undrained condition, is saturated, flooded, or ponded long enough during a growing season to develop an oxygen-deficient state that supports the growth and regeneration of plants growing in water. Irs free file It is saturated by surface or groundwater at a frequency and duration sufficient to support mostly plants that are adapted for life in saturated soil. Irs free file It supports, under normal circumstances, mostly plants that grow in saturated soil. Irs free file Highly erodible cropland. Irs free file   This is cropland subject to erosion that you used at any time for farming purposes other than grazing animals. Irs free file Generally, highly erodible cropland is land currently classified by the Department of Agriculture as Class IV, VI, VII, or VIII under its classification system. Irs free file Highly erodible cropland also includes land that would have an excessive average annual erosion rate in relation to the soil loss tolerance level, as determined by the Department of Agriculture. Irs free file Successor. Irs free file   Converted wetland or highly erodible cropland is also land held by any person whose basis in the land is figured by reference to the adjusted basis of a person in whose hands the property was converted wetland or highly erodible cropland. Irs free file Timber Standing timber you held as investment property is a capital asset. Irs free file Gain or loss from its sale is capital gain or loss reported on Form 8949 and Schedule D (Form 1040), as applicable. Irs free file If you held the timber primarily for sale to customers, it is not a capital asset. Irs free file Gain or loss on its sale is ordinary business income or loss. Irs free file It is reported on Schedule F, line 1 (purchased timber) or line 2 (raised timber). Irs free file See the Instructions for Schedule F (Form 1040). Irs free file Farmers who cut timber on their land and sell it as logs, firewood, or pulpwood usually have no cost or other basis for that timber. Irs free file Amounts realized from these sales, and the expenses incurred in cutting, hauling, etc. Irs free file , are ordinary farm income and expenses reported on Schedule F. Irs free file Different rules apply if you owned the timber longer than 1 year and elect to treat timber cutting as a sale or exchange or you enter into a cutting contract, discussed below. Irs free file Timber considered cut. Irs free file   Timber is considered cut on the date when, in the ordinary course of business, the quantity of felled timber is first definitely determined. Irs free file This is true whether the timber is cut under contract or whether you cut it yourself. Irs free file Christmas trees. Irs free file   Evergreen trees, such as Christmas trees, that are more than 6 years old when severed from their roots and sold for ornamental purposes are included in the term timber. Irs free file They qualify for both rules discussed below. Irs free file Election to treat cutting as a sale or exchange. Irs free file   Under the general rule, the cutting of timber results in no gain or loss. Irs free file It is not until a sale or exchange occurs that gain or loss is realized. Irs free file But if you owned or had a contractual right to cut timber, you can elect to treat the cutting of timber as a section 1231 transaction in the year it is cut. Irs free file Even though the cut timber is not actually sold or exchanged, you report your gain or loss on the cutting for the year the timber is cut. Irs free file Any later sale results in ordinary business income or loss. Irs free file See the example below. Irs free file   To elect this treatment, you must: Own or hold a contractual right to cut the timber for a period of more than 1 year before it is cut, and Cut the timber for sale or use in your trade or business. Irs free file Making the election. Irs free file   You make the election on your return for the year the cutting takes place by including in income the gain or loss on the cutting and including a computation of your gain or loss. Irs free file You do not have to make the election in the first year you cut the timber. Irs free file You can make it in any year to which the election would apply. Irs free file If the timber is partnership property, the election is made on the partnership return. Irs free file This election cannot be made on an amended return. Irs free file   Once you have made the election, it remains in effect for all later years unless you revoke it. Irs free file Election under section 631(a) may be revoked. Irs free file   If you previously elected for any tax year ending before October 23, 2004, to treat the cutting of timber as a sale or exchange under section 631(a), you may revoke this election without the consent of the IRS for any tax year ending after October 22, 2004. Irs free file The prior election (and revocation) is disregarded for purposes of making a subsequent election. Irs free file See Form T (Timber), Forest Activities Schedule, for more information. Irs free file Gain or loss. Irs free file   Your gain or loss on the cutting of standing timber is the difference between its adjusted basis for depletion and its FMV on the first day of your tax year in which it is cut. Irs free file   Your adjusted basis for depletion of cut timber is based on the number of units (board feet, log scale, or other units) of timber cut during the tax year and considered to be sold or exchanged. Irs free file Your adjusted basis for depletion is also based on the depletion unit of timber in the account used for the cut timber, and should be figured in the same manner as shown in section 611 and Regulations section 1. Irs free file 611-3. Irs free file   Depletion of timber is discussed in chapter 7. Irs free file Example. Irs free file   In April 2013, you owned 4,000 MBF (1,000 board feet) of standing timber longer than 1 year. Irs free file It had an adjusted basis for depletion of $40 per MBF. Irs free file You are a calendar year taxpayer. Irs free file On January 1, 2013, the timber had a FMV of $350 per MBF. Irs free file It was cut in April for sale. Irs free file On your 2013 tax return, you elect to treat the cutting of the timber as a sale or exchange. Irs free file You report the difference between the FMV and your adjusted basis for depletion as a gain. Irs free file This amount is reported on Form 4797 along with your other section 1231 gains and losses to figure whether it is treated as a capital gain or as ordinary gain. Irs free file You figure your gain as follows. Irs free file FMV of timber January 1, 2013 $1,400,000 Minus: Adjusted basis for depletion 160,000 Section 1231 gain $1,240,000   The FMV becomes your basis in the cut timber, and a later sale of the cut timber, including any by-product or tree tops, will result in ordinary business income or loss. Irs free file Outright sales of timber. Irs free file   Outright sales of timber by landowners qualify for capital gains treatment using rules similar to the rules for certain disposal of timber under a contract with retained economic interest (defined later). Irs free file However, for outright sales, the date of disposal is not deemed to be the date the timber is cut because the landowner can elect to treat the payment date as the date of disposal (see Date of disposal below). Irs free file Cutting contract. Irs free file   You must treat the disposal of standing timber under a cutting contract as a section 1231 transaction if all the following apply to you. Irs free file You are the owner of the timber. Irs free file You held the timber longer than 1 year before its disposal. Irs free file You kept an economic interest in the timber. Irs free file   You have kept an economic interest in standing timber if, under the cutting contract, the expected return on your investment is conditioned on the cutting of the timber. Irs free file   The difference between the amount realized from the disposal of the timber and its adjusted basis for depletion is treated as gain or loss on its sale. Irs free file Include this amount on Form 4797 along with your other section 1231 gains or losses. Irs free file Date of disposal. Irs free file   The date of disposal is the date the timber is cut. Irs free file However, for outright sales by landowners or if you receive payment under the contract before the timber is cut, you can elect to treat the date of payment as the date of disposal. Irs free file   This election applies only to figure the holding period of the timber. Irs free file It has no effect on the time for reporting gain or loss (generally when the timber is sold or exchanged). Irs free file   To make this election, attach a statement to the tax return filed by the due date (including extensions) for the year payment is received. Irs free file The statement must identify the advance payments subject to the election and the contract under which they were made. Irs free file   If you timely filed your return for the year you received payment without making the election, you can still make the election by filing an amended return within 6 months after the due date for that year's return (excluding extensions). Irs free file Attach the statement to the amended return and write “Filed pursuant to section 301. Irs free file 9100-2” at the top of the statement. Irs free file File the amended return at the same address the original return was filed. Irs free file Owner. Irs free file   An owner is any person who owns an interest in the timber, including a sublessor and the holder of a contract to cut the timber. Irs free file You own an interest in timber if you have the right to cut it for sale on your own account or for use in your business. Irs free file Tree stumps. Irs free file   Tree stumps are a capital asset if they are on land held by an investor who is not in the timber or stump business as a buyer, seller, or processor. Irs free file Gain from the sale of stumps sold in one lot by such a holder is taxed as a capital gain. Irs free file However, tree stumps held by timber operators after the saleable standing timber was cut and removed from the land are considered by-products. Irs free file Gain from the sale of stumps in lots or tonnage by such operators is taxed as ordinary income. Irs free file   See Form T (Timber) and its separate instructions for more information about dispositions of timber. Irs free file Sale of a Farm The sale of your farm will usually involve the sale of both nonbusiness property (your home) and business property (the land and buildings used in the farm operation and perhaps machinery and livestock). Irs free file If you have a gain from the sale, you may be allowed to exclude the gain on your home. Irs free file For more information, see Publication 523, Selling Your Home. Irs free file The gain on the sale of your business property is taxable. Irs free file A loss on the sale of your business property to an unrelated person is deducted as an ordinary loss. Irs free file Your taxable gain or loss on the sale of property used in your farm business is taxed under the rules for section 1231 transactions. Irs free file See chapter 9. Irs free file Losses from personal-use property, other than casualty or theft losses, are not deductible. Irs free file If you receive payments for your farm in installments, your gain is taxed over the period of years the payments are received, unless you elect not to use the installment method of reporting the gain. Irs free file See chapter 10 for information about installment sales. Irs free file When you sell your farm, the gain or loss on each asset is figured separately. Irs free file The tax treatment of gain or loss on the sale of each asset is determined by the classification of the asset. Irs free file Each of the assets sold must be classified as one of the following. Irs free file Capital asset held 1 year or less. Irs free file Capital asset held longer than 1 year. Irs free file Property (including real estate) used in your business and held 1 year or less (including draft, breeding, dairy, and sporting animals held less than the holding periods discussed earlier under Livestock ). Irs free file Property (including real estate) used in your business and held longer than 1 year (including only draft, breeding, dairy, and sporting animals held for the holding periods discussed earlier). Irs free file Property held primarily for sale or which is of the kind that would be included in inventory if on hand at the end of your tax year. Irs free file Allocation of consideration paid for a farm. Irs free file   The sale of a farm for a lump sum is considered a sale of each individual asset rather than a single asset. Irs free file The residual method is required only if the group of assets sold constitutes a trade or business. Irs free file This method determines gain or loss from the transfer of each asset. Irs free file It also determines the buyer's basis in the business assets. Irs free file For more information, see Sale of a Business in chapter 2 of Publication 544. Irs free file Property used in farm operation. Irs free file   The rules for excluding the gain on the sale of your home, described later under Sale of your home , do not apply to the property used for your farming business. Irs free file Recognized gains and losses on business property must be reported on your return for the year of the sale. Irs free file If the property was held longer than 1 year, it may qualify for section 1231 treatment (see chapter 9). Irs free file Example. Irs free file You sell your farm, including your main home, which you have owned since December 2001. Irs free file You realize gain on the sale as follows. Irs free file   Farm   Farm   With Home Without   Home Only Home Selling price $382,000 $158,000 $224,000 Cost (or other basis) 240,000 110,000 130,000 Gain $142,000 $48,000 $94,000 You must report the $94,000 gain from the sale of the property used in your farm business. Irs free file All or a part of that gain may have to be reported as ordinary income from the recapture of depreciation or soil and water conservation expenses. Irs free file Treat the balance as section 1231 gain. Irs free file The $48,000 gain from the sale of your home is not taxable as long as you meet the requirements explained later under Sale of your home . Irs free file Partial sale. Irs free file   If you sell only part of your farm, you must report any recognized gain or loss on the sale of that part on your tax return for the year of the sale. Irs free file You cannot wait until you have sold enough of the farm to recover its entire cost before reporting gain or loss. Irs free file For a detailed discussion on installment sales, see Publication 544. Irs free file Adjusted basis of the part sold. Irs free file   This is the properly allocated part of your original cost or other basis of the entire farm plus or minus necessary adjustments for improvements, depreciation, etc. Irs free file , on the part sold. Irs free file If your home is on the farm, you must properly adjust the basis to exclude those costs from your farm asset costs, as discussed below under Sale of your home . Irs free file Example. Irs free file You bought a 600-acre farm for $700,000. Irs free file The farm included land and buildings. Irs free file The purchase contract designated $600,000 of the purchase price to the land. Irs free file You later sold 60 acres of land on which you had installed a fence. Irs free file Your adjusted basis for the part of your farm sold is $60,000 (1/10 of $600,000), plus any unrecovered cost (cost not depreciated) of the fence on the 60 acres at the time of sale. Irs free file Use this amount to determine your gain or loss on the sale of the 60 acres. Irs free file Assessed values for local property taxes. Irs free file   If you paid a flat sum for the entire farm and no other facts are available for properly allocating your original cost or other basis between the land and the buildings, you can use the assessed values for local property taxes for the year of purchase to allocate the costs. Irs free file Example. Irs free file Assume that in the preceding example there was no breakdown of the $700,000 purchase price between land and buildings. Irs free file However, in the year of purchase, local taxes on the entire property were based on assessed valuations of $420,000 for land and $140,000 for improvements, or a total of $560,000. Irs free file The assessed valuation of the land is 3/4 (75%) of the total assessed valuation. Irs free file Multiply the $700,000 total purchase price by 75% to figure basis of $525,000 for the 600 acres of land. Irs free file The unadjusted basis of the 60 acres you sold would then be $52,500 (1/10 of $525,000). Irs free file Sale of your home. Irs free file   Your home is a capital asset and not property used in the trade or business of farming. Irs free file If you sell a farm that includes a house you and your family occupy, you must determine the part of the selling price and the part of the cost or other basis allocable to your home. Irs free file Your home includes the immediate surroundings and outbuildings relating to it that are not used for business purposes. Irs free file   If you use part of your home for business, you must make an appropriate adjustment to the basis for depreciation allowed or allowable. Irs free file For more information on basis, see chapter 6. Irs free file More information. Irs free file   For more information on selling your home, see Publication 523. Irs free file Gain from condemnation. Irs free file   If you have a gain from a condemnation or sale under threat of condemnation, you may use the preceding rules for excluding the gain, rather than the rules discussed under Postponing Gain in chapter 11. Irs free file However, any gain that cannot be excluded (because it is more than the limit) may be postponed under the rules discussed under Postponing Gain in chapter 11. Irs free file Foreclosure or Repossession If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. Irs free file The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. Irs free file This is true even if you voluntarily return the property to the lender. Irs free file You may also realize ordinary income from cancellation of debt if the loan balance is more than the FMV of the property. Irs free file Buyer's (borrower's) gain or loss. Irs free file   You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale or exchange. Irs free file The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized. Irs free file See Determining Gain or Loss , earlier. Irs free file Worksheet 8-1. Irs free file Worksheet for Foreclosures andRepossessions Part 1. Irs free file Use Part 1 to figure your ordinary income from the cancellation of debt upon foreclosure or repossession. Irs free file Complete this part only if you were personally liable for the debt. Irs free file Otherwise, go to Part 2. Irs free file   1. Irs free file Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable after the transfer of property   2. Irs free file Enter the Fair Market Value of the transferred property   3. Irs free file Ordinary income from cancellation of debt upon foreclosure or repossession. Irs free file * Subtract line 2 from line 1. Irs free file If zero or less, enter -0-   Part 2. Irs free file Figure your gain or loss from foreclosure or repossession. Irs free file   4. Irs free file If you completed Part 1, enter the smaller of line 1 or line 2. Irs free file If you did not complete Part 1, enter the outstanding debt immediately before the transfer of property   5. Irs free file Enter any proceeds you received from the foreclosure sale   6. Irs free file Add lines 4 and 5   7. Irs free file Enter the adjusted basis of the transferred property   8. Irs free file Gain or loss from foreclosure or repossession. Irs free file Subtract line 7  from line 6   * The income may not be taxable. Irs free file See Cancellation of debt . Irs free file    You can use Worksheet 8-1 to figure your gain or loss from a foreclosure or repossession. Irs free file Amount realized on a nonrecourse debt. Irs free file   If you are not personally liable for repaying the debt (nonrecourse debt) secured by the transferred property, the amount you realize includes the full amount of the debt canceled by the transfer. Irs free file The full canceled debt is included in the amount realized even if the fair market value of the property is less than the canceled debt. Irs free file Example 1. Irs free file Ann paid $200,000 for land used in her farming business. Irs free file She paid $15,000 down and borrowed the remaining $185,000 from a bank. Irs free file Ann is not personally liable for the loan (nonrecourse debt), but pledges the land as security. Irs free file The bank foreclosed on the loan 2 years after Ann stopped making payments. Irs free file When the bank foreclosed, the balance due on the loan was $180,000 and the FMV of the land was $170,000. Irs free file The amount Ann realized on the foreclosure was $180,000, the debt canceled by the foreclosure. Irs free file She figures her gain or loss on Form 4797, Part I, by comparing the amount realized ($180,000) with her adjusted basis ($200,000). Irs free file She has a $20,000 deductible loss. Irs free file Example 2. Irs free file Assume the same facts as in Example 1 except the FMV of the land was $210,000. Irs free file The result is the same. Irs free file The amount Ann realized on the foreclosure is $180,000, the debt canceled by the foreclosure. Irs free file Because her adjusted basis is $200,000, she has a deductible loss of $20,000, which she reports on Form 4797, Part I. Irs free file Amount realized on a recourse debt. Irs free file   If you are personally liable for the debt (recourse debt), the amount realized on the foreclosure or repossession includes the lesser of: The outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer, or The fair market value of the transferred property. Irs free file   You are treated as receiving ordinary income from the canceled debt for the part of the debt that is more than the fair market value. Irs free file The amount realized does not include the canceled debt that is your income from cancellation of debt. Irs free file See Cancellation of debt , later. Irs free file Example 3. Irs free file Assume the same facts as in Example 1 above except Ann is personally liable for the loan (recourse debt). Irs free file In this case, the amount she realizes is $170,000. Irs free file This is the canceled debt ($180,000) up to the FMV of the land ($170,000). Irs free file Ann figures her gain or loss on the foreclosure by comparing the amount realized ($170,000) with her adjusted basis ($200,000). Irs free file She has a $30,000 deductible loss, which she figures on Form 4797, Part I. Irs free file She is also treated as receiving ordinary income from cancellation of debt. Irs free file That income is $10,000 ($180,000 − $170,000). Irs free file This is the part of the canceled debt not included in the amount realized. Irs free file She reports this as other income on Schedule F, line 8. Irs free file Seller's (lender's) gain or loss on repossession. Irs free file   If you finance a buyer's purchase of property and later acquire an interest in it through foreclosure or repossession, you may have a gain or loss on the acquisition. Irs free file For more information, see Repossession in Publication 537, Installment Sales. Irs free file Cancellation of debt. Irs free file   If property that is repossessed or foreclosed upon secures a debt for which you are personally liable (recourse debt), you generally must report as ordinary income the amount by which the canceled debt is more than the FMV of the property. Irs free file This income is separate from any gain or loss realized from the foreclosure or repossession. Irs free file Report the income from cancellation of a business debt on Schedule F, line 8. Irs free file Report the income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. Irs free file    You can use Worksheet 8-1 to figure your income from cancellation of debt. Irs free file   However, income from cancellation of debt is not taxed if any of the following apply. Irs free file The cancellation is intended as a gift. Irs free file The debt is qualified farm debt (see chapter 3). Irs free file The debt is qualified real property business debt (see chapter 5 of Publication 334). Irs free file You are insolvent or bankrupt (see  chapter 3). Irs free file The debt is qualified principal residence indebtedness (see chapter 3). Irs free file   Use Form 982 to report the income exclusion. Irs free file Abandonment The abandonment of property is a disposition of property. Irs free file You abandon property when you voluntarily and permanently give up possession and use of the property with the intention of ending your ownership, but without passing it on to anyone else. Irs free file Business or investment property. Irs free file   Loss from abandonment of business or investment property is deductible as a loss. Irs free file Loss from abandonment of business or investment property that is not treated as a sale or exchange generally is an ordinary loss. Irs free file If your adjusted basis is more than the amount you realize (if any), then you have a loss. Irs free file If the amount you realize (if any) is more than your adjusted basis, then you have a gain. Irs free file This rule also applies to leasehold improvements the lessor made for the lessee. Irs free file However, if the property is foreclosed on or repossessed in lieu of abandonment, gain or loss is figured as discussed earlier under Foreclosure or Repossession . Irs free file   If the abandoned property is secured by debt, special rules apply. Irs free file The tax consequences of abandonment of property that secures a debt depend on whether you are personally liable for the debt (recourse debt) or were not personally liable for the debt (nonrecourse debt). Irs free file For more information, see chapter 3 of Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals). Irs free file The abandonment loss is deducted in the tax year in which the loss is sustained. Irs free file Report the loss on Form 4797, Part II, line 10. Irs free file Personal-use property. Irs free file   You cannot deduct any loss from abandonment of your home or other property held for personal use. Irs free file Canceled debt. Irs free file   If the abandoned property secures a debt for which you are personally liable and the debt is canceled, you will realize ordinary income equal to the canceled debt. Irs free file This income is separate from any loss realized from abandonment of the property. Irs free file Report income from cancellation of a debt related to a business or rental activity as business or rental income. Irs free file Report income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. Irs free file   However, income from cancellation of debt is not taxed in certain circumstances. Irs free file See Cancellation of debt earlier under Foreclosure or Repossession . Irs free file Forms 1099-A and 1099-C. Irs free file   A lender who acquires an interest in your property in a foreclosure, repossession, or abandonment should send you Form 1099-A showing the information you need to figure your loss from the foreclosure, repossession, or abandonment. Irs free file However, if the lender cancels part of your debt and the lender must file Form 1099-C, the lender may include the information about the foreclosure, repossession, or abandonment on that form instead of Form 1099-A. Irs free file The lender must file Form 1099-C and send you a copy if the canceled debt is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. Irs free file For foreclosures, repossessions, abandonments of property, and debt cancellations occurring in 2013, these forms should be sent to you by January 31, 2014. Irs free file Prev  Up  Next   Home   More Online Publications
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The Irs Free File

Irs free file 1. Irs free file   Fuel Taxes Table of Contents Definitions Information Returns Registration RequirementsAdditional information. Irs free file Gasoline and Aviation GasolineTaxable Events Gasoline Blendstocks Diesel Fuel and KeroseneTaxable Events Dyed Diesel Fuel and Dyed Kerosene Alaska and Feedstocks Back-up Tax Diesel-Water Fuel Emulsion Kerosene for Use in AviationTaxable Events Liability For Tax Surtax on any liquid used in a fractional ownership program aircraft as fuel Certificate for Commercial Aviation and Exempt UsesExempt use. Irs free file Reseller statement. Irs free file Other Fuels (Including Alternative Fuels)Taxable Events Compressed Natural Gas (CNG)Taxable Events Fuels Used on Inland WaterwaysFishing vessels. Irs free file Deep-draft ocean-going vessels. Irs free file Passenger vessels. Irs free file Ocean-going barges. Irs free file State or local governments. Irs free file Cellulosic or Second Generation Biofuel Not Used as Fuel Biodiesel Sold as But Not Used as Fuel Definitions Excise taxes are imposed on all the following fuels. Irs free file Gasoline, including aviation gasoline and gasoline blendstocks. Irs free file Diesel fuel, including dyed diesel fuel. Irs free file Diesel-water fuel emulsion. Irs free file Kerosene, including dyed kerosene and kerosene used in aviation. Irs free file Other Fuels (including alternative fuels). Irs free file Compressed natural gas (CNG). Irs free file Fuels used in commercial transportation on inland waterways. Irs free file Any liquid used in a fractional ownership program aircraft as fuel. Irs free file The following terms are used throughout the discussion of fuel taxes. Irs free file Other terms are defined in the discussion of the specific fuels to which they pertain. Irs free file Agri-biodiesel. Irs free file   Agri-biodiesel means biodiesel derived solely from virgin oils, including esters derived from virgin vegetable oils from corn, soybeans, sunflower seeds, cottonseeds, canola, crambe, rapeseeds, safflowers, flaxseeds, rice bran, mustard seeds, and camelina, and from animal fats. Irs free file Approved terminal or refinery. Irs free file   This is a terminal operated by a registrant that is a terminal operator or a refinery operated by a registrant that is a refiner. Irs free file Biodiesel. Irs free file   Biodiesel means the monoalkyl esters of long chain fatty acids derived from plant or animal matter that meet the registration requirements for fuels and fuel additives established by the Environmental Protection Agency (EPA) under section 211 of the Clean Air Act, and the requirements of the American Society of Testing Materials (ASTM) D6751. Irs free file Blended taxable fuel. Irs free file   This means any taxable fuel produced outside the bulk transfer/terminal system by mixing taxable fuel on which excise tax has been imposed and any other liquid on which excise tax has not been imposed. Irs free file This does not include a mixture removed or sold during the calendar quarter if all such mixtures removed or sold by the blender contain less than 400 gallons of a liquid on which the tax has not been imposed. Irs free file Blender. Irs free file   This is the person that produces blended taxable fuel. Irs free file Bulk transfer. Irs free file   This is the transfer of taxable fuel by pipeline or vessel. Irs free file Bulk transfer/terminal system. Irs free file   This is the taxable fuel distribution system consisting of refineries, pipelines, vessels, and terminals. Irs free file Fuel in the supply tank of any engine, or in any tank car, railcar, trailer, truck, or other equipment suitable for ground transportation is not in the bulk transfer/terminal system. Irs free file Cellulosic biofuel. Irs free file   Cellulosic biofuel means any liquid fuel produced from any lignocellulosic or hemicellulosic matter that is available on a renewable or recurring basis that meets the registration requirements for fuels and fuel additives established by the EPA under section 211 of the Clean Air Act. Irs free file Cellulosic biofuel does not include any alcohol with a proof of less than 150 (without regard to denaturants). Irs free file For fuels sold or used after December 31, 2009, cellulosic biofuel does not include fuel of which more than 4% (determined by weight) is any combination of water and sediment, fuel of which the ash content is more than 1%, or fuel that has an acid number greater than 25. Irs free file Also see Second generation biofuel below. Irs free file Diesel-water fuel emulsion. Irs free file   A diesel-water fuel emulsion means an emulsion at least 14% of which is water. Irs free file The emulsion additive used to produce the fuel must be registered by a United States manufacturer with the EPA under section 211 of the Clean Air Act as in effect on March 31, 2003. Irs free file Dry lease aircraft exchange. Irs free file   See later, under Surtax on any liquid used in a fractional ownership program aircraft as fuel. Irs free file Enterer. Irs free file   This is the importer of record (under customs law) for the taxable fuel. Irs free file However, if the importer of record is acting as an agent, such as a customs broker, the person for whom the agent is acting is the enterer. Irs free file If there is no importer of record, the owner at the time of entry into the United States is the enterer. Irs free file Entry. Irs free file   Taxable fuel is entered into the United States when it is brought into the United States and applicable customs law requires that it be entered for consumption, use, or warehousing. Irs free file This does not apply to fuel brought into Puerto Rico (which is part of the U. Irs free file S. Irs free file customs territory), but does apply to fuel brought into the United States from Puerto Rico. Irs free file Fractional ownership aircraft program and fractional program aircraft. Irs free file   See later, under Surtax on any liquid used in a fractional ownership program aircraft as fuel. Irs free file Measurement of taxable fuel. Irs free file   Volumes of taxable fuel can be measured on the basis of actual volumetric gallons or gallons adjusted to 60 degrees Fahrenheit. Irs free file Other fuels. Irs free file   See Other Fuels (Including Alternative Fuels), later, and Alternative Fuel Credit and Alternative Fuel Mixture Credit in chapter 2. Irs free file Pipeline operator. Irs free file   This is the person that operates a pipeline within the bulk transfer/terminal system. Irs free file Position holder. Irs free file   This is the person that holds the inventory position in the taxable fuel in the terminal, as reflected in the records of the terminal operator. Irs free file You hold the inventory position when you have a contractual agreement with the terminal operator for the use of the storage facilities and terminaling services for the taxable fuel. Irs free file A terminal operator that owns taxable fuel in its terminal is a position holder. Irs free file Rack. Irs free file   This is a mechanism capable of delivering fuel into a means of transport other than a pipeline or vessel. Irs free file Refiner. Irs free file   This is any person that owns, operates, or otherwise controls a refinery. Irs free file Refinery. Irs free file   This is a facility used to produce taxable fuel and from which taxable fuel may be removed by pipeline, by vessel, or at a rack. Irs free file However, this term does not include a facility where only blended fuel, and no other type of fuel, is produced. Irs free file For this purpose, blended fuel is any mixture that would be blended taxable fuel if produced outside the bulk transfer/terminal system. Irs free file Registrant. Irs free file   This is a taxable fuel registrant (see Registration Requirements, later). Irs free file Removal. Irs free file   This is any physical transfer of taxable fuel. Irs free file It also means any use of taxable fuel other than as a material in the production of taxable fuel or Other Fuels. Irs free file However, taxable fuel is not removed when it evaporates or is otherwise lost or destroyed. Irs free file Renewable diesel. Irs free file   See Renewable Diesel Credits in chapter 2. Irs free file Sale. Irs free file   For taxable fuel not in a terminal, this is the transfer of title to, or substantial incidents of ownership in, taxable fuel to the buyer for money, services, or other property. Irs free file For taxable fuel in a terminal, this is the transfer of the inventory position if the transferee becomes the position holder for that taxable fuel. Irs free file Second generation biofuel. Irs free file   This is any liquid fuel derived by, or from, qualified feedstocks, and meets the registration requirements for fuels and fuel additives established by the Environmental Protection Agency under section 211 of the Clean Air Act (42 U. Irs free file S. Irs free file C. Irs free file 7545). Irs free file It also includes certain liquid fuel which is derived by, or from, any cultivated algae, cyanobacteria, or lemna. Irs free file It is not alcohol of less than 150 proof (disregard any added denaturants). Irs free file See Form 6478 for more information. Irs free file State. Irs free file   This includes any state, any of its political subdivisions, the District of Columbia, and the American Red Cross. Irs free file An Indian tribal government is treated as a state only if transactions involve the exercise of an essential tribal government function. Irs free file Taxable fuel. Irs free file   This means gasoline, diesel fuel, and kerosene. Irs free file Terminal. Irs free file   This is a storage and distribution facility supplied by pipeline or vessel, and from which taxable fuel may be removed at a rack. Irs free file It does not include a facility at which gasoline blendstocks are used in the manufacture of products other than finished gasoline if no gasoline is removed from the facility. Irs free file A terminal does not include any facility where finished gasoline, diesel fuel, or kerosene is stored if the facility is operated by a registrant and all such taxable fuel stored at the facility has been previously taxed upon removal from a refinery or terminal. Irs free file Terminal operator. Irs free file   This is any person that owns, operates, or otherwise controls a terminal. Irs free file Throughputter. Irs free file   This is any person that is a position holder or that owns taxable fuel within the bulk transfer/terminal system (other than in a terminal). Irs free file Vessel operator. Irs free file   This is the person that operates a vessel within the bulk transfer/terminal system. Irs free file However, vessel does not include a deep draft ocean-going vessel. Irs free file Information Returns Form 720-TO and Form 720-CS are information returns used to report monthly receipts and disbursements of liquid products. Irs free file A liquid product is any liquid transported into storage at a terminal or delivered out of a terminal. Irs free file For a list of products, see the product code table in the Instructions for Forms 720-TO and 720-CS. Irs free file The returns are due the last day of the month following the month in which the transaction occurs. Irs free file Generally, these returns can be filed on paper or electronically. Irs free file For information on filing electronically, see Publication 3536, Motor Fuel Excise Tax EDI Guide. Irs free file Publication 3536 is only available on the IRS website. Irs free file Form 720-TO. Irs free file   This information return is used by terminal operators to report receipts and disbursements of all liquid products to and from all approved terminals. Irs free file Each terminal operator must file a separate form for each approved terminal. Irs free file Form 720-CS. Irs free file   This information return must be filed by bulk transport carriers (barges, vessels, and pipelines) who receive liquid product from an approved terminal or deliver liquid product to an approved terminal. Irs free file Registration Requirements The following discussion applies to excise tax registration requirements for activities relating to fuels only. Irs free file See Form 637 for other persons who must register and for more information about registration. Irs free file Persons that are required to be registered. Irs free file   You are required to be registered if you are a: Blender; Enterer; Pipeline operator; Position holder; Refiner; Terminal operator; Vessel operator; Producer or importer of alcohol, biodiesel, agri-biodiesel, and renewable diesel; or Producer of cellulosic or second generation biofuel. Irs free file Persons that may register. Irs free file   You may, but are not required to, register if you are a: Feedstock user, Industrial user, Throughputter that is not a position holder, Ultimate vendor, Diesel-water fuel emulsion producer, Credit card issuer, or Alternative fuel claimant. Irs free file Ultimate vendors, credit card issuers, and alternative fuel claimants do not need to be registered to buy or sell fuel. Irs free file However, they must be registered to file claims for certain sales and uses of fuel. Irs free file See Form 637 for more information. Irs free file Taxable fuel registrant. Irs free file   This is an enterer, an industrial user, a refiner, a terminal operator, or a throughputter who received a Letter of Registration under the excise tax registration provisions and whose registration has not been revoked or suspended. Irs free file The term registrant as used in the discussions of these fuels means a taxable fuel registrant. Irs free file Additional information. Irs free file   See the Form 637 instructions for the information you must submit when you apply for registration. Irs free file Failure to register. Irs free file   The penalty for failure to register if you must register, unless due to reasonable cause, is $10,000 for the initial failure, and then $1,000 each day thereafter you fail to register. Irs free file Gasoline and Aviation Gasoline Gasoline. Irs free file   Gasoline means all products commonly or commercially known or sold as gasoline with an octane rating of 75 or more that are suitable for use as a motor fuel. Irs free file Gasoline includes any gasoline blend other than: Qualified ethanol and methanol fuel (at least 85 percent of the blend consists of alcohol produced from coal, including peat), Partially exempt ethanol and methanol fuel (at least 85 percent of the blend consists of alcohol produced from natural gas), or Denatured alcohol. Irs free file Gasoline also includes gasoline blendstocks, discussed later. Irs free file Aviation gasoline. Irs free file   This means all special grades of gasoline suitable for use in aviation reciprocating engines and covered by ASTM specification D910 or military specification MIL-G-5572. Irs free file Taxable Events The tax on gasoline is $. Irs free file 184 per gallon. Irs free file The tax on aviation gasoline is $. Irs free file 194 per gallon. Irs free file When used in a fractional ownership program aircraft, gasoline also is subject to a surtax of $. Irs free file 141 per gallon. Irs free file See Surtax on any liquid used in a fractional ownership program aircraft as fuel, later. Irs free file Tax is imposed on the removal, entry, or sale of gasoline. Irs free file Each of these events is discussed later. Irs free file Also, see the special rules that apply to gasoline blendstocks, later. Irs free file If the tax is paid on the gasoline in more than one event, a refund may be allowed for the “second” tax paid. Irs free file See Refunds of Second Tax in chapter 2. Irs free file Removal from terminal. Irs free file   All removals of gasoline at a terminal rack are taxable. Irs free file The position holder for that gasoline is liable for the tax. Irs free file Two-party exchanges. Irs free file   In a two-party exchange, the receiving person, not the delivering person, is liable for the tax imposed on the removal of taxable fuel from the terminal at the terminal rack. Irs free file A two-party exchange means a transaction (other than a sale) where the delivering person and receiving person are both taxable fuel registrants and all of the following apply. Irs free file The transaction includes a transfer from the delivering person, who holds the inventory position for the taxable fuel in the terminal as reflected in the records of the terminal operator. Irs free file The exchange transaction occurs before or at the same time as removal across the rack by the receiving person. Irs free file The terminal operator in its records treats the receiving person as the person that removes the product across the terminal rack for purposes of reporting the transaction on Form 720-TO. Irs free file The transaction is subject to a written contract. Irs free file Terminal operator's liability. Irs free file   The terminal operator is jointly and severally liable for the tax if the position holder is a person other than the terminal operator and is not a registrant. Irs free file   However, a terminal operator meeting all the following conditions at the time of the removal will not be liable for the tax. Irs free file The terminal operator is a registrant. Irs free file The terminal operator has an unexpired notification certificate (discussed later) from the position holder. Irs free file The terminal operator has no reason to believe any information on the certificate is false. Irs free file Removal from refinery. Irs free file   The removal of gasoline from a refinery is taxable if the removal meets either of the following conditions. Irs free file It is made by bulk transfer and the refiner, the owner of the gasoline immediately before the removal, or the operator of the pipeline or vessel is not a registrant. Irs free file It is made at the refinery rack. Irs free file The refiner is liable for the tax. Irs free file Exception. Irs free file   The tax does not apply to a removal of gasoline at the refinery rack if all the following requirements are met. Irs free file The gasoline is removed from an approved refinery not served by pipeline (other than for receiving crude oil) or vessel. Irs free file The gasoline is received at a facility operated by a registrant and located within the bulk transfer/terminal system. Irs free file The removal from the refinery is by railcar. Irs free file The same person operates the refinery and the facility at which the gasoline is received. Irs free file Entry into the United States. Irs free file   The entry of gasoline into the United States is taxable if the entry meets either of the following conditions. Irs free file It is made by bulk transfer and the enterer or the operator of the pipeline or vessel is not a registrant. Irs free file It is not made by bulk transfer. Irs free file The enterer is liable for the tax. Irs free file Importer of record's liability. Irs free file   The importer of record is jointly and severally liable for the tax with the enterer if the importer of record is not the enterer of the taxable fuel and the enterer is not a taxable fuel registrant. Irs free file   However, an importer of record meeting both of the following conditions at the time of the entry will not be liable for the tax. Irs free file The importer of record has an unexpired notification certificate (discussed later) from the enterer. Irs free file The importer of record has no reason to believe any information in the certificate is false. Irs free file Customs bond. Irs free file   The customs bond will not be charged for the tax imposed on the entry of the gasoline if at the time of entry the surety has an unexpired notification certificate from the enterer and has no reason to believe any information in the certificate is false. Irs free file Removal from a terminal by unregistered position holder or unregistered pipeline or vessel operator. Irs free file   The removal by bulk transfer of gasoline from a terminal is taxable if the position holder for the gasoline or the operator of the pipeline or vessel is not a registrant. Irs free file The position holder is liable for the tax. Irs free file The terminal operator is jointly and severally liable for the tax if the position holder is a person other than the terminal operator. Irs free file However, see Terminal operator's liability under Removal from terminal, earlier, for an exception. Irs free file Bulk transfers not received at approved terminal or refinery. Irs free file   The removal by bulk transfer of gasoline from a terminal or refinery, or the entry of gasoline by bulk transfer into the United States, is taxable if the following conditions apply. Irs free file No tax was previously imposed (as discussed earlier) on any of the following events. Irs free file The removal from the refinery. Irs free file The entry into the United States. Irs free file The removal from a terminal by an unregistered position holder. Irs free file Upon removal from the pipeline or vessel, the gasoline is not received at an approved terminal or refinery (or at another pipeline or vessel). Irs free file   The owner of the gasoline when it is removed from the pipeline or vessel is liable for the tax. Irs free file However, an owner meeting all the following conditions at the time of the removal will not be liable for the tax. Irs free file The owner is a registrant. Irs free file The owner has an unexpired notification certificate (discussed later) from the operator of the terminal or refinery where the gasoline is received. Irs free file The owner has no reason to believe any information on the certificate is false. Irs free file The operator of the facility where the gasoline is received is liable for the tax if the owner meets these conditions. Irs free file The operator is jointly and severally liable if the owner does not meet these conditions. Irs free file Sales to unregistered person. Irs free file   The sale of gasoline located within the bulk transfer/terminal system to a person that is not a registrant is taxable if tax was not previously imposed under any of the events discussed earlier. Irs free file   The seller is liable for the tax. Irs free file However, a seller meeting all the following conditions at the time of the sale will not be liable for the tax. Irs free file   The seller is a registrant. Irs free file The seller has an unexpired notification certificate (discussed later) from the buyer. Irs free file The seller has no reason to believe any information on the certificate is false. Irs free file The buyer of the gasoline is liable for the tax if the seller meets these conditions. Irs free file The buyer is jointly and severally liable if the seller does not meet these conditions. Irs free file Exception. Irs free file   The tax does not apply to a sale if all of the following apply. Irs free file The buyer's principal place of business is not in the United States. Irs free file The sale occurs as the fuel is delivered into a transport vessel with a capacity of at least 20,000 barrels of fuel. Irs free file The seller is a registrant and the exporter of record. Irs free file The fuel was exported. Irs free file Removal or sale of blended gasoline. Irs free file   The removal or sale of blended gasoline by the blender is taxable. Irs free file See Blended taxable fuel under Definitions, earlier. Irs free file   The blender is liable for the tax. Irs free file The tax is figured on the number of gallons not previously subject to the tax on gasoline. Irs free file   Persons who blend alcohol with gasoline to produce an alcohol fuel mixture outside the bulk transfer/terminal system must pay the gasoline tax on the volume of alcohol in the mixture. Irs free file See Form 720 to report this tax. Irs free file You also must be registered with the IRS as a blender. Irs free file See Form 637. Irs free file   However, if an untaxed liquid is sold as taxed taxable fuel and that untaxed liquid is used to produce blended taxable fuel, the person that sold the untaxed liquid is jointly and severally liable for the tax imposed on the blender's sale or removal of the blended taxable fuel. Irs free file Notification certificate. Irs free file   The notification certificate is used to notify a person of the registration status of the registrant. Irs free file A copy of the registrant's letter of registration cannot be used as a notification certificate. Irs free file A model notification certificate is shown in the Appendix as Model Certificate C. Irs free file A notification certificate must contain all information necessary to complete the model. Irs free file   The certificate may be included as part of any business records normally used for a sale. Irs free file A certificate expires on the earlier of the date the registrant provides a new certificate, or the date the recipient of the certificate is notified that the registrant's registration has been revoked or suspended. Irs free file The registrant must provide a new certificate if any information on a certificate has changed. Irs free file Additional persons liable. Irs free file   When the person liable for the tax willfully fails to pay the tax, joint and several liability for the tax is imposed on: Any officer, employee, or agent of the person who is under a duty to ensure the payment of the tax and who willfully fails to perform that duty, or Anyone who willfully causes the person to fail to pay the tax. Irs free file Gasoline Blendstocks Gasoline blendstocks may be subject to $. Irs free file 001 per gallon LUST tax as discussed below. Irs free file Gasoline includes gasoline blendstocks. Irs free file The previous discussions apply to these blendstocks. Irs free file However, if certain conditions are met, the removal, entry, or sale of gasoline blendstocks are taxed at $. Irs free file 001 per gallon or are not subject to the excise tax. Irs free file Blendstocks. Irs free file   Gasoline blendstocks are: Alkylate, Butane, Butene, Catalytically cracked gasoline, Coker gasoline, Ethyl tertiary butyl ether (ETBE), Hexane, Hydrocrackate, Isomerate, Methyl tertiary butyl ether (MTBE), Mixed xylene (not including any separated isomer of xylene), Natural gasoline, Pentane, Pentane mixture, Polymer gasoline, Raffinate, Reformate, Straight-run gasoline, Straight-run naphtha, Tertiary amyl methyl ether (TAME), Tertiary butyl alcohol (gasoline grade) (TBA), Thermally cracked gasoline, and Toluene. Irs free file   However, gasoline blendstocks do not include any product that cannot be used without further processing in the production of finished gasoline. Irs free file Not used to produce finished gasoline. Irs free file   Gasoline blendstocks not used to produce finished gasoline are not taxable (other than LUST) if the following conditions are met. Irs free file Removals and entries not connected to sale. Irs free file   Nonbulk removals and entries are not taxable if the person otherwise liable for the tax (position holder, refiner, or enterer) is a registrant. Irs free file Removals and entries connected to sale. Irs free file   Nonbulk removals and entries are not taxable if the person otherwise liable for the tax (position holder, refiner, or enterer) is a registrant, and at the time of the sale, meets the following requirements. Irs free file The person has an unexpired certificate (discussed later) from the buyer. Irs free file The person has no reason to believe any information in the certificate is false. Irs free file Sales after removal or entry. Irs free file   The sale of a gasoline blendstock that was not subject to tax on its nonbulk removal or entry, as discussed earlier, is taxable. Irs free file The seller is liable for the tax. Irs free file However, the sale is not taxable if, at the time of the sale, the seller meets the following requirements. Irs free file The seller has an unexpired certificate (discussed next) from the buyer. Irs free file The seller has no reason to believe any information in the certificate is false. Irs free file Certificate of buyer. Irs free file   The certificate from the buyer certifies the gasoline blendstocks will not be used to produce finished gasoline. Irs free file The certificate may be included as part of any business records normally used for a sale. Irs free file A model certificate is shown in the Appendix as Model Certificate D. Irs free file The certificate must contain all information necessary to complete the model. Irs free file   A certificate expires on the earliest of the following dates. Irs free file The date 1 year after the effective date (not earlier than the date signed) of the certificate. Irs free file The date a new certificate is provided to the seller. Irs free file The date the seller is notified that the buyer's right to provide a certificate has been withdrawn. Irs free file The buyer must provide a new certificate if any information on a certificate has changed. Irs free file   The IRS may withdraw the buyer's right to provide a certificate if that buyer uses the gasoline blendstocks in the production of finished gasoline or resells the blendstocks without getting a certificate from its buyer. Irs free file Received at approved terminal or refinery. Irs free file   The nonbulk removal or entry of gasoline blendstocks received at an approved terminal or refinery is not taxable if the person otherwise liable for the tax (position holder, refiner, or enterer) meets all the following requirements. Irs free file The person is a registrant. Irs free file The person has an unexpired notification certificate (discussed earlier) from the operator of the terminal or refinery where the gasoline blendstocks are received. Irs free file The person has no reason to believe any information on the certificate is false. Irs free file Bulk transfers to registered industrial user. Irs free file   The removal of gasoline blendstocks from a pipeline or vessel is not taxable (other than LUST) if the blendstocks are received by a registrant that is an industrial user. Irs free file An industrial user is any person that receives gasoline blendstocks by bulk transfer for its own use in the manufacture of any product other than finished gasoline. Irs free file Credits or Refunds. Irs free file   A credit or refund of the gasoline tax may be allowable if gasoline is used for a nontaxable purpose or exempt use. Irs free file For more information, see chapter 2. Irs free file Diesel Fuel and Kerosene Generally, diesel fuel and kerosene are taxed in the same manner as gasoline (discussed earlier). Irs free file However, special rules (discussed later) apply to dyed diesel fuel and dyed kerosene, and to undyed diesel fuel and undyed kerosene sold or used in Alaska for certain nontaxable uses and undyed kerosene used for a feedstock purpose. Irs free file Diesel fuel means: Any liquid that without further processing or blending is suitable for use as a fuel in a diesel-powered highway vehicle or train, and Transmix. Irs free file A liquid is suitable for this use if the liquid has practical and commercial fitness for use in the propulsion engine of a diesel-powered highway vehicle or diesel-powered train. Irs free file A liquid may possess this practical and commercial fitness even though the specified use is not the predominant use of the liquid. Irs free file However, a liquid does not possess this practical and commercial fitness solely by reason of its possible or rare use as a fuel in the propulsion engine of a diesel-powered highway vehicle or diesel-powered train. Irs free file Diesel fuel does not include gasoline, kerosene, excluded liquid, No. Irs free file 5 and No. Irs free file 6 fuel oils covered by ASTM specification D396, or F-76 (Fuel Naval Distillate) covered by military specification MIL-F-16884. Irs free file An excluded liquid is either of the following. Irs free file A liquid that contains less than 4% normal paraffins. Irs free file A liquid with all the following properties. Irs free file Distillation range of 125 degrees Fahrenheit or less. Irs free file Sulfur content of 10 ppm or less. Irs free file Minimum color of +27 Saybolt. Irs free file Transmix means a by-product of refined products created by the mixing of different specification products during pipeline transportation. Irs free file Kerosene. Irs free file   This means any of the following liquids. Irs free file One of the two grades of kerosene (No. Irs free file 1-K and No. Irs free file 2-K) covered by ASTM specification D3699. Irs free file Kerosene-type jet fuel covered by ASTM specification D1655 or military specification MIL-DTL-5624T (Grade JP-5) or MIL-DTL-83133E (Grade JP-8). Irs free file See Kerosene for Use in Aviation, later. Irs free file   However, kerosene does not include excluded liquid, discussed earlier. Irs free file   Kerosene also includes any liquid that would be described above but for the presence of a dye of the type used to dye kerosene for a nontaxable use. Irs free file Diesel-powered highway vehicle. Irs free file   This is any self-propelled vehicle designed to carry a load over public highways (whether or not also designed to perform other functions) and propelled by a diesel-powered engine. Irs free file Specially designed mobile machinery for nontransportation functions and vehicles specially designed for off-highway transportation are generally not considered diesel-powered highway vehicles. Irs free file For more information about these vehicles and for information about vehicles not considered highway vehicles, see Off-Highway Business Use (No. Irs free file 2) in chapter 2. Irs free file Diesel-powered train. Irs free file   This is any diesel-powered equipment or machinery that rides on rails. Irs free file The term includes a locomotive, work train, switching engine, and track maintenance machine. Irs free file Taxable Events The tax on diesel fuel and kerosene is $. Irs free file 244 per gallon. Irs free file It is imposed on the removal, entry, or sale of diesel fuel and kerosene. Irs free file Each of these events is discussed later. Irs free file Only the $. Irs free file 001 LUST tax applies to dyed diesel fuel and dyed kerosene, discussed later. Irs free file If the tax is paid on the diesel fuel or kerosene in more than one event, a refund may be allowed for the “second” tax paid. Irs free file See Refunds of Second Tax in chapter 2. Irs free file Use in certain intercity and local buses. Irs free file   Dyed diesel fuel and dyed kerosene cannot be used in certain intercity and local buses. Irs free file A claim for $. Irs free file 17 per gallon may be made by the registered ultimate vendor (under certain conditions) or the ultimate purchaser for undyed diesel fuel or undyed kerosene sold for use in certain intercity or local buses. Irs free file An intercity or local bus is a bus engaged in furnishing (for compensation) passenger land transportation available to the general public. Irs free file The bus must be engaged in one of the following activities. Irs free file Scheduled transportation along regular routes regardless of the size of the bus. Irs free file Nonscheduled transportation if the seating capacity of the bus is at least 20 adults (not including the driver). Irs free file A bus is available to the general public if the bus is available for hire to more than a limited number of persons, groups, or organizations. Irs free file Removal from terminal. Irs free file   All removals of diesel fuel and kerosene at a terminal rack are taxable. Irs free file The position holder for that fuel is liable for the tax. Irs free file Two-party exchanges. Irs free file   In a two-party exchange, the receiving person, not the delivering person, is liable for the tax imposed on the removal of taxable fuel from the terminal at the terminal rack. Irs free file A two-party exchange means a transaction (other than a sale) where the delivering person and receiving person are both taxable fuel registrants and all of the following apply. Irs free file The transaction includes a transfer from the delivering person, who holds the inventory position for the taxable fuel in the terminal as reflected in the records of the terminal operator. Irs free file The exchange transaction occurs before or at the same time as completion of removal across the rack by the receiving person. Irs free file The terminal operator in its records treats the receiving person as the person that removes the product across the terminal rack for purposes of reporting the transaction on Form 720-TO. Irs free file The transaction is subject to a written contract. Irs free file Terminal operator's liability. Irs free file   The terminal operator is jointly and severally liable for the tax if the terminal operator provides any person with any bill of lading, shipping paper, or similar document indicating that diesel fuel or kerosene is dyed (discussed later). Irs free file   The terminal operator is jointly and severally liable for the tax if the position holder is a person other than the terminal operator and is not a registrant. Irs free file However, a terminal operator will not be liable for the tax in this situation if, at the time of the removal, the following conditions are met. Irs free file The terminal operator is a registrant. Irs free file The terminal operator has an unexpired notification certificate (discussed under Gasoline) from the position holder. Irs free file The terminal operator has no reason to believe any information on the certificate is false. Irs free file Removal from refinery. Irs free file   The removal of diesel fuel or kerosene from a refinery is taxable if the removal meets either of the following conditions. Irs free file It is made by bulk transfer and the refiner, the owner of the fuel immediately before the removal, or the operator of the pipeline or vessel is not a registrant. Irs free file It is made at the refinery rack. Irs free file The refiner is liable for the tax. Irs free file Exception. Irs free file   The tax does not apply to a removal of diesel fuel or kerosene at the refinery rack if all the following conditions are met. Irs free file The diesel fuel or kerosene is removed from an approved refinery not served by pipeline (other than for receiving crude oil) or vessel. Irs free file The diesel fuel or kerosene is received at a facility operated by a registrant and located within the bulk transfer/terminal system. Irs free file The removal from the refinery is by: Railcar and the same person operates the refinery and the facility at which the diesel fuel or kerosene is received, or For diesel fuel only, a trailer or semi-trailer used exclusively to transport the diesel fuel from a refinery (described in (1)) to a facility (described in (2)) less than 20 miles from the refinery. Irs free file Entry into the United States. Irs free file   The entry of diesel fuel or kerosene into the United States is taxable if the entry meets either of the following conditions. Irs free file It is made by bulk transfer and the enterer or the operator of the pipeline or vessel is not a registrant. Irs free file It is not made by bulk transfer. Irs free file The enterer is liable for the tax. Irs free file Importer of record's liability. Irs free file   The importer of record is jointly and severally liable for the tax with the enterer if the importer of record is not the enterer of the taxable fuel and the enterer is not a taxable fuel registrant. Irs free file   However, an importer of record meeting both of the following conditions at the time of the entry will not be liable for the tax. Irs free file The importer of record has an unexpired notification certificate (discussed under Gasoline) from the enterer. Irs free file The importer of record has no reason to believe any information in the certificate is false. Irs free file Customs bond. Irs free file   The customs bond will not be charged for the tax imposed on the entry of the diesel fuel or kerosene if at the time of entry the surety has an unexpired notification certificate from the enterer and has no reason to believe any information in the certificate is false. Irs free file Removal from a terminal by unregistered position holder or unregistered pipeline or vessel operator. Irs free file   The removal by bulk transfer of diesel fuel or kerosene from a terminal is taxable if the position holder for that fuel or the operator of the pipeline or vessel is not a registrant. Irs free file The position holder is liable for the tax. Irs free file The terminal operator is jointly and severally liable for the tax if the position holder is a person other than the terminal operator. Irs free file However, see Terminal operator's liability under Removal from terminal, earlier, for an exception. Irs free file Bulk transfers not received at approved terminal or refinery. Irs free file   The removal by bulk transfer of diesel fuel or kerosene from a terminal or refinery or the entry of diesel fuel or kerosene by bulk transfer into the United States is taxable if the following conditions apply. Irs free file No tax was previously imposed (as discussed earlier) on any of the following events. Irs free file The removal from the refinery. Irs free file The entry into the United States. Irs free file The removal from a terminal by an unregistered position holder. Irs free file Upon removal from the pipeline or vessel, the diesel fuel or kerosene is not received at an approved terminal or refinery (or at another pipeline or vessel). Irs free file   The owner of the diesel fuel or kerosene when it is removed from the pipeline or vessel is liable for the tax. Irs free file However, an owner meeting all the following conditions at the time of the removal will not be liable for the tax. Irs free file The owner is a registrant. Irs free file The owner has an unexpired notification certificate (discussed under Gasoline) from the operator of the terminal or refinery where the diesel fuel or kerosene is received. Irs free file The owner has no reason to believe any information on the certificate is false. Irs free file The operator of the facility where the diesel fuel or kerosene is received is liable for the tax if the owner meets these conditions. Irs free file The operator is jointly and severally liable if the owner does not meet these conditions. Irs free file Sales to unregistered person. Irs free file   The sale of diesel fuel or kerosene located within the bulk transfer/terminal system to a person that is not a registrant is taxable if tax was not previously imposed under any of the events discussed earlier. Irs free file   The seller is liable for the tax. Irs free file However, a seller meeting all the following conditions at the time of the sale will not be liable for the tax. Irs free file The seller is a registrant. Irs free file The seller has an unexpired notification certificate (discussed under Gasoline) from the buyer. Irs free file The seller has no reason to believe any information on the certificate is false. Irs free file The buyer of the diesel fuel or kerosene is liable for the tax if the seller meets these conditions. Irs free file The buyer is jointly and severally liable if the seller does not meet these conditions. Irs free file Exception. Irs free file   The tax does not apply to a sale if all of the following apply. Irs free file The buyer's principal place of business is not in the United States. Irs free file The sale occurs as the fuel is delivered into a transport vessel with a capacity of at least 20,000 barrels of fuel. Irs free file The seller is a registrant and the exporter of record. Irs free file The fuel was exported. Irs free file Removal or sale of blended diesel fuel or kerosene. Irs free file   The removal or sale of blended diesel fuel or blended kerosene by the blender is taxable. Irs free file Blended taxable fuel produced using biodiesel is subject to the tax. Irs free file See Blended taxable fuel under Definitions, earlier. Irs free file   The blender is liable for the tax. Irs free file The tax is figured on the number of gallons not previously subject to the tax. Irs free file   Persons who blend biodiesel with undyed diesel fuel to produce and sell or use a biodiesel mixture outside the bulk transfer/terminal system must pay the diesel fuel tax on the volume of biodiesel in the mixture. Irs free file Generally, the biodiesel mixture must be diesel fuel (defined earlier). Irs free file See Form 720 to report this tax. Irs free file You also must be registered by the IRS as a blender. Irs free file See Form 637 for more information. Irs free file   However, if an untaxed liquid is sold as taxable fuel and that untaxed liquid is used to produce blended taxable fuel, the person that sold the untaxed liquid is jointly and severally liable for the tax imposed on the blender's sale or removal of the blended taxable fuel. Irs free file Additional persons liable. Irs free file   When the person liable for the tax willfully fails to pay the tax, joint and several liability for the tax applies to: Any officer, employee, or agent of the person who is under a duty to ensure the payment of the tax and who willfully fails to perform that duty; or Anyone who willfully causes the person to fail to pay the tax. Irs free file Credits or Refunds. Irs free file   A credit or refund is allowable for the tax on undyed diesel fuel or undyed kerosene used for a nontaxable use. Irs free file For more information, see chapter 2. Irs free file Dyed Diesel Fuel and Dyed Kerosene Dyed diesel fuel and dyed kerosene are subject to $. Irs free file 001 per gallon LUST tax as discussed below, unless the fuel is for export. Irs free file The excise tax is not imposed on the removal, entry, or sale of diesel fuel or kerosene (other than the LUST tax) if all the following tests are met. Irs free file The person otherwise liable for tax (for example, the position holder) is a registrant. Irs free file In the case of a removal from a terminal, the terminal is an approved terminal. Irs free file The diesel fuel or kerosene satisfies the dyeing requirements (described next). Irs free file Dyeing requirements. Irs free file   Diesel fuel or kerosene satisfies the dyeing requirements only if it satisfies the following requirements. Irs free file It contains the dye Solvent Red 164 (and no other dye) at a concentration spectrally equivalent to at least 3. Irs free file 9 pounds of the solid dye standard Solvent Red 26 per thousand barrels of fuel or any dye of a type and in a concentration that has been approved by the Commissioner. Irs free file Is indelibly dyed by mechanical injection. Irs free file See section 6 of Notice 2005-80 for transition rules that apply until final regulations are issued by the IRS. Irs free file Notice required. Irs free file   A legible and conspicuous notice stating either: DYED DIESEL FUEL, NONTAXABLE USE ONLY, PENALTY FOR TAXABLE USE or DYED KEROSENE, NONTAXABLE USE ONLY, PENALTY FOR TAXABLE USE must be: Provided by the terminal operator to any person that receives dyed diesel fuel or dyed kerosene at a terminal rack of that operator, and Posted by a seller on any retail pump or other delivery facility where it sells dyed diesel fuel or dyed kerosene for use by its buyer. Irs free file   The notice under item (1) must be provided by the time of the removal and must appear on all shipping papers, bills of lading, and similar documents accompanying the removal of the fuel. Irs free file   Any seller that fails to post the required notice under item (2) is presumed to know that the fuel will be used for a taxable use (a use other than a nontaxable use listed later). Irs free file That seller is subject to the penalty described next. Irs free file Penalty. Irs free file   A penalty is imposed on a person if any of the following situations apply. Irs free file Any dyed fuel is sold or held for sale by the person for a use the person knows or has reason to know is not a nontaxable use of the fuel. Irs free file Any dyed fuel is held for use or used by the person for a use other than a nontaxable use and the person knew, or had reason to know, that the fuel was dyed. Irs free file The person willfully alters, chemically or otherwise, or attempts to so alter, the strength or composition of any dye in dyed fuel. Irs free file The person has knowledge that a dyed fuel that has been altered, as described in (3) above, sells or holds for sale such fuel for any use for which the person knows or has reason to know is not a nontaxable use of the fuel. Irs free file   The penalty is the greater of $1,000 or $10 per gallon of the dyed diesel fuel or dyed kerosene involved. Irs free file After the first violation, the $1,000 portion of the penalty increases depending on the number of violations. Irs free file   This penalty is in addition to any tax imposed on the fuel. Irs free file   If the penalty is imposed, each officer, employee, or agent of a business entity who willfully participated in any act giving rise to the penalty is jointly and severally liable with that entity for the penalty. Irs free file   There is no administrative appeal or review allowed for the third and subsequent penalty imposed by section 6715 on any person except for: Fraud or a mistake in the chemical analysis, or Mathematical calculation of the penalty. Irs free file   If you are liable for the penalty, you may also be liable for the back-up tax, discussed later. Irs free file However, the penalty applies only to dyed diesel fuel and dyed kerosene, while the back-up tax may apply to other fuels. Irs free file The penalty may apply if the fuel is held for sale or use for a taxable use while the back-up tax does not apply unless the fuel is delivered into a fuel supply tank. Irs free file Exception to penalty. Irs free file   The penalty under item (3) will not apply in any of the following situations. Irs free file Diesel fuel or kerosene meeting the dyeing requirements (described earlier) is blended with any undyed liquid and the resulting product meets the dyeing requirements. Irs free file Diesel fuel or kerosene meeting the dyeing requirements (described earlier) is blended with any other liquid (other than diesel fuel or kerosene) that contains the type and amount of dye required to meet the dyeing requirements. Irs free file The alteration or attempted alteration occurs in an exempt area of Alaska. Irs free file See Removal for sale or use in Alaska, later. Irs free file Diesel fuel or kerosene meeting the dyeing requirements (described earlier) is blended with diesel fuel or kerosene not meeting the dyeing requirements and the blending occurs as part of a nontaxable use (other than export), discussed later. Irs free file Alaska and Feedstocks Tax of $. Irs free file 001 per gallon is imposed on: Undyed diesel fuel or undyed kerosene sold or used in Alaska for certain nontaxable uses (see Later sales on page 10). Irs free file Undyed kerosene used for feedstock purposes. Irs free file Removal for sale or use in Alaska. Irs free file   No tax is imposed on the removal, entry, or sale of diesel fuel or kerosene in Alaska for ultimate sale or use in certain areas of Alaska for certain nontaxable uses. Irs free file The removal or entry of any diesel fuel or kerosene is not taxed if all the following requirements are satisfied. Irs free file The person otherwise liable for the tax (position holder, refiner, or enterer): Is a registrant, Can show satisfactory evidence of the nontaxable nature of the transaction, and Has no reason to believe the evidence is false. Irs free file In the case of a removal from a terminal, the terminal is an approved terminal. Irs free file The owner of the fuel immediately after the removal or entry holds the fuel for its own use in a nontaxable use (discussed later) or is a qualified dealer. Irs free file   If all three of the requirements above are not met, then tax is imposed at $. Irs free file 244 per gallon. Irs free file   A qualified dealer is any person that holds a qualified dealer license from the state of Alaska or has been registered by the IRS as a qualified retailer. Irs free file Satisfactory evidence may include copies of qualified dealer licenses or exemption certificates obtained for state tax purposes. Irs free file Later sales. Irs free file   The excise tax applies to diesel fuel or kerosene sold by a qualified dealer after the removal or entry. Irs free file The tax is imposed at the time of the sale and the qualified dealer is liable for the tax. Irs free file However, the sale is not taxable (other than the LUST tax at $. Irs free file 001 per gallon) if all the following requirements are met. Irs free file The fuel is sold in Alaska for certain nontaxable uses. Irs free file The buyer buys the fuel for its own use in a nontaxable use or is a qualified dealer. Irs free file The seller can show satisfactory evidence of the nontaxable nature of the transaction and has no reason to believe the evidence is false. Irs free file Feedstock purposes. Irs free file   The $. Irs free file 001 per gallon LUST tax is imposed on the removal or entry of undyed kerosene if all the following conditions are met. Irs free file The person otherwise liable for tax (position holder, refiner, or enterer) is a registrant. Irs free file In the case of a removal from a terminal, the terminal is an approved terminal. Irs free file Either: The person otherwise liable for tax uses the kerosene for a feedstock purpose, or The kerosene is sold for use by the buyer for a feedstock purpose and, at the time of the sale, the person otherwise liable for tax has an unexpired certificate (described later) from the buyer and has no reason to believe any information on the certificate is false. Irs free file   If all of the requirements above are not met, then tax is imposed at $. Irs free file 244 per gallon. Irs free file   Kerosene is used for a feedstock purpose when it is used for nonfuel purposes in the manufacture or production of any substance other than gasoline, diesel fuel, or Other Fuels. Irs free file For example, kerosene is used for a feedstock purpose when it is used as an ingredient in the production of paint, but is not used for a feedstock purpose when it is used to power machinery at a factory where paint is produced. Irs free file A feedstock user is a person that uses kerosene for a feedstock purpose. Irs free file A registered feedstock user is a person that has been registered by the IRS as a feedstock user. Irs free file See Registration Requirements, earlier. Irs free file Later sales. Irs free file   The excise tax ($. Irs free file 244 per gallon) applies to kerosene sold for use by the buyer for a feedstock purpose (item (3)(b) above) if the buyer in that sale later sells the kerosene. Irs free file The tax is imposed at the time of the later sale and that seller is liable for the tax. Irs free file Certificate. Irs free file   The certificate from the buyer certifies the buyer is a registered feedstock user and the kerosene will be used by the buyer for a feedstock purpose. Irs free file The certificate may be included as part of any business records normally used for a sale. Irs free file A model certificate is shown in the Appendix as Model Certificate G. Irs free file Your certificate must contain all information necessary to complete the model. Irs free file   A certificate expires on the earliest of the following dates. Irs free file The date 1 year after the effective date (not earlier than the date signed) of the certificate. Irs free file The date the seller is provided a new certificate or notice that the current certificate is invalid. Irs free file The date the seller is notified the buyer's registration has been revoked or suspended. Irs free file   The buyer must provide a new certificate if any information on a certificate has changed. Irs free file Back-up Tax Tax is imposed on the delivery of any of the following into the fuel supply tank of a diesel-powered highway vehicle. Irs free file Any dyed diesel fuel or dyed kerosene for other than a nontaxable use. Irs free file Any undyed diesel fuel or undyed kerosene on which a credit or refund (for fuel used for a nontaxable purpose) has been allowed. Irs free file Any liquid other than gasoline, diesel fuel, or kerosene. Irs free file Generally, this back-up tax is imposed at a rate of $. Irs free file 244 per gallon. Irs free file Liability for tax. Irs free file   Generally, the operator of the vehicle into which the fuel is delivered is liable for the tax. Irs free file In addition, the seller of the diesel fuel or kerosene is jointly and severally liable for the tax if the seller knows or has reason to know that the fuel will be used for other than a nontaxable use. Irs free file Exemptions from the back-up tax. Irs free file   The back-up tax does not apply to a delivery of diesel fuel or kerosene for uses 1, 2, 6, 7, 12, 13, 14, and 15 listed under Definitions of Nontaxable Uses in chapter 2. Irs free file   In addition, since the back-up tax is imposed only on the delivery into the fuel supply tank of a diesel-powered vehicle or train, the tax does not apply to diesel fuel or kerosene used as heating oil or in stationary engines. Irs free file Diesel-Water Fuel Emulsion Diesel-water fuel emulsion means diesel fuel at least 14% of which is water and for which the emulsion additive is registered by a United States manufacturer with the EPA under section 211 of the Clean Air Act as in effect on March 31, 2003. Irs free file A reduced tax rate of $. Irs free file 198 per gallon is imposed on a diesel-water fuel emulsion. Irs free file To be eligible for the reduced rate, the person who sells, removes, or uses the diesel-water fuel emulsion must be registered by the IRS. Irs free file If the diesel-water fuel emulsion does not meet the requirements above, or if the person who sells, removes, or uses the fuel is not registered, the diesel-water fuel emulsion is taxed at $. Irs free file 244 per gallon. Irs free file Credits or refunds. Irs free file   The allowance for a credit or refund on a diesel-water fuel emulsion is discussed in chapter 2. Irs free file Kerosene for Use in Aviation Taxable Events Generally, kerosene is taxed at $. Irs free file 244 per gallon unless a reduced rate applies (see Diesel Fuel and Kerosene, earlier). Irs free file For kerosene removed directly from a terminal into the fuel tank of an aircraft for use in noncommercial aviation, the tax rate is $. Irs free file 219. Irs free file The rate of $. Irs free file 219 also applies if kerosene is removed into any aircraft from a qualified refueler truck, tanker, or tank wagon that is loaded with the kerosene from a terminal that is located within an airport. Irs free file The airport terminal does not need to be a secured airport terminal for this rate to apply. Irs free file However, the refueler truck, tanker, or tank wagon must meet the requirements discussed under Certain refueler trucks, tankers, and tank wagons, treated as terminals, later. Irs free file For kerosene removed directly into the fuel tank of an aircraft for use in commercial aviation, the rate of tax is $. Irs free file 044 per gallon. Irs free file For kerosene removed into an aircraft from a qualified refueler truck, tanker, or tank wagon, the $. Irs free file 044 rate applies only if the truck, tanker, or tank wagon is loaded at a terminal that is located in a secured area of the airport. Irs free file See Terminal located within a secured area of an airport, later. Irs free file In addition, the operator must provide the position holder with a certificate similar to Model Certificate K in the Appendix. Irs free file For kerosene removed directly into the fuel tank of an aircraft for a use exempt from tax under section 4041(c) (such as use in an aircraft for the exclusive use of a state or local government), the rate of tax is $. Irs free file 001. Irs free file There is no tax on kerosene removed directly into the fuel tank of an aircraft for use in foreign trade. Irs free file The kerosene must be removed from a qualifying refueler truck, tanker, or tank wagon loaded at a terminal located within a secured area of an airport. Irs free file See Terminal located within a secured area of an airport, later. Irs free file In addition, the operator must provide the position holder with a certificate similar to Model Certificate K in the Appendix. Irs free file The position holder is liable for the $. Irs free file 001 per gallon tax. Irs free file For kerosene removed directly from a terminal into the fuel tank of an fractional ownership program aircraft after March 31, 2012, a surtax of $. Irs free file 141 per gallon applies. Irs free file Certain refueler trucks, tankers, and tank wagons treated as terminals. Irs free file   For purposes of the tax imposed on kerosene for use in aviation removed directly into the fuel tank of an aircraft for use in commercial aviation, certain refueler trucks, tankers, and tank wagons are treated as part of a terminal if the following conditions are met. Irs free file Such terminal is located within an area of an airport. Irs free file Any kerosene for use in aviation that is loaded in a refueler truck, tanker, or tank wagon at a terminal is for delivery into aircraft at the airport in which the terminal is located. Irs free file Except in exigent circumstances, such as those identified in Notice 2005-80, no vehicle registered for highway use is loaded with kerosene for use in aviation at the terminal. Irs free file The refueler truck, tanker, or tank wagon meets the following requirements: Has storage tanks, hose, and coupling equipment designed and used for fueling aircraft, Is not registered for highway use, and Is operated by the terminal operator or a person that makes a daily accounting to the terminal operator of each delivery of fuel from the refueler truck, tanker, or tank wagon. Irs free file Information reporting will be required by terminal operators regarding this provision. Irs free file Until the format of this information reporting is issued, taxpayers are required to retain records regarding the daily accounting, but are not required to report such information. Irs free file Terminal located within a secured area of an airport. Irs free file   See Notice 2005-4 and Notice 2005-80 for the list of terminals located within a secured area of an airport. Irs free file This list refers to fueling operations at airport terminals as it applies to the federal excise tax on kerosene for use in aviation, and has nothing to do with the general security of airports either included or not included in the list. Irs free file Liability For Tax If the kerosene is removed directly into the fuel tank of an aircraft for use in commercial aviation, the operator of the aircraft in commercial aviation is liable for the tax on the removal at the rate of $. Irs free file 044 per gallon. Irs free file However, the position holder is liable for the LUST tax for kerosene for use in aviation removed directly into the fuel tank of an aircraft for use exempt from tax under section 4041(c) (except foreign trade). Irs free file For example, for kerosene removed directly into the aircraft for use in military aircraft, the position holder is liable for the tax. Irs free file For the aircraft operator to be liable for the tax $. Irs free file 044 rate, the position holder must meet the following requirements: Is a taxable fuel registrant, Has an unexpired certificate (a model certificate is shown in the Appendix as Model Certificate K) from the operator of the aircraft, and Has no reason to believe any of the information in the certificate is false. Irs free file Commercial aviation. Irs free file   Commercial aviation is any use of an aircraft in the business of transporting persons or property by air for pay. Irs free file However, commercial aviation does not include any of the following uses. Irs free file Any use exclusively for the purpose of skydiving. Irs free file Certain air transportation by seaplane. Irs free file See Seaplanes under Transportation of Persons by Air in chapter 4. Irs free file Any use of an aircraft owned or leased by a member of an affiliated group and unavailable for hire by nonmembers. Irs free file For more information, see Aircraft used by affiliated corporations under Special Rules on Transportation Taxes in chapter 4. Irs free file Any use of an aircraft that has a maximum certificated takeoff weight of 6,000 pounds or less, unless the aircraft is operated on an established line. Irs free file For more information, see Small aircraft under Special Rules on Transportation Taxes in chapter 4. Irs free file Any use where the surtax on fuel used in a fractional ownership program aircraft is imposed. Irs free file See Surtax on any liquid used in a fractional ownership program aircraft as fuel below. Irs free file Surtax on any liquid used in a fractional ownership program aircraft as fuel Fuel used in a fractional ownership program aircraft (as defined below) after March 31, 2012, is subject to a surtax of $. Irs free file 141 per gallon. Irs free file The fractional ownership program manager is liable for the tax. Irs free file The surtax applies in addition to any other taxes imposed on the removal, entry, use, or sale of the fuel. Irs free file If the surtax is imposed, the following air transportation taxes do not apply. Irs free file Transportation of persons by air. Irs free file Transportation of property by air. Irs free file Use of international air travel facilities. Irs free file These taxes are described under Air Transportation Taxes, later. Irs free file A fractional ownership program aircraft flight is considered noncommercial aviation, for the rules for kerosene used in noncommercial aviation, see Kerosene for Use in Aviation above. Irs free file Fractional ownership aircraft program    is a program under which:  A single fractional ownership program manager provides fractional ownership program management services on behalf of the fractional owners; There are one or more fractional owners per fractional program aircraft, with at least one fractional program aircraft having more than one owner; For at least two fractional program aircraft, none of the ownership interests in the aircraft are less than the minimum fractional ownership interest or held by the program manager; There exists a dry-lease aircraft exchange arrangement among all of the fractional owners; and There are multi-year program agreements covering the fractional ownership, fractional ownership program management services, and dry-lease aircraft exchange aspects of the program. Irs free file Fractional program aircraft. Irs free file   Any aircraft that, in any fractional ownership aircraft program, is listed as a fractional program aircraft in the management specifications issued to the manager of such program by Federal Aviation Administration under subpart K of part 91 title 14, Code of Federal Regulations, and is registered in the U. Irs free file S. Irs free file   Fractional program aircraft are not considered used for transportation of a qualified fractional owner, or on account of such qualified fractional owner when they are used for flight demonstration, maintenance or crew training. Irs free file In such situations, the flight is not commercial aviation. Irs free file Instead, the tax on the fuel used in the flight is imposed at the non-commercial aviation rate. Irs free file Fractional owner. Irs free file   Any person owning any interest (including the entire interest) in a fractional program aircraft. Irs free file Dry lease aircraft exchange. Irs free file   An agreement, documented by the written program agreements, under which the fractional program aircraft are available, on an as-needed basis without crew, to each fractional owner. Irs free file Special rule relating to deadhead service. Irs free file   A fractional program aircraft will not be considered to be used on account of a qualified fractional owner when it is used in deadhead service and a person other than a qualified fractional owner is separately charged for such service. Irs free file More information. Irs free file   See section 4043 for more information on the surtax. Irs free file Certificate for Commercial Aviation and Exempt Uses A certificate is required from the aircraft operator: To support aircraft operator liability for tax on removal of kerosene for use in aviation directly into the fuel tank of an aircraft in commercial aviation, or For exempt uses. Irs free file Certificate. Irs free file   The certificate may be included as part of any business records normally used for a sale. Irs free file See Model Certificate K in the Appendix. Irs free file   A certificate expires on the earliest of the following dates. Irs free file The date 1 year after the effective date (not earlier than the date signed) of the certificate. Irs free file The date the buyer provides the seller a new certificate or notice that the current certificate is invalid. Irs free file The date the IRS or the buyer notifies the seller that the buyer's right to provide a certificate has been withdrawn. Irs free file   The buyer must provide a new certificate if any information on a certificate has changed. Irs free file   The IRS may withdraw the buyer's right to provide a certificate if the buyer uses the kerosene for use in aviation to which a certificate relates other than as stated in the certificate. Irs free file Exempt use. Irs free file   The rate on kerosene for use in aviation is $. Irs free file 001 (LUST tax) if it is removed from any refinery or terminal directly into the fuel tank of an aircraft for an exempt use. Irs free file An exempt use includes kerosene for the exclusive use of a state or local government. Irs free file There is no tax on kerosene removed directly into the fuel tank of an aircraft for use in foreign trade. Irs free file Flash title transaction. Irs free file   A position holder is not liable for tax if, among other conditions, it obtains a certificate (described above) from the operator of the aircraft into which the kerosene is delivered. Irs free file In a “flash title transaction” the position holder sells the kerosene to a wholesale distributor (reseller) that in turn sells the kerosene to the aircraft operator as the kerosene is being removed from a terminal into the fuel tank of an aircraft. Irs free file In this case, the position holder will be treated as having a certificate from the operator of the aircraft if: The aircraft operator puts the reseller's name, address, and EIN on the certificate in place of the position holder's information; and The reseller provides the position holder with a statement of the kerosene reseller. Irs free file Reseller statement. Irs free file   This is a statement that is signed under penalties of perjury by a person with authority to bind the reseller; is provided at the bottom or on the back of the certificate (or in an attached document); and contains: The reseller's name, address, and EIN; The position holder's name, address, and EIN; and A statement that the reseller has no reason to believe that any information in the accompanying aircraft operator's certificate is false. Irs free file Credits or Refunds. Irs free file   A claim may be made by the ultimate purchaser (the operator) for taxed kerosene for use in aviation used in commercial aviation (other than foreign trade) and noncommercial aviation (other than nonexempt, noncommercial aviation and exclusive use by a state, political subdivision of a state, or the District of Columbia). Irs free file A claim may be made by a registered ultimate vendor for certain sales. Irs free file For more information, see chapter 2. Irs free file Other Fuels (Including Alternative Fuels) Other Fuels means any liquid except gas oil, fuel oil, or any product taxable under section 4081. Irs free file Other Fuels include alternative fuels. Irs free file Alternative fuels are: Liquefied petroleum gas (LPG), “P Series” fuels, Compressed natural gas (CNG) (discussed later), Liquefied hydrogen, Any liquid fuel derived from coal (including peat) through the Fischer-Tropsch process, Liquid fuel derived from biomass, Liquefied natural gas (LNG), and Liquefied gas derived from biomass. Irs free file Liquefied petroleum gas includes propane, butane, pentane, or mixtures of those products. Irs free file Qualified methanol and ethanol fuels. Irs free file   Qualified ethanol and methanol means any liquid at least 85 percent of which consists of alcohol produced from coal, including peat. Irs free file The tax rates are listed in the Instructions for Form 720. Irs free file Partially exempt methanol and ethanol fuels. Irs free file   A reduced tax rate applies to these fuels. Irs free file Partially exempt ethanol and methanol means any liquid at least 85 percent of which consists of alcohol produced from natural gas. Irs free file The tax rates are listed in the Instructions for Form 720. Irs free file Motor vehicles. Irs free file   Motor vehicles include all types of vehicles, whether or not registered (or required to be registered) for highway use, that have both the following characteristics. Irs free file They are propelled by a motor. Irs free file They are designed for carrying or towing loads from one place to another, regardless of the type of material or load carried or t