Section 6435 temporary regulations should prompt parties who remove previously taxed dyed diesel fuel or kerosene to re-examine supply agreements

On April 30, 2026, the Treasury and IRS released temporary regulations (T.D. 10047) and identical proposed regulations (REG-119294-25)¹ under section 6435 of the Code,² which was added by the One Big Beautiful Bill Act (OBBBA).³

Section 6435 provides for a payment from the Treasury to a person who removes indelibly dyed diesel fuel or kerosene from a terminal for a nontaxable use under section 4082(a), in an amount (without interest) equal to the tax under section 4081 that was previously paid with respect to such fuel.

Consistent with Ann. 2026-1,⁴ released on December 22, 2025, the regulations take the position that section 6435 does not authorize Treasury to make any payment to the ultimate purchaser of the dyed diesel or kerosene, as would be the case for certain other similar excise tax provisions.⁵ Rather, a payment under section 6435 is only authorized to be made to the taxpayer that has previously paid the section 4081 excise tax, typically the “position holder” who owns the inventory position in the fuel.⁶ 

Lacking a right to payment from Treasury, the ultimate purchaser instead must rely on contractual provisions to obtain the benefit of section 6435. 

Accordingly, parties to transactions involving the removal of previously taxed diesel fuel and kerosene from a terminal for a nontaxable use should analyze their supply agreements to ensure that the proper party is allocated the benefit of the section 6435 payment.

The proposed and temporary regulations also provide guidance on how a position holder or other party who paid the section 4081 excise tax may obtain a refund of such tax under section 6435, using Schedule 5 to IRS Form 8849.

Background

Section 4081 imposes an excise tax on removal of taxable fuel, including diesel fuel or kerosene, from a refinery or terminal. In certain circumstances, diesel fuel or kerosene with respect to which tax has previously been imposed may be transported outside the bulk transfer/terminal system and later entered into a terminal that is part of the system. In that case, the fuel generally would be subject to a second imposition of the section 4081 excise tax on removal from the terminal.⁷

If previously taxed fuel is removed from a terminal for a taxable use and is subject to a second imposition of the section 4081 tax on removal, section 4081(e) and Treas. Reg. § 48.4081-7 provide a mechanism that allows a person who paid the second imposition of the tax to claim a refund of that second imposition.⁸ 

However, if previously taxed fuel is removed from the terminal for a nontaxable use and is indelibly dyed pursuant to section 4081(a), the second removal is not subject to the section 4081 tax, meaning that section 4081(e) and Treas. Reg. § 48.4081-7 do not apply. Logically, in that situation, the first imposition of tax should also be refunded. But prior to the enactment of section 6435, there was no mechanism for a refund or payment of the first imposition.⁹

Section 6435

As enacted by OBBBA, section 6435 allows a person who removed eligible dyed diesel fuel or kerosene from a terminal to claim a payment equal to the amount of the first imposition of the section 4081 tax, including the Leaking Underground Storage Tank (LUST) tax, effective for removals after December 31, 2025.  

Ann. 2026-1 noted that the text of section 6435 omits language found in other excise tax provisions authorizing payments to ultimate purchasers for removal of previously taxed fuel for nontaxable uses. That language deems such payments to be refunds of tax.¹⁰

The IRS concluded in Ann. 2026-1 that section 6435 did not authorize it to make a payment to any party other than the party who paid the first imposition of the section 4081 excise tax. Ann. 2026-1 requested that taxpayers hold any section 6435 claims until the Treasury and IRS issued guidance regarding the process for obtaining a refund.¹¹

The Temporary Regulations

The Preamble to the temporary regulations takes the same position as in Ann. 2026-1, that a payment under section 6435 is only authorized to be made to the position holder or other taxpayer who paid the first imposition of the section 4081 tax.¹²

Temp. Treas. Reg. § 48.6435-1T provides guidance on substantiating a section 6435 claim. The requirements for such a claim are as follows: 

• The section 4081 tax was previously imposed on diesel fuel or kerosene;¹³
• The taxpayer claiming the section 6435 payment was liable for and paid such tax to the IRS and the tax has not been credited or refunded;¹⁴
• The diesel fuel or kerosene was removed from an approved terminal and was dyed as provided in section 4082(a);¹⁵
• The taxpayer meets the reporting requirements of the regulations.¹⁶

The regulatory reporting requirements require filing a prescribed “Section 6435 Taxpayer’s Report”¹⁷ and a Form 8849, Claim for Refund of Excise Taxes, containing a completed Schedule 5.¹⁸

A separate Form 8849 must be filed for section 6435 claims. A taxpayer cannot make a section 6435 claim on the same Form 8849 as any other claims.¹⁹ The claim may be filed at any time after the removal of the eligible dyed fuel and before the expiration of the period of limitations for claims for refund under section 6511.²⁰

Effective and Applicability Dates

The temporary regulations are effective on May 1, 2026 and expire on May 1, 2029.²¹ The regulations apply to removals of eligible dyed fuel occurring on or after December 31, 2025.²²

Eversheds Sutherland Observations and Practical Guidance:

• Taxpayers (typically position holders) who paid the the section 4081 excise tax on diesel fuel or kerosene that is subsequently removed for a nontaxable use are the only eligible claimants under section 6435. 
• Position holders and other taxpayers eligible to claim a section 6435 payment should identify removals after December 31, 2025 of previously taxed clear diesel or kerosene that was subsequently dyed at a terminal for a nontaxable use.
• Ultimate purchasers who remove previously taxed diesel fuel and kerosene from an eligible terminal for a nontaxable use are not eligible claimants under section 6435, even though they economically bear the burden of the section 4081 tax.
• Existing supply agreements may not address section 6435. Parties to those agreements should consider any needed amendments to properly allocate the section 6435 payment attributable to eligible removals.

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If you have any questions about this Legal Briefing, please feel free to contact any of the attorneys listed or the Eversheds Sutherland attorney with whom you regularly work.

_{1 91 Fed. Reg. 23,363 (May 1, 2026).
2 Unless otherwise stated, all “section” references are to the Internal Revenue Code, as currently in effect and all “Temp. Treas. Reg.” references are to the temporary Treasury regulations.
3 One Big Beautiful Bill Act, Pub. L. 119-21, 139 Stat. 72 (2025).
4 2026-4 I.R.B 402.
5 The Preamble states that Treasury and the IRS concluded that a payment to the ultimate purchaser was not authorized because section 6435 does not include language deeming a payment under that section to be a refund and there is no specific appropriation for section 6435 payments. Only a payment to the party that originally paid the tax would technically be a “refund” absent the additional language and thus Treasury and the IRS concluded only a true refund would be authorized by the general appropriation for refunds under 31 U.S.C. § 1324(b). See 91 Fed. Reg. at 23,365 -66.
By contrast, other excise tax provisions include language providing that a payment to the ultimate purchaser is treated as if such payment constituted a refund of tax, authorizing the payment to be made under the general appropriation for refunds, even though not technically a refund. See, e.g., section 6420(a) & (e)(1); section 6421(a) & (g)(1); section 6427(a) & (j)(1). All of these provisions allow a payment to be made to the ultimate purchaser rather than the party that originally paid the tax.
6 See Treas. Reg. § 48.4081-1(b).
7 See 91 Fed. Reg. at 23,365.
8 See id. 
9 See id.
10 See 91 Fed. Reg. at 23,364 (payments under section 6435 may include the LUST tax).
11 See note 5, supra.
12 See 91 Fed. Reg. at 23,365-66. 
Treasury noted that construing the section 6435 payment as a refund of an overpayment on the part of the same taxpayer that paid the first imposition of the section 4081 tax is consistent with the Supreme Court’s explanation of how to determine an overpayment in Jones v. Liberty Glass, 332 U.S. 524. 531-32 (1947), which held that an “overpayment” is “any payment in excess of that which is properly due.” This reasoning essentially deems the first imposition of the section 4081 tax to have been an overpayment due to the subsequent nontaxable removal.
13 Temp. Treas. Reg. § 48.6435-1(d)(1).
14 Temp. Treas. Reg. § 48.6435-1(d)(2).
15 Temp. Treas. Reg. § 48.6435-1(d)(3).
16 Temp. Treas. Reg. § 48.6435-1(d)(4).
17 Temp. Treas. Reg. § 48.6435-1(e).
18 Temp. Treas. Reg. § 48.6435-1(f)(2).
19 Temp. Treas. Reg. § 48.6435-1(f)(1).
20 Temp. Treas. Reg. § 48.6435-1(g).
21 91 Fed. Reg. 23,364
22 91 Fed. Reg. 23,364}