                  T.C. Summary Opinion 2001-21



                     UNITED STATES TAX COURT



           CROP CARE APPLICATORS, INC., Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 2996-00S.                  Filed March 6, 2001.


     William A. Duncan (an officer), for petitioner.

     Paul K. Webb, for respondent.



     DEAN, Special Trial Judge:     This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect at the time the petition was filed.    Unless otherwise

indicated, subsequent section references are to the Internal

Revenue Code in effect for the years in issue.    The decision to

be entered is not reviewable by any other court, and this opinion

should not be cited as authority.
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     Respondent determined deficiencies of $9,821, $9,127, and

$6,166 in petitioner’s Federal income taxes for taxable years

1995, 1996, and 1997, respectively.     After concessions,1 the sole

issue for decision is whether petitioner is entitled to credits

for Federal tax on fuels pursuant to sections 34 and 6420.

                             Background

     Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits are

incorporated herein by reference.    At the time the petition was

filed in this case, petitioner was a corporation organized in the

State of California.    During the years in issue, petitioner’s

principal place of business was Shafter, California.     William A.

Duncan (Mr. Duncan), president and sole shareholder of

petitioner, signed the petition and appeared at trial on behalf

of petitioner.

     Petitioner is an agricultural chemical application company

that applies pesticides to various farms and orchards in

California.    The pesticides are applied by tractor-pulled spray

rigs.    Petitioner enters into either verbal or written service

contracts with its customers depending on the size of the farming

operation.    Petitioner supplies its customers with a cost sheet




     1
        The parties stipulated that respondent correctly reduced
petitioner’s taxable income for tax years 1996 and 1997 and,
correspondingly, correctly adjusted petitioner’s claimed net
operating loss amount for 1997.
                               - 3 -

which outlines charges for the application of pesticides at

different volumes per acre.

     The written contracts petitioner entered into have no

explicit provision addressing fuel tax credits but provide that

petitioner will be responsible for “wages, salaries, bills and

taxes for labor, materials and equipment used in performance” of

its services.   The contracts further provide:

          Company will pay Contractor for the work performed
     under this agreement as outlined in Exhibit “B”
     attached. No tax (or an equivalent amount) or any
     extra charge shall be added to the price or
     compensation as specified in that Exhibit unless
     otherwise expressly stated. Unless otherwise expressly
     provided, Contractor shall pay all sales, use, excise
     and any other applicable taxes now or hereafter
     enforced upon or with respect to or measured by the
     materials, equipment and work furnished by the
     Contractor or the compensation paid to persons employed
     in connection with performance by Contractor, and
     Contractor shall indemnify Company against any and all
     liabilities and expenses of whatsoever nature resulting
     from Contractor’s failure to pay the same.

Upon completion of its services, petitioner issues invoices to

its customers stating the number of acres treated, the unit

price, and the total payment due.   Petitioner’s customers during

the years in issue never had nor requested information about the

amount of fuel that was expended by petitioner in applying

pesticides on their land.

     Before establishing Crop Care Applicators, Inc. in 1984, Mr.

Duncan managed the pest control department of a farming company

that farmed 40,000 acres in California.   As manager, Mr. Duncan
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was responsible for arranging and contracting for the application

of pesticides.   Mr. Duncan never requested information on the

amount of fuel used by the pesticide applicators with whom he

contracted.

     Petitioner filed Forms 4136, Credit for Federal Tax Paid on

Fuels, with its 1995, 1996, and 1997 Forms 1120, U.S. Corporation

Income Tax Returns.   Petitioner, however, did not secure formal

waivers of the fuel tax credits from its customers before filing

its returns.   In the notice of deficiency, respondent determined

that petitioner was not entitled to credits for Federal tax on

fuels for the years in issue because petitioner failed to obtain

these waivers.

     After receiving respondent’s notice of deficiency for the

1995, 1996, and 1997 taxable years, petitioner obtained a waiver

from Sunworld International relinquishing its rights to claim any

credit or payment for gasoline used by petitioner during the

years in issue and stating that it has not claimed any credits or

payments for that gasoline.   After petitioning the Court for a

redetermination of the deficiencies, petitioner obtained

additional waivers from four other customers.   The five waivers

obtained by petitioner together relate to approximately 70

percent of petitioner’s gross revenue during each of the years in

issue.
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     Petitioner argues that it is entitled to the fuel tax

credits at issue because it followed all instructions on Form

4136, Credit for Federal Tax Paid on Fuels, for claiming the

credits, and the farmers to whom petitioner provided services

never claimed or intended to claim credits for petitioner’s use

of fuel on their farms as evidenced by the parties’ agreements,

invoices, payments for services, and waivers.

                            Discussion

     Section 34(a)(1) allows a credit against Federal income tax

for the taxable year in an amount equal to the sum of the amounts

payable to the taxpayer under section 6420 with respect to

gasoline used during the taxable year on a farm for farming

purposes (determined without regard to section 6420(g)).    Under

section 6420(a), the “ultimate purchaser” of the gasoline is

entitled to a credit determined by multiplying the number of

gallons used by the rate of tax applied to the gasoline on the

date he purchased the gasoline.

     Except as provided in section 6420(c)(4), gasoline is

considered to have been used for farming purposes only if used by

the owner, tenant, or operator of a farm for various farming

purposes.   See sec. 6420(c)(3).   The owner, tenant, or operator

of a farm generally is treated as the user and ultimate purchaser

of gasoline used for the farming purposes described in section

6420(c)(3)(A).   See sec. 6420(c)(4)(A).   Section 6420(c)(4),
                               - 6 -

however, provides that “an aerial or other applicator of

fertilizers or other substances” who is the ultimate purchaser of

the gasoline will be treated as having used the gasoline on a

farm for farming purposes if the owner, tenant, or operator of

the farm “waives (at such time and in such form and manner as the

Secretary shall prescribe) his right to be treated as the user

and ultimate purchaser of the gasoline”.

     Pursuant to the authority granted in section

6420(c)(4)(B)(ii), the Secretary prescribed section 48.6420-

4(l)(2), Manufacturers & Retailers Excise Tax Regs., which

provides:

     To waive the right to be treated as user and ultimate
     purchaser of gasoline which is used on a farm by an
     aerial applicator or other applicator, the owner,
     tenant, or operator of a farm who is otherwise entitled
     to treatment as user and ultimate purchaser must
     execute an irrevocable written agreement (as here
     described) no later than the date on which the aerial
     applicator or other applicator claiming the credit or
     payment files its return for the taxable year in which
     the gasoline is used. * * * The waiver may be in the
     form shown under paragraph (l)(6) of this section or in
     any other form that meets the requirements of this
     paragraph and clearly states that the owner, tenant, or
     operator of the farm knowingly waives the right to
     receive the credit or payment. [Emphasis added.]

     The agreement in which the owner, tenant, or operator of the

farm waives his right to receive a credit under section 6420 may

be a separate document or it may appear in the applicator’s

invoice for service or other document from the applicator to the

owner, tenant, or operator.   See sec. 48.6420-4(l)(3),
                               - 7 -

Manufacturers & Retailers Excise Tax Regs.       If the waiver

agreement appears on an invoice or other document, however, it

must be set off from other material in the document and executed

separately from any other item which requires the owner’s,

tenant’s, or operator’s signature.     See id.    The waiver should be

sufficient to put the owner, tenant, or operator of the farm on

notice that he has waived the right to receive the credit.         See

id.   Copies of agreements waiving rights to credits or payments

under section 6420 are not to be submitted to the Internal

Revenue Service unless a request is made by the Service.         See

sec. 48.6420-4(l)(4), Manufacturers & Retailers Excise Tax Regs.

      Petitioner did not obtain waivers from its customers at such

time and in such form and manner as the Secretary prescribed in

section 48.6420-4(l)(2), Manufacturers & Retailers Excise Tax

Regs.   The written contracts petitioner and its customers

executed contain no provision explicitly addressing the fuel tax

credit.   The waivers petitioner did obtain were received several

years after the taxable years in issue and after petitioner

received the notice of deficiency.

      Petitioner does not challenge the validity of the regulation

but asserts that it should not be held to the requirements of

section 48.6420-4(l)(2), Manufacturers & Retailers Excise Tax

Regs., when it accurately completed Form 4136, and the form

instructions do not indicate that a pesticide applicator must
                               - 8 -

obtain a waiver in order to claim credits for fuel taxes.     The

authoritative sources of tax law, however, are statutes,

regulations, and judicial decisions, and not instructions

published by the Internal Revenue Service.   See Sherwin-Williams

Co. Employee Health Plan Trust v. Commissioner, 115 T.C. 440, 451

(2000); Casa de La Jolla Park, Inc. v. Commissioner, 94 T.C. 384,

396 (1990).

     Although petitioner may not rely merely on the printed

instructions on Form 4136, the question emerges whether petitioner

substantially complied with the requirements of the applicable

regulation such that it should not be held to strict adherence

with all regulatory requirements.   This Court has applied the

substantial compliance doctrine and excused taxpayers from strict

compliance with procedural regulatory requirements, provided that

the taxpayer substantially complied by fulfilling the essential

statutory purpose.   See Bond v. Commissioner, 100 T.C. 32 (1993);

American Air Filter Co. v. Commissioner, 81 T.C. 709, 720 (1983);

Tipps v. Commissioner, 74 T.C. 458, 468 (1980); Taylor v.

Commissioner, 67 T.C. 1071 (1977); Hewlett-Packard Co. v.

Commissioner, 67 T.C. 736, 748 (1977); Sperapani v. Commissioner,

42 T.C. 308, 330-333 (1964).   Substantial compliance, however,

cannot relieve a taxpayer of strict adherence if the statutory or

regulatory requirements relate to the substance or essence of the

statute.   See Bond v. Commissioner, supra at 41; Sperapani v.
                                - 9 -

Commissioner, supra at 331.    In other words, the doctrine of

substantial compliance cannot be applied if to do so would defeat

the policies of the underlying statutory provisions.   See Estate

of Chamberlain v. Commissioner, T.C. Memo. 1999-181.

     The legislative history of section 6420 clearly reflects that

the purpose of the statute was to provide financial relief to

farmers.    See S. Rept. 1609, 84th Cong., 2d Sess. (1956), 1956-1

C.B. 989.   As section 6420 was originally enacted only the owner,

tenant, or operator of a farm was eligible for the fuel credit.

Pesticide applicators deliberately were excluded from the benefits

of the credit because there was no assurance that they would pass

the benefit on to farmers.    See id.

     Effective on April 1, 1979, section 6420(c) was amended to

allow “aerial applicators” to receive the fuel credit if the

owner, tenant, or operator of the farm consents by waiving his

right to the credit.   Act of October 14, 1978, Pub. L. 95-458,

sec. 3, 92 Stat. 1257.   The amendment was designed to alleviate

the burden to both aircraft operators and farmers from the system

under which the aircraft operator must supply each farm owner,

operator, or tenant with sufficient information concerning the

number of gallons of fuel consumed by the aircraft on a particular

farm.   See S. Rept. 95-1127, 1978-2 C.B. 369, 371-372.   The

Surface Transportation Assistance Act of 1982 expanded the

availability of the credit to ground applicators if the farm
                               - 10 -

owner, operator, or tenant waives the right to be treated as the

user and ultimate purchaser of the gasoline.    See   Pub. L. 97-424,

sec. 511(f), 96 Stat. 2172; H. Rept. 97-945 at 2, 1983-1 C.B. 421.

     The legislative history of section 6420 establishes that the

requirement that applicators obtain waivers from their farm

customers was not designed solely to ensure that two taxpayers

would not claim entitlement to a tax credit for the same fuel.

The requirement appears also to have been designed to ensure that

farmers are knowledgeable about their entitlement to the fuel tax

credit.

     The waiver requirement, therefore, relates to the essence of

the statute.   To extend the credit to applicators without strict

compliance to the waiver requirement would defeat the policies

underlying the statutory provision.

     It does not appear that anyone will receive the benefit of

the section 34(a)(1) credit for the gasoline used by petitioner

during the years at issue.   Although we are sympathetic to

petitioner’s situation, we are constrained by and cannot disregard

the plain language of the statute and the detailed requirements of

the legislative regulation in order to achieve what would appear

to be a more equitable result in this case.    Accordingly,

petitioner is not entitled to credit for Federal tax on fuels.
                             - 11 -

    Reviewed and adopted as the report of the Small Tax Case

Division.

                                       Decision will be entered

                                  for respondent.
