CCA 1120020: changing from a corporation to an LLC does not erase dyed-fuel penalties

Plain-English summary

Chief Counsel Advice concludes that a business cannot avoid the multiple-violation penalty rules for dyed fuel by converting from a corporation to an LLC and changing its name and employer identification number. When the converted business remains at the same location, conducts the same business, and retains the same equipment, phone number, and employees, the former corporation is treated as the LLC's predecessor. Earlier penalties may therefore be counted when calculating a later penalty under IRC § 6715(b)(2). The advice assumes the new EIN resulted from an entity-classification change rather than an F reorganization that would require continued use of the same EIN.

Ruling snapshot

• Question: Can a corporation's prior dyed-fuel penalties be disregarded after the business converts to an LLC and obtains a new EIN?
• Outcome: Advice given.
• Key authorities: IRC §§ 4081, 4082, and 6715(b)(1), (b)(2); Treas. Reg. §§ 48.4101-1(b)(5) and 48.4219-1(a).

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       Memorandum
       Number: 201120020
       Release Date: 5/20/2011
       CC:PSI:B07 CLangley
       PRENO-103230-11

UILC: 6715.00-00

date: April 20, 2011

 to:   Holly McCann
       Chief, Excise Tax Program

from: Frank Boland,
Chief, Branch 7
Office of Associate Chief Counsel
(Passthroughs & Special Industries)

subject: Penalties for multiple violations of dyed diesel rules under § 6715

       This Chief Counsel Advice responds to your request for assistance for non-taxpayer
       specific legal advice. This advice may not be used or cited as precedent.


       ISSUE

       Whether a taxpayer can be assessed under the multiple violation rules of § 6715(b)(2)
       of the Internal Revenue Code for multiple § 6715 violations if the taxpayer has
       converted from a corporation to a limited liability company (LLC) and has changed its
       name and employer identification number (EIN).

       CONCLUSION

       A taxpayer cannot avoid the multiple violations rules under § 6715(b)(2) by converting
       from a corporation to an LLC and changing its name and EIN.

       FACTS

       A corporation was assessed one or more penalties under § 6715 while operating under
       a particular name and EIN. Later, the owners of the corporation converted the business
       to an LLC, changed the suffix in its name from “Inc.” to “LLC” and got a new EIN. The
       “new” business is operated at the same location doing the same type of business with
       the same equipment, phone number, and employees. If the IRS assesses a penalty

PRENO-103230-11 2

under § 6715(b)(1)(A) against the LLC, you want to know if the prior penalties of the
corporation should be considered for purposes of § 6715(b)(2). For purposes of this
memorandum, we assume that the business was required to get a new EIN due to an
entity classification change rather than electing to be treated as a corporation such that
it reorganized under § 368(a)(1)(F), which would require the taxpayer to continue to use
the same EIN under these facts.

LAW AND ANALYSIS

Section 4081 imposes a tax on certain removals, entries, and sales of diesel fuel and
kerosene (fuel). Section 4082 exempts from tax fuel that is dyed under prescribed
specifications.

Section 6715(a) generally imposes a penalty on the misuse of dyed fuel.

Under § 6715(b)(1), the amount of the § 6715 penalty on each act is the greater of (A)
$1,000, or (B) $10 for each gallon of the dyed fuel involved. Section 6715(b)(2),
however, increases the $1,000 penalty by the product of such amount and the number
of prior penalties (if any) imposed by § 6715 on such person (or a related person or any
predecessor of such person or related person) (emphasis added).

According to the facts submitted, the taxpayer merely converted from a corporation to a
limited liability company. Depending on the particular circumstances, this may require a
taxpayer to obtain a new EIN and to change the suffix in its name from “Inc.” to “LLC.” In
any event, the taxpayer did both. It is clear that to the extent a “new taxpayer” was
created by this conversion, the pre-conversion corporation was its predecessor.
Therefore, those prior penalties may be attributed to the taxpayer and used in
calculating the amount of the § 6715(b)(1)(A) penalty.

Neither the Code nor the regulations define “related person” or “predecessor” for
purposes of this penalty. We therefore look to other parts of the Code and regulations
for suggestions on how to define these terms. For example, § 48.4219-1(a) of the
Manufacturers and Retailers Excise Tax Regulations provides examples of persons that
are successors to manufacturers for purposes of the manufacturers tax and § 48.4101-
1(b)(5) defines “related person” for purposes of the qualifications for applicants for
registration for purposes of the taxes on taxable fuel. You may use these and similar
factors to determine whether a person is a “predecessor” or related person.”

Please call (202) 622-3130 if you have any further questions.