CCA 1226023: IRS advice on actual knowledge required for fuel penalties

Plain-English summary

Chief Counsel advice addresses when the IRS may impose penalties under IRC § 6720A on fuel resellers and retailers. It concludes that penalties require actual knowledge both that fuel will be used in a diesel-powered highway vehicle or train and that the fuel does not meet applicable EPA regulations. Even when those conditions are met, the IRS retains enforcement discretion over whether to assert the penalties. The advice also notes that declining to assert a § 6720A penalty does not eliminate other applicable Code penalties or possible EPA enforcement.

Ruling snapshot

• Question: When may the IRS impose penalties under IRC § 6720A on fuel resellers and retailers?
• Outcome: Advice
• Key authorities: IRC §§ 45H(c)(3) and 6720A; Crane v. Comm’r, 331 U.S. 1, 6 (1947)

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       Memorandum
       Number: 201226023
       Release Date: 6/29/2012
       CC:PSI:B07:MHBeker                          Third Party Communication: None
       POSTN-104250-12                             Date of Communication: Not Applicable

UILC: 6720A.00-00

date: April 30, 2012

 to:   Holly L. McCann
       Chief, Excise Tax Program

from: Stephanie Bland
Senior Technician Reviewer, Branch 7
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)

subject: Applicability of Section 6720A Penalties

       This Chief Counsel Advice responds to your request for assistance dated September 8,
       2011. This advice may not be used or cited as precedent.

       ISSUE

       When may the IRS impose the penalties under § 6720A of the Internal Revenue Code
       (Code)?

       CONCLUSION

       The IRS may impose the § 6720A penalties only if a fuel reseller or retailer has actual
       knowledge that (i) the fuel it transfers for resale, sells for resale, or holds out for sale or
       resale will be used in a diesel-powered highway vehicle or train, and (ii) the fuel does
       not meet the applicable United States Environmental Protection Agency (EPA)
       regulations.

       LAW AND ANALYSIS

       Section 6720A(a) provides that any person who knowingly transfers for resale, sells for
       resale, or holds out for resale any liquid for use in a diesel-powered highway vehicle or
       a diesel-powered train which does not meet applicable United EPA regulations (as
       defined in § 45H(c)(3)), shall pay a penalty of $10,000 for each such transfer, sale, or

POSTN-104250-12 2

holding out for resale, in addition to the tax on such liquid (if any).

Section 6720A(b) provides that, in the case of retailers, any person who knowingly
holds out for sale (other than for resale) any liquid described in § 6720A(a), shall pay a
penalty of $10,000 for each such holding out for sale, in addition to the tax on such
liquid (if any).

You asked what conditions must be satisfied in order to impose the § 6720A penalties.

Section 6720A was added to the Code by the Safe, Accountable, Flexible, Efficient
Transportation Equity Act: A Legacy for Users (Act) (Pub. L. 109–59). The legislative
history to the Act does not clarify what Congress intended when it used the word
“knowingly” in § 6720A. If a statute uses words that it does not define, it is necessary to
look to the ordinary and everyday meaning of the words in question. Crane v. Comm’r,
331 U.S. 1, 6 (1947). The American Heritage Dictionary defines “knowingly” as
“possessing knowledge, information, or understanding” and “deliberate; conscious.”1

These definitions suggest that the word “knowingly” requires actual knowledge. Based
on the plain language of § 6720A, the IRS may impose the penalty only if the following
two conditions are satisfied:

   (i)        The reseller or retailer has actual knowledge that the liquid transfered
              for resale, sold for resale, or held out for sale or resale will be used in a
              diesel-powered highway vehicle or train; and

   (ii)       The reseller or retailer has actual knowledge that the liquid transferred
              for resale, sold for resale or held out for sale or resale does not meet
              the applicable EPA regulations.

Once the conditions described above are satisfied in a particular case, the IRS has
enforcement discretion regarding whether to assert the penalties in that case. However,
while the IRS may exercise its enforcement discretion and decide not to assert § 6720A
penalties in a particular case, that does not mean that the taxpayer is relieved from
other applicable penalties imposed by the Code. Further, the IRS’s exercise of its
enforcement discretion in not asserting § 6720A penalties does not relieve the taxpayer
from enforcement action taken by the EPA for violations of provisions under the EPA’s
jurisdiction.

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

1
The American Heritage Dictionary of the English Language, Fourth Edition. (2003). Retrieved April 27,
2012, from http://www.thefreedictionary.com/knowingly