Court Rebuffs IRS's Request to Summarily Decide Semi Truck Excise Tax Case

(Parker Tax Publishing May 2023)

A district court rejected the IRS's motion for summary judgment arguing that a manufacturer and seller of semi-truck glider kits could not prove that it qualified for the safe harbor exception in Code Sec. 4051(f)(1) to the 12 percent excise tax on the first retail sale of semi-trucks. The court also rejected the IRS's request to summarily rule that the taxpayer could not establish equitable estoppel after finding that the IRS concluded after audits of several years that the taxpayer qualified for the Code Sec. 4051(f)(1) safe harbor and a jury could decide that the taxpayer relied on those audits to support an exemption from the excise tax in later years. Fitzgerald Truck Parts and Sales, LLC v. U.S., 2023 PTC 112 (M.D. Tenn. 2023).

Background

Fitzgerald Truck Parts and Sales, LLC (Fitzgerald) is a glider kit assembler, and has been for 30 years. Fitzgerald's gliders begin as worn or wrecked highway tractors, the engines and transmissions of which are capable of being repaired (i.e., rebuilt). When a glider truck is assembled and sold to a customer (usually an independent owner-operator or a small to mid-size trucking fleet), Fitzgerald retains a copy of the previously taxed tractor's title. This case is a dispute concerning whether Fitzgerald is liable for excise taxes under Code Sec. 4051 on thousands of glider kits it sold between 2012 and 2017.

Code Sec. 4051(a)(1) imposes a 12 percent excise tax on the "first retail sale" of certain "articles," including highway tractors. The "first retail sale" is generally defined in Code Sec. 4052(a) as the first sale or lease after production, manufacture, or importation. Under a safe harbor provided in Code Sec. 4052(f)(1), an article described in Code Sec. 4051(a)(1) is not treated as manufactured or produced, and therefore not subject to the 12 percent excise tax, "by reason of repairs or modifications to the article (including any modification which changes the transportation function of the article or restores a wrecked article to a functional condition) if the cost of such repairs and modifications does not exceed 75 percent of the retail price of a comparable new article." Under Code Sec. 4052(f)(2), the safe harbor exception does not apply "if the article (as repaired or modified) would, if new, be taxable" under Code Sec. 4051 and "the article when new was not taxable" under that section or the corresponding provision of prior law.

For years between 1996-2011, the IRS audited Fitzgerald and determined that its sales of glider kits met the Code Sec. 4052(f) safe harbor requirements. However, after auditing Fitzgerald for years 2012-2017, the IRS determined that it did not qualify for the safe harbor and that the excise tax under Code Sec. 4051 applied to thousands of glider kits Fitzgerald sold in those years.

In a motion for partial summary judgment, Fitzgerald contended that it qualified for the safe harbor under Code Sec. 4052(f)(1) for years 2012-2017. Fitzgerald further argued that even if it owed excise taxes, it should be relieved of liability under the equitable estoppel doctrine because of the IRS's vacillating positions over time. In addition, Fitzgerald contended that Notice 2017-5, in which the IRS provided interim definitions of the terms "chassis" and "body" for purposes of Code Sec. 4051 and the Code Sec. 4052(f) safe harbor, was invalid under the Administrative Procedure Act (APA). According to Fitzgerald, Notice 2017-5 effectively prevented application of the safe harbor rule to worn or wrecked tractors that are rebuilt using glider kits, despite the fact that Code Sec. 4052(f)(1) specifically provides that wrecked tractors may be repaired without triggering the excise tax as long as the 75 percent test is met. The court denied Fitzgerald's motion after finding that its request for leave to file the motion was improvidently granted.

In its own motion for partial summary judgment, the government argued that Fitzgerald could not (1) meet its burden to qualify for the safe harbor exception, (2) prove its equitable defenses to liability, or (3) prevail on its APA challenge to Notice 2017-5. The government also argued that Fitzgerald was liable for the excise taxes on its tractors, plus penalties for not having paid them when due. The government relied on the report of its proffered expert, Stuart MacKay, for the proposition that Fitzgerald incorrectly relied on the manufacturer's suggested retail price (MSRP) as the benchmark for making the 75 percent calculation. According to MacKay's report, tractors usually sold below the MSRP, sometimes significantly so. In addition, Fitzgerald's own records, according to MacKay, showed that its cost of repairing and modifying tractors was more than the 75 percent limit permitted by Code Sec. 4052(f). The government also argued that Fitzgerald could not show that a repaired tractor, when new, was "taxable" as required under Code Sec. 4052(f)(2). According to the government, tractors exported out of the United States were not taxed, nor were excise taxes paid on tractors initially purchased by local governments or nonprofit organizations.

In addition, the government argued that Fitzgerald did not have an equitable defense to liability because it could not rely on the outcomes of audits for earlier years to support an exemption from tax for 2012-2017. The government stated that the entity audited in 1996 and 1997 was not the same as that audited in later years. It also said that Fitzgerald failed to show that its business year-in and year-out was the same and therefore reliance on earlier rulings was misplaced. The government further argued that not only did Fitzgerald decline to seek a private letter ruling, it chose not to do so because it was concerned it would be bound by an unfavorable determination. The government also contended that Fitzgerald could not prevail on its APA challenge to Notice 2017-5 because the notice was a permissible agency interpretation and further, the government was not relying on the notice in this case.

Analysis

The district court denied the government's motion for summary judgment, except with regard to Fitzgerald's APA claim.

First, the court noted as background that in 2021, the Seventh Circuit issued an opinion in Schneider National Leasing, Inc. v. U.S., 2021 PTC 271 (7th Cir. 2021), and decided two questions first impression concerning the Code Sec. 4051(a) excise tax and the safe harbor exception in Code Sec. 4052(f). Based upon the plain text of the statute, the Seventh Circuit found that, contrary to the IRS's position, the safe harbor does not contemplate a measurement for "repairs or modifications" apart from the 75 percent test Congress expressly incorporated into the statute. The court in Schneider also decided that the appropriate measure for the "retail price of a comparable new article" is the market price in ordinary, arms-length transactions. The district court in this case noted that although Schneider was not controlling, the court found it to be a cogent and well-reasoned opinion that could hardly be more on point. The court also said that it has not been provided with anything from which it could conclude that Schneider does not provide the correct framework for analysis in this case.

Addressing the government's argument based on its expert report, the court found that although MacKay's opinions had facial appeal, so did Fitzgerald's assertion that MSRP should serve as the benchmark for the 75 percent rule. The court found also reasoned that the credibility of an expert witness, and the weight to give his testimony, are matters entrusted to the trier of fact. With respect to the government's argument that Fitzgerald could not show that a repaired tractor was taxable when new, the court responded that the government could not be seriously claiming that, to prevail, Fitzgerald would have to prove that each and every one off the thousands of tractors it repaired was taxed when new. According to the court, that is not what the statute demands, because Code Sec. 4052(f) says that the article "would be, if new taxable" but "when new, was not taxable." The court reasoned that if Congress meant taxed as opposed to taxable, it could and should have said so.

The court also rejected the government's equitable estoppel argument after finding that Fitzgerald stated a plausible claim, and the issue was for the jury to decide. In the court's view, Fitzgerald more than demonstrated the minimum evidence for a jury to determine whether it was intentionally or recklessly misled by the government. A jury could reasonably concluded, the court found, that a taxpayer should not be required to revisit an issue when it has repeatedly been given the thumbs-up audit after audit.

However, with regard to Fitzgerald's APA challenge to Notice 2017-5, the court found that the notice is not a legislative rule that requires notice and comment. The court found that the notice purports to define "chassis" and "body" for purposes of Code Sec. 4051 and the safe harbor provision in Code Sec. 4052. It also provided for a period of notice and comment. Nowhere, the court found, does the notice impose any consequence on a taxpayer that chooses not to follow it, nor does it impose and obligation on the taxpayer. Instead, the court found that it states the IRS's opinion. The court also said that Fitzgerald's APA complaint may be premature, since under 28 U.S.C. Section 2401(a), such a complaint must be brought within six years of a "final agency action." The court concluded that in this case, regardless of what the government said about relying on Notice 2017-5, a jury will decide whether the glider kits manufactured by Fitzgerald during the relevant period met the safe harbor provision of the statute, not whether it met any notice that the IRS may have developed since then.

For a discussion of the excise tax on heavy trucks, see Parker Tax ¶235,101.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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