Taxpayer's Estate Owes Luxury and Gas Guzzler Taxes on Exotic Imported Car.
(Parker Tax Publishing May 14, 2014)

An imported a high-performance, luxury vehicle was not a "demonstrator" car and thus was not exempt from the luxury excise tax; and because the vehicle was a low fuel economy car, it was subject to the gas guzzler tax. Gonzales v. U.S., 2014 PTC 213 (Fed. Cl. 4/30/14).

In May 2000, Thomas J. Gonzales, a car collector, purchased and imported a 1998 McLaren F-1 from a German seller through a stateside car dealer located in Missouri. To allow the adjustments to be made to the car so that it met Environmental Protection Agency (EPA) standards, the car was held in a secure area by Customs for over a year. Thomas applied for, and received, an exemption from the Department of Transportation's (DOT) car safety requirements. This exemption, known as a "show or display" exemption, can be obtained for cars with historical or technological significance.

Upon certification that the McLaren had been adapted to meet EPA emissions standards and that the DOT exemption had been granted, the car was released from Customs in August 2001 for transport within the United States. A truck transported the car to California for garage storage at one of Thomas's homes. Before Thomas received delivery of the car, he was diagnosed with terminal gastric cancer and died several months later. Before he died, Thomas transferred the newly delivered McLaren to his father to satisfy an outstanding debt for expenses related to a yacht the two owned. Thomas's father became the executor of his estate and the trustee of Thomas's administrative trust.

With respect to the McLaren purchase, the IRS assessed the luxury automobile excise tax under Code Sec. 4001, as well as the "gas guzzler" tax under Code Sec. 4064, for a total additional tax bill of over $46,000. The estate paid the tax bill and filed for a refund. When the IRS rejected the refund request, the estate filed suit in Federal Claims Court.

Code Sec. 4001 imposes an excise tax on the first retail sale of any luxury passenger vehicle. Under Code Sec. 4002(b)(3), there is an exception to the tax for demonstrator vehicles. The term "demonstrator" is not defined in the statute, nor is there any case law that has interpreted the language of this exemption. The estate argued that Thomas's treatment of the vehicle manifested a clear intent to display the McLaren's features to other car collectors and, thus, fell under the excise tax exemption. The estate asserted that because the McLaren was never driven on public streets in the United States either during Thomas's ownership of the car or after the transfer to his father, it is subject to the demonstrator exception.

The IRS countered that the demonstrator exemption is meant to apply to the display of luxury vehicles by car dealers for retail customers, rather than to private car collectors like Thomas and his father.

Code Sec. 4064 imposes a "gas guzzler tax" on each sale by the manufacturer of an automobile with a low fuel economy. The term "manufacturer" includes a producer or importer. When an importer uses the imported article, Code Sec. 4281 provides that he is liable for the gas guzzler tax in the same manner as if such automobile were sold by him. The estate argued that the McLaren was not used as contemplated by the gas guzzler statute and, thus, was not subject to the gas guzzler tax provision. According to the estate, because the McLaren was not manufactured primarily for use on public streets, it does not fall within the definition of "automobile" under the gas guzzler statute.

The Court of Federal Claims held that the estate was subject to both the luxury automobile excise tax and the gas guzzler tax on the McLaren. In evaluating whether the McLaren was a demonstrator vehicle, the court looked to the dictionary, which supported a finding that the demonstrator exemption applies only to automobiles on display for commercial purposes. According to the court, the exemption allows intermediate car handlers, such as dealers, to avoid luxury tax liability for a car "used" as is necessary for sale, and the collection of any owed tax is delayed until the time of sale. If the demonstrator exemption were construed to apply to collectors who demonstrate their cars to others, the court said, then tax collection could not occur and such a circumstance would create an absurd result for a statutory scheme designed to tax luxury vehicles. The court rejected the estate's contention that the DOT's decision to grant a "show or display" exemption for the McLaren also decided the question of liability for the luxury tax. The court also concluded that whether a car can be deemed a demonstrator vehicle does not turn on whether the car is driven. The relevant consideration for tax purposes, the court said, was whether the car is a collector's item rather than a demonstrator for use in sales.

The court also found that the McLaren F1 was designed for public road use and qualified as an automobile under the gas guzzler statute. Although such an expensive and rare vehicle most likely would be driven infrequently and treated as a collector's item, the court was not persuaded that the expectation of limited road use served to remove the car from being otherwise subject to the gas guzzler tax.

For a discussion of the luxury automobile excise tax and the gas guzzler tax, see Parker Tax ¶235,105 and ¶235,110, respectively. (Staff Editor Parker Tax Publishing)

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