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Fitzgerald Truck Parts and Sales, LLC v. United States

United States District Court, M.D. Tennessee, Northeastern Division

July 16, 2019

FITZGERALD TRUCK PARTS AND SALES, LLC, Plaintiff,
v.
UNITED STATES OF AMERICA, Defendant.

          MEMORANDUM OPINION

          WAVERLY D CRENSHAW, JR. CHIEF UNITED STATES DISTRICT JUDGE.

         This is a case about glider semi-trucks and, more particularly, whether excise taxes are properly imposed on the sale of those trucks. A glider truck is built from a kit. Glider kits consisting of new tractor parts, including such things as the cab, frame, sheet metal, mounting brackets and steering gear, are produced by original equipment manufacturers like Peterbilt, Kenworth, Freightliner, and Western Star. Powertrains and other necessary parts are then added and the glider trucks are offered for sale, usually at a price that is less that 75% of the cost of a new truck.

         Fitzgerald Truck Parts and Sales, LLC (“FTPS”) is a glider kit assembler, and has been for 30 years. (Doc. No. 1, Complaint ¶ 13). FTPS's gliders “begin as worn or wrecked highway tractors, the engines and transmissions of which are capable of being repaired (i.e., rebuilt).” (Id. ¶ 18). When a glider truck is assembled and sold to a customer (usually an independent owner-operator or a small to mid-size trucking fleet), FTPS retains a copy of the previously taxed tractor's title. (Id. ¶¶ 18, 21). It is at this point that the tax dispute between FTPS and the Internal Revenue Service (“IRS”) comes into play, setting the stage for the Government's Motion to Dismiss in Part (Doc. No. 18) and Motion to Strike (Doc. 17).

         I. Factual Background [1]

         Under the Internal Revenue Code, a 12% federal excise tax is imposed “on the first retail sale” on “tractors of the kind chiefly used for highway transportation in combination with a trailer or semitrailer.” 26 U.S.C. § 4051(a)(1). The code also provides, however:

         (f) Certain repairs and modifications not treated as manufacture

(1) In general
An article described in section 4051(a)(1) shall not be treated as manufactured or produced solely 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.

26 U.S.C. § 4052(f)(1).

         Because its costs and profits in assembling the glider (including the costs of rebuilding the engine and/or transmission, buying a glider kit, and melding the two) does not exceed seventy-five percent of the retail price of a comparable new highway tractor, FTPS believes that it is entitled to the exception set forth in § 4052(f)(1) and, thus not liable for the 12% tax set forth in § 4051(a). For two decades, the IRS apparently had the same view.

         FTPS and its predecessor Fitzgerald Kit Truck and Sales, LLC were examined on four separate occasions between 1991 and 2011, covering tax years 1991, 1996-1997, and 2006-2011. During each of those years, FTPS did not collect excise tax on the sale of gliders. Following each of the examinations, the IRS determined that “FTPS's gliders satisfied the 75 percent safe harbor math test under § 4052(f)(1) and therefore were not taxable under § 4051(a)(1).” (Complaint ¶ 33). FTPS even received a letter from a District Director of the IRS dated March 20, 1998 that stated, in part:

It has . . . been determined all of your rebuilt worn tractors using glider kits qualified for the 75% safe harbor provisions per Revenue Ruling 91-27. In conclusion, it is our opinion that no Federal Excise Tax applies to your glider kit installations for 1996 and 1997.

(Doc. No. 1-2 at 1). Unsurprisingly, FTPS continued not to collect the excise tax on the sale of its gliders. (Complaint ¶ 33).

         In 2014, the IRS began an examination for each of the tax quarters from 2012 to 2014. On May 26, 2015, the IRS sent a letter informing FTPS that, among other things, it owed excise taxes, penalties, and interest. (Id. ¶¶ 34-36). An accompanying report from a revenue agent opined that FTPS was “not extending [the] useful life of an existing vehicle, ” but instead was “fabricating . . . a truck tractor that did not exist prior to the fabrication.” (Id. ¶ 37).

         After FTPS filed a written protest and additional documentation with IRS Appeals (“Appeals”), the parties agreed to mediate their dispute before an IRS Appeals Mediator. An agreement was struck whereby no tax would be due for any period up to that point, but FTPS would begin collecting excise tax on a “prospective basis.” (Doc. No. 1-3 at 1). The next day, the mediator confirmed the agreement in a document titled “Mediator's Report, ” and indicated that “settlement documents will be prepared under established appeals procedures.” (Id.). The Mediator's report outlining the terms of the settlement was signed by the Mediator, the IRS Appeals Team Manager, and a representative for FTPS. (Id.).[2]

         For whatever reason, however, the IRS chose not to abide by the settlement, and sustained the assessments set forth in the earlier letter. (Id. ¶¶ 47-48). This may have been due, in part, to the fact that “in 2014 the IRS decided to target the glider industry, and specifically FTPS, and reversed its position [on taxibility] in secret, without any ...


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