Tax Case Illustrating the First Rule of Persuasion--Avoid Irritating the Person You Seek to Persuade (12/3/23)

In Fitzgerald Truck Parts, Inc. v. United States, 2023 WL 8100540, 2023 U.S. Dist. LEXIS 208420 (M.D. Tenn. 11/21/23), CL here and GS here, “After a trial held in Cookeville, Tennessee between July 10 and July 14, 2023, a jury found that Fitzgerald Truck Parts and Sales, LLC (“Fitzgerald”) was not liable for excise tax on some  12,830 glider semi trucks sold between 2012 and 2017.” The Government moved for Judgment as a Matter of Law or New Trial. The Court denied the motion.

I am not sure there is any federal tax procedure issue involved in the opinion, except that tax procedure necessarily involves trial procedures. For that reason, this decision is a doozy, primarily because the judge appears (my inference) to be irritated with the Government claims on the motion.

The essential facts are recounted in the opinion (pp. 1-3 bold face supplied by JAT):

          For more than 30 years, and up until Environmental Protection Agency (“EPA”) regulations essentially abolished the market, Fitzgerald manufactured glider semi-trucks. It did so by placing rebuilt engines and transmissions from wrecked highway tractors into glider kits produced by original equipment manufacturers. The kits from those manufacturers generally included such things as the cab, frame, sheet metal, mounting brackets and steering gear, to which the rebuilt powertrains were then added. Through this method, the goal was to offer for sale essentially a new truck – albeit with a rebuilt engine and transmission – at a lower price than a comparable truck from the factory.

          Not only did the customer receive a reduction in price, the customer was also not on the hook for  excise taxes, at least if the governing regulations were followed. Herein lies the core of the parties’ dispute.

          Under the Internal Revenue Code, a 12% federal excise tax is imposed “on the first retail sale” of “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 contains a safe harbor provision that states:

(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).

          It has been Fitzgerald’s position throughout that the trucks it produced met the safe harbor [*3] provision. The Internal Revenue Service (“IRS”) disagrees. In accordance with IRS regulations, Fitzgerald paid the excise tax on one truck for each quarter of the tax years at issue, meaning excise taxes were not paid on some 12,800-plus gliders. The stakes are enormous, especially for a company that is no longer producing trucks, and never collected the excise tax from the purchaser in the first place. Those taxes are more than ten million dollars. Penalties and interest place that figure in the neighborhood of $300 million.