Glider kits and the 75% rule - How does it apply?

From an NTEA member If we use a glider kit to repair and refurbish a chassis, can we treat the refurbished chassis as non-taxable, so long as it falls within the so-called 75% safe harbor? Yes, you can probably treat the refurbished chassis as non-taxable. However, there is a potential risk, in certain circumstances, that the Internal Revenue Service (IRS) may conclude the 75% Safe Harbor does not apply, depending on the type of glider kit you are using. The 75% Safe Harbor provides, in general, that if the cost of repairs and modifications to an article that was taxable when new is 75% or less than the retail price of a comparable new article, the repairs and modifications will not be treated as creating a new taxable article. See Internal Revenue Code (IRC) 4052(f) (effective Jan. 1, 1998). (Prior to that time, in 1991, a more limited 75% Safe Harbor was established in Revenue Ruling 91-27.) If the 75% Safe Harbor applies, the combination of components from a “donor chassis” with a glider kit will not trigger Federal Excise Tax (FET) in many cases. But, if the Safe Harbor does not apply — either because the costs of the modifications exceed 75% or a “new” chassis is deemed to have been created — then the “first retail sale” or use of the resulting chassis will trigger FET. See Revenue Rulings 86-130 and 91-27. In Technical Advice Memorandum (TAM) 9238008 (June 11, 1992), a glider kit was combined with new parts, as well as salvaged parts from two used tractors from different manufacturers. The IRS ruled that the 75% Safe Harbor did not apply because there was no existing tractor that had been modified. Instead, the IRS ruled that an entirely new tractor had been created, and the “first retail sale” or use of that tractor triggered FET. In TAM 9333007 (May 11, 1993), the IRS ruled that the 75% Safe Harbor did apply when a glider kit was combined with the engine, transmission and tandem axles of a single used tractor. (The IRS specifically noted that the components of the used tractor were not intermingled with the components of other used tractors.) Although not discussed in TAM 9333007, it is important to note, in that ruling, the “donor chassis” (i.e., the chassis being modified for purposes of the 75% Safe Harbor) supplied three significant chassis components_ the engine, transmission and tandem axles. Today, there are certain types of glider kits that are quite evolved, which means that the refurbished chassis may not actually contain many components of the original “donor chassis.” For example, so-called “rolling glider kits” may include rear suspension, rear drive axle and rear tires/wheels, in addition to all the other components generally provided in a basic glider kit. There are also so-called “powered glider kits,” which may include an engine and transmission, in addition to all the other componentry provided in a rolling glider kit. Therefore, a potential issue arises as to whether the IRS might determine, in certain cases, that a “donor chassis” did not contribute sufficient componentry to the finished chassis. As a result, there was no modification of the “donor chassis.” Instead, an entirely new chassis was manufactured, to which the 75% Safe Harbor would not apply. In IRS CC 201306019 (Jan. 7, 2013), the IRS recently issued non-taxpayer-specific legal advice, which indicates that the 75% Safe Harbor generally applies to repairs and modifications involving glider kits. In addition, the advice suggests, without any discussion or analysis, that it will not reject the application of the 75% Safe Harbor in situations where the “donor chassis” fails to contribute any significant components to the resulting chassis. However, the advice (like TAMs and letter rulings) provides guidance on FET issues, but is not binding on the IRS, which means that taxpayers are not entitled to rely on it. If you are completing a chassis using a rolling or powered glider kit (and no significant chassis components will be retained from a single “donor chassis”), consider discussing the issues raised in this article with your tax advisor.

Glider kits and the 75% rule - How does it apply?

Recommended Articles

FET on cranes

Applying FET to spare/replacement parts and accessories

Applying FET to spare/replacement parts and accessories