Internal Revenue Service issues new guidance on glider kit usage

From an NTEA member My company completes vehicles using glider kits. I have heard there is new guidance from the Internal Revenue Service (IRS) on the use of glider kits. Can you explain what this may mean for my business? This past January, the IRS issued chief counsel advice addressing the taxability of chassis or tractors completed with glider kits (“2014 Advice”). The 2014 Advice effectively reverses the position the IRS took when it issued chief counsel in 2013 regarding the use of glider kits (“2013 Advice”). The IRS now recommends that taxpayers should no longer follow the 2013 Advice. Based on the IRS’s current reasoning, many vehicles completed with glider kits will be subject to Section 4051 tax. The change in the IRS’s position focuses on the application of the so-called 75 Percent Rule to chassis and tractors completed with glider kits. In the 2013 Advice, the IRS indicated that the 75 Percent Rule would apply generally to situations in which used components were combined with a glider kit to complete a chassis or tractor. However, in the 2014 Advice, the IRS suggests that the 75 Percent Rule likely would not apply to many situations in which a tractor or chassis is completed by combining used components with a glider kit. This change in position is very important: if the 75 Percent Rule applies, a chassis or tractor completed with a glider kit often will be non-taxable. However, if the 75 Percent Rule does not apply, the same chassis or tractor, if it exceeds the applicable gross vehicle weight (GVW) tax threshold, likely will be taxable. Under the 75 Percent Rule, if the cost of modifications or repairs to an article (i.e., a chassis, body or tractor) is not greater than 75 percent of the retail price of a new, comparable article, then the newly-modified/repaired article generally will not be taxable upon its first sale, lease or use. See Section 4052(f)(2). Note, the 75 Percent Rule will not apply if the repaired/modified article would be taxable, if new, but was not taxable prior to such repairs/modifications. (For example, a 32,000-lb. truck chassis that was modified in a manner that increased its GVW to 33,100 pounds.) In the 2014 Advice, the IRS took the position that the 75 Percent Rule applies only when a taxpayer is modifying or repairing an existing article (such as a chassis or tractor). The IRS then applied this rationale to four separate fact patterns. In each fact pattern, a glider kit was combined with either (1) a used or refurbished engine and transmission, or (2) a used or refurbished transmission and rear axle. The IRS determined that, in these fact patterns, the used (or refurbished) components (i.e., the engine/transmission or the transmission/rear axle) were not articles (such as a chassis or tractor) that could be repaired or modified for purposes of the 75 Percent Rule. Instead, the IRS determined the taxpayer, in each of four fact patterns, had manufactured a new chassis or tractor, rather than repaired or modified an existing one. See 2014 Advice (stating the taxpayer had “manufactured a new article from a combination of new and used automotive components, none of which were articles.”) Therefore, the newly manufactured chassis or tractors were taxable (assuming the completed chassis or tractor exceeds the applicable taxable weight threshold). The 2014 Advice does not clarify the type or quantity of used components from a donor vehicle necessary before the IRS will consider the used components to be an “article” for purposes of applying the 75 Percent Rule. However, the Advice suggests that if there is not already an identifiable chassis or tractor to which the glider kit is being added, the 75 Percent Rule likely will not apply. Please note that neither the 2013 nor the 2014 Advice is binding on the IRS, and taxpayers were not (and are not) entitled to rely on any such advice. In other words, as a technical matter, the IRS could still assess tax liability if you did not charge tax in 2013 on chassis and tractors completed with glider kits, based on the IRS guidance in the 2013 Advice. However, it is unclear whether the IRS would actually seek to assess tax under such circumstances. Going forward, the 2014 Advice suggests the current reasoning of the IRS on this issue. Therefore, if you are selling articles completed with glider kits, and are not charging tax based on the 75 Percent Rule, it is strongly recommended that you consult with your tax advisor.

Internal Revenue Service issues new guidance on glider kit usage

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