Review of releases concerning FET on motor vehicles

March 2022 1. Overview Internal Revenue Service (IRS) publishes Revenue Rulings in the weekly Internal Revenue Bulletin. A Revenue Ruling numbered 2021-19, I.R.B. 2021-2, 8 would mean it is the 19th published in 2021, and would appear in the Bulletin for week 2 of 2021 on page 8. Revenue Rulings may be relied upon as precedent by taxpayers and the IRS. However, such rulings are limited to the facts presented for consideration by IRS, and may be used to predict the outcome in other cases only to the extent that the facts and circumstances of such other cases are substantially similar to those in the Revenue Ruling. Unlike Revenue Rulings, (a) IRS Letter Rulings (LRs), (b) Technical Advice Memoranda (TAMs), (c) Chief Counsel Advisories (CCAs) and (d) Legal Advice Issued to Program Managers (PMTA) are not published in the weekly Internal Revenue Bulletin, but are made available for public inspection usually within a few months after being sent to a taxpayer. They are not relied upon as precedent by IRS and cannot be used for that purpose by taxpayers (other than the recipient of a Letter Ruling or TAM). Letter Ruling, TAMs, CCAs and PMTAs serve primarily as an indication of IRS’s position on the law and should be used cautiously as a guideline for taxpayers involved in similar transactions. A Letter Ruling or TAM numbered 202109008 (March 15, 2021), would signify the letter or memorandum was made available to the public in the ninth week of 2021, was Letter Ruling or TAM number eight for that week and was sent to the inquiring taxpayer on March 15, 2021. The following are summaries of Federal Excise Tax (FET) LRs, TAMs, CCAs, PMTAs and court decisions (Rulings) released in the year 2021 that discuss the retail tax under IRC Section 4051. Although portions of these summaries are sometimes verbatim from the text of the released Rulings, other portions of the Rulings may be omitted from the summaries, rephrased, or condensed. Accordingly, prior to relying on any Ruling, NTEA members are urged to obtain and review a copy of the full text of the Ruling as published by the IRS or applicable court. You are also urged to consult with a tax adviser prior to adopting or changing any position that affects FET due. To obtain a copy of the full text of a Ruling, members should contact NTEA at info@ntea.com or 800-441-6832. Schneider Nat’l Leasing, Inc. v. United States, 11 F.4th 548 (7th Cir. 2021), reversing prior district court decision. Issues: The first issue is whether the safe harbor at IRC 4052(f)(1) for modifications and repairs applies to certain tractors refurbished using powered glider kits (which contained remanufactured engines). The second issue is the meaning of the term “retail price of a comparable new article,” as that term is used in the safe harbor in Section 4052(f)(1). Background: This decision reverses the lower district court’s decision concerning the application of the Section 4052(f)(1) safe harbor to certain tractors that were refurbished using powered glider kits. The safe harbor provides_ “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.” The taxpayer purchased certain glider kits to overhaul existing tractors. “At a minimum, each glider kit came with a cab, chassis, radiator, front axle, front suspension, front wheels, front tires, front brakes, brake system”, trailer connections and a remanufactured engine. The seller of the glider kits assembled the parts “in a manner resembling a tractor cab and chassis and shipped the kits” to the taxpayer’s outfitter. “The refurbishing process generally involved dismantling the old tractors, stripping non-usable parts, reassembling the reusable components of the old tractor with the glider kit parts, and giving the rebuilt tractor a new vehicle identification number matching the serial number on the glider kit.” The court also noted that parts used from the old tractor varied, “but in many instances the outfitter reused the transmission, driveline, rear axle, rear suspension, and rear wheel hubs — and sometime the fuel tank, fifth wheel, and rear brakes — in the refurbished tractors.” The old engines were sent to the company from which the taxpayer had purchased the glider kit “in exchange for a rebate on the refurbished engines included in the glider kits.” Any remaining components of the old tractors “were either kept as replacement parts for future repairs or sold for salvage value.” The lower court had determined the safe harbor only applied if two requirements were satisfied_ First, the taxpayer had to show its refurbishing constituted only “repairs or modifications” (i.e., the refurbishing was not extensive enough to constitute manufacturing). If that first requirement was satisfied, then the taxpayer had to show the cost of such repairs/modifications did not exceed the 75% threshold. The appellate court said the lower court erred in this decision. In addition, the lower court held the reference to “retail price” in the safe harbor referred to “the price that [the taxpayer] actually paid (net of any discounts) for comparable new tractors, rather than the industry retail price on the open market.” The appellate court disagreed. Ruling: The appellate court determined that the application of the safe harbor at Section 4052(f) “is not found in definitions of ‘repairs or modifications’ versus ‘manufacture,’ but rather derives from the 75% threshold. It is the 75% threshold that determines whether the work performed was “repairs or modifications” or was “manufacture.” The appellate court noted “[t]he plain text of the safe harbor does not contemplate any measurement apart from this 75% test.” The appellate court also determined that “the ‘retail price’ referred to in [section] 4052(f)(1) is the price at which a comparable tractor could be acquired in the open market.” Therefore, based on this definition of retail price, the lower court needed to do a new determination as to whether the taxpayer’s refurbishments exceeded the 75% threshold. NTEA note: Although the appellate court ruled in favor of the taxpayer in this case, it’s unclear whether the IRS will accept this court’s interpretation of the safe harbor. In addition, similar issues in other courts are still being litigated, and it is not yet known how the other courts will rule on the application of the safe harbor. No taxpayer should rely on this case until consulting with their tax attorney. Action of Decision by IRS (November 22, 2021) regarding Mayo Clinic v. United States, 997 F.3d 789 (8th Cir. 2021) IRS issued an Action on Decision stating its disagreement with the 2021 court case. In a prior summary of the 2019 lower court case, NTEA noted this case did not directly involve Section 4051 tax, but indirectly involves a Section 4221 tax exemption that exempts certain sales to non-profit educational organizations from Section 4051 tax. See IRC 4221(a)(5). The 2019 court case concerned the definition of “educational organization” under Section 170(b)(1)(A)(ii), which is incorporated into the regulations under the 4221(a)(5) tax exemption. See Treasury Regulation 48.4221-6. In 2021, the appellate court (8th Circuit) reversed the 2019 decision of the lower court. In the Action of Decision, IRS stated it disagreed with the appellate court’s decision invalidating the “regulatory requirement that the primary function of an educational organization described in section 170(b)(1)(A)(ii) must be formal instruction.” The IRS said that it would continue litigating that issue in cases other than the 8th Circuit (but that it recognized “the precedential effect of the decision to cases appealable to the Eighth Circuit and will follow it for cases within the Eighth Circuit in which the facts are not materially distinguishable”). NTEA comment: Because the facts of this proceeding do not directly concern Section 4051 or Section 4221, and the case involves a complicated statutory and regulatory analysis, NTEA is not summarizing the appellate court case or providing a more detailed summary of IRS’s Action of Decision. If interested in this proceeding, review the prior decisions of the lower and appellate courts as well as IRS’s decision, and then discuss them with your tax advisor.

Review of releases concerning FET on motor vehicles

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