Status of FET on glider kits litigation

From an NTEA member We understand there is litigation regarding application of Section 4051 tax to vehicles produced with glider kits. Have the courts issued any rulings related to this litigation? No court yet appears to have issued a ruling on whether the so-called 75% rule applies to an article produced with a glider kit. However, a court in one glider case issued a preliminary ruling that interprets certain aspects of the 75% rule. Background Although there are certain exceptions, the 75% rule generally provides that modifications and repairs to an article subject to Section 4051 tax (i.e., a tractor, or a chassis or body of a truck, trailer or semitrailer) will not be treated as manufacturing a new article if the cost of such repair or modification does not exceed 75% of the retail price of a comparable new article. See Internal Revenue Code (IRC) 4052(f)(1). Internal Revenue Service (IRS) has taken the position that this 75% safe harbor does not apply to articles produced with glider kits because no article was modified or repaired. Instead, IRS’s position is that a new article was manufactured by combining new and used components, and none of those components constituted an article. See Chief Counsel Advisory Memorandum 201403014. Accordingly, IRS’s general view is that the sale of an otherwise taxable article produced with a glider kit will trigger tax, regardless of whether the cost of producing the article is less than 75% of the retail price of a comparable article. IRS’s view has been disputed by taxpayers, who generally take the position that the 75% safe harbor applies because the article donating the used components combined with the glider kit is the article that has been modified or repaired. This issue has been the subject of litigation in courts. Current litigation One of the biggest glider kit cases (in terms of assessment amount sought by IRS) is the current litigation involving Fitzgerald Truck Parts & Sales. Although a procedural decision in July 2019 denied IRS’s motion to dismiss certain claims by Fitzgerald, the court in this case has not yet issued a decision on whether the 75% safe harbor applies to vehicles produced with glider kits. See Fitzgerald Truck Parts & Sales, LLC v. United States, 391 F. Supp.3d 794 (M.D. TN 2019). At least two other court cases addressing glider kits are pending — one with D&B Truck and Equipment Sales LLC, and another involving Schneider National Leasing Inc. As with Fitzgerald, the courts in each of these cases have not yet addressed the primary issue (i.e., whether the 75% safe harbor applies to vehicles produced with glider kits). Note, in a 2017 case, the D&B court declined to “rule on the pleadings” that the safe harbor generally applied to trucks produced from glider kits; instead, the court noted that “a more robust record,” including discovery, was needed to address this issue. See D&B Truck & Equip. Sales, LLC v. United States, 2017 US Dist. LEXIS 223100 (WD KY 2017). However, the court in the Schneider case addressed other interpretive issues regarding the 75% rule. See Schneider Nat’l Leasing, Inc. v. US, 400 F. Supp.3d 782 (E.D. WI 2019). In that case, the Schneider court ruled the reference to retail price in IRC 4052(f)(1) did not include (1) the amount of any Section 4051 taxes, and (2) the amount of any transportation or delivery charges to the purchaser. The Schneider court also ruled the reference to cost of repairs/modifications in IRC 4052(f)(1) did not include any freight or delivery charges for transporting an article or parts provided by the owner to the location where the repairs/modifications were performed. Determinations as to how retail price and repair/modification costs should be calculated, for purposes of Section 4052(f)(1), are important because they may affect whether a particular sale satisfies the 75% safe harbor (assuming safe harbor applies to the sale). Keep in mind, once courts issue their respective rulings on application of the 75% safe harbor to articles produced with glider kits, those decisions may or may not be consistent with each other, may or may not be appealed by one or both parties, and may or may not change IRS’s position on the issue with respect to other taxpayers. In other words, it will be a while before the impact of these cases on other taxpayers is known.

Status of FET on glider kits litigation

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