On Aug. 25, 2021, the Seventh Circuit Court of Appeals held Schneider National Leasing Inc. (the company) was not liable for over $9 million dollars in federal excise tax. In an issue of first impression, the appeals court reversed the lower court’s decision. The crux of the case relates to whether Schneider’s program to restore 912 highway tractors using powered glider kits was treated as the manufacture of new articles or whether it met the safe harbor rule under Internal Revenue Code section 4052(f) for certain repairs and modifications not being treated as the manufacture of a new article.
Section 4051 of the Code imposes a 12% tax on the “first retail sale” of tractors used in highway transportation. Section 4052(f) allows companies to refurbish and repair highway tractors, trailers or trucks they own if the cost of the repairs do not exceed 75% of the retail price of a similar tractor (75% test).
The government argued that as a threshold matter, section 4052(f) did not apply because the use of the glider kits created a new vehicle and the analysis of whether the tractors were restored is not reached. The Seventh Circuit disagreed, ruling that the section 4052(f) safe harbor does not contemplate a measurement for repairs or modifications apart from the 75% test. Thus, applying the 75% test is how a company determines if there was a repair of a taxable article or, if the taxpayer fails the test, the manufacture of a new vehicle. Further, it held that in applying the 75% test, the appropriate measurement for the retail price of a comparable new article is the market price in ordinary, arms-length transactions, of a single comparable vehicle. Thus, the government’s argument that Schneider’s volume discount used to purchase new comparable trailers was not a comparable price for purposes of the 75% test.
As a result, in applying the 75% test, the Seventh Circuit court of appeals found that Schneider’s refurbished tractors were eligible for the safe harbor rule under section 4052, excluding the tractors from excise tax under section 4051.
This case is significant for the trucking industry and others companies with large fleets of highway tractors, trucks or trailers that refurbish their vehicles instead of purchasing new fleet vehicles. The Schneider case is the first appeals court to rule on this issue and set forth guidance on how to apply the section 4052(f) test.
The government, however, has been litigating the issue of whether the section 4052(f) test applies to powered glider kits and applying the tests that were rejected by the court to other taxpayers across the country. In another case involving Fitzgerald Truck Parts and Sales, the nation’s largest glider kit manufacturer, the IRS has asserted collection of $83 million in taxes and penalties for a similar issue; this case is still in litigation in Tennessee.
For more information on the Seventh Circuit’s ruling, refer to Schneider National Leasing, Inc. v. United States.
For application of the section 4052(f) test, consult your tax advisor.