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Where a plaintiff challenged the imposition of a 12 percent excise tax on rebuilt tractors under 26 U.S.C. §4051, the plaintiff must show that each refurbished tractor, when new, incurred the excise tax under §4051.
Reversed.
“For years, Fitzgerald Truck Parts & Sales, LLC built and sold highway tractors by installing old engines and transmissions from third-party salvage yards into otherwise new tractors. Ordinarily, the sale of a newly manufactured tractor triggers a 12% excise tax. … Fitzgerald believes its sales are exempt from those taxes due to its reincorporation of engines and transmissions. For support, it points to 26 U.S.C. §4052(f)(1), which authorizes a safe harbor applicable when ‘repairs or modifications’ to an existing tractor ‘do[] not exceed 75 percent of the retail price of a comparable new [tractor].’ The IRS disagreed and assessed unpaid excise taxes, penalties, and interest to the tune of $268 million. Fitzgerald sued. And it won before a jury, a verdict the government now appeals.
“We agree with Fitzgerald that §4052(f)(1) poses a bright-line, 75% test without any further qualitative inquiry, meaning its vehicles constructed with used engines and transmissions could qualify for the safe harbor. But there is more to consider, namely, that §4052(f)(2) forecloses this exemption for tractors that never triggered the excise tax when they were new. And so far, Fitzgerald has not met its burden of proving that this latter provision does not apply to its tractors. In fact, evidence suggests that at least some of those vehicles were first sold in tax-exempt transactions, … with the original purchasers being either entities abroad or state or local governments. Accordingly, to escape §4052(f)(2) and invoke the safe harbor, Fitzgerald must show that each refurbished tractor, when new, incurred the excise tax under §4051. We reverse and remand on that basis.
“Whether we approach this issue through first principles or case law, the outcome is the same: to escape §4052(f)(2), a taxpayer must prove that the respective tractor was capable of being taxed when new. In other words, §4051’s excise tax must have been payable, taking all cross-referenced statutes and regulations—including §4221—into account. And on that front, Fitzgerald seemingly comes up short. For any restored tractor lacking sufficient proof, by a preponderance of the evidence, that it incurred the excise tax under §4051 when new, Fitzgerald cannot claim the safe harbor. … The language of §4052(f)(2) does not require taxpayers to show that money was remitted to the Treasury in satisfaction of the excise tax. Rather, consistent with the statute’s plain meaning, the taxpayer must show that every tractor was ‘subject to’ and caused the imposition of §4051 when new.
“At this juncture, Fitzgerald has not done so. Again, the record reflects that at least some of the salvaged tractors acquired by Fitzgerald were likely first sold in foreign countries or to state and local governments. Fitzgerald alleges that the government gave no ‘credible evidence’ that these tractors first derived from tax-exempt sales. But beyond disregarding the government’s numerous citations to that exact kind of evidence, Fitzgerald has implicitly shirked its burden of proof. … With Fitzgerald having failed to do so, we cannot affirm the wholesale exemption of all 12,830 of the company’s tractor sales without further factfinding.
“Because the statute sets out a bright-line, 75% threshold for articles that were capable of being taxed when new, we reverse the judgment of the district court and remand for proceedings consistent with this opinion.”
