Prefabricated Home Builder Argues 'Toters' Not Subject to Excise Tax

I. PARTIES:

A. For Appellant:

Department of Justice

Robert J. Branman, Attorney, Appellate Section, Tax Division

Frank M. Dale, Jr., Trial Attorney, Tax Division

Lynne M. Murphy, Trial Attorney, Tax Division

Brian P. Kaufman, Trial Attorney, Tax Division

Candice M. Turner, Trial Attorney, Tax Division

Office of United States Attorney

Frank Maxwell Wood, United States Attorney

H. Randolph Aderhold, Jr., Assistant United States Attorney

Melanie D. Wilson, Assistant United States Attorney

III. JUDGE: Wilbur D. Owens, Jr.

[3] A second issue is presented if the district court's expansive interpretation of the temporary excise tax regulation is upheld. Horton challenges the district court's conclusion of law that Horton was liable for the excise tax, rather than the dealer who sold the vehicles to Horton. Because this conclusion is at odds with the district court's findings of fact, this issue would benefit from oral argument.

STATEMENT REGARDING ORAL ARGUMENT

TABLE OF CONTENTS

TABLE OF AUTHORITIES

STATEMENT OF JURISDICTION

STANDARD OF REVIEW

ISSUES PRESENTED FOR REVIEW

STATEMENT OF THE CASE

I. Proceedings in the Court Below

II. Statement of Facts

SUMMARY OF THE ARGUMENT

ARGUMENT AND AUTHORITIES

I. Temporary excise tax regulation § 145.4051-1(e)(1), as interpreted, is invalid because it goes beyond the plain meaning of the statute

CONCLUSION

CERTIFICATE OF COMPLIANCE WITH TYPE-VOLUME LIMITATION

*Chevron, U.S.A., Inc. v. Natural Res. Defense Council, Inc., 467 U.S. 837 (1984)

Christensen v. Harris County, 529 U.S. 576 (2000)

Coggin Auto. Corp. v. Commissioner, 292 F.3d 1326 (11th Cir. 2002)

Consolidated Bank, N.A. v. United States Dep't of Treasury, 118 F.3d 1461 (11th Cir. 1997)

Crane v. Commissioner, 331 U.S. 1 (1947)

Davenport Recycling Assocs. v. Commissioner, 220 F.3d 1255 (11th Cir. 2000)

Estate of Cowart v. Nicklos Drilling Co., 505 U.S. 469 (1992)

Hanover Bank v. Commissioner, 369 U.S. 672 (1962)

Helvering v. San Joaquin Fruit & Inv. Co., 297 U.S. 496 (1936)

Holmes Limestone Co. v. United States, 946 F. Supp. 1310 (D.C. Ohio 1997)

*In re White Trailer Corp., 266 B.R. 390 (Bankr. N.D. Ind. 2000)

Indiana Family & Soc. Servs. Admin. v. Thompson, 286 F.3d 476 (7th Cir. 2002)

INS v. Cardoza-Fonseca, 480 U.S. 421 (1987)

Limited, Inc. v. Commissioner, 286 F.3d 324 (6th Cir. 2002)

*Lorillard v. Pons, 434 U.S. 575 (1978)

*McLaulin v. Commissioner, 276 F.3d 1269 (11th Cir. 2001)

Old Colony R.R. Co. v. Commissioner, 284 U.S. 552 (1932)

Porter v. Commissioner, 288 U.S. 436 (1933)

*Ruan Fin. Corp. v. United States, 976 F.2d 452 (8th Cir. 1992)

Tax and Accounting Software Corp. v. United States, 301 F.3d 1254 (10th Cir. 2002)

TeamBank N.A. v. McClure, 279 F.3d 614 (8th Cir. 2002)

Thomas Jefferson Univ. v. Shalala, 512 U.S. 504 (1994)

Turcotte v. United States, 55-1 U.S.T.C. paragraph 49,078 (S.D. Cal. 1954)

*US. Freightways Corp. v. Commissioner, 270 F.3d 1137 (7th Cir. 2001)

*United States v. Howle, 166 F.3d 1166 (11th Cir. 1999)

*United States v. Mead Corp., 533 U.S. 218 (2001)

United States v. Ron Pair Enters., 489 U.S. 235 (1989)

Vons Cos., Inc. v. United States, 51 Fed. Cl. 1 (2001)

West v. Village Ford-Mercury, Inc., 567 S.E. 2d 355 (Ga. Ct. App. 2001)

Statutes and Rules

24 CFR 3280.2

26 U.S.C. §§ 4051-4053

28 U.S.C. § 1291

28 U.S.C. § 1340

28 U.S.C. § 1346

28 U.S.C. §§ 1340

5 U.S.C. § 553(b)-(d)

APA § 553(b)(3)(A) & (B)

Fed. R. Civ. P. 26(b)(4)(C)

FED.R.APP.P. 4(a)(1)(B)

Internal Revenue Code § 4051

Internal Revenue Code § 4051(a)(1)(C) and (D)

Internal Revenue Code § 4051(a)(1)(E)

Internal Revenue Code § 4052(3)(B)

Internal Revenue Code § 4052(a)

Internal Revenue Code § 4052(a)(1)

Internal Revenue Code § 4052(a)(3)(A)

Internal Revenue Code § 4053(1) and (3)

Internal Revenue Code § 4061

Internal Revenue Code § 6501(a)

Internal Revenue Code § 7805(e)

Internal Revenue Code §§ 4051-4053

Local Rule 28-1(c)

O.C.G.A. 11-2-401(2)

O.C.G.A. § 40-1-1

O.C.G.A. § 48-8-1 et seq. (2002)

Regulations

26 CFR § 145.4051

Temporary Excise Tax Regulation 145.4051-1(e) xiii

Temporary Excise Tax Regulation § 145.4051-1

Temporary Excise Tax Regulation § 145.4051-1(a)(iii)

Temporary Treasury Regulation 145.4052-1

Treasury Regulation § 48.4061(a)-3(c)

Treasury Regulation § 48.4061(a)-3(c)

Treasury Regulation § 48.4061(d)

Miscellaneous

1 MERTENS LAW OF FED. INCOME TAX., § 3:10 (2002)

H.R. REP. No. 100-1104, 1988-3 C.B. 473, 668

IRS PUBLICATION 510 (rev. 2002)

MICHAEL I. SALTZMAN, IRS PRACTICE AND PROCEDURE ¶ 3.02[3] (rev. ed. 2002)

RANDOM HOUSE WEBSTER'S UNABRIDGED DICTIONARY 1743, 2007 (2d ed. 2001)

Rev. Rul. 87-85,1987-2 C.B. 251

Rev. Rul., 64-241, 1964-2 C.B. 412

Samuel B. Sterrett, Use of Industry Definitions in Interpretation of the Internal Revenue Code: Towards a More Systematic Approach, 16 VA. TAX REV. 1, 4 (1996)

Surface Transportation Assistance Act of 1982, Pub. L. No. 97-424, Title V, 96 Stat. 2174

T.D. 6648,1963-1 C.B. 197

T.D. 7882, 1983-2 C.B. 274

U.S. CONST., art. 1, § 8, cl.1

§ 6111 of the Technical and Miscellaneous Revenue Act of 1988, Pub. L 100-647, 102 Stat. 3342, 3713

§ 709 of the Revenue Act of 1938, Revenue Act of 1938, Pub. L. No. 75-552, 52 Stat. 447, 26 U.S.C.A. Int. Rev. Acts, p. 1147

[5] The district court had jurisdiction over the person of defendant and the subject matter of the litigation pursuant to 28 U.S.C. §§ 1340¹ and 1346²[.]

[6] This Court's jurisdiction is conferred by 28 U.S.C. § 1291.³

[7] This appeal is from an amended final judgment that disposes of all parties' claims. (R: 73.) The district court entered a judgment on November 12, 2002 (R: 69), and an amended final judgment on January 7, 2003 (R: 73). Also on January 7, 2003, Horton Homes filed its notice of appeal. (R: 74.) This appeal is, therefore, timely. FED.R.APP.P. 4(a)(1)(B).

[9] The second issue, which must be addressed only if the temporary excise tax regulation is upheld, challenges the district court's legal conclusion that Horton Homes, the buyer, was the party responsible for any excise tax determined to be due, when normally, the seller is the responsible party. This legal conclusion, which is contrary to the district court's findings of fact, is a misapplication of a rule of law that is subject to de novo review. Davenport Recycling Assocs. v. Commissioner, 220 F.3d 1255, 1258-59 (11th Cir. 2000).

II. If the temporary excise tax regulation is valid, why is the dealer not liable for the tax on the "first retail sale"'?

[10] On March 22, 2001, Horton Homes filed a complaint with the United States District Court for the Middle District of Georgia, seeking a refund of excise taxes in the total amount of $80,652, including penalties and interest it had paid for the quarters in issue.⁵ (R: 55, Ex. A-2 ¶¶ 9.) On August 10, 2001, the United States filed an answer and counterclaim seeking to recover the unpaid balance of the excise tax assessments totaling $426,660.86, plus interest. (R: 55, Ex. A-3 ¶ 10.) Ultimately, the United States conceded that no penalties were due, and payments Horton Homes had made for penalties, together with a $200 payment Horton Homes made in October 2001, would be credited toward interest for the respective quarters. (R: 55, Ex. A-3 ¶¶ 12, 13, 14.) The government amended its Answer and Counterclaim to reflect this concession and reflect that Horton Homes' total payments applied to its assessments equaled $80,852 and that the unpaid excise taxes for the quarters in issue now totaled $349,334.48. (R: 55, Ex. A-3 ¶¶ 12, 15.)

[11] Trial of the issues was held before The Honorable Wilbur D. Owens, Jr. on September 24 and 25, 2002. The evidence consisted of a stipulation of the "Material Undisputed Facts Established by The Pleadings, Depositions, or Admissions of the Parties" (R: 55, Ex. A), exhibits introduced by plaintiff or defendant, and oral testimony received at trial (R: 66 and 67).⁶ Judgment was entered by Judge Owens on November 12, 2002 (R: 69), and an Amended Judgment was entered January 7, 2003, on all issues in favor of Defendant. (R: 73.) Horton Homes timely filed a Notice of Appeal on January 7, 2003.⁷ (R: 74.)

II. Statement of Facts.

[12] Horton Homes manufactures homes at its plant in Eatonton, Georgia. (R: 55, Ex. A-1 ¶¶ 1, 2.) The manufactured homes are designed and used as permanent dwellings, and, once installed at the owner's location, they are rarely moved. (R: 66-25.) Their design and manufacture is regulated by the Housing and Urban Development ("HUD") Code. (R: 66-22, 50.) Manufactured homes, which are outfitted as dwellings, do not transport people or property over the roads. (R: 66-12, 40, 121, 122.) (See Appendix to Brief, 4.)

[13] In contrast, trailers and semitrailers, which are designed to transport property over the roads, are not designed or used as dwellings, not regulated by HUD, and have a road life of over a million to a million and one-half miles. (R: 66-121, 209, 210.) The Internal Revenue Service has never claimed that Horton Homes' manufactured homes were trailers or semitrailers subject to the excise tax under Code § 4051, and has not, to Horton Homes' knowledge, made that claim elsewhere. (R: 66-42, 43, 48, 66.)

[14] Horton Homes uses vehicles known in the industry as "toters" to transport the manufactured homes and related equipment and supplies from its manufacturing facility to retail dealers in Georgia and the surrounding region, a trip generally of less than 300 miles. (R: 55, Ex. A-1 ¶ 3; R: 66-24, 109, 210.) It is these toters that the government seeks to tax. (R: 68-2.)

[15] During the quarters in issue, Horton Homes purchased 75 toters from LJL Truck Center, a dealership located in Macon, Georgia ("LJL"). (R: 55, Ex. A-5 ¶ 21, 22.) LJL specially ordered these toters from Ford Motor Company ("Ford") or International/Navistar ("International") with extra short wheel bases and brakes for straight truck application, so that the vehicles had no other practical use other than to transport manufactured homes and their equipment and supplies. (R: 55, Ex. A-5, 6 ¶¶ 23, 29, 30, 32; R: 66-33, 34, 66, 72, 73, 109; R: 68-1.)⁸

[16] Once the vehicles were manufactured by Ford or International, LJL and Horton arranged to have the vehicles delivered to Double Eagle, a company that specialized in installing sleepers, where a combination sleeper berth and tool box was installed. (R: 55, Ex. A-6 ¶ 28; R: 68-1.) The vehicles were then driven by a Kingsley-Fisher driver from Double Eagle to Kingsley-Fisher, a company in Centralia, Illinois. (R: 55, Ex. A-6 ¶ 28; R: 66- 184; R: 68-1.) Kingsley-Fisher installed a vertical hitch designed for the transport of manufactured homes, coil spring boxes, fenders, a spare 200 gallon fuel gas tank, a light and mirror bar on top, a wide load sign in front, lighting and a $40 controller for electric brakes that were temporarily installed on the manufactured homes during transport. (R: 66-184, 185; R: 68-2.) The work performed by Kingsley-Fisher and Double Eagle converted the incomplete vehicles from ones that had no function to toters that were fully capable of transporting manufactured homes. (R: 66-58, 59, 193, 194, 203, R: 68-2.) The toters all had gross vehicle weight ratings of less than 33,000 pounds, and the work performed by Kingsley Fisher did not change that rating. (R: 55, Ex. A-6, 7 ¶¶ 33, 34.)

[17] As dealer, LJL was involved in the transaction from the time the toters were ordered until after they were delivered to Horton Homes, and LJL made the post-delivery inspection and started the warranty. The toters could not be placed in service until the inspection was made. At that time, LJL was paid and endorsed over the manufacturer's certificates of origin to Horton. (R: 66-30, 31, 77, 84, 85.) LJL arranged for delivery of the manufactured homes from Ford or International to Double Eagle and discussed delivery dates with Kingsley-Fisher. (R: 76.) LJL inspected all the vehicles once they were delivered by Kingsley-Fisher to Horton Homes in Eatonton, Georgia. (R: 66-30, 84, 85.) LJL was fully aware of the purposes for which Horton Homes purchased the vehicles and how they were equipped. (R: 66-27, 71.) LJL did not pay federal excise taxes on the vehicles because it understood that the toters were not tractors and that no excise taxes were due. (R: 66-80.)⁹ Horton Homes had the same understanding, and this understanding remained after an earlier excise tax audit by the government for prior years. (R: 66-45.)

[18] Tractors and toters have different functions, and these functions are not interchangeable. In common parlance, tractors are used to move commercial trailers and semitrailers, and toters are used to move manufactured homes. A tractor cannot move a manufactured home, and, for a variety of reasons, a toter cannot move a trailer or semitrailer. (R: 66-25, 26, 109.) First, a toter does not have a brake package that can connect to and control the air brakes required on a commercial trailer or semitrailer. (R: 66-74, 80, 109, 110, 111, 112.) Second, the wheel base of a toter is so short that a fifth wheel cannot be positioned far enough from the cab to keep the front of the semitrailer from colliding with the toter's cab on turns. (R: 66-100, 116, 187.) Third, a toter does not have enough traction to pull and stop a full trailer. (R: 66-117.) There are many other differences, both major and minor between toters and tractors -- for example: tractors are heavier duty than toters and have much longer road lives. (R: 66-31, 209.)

[19] The federal excise tax in issue is applicable to trucks with gross vehicle weights in excess of 33,000 pounds and to "tractors of the kind chiefly used for highway transportation in combination with a trailer or semitrailer." (Emphasis added.) Internal Revenue Code §§ 4051-4053, as in effect during the periods in issue ("Code").¹⁰ Horton Homes uses special purpose vehicles, referred to in the industry as "toters," to transport its manufactured homes and related equipment from its plant in Eatonton, Georgia to dealers in the surrounding region. The toters have no practical use other than to transport manufactured homes and their equipment. The toters all have gross vehicle weights less than 33,000 pounds and are not subject to the excise tax as trucks. Also, the toters cannot be used in combination with a trailer or semitrailer, and so, under the plain wording of the statute, are not covered by the provision taxing tractors, either.

[20] However, the district court relied on temporary excise tax regulation § 145.4051-1(e) to find Horton Homes' toters subject to tax. That regulation, which purports to define the word "tractor," states that "[t]he term 'tractor' means a highway vehicle primarily designed to tow a vehicle, such as a trailer or semitrailer, but does not carry cargo on the same chassis as the engine." (Emphasis added.) As interpreted by the district court, that temporary regulation converts a toter into a taxable tractor. We submit that such interpretation goes beyond the plain words of the statute by imposing a tax on vehicles (toters) that are not used in combination with trailers or semitrailers, but are used in combination with something else -- in this instance, manufactured homes.

[21] As the testimony showed without doubt, Horton Homes' manufactured homes are not "trailers or semitrailers." They are designed and function as permanent dwellings. They do not carry people or property, as trailers and semitrailers are designed to do. If the manufactured homes were considered "trailers or semitrailers," they too would be subject to the same excise tax that the Internal Revenue Service is trying to impose on Horton Homes' toter. An entire industry would then be taxed under Code § 4051 that has never been subject to that tax before.¹¹

[22] As written, the statute does not apply to manufactured homes, nor does it apply to the vehicles that transport manufactured homes. The statute is simple, unambiguous and symmetrical: trailers and semitrailers are subject to the excise tax and the vehicles that pull them are subject to the tax. Manufactured homes are not subject to the excise tax and the vehicles that transport them are not subject to the tax. As interpreted by the district court, the temporary excise tax regulation makes the taxing scheme convoluted, ambiguous and asymmetrical: manufactured homes (which are not trailers or semitrailers) are not subject to tax, but the vehicles that transport them are subject to tax, because for that purpose, the manufactured homes are considered as trailers or semitrailers. The temporary excise tax regulation that expands the statute beyond its plain meaning is invalid.

II. Second Issue.

[23] The burden of the excise tax generally falls on the dealer, who is then required to remit taxes on a semimonthly basis and to file excise tax returns on a quarterly basis and report tax on the first retail sale of taxable items during that quarter. Code § 4052(a)(1). If a person uses a taxable item before the first retail sale for purposes other than for further manufacture, then the user becomes liable for the tax.

[24] The district court found that the first retail sale from LJL to Horton occurred after Kingsley-Fisher converted the incomplete vehicles to toters that were fully capable of transporting manufactured homes. ("[T]he 'first retail sale' occurred upon completion of the conversion of the incomplete chassis cabs into toters." (R: 68-5.) His findings are consistent with the conclusion that the only use made of the vehicles prior to the first retail sale was a nontaxable use for further manufacturing. Accordingly, the general rule applies, and the excise tax (if there is one) should have been reported and paid by the dealer, rather than by Horton Homes.

A. Introduction.

[25] The excise tax in issue is imposed on trucks with gross vehicle weights of 33,000 pounds or less and on "tractors of the kind chiefly used for highway transportation in combination with a trailer or semitrailer."¹²

[26] All Horton Homes' toters, which are used exclusively to transport manufactured homes and their equipment and supplies, have gross vehicle weights of 33,000 pounds or less, and so are exempt from the tax as trucks. (R: 55, Ex. A-1 ¶ 3; R: 55, Ex. A-6, 7 ¶¶ 6, 7.)¹³ However, Judge Owens concluded that the toters were tractors "described in the statute and regulations." (R: 68-5.)

[27] Not all tractors are subject to the excise tax under Code § 4051 et. seq. According to the explicit language of the statute, only "[t]ractors of the kind chiefly used for highway transportation in combination with a trailer or semitrailer" are subject to tax. In the court below, the government did not contend that Horton Homes' manufactured homes were trailers or semitrailers (which would make the manufactured homes subject to tax). Rather, it contended that temporary excise tax regulations legitimately expanded the scope of the statute beyond its actual words, and the expansive words of the regulations controlled, rather than the clear words of the statute.

[28] Temporary excise tax regulation § 145.4051-1(e)(1)(i) states: "The term 'tractor' means a highway vehicle primarily designed to tow a vehicle, such as a trailer or semitrailer, but does not carry cargo on the same chassis as the engine."¹⁴ (Emphasis added.) The district court agreed that the temporary regulations, which add ambiguity rather than clarity to the statute, controlled. Appellants take issue with that conclusion.

[30] The words "trailer or semitrailer," are used in Code § 4051 in the normal industry sense to refer to vehicles that haul freight. See, e.g.,, Random House Webster's Unabridged Dictionary 1743, 2007 (2d ed. 2001) ("semitrailer" is "a detachable trailer for hauling freight, with wheels at the rear end, the forward end being supported by the rear of a truck tractor when attached"; "trailer" is "a large van or wagon drawn by an automobile, truck, or tractor, used esp. in hauling freight by road.") "[A] word that is not statutorily defined should generally be interpreted using its ordinary, contemporary, common meaning . . . ." 1 Mertens Law of Fed. Income Tax., § 3:10 (2002). "Had Congress wished unique or specialized meanings to attach to any of these terms, it readily could have taken the obvious and usual step either of including a specialized meaning in the definitions section of the statute or by using clear modifying language in the text of the statute." Consolidated Bank, N.A. v. United States Dep't of Treasury, 118 F.3d 1461, 1464 (11th Cir. 1997).

[31] This rule applies with equal or greater force in taxing statutes. Old Colony R.R. Co. v. Commissioner, 284 U.S. 552, 560 (1932) ("The legislature must be presumed to use words in their known and ordinary signification . . . . This rule is applied to taxing acts . . . ."). Accord Helvering v. San Joaquin Fruit & Inv. Co., 297 U.S. 496, 499 (1936); Crane v. Commissioner, 331 U.S. 1, 6 (1947); Hanover Bank v. Commissioner, 369 U.S. 672, 687 (1962); United States v. Ron Pair Enters., 489 U.S. 235, 242 (1989). As noted by former United States Tax Court Chief Judge Samuel B. Sterrett, "the primary assumption of Congress, and all who read, interpret, and apply the Code (from the Treasury Department and the Internal Revenue Service . . . to the individual filling out his or her 1040EZ) should be that the words in the Code carry their common and ordinary meaning to their intended audience." Samuel B. Sterrett, Use of Industry Definitions in Interpretation of the Internal Revenue Code: Towards a More Systematic Approach, 16 Va. Tax Rev. 1, 4 (1996).

[32] Congress clearly imposed a tax on trailers and semitrailers weighing more than 26,000 pounds, and it imposed a tax on the vehicles that pull trailers and semitrailers: "Tractors of the kind chiefly used for highway transportation in combination with a trailer or semitrailer." There is absolutely no ambiguity under the statute about the words "trailers and semitrailers." At least none is presented by this case.

[34] There is no contention that the excise tax applies to Horton Homes' manufactured homes, which would be the case if they were trailers or semitrailers. Code § 4051(a)(1)(C) and (D). The government repeatedly emphasized that manufactured homes were not trailers or semitrailers. (R: 66-42, 43, 48, 66.) In closing argument in the court below, Defendant admitted that manufactured homes were not trailers or semitrailers:

[37] Lack of consistency in an agency position is a prime reason to disregard the position. See, e.g., U.S. Freightways Corp. v. Commissioner, 270 F.3d 1137, 1139 (7th Cir. 2001) ("[L]ack of any sound basis behind the Commissioner's interpretation, coupled with a lack of consistency on the Commissioner's own part, compels us to rule in favor of [the taxpayer]"); Thomas Jefferson Univ. v. Shalala, 512 U.S. 504, 515 (1994); citing INS v. Cardoza-Fonseca, 480 U.S. 421, 446, n.30 (1987). ("[A]n agency's interpretation of a statute or regulation that conflicts with a prior interpretation is entitled to considerably less deference than a consistently held agency view.") The inconsistency of the IRS' position here, without any material change in the law, is reason enough to invalidate the regulation.

[39] Congress was aware of and approved treasury regulation § 48.4061(a)-3(c) when it enacted § 4051(a)(1)(E) because it used the same words as in Code § 4061.¹⁶ Any interpretation of temporary excise tax regulation § 145.4051- 1(e)(1) that goes beyond the Code and prior treasury regulation is unjustified.

[40] It is possible to interpret the temporary excise tax regulation in question consistently with the prior treasury regulation and with the words of the statute itself. Temporary excise tax regulation § 145.4051-1(a)(iii) mirrors the words of the statute:

[43] A regulation receives the force of law if it is "(1) within the granted power of the agency; (2) issued pursuant to proper procedure; and (3) reasonable." See MICHAEL 1. Saltzman, IRS Practice and Procedure ¶ 3.02[3] [a] (rev. ed. 2002). (See Appendix to Brief, 1.) The proper procedure for issuing regulations is spelled out by the Administrative Procedure Act ("APA"), which requires an agency seeking to adopt a "substantive" rule or regulation to (1) publish a notice of proposed rule making in the Federal Register; (2) give interested persons an opportunity to comment on the proposed rule; and (3) postpone the effective date of the rule until 30 days after publication in the Federal Register. 5 U.S.C. § 553(b)-(d).

[44] Two exceptions apply. Under APA § 553(b)(3)(A)&(B), notice-and-comment procedures do not apply "(A) to interpretive rules, general statements of policy, or rules of agency organization, procedure, or practice; or (B) when the agency for good cause finds (and incorporates the finding and a brief statement of reasons therefor in the rules issued) that notice and public procedure thereon are impracticable, unnecessary, or contrary to the public interest." The Treasury failed to complete all APA steps for notice- and-comment and used the "good cause" exception to issue temporary regulations §§ 145.4051-1 and 145.4052-1 which have remained temporary for almost 20 years. See T.D. 7882, 1983-2 C.B. 274.

[45] In 1988, Congress severely restricted the type of procedure the Treasury could use to issue temporary regulations like the ones in issue. Code § 7805(e) requires any temporary regulation issued after November 20, 1988, to be issued as a proposed regulation (thereby providing for notice-and-comment) and provides that "[a]ny temporary regulation shall expire within 3 years after the date of issuance of such regulation." Congress made its direction clear 14 years ago but the Treasury still has taken no action to bring these disputed regulation within the spirit of the Congressional mandate.

[46] Even though Treasury did not go through the formal notice- and-comment procedure, it informally solicited comments from interested persons, who responded with concern. The National Truck Equipment Association submitted comments to the Department of the Treasury by cover letter dated November 30, 1983. (See Appendix to Brief, 2.) The comments addressed a number of problems with the temporary regulations, including the definition of "tractor" in the regulations, and the NTEA specifically urged the Treasury to define "tractor" with "greater specificity so that distributors and manufacturers will be aware of the vehicles on which tax must be paid." The comments went on to state the following:

a. The temporary regulation brings ambiguity, not clarity, to the taxing scheme.

[48] The temporary regulation requires the words "trailers or semitrailers" as used in Code § 4051(a)(1)(C) and (D) to have different meanings than those same words when used in Code § 4051(a)(1)(E). That makes no sense and is contrary to a fundamental tenet of statutory construction, noscitur a sociis. Courts should use the words around an undefined word to help deduce its meaning, Limited, Inc. v. Commissioner, 286 F.3d 324, 333 (6th Cir. 2002).

[49] Furthermore, the words "such as," while seeming innocuous, leave open the possibility that anything that moves over the road could be treated as a trailer or semitrailer. This is contrary to the purpose of regulations which should illuminate taxpayers, not leave them in the dark about what is taxed and what is not. As this Court said in Coggin Auto. Corp., 292 F.3d at 1333, "a taxpayer deserves the night to be able to predict in advance what the tax consequences of [a] transaction will be with reasonable certainty." Today, a manufactured home is treated as a "vehicle such as a trailer or semitrailer," whereas, yesterday, it was not. Tomorrow, a bandstand on wheels might be a "vehicle such as a trailer or semitrailer," whereas yesterday, it was not. See, e.g., Rev. Rul., 64-241, 1964-2 C.B. 412. As interpreted, these regulations will multiply tax controversies rather than reduce them.

b. The regulation, as interpreted, taxes an industry that has not been previously taxed under Code § 4051 or § 4061.

[50] The government admits that manufactured homes have not been subject to the tax under Code § 4051 or § 4061. However, if suddenly the vehicles that pull those homes are taxable because manufactured homes are "vehicles such as trailers or semitrailers," then what keeps the IRS from deciding to issue another regulation or ruling, without notice-and-comment, taking the position that, for purposes of Code § 4051(a)(1)(C) and (D), "vehicles such as trailers and semitrailers" are themselves subject to the excise tax, and that manufactured homes fit that description. The district court decision in this case expands the tax base to a new industry beyond the statutory bounds. This decision, as well as any future IRS position to tax manufactured homes, directly usurp the taxing authority delegated solely to Congress. U.S. Const., art. 1, § 8, cl.1. "[T]he Congress, and only the Congress, has the power to make law." Vons Cos., Inc. v. United States, 51 Fed. Cl. 1, 12 (2001). This is undoubtedly the reason that the scope of a taxing provision should be resolved liberally in favor of taxpayers. Holmes Limestone Co. v. United States, 946 F. Supp. 1310, 1319 (D.C. Ohio 1997), aff'd per curiam, 98-2 U.S.T.C. ¶ 70, 103 (6th Cir. 1998); Porter v. Commissioner, 288 U.S. 436, 442 (1933). (This is in contrast to the interpretation of Code provisions dealing with deductions, exemptions and exclusions, which are narrowly construed.) 1 Mertens Law of Fed. Income Tax. § 3:09 (2002).

[51] The transport of manufactured homes is subject to fees and taxes not required for the transport of trailers and semitrailers. For example, Horton pays $250,000 to $500,000 a year to move homes in Georgia and the surrounding states. (R: 66-32.) Those fees are not payable for the transport of trailers and semitrailers. It is for Congress to decide whether or not it is appropriate to subject manufactured homes or the specialized vehicles that transport them to the excise tax imposed by Code § 4051, in light of the different regulatory and taxing schemes to which they are subjected and in light of the different uses to which they are put. The temporary regulation itself, and the interpretation of it taken by the IRS in this case -- with no public notice or comment -- is entitled to no deference.

II. Second Issue. Even if the toters are determined to be tractors, Horton Homes is not liable, because Horton is not the dealer and made no taxable use of the vehicles before the first retail sale.

[52] The applicable provisions of the Code are set out in §§ 4051(a)(1) and 4052(a)(1) and (3). The general rule is expressed in Code § 4051(a)(1) that the excise tax is imposed on the "first retail sale." The consistent understanding and interpretation of that provision, which is not challenged in this case, is that the burden of the tax generally falls on the dealer. See, e.g., IRS Publication 510 (rev. 2002), Excise Taxes for 2002 at 23, Retail Tax on Heavy Trucks, Trailers, and Tractors, ("The seller is liable for the tax."). (See Appendix to Brief, 3.) See also, In re White Trailer Corp., 266 B.R. 390, 395 (Bankr. N.D. Ind. 2000) ("The language of § 4051 contains no indication that it imposes a tax on the buyer which the seller is required to collect and remit to the IRS."); United States v. Howle, 166 F.3d 1166 (11th Cir. 1999) (conviction in criminal case based on assumption that tax burden is on dealers.) This tax is unlike most state sales taxes, which impose the ultimate tax burden on the buyer. See, e.g., O.C.G.A. § 48-8-1 et seq. (2002).

[53] By the time the IRS completed its audit in this case, the statute of limitations barred the assessment and collection of tax from LJL for most of the quarters in issue. See Code § 6501(a) (General rule is that taxes must be assessed within three years after the return was filed.) Because the IRS could no longer pursue the party that was responsible for the tax, the IRS turned to Horton Homes for collection of the tax, even though it was not the seller and would not normally have been liable for any unpaid excise taxes. The situation here is similar to that in Turcotte v. United States, 55-1 U.S.T.C. ¶ 49,078 (S.D. Cal. 1954). In that case, a refund suit was brought under Code § 4061, the predecessor of § 4051.¹⁷ In Turcotte, the IRS sought to collect the excise tax from the purchaser. The court found that the purchaser was not the party subject to tax because it was not a manufacturer. Just "[b]ecause the tax was not collected from the manufacturer does not justify the government in attempting to impose it upon someone else." Id. at 55,568.

[54] If the general rule applies, LJL Truck Center in Macon, Georgia was the retailer who sold the toters to Horton Homes, and LJL would be liable for tax. The exception is set out in Code § 4052(a)(3)(A) which provides the following:

[56] The excise tax in question is not an esoteric tax. It is imposed on the "first retail sale" and it is incumbent on the dealer to remit to the government semi-monthly the tax collected during that period and file quarterly returns reporting the taxes paid during the quarter. See United States v. Howle, 166 F.3d at 1166. It would be impossible for a dealer to fulfill this obligation if the retail sale occurred other than when the dealer fulfilled his responsibilities, was paid for the vehicle and gave the MSO to the purchaser. That, as a matter of practicality and state law, is when the sale occurred. See O.C.G.A. 11-2-401(2); West v. Village Ford- Mercury, Inc., 567 S.E. 2d 355, 357 (Ga. Ct. App. 2001).

[57] Judge Owens further found that "Until the incomplete chassis cabs were converted into toters, they had no functional use." (R: 68-5.) This finding is consistent with a conclusion that any use before the first retail sale was in further manufacturing, which is not a taxable use and is specifically exempted from tax.

[58] The question of what constitutes an act of "manufacture" has long been a subject of dispute between the IRS and taxpayers, first with respect to former § 4061 and later, after the enactment of § 4051, with the provisions at issue in this case. This long history includes myriad examples of fact-bound determinations, some resulting in a finding of manufacture, and others resulting in a finding of no manufacture. Examples of IRS administrative determinations of this kind are compiled in Rev. Rul. 87-85, 1987-2 C.B. 251, which specifically made those examples applicable to the tax imposed by § 4051.

[59] The most recent congressional statement on this subject is contained in the legislative history accompanying a slight alteration of the language of § 4052(a), enacted in § 6111 of the Technical and Miscellaneous Revenue Act of 1988, Pub. L 100-647, 102 Stat. 3342, 3713. That legislative history, contained in H.R. Rep. No. 100-1104, 1988-3 C.B. 473, 668, summarized the law as to when acts performed on a vehicle would be considered manufacturing. The report states:

[61] The district court's ultimate findings that (i)" the 'first retail sale' occurred upon completion of the conversion of the incomplete chassis cabs into toters"; and (ii) " [u]ntil the incomplete chassis cabs were converted into toters, they had no functional use" compel a conclusion that LJL, and not Horton, was liable for any excise tax.

[63] The district court's ultimate findings of fact are consistent with the holding that the tax burden should be on the dealer, rather than Horton Homes. The legal conclusion to the contrary is clear error and should be reversed.

1. Exclusive of the exempted portions, the Brief of Appellant contains 8,296 words.

2. The Brief has been prepared in proportionally spaced typeface using Times New Roman 14 pt font in text and footnotes produced by Corel WordPerfect 8.0 software.

3. Upon request, the undersigned Counsel will provide an electronic version of this Brief and/or a copy of the Corel WordPerfect 8.0 printout to the Court. Undersigned Counsel understands that a material misrepresentation in completing the Certificate, or circumvention of the type/volume limits in Fed.R. App.P. 32(A)(7), may result in the Court's striking the Brief and imposing sanctions against the person who signed it.

[Editor's Note: The attachment has been omitted. However, this document in its entirety can be obtained through our Tax Analysts' Access Service as Doc 2003-9858 (83 original pages) [PDF].]

²"The District Courts shall have original jurisdiction, concurrent with the United States Court of Federal Claims, of:

(1) Any civil action against the United States for the recovery of any Internal-Revenue tax alleged to have been erroneously or illegally assessed or collected . . . under the Internal-Revenue laws; . . ." 28 U.S.C. § 1346.

³"The Court of Appeals . . . shall have jurisdiction of appeals from all final decisions of the District Courts of the United States . . . except where a direct review may be had in the Supreme Court." 28 U.S.C. § 1291.

⁴The temporary excise tax regulations are found at 26 CFR § 145.4051, et seq.

⁵The quarters in issue are those ending September 30, 1989, December 31, 1989, December 31, 1990, September 30, 1992, March 31, 1993, June 30, 1994, September 30, 1994, and June 30, 1995.

⁶[no footnote in original]

⁷Also, on January 7, 2003, Plaintiff filed an Objection to Defendant's Bill of Costs and an Application for Costs Under Fed. R. Civ. P. 26(b)(4)(C) (R: 75 and 76), which was not acted on by the district court.

⁸In fact, International, which was the manufacturer of 92% of the toters in issue identified the vehicles as trucks. (R: 55, Ex. A-5 ¶ 24.) All the International toters had vehicle identification numbers ("VIN") that began with "1HT, "which is the code for a straight truck, a truck with straight truck brakes. A tractor would have had a VIN number that began with "1HS." (R: 66-81, 82, 107, 108.)

⁹During the periods in issue, Horton Homes was required to pay the states between $250,000 and $500,000 a year for the special permits that were required for the transport of manufactured homes, which were not required of tractor owners for transporting trailers or semitrailers. (R: 66-32.)

¹⁰Corresponding sections of the Internal Revenue Code are found at 26 U.S.C. §§ 4051-4053.

¹¹The excise tax also is imposed on truck trailer and semitrailer chassis and bodies for use with a vehicle which has a gross vehicle weight of more than 26,000 pounds. Code § 4051(a)(1)(C) and (D).

¹²The operative provision of the excise tax, Code § 4051 (26 U.S.C. § 4051) states the following:

SEC. 4051. Imposition of Tax on Heavy Trucks and Trailers Sold at Retail.

(a) Imposition of Tax. --

(1) IN GENERAL. -- There is hereby imposed on the first retail sale of the following articles (including in each case parts or accessories sold on or in connection therewith or with the sale thereof) a tax of 12 percent of the amount for which the article is so sold:

(A) Automobile truck chassis.

(B) Automobile truck bodies.

(C) Truck trailer and semitrailer chassis.

(D) Truck trailer and semitrailer bodies.

(E) Tractors of the kind chiefly used for highway transportation in combination with a trailer or semitrailer.

(2) EXCLUSION FOR TRUCKS WEIGHING 33,000 POUNDS OR LESS. -- The tax imposed by paragraph (1) shall not apply to automobile truck chassis and automobile truck bodies, suitable for use with a vehicle which has a gross vehicle weight of 33,000 pounds or less (as determined under regulations prescribed by the Secretary.)

(3) EXCLUSION FOR TRAILERS WEIGHING 26,000 POUNDS OR LESS. --

The tax imposed by paragraph (1) shall not apply to truck trailer and semitrailer chassis and bodies, suitable for use with a trailer or semitrailer which has a gross vehicle weight of 26,000 pounds or less (as determined under regulations prescribed by the Secretary).

¹³The evidence supports a finding that the toters were trucks (i.e., they had brakes for straight truck application, 90 per cent of the vehicles in issue were designated as "trucks" by the manufacturer, they did not have "fifth wheels" for pulling commercial trailers or semitrailers and could not be equipped to pull commercial trailers or semitrailers because of their ultra-short wheel base and after frame). (R: 55, Ex. A-5, 6 ¶¶ 23, 24, 29, 30, 32; R: 66-33, 34, 66, 72, 73, 81, 82, 107, 108, 109; R: 68-1.)

¹⁴145.4051-1(e) reads as follows:

(e) Definitions. For purposes of this section:

(1) Tractor. (i) The term "tractor" means a highway vehicle primarily designed to tow a vehicle, such as a trailer or semitrailer, but does not carry cargo on the same chassis as the engine. A vehicle equipped with air brakes and/or towing package will be presumed to be primarily designed as a tractor.

(ii) An incomplete chassis cab shall be treated as a tractor if it is equipped with one or more of the following:

(A) A device for supplying pressure from the chassis cab to the brake system (air or hydraulic) of the towed vehicle;

(B) A mechanism for protecting the chassis cab brake system from the effects of a loss of pressure in the brake system of the towed vehicle;

(C) A control linking the brake system of the chassis to the brake system of the towed vehicle;

(D) A control in the cab for operating the towed vehicle's brakes independently of the chassis cab's brakes; or

(E) Any other equipment designed to make it suitable for use as a tractor.

An incomplete chassis cab which is not equipped with any of the devices set forth in paragraphs (e)(1)(ii)(A) through (E) of this section shall be treated as a truck if the purchaser certifies in writing that the vehicle will not be equipped for use as a tractor.

¹⁵Horton Homes does not manufacture self-propelled recreational vehicles (sometimes referred to as "mobile homes") or "house trailers" like "Air Streams," which are designed to be pulled from place to place over the highways, and which are specifically exempted from the excise tax by Code § 4053(1) and (3). This demonstrates Congress' intent to exempt living quarters. The fact that manufactured homes are not included in this statutory exemption is a strong indication that manufactured homes were not intended to be considered trailers or semitrailers.

¹⁶Prior to the effective date of Code § 4051, the relevant text of Code § 4061 read as follows: "There is hereby imposed upon the following articles . . . sold by the manufacturer, producer, or importer a tax of 10% of the price for which so sold . . . [t]ractors of the kind chiefly used for highway transportation in combination with a trailer or semitrailer."

¹⁷Code § 4051 was almost identical to Code § 4061, except that, under § 4061, the incidence of the excise tax was on the manufacture of the article instead of the retail sale. Under Code § 4061 the manufacturer was generally liable for the tax, just as under Code § 4051 the dealer is now generally liable.

¹⁸Judge Owen's statement "When purchased from LJL, the vehicles were incomplete chassis cabs . . . ." (R: 68-1) is enigmatic at best and facially inconsistent with the record and his conclusion that the "the first retail sale" occurred after the conversion into toters.