Firm Says Guidance Creates Excise Tax Issue for Trucking Industry

March 28, 2019

The Honorable Charles P. Rettig
Commissioner of the Internal Revenue Service
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20224

Re: Industry-wide Federal Excise Tax Issue Created by IRS Actions Contrary to the "Policy Statement on the Tax Regulatory Process"

Dear Commissioner Rettig:

On behalf of the members of the Glider Kit Association of America, Inc. (the " GKAA"), we are writing to bring to your attention a pressing industry issue affecting hundreds of small trucking businesses. The issue was created by subregulatory guidance, specifically Notice 2017-5, 2017-06 I.R.B. 779, and involves the 12 percent excise tax imposed by section 4051(a) on sales of highway tractors and the application of the section 4052(f)(1) safe harbor provision. As explained below, the notice turns almost 30 years of consistent agency action on its head and makes the safe harbor inapplicable to a sizable portion of the trucking industry, all the while bypassing the Administrative Procedure Act.¹

In the recent "Policy Statement on the Tax Regulatory Process," attached as Exhibit A, the Treasury Department and IRS committed to "a tax regulatory process that encourages public participation, fosters transparency, affords fair notice, and ensures adherence to the rule of law." Without exaggeration, Notice 2017-5 violates each and every one of these principles. On behalf of the industry, we ask to meet with you to discuss the continued viability of Notice 2017-5 in light of the Policy Statement and to explore potential ways the IRS can provide affected taxpayers clarity and certainty.

The Purpose and Scope of Subregulatory Guidance

Subregulatory guidance is a valuable and critical tool of tax administration and can be an efficient means of providing taxpayers important information about how the IRS intends to interpret the tax laws. But subregulatory guidance does not have the force or effect of law. Nor is it constrained by any of the APA's procedural requirements or safeguards. For these reasons, the IRS made several commitments to taxpayers in the recent Policy Statement:

• The IRS will not take positions inconsistent with its subregulatory guidance when such guidance is in effect;

• The IRS will not publish subregulatory guidance affecting taxpayer rights or obligations independent from underlying statutes or regulations;

• The IRS will not use subregulatory guidance to modify existing legislative rules or create new legislative rules; and

• The IRS must consider the effect of subsequent legislation, case law, rulings, and procedures when applying subregulatory guidance, which generally should apply only prospectively.

Notice 2017-5 breaches these commitments because it announced a new position that is plainly contrary to a 1991 revenue ruling still in effect. The notice appears to have been issued in haste, in the closing days of the previous administration. The notice acknowledges that it establishes a new rule not contained in the existing regulations or public guidance. In addition, the IRS is applying the notice prospectively and retroactively, reaching back years before it was published. Taxpayers did not have an opportunity to comment on the new rule, to propose alternatives, or to address the industry's historic reliance on the IRS's previous long-standing position.

Notice 2017-5 and the IRS's Attempt to Rewrite the Safe Harbor

Section 4051(a) imposes a 12 percent excise tax on the first retail sale of certain "articles," including highway tractors (i.e., heavy-duty trucks). But section 4052(f)(1) provides a safe harbor that allows previously taxed highway tractors to be substantially repaired or modified without the repair or modification being considered production or manufacture. The safe harbor sets out a simple, bright-line math test for determining whether repairs or modifications are so significant as to result in the production or manufacture of a taxable highway tractor: "if the cost of such repairs and modifications does not exceed 75 percent of the retail price of a comparable new article."

Notice 2017-5, attached as Exhibit B, announced an "interim" definition of "chassis" for purposes of applying the safe harbor. The notice first defines "chassis" broadly as "a vehicle's frame and supporting structure and all those components that are attached to it." It then gets very specific. For highway tractors, the notice sets forth a "nonexclusive list of components that are attached to and, therefore, part of a chassis." Those components are the engine, axles, transmission, drive train, suspension, exhaust after treatment system, and cab (including a chassis cab). In other words, almost the entire tractor. The notice explains that for purposes of the safe harbor statute, the IRS will use its new definition of "chassis," and therefore the safe harbor will only apply if the components specified in the notice are retained when restoring a tractor.

The effect of the notice's new definition of "chassis" is straightforward: if a worn or wrecked highway tractor lacks any of the enumerated parts, then there is no chassis to which section 4052(f)(1)'s safe harbor can apply. Even if all of the enumerated parts are present on a worn or wrecked highway tractor but are not retained in the tractor after repairs, the notice dictates that the safe harbor cannot apply.

Rev. Rul. 91-27 and Notice 2017-5's Impact on the Trucking Industry

Congress mandated the safe harbor math test in 1988, and the IRS issued Rev. Rul. 91-27, 1991-1 C.B. 192, adopting Congress's 75 percent safe harbor.

The ruling, attached as Exhibit C. uses two hypothetical scenarios to illustrate how the safe harbor applies. In the first scenario, the owner extensively restored a worn tractor, adding new components and rebuilding others. The repair cost was less than 75 percent of the price of a comparable new tractor. In the second scenario, the owner restored a wrecked tractor by combining salvaged components with a "glider kit" that it purchased. Glider kits have been used to repair highway tractors since at least the 1960s. A "glider kit" is a collection of tractor components that is sold as a kit, typically without the engine, transmission and, in some cases, the rear axle. They always include a cab. The engine, transmission, and rear axle from a previously taxed tractor are repaired and incorporated into the glider kit. The resulting refurbished tractor is referred to as a "glider."

Because the cost of repairs did not exceed 75 percent of the price of a comparable new tractor, Rev. Rul. 91-27 concluded that the safe harbor applied to the worn tractor in the first scenario. The ruling noted that the IRS would reach the same conclusion if the owner had used a glider kit to restore the tractor, provided the repair cost did not exceed the 75 percent threshold. In the second scenario, the IRS concluded that the excise tax applied because the act of restoring a wrecked tractor constitutes the manufacture of a new vehicle. However, in 1997, Congress disapproved of the IRS's worn versus wrecked distinction, and included language in section 4052(f)(1) to make clear that the statutory safe harbor applies to both worn and wrecked articles that are restored.

Rev. Rul. 91-27 is important for three reasons. First, it advised the industry that the only test under the safe harbor is a 75 percent math test, not a test based on how many or which parts or pieces were retained. Second, the ruling told taxpayers that a highway tractor can be repaired with a glider kit and still qualify for the safe harbor. Third, the ruling is still in effect and has not been revoked or modified.

There is little doubt that Notice 2017-5 was directed at those in the industry who use glider kits to repair worn or wrecked highway tractors (glider assemblers, including single-truck operators who use a glider kit to repair their only tractor) or buy highway tractors that have been repaired with glider kits (mostly independent owner-operators and small to mid-size fleets). But the trucking industry has relied on Rev. Rul. 91-27, in conjunction with the safe harbor language in section 4052(f)(1), and the complete absence of any other IRS guidance, for almost 30 years. If the cost of repairing a worn or wrecked highway tractor with a glider kit did not exceed 75 percent of the retail price of a comparable new highway tractor, most glider assemblers concluded that the safe harbor applied and did not collect excise tax upon the first use or retail sale. For the better part of the last three decades the IRS agreed. Reversing course should require more than subregulatory guidance.

Notice 2017-5 has upended the industry. Glider kits often are used to repair worn or wrecked highway tractors that lack one or more of the components enumerated in the notice. And many worn or wrecked highway tractors have badly damaged components that must be replaced with new ones when the refurbished engine and transmission are incorporated into a glider kit. If any one of the components listed in the notice's definition of "chassis" is missing or gets replaced, say, for example, the cab, Notice 2017-5 provides that the safe harbor cannot apply. This new parts-and-pieces test effectively prevents any tractor repaired with a glider kit from qualifying for the safe harbor, even if it would otherwise meet the 75 percent math test.

The notice "is effective on and after January 9, 2017," but the IRS is applying the notice retroactively, resulting in significant underpayments, penalties, and interest. This is having a devastating impact on hundreds of small businesses and sole proprietors across the United States, all of whom relied on existing IRS subregulatory guidance, namely Rev. Rul. 91-27, to their detriment, and their continued operations are in jeopardy. Even Congress is aware of the notice, having recently expressed its disapproval in the Consolidated Appropriations Act, 2018, and still the IRS has not addressed the issue.

* * * * *

The recent Policy Statement reads as though the Treasury Department and IRS had Notice 2017-5 in mind. The notice attempts to narrow unambiguous statutory language that has been on the books for more than two decades, something that should have, at the very minimum, necessitated a notice-and-comment rulemaking. Again, prior to the notice, only Rev. Rul. 91-27 provided public guidance. Without even mentioning the revenue ruling, the notice announced a new rule without giving any opportunity for public comment or any consideration of the adverse impact on the industry. It is the antithesis of the well-considered and fair subregulatory guidance that the IRS has committed to using. Those commitments were more than mere platitudes, and the IRS must address this issue head on.

Thank you for your consideration, and should you need to reach us, please contact Ken Jones at (202) 383-0825.

Sincerely,

Ken Jones
Of Counsel

N. Gerald Cohen
Of Counsel

Eversheds Sutherland (UP) LLP
Atlanta, GA

Attachments

cc:
The Honorable David J. Kautter,
Assistant Secretary for Tax Policy,
U.S. Department of the Treasury