Fitzgerald Truck Parts & Sales, LLC v. United States
Docket: No. 2:19-cv-00008
Court: District Court, M.D. Tennessee; July 15, 2019; Federal District Court
The case involves the sale of glider semi-trucks and the imposition of excise taxes on those sales. Glider trucks are assembled from kits that include new parts from manufacturers such as Peterbilt and Freightliner, and are sold at prices significantly lower than new trucks. Fitzgerald Truck Parts and Sales, LLC (FTPS) has been assembling glider kits for 30 years, using worn or wrecked highway tractors that can be repaired. FTPS maintains a copy of the title from previously taxed tractors when selling glider trucks, which triggers a tax dispute with the IRS.
Under the Internal Revenue Code, a 12% federal excise tax applies to the first retail sale of certain tractors. However, repairs that do not exceed 75% of the retail price of a comparable new article are exempt from being classified as manufacturing. FTPS argues that its costs for assembling glider trucks fall within this 75% threshold, thus exempting it from the excise tax. Historically, the IRS agreed with FTPS's interpretation during audits from 1991 to 2011, confirming that no excise tax was due.
In 2014, however, the IRS initiated a new examination covering tax quarters from 2012 to 2014, ultimately asserting that FTPS owed excise taxes, penalties, and interest, claiming that FTPS was fabricating new trucks rather than repairing existing ones. Following FTPS's written protest and submission of additional documentation, the parties entered mediation to resolve the dispute.
An agreement was established stipulating that no taxes were owed up to that point, but FTPS would commence collecting excise tax on a prospective basis. This agreement was confirmed the following day in a "Mediator's Report," signed by the Mediator, the IRS Appeals Team Manager, and FTPS's representative. Despite this settlement, the IRS did not honor the terms and maintained prior tax assessments, which may have been influenced by a 2014 decision targeting the glider industry. In February 2017, FTPS paid $166,690.20 in excise taxes for one glider for each relevant tax period. Subsequently, the IRS assessed $64 million in taxes, penalties, and interest against FTPS for the 2012-2014 period. This was problematic since the taxes had not been collected at the time of sale, making it improbable for truckers to pay taxes on trucks bought several years prior.
FTPS then filed a three-count Complaint: Count I requests a refund of the excise taxes paid post-settlement; Count II asserts equitable estoppel based on previous IRS examinations and guidance; and Count III also claims equitable estoppel, citing the retroactive application of a new legal standard. The Government aims to dismiss the equitable estoppel claims and strike specific paragraphs relating to excise tax treatment of other glider dealers. The Government references the Supreme Court case Richmond v. Office of Personnel Management, emphasizing the difficulty of establishing equitable estoppel against the federal government, which has historically denied such claims unless there is evidence of "affirmative misconduct."
The Supreme Court rejected a broad rule that estoppel cannot apply against the government, emphasizing that estoppel may be considered but is not appropriate when a plaintiff seeks payment from the public treasury in violation of statutory appropriations. The case at hand differs from Richmond, as the claim regarding excise taxes on glider trucks is contentious, and there are permanent appropriations for tax refunds due to erroneous collections, governed by statutory procedures for filing claims with the IRS. The government contends that the complaint fails to assert intentional misconduct or false representation, does not meet the heightened burden to estop the United States, and overlooks key principles of federal tax law. Additionally, the Service has consistently maintained its position on the taxability of glider kits and has conducted normal audits, making FTPS's reliance on past audits unreasonable. Many of these points require resolution through summary judgment or trial to assess the facts.
The IRS has historically suggested since the 1960s that certain uses of glider kits could be considered manufacturing, raising questions about their applicability to FTPS's gliders. While the IRS claims it fulfilled its examination duties, there is no supporting evidence presented to the Court. FTPS's reliance on previous audits for subsequent tax years may not be unreasonable if the products remained consistent. For an equitable estoppel claim, there must be misrepresentation by the government, reasonable reliance by FTPS on that misrepresentation, and demonstrable detriment to FTPS. The burden of proof for estopping the government is high; FTPS must show "affirmative misconduct," which goes beyond negligence and involves intentional or reckless misleading actions by the government.
Under the Federal Rules of Civil Procedure, FTPS only needs to provide a concise claim statement to survive a motion to dismiss. The complaint asserts that from 1991 to 2014, the IRS consistently ruled that gliders repaired with glider kits were exempt from excise taxes if they met a 75% cost threshold. FTPS did not collect excise tax on gliders that fit this criterion and was examined by the IRS four times, with each examination confirming their non-taxable status. FTPS received IRS correspondence affirming that its rebuilt tractors qualified for a safe harbor provision. However, in 2014, the IRS changed its stance on the taxability of glider trucks without public notice, initiating a fifth examination and subsequently assessing FTPS approximately $64 million in taxes, penalties, and interest for gliders that had previously been deemed exempt. Additionally, the IRS appeared to treat other glider dealers more favorably than FTPS regarding the safe harbor provision.
Requiring FTPS to pay nearly $65 million in taxes, penalties, and interest, which it neither collected nor possessed, would impose an undue hardship. The allegations sufficiently support an equitable estoppel claim. The Court finds dismissal unwarranted, especially when comparing this case to the cited precedents. In Volvo Trucks of North America v. United States, the Fourth Circuit required reasonable reliance for estoppel, concluding that Volvo could not have reasonably relied on IRS agents' representations regarding compliance with tax law. In contrast, FTPS's claim is founded on consistent assurances from the IRS, including a letter from a District Director confirming compliance with a relevant Revenue Ruling. Unlike Hollow v. United States, which was decided after factual development and where the taxpayer acknowledged proper tax assessments, FTPS disputes the excise tax's applicability and asserts it received confirmation from the IRS that its gliders were not taxable. Consequently, the Government's Motion to Dismiss in Part will be denied.
Furthermore, the Government seeks to strike paragraphs 49 through 53 of the Complaint, where FTPS claims the IRS favored others by not taxing similar gliders. The Government argues that these allegations are immaterial, violate 21 U.S.C. 6103 by disclosing third-party tax information, and could mislead by suggesting unfair tax administration. Although motions to strike are generally disfavored, they can be granted under Rule 12(f) for redundant or impertinent material, but such instances are rare.
A motion to strike is only appropriate when the pleading in question bears no relation to the controversy at hand, as established in Parlak v. U.S. Immigration & Customs Enforcement. The Government's apprehensions about revealing confidential taxpayer information may be unfounded, as the allegations stem from FTPS's own observations regarding how others were treated. Concerns about 'fishing expeditions' and irrelevant information should be resolved during discovery rather than through a motion to strike. The Court finds that the paragraphs the Government seeks to strike do relate to the controversy, particularly in light of FTPS's equitable estoppel claims, which necessitate proof of misrepresentation, reliance, and harm. For instance, if FTPS discovered that other glider assemblers were informed by the IRS that their gliders were non-taxable, this could impact FTPS's claims of reasonable reliance on similar IRS advice.
As a result, the Government's Motion to Dismiss in Part and Motion to Strike are both denied. The Court accepts the factual allegations from the Complaint as true for the purposes of these motions. The Government's brief argument regarding the mediator's report violating 5 U.S.C. 574 and Fed. R. Evid. 480 is insufficient, as both the statute and the rule have exceptions not addressed by the Government. However, the Court does not need to make a determination on this matter at this time, as its conclusions remain unchanged without considering the mediation allegations. Additionally, the Court grants the Government a fourteen-day extension to respond to the Complaint, despite the recommendation that this request be made through a separate motion to avoid complications with timing.
