Court: Court of Appeals for the Federal Circuit; September 12, 1997; Federal Appellate Court
The case involves Oshkosh Truck Corporation, which appeals a decision regarding the application of federal excise tax on trucks sold directly to the United States. The primary legal question concerns whether the Internal Revenue Service (IRS) correctly interpreted a regulation related to the federal excise tax on retail sales of heavy-duty trucks. The Court of Federal Claims had upheld the IRS's application of the regulation, but this decision is reversed and remanded by the Federal Circuit.
Under Section 4051(a) of the Internal Revenue Code, a 12% federal excise tax is imposed on the "first retail sale" of heavy-duty trucks and trailers. The term "first retail sale" refers to the initial sale for non-resale purposes following production or importation. Amendments to Section 4052, enacted in 1987, introduced provisions for calculating the sales price for tax purposes, including a "presumed markup percentage."
A Temporary Treasury Regulation established a single presumed markup percentage of 4% for most articles subject to Section 4051, but specified exceptions for certain items, such as trailers and remanufactured trucks, which were assigned a presumed markup percentage of 0%. This determination was based on the retail sales dynamics of those articles, indicating that they are typically sold directly by manufacturers, not through a retail distribution network.
The facts of the case indicate that between October 1987 and December 1990, Oshkosh sold approximately 3,600 High Expanded Mobility Tactical Trucks (HEMT trucks) directly to the Army, with prices ranging from $105,000 to $213,000, and one truck sold to Taiwan for $232,500, all through arms-length negotiations.
During the taxable years from April 1, 1987, to December 31, 1990, Oshkosh paid a twelve percent excise tax on the sale price of HEMT trucks but excluded the presumed markup. Following an audit, the Service determined that Oshkosh should have also paid the tax on the presumed markup, resulting in an additional tax and interest assessment of $3,068,806.67, which Oshkosh paid. After the Service disallowed a refund claim, Oshkosh filed an action in the Court of Federal Claims, asserting that the regulations requiring a presumed markup greater than zero percent were invalid. Oshkosh argued that the statute and its legislative history indicated that the presumed markup should not apply to sales where it was unnecessary to enforce the statute's intent of taxing retail rather than wholesale prices.
Oshkosh sought summary judgment; however, the court ruled in favor of the United States. The court acknowledged that Congress likely did not intend for the presumptive markup to apply to such sales but noted that Congress granted the Secretary broad discretion in implementing the law. It indicated that Oshkosh should seek relief from the Agency or Congress. The court concluded that, while it did not believe the presumed markup was necessary for the statute's purpose, Congress did not specifically instruct the Secretary to exclude all vehicles sold at retail prices.
The court highlighted that the presumptive markup rule was designed to close a loophole allowing certain vehicle sales to evade excise tax when manufacturers sold directly to customers instead of through retail dealers. Congress intended the rule to encompass all sales where manufacturers or importers collect the retail excise tax. The court clarified that the presumptive retail sales price rule should not apply in situations identified by Treasury regulations where its application is unnecessary for imposing the retail tax, such as when true arm's-length retail sales prices are established through finance leases.
The Secretary's intent in introducing the presumed markup percentage was to ensure that the tax base for taxable sales under section 4051 included either an actual or presumptive retail markup. Certain vehicles—specifically truck trailers, semitrailers, and remanufactured trucks and tractors—were exempted from the four percent markup because their retail sales are typically handled by manufacturers, making the markup unnecessary for the retail tax's purpose. This reasoning extends to Oshkosh's sales of HEMT trucks to the United States, as these trucks were specifically designed for Army requirements, sold directly by Oshkosh to the government without retail distribution involvement. The Army utilized the trucks without reselling them.
The government contended that these sales were wholesale rather than retail, but this contradicts the statutory definition of 'first retail sale,' which refers to sales made for purposes other than resale. Retail is defined as a sale for final consumption. Although the single truck sold to Taiwan was at a higher price, this did not alter the retail nature of sales to the U.S. The government's view could imply that if these were wholesale sales, they would not be taxed under the twelve percent excise tax, which is applicable only to 'first retail sales.' The Court of Federal Claims acknowledged these arguments but still upheld the Secretary's decision to impose the presumed markup, citing the Secretary's broad discretion in law implementation.
The government claims broad discretion for the Secretary to determine vehicle exemptions from the presumed markup. However, the Secretary fails to justify the different treatment of Oshkosh's HEMT truck sales, which are subject to the markup, compared to exempted direct retail sales of trailers and semitrailers. Congress intended the markup rule to apply only when necessary for tax purposes. When an agency's interpretation contradicts congressional intent, it receives no deference. Additionally, the Secretary's inconsistent treatment of similarly situated taxpayers lacks a rational basis, which undermines the principle of equal treatment under the law.
Ultimately, the Secretary exercised discretion improperly by applying the four percent markup to Oshkosh's truck sales, which are comparable to exempted sales. The Secretary's rationale does not align with congressional objectives regarding the markup. Following oral arguments, the government submitted a 'letter of clarification' without court permission, which is not allowed under court rules. Therefore, the court will not consider these new arguments. The judgment of the Court of Federal Claims is reversed, and the case is remanded for further proceedings.
