IRS Appears to Change Course on Applying Federal Excise Tax to Glider Kits
On Friday, January 17, 2014, the IRS Office of Chief Counsel (CCA) released a much anticipated memorandum on the tax treatment of chassis renovations, in which an outfitter (dealer) combines components (sometimes referred to as glider kits), to produce a highway tractor or truck chassis. The hope was that the memo would provide some clarity to the many questions that those in the dealership industry had on the previous memo released on January 7, 2013.
The memo outlines four scenarios and discusses whether the units are taxable, who is liable for the Federal Excise Tax (FET), and how the price is computed.
“The new memo seems to be an ‘about face’ of prior IRS guidance and suggests the IRS may be taking a more aggressive stance with glider kits,” says Tim Reynolds, a dealership tax principal with CliftonLarsonAllen.
The CCA report cites a court case (Boise National Leasing v. United States) where a trucking company combined new cabs, frames, and other minor components, with major components of old trucks, such as engines and axles, to produce a complete and operational truck. The court ruled this activity is considered to be manufacturing for excise tax purposes.
Repair or restoration?
In other words, it was found that the taxpayer went above and beyond the normal “repair” or “modifications” (as referenced under IRC 4052(f)(1)) that merely restored the utility or existence of the previous truck. As a result, the units in the court case were found to be subject to FET.
“It would seem that the 75 percent safe harbor is ignored as the 2014 memo recommends taxpayers no longer rely upon the advice they provided in the 2013 memo,” notes Reynolds. “In essence, you have to ask the question ‘Do I still have the same vehicle?’ or, ‘Do I have two separate vehicles?’ which still leaves this open to interpretation depending on who you ask.”
Four percent markup
In addition, the memo adds a new twist to how price is computed (reduced by the fair market value of used components from the original unit in some cases) by adding a four percent markup to the FET base.
In summary, what was supposed to have been a highly anticipated CCA that would provide clarity to the 2013 memo on glider kits, seems to only result in more confusion, a potentially higher FET base via the markup component, and suggests the IRS may be taking a more aggressive position by ignoring the 75 percent safe harbor guidance.
How we can help
CliftonLarsonAllen believes there are still many aspects of this guidance that are open to interpretation. In addition, this new guidance could potentially expose many more glider kit transactions to FET.
CLA will continue to work with the IRS and various industry groups to try to resolve these issues and provide more clarity in the near future.