Western Co. of North America v. U.S.

Decision Date04 March 1983
Docket NumberNo. 81-1397,81-1397
Citation699 F.2d 264
CourtU.S. Court of Appeals — Fifth Circuit
Parties83-2 USTC P 16,405 WESTERN COMPANY OF NORTH AMERICA, J & L Tank, Inc., Grayco Electrical, Inc. and Aggregate Plant Products Company, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant.

Glenn L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup, Richard W. Perkins, Michael J. Roach, Attys., Chief Appellate Section, Tax Div., Dept. of Justice, Washington, D.C., for defendant-appellant.

R. Gordon Appleman, Fort Worth, Tex., for Western Co. of North America.

Appeal from the United States District Court for the Northern District of Texas.

Before THORNBERRY, JOHNSON and HIGGINBOTHAM, Circuit Judges.

JOHNSON, Circuit Judge:

Western Company of North America won a refund of $208,008.73 in special fuels and highway use excise taxes assessed on certain of its vehicles for the taxable period 1971 through 1977. The Government appeals, contending that the district court erred in refusing to apply a regulation promulgated in 1977 to the determination of Western's 1977 tax liability, and in refusing to hold a hearing on a post-verdict dispute regarding the taxability of certain hybrid vehicles. We agree that the district court erred in its apparent determination that the 1977 regulation was invalid because a different, prior interpretation had attained the force of law, and remand for entry of judgment in favor of the Government for the taxing period 1977. We find no error in the district court's decision to resolve the post-verdict dispute on the record developed at trial.

I.

Section 4041(a) of the Internal Revenue Code of 1954 imposes a special fuel excise tax of four cents per gallon on any liquid sold or used as fuel in a "diesel-powered highway vehicle." 26 U.S.C. Sec. 4041(a). Section 4481(a) of the Code imposes a highway use excise tax on any "highway motor vehicle" with a gross weight of more than 26,000 pounds. The dispute between Western Company and the United States centers on whether certain specialized equipment-bearing trucks and trailer chassis are "highway vehicles," and thus taxable, within the meaning of sections 4041(a) and 4481(a).

Western is a corporation in the business of providing specialized services needed in drilling and operating oil and gas wells. Western's services consist primarily of cementing, 1 acidizing, 2 and fracturing 3 wells at the well sites. These functions are performed by specialized cement, acid and sand-and-water high pressure pumping machines, known as "slurrymasters," "acidmasters," and "fracmasters." The pumping units are serviced by additional specialized equipment designed to blend the cement and sand mixtures ("slurry mixers" and "blenders"), to transport the necessary dry cement, acid and sand, to pneumatically transfer these supplies from transports to storage units and to transport and unload high pressure pipe at the job sites.

The nature of Western's work demands that its equipment be mobile. The machinery is kept at district offices and dispatched, as needed, to well servicing jobs one hundred miles or more from the offices. The equipment stays on the job site for a few hours or days and is then moved onto another job or returned to the district office. To facilitate movement of the equipment, Western mounts each unit, by welding or bolting, on a truck chassis or trailer. Special capabilities are required of these equipment-bearing chassis and trailers, as well as of Western's various tractors, transports, and other trucks, by virtue of the geographic dispersion of Western's customers and the relative inaccessability of many of the well sites. About eighty percent of the average 21,841 miles annually logged by Western's service vehicles is over public highways. But many job sites are remotely situated, and can be reached only by traveling substantial distances over often rocky, muddy, uneven private roads. To meet these demands, Western's chassis and trailers are designed to be able both to travel public highways at sustained speeds with reasonable economy of operation, and to traverse difficult terrain and unimproved private roads.

The truck chassis and trailers are built by various manufacturers to Western's engineering specifications. Western's design incorporates the compromises necessary to satisfy the requisites of highway driving and off-road use. Most of Western's vehicles are equipped with a 16-speed Spencer transmission, providing high torque at low speeds, as well as the range necessary for highway operation. The vehicles' Michelin XYZ radial tires, while not providing the high traction and damage resistance of all-terrain tires designed for off-highway use, do provide a good service life on the highway and more traction than a normal highway tire in sand and loose soil, without the danger of failure due to overheating at sustained highway speeds posed by all-terrain tires. Other features, such as special frame supports and cross-member reinforcements, tandem front axles, and heavy-duty suspension systems, make the vehicles heavier and more expensive than similar commercial vehicles, thereby limiting their payload and increasing their operating costs as compared with exclusively highway vehicles. These features are, however, commonly found in heavy-duty highway trucks. Finally, the vehicles are in most cases engineered to incorporate the off-highway use features into designs acceptable for highway use without special permit. The delays and travel restrictions imposed on the movement of equipment with special permit are thereby avoided.

The issue of the taxability of Western's vehicles was tried to a jury. Western contended at trial that its vehicles were exempt from the special fuel and highway use excise taxes under a long-standing interpretation of the term "highway vehicle" as used in the manufacturer's excise tax, Sec. 4061(a) of the Internal Revenue Code of 1954, 26 U.S.C. Sec. 4061(a). Under that interpretation, vehicles are not taxable if "primarily designed" or "predominantly adapted" for use as nonhighway vehicles, even though incidental highway use may occur. Treas.Reg. 46, Sec. 316.50, T.D. 4998, 1940-2 C.B. 300; Rev.Rul. 57-440, 1957-2 C.B. 721; modified Treas.Reg. Sec. 48.4061(a)-1, T.D. 6648, 1963-1 C.B. 197. Western argued that judicial applications of the primary design standard to oil well servicing vehicles had consistently resulted in findings that the vehicles were not taxable because their design had been controlled by the demands of their specialized functions and off-road usage, see Big Three Industrial Case & Equipment Co. v. United States, 329 F.Supp. 1273 (S.D.Tex.1971), aff'd per curiam, 459 F.2d 1042 (5th Cir.1972); Otis Engineering Corp. v. United States, 376 F.Supp. 109 (N.D.Tex.1974); compare Frank Hrubetz & Co. v. United States, 412 F.Supp. 1033 (D.Or.1973), aff'd on district court opinion, 542 F.2d 512 (9th Cir.1976) and Central Engineering Co. v. United States, 306 F.Supp. 667 (E.D.Wis.1969); contra Rev.Rul. 66-61, 1960-2 C.B. 250, superseded Rev.Rul. 80-353, 1980-2 C.B. 309.

The Government denied that Western's vehicles were exempt under that standard; in addition, it argued that a definition of "highway vehicle" contained in Treasury Regulations promulgated January 13, 1977, 42 Fed.Reg. 2672, T.D. 7461 1977-1 C.B. 317 promulgating Treas.Reg. on Excise Tax on Use of Certain Highway Motor Vehicles, Sec. 41.4482(a)-1 (26 C.F.R.) and Treas.Reg. on Manufacturers and Retailers Excise Tax, Sec. 48.4041-7 (26 C.F.R.) incorporating by reference Treas.Reg. on Manufacturers and Retailers Excise Tax, Sec. 48.4061(a)-1 (26 C.F.R.), superseded all prior interpretations of the term "highway vehicle" and governed the tax status of Western's vehicles for at least the taxing period 1977. 4 The new regulation defined a "highway vehicle" as "any self-propelled vehicle, or any trailer or semi-trailer, designed to perform a function of transporting a load over public highways whether or not also designed to perform other functions," 26 C.F.R. Sec. 48.4061(a)-1(d). 5 Vehicles meeting that standard might nonetheless be exempted from taxation if their chassis were designed to carry specialized equipment and could not, without substantial structural modification be used in another function, Treas.Reg. Sec. 48.4061(a)-1(d)(i), or if their chassis were specially designed for an off-highway transportation function and that special design substantially limited or impaired public highway use, Treas.Reg. Sec. 48.4061(a)-1(d)(ii). The Government claimed that Western's vehicles fell within the 1977 regulation's definition of highway vehicle, and qualified under neither exception.

Western countered by claiming that the 1977 regulation was invalid because the long-standing judicial and administrative interpretation of the term "highway vehicle" under the narrower "primary design" test had attained the force of law through implicit congressional approval by amendments and re-enactments of the underlying statutes. Finally, Western rounded out its position by claiming that even if the new regulation applied, its vehicles qualified under two of the exemptions from taxation set out in the new regulation.

The district court wisely refrained from resolving this dispute before sending the case to the jury. Instead, it asked that the jury apply each standard in turn to the nine categories of vehicles identified by the parties. 6 The jury decided in Special Interrogatory 1 that under the pre-1977 regulation test, all of Western's vehicles except the truck and trailer chassis bearing pressurized pumping and mixing equipment were taxable. In Special Interrogatory 2, it found all vehicles to be taxable under the standards set out in the 1977 regulation. The district court, in an apparent but unstated determination that the 1977 regulation was invalid because the primary design test had, as Western contended, attained the force of law,...

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