CenTra, Inc. v. U.S.

• Decision Date: 15 January 1992
• Docket Number: No. 91-1514,91-1514
• Citation: 953 F.2d 1051
• Parties: -1488, 92-1 USTC P 70,013 CenTra, INC. and Central Transport, Inc., Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 1051

953 F.2d 1051

69 A.F.T.R.2d 92-1488, 92-1 USTC P 70,013

CenTra, INC. and Central Transport, Inc., Plaintiffs-Appellants, v. UNITED STATES of America, Defendant-Appellee.

No. 91-1514.

United States Court of Appeals Sixth Circuit.

Argued Nov. 14, 1991.

Decided Jan. 15, 1992.

Morley Witus (argued), Eugene Driker (briefed), Barris, Sott, Denn & Driker, Detroit, Mich., John E. Young, Simpson & Moran, Birmingham, Mich., for plaintiffs-appellants.

Jennifer M. Gorland, Office of U.S. Atty., Detroit, Mich., Daniel M. Houlf, Alexandra E. Nicholaides, Trial Atty., U.S. Dept. of Justice, Tax Div., Gary R. Allen (briefed), Acting Chief, Jonathan S. Cohen, Kenneth W. Rosenberg (argued), U.S. Dept. of Justice, Appellate Section, Tax Div., Washington, D.C., for defendant-appellee.

Before MILBURN and GUY, Circuit Judges, and GRAHAM, District Judge. ^*

MILBURN, Circuit Judge.

Plaintiffs-appellants Central Transport, Inc. and CenTra, Inc. ("taxpayers") appeal from the judgment entered in favor of defendant-appellee, United States of America, in this action seeking a refund of excise taxes paid by the taxpayers. The principal issue in this case is whether the excise taxes imposed on certain heavy trucks under 26 U.S.C. § 4051 was properly imposed on American made trucks imported into the United States after sale and use in a foreign country. For the reasons that follow, we affirm.

I.

This case was submitted to the district court for decision on stipulated facts and briefs of the parties. Accordingly, the facts are undisputed.

CenTra, Inc. owned four subsidiaries, Central Transport, Inc., GLS LeasCo, Inc., Central Cartage Co., and McKinlay Transport, Inc. During the relevant time period, GLS LeasCo, Inc. ("GLS") purchased trucks manufactured in the United States by Ford Motor Company and General Motors Corporation from retail truck dealerships in Toronto, Canada. GLS then leased the trucks in Canada to its subsidiary, McKinlay Transport, which used the trucks in its long-haul operations in Canada and the United States until the trucks were no longer fit for long-range hauling. At that point, GLS imported the trucks into the United States and leased them to Central Cartage for use in short-haul operations within the United States.

The Internal Revenue Service determined that the leases between GLS and Central Cartage constituted "first retail sales" within the meaning of 26 U.S.C. § 4051 ¹ and, by letter of October 23, 1986, asserted tax liabilities against GLS in the sum of $869,453.67, inclusive of penalties and interest. On June 13, 1988, CenTra, on behalf of GLS, paid the tax liabilities in full, including penalties and interest. On June 15, 1989, Central Transport, in its capacity as successor in interest to GLS, filed this action seeking a refund of all taxes, penalties, and interest previously paid on the grounds that the leases of the trucks from GLS to Central Cartage were not taxable transactions within the meaning of 26 U.S.C. § 4051. By stipulation of the parties, CenTra, Inc. was added as a plaintiff.

The district court entered judgment for the United States, and this timely appeal followed.

II.

A.

The resolution of the issue in this case turns entirely on a question of law, and for Heavy trucks and trailers sold at retail are taxed by 28 U.S.C. § 4051, which provides that "[t]here is hereby imposed on the first retail sale ..." of certain trucks "a tax of 12 percent of the amount for which the article is so sold." The term "first retail sale" is defined in 26 U.S.C. § 4052 as follows:

that reason this court will review the matter de novo. Loudermill v. Cleveland Bd. of Educ., 844 F.2d 304, 308 (6th Cir.), cert. denied, 488 U.S. 946, 109 S.Ct. 377, 102 L.Ed.2d 365 (1988).

(a) First retail sale.--For purposes of this subchapter--

(1) In general.--The term "first retail sale" means the first sale, for a purpose other than for resale or leasing in a long-term lease, after production, manufacture, or importation.

Because the excise tax is imposed only on the first retail sale, and because the initial retail sale of the trucks indisputably occurred in Canada, where the trucks were purchased from dealers by GLS and where the sale could not be taxed by United States authorities, the question arises as to whether the subsequent lease of the trucks by GLS to McKinlay Transport in the United States, which was the first retail sale that could be taxed, should be taxed under the statute.

As stated above, the term "first retail sale" is defined in 26 U.S.C. § 4052(a) as "the first sale, for a purpose other than for resale or leasing in a long term lease, after production, manufacture, or importation." The term is further defined in a regulation issued by the Secretary of Treasury, Temp.Treas.Reg. § 145.4052-1 (as amended in 1988), which provides:

(a) First retail sale--

(1) General rule. For purposes of section 4051(a)(1) and § 145.4051-1, the term "first retail sale" means a taxable sale described in paragraph (a)(2) of this section.

(2) Taxable sale. The sale of an article is a taxable sale unless--

(i) The sale is a tax-free sale under section 4221,

(ii) Both the purchaser and the seller are registered under section 4222 and § 48.4222(a)-1 and the seller has in good faith accepted from the purchaser a proper certification, as provided in paragraph (a)(6) of this section, executed in good faith, that the purchaser intends to lease such article on a long-term basis or resell such articles, or

(iii) There has been a prior taxable sale of the article. Notwithstanding the preceding clause, the sale of a chassis or body of a trailer or semitrailer ("trailer or semitrailer") less than six months after a taxable sale of the article shall be treated as a taxable sale.

(Emphasis added.)

Taxpayers first argue that this regulation, retroactive by virtue of 26 U.S.C. § 7805(b), ² means that the truck sales by Canadian retailers to GLS in Canada ("Canadian sales") meet the definition of "taxable sales" under subparagraph (a)(2) because they were not

(1) tax free under Section 4221,

(2) pursuant to a certification of intent to resale or lease long-term under Section 4222, or

(3) subsequent to a prior taxable sale.

If taxpayers are correct that the Canadian sales to GLS were "taxable sales" under a strict reading of subparagraph (a)(2), then those Canadian sales were the "first retail sales" within the meaning of 26 U.S.C. §§ 4051 and 4052, and the subsequent retail sales of the used trucks by GLS to McKinlay Transport in the United States were not. Therefore, the sales in the United States were not taxable because section 4051 imposes the tax only on first retail sales.

The United States, on the other hand, takes the position that Temp.Treas.Reg. 145.4052-1(a), when read in conjunction with Revenue Ruling 85-95, 1985-2 C.B.

                204, establishes the agency's interpretation of the statutes.   Rev.Rul. 85-95 posed the following question:
                

ISSUE

Does the retailers excise tax imposed by section 4051(a) of the Internal Revenue Code apply if a truck is sold by a United States manufacturer for export to a foreign country, is exported to, and used in, the foreign country, and is subsequently sold to a United States dealer who imports it into the United States and sells it at retail?

The ruling concluded:

In this case, the sale of the used truck by X on February 4, 1984 was the first retail sale of the truck in the United States after importation. The retailer's tax was not applicable to the original manufacturer's sale of the vehicle for export since the sale was not a sale at retail. No initial retail sale, taxable or tax-free, occurred prior to the exportation of the truck out of the United States. The first retail sale after the vehicle was subsequently imported into the United States presented the first, and only, opportunity to impose the tax.

HOLDING

The sale of the truck by X after importation into the United States is subject to the retailers excise tax imposed by section 4051(a) of the Code.

The regulation and revenue ruling function as agency interpretations of the statute, and, read together, support the United States' position that the sales in the United States were taxable. The difficulty in this case is introduced by the taxpayers' reading of Temp.Treas.Reg. § 145.4052-1, which, if correct, results in the conclusion that the Canadian sale was a "taxable sale" and thus the "first retail sale" within the meaning of section 4051. That makes the United States sale a "second retail sale," which is not taxed under the statute.

The particular battleground within this regulation is subsection (2)(iii), which reads in relevant part: "The sale of an article is a taxable sale unless ... [t]here has been a prior taxable sale of the article." Applying this definition to the Canadian sale, taxpayers insist that no "prior taxable sale" occurred before the retail sale in Canada, and, therefore, the Canadian sale was a "taxable sale" under the regulation. That the Canadian sale was not actually taxed, and could not have been, is immaterial in their view.

On the other hand, the United States reads the phrase "prior taxable sale" as meaning a prior sale that was in fact capable of being taxed under current law, and it argues that the Canadian sale was not capable of being taxed because it was the kind of "wholly foreign" transaction not actually taxed under the present Internal Revenue Code. Therefore, it argues, the Canadian sale was not a "prior taxable sale," and the sale in the United States was a taxable sale because, under the 1988 regulation, all sales are taxable unless there has been a prior taxable sale. Thus, the controversy is over the meaning of the word "taxable" in subsection 2(iii) of the regulation.

In this case, it is the interpretation by the United States that is the more reasonable because it results in harmony between the regulation and Rev.Rul. 85-95. If the 1988 regulation is read to be...