Gateway Equipment Corp. v. U.S., 00-CV-51C(SC).

• Decision Date: 23 February 2003
• Docket Number: No. 00-CV-51C(SC).,00-CV-51C(SC).
• Citation: 247 F.Supp.2d 299
• Parties: GATEWAY EQUIPMENT CORP., Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Western District of New York

247 F.Supp.2d 299

GATEWAY EQUIPMENT CORP., Plaintiff, v. UNITED STATES of America, Defendant.

No. 00-CV-51C(SC).

United States District Court, W.D. New York.

February 23, 2003.

Harold D. Rogers, Esq., Wichita Falls, TX, for Plaintiff.

United States Department of Justice, Tax Division (Bartholomew Cirenza, Esq., of Counsel), Washington, DC, for Defendant.

INTRODUCTION

CURTIN, District Judge.

Plaintiff Gateway Equipment Corporation ("Gateway") brought two actions¹ against the United States for the recovery of excise taxes. In the first action, docketed as 00-CV-51, Gateway alleged that taxes in the amount of $15,534.00 were erroneously and illegally assessed against and collected from it during the taxable quarter ending June 30, 1995. Item 1. Shortly after the first action was filed, Gateway filed another action against the United States to recover additional excise taxes in the amount of $105,823.00 assessed and collected during seven taxable quarters ranging from June 30, 1992 to December 31, 1994. That case, originally docketed as 00-CV-124, was consolidated with the present action. Item 38. The excise taxes were assessed on sales of Flow Boy Live Bottom semi trailers, model CB-4000 ("CB-4000 units"), used in highway construction and manufactured by Flow Boy Manufacturing ("Flow Boy Mfg."), a division of Dan Hill & Associates, Inc., Norman, Oklahoma. During the time period of this case, Gateway was a distributor of Flow Boy equipment. It purchased the CB-4000 units from Flow Boy Mfg. for resale to customers ("end-users") in the highway construction business, and added the 12 percent excise tax to the cost of the machine. It then paid the excise tax to the Internal Revenue Service.

The government answered, Item 2, and on April 5, 2000, Gateway moved for summary judgment. Items 4-6. Gateway based its summary judgment argument on three grounds: (1) collateral estoppel premised on a previous decision in Flow Boy, Inc. v. United States, 1984 WL 15513 (10th Cir. Jan. 20, 1984); (2) the United States has treated Gateway differently than "similarly situated" taxpayers; and (3) the CB-4000, by its design, is excepted from the Federal Excise Tax ("FET") in Treasury Regulation 26 C.F.R. § 48.4061(a)-l (2001).

The court ordered discovery to proceed on the first two grounds, collateral estoppel and fairness. Item 7. The United States then filed papers in opposition to the motion for summary judgment on February 20, 2001. Items 17, 18. Plaintiff filed a reply, Item 24, and oral argument on the first two grounds took place on May 31, 2001.

Following oral argument, and prior to reaching a decision on the summary judgment motion, the court issued an order stating that discovery on the third issue should be conducted. Item 29. Deposition transcripts were filed with the court,² and the government filed the report of its expert, G. Allan Hagelthorn. Item 69. The government then filed a supplemental memorandum, Item 76, and the plaintiff filed a reply memorandum. Item 78. Oral argument was heard on July 31, 2002.

At this time, all three issues submitted by the plaintiff are before the court. For the reasons set forth below, the court grants summary judgment to Gateway on the design and fairness issues and denies summary judgment to Gateway on the grounds of collateral estoppel.

FACTS

A. Description of the Units

In 1969, Flow Boy (or its predecessor companies³) began to manufacture the ST-1000 unit, the precursor to the CB-4000 unit. Item 6, ¶ 6. The Flow Boy ST-1000 units were "specially designed to efficiently and safely discharge hot-mix asphalt into the laydown machine for the purpose of building roads and highways." Item 6, 118; Item 18, 118. The unit is placed in front of a laydown machine (a paver), with both the Flow Boy unit and the laydown machine moving down the roadbed/highway simultaneously.⁴ The Flow Boy unit continuously delivers asphalt into the laydown machine, resulting in building a new highway or resurfacing an existing highway. Item 6, 1111; Item 18, 1Ill. This process is performed on a prepared bed (1) before a new highway is finished or (2) within barricades so that during the construction process, no public traffic is allowed on that part of the prepared bed and/or highway under construction. Id. (A photograph showing the Flow Boy semitrailer working with a laydown machine is attached to Item 4 as Ex. S. The Flow Boy unit is attached to and pulled by a tractor-truck.)

The CB-4000 unit is an updated and improved version of the ST-1000, "primarily designed for the same purpose as the ST-1000."⁵ Item 4, Ex. Q, 9. The CB-4000 is described as a "patented hydraulically controlled, horizontal materials discharge system." Item 6, 110; Item 18, f 10. It is "identical to the ST-1000 units in all major respects regarding design except for the fact that the slatted roller chain in the CB-4000 units is covered with a continuous rubber belt whereas the ST-1000 was manufactured with an open slatted roller chain." Item 6, 19,⁶ Item 18, ¶¶ 19, 48. The chain is driven by a hydraulie motor. Item 22, p. 60. The "horizontal materials discharge system" consists of the mechanism delivering and controlling the discharge of the hot-mix asphalt. A rubber belt, located on the floor of the hopper, is attached to a steel-slatted roller chain which carries the payload to the rear tailgate, where it is discharged at a precisely controllable rate. Item 6, 1110. The CB-4000 hopper is equipped with insulated sidewalls "primarily designed for handling hot-mix asphalt and asphalt related materials as well as low-slump concrete for highway construction." Id. The insulation keeps the payload of hot-mix asphalt or asphalt-related materials at a proper temperature for highway construction. Item 6, 1110; Item 18, ¶ 10. The maximum payload is 33 to 35 tons. Item 4, Ex. R; Item 6, ¶ 58. The CB-4000 is equipped to comply with federal and state regulations for highway use, including brake lights, mud flaps, and highway tires. Item 4, Ex. R.

In 1995, the cost of the CB-4000 was $43,150.00, excluding federal excise tax. Item 4, Ex. Q, 116. That cost ranged "from one-third to 50% more than the cost of over-the-road hauling semi-trailers and end dump trailers." Id.

Gateway officers and its attorney, Harold Rogers, became aware that Flow Boy Mfg. had applied for and received excise tax refunds for the CB-4000 units during the same taxable quarters at issue, and had passed on the refunds to end-user customers located in 17 states,⁷ including New York State. Id. ¶¶ 28, 29. Gateway also became aware that distributors in other states had been successful in applying for excise tax refunds on the CB-4000 units. Id. 111131-36. When Gateway applied for a FET refund on the CB-4000 units it had sold during the quarters at issue, the IRS denied the claim. Id. 14; Ex. A. Consequently, Gateway filed both actions.

B. The Oklahoma Litigation

In 1982 Flow Boy, Inc. sued the federal government, asserting that the ST-1000 trailer was not subject to the FET, and demanded a refund of excise tax paid. Item 4, Ex. B. The Flow Boy units at issue in Flow Boy, Inc. v. United States, 1982 WL 1735 (W.D.Okla. April 20, 1982) were identical to the units which had previously been held not subject to the FET in J.H. Holland Co. v. United States, 1977 WL 1282 (W.D.Okla. April 21, 1977).⁸ In the Flow Boy litigation, the plaintiff contended that the unit was not subject to the excise tax because it was specially designed for the primary function of transporting hotmixed asphalt in a construction operation other than over the public highway.⁹ Flow Boy, Inc. also asserted that the use of the unit in transporting a load over the public highway was substantially limited or substantially impaired because (a) the Flow Boy was specially designed to carry weight in excess of the legal road limit; (b) the unit's special design resulted in its being sold at prices approximately two and onehalf times the price of a conventional semi end dump trailer having the same highway payload capacity; and (c) the Flow Boy could not economically haul over the public highway. Flow Boy, Inc. maintained that the excise tax had not been included in the price of the units, and therefore, the tax had not been passed on to the purchaser.

The government, on the other hand, claimed that the unit was not specially designed for the primary function of transporting a particular type of load other than over the public highway. Alternatively, the government argued that even if it was specially designed, that special design did not substantially limit or substantially impair the use of the vehicles to transport such load over the public highway. It also asserted that Flow Boy passed on the tax to its customers and therefore was not entitled to a refund.

A jury found for Flow Boy, and against the government, on three issues: (1) the Flow Boy trailer was specially designed for the primary function of transporting a particular type of load other than over a highway in connection with construction; (2) the Flow Boy's special design substantially impaired the use of the vehicle to transport its load over the public highway; and (3) Flow Boy did not include the excise tax in the sales price of the unit. The court denied the government's Motion Notwithstanding the Verdict, and Flow Boy received a refund of the excise taxes it had paid, plus interest. Flow Boy, Inc. v. United States, supra.

The government appealed only the second finding. The Tenth Circuit held that the Flow Boy design was such that its over-the-highway use was substantially impaired, and affirmed the refund of the excise taxes. Flow Boy, Inc. v. United States, 1984 WL 15513 (10th Cir. Jan. 20, 1984).

C. Refunds

In his affidavit, Richard Sheridan, General Manager of Gateway, outlined how Gateway started selling the CB-4000 units in 1990, and originally added the FET to the selling price. Item 4, Ex. E, 114. Gateway was then advised by Dan...