Liquid Asphalt Systems, Inc. v. United States, 78-0616-CV-W-9.

• Decision Date: 23 November 1982
• Docket Number: No. 78-0616-CV-W-9.,78-0616-CV-W-9.
• Citation: 555 F. Supp. 1100
• Parties: LIQUID ASPHALT SYSTEMS, INC., Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Western District of Missouri

555 F. Supp. 1100

LIQUID ASPHALT SYSTEMS, INC., Plaintiff, v. UNITED STATES of America, Defendant.

No. 78-0616-CV-W-9.

United States District Court, W.D. Missouri, W.D.

November 23, 1982.

James Kapp, Spencer, Fane, Britt & Browne, Kansas City, Mo., for plaintiff.

Scott Nebergall, Trial Atty., Dept. of Justice, Washington, D.C., for defendant.

MEMORANDUM AND ORDER

BARTLETT, District Judge.

This is a civil action against the United States of America for recovery of manufacturer's excise tax under Section 4061(a)(1) of the Internal Revenue Code of 1954, as amended, 26 U.S.C. § 4061(a)(1). Plaintiff alleges the taxes, penalties and interest at issue were erroneously paid, or erroneously or illegally assessed and collected. Plaintiff also seeks recovery of attorney's fees under the Civil Rights Attorney's Fees Awards Act of 1976, 42 U.S.C. § 1988. The case was tried to the Court on September 27-28, 1982.

The Court has considered the testimony adduced at trial, the exhibits introduced into evidence, the briefs and arguments of the parties and the applicable law, and issues this Memorandum and Order in accordance with Federal Rules of Civil Procedure 52(a).

The plaintiff is Liquid Asphalt Systems, Inc., a corporation organized and existing under the laws of the State of Missouri. It was formed in 1973 and its president since incorporation has been Melvin D. Stevenson. During all relevant periods, plaintiff's principal place of business has been located at 2425 Jefferson, Kansas City, Missouri, within the Western District of Missouri. Since the second quarter of 1973, plaintiff has been manufacturing and selling asphalt-handling systems for the roofing industry.

Plaintiff manufactures four variations of asphalt-handling systems: (1) truck-mounted job tanks, (2) trailer-mounted job tanks, (3) mobile storage units, and (4) yard storage units. The Commissioner of Internal Revenue assessed manufacturer's excise tax only on certain truck-mounted and trailer-mounted models. The truck-mounted models were designated JTK6, JTK7, JTK12, JTK13, JTK15, JTK20; the trailer-mounted models were designated JTR3 and JTR6.¹

Liquid Asphalt seeks recovery of $73,430.59 in manufacturer's excise tax, penalties and interest paid to defendant for the calendar quarters ending June 30, 1973, through December 31, 1975, inclusive, together with interest, costs, expenses and attorneys' fees. The total amount of excise tax paid by the plaintiff for the years 1973, 1974, and 1975 was $64,593.80. Of this amount, $55,066.95 were charged to and collected from the ultimate purchasers of the products. The remaining $9,526.85 plus $8,836.79 in interest and penalties were paid directly by the plaintiff and were not assessed to or collected from the ultimate purchasers.

Plaintiff has agreed to refund to its customers any excise taxes recovered as a result of this action to the extent that the tax was collected from its customers. Most of the ultimate purchasers of plaintiff's job tankers who paid the tax have consented in writing to the making of a refund. Therefore, plaintiff can claim in this action a refund for the tax imposed on those sales as well as the tax paid by it. 26 U.S.C. § 6416(a)(1)(D).

The Court has jurisdiction over the parties and the subject matter of this suit pursuant to 28 U.S.C. § 1346(a)(1) and plaintiff has complied with the requirements of 26 U.S.C. § 7422. In a tax refund suit, the assessments made by the Internal Revenue Service have a presumption of correctness. Welch v. Helvering, 290 U.S. 111, 115, 54 S.Ct. 8, 9, 78 L.Ed. 212 (1933). The taxpayer must prove by a preponderance of the evidence both that it has overpaid tax and the amount of the overpayment. Helvering v. Taylor, 293 U.S. 507, 514, 55 S.Ct. 287, 290, 79 L.Ed. 623 (1935); United States v. Janis, 428 U.S. 433, 440, 96 S.Ct. 3021, 3025, 49 L.Ed.2d 1046 (1976). The taxpayer has both the burden of going forward with the evidence and the burden of ultimate persuasion. Laurel Hill Cemetery Association v. United States, 427 F.Supp. 679, 686 (E.D.Mo.1977), aff'd, 566 F.2d 630 (8th Cir. 1977); Rosenberg v. United States, 295 F.Supp. 820, 822 (E.D.Mo.1969), aff'd, 422 F.2d 341 (8th Cir.1970).

The Court has previously granted summary judgment for the defendant on two constitutional claims made by the plaintiff. The remaining issues are:

1. Are the job tanks in question subject to the manufacturer's excise tax under Section 4061(a)(1)?

2. Are the machinery and equipment installed on these job tanks taxable under Section 4061(a)(1)?

Section 4061(a)(1) does not distinguish between highway and nonhighway vehicles. However, since 1956, the manufacturer's excise tax imposed by Section 4061(a)(1) has been diverted to the highway trust fund which provides funding for primary, secondary, and urban roads and the interstate highway system. H.R.Rep. No. 2022, 84th Cong., 2d Sess. 41-50 (1956); 1956-2 Cum. Bull. 1285, 1290-95. In recognition of this use for the proceeds of the manufacturer's excise tax, the Secretary of the Treasury has narrowed the scope of Section 4061(a)(1) by promulgating regulations which exempt from the tax vehicles not designed for highway use.

To resolve the issues in this case two sets of regulations must be interpreted and applied. During the period from April 4, 1973, to December 31, 1975, when the tax in question was allegedly incurred, regulations propounded in 1963 were in effect (hereinafter referred to as the "prior regulations"). See Treas.Reg. § 48.4061(a)-1 et seq. (1963), T.D. 6648, 1963-1 Cum.Bull. 197. In 1977 the regulations were revised (hereinafter "revised regulations"). See 26 C.F.R. § 48.4061(a)-1, T.D. 7461, 1977-1 Cum.Bull. 317.

Treasury regulations must be upheld if they are found to implement the congressional mandate in some reasonable manner. United States v. Cartwright, 411 U.S. 546, 550, 93 S.Ct. 1713, 1716, 36 L.Ed.2d 528 (1973). This case does not involve a challenge to either the prior or revised regulations. The issues raised depend for their resolution on the interpretation and application of these regulations.

Exemptions from taxation are to be strictly construed and not easily expanded. Heiner v. Colonial Trust Co., 275 U.S. 232, 235, 48 S.Ct. 65, 66, 72 L.Ed. 256 (1927); Bingler v. Johnson, 394 U.S. 741, 752, 89 S.Ct. 1439, 1445, 22 L.Ed.2d 695 (1969); Commissioner v. Jacobson, 336 U.S. 28, 49, 69 S.Ct. 358, 369, 93 L.Ed. 477 (1949).

The revised regulations apply retroactively. See 26 U.S.C. § 7805(b). However, the prior regulations can be applied if the taxpayer desires and if the prior regulations would "unequivocally resolve an issue involving the definition of a highway vehicle with respect to a period prior to such date ...." Section 48.4061(a)-1(d)(3). "Unequivocal" is defined in Black's Law Dictionary (5th ed. 1979) as "clear; plain; capable of being understood in only one way, or as clearly demonstrated. Free from uncertainty, or without doubt ...."

The prior regulations provide that those vehicles "not designed for highway use" would be exempt from the tax and that trailers or semitrailers "primarily designed for highway use" would be subject to tax under Section 4061(a). Treas.Reg. § 48.4061(a)-1 (1963). Courts have utilized a two-step process to determine whether a vehicle is taxable under the prior regulations. First, courts have determined if the manufactured item was designed primarily for highway use. If a primary design is evident, either for highway use or for purposes primarily or predominantly other than for the transportation of persons or property on the highway, the question of taxability is resolved. However, if a vehicle was designed both for transportation over the highway and for off-highway use, and no primary design was evident, the courts have then determined whether the designed highway use was merely incidental to the off-highway use. Big Three Indus. Gas & Equip. Co. v. United States, 329 F.Supp. 1273, 1277 (S.D.Tex.1971), aff'd, 459 F.2d 1042 (5th Cir.1972); Frank Hrubetz Co. v. United States, 412 F.Supp. 1033 (D.Or.1973), aff'd, 542 F.2d 512 (9th Cir. 1976); Dillon Ranch Supply v. United States, 652 F.2d 873, 879-81 (9th Cir.1981).

Plaintiff's job tankers are designed to provide roofing contractors with a more convenient and economical means of supplying hot liquid asphalt to the roofing job site than is available using the older "kettle system." Usually, the "kettle system" involved transporting cold asphalt in cartons and an asphalt kettle to the job site. The cartons of cold asphalt would then be broken open, and placed into the kettle for heating. When the asphalt reached application temperature it would be either hoisted or pumped to the roof for application.

Plaintiff's job tankers arrive at the site with large quantities of liquid asphalt which is then heated to application temperature and pumped to the roof. Ludwig Krchma, plaintiff's expert witness, testified that, in comparison to a kettle, plaintiff's job tanker are more sophisticated, bigger pieces of equipment with better temperature control. Also, because plaintiff's job tankers can carry liquid asphalt, they are more efficient—simultaneously delivering to the job site the materials and equipment necessary to build a roof.

Plaintiff's evidence clearly established that an important aspect of the design of these job tankers is to function as construction equipment on the job site. However, these job tankers are also designed to perform an important, not an incidental, highway transportation function. The job tankers were designed to transport liquid asphalt over the public streets and highways simultaneously with the other equipment necessary to prepare the asphalt for use in the roofing process. The tankers include as standard equipment lights, brakes, mudflaps and fenders. They require no special permit to be used on the highway and in fact are generally licensed as normal highway vehicles by the state....