Schneider Nat'l Leasing, Inc. v. United States

• Decision Date: 25 August 2021
• Docket Number: No. 20-3354,20-3354
• Citation: 11 F.4th 548
• Parties: SCHNEIDER NATIONAL LEASING, INC., Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

11 F.4th 548

SCHNEIDER NATIONAL LEASING, INC., Plaintiff-Appellant,

v.UNITED STATES of America, Defendant-Appellee.

No. 20-3354

United States Court of Appeals, Seventh Circuit.

Argued May 13, 2021

Decided August 25, 2021

Gilbert Dickey, Attorney, McGuirewoods LLP, Charlotte, NC, Matthew Allen Fitzgerald, Bradley Allan Ridlehoover, Craig Dennis Bell, Attorneys, McGuirewoods LLP, Richmond, VA, for Plaintiff-Appellant.

Bruce R. Ellisen, Douglas Campbell Rennie, Attorneys, Department of Justice, Tax Division, Appellate Section, Washington, DC, Timothy W. Funnell, Attorney, Office of the United States Attorney, Green Bay, WI, Jonathan H. Koenig, Attorney, Office of the United States Attorney, Milwaukee, WI, for Defendant-Appellee.

Before Sykes, Chief Judge, and Scudder and Kirsch, Circuit Judges.

Scudder, Circuit Judge.

This appeal presents two questions of first impression concerning a federal excise tax on heavy trucks and the scope of a statutory safe harbor. The answer affects whether Schneider National Leasing, a large trucking company, can take advantage of the safe harbor for repairs and modifications, codified in 26 U.S.C. § 4052(f)(1), to avoid paying a 12% excise tax on 976 tractors it overhauled from 2011 to 2013. The district court held a bench trial, determined that the degree of refurbishing in question constituted the manufacture of new trucks rather than repairs or modifications, and therefore concluded the safe harbor did not apply. We see the application of the statutory language differently and reverse.

I

We begin with the statutory framework and then turn to whether Schneider National Leasing's overhaul of nearly 1,000 highway tractors fell within the safe harbor from the federal excise tax.

A

Congress has taxed the sale of trucks by manufacturers, producers, and importers for over 100 years. See War Revenue Act of 1917, Pub. L. No. 65–50, § 600(a), 40 Stat. 300, 316. The current iteration of this excise tax, enacted as part of the Highway Revenue Act of 1982, resides in 26 U.S.C. § 4051. See Pub. L. No. 97–424, § 512, 96 Stat. 2168, 2174–75. The statute imposes the excise tax in these terms:

There is hereby imposed on the first retail sale of the following articles (including in each case parts or accessories sold on or in connection therewith or with the sale thereof) a tax of 12 percent of the amount for which the article is so sold:

...

(E) Tractors of the kind chiefly used for highway transportation in combination with a trailer or semitrailer.

26 U.S.C. § 4051(a)(1).

In a neighboring provision, § 4052, Congress provides definitions and rules that clarify the contours of the tax. Section 4052(a) defines "first retail sale" to mean "the first sale, for a purpose other than for resale or leasing in a long-term lease, after production, manufacture, or importation." Id. § 4052(a)(1). Congress likewise considered both the lease of an "article" by the manufacturer and the use of "an article taxable under section 4051 before the first retail sale" to constitute sales subject to the 12% tax. See id. § 4052(a)(2) (referencing 26 U.S.C. § 4217 ); § 4052(a)(3). The statute further makes plain that a highway semi-tractor qualifies as an "article." See id. § 4051(a)(1)(E).

What this all means in nontechnical terms is that a company that manufactures a big rig semi-tractor and then sells, leases, or uses the tractor, incurs a 12% tax on the first sale or lease. The IRS requires a company like the taxpayer here, Schneider National Leasing, to file a Form 720 on a quarterly basis to report any federal excise taxes due.

Front and center in this appeal is the safe harbor, also in § 4052, that Congress adopted in 1997 to permit companies to repair or modify tractors they already own (and which have already been taxed) without triggering the 12% excise tax anew. See Taxpayer Relief Act of 1997, Pub. L. No. 105–34, § 1434, 111 Stat. 788 (1997). This safe harbor provision—titled "Certain repairs and modifications not treated as manufacture"—provides:

An article described in section 4051(a)(1) shall not be treated as manufactured or produced solely by reason of repairs or modifications to the article (including any modification which changes the transportation function of the article or restores a wrecked article to a functional condition) if the cost of such repairs and modifications does not exceed 75 percent of the retail price of a comparable new article.

26 U.S.C. § 4052(f)(1).

Notice how Congress drafted the safe harbor. Recall that the underlying excise tax applies to the "first retail sale" of an "article" like a tractor, which means "the first sale ... after production, manufacture, or importation." Id. §§ 4051(a)(1), 4052(a)(1). The safe harbor establishes that some changes to a tractor do not qualify as "manufacture" or "production"—the consequence being that a company can lease, sell, or use that tractor without the transaction constituting a "first retail sale" because it has not occurred "after production, manufacture, or importation." Id. § 4052(a)(1); (f)(1). The 12% excise tax only applies to "the first retail sale," so without "manufacture" or "production," no tax liability is triggered.

Note, too, that Congress made the safe harbor conditional. By its terms, § 4052(f)(1) provides that a tractor that has been repaired or modified is not subject to the 12% tax if , and only if , the cost of those repairs or modifications is less than or equal to 75% of the price of a comparable new tractor.

Complicating matters is the absence in the excise tax and the safe harbor of any definition of the terms "repairs," "modifications," or "retail price of a comparable new article." Nor has the IRS promulgated any implementing regulations defining these terms. Much of this appeal hinges on the meaning (and limits) of these terms.

B

Schneider National Leasing purchases truck tractors and trailers and leases them to its parent company, Schneider National, Inc., one of the nation's largest trucking companies. At any one time, Schneider National Leasing owns several thousand tractors and tens of thousands of trailers and containers. To keep up with demand from drivers for updated rigs and to maintain the health of its fleet, the company purchases more than 3,000 semi-tractors each year.

From 2011 through 2013, rather than retiring a large set of older tractors and purchasing all new replacements, Schneider took a different tack. It bought 61 new tractors, the Freightliner Cascadia 125 model, but also decided to overhaul 982 of its existing tractors using new and refurbished parts packaged together in so-called glider kits. This decision made strategic business sense. For one, Schneider's older tractors were lighter and realized better fuel economy than newer models subject to more stringent environmental regulations. By refurbishing older models, Schneider could keep these more fuel-efficient tractors in its fleet. For another, Schneider's tax advisors counseled that the company would have to pay the 12% excise tax if it bought new tractors but could avoid the tax by refurbishing tractors in the existing fleet.

Following this advice, Schneider purchased 982 glider kits—bundled assemblies of new and remanufactured tractor components—from Daimler Trucks North America LLC. At a minimum, each glider kit came with a cab, chassis, radiator, front axle, front suspension, front wheels, front tires, front brakes, brake system, and trailer connections. 912 of these kits were so-called powered glider kits because they included a remanufactured engine. Daimler assembled these parts together, as shown below, in a manner resembling a tractor cab and chassis and shipped the kits to Schneider's outfitters.

Supp. App. 3; Richard K. Lattanzio & Sean Lowry, Cong. Rsch. Serv., R45286, Glider Kit, Engine, and Vehicle Regulations (Aug. 10, 2018).

Schneider contracted with third-party outfitters to perform the refurbishments from January 2011 to December 2013. That process entailed the outfitters matching Schneider's old tractors with a glider kit and combining the parts to create overhauled tractors. The refurbishing process generally involved dismantling the old tractors, stripping non-usable parts, reassembling the reusable components of the old tractor with the glider kit parts, and giving the rebuilt tractor a new vehicle identification number matching the serial number on the glider kit. The precise parts from the old tractors that were combined with each glider kit varied, but in many instances the outfitter reused the transmission, driveline, rear axle, rear suspension, and rear wheel hubs—and sometimes the fuel tank, fifth wheel, and rear brakes—in the refurbished tractors. Schneider sent the old engines to Daimler in exchange for a rebate on the refurbished engines included in the glider kits. Whatever components of the old tractors that remained were either kept as replacement parts for future repairs or sold for salvage value.

Schneider had paid the 12% excise tax when it first purchased these 982 trucks as required by 26 U.S.C. § 4051(a)(1). But the company did not pay the excise tax on any of the 982 refurbished tractors. Rather, Schneider invoked the safe harbor in § 4052(f)(1) for repairs or modifications and took the position that the overhauled tractors were exempt from the excise tax.

The IRS disagreed, determining that only six of the 982 total tractors qualified for the safe harbor. In the Service's view, Schneider triggered the 12% excise tax obligation in § 4051(a)(1) upon leasing these "articles"—"tractors of the kind chiefly used for highway transportation"—to its parent company, an action that the statute treats as a "first retail sale" of an article. 26 U.S.C. § 4051(a)(1) ; see id. § 4052(a)(2). The IRS concluded that the safe harbor in § 4052(f)(1) could not shield 912 of the overhauled tractors—those that received new engines—because the refurbishment process using powered glider kits exceeded permissible "repairs or modifications"...