By Rose-Michele Nardi
Transport Counsel
PC
This article was published in the July 2013 edition of NTEA
News
Question: If we use a glider kit to repair and
refurbish a chassis, can we treat the refurbished chassis as non-taxable, so
long as it falls within the so-called “75% Safe Harbor”?
Answer: Yes, you can probably treat the refurbished
chassis as non-taxable. However, there is a potential risk, in certain
circumstances, that the Internal Revenue Service (IRS) may conclude the 75% Safe
Harbor does not apply, depending on the type of glider kit you are using.
The 75% Safe Harbor provides, in general, that if the cost
of repairs and modifications to an article that was taxable when new is 75% or
less than the retail price of a comparable new article, the repairs
and modifications will not be treated as creating a new taxable article. See
Internal Revenue Code (IRC) 4052(f) (effective Jan. 1, 1998). (Prior to that
time, in 1991, a more limited 75% Safe Harbor was established in Revenue Ruling
91-27.)
If the 75% Safe Harbor applies, the combination of components from a
“donor chassis” with a glider kit will not trigger Federal Excise Tax (FET) in
many cases. But, if the Safe Harbor does not apply — either because the costs of
the modifications exceed 75% or a “new” chassis is deemed to have
been created — then the “first retail sale” or use of the
resulting chassis will trigger FET. See Revenue Rulings 86-130 and
91-27.
In Technical Advice Memorandum (TAM) 9238008 (June 11, 1992), a glider
kit was combined with new parts, as well as salvaged parts from two used
tractors from different manufacturers. The IRS ruled that the 75% Safe Harbor
did not apply because there was no existing tractor that had been
modified. Instead, the IRS ruled that an entirely new tractor had been
created, and the “first retail sale” or use of that tractor triggered FET.
In TAM 9333007 (May 11, 1993), the IRS ruled that the 75% Safe Harbor
did apply when a glider kit was combined with the engine,
transmission and tandem axles of a single used tractor. (The IRS specifically
noted that the components of the used tractor were not intermingled with the
components of other used tractors.)
Although not discussed in TAM 9333007, it is important to note, in that
ruling, the “donor chassis” (i.e., the chassis being modified for purposes of
the 75% Safe Harbor) supplied three significant chassis components: the engine,
transmission and tandem axles. Today, there are certain types of glider kits
that are quite evolved, which means that the refurbished chassis may not
actually contain many components of the original “donor chassis.” For example,
so-called “rolling glider kits” may include rear suspension, rear drive axle and
rear tires/wheels, in addition to all the other components generally provided in
a basic glider kit. There are also so-called “powered glider kits,” which may
include an engine and transmission, in addition to all the other componentry
provided in a rolling glider kit.
Therefore, a potential issue arises as to whether the IRS might
determine, in certain cases, that a “donor chassis” did not contribute
sufficient componentry to the finished chassis. As a result, there was no
modification of the “donor chassis.” Instead, an entirely new chassis was
manufactured, to which the 75% Safe Harbor would not apply.
In IRS CC 201306019 (Jan. 7, 2013), the IRS recently issued
non-taxpayer-specific legal advice, which indicates that the 75% Safe Harbor
generally applies to repairs and modifications involving glider kits. In
addition, the advice suggests, without any discussion or analysis, that it will
not reject the application of the 75% Safe Harbor in situations where the “donor
chassis” fails to contribute any significant components to the resulting
chassis. However, the advice (like TAMs and letter rulings) provides guidance on
FET issues, but is not binding on the IRS, which means that taxpayers are not
entitled to rely on it.
If you are completing a chassis using a rolling or powered glider kit
(and no significant chassis components will be retained from a single
“donor chassis”), consider discussing the issues raised in this article
with your tax advisor.