REVENUE RULE 91-27

1991-1 C.B. 192, 1991-15 I.R.B. 26.

Internal Revenue Service
Revenue Ruling

HEAVY VEHICLES; RESTORATION

Published: April 15, 1991

Section 4051.-Imposition of Tax, 26 CFR 145.4051-1: Imposition of tax on heavy trucks and trailers sold at retail.

(See Also Section 4052; 48.0-2.)

Heavy vehicles; restoration. The use of a worn truck, truck trailer or semitrailer, or tractor that has been restored to a usable condition is not subject to tax under section 4051(a) of the Code if the cost of restoration is 75 percent or less of the price of a comparable new vehicle. Rev. Rul. 86-130 amplified and modified.

ISSUE

(1) If a worn vehicle is extensively restored so that its useful life is extended, is the owner of the vehicle subject to the retailers excise tax imposed by section 4051(a)(1) of the Internal Revenue Code on the sale or use of the restored vehicle?

(2) If a wrecked vehicle is restored to a functional condition, is the owner of the vehicle subject to the retailers excise tax on the sale or use of the restored vehicle?

FACTS

SITUATION 1: The owner of a used tractor, of the kind chiefly used for highway transportation in combination with a trailer or semitrailer, restored the tractor by adding new components and rebuilding others. The restoration was extensive and extended the useful life of the tractor. The restoration was necessary because the tractor was worn from use and not because of any damage resulting from a wreck. The owner then continued to use the tractor in the owner's trade or business. The owner does not regularly sell such tractors at retail in arm's length transactions. The cost to restore the tractor was equal to 65 percent of the price of a comparable new tractor.

SITUATION 2: The owner in Situation 1 owned a similar tractor that was wrecked. The owner returned the vehicle to a functional condition by combining salvaged components with a "glider kit" (an assemblage of parts usually including a cab) that it purchased. The owner then continued to use the tractor in the owner's trade or business.

LAW AND ANALYSIS

Section 4051(a) of the Code imposes on the first retail sale of certain enumerated articles a tax equal to 12 percent of the price for which the article is sold. Included among those articles are truck chassis and bodies and tractors of the kind chiefly used for highway transportation in combination with a trailer or semitrailer, except that the tax does not apply to truck chassis and bodies suitable for use with vehicles having a gross vehicle weight of 33,000 pounds or less.

Section 4052(a)(1) of the Code defines the term "first retail sale" as the first sale for a purpose other than resale or leasing in a long term lease, after production, manufacture, or importation.

Section 4052(a)(3)(A) of the Code provides, in general, that if any person uses an article taxable under section 4051 before the first retail sale of such article, that person shall be liable for tax under section 4051 in the same manner as if such article were sold at retail by that person.

Section 4052(a)(3)(C) of the Code provides that in the case of any person made liable for tax by section 4052(a)(3)(A), the tax shall be computed based on the price at which similar articles are sold at retail in the ordinary course of trade, as determined by the Secretary.

Section 48.0-2(a)(4)(i) of the Manufacturers and Retailers Excise Tax Regulations provides that the term "manufacturer" includes a person who produces a taxable article from scrap, salvage, or junk material, as well as from new or raw material, (1) by processing, manipulating, or changing the form of an article, or (2) by combining or assembling two or more articles.  Generally, the repair or restoration of a vehicle that is sufficiently extensive to extend the useful life of the vehicle is an act of manufacture for purposes of section 4052 of the Code and section 48.0-2 of the regulations.  Rev. Rul. 86-130, 1986-2 C.B. 179, in Situation 2, describes the tax consequences of a repair of a highway tractor using a "glider kit." The revenue ruling concludes that the refurbishing operation described is an act of manufacture within the meaning of section 48.0-2(a)(4)(i) of the regulations and that the owner of the tractor is subject to tax on the sale or the use of the tractor.

Section 6111 of the Technical and Miscellaneous Revenue Act of 1988 (TAMRA), 1988-3 C.B. 1, 373, amended section 4052(a)(1) of the Code. In the explanation of the amendment, H.R. Conf. Rep. No. 1104, 100th Cong., 2d Sess. 1, 178 (1988), 1988-3 C.B. 668, states that extensive repairs on a truck or trailer after it has been in use for several years may trigger liability under the 12 percent retail excise tax because the repairs are considered to have resulted in the manufacture of a new vehicle.

The Conference Committee Report further states that three categories of operations performed on a vehicle may be considered manufacturing under Internal Revenue Service rulings. The first category is an addition or modification to a chassis or body that changes the transportation function of the vehicle. The second category is the fabrication of a usable vehicle from a wrecked vehicle. The third category pertains to a used vehicle on which repairs or other modifications are so extensive that they extend the useful life of the vehicle.

According to the Conference Committee Report, the amendment clarifies that the three categories used to determined whether the manufacture of a new vehicle has occurred are consistent with the intent of the statute. (See also, Boise National Leasing, Inc. v. United State's 389 F.2d 633 (9th Cir. 1968), in which the court held the extensive restoration of trucks to be acts of manufacture). In the case of repair or modification that extends the useful life of a vehicle, however, the Report sets forth a safe harbor for determining whether repairs are sufficiently extensive to constitute manufacture. Under the safe harbor, if the cost to repair or refurbish a truck is 75 percent or less of the price of a comparable new truck, no tax is imposed on the sale or use of that truck. The costs of non-emergency repairs, modifications, and upgrades occurring over any 6-month period are to be aggregated in applying the rule. The Report states that the safe harbor is effective as of the date of enactment of TAMRA (November 10, 1988).

The Internal Revenue Service adopts the safe harbor provided in the Conference Committee Report for the repair or modification of used vehicles listed in section 4051(a) of the Code (tractors and chassis and bodies for trucks, trailers, and semitrailers). The safe harbor, however, will not apply to wrecked vehicles. Therefore, if a wrecked tractor is restored to a functional condition, the owner of the tractor will be considered to have fabricated a new vehicle and will be liable for tax on the sale or the use of the tractor. A vehicle will be considered "wrecked" when it has incurred damage as a result of a collision or similar mishap and extensive repairs are necessary to return the vehicle to a fully functional condition. A vehicle that has incurred only minor damage will not be considered wrecked even if the damage renders the vehicle inoperable.

HOLDING

(1) In Situation 1, because the cost of the restoration of the worn tractor did not exceed 75 percent of the price of a comparable new vehicle, no retailers excise tax is imposed on the sale or the use of the tractor. This holding will also apply in cases where the owner uses a glider kit to repair the vehicle, so long as the cost of the repair does not exceed 75 percent of the price of a comparable new vehicle.

(2) In Situation 2, because the wrecked tractor was restored to a functional condition, the repairs are considered to constitute the manufacture of a new vehicle. The owner of the restored tractor is subject to the retailers excise tax under section 4051(a) of the Code on the use of the restored tractor. The tax on the use of the tractor is computed in the manner described in Situation 2 of Rev. Rul. 86- 130.

EFFECTIVE DATE

The holding in Situation 1 of this revenue ruling is effective for sales or uses occurring after November 9, 1988.

EFFECT ON OTHER RULINGS

Rev. Rul. 86-130 is amplified and modified.

DRAFTING INFORMATION

The principal author of this revenue ruling is Edward B. Madden, Jr. of the Office of Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling contact Mr. Madden on (202) 535-9758 (not a toll-free call).

Rev. Rul. 91-27, 1991-1 C.B. 192, 1991-15 I.R.B. 26.