Tax Court Decides Heavy Duty Tractor Trailer Not a Vehicle Designed for Off-Highway Transportation, Denies Refund of Diesel Fuel Tax

Definitions are the underpinnings of the tax law, and the Tax Court had an opportunity to thrash out a definition under two slightly different versions of the Internal Revenue Code in the case of Myles Lorentz, Inc. v. Commissioner, 138 TC No. 3.  In this case the issue involved what was meant when the Code and regulations referred to a vehicle specially designed for off-highway transportation.  Such a vehicle is one that, while being a vehicle that either is registered for highway use or that should be registered for that use, meets the following two criteria:

• Specially designed for the primary function of transporting a particular type of load other than over the public highway in connection with a construction, manufacturing, processing, farming, mining, drilling, timbering, or operation similar to any one of the foregoing enumerated operations, and
• By reason of such special design, the use of such vehicle to transport such load over the public highways is substantially limited or substantially impaired. [Reg. §48.4061(a)-1(d)(2)(ii)]

For 2006, the second year under consideration in this case, Congress added clarity to the latter definition, enacting IRC §7701(a)(48), imposing limits on the “substantial limitation” provision that is more restrictive than the regulation provided.

Such vehicles are ones that, to the extent they consume diesel fuel that was subject to the 24.4 cent excise tax, can obtain a credit to refund that tax under IRC §§34(a)(3) and 6427(1)(1).

The taxpayer’s vehicles in this case involved tractor-trailer rigs used in road building and mining.  The tractors were “heavy-duty” tractors, having been modified to give them, in the court’s words, “extreme strength and power.”  The trailers were “belly-dump” trailers that were modified to hold 43 tons of load, with side panels of steel added to the trailers to enable them to handle their extremely large loads.  As the Court noted “All of this would make the tractor-trailer combination a daunting thing for a mere passenger car to meet on the road.”

The first question was whether the combined tractor-trailer rig was the “vehicle” to be tested or whether they had to be treated as two separate vehicles.  As the Court noted, this was a key question, since only the tractor actually used fuel.  The Court agreed with the IRS that the tractor and trailers were separate vehicles, citing Reg. §48.4061(a)-1(d)(1)’s language that stated “Examples of vehicles * * * are * * * truck tractors, trailers, and semitrailers” and continued on to define a “highway vehicle” as “any self-propelled vehicle, or any trailer or semitrailer, designed to perform a function of transporting a load over public highways.”  The separate identification of tractors and trailers, and the use of the “or” connector in the second reference suggested to the Court that the regulation contemplated the tractor and trailer as separate vehicles.

The Court noted that the taxpayer failed to show any particular reason to consider its particular tractor-trailer combination as a single vehicle.  The tractors were actually often hitched to other trailers, and the belly-dump trailers had special bumpers that allowed to be pushed by bulldozers.  The court noted that the tractors were also not shown to be designed for the primary function of towing the belly-dump trailers.  The taxpayer failed to show the heavy duty design of the tractors was specifically aimed at making them principally useful for hauling these particular belly-dump trailers—rather the tractor could be used for hauling any particularly heavy load.  As well, the design was not one that made the tractors uniquely an off-road vehicle—rather, it was perfectly capable of hauling any sort of trailer on highways.

While failing the “special design” test was enough to deny the credit, the Court continued to note that the taxpayer would have also failed to show that the tractors use over public highways was substantially limited or substantially impaired.  The Court pointed that such impairment can be shown if it would have been uneconomical to use the trailers over the road, and agreed that the heavy-duty tractor was less efficient in over the road use than a less powerful tractor.  Their maximum efficiency showed when hauling loads that would have been illegal to haul on public roads due to excessive weight.

But the Court held that merely being “less” efficient did not equate with being uneconomical to operate—the taxpayer could not show that the vehicles could not be operated profitably (even if less profitably than others) on public roads with the loads limited to their allowed maximum.  In fact, the Court noted, 60% of the use of the tractors were conceded by the taxpayer to be on public roads (the taxpayer was not claiming a credit for fuel used during those trips).

The Court also found that the law change applicable to 2006 when the newly enacted IRC §7701(a)(48) became applicable did not help the taxpayer.  The Court noted that under the 2006 IRC definition, the Court could not consider actual use of the vehicle in determining a substantial limitation but rather was limited to its physical characteristics.  As well, rather than, as under the regulation, looking at whether the vehicle could operate at speed on the highway, the new law rather imposed a strict 25 mile per hour sustained speed test, lower than that which the Company would have been able to argue for under the regulation’s language.

Thus the Court disallowed the taxpayer’s claim for a credit for fuel, finding it did not have fuel that met the requirements for qualified off highway use required to obtain the relief.

The Court’s decision on the separateness of tractors and trailers could have impact on other taxpayers in construction industries where special operations take place off the public roads—such as, in this case, road building itself.  Taxpayers who have previously taken the position that such use should qualify for the IRC §34 credit may need to reevaluate those positions in light of this case.

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