Bright-Line 75% Safe Harbor Confirmed; Proof of Original Taxability Required: The Sixth Circuit’s Framework for § 4052(f)

Introduction

In Fitzgerald Truck Parts & Sales, LLC v. United States (6th Cir. Mar. 31, 2025), the Sixth Circuit addressed a high-stakes dispute over the federal excise tax on heavy highway tractors. Fitzgerald built “glider tractors” by installing used engines and transmissions from salvage yards into new “glider kits” and claimed exemption from the 12% excise tax imposed on the first retail sale of heavy trucks under 26 U.S.C. § 4051(a)(1). Fitzgerald relied on the “safe harbor” in 26 U.S.C. § 4052(f)(1), which excludes certain “repairs or modifications” from being treated as manufacturing if their cost does not exceed 75% of the retail price of a comparable new article.

The Internal Revenue Service assessed approximately $268 million in tax, penalties, and interest, contending Fitzgerald’s operations exceeded what § 4052(f)(1) permits and, in any event, the safe harbor was unavailable under § 4052(f)(2) because many donor tractors—when new—were not taxable (for example, first sold to state/local governments or abroad).

A jury ruled for Fitzgerald; the government appealed. The Sixth Circuit delivers a two-part ruling that clarifies the statute:

• First, § 4052(f)(1) is a bright-line, quantitative safe harbor: if the cost of repairs/modifications is ≤75% of the retail price of a comparable new tractor, no qualitative limit bars the exemption. Ownership of, or continuity with, an identifiable “same” tractor is not required.
• Second, § 4052(f)(2) carves out from the safe harbor any refurbished tractor that, when new, was not taxable under § 4051 (including because of § 4221 exemptions). The taxpayer bears the burden to prove, vehicle by vehicle, that the donor tractor’s original first sale was taxable (i.e., tax was payable), not merely that the tractor fell within the general class of taxable articles.

The court thus reverses the judgment and remands for proceedings focused on § 4052(f)(2), holding Fitzgerald has not yet proved that each refurbished tractor originated from a unit that was taxable when new.

Summary of the Opinion

The Sixth Circuit holds:

• Section 4052(f)(1) establishes an exclusively quantitative safe harbor. The terms “repairs” and “modifications” do not impose additional qualitative limits beyond requiring that the restoration process involve an old tractor; the 75% cost threshold controls. The court aligns with the Seventh Circuit’s decision in Schneider National Leasing, Inc. v. United States.
• “Article” does not require retention of an identifiable, continuous tractor pre- and post-restoration. Reuse of engines and transmissions sourced from deconstructed tractors—even from multiple donors and without title or VIN continuity—can satisfy § 4052(f)(1) if the cost test is met.
• However, § 4052(f)(2) disqualifies the safe harbor if the article, when new, was not taxable under § 4051 or corresponding prior law. “Taxable” means capable of being taxed (payable), not necessarily actually taxed. Sales exempted by § 4221 (e.g., exports or sales to state/local governments) mean the tractor was not taxable when new, and thus the safe harbor is unavailable for refurbishments derived from those original units.
• The taxpayer bears the burden of proof in the refund suit. Given evidence that some donor tractors were first sold abroad or to government entities, and that Fitzgerald often lacked VIN/title traceability, Fitzgerald has not proven entitlement to the safe harbor across all 12,830 tractors. The verdict is reversed and the case is remanded for further factfinding on § 4052(f)(2).

Analysis

Precedents and Authorities Cited

• Schneider National Leasing, Inc. v. United States, 11 F.4th 548 (7th Cir. 2021): The Seventh Circuit held § 4052(f)(1) is a quantitative safe harbor; no added qualitative limits. It rejected the IRS’s argument that use of certain replacement parts (including engines) transforms repairs into “manufacture.” The Sixth Circuit adopts Schneider’s reasoning.
• Boise National Leasing, Inc. v. United States, 389 F.2d 633 (9th Cir. 1968), and Ruan Financial Corp. v. United States, 976 F.2d 452 (8th Cir. 1992): Pre-1997 cases employing qualitative “manufacture” tests. The 1997 safe harbor supplants this indeterminate approach with a bright-line cost rule.
• CenTra, Inc. v. United States, 953 F.2d 1051 (6th Cir. 1992): Interpreted “taxable sale” in the regs to mean a sale capable of being taxed under current law; exports were not “taxable sales.” The Sixth Circuit extends that logic to § 4052(f)(2)’s “taxable under § 4051.”
• Loper Bright Enterprises v. Raimondo, 603 U.S. 369 (2024): With Chevron deference abrogated, the court applies independent judgment; CenTra’s bottom line still aligns with § 4051’s text.
• Other interpretive authorities: Digital Realty Tr. v. Somers (follow statutory definitions over ordinary meaning); Walters v. Metropolitan Educational Enterprises (give effect to each word); Lomax v. Ortiz-Marquez (new statute intended to change prior law); Life Technologies v. Promega (plural usage significant); Crooks v. Harrelson (absurdity doctrine limited); Niles Bement Pond Co. v. United States and Sherwin-Williams Co. v. United States (taxpayer’s burden in refund suits).
• IRS guidance: Rev. Rul. 86-130 (glider kits defined); Rev. Rul. 91-27 (IRS-created safe harbor precursor); technical advice memoranda (TAMs 92-38-008; 93-33-007). The court accords TAMs no precedential force and declines to import their “single donor” limitation into § 4052(f)(1).
• Regulations: 26 C.F.R. § 145.4052-1(a)(2)(i) (defining “first retail sale” as a taxable sale and excluding tax-free § 4221 sales); 26 C.F.R. § 48.4061(a)-1(d)(1) (definition of tractors).
• Statutes: 26 U.S.C. §§ 4051(a)(1)-(2) (12% excise tax on first retail sale of heavy tractors), 4052(a)(1) (first retail sale defined), 4052(a)(3)(A) (first use taxed if before first retail sale), 4052(f)(1) (75% safe harbor), 4052(f)(2) (exception), 4052(b)(1)(B)(iii) (price reduction for components furnished by first user), 4221(a)(2), (4) (exports and sales to state/local governments are tax-free).

Legal Reasoning

The court’s analysis proceeds in two stages, each grounded in textual interpretation and structure.

1) § 4052(f)(1): A quantitative safe harbor without qualitative overlays

• Plain text controls: The safe harbor activates if the “cost of such repairs and modifications does not exceed 75 percent of the retail price of a comparable new article.” The statute thereby supplies its own operative line: the 75% ratio. The court holds that Congress displaced indeterminate, qualitative inquiries into what counts as “repair” or “modification” beyond the categorical requirement that the activity involve an existing tractor.
• Context confirms breadth: Congress chose a high numeric threshold (75%), and expressly included substantial projects (e.g., restoring wrecked tractors or changing transportation function). That language indicates Congress contemplated extensive work—far beyond “incremental” tweaks—so long as the cost stays under the 75% ceiling.
• No “identifiable same article” requirement: The government’s theory that “article” demands persistence of a single, traceable tractor fails. The statute contains no ownership, title, or VIN continuity requirement. The court notes the IRS’s inability to offer a workable, text-based standard for “identifiable article,” and rejects importing the TAMs’ “single donor” concept.
• Whole-text harmony: Section 4052(b)(1)(B)(iii)’s price-reduction rule for components furnished by the first user does not narrow § 4052(f)(1). Overlap between a complete exemption (f)(1) and a partial price reduction (b)(1)(B)(iii) is neither unusual nor problematic; the Code routinely features layered benefits with different eligibility thresholds.
• Absurdity argument rejected: Using the agreed “retail price of a comparable new article” (arm’s-length market price, not a buyer’s discounted price) as the benchmark, the safe harbor can be generous by design. That policy choice does not rise to the level of absurdity warranting departure from clear text.

2) § 4052(f)(2): The origin-taxability gatekeeper

• Text and cross-references: Section 4052(f)(2) provides that the safe harbor “shall not apply if the article (as repaired or modified) would, if new, be taxable under § 4051 and the article when new was not taxable under such section or the corresponding provision of prior law.” Read with § 4051 and the regulations, an article “when new” is not taxable if its original first retail sale was a tax-free sale under § 4221 (e.g., exports or sales to state/local governments).
• “Taxable” means liable to tax (payable), not necessarily previously taxed: The court follows CenTra’s logic that “taxable sale” is one capable of being taxed under current law. Thus, a tractor originally sold abroad or to a governmental entity was not taxable under § 4051 “when new,” which disqualifies later refurbishments of that article from the safe harbor.
• Burden of proof on the taxpayer: In a refund suit, the taxpayer must prove entitlement. For each refurbished tractor, Fitzgerald must show, by a preponderance of the evidence, that the donor tractor’s first sale was taxable (i.e., not exempt under § 4221). Lacking VINs, titles, or other provenance, Fitzgerald had not met that burden on the full fleet.
• Procedural points: The government did not forfeit the § 4052(f)(2) argument by failing to object to jury instructions where it pursued judgment as a matter of law and preserved the legal contention. Nor did the government shift to a new theory on appeal; it consistently argued that “taxable” means “payable.”

Impact and Practical Consequences

Key takeaways for the heavy-truck and remanufacturing sectors

• Broadened access to the safe harbor on the “front end”: The Sixth Circuit joins the Seventh in declaring § 4052(f)(1) a bright-line safe harbor with no qualitative overlay. Reuse of engines and transmissions from deconstructed tractors (even without title/VIN continuity and even if sourced from multiple donors) may qualify, provided total repair/modification costs are ≤75% of the comparable new tractor’s retail price.
• But a stringent “origin taxability” filter on the “back end”: Section 4052(f)(2) requires per-vehicle proof that the donor tractor, when new, was taxable under § 4051. If a donor tractor’s original first sale was tax-exempt under § 4221 (exports; state/local governments), the safe harbor is categorically unavailable for the later refurbishment drawing from that article.
• Documentation now decisive: Taxpayers sourcing engines/transmissions from salvage channels must implement provenance controls. The inability to trace donor tractors back to a taxable first sale may forfeit the safe harbor even where the 75% cost test is satisfied.
• Alignment across circuits, growing predictability: With the Sixth and Seventh Circuits aligned on the bright-line nature of § 4052(f)(1), industry participants have increased clarity on the cost test. The distinctive contribution of Fitzgerald is to foreground § 4052(f)(2)’s “capable of being taxed when new” requirement and the taxpayer’s proof burden.
• Audit posture: Expect IRS audits to focus less on qualitative “manufacture vs. repair” disputes and more on (i) the 75% calculation inputs and (ii) whether the taxpayer can substantiate that each donor unit was taxable when new (i.e., not within § 4221’s exemptions).
• Potential anomalies: The court notes that a truck first sold to a tax-exempt entity can later incur a “first retail sale” tax when sold/leased to a non-exempt buyer, yet § 4052(f)(2) may still deny the safe harbor for subsequent refurbishments of that article. The court leaves any policy concerns for Congress or a future case.

A practical decision tree after Fitzgerald

1. Is there an “article described in § 4051(a)(1)” involved—i.e., an existing tractor (even if deconstructed) forming the basis for the work? If yes, continue.
2. Calculate costs of all repairs and modifications. Are total costs ≤75% of the retail price of a comparable new tractor (market, arm’s-length retail price)? If yes, the safe harbor’s quantitative test is satisfied.
3. Apply § 4052(f)(2)’s filter. For each refurbished tractor, was the donor tractor “when new” taxable under § 4051 (i.e., was its original first sale capable of being taxed and not exempt under § 4221)? The taxpayer must prove this. If no, § 4052(f)(1) is unavailable for that unit.
4. If steps 1–3 are all satisfied, the sale is not treated as manufacture and the § 4051 excise tax does not apply to that sale.

Complex Concepts Simplified

• First retail sale (26 U.S.C. § 4052(a)(1)): The first sale for a purpose other than resale or long-term lease after production/manufacture/importation. That is the sale generally subject to the 12% excise tax under § 4051(a)(1); some transactions (like exports or sales to governments) are tax-free under § 4221.
• Safe harbor (26 U.S.C. § 4052(f)(1)): If you repair or modify an existing tractor and your total repair/modification costs are 75% or less of the retail price of a comparable new tractor, your work is not treated as “manufacture”—so the excise tax doesn’t apply on that account.
• Comparable new article’s “retail price”: The ordinary arm’s-length market price at which comparable new tractors are sold in individual transactions (not a specially discounted price the taxpayer may have paid).
• “Taxable” vs. “taxed”: “Taxable” means the tax was payable if the transaction occurred—i.e., capable of being taxed. It does not require that the tax was actually paid. If the first sale when new was tax-exempt under § 4221, the tractor was not taxable when new.
• Glider kits: Sets of unassembled new parts that, combined with new or used components (e.g., engines, transmissions), form a functioning highway tractor. They typically include the cab, chassis, axles, wheels, and related systems.
• Significance of § 4221: Sales for export or to state/local governments (among others) are tax-free; tractors first sold in those channels were not taxable under § 4051 when new. That disables the § 4052(f)(1) safe harbor through § 4052(f)(2).
• Burden of proof in tax refund suits: The taxpayer must prove entitlement by a preponderance of the evidence, including satisfaction of the safe harbor and inapplicability of any carve-outs like § 4052(f)(2).

Practical Compliance Guidance

Fitzgerald clarifies the law and shifts compliance emphasis from qualitative disputes to documentation and cost accounting. Consider the following controls:

• Provenance tracking: For each used engine/transmission, obtain and retain available data that can establish the donor tractor’s original first sale was taxable (not a § 4221-exempt sale). Items can include chain-of-title documents, seller attestations, jurisdiction-of-first-sale records, and any available identifiers tying components to their original units.
• Supplier representations and warranties: Contract for representations that components are not sourced from tractors first sold to state/local governments or for export, along with audit rights and indemnities for misstatements.
• Cost accounting: Maintain detailed, contemporaneous cost records to substantiate that total “repairs and modifications” do not exceed 75% of the comparable new tractor’s retail price. Preserve methodologies and market data for determining the “retail price of a comparable new article.”
• Segmentation: Recognize that safe harbor eligibility must be evaluated unit-by-unit. If provenance is uncertain for a subset, isolate those units operationally and financially to manage tax exposure and potential reserves.
• Audit readiness: Organize files by refurbished unit, linking provenance, cost calculations, and comparable-price support. Be prepared to explain how engines/transmissions derive from articles described in § 4051(a)(1), even if sourced via salvage and even without ownership/VIN continuity.

Unresolved Questions and Future Litigation Vectors

• Proof standards for § 4052(f)(2): What combinations of circumstantial evidence, supplier attestations, or market inferences will satisfy the taxpayer’s burden when VIN/title data are unavailable?
• Scope of “repairs or modifications” inputs: While the 75% threshold is quantitative, what precisely counts in the numerator (e.g., outsourced vs. in-house remanufacturing costs) may continue to generate disputes at the margins.
• Interaction with § 4052(b)(1)(B)(iii): Although overlap is permitted, the precise boundaries of price-exclusion vs. exemption may receive further development in fact-specific settings.
• Potential regulatory or legislative responses: The IRS may consider guidance emphasizing documentation expectations for § 4052(f)(2); Congress could refine the safe harbor or its carve-out to address the anomaly identified by the court.

Conclusion

Fitzgerald sets a clear, two-step framework for the heavy truck excise tax safe harbor. First, the court confirms a bright-line, quantitative safe harbor under § 4052(f)(1): if the cost of repairs and modifications to an existing tractor is ≤75% of the comparable new retail price, the work is not treated as “manufacture,” with no added qualitative threshold. This aligns the Sixth Circuit with the Seventh and rejects non-textual constraints such as single-donor or identifiable-article requirements.

Second—and crucially—the court enforces § 4052(f)(2)’s carve-out: the safe harbor is unavailable if the donor tractor, when new, was not taxable under § 4051 (including because its first sale fell within § 4221’s tax-free categories). “Taxable” means capable of being taxed, not necessarily actually taxed. The taxpayer bears the burden to prove that origination fact for each unit.

By reversing and remanding, the Sixth Circuit underscores that while Congress created an administrable safe harbor on the cost side, Congress also conditioned its availability on the tax status of the original sale. The decision therefore provides welcome certainty about the cost test while elevating the centrality of provenance and documentation. Going forward, taxpayers in the Sixth Circuit—and likely beyond—must pair meticulous cost accounting with robust origin evidence to secure the safe harbor for refurbished tractors.