Opinion
CIVIL NO. 1:01CV00416
January 30, 2003
MEMORANDUM OPINION
Plaintiff Volvo Trucks North America, Inc. f/k/a Volvo GM Heavy Truck Corporation ("Plaintiff") brought this action against Defendant United States of America ("Defendant") for a refund of excise taxes it paid to the Internal Revenue Service ("IRS"). Plaintiff avers that: (1) the temporary regulation relied on by the IRS is arbitrary, capricious, and inconsistent as applied to Plaintiff under the circumstances; (2) Plaintiff complied in "good faith" with the temporary regulation; and (3) the IRS is equitably estopped from denying Plaintiff's tax refund claim due to the affirmative misconduct of its agents. Defendant now moves for summary judgment as to the first two claims and to dismiss the remaining claim as a claim for which relief cannot be granted.
FACTS
Plaintiff manufactures and markets commercial heavy duty trucks, highway tractors, and related replacement truck parts. During the taxable periods at issue in the present case, Plaintiff had franchise dealers throughout the United States, including Atlas Engine Rebuilders, Inc. ("Atlas"), Alaska Sales and Service, Inc. ("Alaska"), and Alameda Truck Center, Inc. ("Alameda"). These dealers made wholesale purchases of heavy trucks and truck parts from Plaintiff for the purpose of reselling them. All business transactions between Plaintiff and its dealers were governed by the provisions of Plaintiff's Dealer Sales and Service Agreement ("Agreement"). The Agreement indicated that all purchases by the dealers of heavy trucks and truck parts were for resale. The Agreement also required dealers to collect and remit to the IRS all taxes associated with their resale of heavy trucks and truck parts purchased from Plaintiff, including all excise taxes.
In 1983, the United States Congress enacted Internal Revenue code ("IRC") Sections 4051- 4052, 26 U.S.C. § 4051-4052. IRC Section 4051 provided that an excise tax on heavy trucks and truck parts would be imposed upon only the "first retail sale" of such items. IRC § 4051(a)(1). Over five years later the IRS issued "Temporary Treasury Regulation" Section 145.4052-1 ("26 C.F.R. § 145.4051-1" or "temporary regulation") which set out the procedures manufacturers must follow to be eligible for the tax exemption allowed by IRC Sections 4051- 4052.
Unless otherwise noted, all citations to statutes and requlations are to those applicable to the periods at issue, 1989-1992.
Under IRC Section 4051, as applicable in 1989-1992, an excise tax is imposed on the "first retail sale" of truck chassis and bodies. IRC Section 4051(a)(1). IRC Section 4052 provided definitions and special rules applicable to IRC Section 4051. One such special rule gave the Secretary of the Treasury the authority to promulgate regulations setting forth registration and certification requirements to be met before the excise tax on trucks could be shifted from the manufacturers to their dealers. IRC Section 4052(d).
IRC Section 4052(d) stated that the Secretary of the Treasury could promulgate rules "similar to the rules of . . . (2) section 4222." IRC Section 4222(a) required manufacturers and their customers to register with the IRS for sales between them to be tax exempt. The regulations under IRC Section 4222 required the purchaser to provide the seller with a written statement setting forth the tax exempt purpose for which it was acquiring the item and also to provide the seller with its registration number. See C.F.R. § 48.4222(a)-1(c) and 48.4221-1(c)
Pursuant to IRC Section 4052(d), the Secretary of the Treasury promulgated 26 C.F.R. § 145.4052-1. As directed by IRC Section 4052, this regulation imposed the same requirements as those imposed by Section 4222 and its regulations. Section 145.4052-1 provided that the sale of an article was to be taxable unless "[b]oth the purchaser and the seller are registered under Section 4222 . . . and the seller has in good faith accepted from the purchaser a proper certification." 26 C.F.R. § 145.4052-1(a)(2) (emphasis added). The regulation required that the certification state: (1) that the purchaser intended to resell or lease the article purchased on a long-term basis; (2) that the purchaser had filed a Form 637 with the IRS; and (3) the purchaser's registration number. The regulation also required that the certification be signed. Id.; 26 C.F.R. § 145.4052-1(a)(6).
Following enactment of the temporary regulation, Plaintiff required each of its franchised dealers to file IRS Form 637 registering with the IRS and to provide Plaintiff with an exemption certificate indicating its registration number, or that the registration number had been "applied for" and that the trucks and truck parts purchased from Plaintiff were for resale. In response, Atlas and Alaska provided Plaintiff with exemption certificates for the relevant tax periods wherein they indicated that they had "applied for" but not yet received a registration number from the IRS. Alameda did not provide Plaintiff with an exemption certificate.
In 1991, the IRS began two excise tax audits of Plaintiff covering taxable periods 1989 to 1990 and 1990 to 1991. At the end of this audit cycle, the IRS assessed excise tax on Plaintiff for its wholesale transactions with its dealers. A second audit cycle also resulted in the imposition of excise tax upon Plaintiff. Subsequently, Plaintiff pursued an administrative appeal of both excise tax adjustments.
Plaintiff claims that it is during this first audit cycle that IRS agent Kimberly Johnson Putnam informed Plaintiff that it need not comply with the temporary regulation and obtain exemption certificates for its wholesale transactions with its franchise dealers. Plaintiff then claims that it relied on these representations and ceased its efforts to obtain exemption certificates from those dealers who had not already provided them. Lastly, Plaintiff claims that, despite these representations, the IRS repudiated Putnam's position and invoked the registration and certification requirements imposed by the temporary regulation.
Plaintiff claims that the IRS, through appeals officer Ted Bryant, informed Plaintiff during its administrative appeal that it would gain exemption from the excise tax as long as Plaintiff provided the IRS with signed affidavits from its dealers, including Atlas, Alaska, and Alameda. Furthermore, Plaintiff avers that Officer Bryant informed Plaintiff that the dealers had to attest only that they had collected and remitted to the IRS excise tax on their resale of heavy trucks and truck parts that they had initially purchased from Plaintiff. Plaintiff alleges that, in reliance on Officer Bryant's representations, it obtained affidavits from many of its dealers, including Alaska and Alameda.
Despite these affidavits, the IRS required Plaintiff to remit additional excise tax, which Plaintiff paid under protest. Plaintiff instituted the present litigation for a refund of the excise taxes it paid the IRS as a result of these audits.
DISCUSSION
Summary judgment must be granted if there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). The moving party bears the burden of persuasion on the relevant issues. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). The non-moving party may survive a motion for summary judgment by producing "evidence from which a [fact finder] might return a verdict in his favor." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 257 (1986). When the motion is supported by affidavits, the non-moving party must set forth specific facts showing that there is a genuine issue for trial.See Fed.R.Civ.P. 56(e); see also Cray Communications, Inc. v. Novatel Computer Sys., Inc., 33 F.3d 390, 393-94 (4th Cir. 1994) (moving party on summary judgment motion can simply argue the absence of evidence by which the non-movant can prove her case). In considering the evidence, all reasonable inferences are to be drawn in favor of the non-moving party.Anderson, 477 U.S. at 255. However, "[t]he mere existence of a scintilla of evidence in support of the plaintiff's position will be insufficient; there must be evidence on which the [fact finder] could reasonably find for the plaintiff." Id. at 252.
Plaintiff makes three arguments in support of an excise tax refund: (1) the temporary regulation relied on by the IRS is arbitrary, capricious, and inconsistent with the IRC as applied to Plaintiff under the circumstances; (2) Plaintiff complied in "good faith" with the temporary regulation; and (3) the IRS is equitably estopped from denying Plaintiff's tax refund claims due to the affirmative misconduct of its agents.
I. Validity of the Temporary Regulation
Treasury regulations, when not inconsistent with statutory provisions, have the force and effect of law. Maryland Cas. Co. v. United States, 251 U.S. 342, 349 (1920). They are valid and must be upheld if they "implement the congressional mandate in some reasonable manner,'" Rowan Cos. v. United States, 452 U.S. 247, 252 (1981) (quoting United States v. Correll, 389 U.S. 299, 307 (1967)), or if they are "based on a permissible construction of the statute." Chevron USA, Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 843 (1984); see also Miller v. ATT, 250 F.3d 820, 833 (4th Cir. 2001) ("[S]o long as the regulations promulgated by the Secretary are reasonable, we are not at liberty to question their wisdom.").
When, as here, Congress has "explicitly left a gap for the agency to fill, there is an express delegation of authority to the agency to elucidate a specific provision of the statute by regulation." Chevron, 467 U.S. at 843-44. Any ensuing regulation enacted by an administrative agency is valid and binding upon courts unless procedurally defective, arbitrary, or capricious, or manifestly contrary to the statute. 5 U.S.C. § 706(2)(a); United States v. Mead Corp., 533 U.S. 218, 227 (2001); see also NISH v. Cohen, 247 F.3d 197 (4th Cir. 2001); Allen v. United States, 173 F.3d 533 (4th Cir. 1999).
In the present case, Plaintiff alleges that Temporary Treasury Regulation Section 145.4052-1 is arbitrary, capricious, and inconsistent with the IRC as applied to Plaintiff under the circumstances. Because IRC Section 4051(a)(1) provides that a "first retail sale" constitutes a taxable event and Plaintiff sells only for resale, Plaintiff avers that it is not liable for any excise taxes on heavy trucks or parts it sold to its dealers. Thus, Plaintiff claims that the temporary regulation is invalid because it caused manufacturers (i.e., Plaintiff) to incur this exact excise tax liability when their dealers failed to provide them with certain exemption certificates and registration information.
A "first retail sale" is "the first sale, for purposes other than for resale or leasing in a long-term lease, after production, manufacture, or importation." IRC § 4052(a)(1) (emphasis added).
Although the temporary regulation may seem unfair to Plaintiff, that does not make it invalid. To the contrary, the temporary regulation is reasonable and valid in light of IRC Section 4052(d). The temporary regulation was passed by the Secretary pursuant to specifically prescribed statutory authority. IRC Section 4052(d), which governs IRC Section 4051, specifically states that the Secretary was to issue regulations "similar to the rules of . . . Section 4222." Furthermore, it is clear that, in order to reap the benefits of IRC Section 4051, manufacturers and dealers had to comply with the straightforward restrictions promulgated by the Secretary. As discussed supra in order for a sale to be tax-free, both Section 4222 and its regulations and 26 C.F.R. § 145.4052-1 require registration of both the purchaser and seller with the IRS. Both also require the purchaser to furnish the seller with its registration number and the tax exempt purpose for which it was acquiring the article. Furthermore, it is important to point out that it was not the temporary regulation but Plaintiff's failure to abide by its requirements that caused Plaintiff to be liable for excise taxes.
Plaintiff also makes the claim that the temporary regulation "was not uniformly or literally applied by IRS agents and appeals officers" to Plaintiff. (Pl.'s Br. Opp'n Def.'s Renewed Mot. Dismiss and Summ. J. at 11.) Plaintiff alleges that these actions are inherently arbitrary and capricious and, as a result, the temporary regulation is invalid. However, the real question here is whether the IRS can be equitably estopped by the actions or representations of its agents. This claim will be dealt with under the court's discussion of Plaintiff's equitable estoppel claim.
II. "Double Taxation" Claim
Plaintiff claims that the temporary regulation resulted in "double taxation" to Plaintiff and its dealers. Plaintiff alleges that the IRS imposed an "unauthorized double tax" on it and its dealers because they both were taxed for the same transaction. (Pl.'s Br. Opp'n Def.'s Renewed Mot. Dismiss and Summ. J. at 10.) Plaintiff avers that the facts and evidence show that its dealers at issue in this case have already paid the excise taxes in dispute, and thus Plaintiff is entitled to a refund of its taxes that it paid for the same transactions. Defendant claims that, even if all of these facts were true, it would not matter because Plaintiff is still liable for the excise taxes due to its noncompliance with the law.
Plaintiff points to the following evidence: (1) the affidavits and printouts from Alameda and Alaska; (2) documents produced during discovery showing that Alameda was registered with the IRS, Atlas filed IRS Forms 720 (excise tax returns), and that Alameda and Atlas paid large sums in excise tax during the periods at issue; and (3) even more recently discovered evidence that Alaska was actually registered.
In this case, Plaintiff has all but admitted that it failed to comply with the statute and temporary regulation. As a result of its noncompliance, Plaintiff was not entitled to the excise tax exemption available under Section 4051. Thus Plaintiff, not its dealers, was the party ultimately liable for excise taxes on its sales of vehicles and parts. Because of Plaintiff's liability, it is of no consequence to Plaintiff's case that its dealers may have mistakenly paid the same taxes. Furthermore, if the dealers paid the excise taxes which Plaintiff was actually responsible for paying and did pay, it is the dealers, not Plaintiff, that would have a claim for refund.
Although it is clear that any claim by the dealers would be time-barred by the applicable statutes of limitation, Defendant has acknowledged that the dealers may still be able to make out a claim for refund under the "deposit" theory first announced in Rosenman v. United States, 323 U.S. 658 (1945); see also Ott v. United States, 141 F.3d 1306 (9th Cir. 1998) (discussing the different lines of authority dealing with the "deposit" theory).
III. "Good Faith" Claim
Plaintiff next avers that it should receive an excise tax refund because of its good faith compliance with the temporary regulation. In support of its claim, Plaintiff points out that issues of good faith compliance are factual inquiries that need to be decided by the trier of fact and cannot be resolved by summary judgment, citing Safeco Ins. Co. v. City of White House, 36 F.3d 540, 548 (6th Cir. 1994). This may be true when good faith compliance with a statute or regulation is a relevant question. In the present case it is not.
Plaintiff also cites Safeco in support of its proposition that good faith should be implied into the temporary regulation. Plaintiff's reliance on Safeco is misplaced, however. The Safeco court applied terms of good faith and fair dealing to the federal regulation at issue in that case solely because the contract at issue was controlled by Tennessee state contract law, which provides that "`standards of good faith and fair dealing [are] implied in every contract.'" 36 F.3d at 548 (quotingMisco, Inc. v. United States Steel Corp., 784 F.2d 198, 203 (6th Cir. 1986)).
Plaintiff has structured the question at issue to be whether it hascomplied with the requirements of 26 C.F.R. § 145.4052-1 in good faith. The proper and relevant question, however, is whether Plaintiff "has in good faith accepted from [its dealers] proper certification." 26 C.F.R. § 145.4052-1 (emphasis added). Thus, it is in the act of acceptance of a proper certification where good faith becomes an issue and not in compliance generally by Plaintiff.
It is clear from a review of the relevant regulation and facts that the Plaintiff's acceptance of an indication from its dealers stating that the dealer had applied to be registered with the IRS does not make its truck sales to that dealer tax free. First, the dealer's indication of "applied for" registration was not "proper" under 26 C.F.R. § 145.4052-1 because it did not provide Plaintiff with the dealer's registration number as required. Second, 26 C.F.R. § 145.4052-1 required that both the seller and the purchaser be registered before a transaction can be tax free. Because the two dealers that did submit certification, Alaska and Atlas, acknowledged that they had not registered with the IRS but had only "applied for" registration, the transaction could not be tax free.
Although it was discovered during the course of this litigation that it was registered with the IRS, Alameda, the third dealer at issue, never submitted certification to Plaintiff during the period at issue.
Moreover, Plaintiff cannot claim "good faith" acceptance when it knowingly accepted less than required by the temporary regulation. Plaintiff admits to having intimate knowledge of the negotiation process and passage of 26 C.F.R. § 145.4052-1. (Compl. at ¶ 13; Pl.'s Br. Opp'n Def.'s Renewed Mot. Dismiss and Summ. J., Shumaker Aff. at ¶¶ 7-10). Although it clearly disagreed with the temporary regulation, Plaintiff also clearly knew of its requirements.
Plaintiff knowingly allowed its dealers to submit forms stating that registration numbers had been "applied for." Plaintiff also knew that the temporary regulation required actual registration numbers for compliance. Because two dealers submitted "applied for" certificates and one did not submit a certificate at all, these three dealers did not submit "proper certification" to Plaintiff. As a result, Plaintiff did not in good faith accept proper certification and did not comply with the requirements of 26 C.F.R. § 145.4052-1.
IV. Equitable Estoppel Claim
Lastly, Plaintiff avers that Defendant's motion to dismiss Plaintiff's claim of equitable estoppel must be denied. The court may dismiss a complaint for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6) only if "it appears beyond a doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957). In considering a motion to dismiss, the court accepts as true all well-pleaded allegations and views the complaint in the light most favorable to the plaintiff.Mylan Labs., Inc. v. Matkari, 7 F.3d 1130, 1134 (4th Cir. 1993). "`The issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims.'" Revene v. Charles County Commr's, 882 F.2d 870, 872 (4th Cir. 1989) (quotingScheuer v. Rhodes, 416 U.S. 232, 236 (1974), abrogated on other grounds by Harlow v. Fitzgerald, 457 U.S. 800 (1982)).
Plaintiff alleges that the IRS is equitably estopped from denying Plaintiff's tax refund claim due to the affirmative misconduct of its agents. Plaintiff claims that it properly pled equitable estoppel by stating (1) that the IRS agents' misrepresentations constituted affirmative misconduct under the law; (2) that it reasonably relied upon the misrepresentations; and (3) that it suffered detriment in its reliance on the misrepresentations.
The United States Supreme Court has expressly reserved ruling on the question of whether estoppel may ever run against the federal government. See Heckler v. Community Health Servs., 467 U.S. 51, 60 (1984). Generally, however, courts have held that a private party's reliance on government actions or omissions is not reasonable if such acts or omissions are contrary to the law or beyond the agent's authority. See, e.g., Miller v. United States, 949 F.2d 708 (4th Cir. 1991); Goldberg v. Weinberger, 546 F.2d 477 (2d Cir. 1976); Posey v. United States, 449 F.2d 228 (5th Cir. 1971). Specifically, the Fourth Circuit has held that an IRS agent does not have the authority to bind the Commissioner, and, consequently, a claim of estoppel must be rejected even though a taxpayer contends that he followed the erroneous advice of an agent and acted in reliance upon it. See Miller, 949 F.2d at 712. Furthermore, the Fourth Circuit has expressly prohibited the application of the doctrine of equitable estoppel in cases involving the IRS. Id. InMiller, the court held that "neither the government, nor a government agency such as the IRS, can be equitably estopped from asserting its legal rights because of the actions of an agent." Id.
Plaintiff also asserts that other circuits' decisions undermine this analysis and prove that equitable estoppel may be brought against the IRS. See Fredericks v. Commissioner of Internal Revenue, 126 F.3d 433, 438 (3d Cir. 1997); Simmons v. United States, 308 F.2d 938, 945 (5th Cir. 1962); Schuster v. Commissioner Internal Revenue, 312 F.2d 311, 317-18 (9th Cir. 1962). In light of the Fourth Circuit precedent cited above, however, other circuits' decisions are simply not controlling.
Plaintiff contends, however, that precedent in this circuit allows for estoppel claims against the IRS. See Bennett v. Commissioner Internal Revenue, 1991 WL 107735, at *2 (4th Cir. July 15, 1991); Hunt v. United States, 94 F. Supp.2d 665, 669 (D. Md. 2000); Smith v. Commissioner, 837 F. Supp. 130, 134 (E.D.N.C. 1993). Plaintiff's reliance on these cases, however, is misplaced. As an unpublished Fourth Circuit opinion decided prior to Miller, Bennett holds little, if any, precedential value. Furthermore, Smith is of little help to Plaintiff as the court either ignored or completely failed to acknowledge Miller altogether. 837 F. Supp. at 134-35. Lastly, Hunt is completely distinguishable from the present case.
In Hunt, the court viewed Miller's holding to be that "the government cannot be estopped where a taxpayer asserts that he relied upon advice allegedly given him by an IRS agent to avoid his statutory or regulatory obligations." 94 F. Supp.2d at 669. Although this seems to be an unnecessarily narrow view of Miller's holding, the court went on to distinguish its case from that of Miller. The court held that Hunt had not sought "to avoid any duty the law imposes upon him" but that he was "misled by the government" into "giving up a right of his own, that is the right to pursue litigation" of his case. Id. As a result, the court allowed for the IRS to be equitably estopped from denying Hunt a tax refund.
Plaintiff in this case, however, is trying to avoid a duty imposed by law, namely the statutory and regulatory duty to obtain proper certification before gaining its excise tax exemption. In fact, the misrepresentations were allegedly made by the IRS agents during Plaintiff's audits and appeal, well after Plaintiff accepted improper certifications from its dealers. As a result, any alleged misrepresentations would be attempting to circumvent the statutory and regulatory obligations of Plaintiff. Thus, even under Hunt's narrow holding, Plaintiff's claim would be dismissed.
CONCLUSION
Plaintiff is understandably frustrated with what it believes was an unduly cumbersome regulatory scheme and contradictory directions from IRS agents. However, to assure equal treatment under the law the court must interpret the law as written, particularly in matters of taxation. Here, it is undisputed that Plaintiff did not comply with Section 145.4052-1.
For the foregoing reasons, the court will grant Defendant's motion to dismiss Plaintiff's equitable estoppel claim and will grant Defendant's motion for summary judgment on Plaintiff's regulatory invalidity and good faith compliance claims.
An order and judgment in accordance with this memorandum opinion shall be entered contemporaneously herewith.
ORDER and JUDGMENT
For the reasons set forth in the memorandum opinion filed contemporaneously herewith,
IT IS ORDERED that Defendant's motion to dismiss Plaintiff's equitable estoppel claim is GRANTED, and that claim (Count Five) is DISMISSED with prejudice.
IT IS ORDERED AND ADJUDGED that Defendant's motion for summary judgment is GRANTED on Plaintiff's regulatory invalidity and good faith compliance claims, and those claims (Counts One through Four) are DISMISSED with prejudice.