Worldwide Equipment, Inc. v. United States

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 10a0142p.06

UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________

X
Plaintiff/Counterclaim Defendant-Appellant, -
WORLDWIDE EQUIPMENT, INC.,
-
-
-
No. 08-5950
v.
,
>
-
Defendant/Counterclaim Plaintiff-Appellee. -
UNITED STATES OF AMERICA,
-
N
Appeal from the United States District Court
for the Eastern District of Kentucky at Pikeville.
No. 04-00451—David L. Bunning, District Judge.
Argued: April 29, 2009
Decided and Filed: May 17, 2010
Before: MERRITT, COOK, and WHITE, Circuit Judges.

_________________

COUNSEL
ARGUED: James E. Burke, Jr., KEATING, MUETHING & KLEKAMP, Cincinnati, Ohio,
for Appellant. Bethany B. Hauser, UNITED STATES DEPARTMENT OF JUSTICE,
Washington, D.C., for Appellee. ON BRIEF: James E. Burke, Jr., Sue A. Erhart, Brenna
L. Penrose, KEATING, MUETHING & KLEKAMP, Cincinnati, Ohio, for Appellant.
Bethany B. Hauser, Richard Farber, UNITED STATES DEPARTMENT OF JUSTICE,
Washington, D.C., for Appellee. Richard H.C. Clay, DINSMORE & SHOHL, Louisville,
Kentucky, Emily Fritts Whitty, MORRIS & PLAYER, Louisville, Kentucky, Mark H.
Sidman, Rose-Michele Nardi, Sandra B. Vipond, WEINER, BRODSKY, SIDMAN &
KIDER, Washington, D.C., for Amici Curiae.
WHITE, J., delivered the opinion of the court, in which COOK, J., joined.
MERRITT, J. (pp. 19-20), delivered a separate dissenting opinion.

1
No. 08-5950 Worldwide Equip., Inc. v. United States Page 2

_________________

OPINION
_________________

HELENE N. WHITE, Circuit Judge. Plaintiff Worldwide Equipment, Inc.
(Worldwide), a heavy-truck dealer and authorized distributor of Mack Trucks, serves the
coal-mining industry in Kentucky, Tennessee, West Virginia and Virginia, and is required
to collect a federal retail excise tax (FRET) on the sale of certain trucks. Worldwide filed
this suit for a refund of $119,302 in heavy-truck excise taxes it paid the IRS for the first
quarter of 2004, related to the sale of eight Model RD888SX coal-hauler dump trucks.
Defendant Government counterclaimed for $1,149,140.59 in excise taxes claimed to be due
for the period from 1999 to early 2003. The Government sought summary judgment on both
the claim and counterclaim. The district court granted the Government’s motion on both
claims. We vacate the grant of summary judgment and remand for further proceedings.

I.

A

Neither party challenges the district court’s statement of underlying facts:

Plaintiff Worldwide Equipment is a heavy truck dealer with
headquarters in Prestonburg, Kentucky. (Doc. #47-1 at 2). It has facilities
and conducts business in Kentucky, West Virginia, Tennessee, and Ohio.
(Id.) The vehicle at issue in this case is a Mack Trucks, Inc. (“Mack”)
RD888SX. By way of explaining why Worldwide is responsible for the
federal excise tax imposed by the Internal Revenue Service (“IRS”),
Worldwide provides:
Worldwide is a heavy truck dealer and as such, a
“Form 637 filer.” This means that Worldwide purchases
complete or incomplete new truck chassis from an original
manufacturer, such as Mack, without paying federal excise
tax. When Worldwide sells a completed new truck or an
incomplete chassis to a retail customer, it has the
responsibility for determining whether the 12% excise tax is
due, and if it is, charging, collecting and remitting the tax to
the IRS along with a Form 720 (Federal Excise Tax Return).
While Worldwide, like most dealers, passes the excise tax
on to its customers, Worldwide is the party required by law
to collect the excise tax.
No. 08-5950 Worldwide Equip., Inc. v. United States Page 3

(Doc. #47-1 at 5 (footnotes omitted)). With respect to the RD888SX,
Plaintiff states:

Worldwide adopted a practice of requiring its customers to
sign a written statement attesting that the RD888SX Coal
Hauler they were purchasing from Worldwide would be
operated as an off-highway vehicle. If the customer refused
to sign this statement, or Worldwide believed that the
customer intended to operate the vehicle on public
highways, it collected, reported and remitted excise
tax–even though the vehicle was still illegal to operate on
public highways.
(Doc. #47-1 at 13 (footnote and internal citation omitted)).

The RD888SX first came to the attention of the IRS during a 1999
investigation into whether a particular Bridgestone/Firestone tire should be
subject to excise tax. (Doc. #48-2 at 14). The IRS ultimately determined
that the RD888SX was subject to excise tax. On or before July 24, 2001, the
IRS notified Plaintiff that it was opening an investigation into Plaintiff’s
1999 tax returns because Plaintiff had not paid federal retail excise taxes
(FRET) for certain RD888SX sales. (Doc. #48-2 at 22). [A footnote here
states “During the relevant period (from 1999 to 2004), Plaintiff sold
approximately 200 RD888SXs total. (48-2 at 16).”] Plaintiff argued that the
IRS assessment was erroneous. This argument was “initially rejected in
2003, and again in 2004 after plaintiff had availed itself of internal Service
administrative appeal procedures.” (Id.). Plaintiff paid the excise tax on
eight vehicles sold to a single customer, James C. Justice Cos. Plaintiff then
filed a complaint for the refund of the FRET paid ($119,302). Defendant
filed a counterclaim for $1,149,140 for taxes assessed upon at-issue vehicles
sold since 1999 [from 1999 through the first quarter of 2003, about 90
vehicles] for which no FRET had been paid.
No. 08-5950 Worldwide Equip., Inc. v. United States Page 4

B

1
The Internal Revenue Code, 26 U.S.C. § 4051(a), imposes a 12% tax on the first
retail sale of any heavy-truck chassis or body weighing over 33,000 pounds if the chassis
or body is sold for use as a component part of a “highway vehicle.” “Highway vehicle”
is defined as:

* * * any self-propelled vehicle, or any trailer or semitrailer, designed to
perform a function of transporting a load over public highways, whether
or not also designed to perform other functions, but does not include a
vehicle described in paragraph (d)(2) of this section. . . . [26 C.F.R.
§ 48.4061(a)-1(d).]

The § (d)(2) exception at issue in this case is the off-highway vehicle exception, which
provides:

(ii) Certain vehicles specially designed for offhighway
transportation. A self-propelled vehicle, or a trailer or semitrailer, is
not a highway vehicle if it is (A) specially designed for the primary
function of transporting a particular type of load other than over the
public highway in connection with a . . . mining . . . operation[] and (B) if
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. For purposes of applying the rule of (B) of this subdivision,
account may be taken of whether the vehicle may travel at regular
highway speeds, requires a special permit for highway use, is
overweight, overheight or overwidth for regular use, and any other
relevant considerations. . . . . [26 C.F.R. § 48.4061(a)-1(d)(2)(ii).]
A vehicle’s taxability is determined by application of an ex ante analysis that
examines a vehicle’s intended primary design. See Dillon Ranch Supply v. United

1
Relevant provisions of the statute (effective June 9, 1998, to August 9, 2005) provided at
pertinent times:
(a) Imposition of tax.--
(1) In general.–There is hereby imposed on the first retail sale of the following articles
. . . a tax of 12 percent of the amount for which the article is so sold:
***
(C) Truck trailer and semitrailer chassis.
(D) Truck trailer and semitrailer bodies.
***
(4) Sale of trucks, etc., treated as sale of chassis and body.–For purposes of this
subsection, a sale of an automobile truck or truck trailer or semitrailer shall be
considered to be a sale of a chassis and of a body described in paragraph (1).
No. 08-5950 Worldwide Equip., Inc. v. United States Page 5

States, 652 F.2d 873, 881 (9th Cir. 1981) (noting that “[t]he test for taxability under
§ 4061(a) is primary design, not primary use, under both the old [pre-1977] and new
Treasury Regulations. . . [A] use test would be unworkable since there would be no way
of knowing how a given article would be used by the consumer at the time of sale.”); see
also Freightliner of Grand Rapids v. United States, 351 F. Supp. 2d 718, 728 (W.D.
Mich. 2004) (noting that “because the taxability of a vehicle [under 26 U.S.C. § 4501,
see id. at 720 n.1] must be determined at the time of the first retail sale, an actual use
standard is unworkable.”)

C

The Government’s motion for summary judgment argued that the RD888SX was
not specially designed for the primary function of transporting a load other than over the
public highway because it was designed to be “a dual-use on/off highway vehicle,” and
because it was not specially designed to transport a particular type of load. The district
court agreed that the exception does not apply:

Whether the RD888SX satisfies the off-highway exception’s
special design test is a close call. It would seem that the vehicle’s
primary purpose is, indeed, the hauling of coal. However, this hauling
entails transport of the coal from mine site to tipple, which often entails
travel over the public highways. Thus, while specific components of the
RD888SX may have been modified to improve its ability to operate in
the Appalachian coal region, it does not satisfy the requirement that it be
“specially designed for the primary function of transporting a particular
type of load other than over the public highway.” 26 C.F.R.
§ 48.4061(a)-1(d)(2)(ii(A) (emphasis added). Rather, the RD888SX’s
ability to transport coal over public roadways is as important to its role
in the coal industry as its sturdier design features which make it better
suited for work in the Appalachian coal fields. Use of the RD888SX on
the public highways can hardly be considered “merely incidental,” since,
in most cases, one must travel over the public roads to transport coal
from mine face to tipple. [Footnote 4 here states “While some mines
have on-site tipples, most do not. (Pigman Decl. ¶¶ 6-7).”]
***
Taken as a whole, the record evidence suggests that the
RD888SX is not a special off-highway design. Rather, it is a dual use
(on/off highway) vehicle that may be licensed and that complies with
applicable Federal Motor Vehicle Safety Standards . . . .
No. 08-5950 Worldwide Equip., Inc. v. United States Page 6

D

Worldwide raises three objections to the district court’s opinion: 1) that the court
failed to properly apply the summary judgment standard; 2) that the court applied an
incorrect legal standard when analyzing the “special design” test, in that Worldwide
need only show that the primary function of the RD888SX was the transport of coal off-
road; and 3) that the court misconstrued several key pieces of evidence, thereby making
assumptions of fact that were not supported by the record. In essence, Worldwide
challenges the district court’s conclusion that, as a matter of law, the RD888SX did not
meet the special design prong of the off-highway vehicle exception.

This court reviews de novo a district court’s grant of summary judgment.
Sherwin-Williams Co. v. United States, 403 F.3d 793, 795 (6th Cir. 2005). Summary
judgment is properly granted “if the pleadings, the discovery and disclosure materials
on file, and any affidavits show that there is no genuine issue as to any material fact and
that the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(c); see
also Sherwin-Williams, 403 F.3d at 795. IRS tax-liability determinations are presumed
correct, and the taxpayer must prove by a preponderance of the evidence that it is
entitled to a tax refund. Sherwin-Williams, 403 F.3d at 796.

1. Dual Use Vehicles are not Disqualified under the Off-Highway Vehicle
Exception
Worldwide and amici argue that the district court incorrectly interpreted the
special design prong of the off-highway vehicle exception as disqualifying dual-use
vehicles. Amici National Automobile Dealers Association and various state Coal
Associations relatedly assert that the district court’s application of an “incidental use”
standard was improper and unsupported by the plain language of the regulations. We
agree with both arguments.

Clause A of the off-highway vehicle exception, the special design prong,
provides that a vehicle is not a highway vehicle if it is “specially designed for the
primary function of transporting a particular type of load other than over the public
highway.” 26. C.F.R. § 48.4061(a)-1(d)(2)(ii)(A) (emphasis added). The term
No. 08-5950 Worldwide Equip., Inc. v. United States Page 7

“primary” means first in rank of importance, WEBSTER’S THIRD NEW
INTERNATIONAL DICTIONARY (2002); it does not mean exclusive. See also Malat v.
Riddle, 383 U.S. 569, 571-72 (1966) (noting that a statute’s words, including revenue
acts, should be interpreted where possible in their ordinary, everyday senses, and holding
that as used in 26 U.S.C. § 1221(1) of the Internal Revenue Code, “primarily” means “of
first importance” or “principally”).

The structure of the statute supports that the off-highway exception comes into
play only with respect to vehicles that are designed, at least to some extent, for both on-
and off-highway use.2 Various IRS general counsel memoranda3 support that
conclusion. See I.R.S. G.C.M. 37833, at 5 (Jan. 26, 1979) (noting that “only vehicles
with no or negligible utility for transporting loads on public highways fail to meet the
design test in the general definition of highway vehicle,” and “[t]he exceptions are
provided to exclude vehicles that should not be taxed, but which meet the design test”);
see also I.R.S. G.C.M. 39530 (July 16, 1986) (noting that “only vehicles with no or
negligible highway capabilities fail to come within the general definition of a ‘highway
vehicle’, and because [the truck at issue] can function as a highway vehicle it is subject
to excise tax . . . unless it is exempt” under one of the exceptions.).

Further, when read as a whole, the off-highway exception clearly contemplates
that highway use may occur, in that Clause B of the exception states “if 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.” 26 C.F.R. § 48.4061(a)-
1(d)(2)(ii)(B) (emphasis added).

2
If a vehicle is not designed for highway use, it would fall outside the regulatory definition of a
highway vehicle and would not be subject to the 12% excise tax.
3
IRS General counsel memoranda are entitled to some deference, although they do not have the
force of law because they have not been subject to notice and comment. See Schlumberger Tech. Corp.
and Subsidiaries v. United States, 55 Fed. Cl. 203, 212 n.5 (2003).
No. 08-5950 Worldwide Equip., Inc. v. United States Page 8

2. The Primary Function Standard of § 48.4061(a)-1 Permits More than
Incidental Highway Use
The district court concluded that “[r]egardless of whether Plaintiff’s or
Defendant’s version of highway usage is accepted, the record does not support Plaintiff’s
position that the RD888SX’s use on public highways is merely incidental.”

Although the court understandably applied an “incidental” use standard to the
special design prong of the off-highway exception, given that the parties argued it, that
standard no longer applies under current regulations.4 The term “incidental” is defined
as “[s]ubordinate to something of greater importance; having a minor role.” BLACK’S
LAW DICTIONARY (8th ed. 2004). However, the proper standard for application of the
off-highway-vehicle exception special design prong is not whether highway use is
incidental or subordinate to off-highway use, but rather, whether the vehicle was
designed for the primary function of transporting loads other than over a public highway.
See 26 C.F.R. § 48.4061(a)-1(d)(2)(ii). The primary function standard permits more than
incidental highway use. See e.g., GLB Enterprises, Inc. v. United States, 232 F.3d 965,
967-68 (8th Cir. 2000). Highway use that is more than incidental does not necessarily
mean the truck was not designed primarily for off-highway use. See Halliburton Co. v.
United States, 611 F. Supp. 1118, 1121-22, 1127 (N.D. Tex. 1985) (noting that trucks
that were primarily designed as off-highway vehicles were not subject to excise tax
simply because of their use on public highways as necessary to get to the job sites); see
also GLB Enterprises, 232 F.3d at 967-68.

We relatedly conclude that the district court erroneously considered evidence of
presumed use instead of focusing on the objective design of the vehicle. The district
court noted the proper standard – an ex ante analysis that examines a vehicle’s primary
design, see Dillon Ranch Supply, 652 F.2d at 881 (noting that “[t]he test for taxability
under § 4061(a)(1) is primary design, not primary use, under both the old and new

4
We note that although the “incidental use” standard is not part of current regulations and
apparently originated in the pre-1977 regulations, see Liquid Asphalt Systems, Inc. v. United States, 555
F. Supp. 1100, 1102-03 (W.D. Mo. 1982), some courts continue to consider evidence regarding whether
highway use of the vehicle at issue is “incidental.” See, e.g., Gateway Equip. Corp. v. United States, 247
F. Supp. 2d 299, 308 (W.D. NY 2003).
No. 08-5950 Worldwide Equip., Inc. v. United States Page 9

Treasury Regulations . . . [A] use test would be unworkable since there would be no way
of knowing how a given article would be used by the consumer at the time of sale.”)
However, after citing the proper standard, the court considered evidence of highway use
(the IRS 1999 and 2006 surveys5) and intended use (the fact that Worldwide collected
taxes on certain RD888SX’s sold to customers who planned public highway use). The
court’s inquiry should have been limited to the pre-sale intent and objective design of
the vehicle itself.

In addition, the district court credited only the Government’s interpretation of the
evidence when it found that Worldwide “admits the RD888SX was designed to transport
coal from mine site to tipple–a purpose often necessitating use of the public roads.” The
evidence Worldwide submitted below supported that the RD888SX’s primary design
function was for off-highway transport from mine face to tipple.

Rather than focusing on whether a question of material fact existed, the court
improperly credited only IRS expert Pigman’s affidavit, which stated in pertinent part:

6. It is true that some mine facilities are large enough, and expected to
have a long enough productive lifetime, in order to justify construction
of a tipple on the mine property itself. However, most mines in
Kentucky have not been of that scale (or have been located in areas
inaccessible to rail or barge transportation) with the result that tipples
have generally not been located on the mine property itself.

Based on Pigman’s general statement that most mines in Kentucky have not been of a
large enough scale to justify an on-site tipple, the district court concluded that “some
mines have on-site tipples, most do not,” and that one must travel over public roads to
transport coal from mine face to tipple. The district court concluded that the RD888SX
must have been designed to travel on public highways and, therefore, that it fails the
“special design” test.

5
The survey data the Government relied on, and which our dissenting colleague believes supports
the Government under the off-highway exception’s Clause B (substantial impairment), showed that some
RD888SX coal haulers operated over Kentucky public highways during the three-day survey periods in
1999 and 2006, and that the RD888SX trucks looked similar to standard dump trucks. The Government’s
evidence had nothing to do with the design of the RD888SX or its primary function and, as noted infra,
the district court did not reach Clause B and the Government on appeal does not request that we do so.
No. 08-5950 Worldwide Equip., Inc. v. United States Page 10

We note that expert witnesses cannot create a question of fact by simply stating
conclusions on ultimate issues. A court is free to reject an argument as having no factual
basis. However, as discussed below, Worldwide presented extensive evidence
demonstrating the existence of a factual dispute regarding whether the RD888SX was
designed for the primary function of transporting coal other than over the public
highways. Under these circumstances, the district court was not free to simply credit the
Government’s submissions, i.e., weigh the evidence and determine the truth of the
matter. Rather, the court’s function was to determine whether there was a genuine issue
for trial. See Doe v. Metropolitan Nashville Pub. Schs., 133 F.3d 384, 387 (6th Cir.
1998) (noting that weighing the evidence “is never appropriate at the summary judgment
stage.”)

Worldwide does not dispute that the RD888SX coal hauler is physically capable
of being driven on the highway and is sometimes driven on public highways.
Nonetheless, Worldwide introduced extensive evidence regarding the special design
features of both the chassis (the Mack RD888SX) and the bodies incorporated into the
RD888SX coal hauler. This evidence included the affidavit of Terry Dotson, Chief
Executive Officer, President and Chairman of Worldwide Equipment, which stated in
pertinent part:

2. Worldwide is a heavy truck dealer headquartered in Prestonburg,
Kentucky, and an authorized dealer for new Mack, Volvo . . . and GMC
trucks. . . . Worldwide was founded as a Mack dealer.
3. A significant portion of Worldwide’s business is selling and servicing
heavy trucks for the coal mining industry in Eastern Kentucky, West
Virginia, Virginia and, to a lesser extent, Tennessee.
4. Mack is a custom truck builder that manufactures and sells trucks . . . .
Every Mack truck is a custom designed and custom engineered truck.
Worldwide, working with its retail customers, custom orders each truck
it buys from Mack according to the specific application for which the
truck is being purchased.
***
6. From the time I joined the company in 1972 until sometime in the
mid-1980's, Worldwide would typically recommend and custom order a
No. 08-5950 Worldwide Equip., Inc. v. United States Page 11

specially designed and configured version of a Mack Model DM800
series truck for customers who said they wanted a rugged off-road dump
truck to haul coal in the coal fields in the area.
7. Mack designated the unique combination of special design and
configuration features for the off-highway coal hauling dump version of
the DM800 series ordered by Worldwide as the “DMC800” sometime in
1980. The “C” stood for “Coal.” Prior to Mack’s use of this model
designation, Worldwide would order a DML800 for its off-road coal
hauling customers. The DML800 had the same unique special design
and configuration features as the DMC800. The “L” stood for
“Logging.” However, the intended use of the DML800 trucks ordered
by Worldwide was for hauling coal and an oversized dump bed was
added to the truck.
***
9. Sometime in late 1982 or early 1983, I learned that Mack was going
to stop building the DMC800 . . . .
10. Based upon years of working closely with Worldwide’s customers
involved in the coal mining industry, I knew that they had a need for a
rugged dump truck designed and configured for operating off-road in the
conditions typical to the region: A vehicle that could survive in the hilly,
muddy, rocky, gravelly Appalachian coal fields and still provide an
economically viable method to transport coal from the extraction point
(the mine face) to the tipple or processing area.
11. In late 1982 or early 1983, I learned about the RD800 series trucks
that Mack was just beginning to manufacture for the Canadian logging
industry. After seeing the basic specifications for this new series, I
personally approached Mack and asked whether the RD800 base
platform could be designed and configured so that it would be suitable
for use as an off-road coal hauling dump truck–a suitable replacement for
the DMC800.
***
13. Worldwide, in collaboration with Mack and its coal field customers,
helped to develop the specifications for the specially configured RD800
truck that became known as the RD888SX Coal Hauler. The paperwork
on every RD888SX Coal Hauler ordered by Worldwide stated that the
vehicle was intended to be used as severe service “off-highway” coal
hauler.
14. The RD888SX Coal Hauler was a direct successor to the DMC800
and shared many of the same design features, including a 65,000 lb.
bogie, heavy duty triple rail frames and associated frame and suspension
No. 08-5950 Worldwide Equip., Inc. v. United States Page 12

components; a special engine, transmission and rear axle combination;
an oversized steel dump body; and special off-road Goodyear tires. The
RD888SX Coal Hauler was designed and sold to the same customers for
the same exact purpose as the DMC800–off-road coal hauling.
15. The typical RD888SX Coal Hauler sold by Worldwide had more
than $27,000 in customizations as compared to the standard RD800 SX
truck, or a price increase of approximately 25%. Attached hereto as
Exhibit A is a specification comparison of the RD800 SX “standard”
truck and the RD888SX Coal Hauler.
***
17. The RD888SX Coal Hauler was a custom designed and configured
truck built for a special purpose. It was wider, taller, longer, heavier,
slower and significantly more expensive to purchase and operate than
general purpose heavy duty dump trucks manufactured by Mack and
several other manufacturers which were intended for highway use. It
was built for the primary purpose of off-highway use. Attached hereto
as Exhibit B is a copy of a January 9, 2003 letter where Mack confirms
the RD888SX Coal Hauler’s intended purpose.
18. The RD888SX Coal Hauler shared the same fundamental
modifications that distinguished the DMC800 trucks as off-road and
qualified them for tax exempt status: A 65,000 lb. bogie; heavy duty
triple rail frames and associated frame and suspension components; a
special engine, transmission and rear axle combination; an oversized
steel dump body; and special off-road Goodyear tires.
19. In the majority of situations, Worldwide would take delivery of an
incomplete RD888SX chassis from Mack and subcontract with a custom
dump bed manufacturer to affix a dump bed to the chassis to make a
complete truck. On rare occasions, Worldwide’s customer wanted to
complete the vehicle by affixing a dump bed or other equipment to the
chassis on its own or through a subcontractor of its choice.
20. Every RD888SX Coal Hauler sold by Worldwide from April 1, 1999
through March 31, 2004 was at least 104.4 inches wide at the rear bogie
(as measured from tire to tire), and the majority of those trucks were sold
with dump beds that exceeded 102 inches in width. It is important to
note that this width measurement is based on an empty truck. When the
truck is loaded, the tires flatten out and the width of the vehicle increases
as much as 2 inches or more.
21. The maximum allowed width for vehicles using public highways in
the United States is 102 inches–except Hawaii is 108 inches, and
Connecticut is 102.36 inches. Worldwide never sold an RD888SX Coal
Hauler for use in Hawaii or Connecticut. Further, there are many public
No. 08-5950 Worldwide Equip., Inc. v. United States Page 13

roads on which the maximum width is just 96 inches. Attached hereto
as Exhibit C is a copy of a July 1, 2002 list prepared by J.J. Keller and
Associates, Inc., which shows maximum vehicle sizes and weights for all
states. This is a document that Worldwide uses in its business.
22. The custom specifications of the RD888SX Coal Hauler prevent it
from being driven at regular highway speeds. Although the “maximum
geared road speed” of this truck is listed by Mack as approximately 45
MPH, it is virtually impossible to sustain that speed for any length of
time because to do so would require the engine to operate at its maximum
governed RPM rating. In addition, if the RD888SX Coal Hauler is
operated for any length of time at or above 35-40 MPH, the rear
transaxles will overheat due to the very low gear ratios (a low gear ratio
means that the rear transaxles must turn 7.58 times for each revolution of
the rear wheels). If the rear transaxles are overheated for any length of
time, the lubricant will “coke” and the gears will be burned out.
Furthermore, if an RD888SX Coal Hauler is operated for any length of
time at or above 35-40 MPH, the special off-road Goodyear tires will
overheat and suffer tread separation or even catastrophic tire failure (a
blowout), a problem that is exacerbated if the truck is hauling a heavy
load.
***
26. The RD888SX Coal Hauler cannot legally be operated on the
highway without a special permit due to its excessive width and/or
weight . . . .
27. To justify the premium cost for an RD888SX Coal Hauler, an
owner/operator must fully load the truck for its operation to be
economically feasible. A fully loaded RD888SX Coal Hauler often
weighs in excess of 100,000 pounds (41,000 lbs. empty weight). But if
used on public highways, the RD888SX Coal Hauler would only be able
to legally haul a fraction of its rated or actual load capacity. It is not
economically feasible for the RD888SX Coal Hauler to be used for the
primary purpose of transporting loads over public highways.
28. Mack halted production of the RD888SX Coal Hauler in 2004.
***
30. Less than 1,315 RD888SX Coal Hauler trucks were built by Mack
Truck during the entire 20 plus year production run. Of this number,
Worldwide purchased all but about 50.
***
No. 08-5950 Worldwide Equip., Inc. v. United States Page 14

32. An owner/operator could modify an RD888SX Coal Hauler to make
it highway legal, but I’ve never known anyone to do this. The truck
would have to be totally reconfigured. At a minimum, the 65,000 lb.
bogie and all the wheels, spacers and tires would have to be replaced, the
custom dump bed would have to be replaced, and the chassis would have
to be reconfigured. . . . [Emphasis added.]

Additional evidence Worldwide presented on the special design prong of the off-
highway exception included the affidavit of Bruce Hollenbeck, Mack Truck Vice
President of Product Planning, and an employee of Mack Truck since 1971, stating in
pertinent part:

4. Mack has historically used the terms “Highway (On Road) Vehicles,”
“On/Off Highway Vehicles, and “Off Highway (Off Road) Vehicles” to
describe the different categories or types of vehicles it has designed and
manufactured over the years. However, Mack’s internal terminology . . .
had nothing whatsoever to do with whether particular vehicles could be
licensed or whether federal excise tax was applicable to the sale of
particular vehicles.
5. From 1977 to 1983, I was the program manager responsible for the
development of the RD800 series of Mack trucks. One of the variants of
the RD800 series was the RD888SX model. As such, I am very familiar
with the development of the RD800 series and the RD888SX variant of
that series.
6. The RD800 series, including the RD888SX variant, was purposely
designed so that, depending on the specifications required by the
customer, the vehicles could operate off-highway, on-highway or both.
Customer specifications are generally driven by the customer’s intended
vehicle application–in other words, how the customer intends to use the
truck.
7. The two vocational applications for which the RD800 series was
originally designed were (1) logging (hauling logs both off and on paved
surfaces), and (2), oil field operations (hauling very heavy oil field
equipment both off and on paved surfaces).
8. Coal hauling was not one of the original applications for which the
RD800 series was designed. However, after the RD800 series had been
put in production, it was determined in approximately 1983 that RD800
chassis could be configured in such a way that would be suitable for coal
hauling (both off and on paved surfaces).
9. The RD800 series was a very low volume product for Mack.
No. 08-5950 Worldwide Equip., Inc. v. United States Page 15

10. I have carefully examined pages 3793 through 3803 of “Mack
Exhibit 13” to my deposition (January 8, 2007). These pages relate to
the specifications for 8 RD888SX trucks (Serial No. 2189 through 2196)
ordered by Worldwide Equipment in April 1998. Based upon my review
of those specifications, I would classify those 8 vehicles as “Off
Highway Vehicles.” I base this statement on the fact that the customer’s
stated application or intended use of these vehicles was “Class D Off
Road” for “Mining.” I also note that these vehicles were ordered with
heavy duty tandem rear axles (referred to as “bogies”) rated at 65,000
pounds, and 12.00R24 Goodyear tires, which would result in a vehicle
that was at least 104.4 inches wide. It is my understanding that the
maximum legal width for vehicles traveling on public roads in the United
States is either 96 inches or 102 inches, depending on the type of road.
11. Similarly, I have carefully examined pages 5108 through 5112 of
“Mack Exhibit 5” to my deposition (January 8, 2007). These pages are
part of a Mack document called an “Invoice Detail/Vehicle
Specification” and relate to the specifications for 5 RD888SX trucks
(Serial Nos. 2240 through 2244) ordered by Worldwide Equipment in
March 1999. Based upon my review of those specifications, I would
classify those 5 vehicles as “Off Highway Vehicles.” I base this
statement on the fact that the customer’s stated application or intended
use of these vehicles was “Class D Off Road” for “Mining.” I also note
that these vehicles were ordered with the heavy duty 65,000 lb. bogies
and 12.00R24 Goodyear tires, which would result in a vehicle that was
at least 104.4 inches wide. It is my understanding that the maximum
legal width for vehicles traveling on public roads in the United States is
either 96 inches or 102 inches, depending on the type of road.

Worldwide also submitted the affidavit of Al Campbell, Goodyear representative
for the Mack Truck account, stating that the G177 tire with which the 8 RD888SX coal
haulers were equipped was the functional equivalent and substantially the same as the
Bridgestone/Firestone L317. The Bridgestone L317 tire was judicially determined to be
an excise-tax exempt specially designed off-road tire in Bridgestone/Firestone Am.
Holding, Inc. v. United States, 2006 WL 724561, at *8 (M.D. Tenn. Mar. 22, 2006)
(unreported disposition).

Additional evidence Worldwide submitted below supporting that the RD888SX
was primarily designed for off-highway use included the report of Worldwide’s Engineer
Expert, Frank Entwisle, which summarized his findings in pertinent part:
No. 08-5950 Worldwide Equip., Inc. v. United States Page 16

OBJECT
Determination of the suitability of the subject trucks for public
highway usage.
CONCLUSION
Due to the dimensional configuration and inclusion of specific
severe components, the specially designed Mack RD888SX coal trucks
are not suitable for highway use, and in fact, are in violation of Federal
and State laws applicable to highway vehicles.
Specific components at issue include the cargo body, rear axle,
drive train, and tires. The combination of these components results in
vehicles which have speed capability at maximum engine RPM rating of
approximately 45 mph.
The above issues substantially impair the use of the trucks to
operate on public highways.
***
It is my opinion to a reasonable degree of engineering certainty that the
Mack model RD888SX is specially designed for a vocation as an off-
highway coal hauling vehicle and the very design features which suit it
for that vocation, substantially impair the ability of the truck to operate
on public highways. The basis for this opinion includes my education,
training, and work experience as reflected in my attached Curriculum
Vitae as well as review and study of the materials identified in this
Report.

Additionally, Worldwide submitted affidavits of 14 RD888SX owners/operators, who
had purchased 98 of the coal haulers between 1998 and 2004, stating that highway use
was limited to about 5% or less of total operational time.

E

The evidence Worldwide submitted below supports that, by design, the
RD888SX’s primary function is to haul coal off-highway. Worldwide did not “admit”
that the RD888SX design to transport coal from mine site to tipple “often necessitated
use of the public roads.” Rather, Worldwide presented documentary evidence, including
affidavits of RD888SX owners/operators, who averred that the vast majority of the
trucks’ functional time was spent off-highway, and that highway use accounted for
No. 08-5950 Worldwide Equip., Inc. v. United States Page 17

approximately 5% of their time. The Government was not entitled to summary
disposition on the basis of its argument that the RD888SX’s primary function was dual
use.

II. Discussion of Cases on which the District Court Relied

Amici National Auto Dealers Association and various state coal associations
argue that the district court cited only one case, Florida Power & Light Co. v. United
States, 56 Fed. Cl. 328 (2003), in support of using the highway mileage threshold to
disqualify a vehicle from satisfying the special design prong (Clause A) of the exception,
and that reliance on that case was misplaced. We agree. The court in Florida Power
referred to the annual number of highway miles in its analysis of the substantial
limitation or impairment (Clause B) of the off-highway exception, not Clause A. 56 Fed.
Cl. at 333. In the instant case, the district court never reached Clause B, finding instead
that the exception did not apply because the RD888SX coal hauler did not satisfy Clause
A. We conclude that the district court erroneously relied on Florida Power.

The district court also followed Liquid Asphalt Systems, supra, which it found
“persuasive.” The Liquid Asphalt court concluded that the off-highway vehicle
exception did not apply because “transporting a load over the public highway is an
important part of the design and use of plaintiff’s job tankers.” 555 F. Supp. at 1104-05.
Liquid Asphalt is of limited application for several reasons. First, the decision followed
a trial, not a motion for summary judgment. Id. at 1101. Second, unlike in Liquid
Asphalt, no evidence was submitted in the instant case that highway transport was an
important part of the RD888SX’s design. Further, the asphalt tankers at issue in Liquid
Asphalt did not require a special permit to operate on the highway and were licensed as
normal vehicles, id. at 1103, unlike the RD888SX, which requires a special permit.

A

Having concluded as a matter of law that the RD888SX was not specially
designed for the primary function of transporting coal other than over the public highway
(Clause A of the off-highway exception), the district court did not reach the substantial
No. 08-5950 Worldwide Equip., Inc. v. United States Page 18

impairment prong (Clause B). Our dissenting colleague notes that at oral argument
Worldwide limited our focus to Clause A and caused us to ignore Clause B. That is not
the case. The Government has not requested that we consider and rule on Clause B; its
appellate brief states that in the event this court were to hold that summary judgment in
its favor was not warranted on the issue whether the trucks satisfy Clause A, the case
should be remanded for a trial on that issue and, if then necessary, for a determination
whether the trucks meet the additional requirement set forth in Clause B. Def.’s Br. 57
n.10.

We VACATE the district court’s grant of summary judgment to the Government
on both the claim and counterclaim, and REMAND for further proceedings.
No. 08-5950 Worldwide Equip., Inc. v. United States Page 19

________________

DISSENT
________________

MERRITT, Circuit Judge, dissenting. This should be an easy case. The
defendant-appellant, Worldwide Equipment Inc., is a heavy truck dealer that supplies
coal hauler dump trucks to coal mining companies in the Appalachian region. The
companies use the trucks to haul coal from mine face to tipple, a process which almost
always involves travel over the Interstate and other roads. For this reason, the
government claims that Worldwide must pay a 12% excise tax on the sale of its trucks
under 26 U.S.C. § 4051. The tax applies to “heavy trucks” (trucks over 33,000 pounds)
because of the special damage that they cause to public roadways.

Whether Worldwide is subject to the excise tax turns on whether its trucks fall
under an exception to the tax for off-highway vehicles. To qualify, a vehicle must be
(1) “specially designed for the primary function of transporting a particular type of load
other than over the public highway,” and (2) “by reason of such special design, the use
of such vehicle to transport such load over the public highways [must be] substantially
impaired.” 26 C.F.R. § 4061(d)(2)(ii) (emphasis added).

Worldwide persuaded the majority that it fell under the exception by slight of
hand. During oral argument, its attorney limited the Court’s focus to whether the trucks
at issue were specially designed for the primary function of hauling coal off-highway
and, as result, caused the Court to ignore the second factor, which considers whether (by
reason of such design) they were substantially impaired from traveling over public roads.
Although there is a strong argument that the trucks were not specially designed for the
primary function of off-road use, this question is a little closer than whether the trucks
were impaired from traveling over public roads. That the trucks were not substantially
impaired from using public roads was clearly established by facts in the record which
detailed routine use of the Interstate by Worldwide trucks transporting coal from face
to tipple. An expert civil engineer testified that most coal mines in the Appalachian
region are too small to justify an on-site tipple such that a central tipple often serves
No. 08-5950 Worldwide Equip., Inc. v. United States Page 20

multiple small mine faces in a region, and that travel to the tipple in this scenario
necessitates highway use. This theory was supported by data collected by the IRS and
Kentucky Vehicle Enforcement officer in 1999 and 2006 documenting routine highway
use by coal trucks (including Worldwide’s model) in transporting coal from face to
tipple. In view of such facts, it is impossible to conclude that the truck at issue is
substantially impaired from travel over public highways. Therefore, on this fact alone,
the Court cannot conclude that the truck falls under the exception. Under this statute,
the law does not require general taxpayers to subsidize all the costs of large, commercial
trucks hauling heavy loads that tear up the country’s roads between the coal mine and
points of further distribution.

Beyond the question of substantial impairment, there is also strong support for
the proposition that the trucks were not primarily designed for off-highway use, but
instead for the more general road use of getting coal from face to tipple which
contemplates the dual function of driving off-road in and around the mine face and
traveling on public roadways to get the coal to tipple. A coal truck incapable of
traveling on public roads would, in most cases, be unable to get coal from face to tipple
and would therefore serve no purpose.