T.C. Summary Opinion 2001-21
UNITED STATES TAX COURT
CROP CARE APPLICATORS, INC., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 2996-00S. Filed March 6, 2001.
William A. Duncan (an officer), for petitioner.
Paul K. Webb, for respondent.
DEAN, Special Trial Judge: This case was heard pursuant to
the provisions of section 7463 of the Internal Revenue Code in
effect at the time the petition was filed. Unless otherwise
indicated, subsequent section references are to the Internal
Revenue Code in effect for the years in issue. The decision to
be entered is not reviewable by any other court, and this opinion
should not be cited as authority.
- 2 -
Respondent determined deficiencies of $9,821, $9,127, and
$6,166 in petitioner’s Federal income taxes for taxable years
1995, 1996, and 1997, respectively. After concessions,1 the sole
issue for decision is whether petitioner is entitled to credits
for Federal tax on fuels pursuant to sections 34 and 6420.
Background
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by reference. At the time the petition was
filed in this case, petitioner was a corporation organized in the
State of California. During the years in issue, petitioner’s
principal place of business was Shafter, California. William A.
Duncan (Mr. Duncan), president and sole shareholder of
petitioner, signed the petition and appeared at trial on behalf
of petitioner.
Petitioner is an agricultural chemical application company
that applies pesticides to various farms and orchards in
California. The pesticides are applied by tractor-pulled spray
rigs. Petitioner enters into either verbal or written service
contracts with its customers depending on the size of the farming
operation. Petitioner supplies its customers with a cost sheet
1
The parties stipulated that respondent correctly reduced
petitioner’s taxable income for tax years 1996 and 1997 and,
correspondingly, correctly adjusted petitioner’s claimed net
operating loss amount for 1997.
- 3 -
which outlines charges for the application of pesticides at
different volumes per acre.
The written contracts petitioner entered into have no
explicit provision addressing fuel tax credits but provide that
petitioner will be responsible for “wages, salaries, bills and
taxes for labor, materials and equipment used in performance” of
its services. The contracts further provide:
Company will pay Contractor for the work performed
under this agreement as outlined in Exhibit “B”
attached. No tax (or an equivalent amount) or any
extra charge shall be added to the price or
compensation as specified in that Exhibit unless
otherwise expressly stated. Unless otherwise expressly
provided, Contractor shall pay all sales, use, excise
and any other applicable taxes now or hereafter
enforced upon or with respect to or measured by the
materials, equipment and work furnished by the
Contractor or the compensation paid to persons employed
in connection with performance by Contractor, and
Contractor shall indemnify Company against any and all
liabilities and expenses of whatsoever nature resulting
from Contractor’s failure to pay the same.
Upon completion of its services, petitioner issues invoices to
its customers stating the number of acres treated, the unit
price, and the total payment due. Petitioner’s customers during
the years in issue never had nor requested information about the
amount of fuel that was expended by petitioner in applying
pesticides on their land.
Before establishing Crop Care Applicators, Inc. in 1984, Mr.
Duncan managed the pest control department of a farming company
that farmed 40,000 acres in California. As manager, Mr. Duncan
- 4 -
was responsible for arranging and contracting for the application
of pesticides. Mr. Duncan never requested information on the
amount of fuel used by the pesticide applicators with whom he
contracted.
Petitioner filed Forms 4136, Credit for Federal Tax Paid on
Fuels, with its 1995, 1996, and 1997 Forms 1120, U.S. Corporation
Income Tax Returns. Petitioner, however, did not secure formal
waivers of the fuel tax credits from its customers before filing
its returns. In the notice of deficiency, respondent determined
that petitioner was not entitled to credits for Federal tax on
fuels for the years in issue because petitioner failed to obtain
these waivers.
After receiving respondent’s notice of deficiency for the
1995, 1996, and 1997 taxable years, petitioner obtained a waiver
from Sunworld International relinquishing its rights to claim any
credit or payment for gasoline used by petitioner during the
years in issue and stating that it has not claimed any credits or
payments for that gasoline. After petitioning the Court for a
redetermination of the deficiencies, petitioner obtained
additional waivers from four other customers. The five waivers
obtained by petitioner together relate to approximately 70
percent of petitioner’s gross revenue during each of the years in
issue.
- 5 -
Petitioner argues that it is entitled to the fuel tax
credits at issue because it followed all instructions on Form
4136, Credit for Federal Tax Paid on Fuels, for claiming the
credits, and the farmers to whom petitioner provided services
never claimed or intended to claim credits for petitioner’s use
of fuel on their farms as evidenced by the parties’ agreements,
invoices, payments for services, and waivers.
Discussion
Section 34(a)(1) allows a credit against Federal income tax
for the taxable year in an amount equal to the sum of the amounts
payable to the taxpayer under section 6420 with respect to
gasoline used during the taxable year on a farm for farming
purposes (determined without regard to section 6420(g)). Under
section 6420(a), the “ultimate purchaser” of the gasoline is
entitled to a credit determined by multiplying the number of
gallons used by the rate of tax applied to the gasoline on the
date he purchased the gasoline.
Except as provided in section 6420(c)(4), gasoline is
considered to have been used for farming purposes only if used by
the owner, tenant, or operator of a farm for various farming
purposes. See sec. 6420(c)(3). The owner, tenant, or operator
of a farm generally is treated as the user and ultimate purchaser
of gasoline used for the farming purposes described in section
6420(c)(3)(A). See sec. 6420(c)(4)(A). Section 6420(c)(4),
- 6 -
however, provides that “an aerial or other applicator of
fertilizers or other substances” who is the ultimate purchaser of
the gasoline will be treated as having used the gasoline on a
farm for farming purposes if the owner, tenant, or operator of
the farm “waives (at such time and in such form and manner as the
Secretary shall prescribe) his right to be treated as the user
and ultimate purchaser of the gasoline”.
Pursuant to the authority granted in section
6420(c)(4)(B)(ii), the Secretary prescribed section 48.6420-
4(l)(2), Manufacturers & Retailers Excise Tax Regs., which
provides:
To waive the right to be treated as user and ultimate
purchaser of gasoline which is used on a farm by an
aerial applicator or other applicator, the owner,
tenant, or operator of a farm who is otherwise entitled
to treatment as user and ultimate purchaser must
execute an irrevocable written agreement (as here
described) no later than the date on which the aerial
applicator or other applicator claiming the credit or
payment files its return for the taxable year in which
the gasoline is used. * * * The waiver may be in the
form shown under paragraph (l)(6) of this section or in
any other form that meets the requirements of this
paragraph and clearly states that the owner, tenant, or
operator of the farm knowingly waives the right to
receive the credit or payment. [Emphasis added.]
The agreement in which the owner, tenant, or operator of the
farm waives his right to receive a credit under section 6420 may
be a separate document or it may appear in the applicator’s
invoice for service or other document from the applicator to the
owner, tenant, or operator. See sec. 48.6420-4(l)(3),
- 7 -
Manufacturers & Retailers Excise Tax Regs. If the waiver
agreement appears on an invoice or other document, however, it
must be set off from other material in the document and executed
separately from any other item which requires the owner’s,
tenant’s, or operator’s signature. See id. The waiver should be
sufficient to put the owner, tenant, or operator of the farm on
notice that he has waived the right to receive the credit. See
id. Copies of agreements waiving rights to credits or payments
under section 6420 are not to be submitted to the Internal
Revenue Service unless a request is made by the Service. See
sec. 48.6420-4(l)(4), Manufacturers & Retailers Excise Tax Regs.
Petitioner did not obtain waivers from its customers at such
time and in such form and manner as the Secretary prescribed in
section 48.6420-4(l)(2), Manufacturers & Retailers Excise Tax
Regs. The written contracts petitioner and its customers
executed contain no provision explicitly addressing the fuel tax
credit. The waivers petitioner did obtain were received several
years after the taxable years in issue and after petitioner
received the notice of deficiency.
Petitioner does not challenge the validity of the regulation
but asserts that it should not be held to the requirements of
section 48.6420-4(l)(2), Manufacturers & Retailers Excise Tax
Regs., when it accurately completed Form 4136, and the form
instructions do not indicate that a pesticide applicator must
- 8 -
obtain a waiver in order to claim credits for fuel taxes. The
authoritative sources of tax law, however, are statutes,
regulations, and judicial decisions, and not instructions
published by the Internal Revenue Service. See Sherwin-Williams
Co. Employee Health Plan Trust v. Commissioner, 115 T.C. 440, 451
(2000); Casa de La Jolla Park, Inc. v. Commissioner, 94 T.C. 384,
396 (1990).
Although petitioner may not rely merely on the printed
instructions on Form 4136, the question emerges whether petitioner
substantially complied with the requirements of the applicable
regulation such that it should not be held to strict adherence
with all regulatory requirements. This Court has applied the
substantial compliance doctrine and excused taxpayers from strict
compliance with procedural regulatory requirements, provided that
the taxpayer substantially complied by fulfilling the essential
statutory purpose. See Bond v. Commissioner, 100 T.C. 32 (1993);
American Air Filter Co. v. Commissioner, 81 T.C. 709, 720 (1983);
Tipps v. Commissioner, 74 T.C. 458, 468 (1980); Taylor v.
Commissioner, 67 T.C. 1071 (1977); Hewlett-Packard Co. v.
Commissioner, 67 T.C. 736, 748 (1977); Sperapani v. Commissioner,
42 T.C. 308, 330-333 (1964). Substantial compliance, however,
cannot relieve a taxpayer of strict adherence if the statutory or
regulatory requirements relate to the substance or essence of the
statute. See Bond v. Commissioner, supra at 41; Sperapani v.
- 9 -
Commissioner, supra at 331. In other words, the doctrine of
substantial compliance cannot be applied if to do so would defeat
the policies of the underlying statutory provisions. See Estate
of Chamberlain v. Commissioner, T.C. Memo. 1999-181.
The legislative history of section 6420 clearly reflects that
the purpose of the statute was to provide financial relief to
farmers. See S. Rept. 1609, 84th Cong., 2d Sess. (1956), 1956-1
C.B. 989. As section 6420 was originally enacted only the owner,
tenant, or operator of a farm was eligible for the fuel credit.
Pesticide applicators deliberately were excluded from the benefits
of the credit because there was no assurance that they would pass
the benefit on to farmers. See id.
Effective on April 1, 1979, section 6420(c) was amended to
allow “aerial applicators” to receive the fuel credit if the
owner, tenant, or operator of the farm consents by waiving his
right to the credit. Act of October 14, 1978, Pub. L. 95-458,
sec. 3, 92 Stat. 1257. The amendment was designed to alleviate
the burden to both aircraft operators and farmers from the system
under which the aircraft operator must supply each farm owner,
operator, or tenant with sufficient information concerning the
number of gallons of fuel consumed by the aircraft on a particular
farm. See S. Rept. 95-1127, 1978-2 C.B. 369, 371-372. The
Surface Transportation Assistance Act of 1982 expanded the
availability of the credit to ground applicators if the farm
- 10 -
owner, operator, or tenant waives the right to be treated as the
user and ultimate purchaser of the gasoline. See Pub. L. 97-424,
sec. 511(f), 96 Stat. 2172; H. Rept. 97-945 at 2, 1983-1 C.B. 421.
The legislative history of section 6420 establishes that the
requirement that applicators obtain waivers from their farm
customers was not designed solely to ensure that two taxpayers
would not claim entitlement to a tax credit for the same fuel.
The requirement appears also to have been designed to ensure that
farmers are knowledgeable about their entitlement to the fuel tax
credit.
The waiver requirement, therefore, relates to the essence of
the statute. To extend the credit to applicators without strict
compliance to the waiver requirement would defeat the policies
underlying the statutory provision.
It does not appear that anyone will receive the benefit of
the section 34(a)(1) credit for the gasoline used by petitioner
during the years at issue. Although we are sympathetic to
petitioner’s situation, we are constrained by and cannot disregard
the plain language of the statute and the detailed requirements of
the legislative regulation in order to achieve what would appear
to be a more equitable result in this case. Accordingly,
petitioner is not entitled to credit for Federal tax on fuels.
- 11 -
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for respondent.