John A. Dudeck, Jr., Washington, D. C., argued for defendant-appellant; Gary R. Allen, Washington, D. C., on brief.

John R. Kline, Kline & Niklas, Helena, Mont., for plaintiff-appellee.

Appeal from the United States District Court for the District of Montana.

Before ALARCON and CANBY, Circuit Judges, and HOFFMAN,* District Judge.

This case involves the issue of the taxability of certain flatbed trailers and related attachments which are manufactured or assembled by Dillon Ranch Supply. Specifically, the Government appeals from a judgment of the United States District Court for the District of Montana which ordered the United States to refund to Dillon Ranch Supply the manufacturers' excise tax paid by taxpayer for the fourth quarter of 1972 through the second quarter of 1975, in the amount of $12,882.71, plus interest.1 For reasons stated herein, we reverse.

The facts are essentially undisputed. Dillon Ranch Supply is a Delaware corporation with its principal place of business in Dillon, Montana. It is engaged in the business of manufacturing, assembling, and selling supplies and equipment, including but not limited to gooseneck, flatdeck, self-ramping trailers and attachments which may be mounted on such trailers. During the tax periods at issue in this case, taxpayer was a distributor of "Maverick" brand trailers. It assembled the trailers from components which, except for the tires and wheels, were imported by Dillon Ranch Supply from Maverick M/C Manufacturing Co. Ltd., of Fort MacLeod, Alberta, Canada.

A. Facts pertinent to the "Maverick" brand flatbed, gooseneck trailers.

The standard "Maverick" brand trailers sold by taxpayer consisted essentially of a large flat deck mounted on a chassis with moveable tandem or triple axle undercarriages. As illustrated by the photographs and advertisements in the record, the trailers were suitable for transporting a broad range of products and commodities.

The chassis frame and trailer deck varied in length from 18 feet through 30 feet and, with minor exceptions, were 8 feet in width to conform with the size limitations prescribed for travel on the interstate highway system.2 They were rated by taxpayer as having gross vehicle weight capacities between 14,000 and 20,000 pounds. The main frame of the trailers was "very strong" seamless steel tubing with cross members and center bracing to prevent twisting of the frame under uneven loads. The trailer decks were solidly built with 2 inch by 8 inch fir deck boards mounted crosswise for stronger construction and supported by 1 inch angle iron and seamless tubing. Deck height was 3 feet off the ground.

Although the trailers were adaptable for use with practically any type and size of pulling vehicle, Dillon Ranch Supply's advertisement emphasized that the trailers were designed for use by 1/2 ton, 3/4 ton, and 1 ton pick-up trucks as the principal towing vehicle. The trailers featured "fifth wheel" hitches with adjustable goosenecks to accommodate various heights of pulling vehicles. These fifth wheel hitches operated on the same principles as used on large highway tractor-trailers and they had sufficient surface space to prevent "careening" of the trailer while turning. In addition, a farm tractor hitch was available for the trailers as an option.

The trailers were built on either tandem axles or triple axles. They were certified as having a weight capacity per axle of either 6,000 or 7,000 pounds. The axles were mounted on moveable undercarriages which could slide to a position within 48 inches of the rear of the chassis. This feature enabled the operator to properly distribute the weight between the pulling vehicle and the trailer. Depending upon the placement of the trailer axles, approximately 9 to 14 percent of the weight on the trailer could be shifted to the pulling vehicle, thereby increasing the gross vehicle weight capacity of the trailer. The moveable axle assemblage also contributed to the overall stability and highway maneuverability of the trailers. A special design feature permitted the axles to be moved to the extreme front of the chassis, the trailer deck tilted, thereby forming a ramp to assist in loading and unloading.

Each trailer sold by Dillon Ranch Supply had affixed to it a tag certifying that, as of the date of manufacture, it conformed with the federal safety standards applicable to highway vehicles. Thus, each trailer was outfitted with dual stop lights and turn lights which met or exceeded applicable Department of Transportation requirements. Similarly, the trailers were equipped with standard highway certified tires with ratings up to 3,100 pounds. Finally, the trailers featured electric brakes rated at 5,200 pounds per wheel (excluding the brake rating of the pulling vehicle), and heavy duty springs, equalizers, and rubber shackles.

Advertisements prepared by taxpayer emphasized that the trailers complied with the federal highway motor vehicle safety standards. Other advertisements prepared by Maverick stressed that the trailers could be used for a broad range of activities, many of which involved the transportation of loads over the public highways. Accordingly, one of the advertisements stated that the trailers could be used for the following applications:

What Are Its Applications?

For the transportation of many products and commodities. The trailer affords a large deck, making it especially suitable for bulky, long and irregular loads, machinery, hay, livestock, campers, pallets; the new containerized method of freight handling, furniture, building material, etc.

The advertisement then listed numerous businesses which use the "Maverick" brand trailers, including distributors, manufacturers, movers, an oil company, a steel company, lumber yards, modular home manufacturers, livestock dealers, an automobile dealer, and a Government utility in Canada.

B. Facts Pertinent to the Optional Trailer Accessories and Attachments.

Dillon Ranch Supply sold a number of optional attachments designed for use with the "Maverick" brand trailers. The accessories include, inter alia, detachable cattle racks, a haying attachment for hauling and stacking hay, and grain boxes. All of the attachments (excluding three cattle racks) were also manufactured by Maverick M/C Manufacturing Co., Ltd., in Canada.

The cattle racks were one piece bodies constructed with tubular steel, covered on the interior with plywood. Excluding the floors, these racks were self-contained units which could be used for transporting cattle and other livestock. The cattle racks were designed to be quickly mounted on the flatbed deck of a "Maverick" trailer by one man with out tools. The haying attachment consisted of an 8,000 pound electric winch, a hay ejector with a traveling head gate, and a hay tie down. This accessory mounted on the deck of the trailer with 4 bolts and it could be used to move and stack up to 7 to 9 tons of baled hay, loose hay, silage or chopped hay. Finally, the grain box available as an option on the trailers was a self-contained removable body which was complete in itself. It featured a 12-volt hydraulic hoist and had a capacity of up to 360 bushels when used as an accessory with the triple axle Maverick trailer.

C. Proceedings Below.

At some time prior to July 13, 1973, Internal Revenue Service Agent Tom Harris began an investigation into taxpayer's liability for federal manufacturers' excise tax on its sales of Maverick brand trailers and related accessories and equipment. After conducting a field investigation, Agent Harris subsequently requested technical advice from the National Office of the Internal Revenue Service concerning the taxability of the vehicles and related attachments. Thereafter, the national office issued a technical advice memorandum to the District Director of the Internal Revenue of the Helena, Montana District, regarding the trailers in question, concluding that the trailers were subject to tax under Section 4061(a) of the Internal Revenue Code of 1954. The memorandum concluded the trailers were taxable because their overall design characteristics allowed them to be used for general purpose hauling on the public highways, as well as for hauling on farms.

The Commissioner of Internal Revenue subsequently assessed federal excise taxes for the fourth quarter of 1972 through the second quarter of 1975 on taxpayer's sales of trailers and related accessories and attachments. Dillon Ranch Supply paid those assessments, filed timely claims for refund, and upon their denial, brought the instant suit for refund.

The district court held that the Maverick trailers were "farm wagons" primarily designed for use on the farms within the meaning of Section 4063(a) (2) of the Internal Revenue Code, although they may be used on the highway, also.3 Additionally, the court held that the stock racks and haying attachments4 were exempt from the manufacturers' excise tax imposed by Section 4061(a)(1) as accessories to vehicles excluded from the provisions of Section 4061(a). The district court failed to make a finding as to the taxability of the grain box attachment of the Maverick trailer. We reverse and remand the case for further proceedings consistent with this opinion.

D. Applicable Sections of the Internal Revenue Code.

Section 4061(a)(1)5 of the Internal Revenue Code of 1954 imposes a ten-percent excise tax on sales by manufacturers or importers of certain enumerated articles, including truck trailer and semi-trailer chassis and bodies. Although an exemption from taxation does not appear on the face of the statute, the Treasury Regulations promulgated thereunder have long exempted vehicles which are not designed for highway use.

Section 4061(a)(2)6 exempts from the excise tax imposed by Section 4061(a)(1) truck trailer and semi-trailer chassis and bodies, suitable for use with a trailer or semitrailer having a gross vehicle weight of 10,000 pounds or less. The district court failed to make a finding as to the applicability of this exemption. Although Dillon Ranch Supply relied on this exemption in this action below, the issue is not before this Court on appeal.

Section 4063(a)(2)7 specifically excludes from taxation bodies, parts, or accessories which would otherwise be subject to taxation under section 4061(a) (1), that are primarily designed for use on farms as certain feed, seed, or fertilizer equipment.

E. Regulations Promulgated Under Section 4061(a)(1).

The Treasury Regulations promulgated under Section 4061(a)(1) supply the controlling definitions regarding the applicability of the excise tax to particular vehicles. Section 48.4061(a)-1(d) of the Treasury Regulations on Manufacturers' and Retailers Excise Tax as revised (T.D. 7461, 1977 Cum.Bull. 317)8 contains detailed definitions of taxable highway vehicles. These revised regulations apply retroactively to sales made in prior periods except to the extent the prior Regulations, if applicable, would "unequivocally resolve" the question. 26 C.F.R. § 48.4061(a)-(1)(d)(3).

1. Prior Regulations.

The prior regulations9 (§ 48.4061(a)-1 (as promulgated by T.D. 6648, 1963-1 Cum.Bull. 197)) may be determinative of this case to the extent such regulations "unequivocally resolve" the question of taxability under section 4061(a)(1).

The courts10 have utilized a two-prong test to determine the taxability of an article under the previous regulations. The first test was whether a chassis or body was primarily designed "for purposes of transportation over the public highways." If the vehicle was determined to be primarily designed for transportation over the public highways, the vehicle was taxable. The second test was employed if no primary design was evident and the chassis or body was designed for both on-highway and off-highway use. The vehicle would be taxable under this test unless the designed highway use was "merely incidental" to its non-highway function.

2. Revised Regulations.

Under the revised regulations, any trailer or semitrailer designed to perform a function of transporting a load over the public highways is subject to the excise tax imposed by Section 4061(a)(1). Such trailer or semitrailer is subject to taxation, whether or not it is also designed to perform other functions, unless it falls within one of three specified exceptions.

The exception which is potentially relevant in this case is the second enumerated exception involving vehicles "specially designed" for certain off-highway functions. In order to fall within this exception it must be shown: (1) that the vehicle is "specially designed" for the primary function of transporting a particular type of load off the highway in connection with various enumerated activities (including farming, mining, timbering, or any operation similar to the foregoing examples); and (2) that, by reason of such special design, the use of such vehicles to transport a load over the public highways is "substantially limited or substantially impaired." In applying this test, the regulation further provides that account should be taken of factors such as whether the trailer may travel at normal highway speeds and whether special permission is required for highway use, etc.

F. The Maverick Trailers.

The district court held that the revised regulations do not establish a test for determining whether vehicles are taxable under section 4061(a)(1). The court concluded that the revised regulations serve "merely an exemplary purpose". However, it is well-settled that Treasury Regulations "must be sustained unless unreasonable and plainly inconsistent with the revenue statutes." Commissioner v. South Texas Co., 333 U.S. 496, 501, 68 S. Ct. 695, 698, 92 L. Ed. 831 (1948). Accord: Bingler v. Johnson, 394 U.S. 741, 750, 89 S. Ct. 1439, 1445, 22 L. Ed. 2d 695 (1969); Fulman v. United States, 434 U.S. 528, 98 S. Ct. 841, 55 L. Ed. 2d 1 (1978).11

Regulations issued pursuant to specific statutory authorization are legislative regulations. Such legislative regulations, if consistent with statutory authorization, adopted pursuant to proper procedure, and are reasonable, have the force of law. United States v. California Portland Cement Company, 413 F.2d 161 (9th Cir. 1969); Anderson, Clayton & Co. v. United States, 562 F.2d 972 (5th Cir. 1977), cert. denied, 436 U.S. 944, 98 S. Ct. 2845, 56 L. Ed. 2d 785 (1978). Moreover, the United States Supreme Court in United States v. Correll, 389 U.S. 299, 88 S. Ct. 445, 19 L. Ed. 2d 537 (1967), emphasized the role of the courts in construing Treasury Regulations:

Congress has delegated to the Commissioner, not to the courts, the task of prescribing "all needful rules and regulations for the enforcement" of the Internal Revenue Code. 26 U.S.C. § 7805(a). In this area of limitless factual variations, "it is the province of Congress and the Commissioner, not the courts, to make appropriate adjustments." Commissioner v. Stidger, 386 U.S. 287, 296 (87 S. Ct. 1065, 1071, 18 L. Ed. 2d 53). The role of the judiciary in cases of this sort begins and ends with assuring that the Commissioner's regulations fall within his authority to implement the congressional mandate in some reasonable manner.

389 U.S. at 307, 88 S. Ct. at 449. Thus, the district court erred in summarily dismissing the applicability of the revised regulations.

Moreover, the lower court neglected to adequately examine the applicability of the prior regulations promulgated by the Secretary of Treasury. In approving the test advanced by the taxpayer, Dillon Ranch Supply, the court stated:

Dillon Ranch Supply asserts that the test therefore is that those vehicles that are designed and sold primarily for use off the highway are not to be taxed, rather than that all vehicles are taxable regardless of the use for which they were primarily designed unless there is a design characteristic that actually limits their use to off-highway. (emphasis added)

Thus, the court accepted taxpayer's test to determine taxability concluding: "If the vehicle or accessory is primarily designed for any of the farm uses enumerated in I.R.C. § 4063(a)(2), the excise tax does not apply."

The "proper test", as so designated by the lower court, embodies the "primary design" concept, which comprised the test as to taxability under the prior regulations. The court also incorporated § 4063(a)(2) in deriving this "proper test" of taxability stating: "If the vehicle or accessory is primarily designed for any of the farm uses, the excise tax does not apply." However the emphasis of the court on § 4063(a)(2) in formulating the "proper test" is misplaced. Section 4063(a)(2) of the Internal Revenue Code covers only bodies, parts or accessories and does not, by its own terms, apply to vehicles or chassis.

The court concluded that the Maverick trailer was primarily designed to be used as a "farm wagon", an example of a nontaxable trailer under the prior regulations. Accordingly, it held that the Maverick trailer was nontaxable as "(a) farm wagon primarily designed for use on farms, although it may be used on the highway (which) illustrates a type of vehicle which is not a trailer within the meaning of section 4061(a)." In reaching its conclusion that the trailers were nontaxable "farm wagons" the court relied on its findings of fact pertaining to the primary use of the trailers.12 The test for taxability under § 4061(a)(1) is primary design, not primary use, under both the old and new Treasury Regulations. Indeed 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.

Accordingly, this case is remanded to the district court. On remand, the court should begin its analysis as to the taxability of the Maverick trailers with the revised regulations. Such Treasury Regulations are controlling unless found to be "unreasonable and plainly inconsistent with the revenue statutes." Commissioner v. South Texas Co., supra.

Section 48.4061(a)-1(d)(3) provides that, for periods prior to January 3, 1977 (date of promulgation of revised regulations), the taxpayer may have the option of continuing to apply the rules existing during such periods (the prior regulations), but only if those rules "would, if applicable, unequivocally resolve an issue involving the definition of a highway vehicle" for those earlier periods. Therefore, if taxpayer opts to continue the test of taxability under the prior regulations, the court must determine whether the prior regulations "unequivocally resolve" the issue.

If the court concludes that the prior regulations do not "unequivocally resolve" the issue, it must apply the revised regulations. It is well-settled that the extent to which newly promulgated regulations are to be applied retroactively or nonretroactively is a matter for the discretion of the Secretary or his delegate under section 7805(b) of the Internal Revenue Code. See: Manhattan Equipment Co. v. Commissioner, 297 U.S. 129, 135, 56 S. Ct. 397, 400, 80 L. Ed. 1010 (1936); United States v. California Portland Cement Co., supra.

G. Accessories And Attachments.

The district court held that the stock racks and haying attachments were exempt from the excise tax imposed by § 4061(a)(1) as accessories to vehicles excluded from the provisions of 4061(a)(1). The United States does not appeal the judgment of the court as to the nontaxability of the haying attachment. No finding was made below as to the applicability of the manufacturers' excise tax to the grain box attachment.

The tax imposed by § 4061(a) of the Internal Revenue Code applies to equipment which is sold with the vehicle itself and which contributes toward the highway function of the vehicle. Section 4061(b) levies a tax on parts and accessories sold separately from the vehicle which would otherwise be subject to taxation under § 4061(a). Insofar as the items sold by Dillon Ranch are accessories13 within the meaning of the statute and regulations, they are taxable to the same extent the trailers are taxable, unless exempt under § 4063(a)(2).

Section 4063(a)(2) specifically excludes from taxation those accessories, otherwise subject to taxation under sections 4061(a) and 4061(b), that are primarily designed for use on farms as feed, seed or fertilizer equipment. The legislative history underlying section 4063(a)(2) indicates that such feed, seed, and fertilizer equipment may satisfy the "primary design" test set forth therein even though it "incidentally may use the highway." S.Rep.No.324, 89th Cong., 1st Sess., pp. 44-45, U.S.Code Cong. & Admin.News 1965, p. 1645 (1965-2 Cum.Bull. 676, 711). Thus, on remand the district court should determine whether the cattle racks and grain boxes are primarily designed to haul feed, seed, or fertilizer to and on farms within the meaning of section 4063(a)(2). The court on remand may take such additional evidence as may be necessary.

REVERSED AND REMANDED.