The opinion of the court was delivered by: John T. Curtin, District Judge.
Plaintiff Gateway Equipment Corporation ("Gateway") brought two actions*fn1 against the United States for the recovery of excise taxes. In the first action, docketed as 00-CV-51, Gateway alleged that taxes in the amount of $15,534.00 were erroneously and illegally assessed against and collected from it during the taxable quarter ending June 30, 1995. Item 1. Shortly after the first action was filed, Gateway filed another action against the United States to recover additional excise taxes in the amount of $105,823.00 assessed and collected during seven taxable quarters ranging from June 30, 1992 to December 31, 1994. That case, originally docketed as 00-CV-124, was consolidated with the present action. Item 38. The excise taxes were assessed on sales of Flow Boy Live Bottom semi-trailers, model CB-4000 ("CB-4000 units"), used in highway construction and manufactured by Flow Boy Manufacturing ("Flow Boy Mfg."), a division of Dan Hill & Associates, Inc., Norman, Oklahoma. During the time period of this case, Gateway was a distributor of Flow Boy equipment. It purchased the CB-4000 units from Flow Boy Mfg. for resale to customers ("end-users") in the highway construction business, and added the 12 percent excise tax to the cost of the machine. It then paid the excise tax to the Internal Revenue Service.
The government answered, Item 2, and on April 5, 2000, Gateway moved for summary judgment. Items 4-6. Gateway based its summary judgment argument on three grounds: (1) collateral estoppel premised on a previous decision in Flow Boy, Inc. v. United States, 1984 WL 15513 (10th Cir. January 20, 1984); (2) the United States has treated Gateway differently than "similarly situated" taxpayers; and (3) the CB-4000, by its design, is excepted from the Federal Excise Tax ("FET") in Treasury Regulation 26 C.F.R. § 48.4061(a)-1 (2001).
The court ordered discovery to proceed on the first two grounds, collateral estoppel and fairness. Item 7. The United States then filed papers in opposition to the motion for summary judgment on February 20, 2001. Items 17, 18. Plaintiff filed a reply, Item 24, and oral argument on the first two grounds took place on May 31, 2001.
Following oral argument, and prior to reaching a decision on the summary judgment motion, the court issued an order stating that discovery on the third issue should be conducted. Item 29. Deposition transcripts were filed with the court,*fn2 and the government filed the report of its expert, G. Allan Hagelthorn. Item 69. The government then filed a supplemental memorandum, Item 76, and the plaintiff filed a reply memorandum. Item 78. Oral argument was heard on July 31, 2002.
At this time, all three issues submitted by the plaintiff are before the court. For the reasons set forth below, the court grants summary judgment to Gateway on the design and fairness issues and denies summary judgment to Gateway on the grounds of collateral estoppel.
A. Description of the Units
In 1969, Flow Boy (or its predecessor companies)*fn3 began to manufacture the ST-1000 unit, the precursor to the CB-4000 unit. Item 6, ¶ 6. The Flow Boy ST-1000 units were "specially designed to efficiently and safely discharge hot-mix asphalt into the laydown machine for the purpose of building roads and highways." Item 6, ¶ 8; Item 18, ¶ 8. The unit is placed in front of a laydown machine (a paver), with both the Flow Boy unit and the laydown machine moving down the roadbed/highway simultaneously.*fn4 The Flow Boy unit continuously delivers asphalt into the laydown machine, resulting in building a new highway or resurfacing an existing highway. Item 6, ¶ 11; Item 18, ¶ 11. This process is performed on a prepared bed (1) before a new highway is finished or (2) within barricades so that during the construction process, no public traffic is allowed on that part of the prepared bed and/or highway under construction. Id. (A photograph showing the Flow Boy semitrailer working with a laydown machine is attached to Item 4 as Ex. S. The Flow Boy unit is attached to and pulled by a tractor-truck.)
The CB-4000 unit is an updated and improved version of the ST-1000, "primarily designed for the same purpose as the ST-1000."*fn5 Item 4, Ex. Q, ¶ 9. The CB-4000 is described as a "patented hydraulically controlled, horizontal materials discharge system." Item 6, ¶ 10; Item 18, ¶ 10. It is "identical to the ST-1000 units in all major respects regarding design except for the fact that the slatted roller chain in the CB-4000 units is covered with a continuous rubber belt whereas the ST-1000 was manufactured with an open slatted roller chain." Item 6, ¶ 9,*fn6 Item 18, ¶¶ 9, 48. The chain is driven by a hydraulic motor. Item 22, p. 60. The "horizontal materials discharge system" consists of the mechanism delivering and controlling the discharge of the hot-mix asphalt. A rubber belt, located on the floor of the hopper, is attached to a steel-slatted roller chain which carries the payload to the rear tailgate, where it is discharged at a precisely controllable rate. Item 6, ¶ 10. The CB-4000 hopper is equipped with insulated sidewalls "primarily designed for handling hot-mix asphalt and asphalt related materials as well as low-slump concrete for highway construction." Id. The insulation keeps the payload of hot-mix asphalt or asphalt-related materials at a proper temperature for highway construction. Item 6, ¶ 10; Item 18, ¶ 10. The maximum payload is 33 to 35 tons. Item 4, Ex. R; Item 6, ¶ 58. The CB-4000 is equipped to comply with federal and state regulations for highway use, including brake lights, mud flaps, and highway tires. Item 4, Ex. R. In 1995, the cost of the CB-4000 was $43,150.00, excluding federal excise tax. Item 4, Ex. Q, ¶ 16. That cost ranged "from one-third to 50% more than the cost of over-the-road hauling semi-trailers and end dump trailers." Id.
B. The Oklahoma Litigation
In 1982 Flow Boy, Inc. sued the federal government, asserting that the ST-1000 trailer was not subject to the FET, and demanded a refund of excise tax paid. Item 4, Ex. B. The Flow Boy units at issue in Flow Boy, Inc. v. United States, 1982 WL 1735 (W.D. Okla. April 20, 1982) were identical to the units which had previously been held not subject to the FET in J.H. Holland Co. v. United States, 1977 WL 1282 (W.D.Okla. April 21, 1977).*fn8 In the Flow Boy litigation, the plaintiff contended that the unit was not subject to the excise tax because it was specially designed for the primary function of transporting hot-mixed asphalt in a construction operation other than over the public highway.*fn9 Flow Boy, Inc. also asserted that the use of the unit in transporting a load over the public highway was substantially limited or substantially impaired because (a) the Flow Boy was specially designed to carry weight in excess of the legal road limit; (b) the unit's special design resulted in its being sold at prices approximately two and one-half times the price of a conventional semi-end dump trailer having the same highway payload capacity; and (c) the Flow Boy could not economically haul over the public highway. Flow Boy, Inc. maintained that the excise tax had not been included in the price of the units, and therefore, the tax had not been passed on to the purchaser.
The government, on the other hand, claimed that the unit was not specially designed for the primary function of transporting a particular type of load other than over the public highway. Alternatively, the government argued that even if it was specially designed, that special design did not substantially limit or substantially impair the use of the vehicles to transport such load over the public highway. It also asserted that Flow Boy passed on the tax to its customers and therefore was not entitled to a refund.
A jury found for Flow Boy, and against the government, on three issues: (1) the Flow Boy trailer was specially designed for the primary function of transporting a particular type of load other than over a highway in connection with construction; (2) the Flow Boy's special design substantially impaired the use of the vehicle to transport its load over the public highway; and (3) Flow Boy did not include the excise tax in the sales price of the unit. The court denied the government's Motion Notwithstanding the Verdict, and Flow Boy received a refund of the excise taxes it had paid, plus interest. Flow Boy, Inc. v. United States, supra.
The government appealed only the second finding. The Tenth Circuit held that the Flow Boy design was such that its over-the-highway use was substantially impaired, and affirmed the refund of the excise taxes. Flow Boy, Inc. v. United States, 1984 WL 15513 (10th Cir. January 20, 1984).
In his affidavit, Richard Sheridan, General Manager of Gateway, outlined how Gateway started selling the CB-4000 units in 1990, and originally added the FET to the selling price. Item 4, Ex. E, ¶ 4. Gateway was then advised by Dan Hill & Associates, the Flow Boy manufacturer, that "the CB-4000 units were not subject to the federal excise tax since such units were identical in all major respects to the Flow Boy Live Bottom Semi-Trailer model ST-1000 (ST-1000) which units had been held to be nontaxable by the Tenth Circuit Court of Appeals in Flow Boy, Inc. v. United States." Id.
On August 1, 1995, Gateway filed FET refund claims for various taxable quarters, based on the Flow Boy holding. See Flow Boy, Inc. v. United States, 1984 WL 15513 (10th Cir. January 20, 1984). On April 18, 1997, the IRS notified Gateway that Gateway's claims for refund would be denied in full. Id. ¶ 6. In the fall of 1998, Gateway was informed by Dan Hill & Associates that the IRS had approved and granted excise tax refunds on CB-4000 units to Dan Hill and a number of other Flow Boy distributors, including Critzer Equipment Co. of Spokane, Washington, The McLean Company of Cleveland, Ohio, and Ranchers Supply Co. of Lamar, Colorado. Id. ¶ 7. Gateway also learned that these distributors passed the excise tax refunds to end-users in 22 different states, including three end-users in New York.*fn10 Id. ¶¶ 8, 9.
Through the office of New York Senator Charles Schumer, Gateway requested that the IRS reverse its denial of Gateway's request for excise tax refunds. Item 4, Ex. F. Following a November 16, 1999 meeting, the IRS Assistant Chief Counsel denied the request in a letter to Senator Schumer. Item 4, Ex. G. The letter stated that the IRS believed Flow Boy had been wrongly decided; that the "administrative settlements" that the Senator referred to in his letter of November 24, 1999, Item 4, Ex. F, did not reflect IRS policy; and that the IRS's effort to gain a circuit split so that the case may be taken to the Supreme Court is an important avenue for the IRS to pursue when it believes a case has been wrongly decided. Item 4, Ex. G.
Gateway continued to add excise taxes to the CB-4000 units it sold.*fn11 It asserted that having to add the 12 percent FET provides its competitors with an unfair advantage, since other Flow Boy distributors can sell the unit for $5,160.00 less, and its non-Flow Boy competitor, Red River,*fn12 does not charge excise tax on its model. Item 4, Ex. E, ¶¶ 13, 14; Item 52, p. 54. Mr. Sheridan also asserted that since April 1983, Gateway had not added FET to the ST-1000 units it had sold, despite being audited twice by the IRS. Id. ¶ 16.
David Griffis, Executive Vice President of Dan Hill & Associates, submitted an affidavit in support of Gateway's fairness argument. Item 4, Ex. H. He stated that he was present when the excise tax field auditor from the IRS District Office in Oklahoma City, John S. Munholland, inspected the Flow Boy manufacturing operation on April 29, 1996. The auditor determined that the CB-4000 units were not subject to the FET. Id. ¶ 7. The report of this audit examination prompted the refunds to Flow Boy Mfg. for 16 taxable quarters, from March 31, 1992 to December 31, 1995. The refunds were passed on to end users in 22 states. Id. ¶ 8.
Harold Rogers also submitted an affidavit in support of Gateway's fairness argument, noting that he had prepared claims for FET refunds regarding all CB-4000 units sold by Flow Boy to three other distributors (Critzer, Ranchers, and McLean) for the years 1992 to1995. Item 4, Ex. I, ¶ 8. All claims were allowed in full by the IRS. Id. ¶ 9. He also prepared Flow Boy Mfg.'s refund claims which were allowed for that same period. Id. ¶ 11. Mr. Rogers attached as exhibits to his affidavit IRS documents pertaining to Critzer Equipment, McLean Company, and Ranchers Supply Co. indicating the FET refunds. Id. Exs. J-M, O. On the Excise Tax Examination Changes and Consent to Assessment and Collection Form for Critzer Equipment Co., the IRS had written, "[t]he tax periods shown above are corrected to reflect the determination that the eight (8) Flow Boy [CB-4000] trailers involved in your claims for refund and identified on attached consent form have been found to be non-taxable equipment used in construction." Id. Ex. J. Appended as Exhibit O to Rogers' Affidavit was a Notice of Adjustment relating to the refunds the IRS issued Ziegler, Inc. in accordance with a settlement agreement in the case of Ziegler, Inc. v. United States, D-Iowa., 4-97-CV-10242, dismissed with prejudice.
Also included in the exhibits to Rogers' affidavit were two letters (Id. Exs. N and P) from the Albany, New York IRS Appeals Office to Contractors Sales Co. of Albany, which Mr. Rogers characterized as the IRS's agreement to settle the IRS cases against Contractors "by conceding 80% of the excise tax [on the ST-1000 and the CB-4000 respectively] to Contractors." Id. Ex. I, ¶ 15, 18.
I. Standard for Summary Judgment
Rule 56(c) of the Federal Rules of Civil Procedure provides that a motion for summary judgment shall be granted if the pleadings and supplemental evidentiary materials "show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." A dispute regarding a material fact is genuine "`if the evidence is such that a reasonable jury could return a verdict for the nonmoving party.'" Morales v. Quintel Entertainment, Inc., 249 F.3d 115, 121 (2d Cir. 2001) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986)). Under the rule, the burden is on the moving party to inform the court of the basis for its motion and to demonstrate the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). After the moving party has carried its burden, the non-moving party "must do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). "[T]he non-moving party must come forward with `specific facts showing that there is a genuine issue for trial.'" Id. at 587 (quoting Fed.R.Civ.P. 56(e)). The object of summary judgment "is to discover whether one side has no real support for its version of the facts. . . ." Community of Roquefort v. William Faehndrich, Inc., 303 F.2d 494, 498 (2d Cir. 1962).
At issue in this action is whether the design and use of the CB-4000 subject it to the federal excise tax. The Internal Revenue Code provides that a tax of 12 percent on the first retail sale of truck-trailer and semitrailer bodies must be charged. 26 U.S.C. § 4051(D). A highway vehicle is defined in 26 C.F.R. § 48.4061(a)-1(d) 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 functins [sic], but does not include a vehicle described in paragraph (d)(2) of this section." Paragraph (d)(2), entitled "exceptions," 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 construction . . . 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
such relevant considerations.
26 C.F.R. § 48.4061(a)-1(d)(2)(ii) (emphasis added).
If a vehicle fits the two elements of the test set forth in paragraph (d)(2), it is not subject to the excise tax. The plaintiffs do not dispute that the Flow Boy meets the definition of highway vehicle; they contend that it satisfies the exception in that it is specially designed and substantially limited/impaired.
A. Is the CB-4000 specially designed?
Gateway argues that there are no genuine issues of material fact relating to the design of the CB-4000: (1) it is "primarily designed to deliver hot-mix asphalt into the paver for resurfacing or construction of highways;" (2) the special design features include the horizontal discharge mechanism, not present in dump trucks or end dump trailers, and the insulated sidewalls; (3) in order to be economical in operation, it is designed to carry a maximum 33-ton payload. This means that the weight of the payload, plus the weight of the empty trailer and tractor, would exceed the legal highway limit of 80,000 pounds, requiring a special permit; (4) end-users buy the units to deliver hot-mix asphalt into a paver, and use it for that purpose from 75 to 99 percent of the time; (5) travel over the highway to the job site is incidental to the job function. Of the total time involved in a job, 30 to 35 percent is travel time, and 65 to 70 percent is time at the job site. Item 78, pp. 4-6.
The government asserts that material facts concerning the design and use of the CB-4000 are in dispute, warranting denial of Gateway's summary judgment motion. In particular, the government contends that the CB-4000 units "are not specially designed to carry a particular kind of load" because they also have been used to transport road salt, sand, dirt, and smaller aggregate stone "as much as 25% of the time. . . ." Item 76, p. 7. As stated above, the regulations do not define "specially designed." Implicit in the term "special design," particularly in this case, is a comparison with a vehicle that is not specially designed that could haul all kinds of loads over the highway year-round, such as a dump truck or an end-dump trailer. Thus, a design becomes "special" in this case when a unit that has general hauling capability is modified for a particular payload.
1. Designed to Deliver Hot-mix Asphalt
The CB-4000 is built with a "horizontal materials discharge system" which maintains a uniform flow of asphalt into the paver. The original 1971 patent for the ST-1000, precursor to the CB-4000, indicated that the "invention relates to a material delivery system in which hot asphalt is transported to paving machines in large capacity semi-trailers." Item 21, Ex. A, line 23-25. David Griffis, Executive Vice President of Dan Hill & Associates and the design supervisor for the Flow Boy CB-4000 units, estimated that the weight of the horizontal materials discharge system is 2,500 pounds, and its cost is $15,000.00. Item 4, Ex. Q, ¶ 10. The machinery, which includes motors, head shafts, foot shafts, and bearings, Item 52, p. 46, and a discharge valve, Item 22, p. 53, allows the operator to regulate the flow of the asphalt into the laydown machine. This is important, since on state highway construction jobs there is a smoothness specification, Item 22, pp. 39-40, which, if not met, requires repaving, Item 66, p. 46, or the contractor may be fined. Item 22, pp. 47-49. This is a clear advantage when compared to a dump truck, which dumps the asphalt into a pile. Item 22, pp. 40, 41; Item 55, p. 41; Item 66, p. 92.
The fact that the payload exits through the back via the belt is also a significant design feature when compared to dump trucks. In order to dump their load, dump trucks must raise their bodies, allowing the load to exit by force of gravity through an open tail gate. Item 22, p. 41. The dump truck operator has no control over the speed and amount of payload dumped. "The problem is the off-loading. You can't control [the payload], so when they raise the end-dump dump trailer, and you hit that certain point, it will throw out two, three ton at a time, and you will have 20 tons, or you would have a bump in the road. . . ." Item 65, pp. 38-39. Many contractors agreed that dump trucks are much more likely to tip over, given their higher center of gravity. The delivery of the dump truck payload is affected by overhead obstructions such as overpasses, bridges, trees, and wires. In comparison, the Flow Boy CB-4000 design does not make it susceptible to tipping over. The design also makes it possible to operate where dump trucks cannot because of overhead obstructions. Item 4, Ex. Q, ¶ 13; Item 20, p. 31; Item 54, pp. 39-40; Item 55, pp. 35-36, 41; Item 57, pp. 37-38; Item 62, p. 49; Item 63, p. 30; Item 64, p. 56; Item 65, p. 59; Item 66, pp. 91-92, 109; Item 73, p. 33.
The CB-4000 is designed with insulated sidewalls, unlike regular trailers. Item 58, p. 12. New York State specifications require hot-mix asphalt to be a certain temperature at the point of releasing it into the paving machine. Item 66, p. 45. The insulation allows the hot mix to stay hot for as much as three to four hours at the job site, depending on the ambient temperature. Item 58, p. 12. This is an advantage for contractors, since "when you get at a job site, anything can happen. I mean you can have a breakdown, the insulation was designed that if you're sitting at the job site, that trailer will keep the blacktop to a temperature that will be acceptable by the state inspector." Item 74, pp. 39-40. Another contractor stated, ""[I]f you get on a job and the machine breaks down or something, the longer you can hold the material, the longer you can keep it. If you did have a trailer that wasn't insulated, they may have to throw the load away too. You may waste a load." Item 20, p. 22.
The CB-4000 was designed for a maximum payload of 33 to 35 tons, in comparison to a dump truck capacity of 17 to 20 tons. Item 66, p. 83. This special design feature relates to the practicalities of doing business in the highway construction field. "Such designed use of maximum payloads mean fewer cycles per day, fewer trailers needed, less trailer working time and less cost per ton delivered to the lay down machine." Item 4, Ex. Q, ¶ 12. End-users are well aware of how valuable it is to carry 34 tons, Item 74, p. 33, and in fact, to be profitable, it has to be loaded to its maximum payload. Item 66, p. 98; ¶ 8 in Items 40, 42, and 47-49
In addition, the contractors agreed in their depositions that the use of the CB-4000 to travel on the highway from the asphalt plant to the construction site is incidental to the use to which the unit is put. On average, the unit spends 65 to 70 percent of its time working in conjunction with the laydown machine at the site, which is either on a new highway being constructed or behind barricades while resurfacing an old highway (i.e., off the public highway). Item 66, p. 95. It spends 30 to 35 percent of the time traveling to and from the site. Item 52, pp. 46-47; Item 57, pp. 43-44; Item 65, pp. 65-66, 68; Item 74, pp. 34-35. The court concludes that the unit would have no practicality if it was not designed to carry the payload to the construction site.
The government argues that the CB-4000 is not specially designed for hot-mix asphalt because it carries a number of other items. The brochure indicates that it is versatile, and can carry aggregate and crushed material, hot-mix asphalt, sand, salt, low-slump concrete, and recycled asphalt. Item 4, Ex. U. See also Item 6, ¶ 10. A number of contractors estimated they occasionally carry other materials from 1 to 25 percent of the time. ¶ 7 of Items 40-49; ¶ 11 of Boehmer Aff. (attached to Item 4 following Ex. S). But simply because the CB-4000 may carry loads other than hot-mix asphalt does not mean that the unit is not specially designed. The special design of the horizontal discharge unit limits the size of material (other than hot-mix asphalt) that can be carried. The contractors agreed that hauling aggregate over the size of two-inch stone presents problems, because the material will get stuck in the chain mechanism or break it. Item 62, pp. 13, 48. Thus, the special design of the discharge mechanism limits what payload may be transported.
As David Griffis, Executive Vice President of Dan Hill & Associates, pointed out, "[i]f the CB-4000 had been specially designed to haul over public highways, it would have been designed (1) without the designed payload of 33 tons; (2) without the extra weight and cost attributable to the horizontal materials ...