Schneider National Leasing Inc v. United States

In the

United States Court of Appeals

For the Seventh Circuit

____________________

No. 20-3354

SCHNEIDER NATIONAL LEASING, INC.,

Plaintiff-Appellant,

v.

UNITED STATES OF AMERICA,

Defendant-Appellee.

____________________

Appeal from the United States District Court for the

Eastern District of Wisconsin.

No. 1:17-cv-00672 — William C. Griesbach, Judge.

____________________

ARGUED MAY 13, 2021 — DECIDED AUGUST 25, 2021

____________________

Before SYKES, Chief Judge, and SCUDDER and KIRSCH, Circuit

Judges.

SCUDDER, Circuit Judge. This appeal presents two questions

of first impression concerning a federal excise tax on heavy

trucks and the scope of a statutory safe harbor. The answer

affects whether Schneider National Leasing, a large trucking

company, can take advantage of the safe harbor for repairs

and modifications, codified in 26 U.S.C. § 4052(f)(1), to avoid

paying a 12% excise tax on 976 tractors it overhauled from

2 No. 20-3354

2011 to 2013. The district court held a bench trial, determined

that the degree of refurbishing in question constituted the

manufacture of new trucks rather than repairs or modifica-

tions, and therefore concluded the safe harbor did not apply.

We see the application of the statutory language differently

and reverse.

I

We begin with the statutory framework and then turn to

whether Schneider National Leasing’s overhaul of nearly

1,000 highway tractors fell within the safe harbor from the

federal excise tax.

A

Congress has taxed the sale of trucks by manufacturers,

producers, and importers for over 100 years. See War Revenue

Act of 1917, Pub. L. No. 65–50, § 600(a), 40 Stat. 300, 316. The

current iteration of this excise tax, enacted as part of the High-

way Revenue Act of 1982, resides in 26 U.S.C. § 4051. See Pub.

L. No. 97–424, § 512, 96 Stat. 2168, 2174–75. The statute im-

poses the excise tax in these terms:

There is hereby imposed on the first retail sale of the

following articles (including in each case parts or ac-

cessories sold on or in connection therewith or with the

sale thereof) a tax of 12 percent of the amount for

which the article is so sold:

…

(E) Tractors of the kind chiefly used for highway trans-

portation in combination with a trailer or semitrailer.

26 U.S.C. § 4051(a)(1).

No. 20-3354 3

In a neighboring provision, § 4052, Congress provides def-

initions and rules that clarify the contours of the tax. Section

4052(a) defines “first retail sale” to mean “the first sale, for a

purpose other than for resale or leasing in a long-term lease,

after production, manufacture, or importation.” Id.

§ 4052(a)(1). Congress likewise considered both the lease of an

“article” by the manufacturer and the use of “an article taxa-

ble under section 4051 before the first retail sale” to constitute

sales subject to the 12% tax. See id. § 4052(a)(2) (referencing 26

U.S.C. § 4217); § 4052(a)(3). The statute further makes plain

that a highway semi-tractor qualifies as an “article.” See id.

§ 4051(a)(1)(E).

What this all means in nontechnical terms is that a com-

pany that manufactures a big rig semi-tractor and then sells,

leases, or uses the tractor, incurs a 12% tax on the first sale or

lease. The IRS requires a company like the taxpayer here,

Schneider National Leasing, to file a Form 720 on a quarterly

basis to report any federal excise taxes due.

Front and center in this appeal is the safe harbor, also in

§ 4052, that Congress adopted in 1997 to permit companies to

repair or modify tractors they already own (and which have

already been taxed) without triggering the 12% excise tax

anew. See Taxpayer Relief Act of 1997, Pub. L. No. 105–34,

§ 1434, 111 Stat. 788 (1997). This safe harbor provision—titled

“Certain repairs and modifications not treated as manufac-

ture”—provides:

An article described in section 4051(a)(1) shall not be

treated as manufactured or produced solely by reason

of repairs or modifications to the article (including any

modification which changes the transportation func-

tion of the article or restores a wrecked article to a

4 No. 20-3354

functional condition) if the cost of such repairs and

modifications does not exceed 75 percent of the retail

price of a comparable new article.

26 U.S.C. § 4052(f)(1).

Notice how Congress drafted the safe harbor. Recall that

the underlying excise tax applies to the “first retail sale” of an

“article” like a tractor, which means “the first sale … after pro-

duction, manufacture, or importation.” Id. §§ 4051(a)(1),

4052(a)(1). The safe harbor establishes that some changes to a

tractor do not qualify as “manufacture” or “production”—the

consequence being that a company can lease, sell, or use that

tractor without the transaction constituting a “first retail sale”

because it has not occurred “after production, manufacture,

or importation.” Id. § 4052(a)(1); (f)(1). The 12% excise tax

only applies to “the first retail sale,” so without “manufac-

ture” or “production,” no tax liability is triggered.

Note, too, that Congress made the safe harbor conditional.

By its terms, § 4052(f)(1) provides that a tractor that has been

repaired or modified is not subject to the 12% tax if, and only

if, the cost of those repairs or modifications is less than or

equal to 75% of the price of a comparable new tractor.

Complicating matters is the absence in the excise tax and

the safe harbor of any definition of the terms “repairs,” “mod-

ifications,” or “retail price of a comparable new article.” Nor

has the IRS promulgated any implementing regulations de-

fining these terms. Much of this appeal hinges on the meaning

(and limits) of these terms.

B

Schneider National Leasing purchases truck tractors and

trailers and leases them to its parent company, Schneider

No. 20-3354 5

National, Inc., one of the nation’s largest trucking companies.

At any one time, Schneider National Leasing owns several

thousand tractors and tens of thousands of trailers and con-

tainers. To keep up with demand from drivers for updated

rigs and to maintain the health of its fleet, the company pur-

chases more than 3,000 semi-tractors each year.

From 2011 through 2013, rather than retiring a large set of

older tractors and purchasing all new replacements, Schnei-

der took a different tack. It bought 61 new tractors, the

Freightliner Cascadia 125 model, but also decided to overhaul

982 of its existing tractors using new and refurbished parts

packaged together in so-called glider kits. This decision made

strategic business sense. For one, Schneider’s older tractors

were lighter and realized better fuel economy than newer

models subject to more stringent environmental regulations.

By refurbishing older models, Schneider could keep these

more fuel-efficient tractors in its fleet. For another, Schnei-

der’s tax advisors counseled that the company would have to

pay the 12% excise tax if it bought new tractors but could

avoid the tax by refurbishing tractors in the existing fleet.

Following this advice, Schneider purchased 982 glider

kits—bundled assemblies of new and remanufactured tractor

components—from Daimler Trucks North America LLC. At a

minimum, each glider kit came with a cab, chassis, radiator,

front axle, front suspension, front wheels, front tires, front

brakes, brake system, and trailer connections. 912 of these kits

were so-called powered glider kits because they included a

remanufactured engine. Daimler assembled these parts to-

gether, as shown below, in a manner resembling a tractor cab

and chassis and shipped the kits to Schneider’s outfitters.

6 No. 20-3354

Supp. App. 3; Richard K. Lattanzio & Sean Lowry, Cong. Rsch. Serv.,

R45286, Glider Kit, Engine, and Vehicle Regulations (Aug. 10, 2018).

Schneider contracted with third-party outfitters to per-

form the refurbishments from January 2011 to December

2013. That process entailed the outfitters matching Schnei-

der’s old tractors with a glider kit and combining the parts to

create overhauled tractors. The refurbishing process generally

involved dismantling the old tractors, stripping non-usable

parts, reassembling the reusable components of the old trac-

tor with the glider kit parts, and giving the rebuilt tractor a

new vehicle identification number matching the serial num-

ber on the glider kit. The precise parts from the old tractors

that were combined with each glider kit varied, but in many

instances the outfitter reused the transmission, driveline, rear

axle, rear suspension, and rear wheel hubs—and sometimes

the fuel tank, fifth wheel, and rear brakes—in the refurbished

tractors. Schneider sent the old engines to Daimler in ex-

change for a rebate on the refurbished engines included in the

glider kits. Whatever components of the old tractors that re-

mained were either kept as replacement parts for future re-

pairs or sold for salvage value.

Schneider had paid the 12% excise tax when it first pur-

chased these 982 trucks as required by 26 U.S.C. § 4051(a)(1).

No. 20-3354 7

But the company did not pay the excise tax on any of the 982

refurbished tractors. Rather, Schneider invoked the safe har-

bor in § 4052(f)(1) for repairs or modifications and took the

position that the overhauled tractors were exempt from the

excise tax.

The IRS disagreed, determining that only six of the 982 to-

tal tractors qualified for the safe harbor. In the Service’s view,

Schneider triggered the 12% excise tax obligation in

§ 4051(a)(1) upon leasing these “articles”—“tractors of the

kind chiefly used for highway transportation”—to its parent

company, an action that the statute treats as a “first retail sale”

of an article. 26 U.S.C. § 4051(a)(1); see id. § 4052(a)(2). The IRS

concluded that the safe harbor in § 4052(f)(1) could not shield

912 of the overhauled tractors—those that received new en-

gines—because the refurbishment process using powered

glider kits exceeded permissible “repairs or modifications”

and instead resulted in the manufacture of new “articles.” In

more technical terms, no existing “articles” had been “re-

paired or modified,” so the safe harbor did not apply.

The IRS found the safe harbor unsatisfied for an alterna-

tive reason. Even if the refurbished tractors qualified as hav-

ing been repaired or modified, the Service determined that the

cost of repairs exceeded 75% of the retail value of a compara-

ble new tractor, disqualifying nearly all of Schneider’s refur-

bished tractors from § 4052(f)(1)’s protection. In the end, then,

the IRS denied Schneider the safe harbor and assessed the

company $9,387,403.73 plus interest in unpaid excise tax over

12 quarterly periods from January 1, 2011 through December

31, 2013.

Schneider paid the excise tax on 12 tractors—one for each

quarterly tax period at issue—and then filed an

8 No. 20-3354

administrative claim for a refund of that amount. The IRS de-

nied the refund claim, paving the way for Schneider to pursue

a tax refund action in federal court.

In May 2017 Schneider initiated a federal lawsuit pursuant

to 26 U.S.C. § 7422(a) and 28 U.S.C. § 1346(a)(1) asserting that

the IRS erroneously assessed excise taxes on its refurbished

tractors. Schneider’s complaint sought a refund of the

$157,683.64 it paid in excise taxes for the 12 tractors and an

abatement of the full amount of the IRS’s tax assessment. For

its part, the government maintained that the safe harbor did

not apply and filed a counterclaim to reduce to judgment the

unpaid balance of the full tax assessment.

C

Schneider and the government stipulated to nearly all per-

tinent facts and the district court held a one-day bench trial in

February 2020 on the remaining issues. By the time of the trial,

the government conceded that the safe harbor applied to 64

of Schneider’s refurbished tractors—those upgraded using

non-powered glider kits that did not contain engines—if the

cost of repairs fell below the 75% limit in § 4052(f)(1). That left

two issues for the district court to resolve: first, whether the

safe harbor applied to Schneider’s 912 tractors refurbished us-

ing powered glider kits (containing remanufactured engines);

and second, how to measure “the retail price of a comparable

new article” as those terms are used in § 4052(f)(1) to deter-

mine the 75% threshold.

The district court began with the text of § 4052(f)(1). Con-

gress provided that a tractor “shall not be treated as manufac-

tured or produced” (and thus not subject to the excise tax)

“solely by reason of repairs or modifications to the article …

No. 20-3354 9

if the cost of such repairs or modifications does not exceed 75

percent of the retail price of a comparable new article.” 26

U.S.C. § 4052(f)(1). This language, the district court reasoned,

established a two-step process for qualifying for the safe har-

bor. Schneider first had to show that it made “repairs or mod-

ifications” to specific tractors, and only then did the safe har-

bor require an assessment of whether the cost of those repairs

or modifications exceeded the 75% limit. Put another way, the

district court read § 4052(f)(1) to require a threshold determi-

nation of whether the taxpayer’s refurbishing was so exten-

sive to cross the line of “repairs and modifications” and in-

stead constitute an act of manufacturing.

With respect to the 912 powered glider kits, the district

court concluded Schneider could not satisfy the first step. The

safe harbor, the court reasoned, did not encompass situations

where a company combines a glider kit with only a few parts

from a used tractor, resulting in the creation of an effectively

new tractor. The district court did not explain its understand-

ing of the terms “repairs or modifications,” nor did it offer

guidance about how many repairs can be made, or how ex-

tensively a tractor can be modified, before the changes qualify

as the manufacture of a new tractor. Instead, the court looked

at the facts and determined that Schneider’s refurbishments

using powered glider kits resembled the creation of new trac-

tors—not repairs or modifications to existing tractors. The

safe harbor therefore did not apply, so Schneider owed the

12% excise tax on these 912 tractors.

The remaining question concerned the meaning in the safe

harbor of “the retail price of a comparable new article,” the

benchmark for the 75% limit on the cost of repairs and modi-

fications. The district court agreed with the government’s

10 No. 20-3354

view that the term “retail price” in § 4052(f)(1) referred to the

price paid at the first retail sale—meaning, the price that

Schneider actually paid (net of any discounts) for comparable

new tractors, rather than the industry retail price on the open

market.

After ruling in the government’s favor on both issues, the

district court instructed the parties to calculate the total

amount that Schneider owed to the IRS. The court entered fi-

nal judgment one month later, ordering Schneider to pay

$9,017,513.15 in unpaid excise taxes plus interest and costs.

Schneider now appeals.

II

As in any statutory interpretation dispute, the “proper

starting point lies in a careful examination of the ordinary

meaning and structure of the law itself.” Food Mktg. Inst. v.

Argus Leader Media, 139 S. Ct. 2356, 2364 (2019). Once more,

Congress established the safe harbor in these terms:

An article described in section 4051(a)(1) shall not be

treated as manufactured or produced solely by reason

of repairs or modifications to the article (including any

modification which changes the transportation func-

tion of the article or restores a wrecked article to a func-

tional condition) if the cost of such repairs and modifi-

cations does not exceed 75 percent of the retail price of

a comparable new article.

26 U.S.C. § 4052(f)(1).

Our own examination of this language leads us to two

conclusions: first, the safe harbor does not contemplate a

measurement for “repairs or modifications” apart from the

No. 20-3354 11

75% test Congress expressly incorporated into the statutory

text; and second, the appropriate measurement for the “retail

price of a comparable new article” is the market price in ordi-

nary, arms-length transactions.

A

Several initial observations are plain from the text of

§ 4052(f)(1). To begin, the safe harbor instructs that something

otherwise constituting an act of manufacturing “shall not be

treated as manufacture[]” for the purpose of assessing excise

tax liability. 26 U.S.C. § 4052(f)(1) (emphasis added). Con-

gress designed the boundaries of this safe harbor by defin-

ing—or perhaps deeming—what shall not be considered man-

ufacture: “repairs or modifications” made to an article that do

not exceed in cost “75 percent of the retail price of a compara-

ble new article.” Id.

Although the statute does not explicitly define “repairs or

modifications,” it gives some meaning to these terms by offer-

ing a parenthetical to confirm what those terms include. The

“repairs or modifications” within the safe harbor, Congress

made clear, “includ[e] any modification which changes the

transportation function of the article or restores a wrecked ar-

ticle to a functional condition.” Id. The word “including” is a

broadening term of illustration, informing us that the uni-

verse of “repairs or modifications” covered by the safe harbor

goes beyond the two examples provided. See Hammer v.

United States Dep't of Health & Hum. Servs., 905 F.3d 517, 527

(7th Cir. 2018); Antonin Scalia & Bryan A. Garner, Reading Law

132 (2012); see also Fed. Land Bank of St. Paul v. Bismarck Lumber

Co., 314 U.S. 95, 99–100 (1941) (according significance to Con-

gress’s use of the term “including” in a tax statute and apply-

ing a broad construction).

12 No. 20-3354

The substance of the parenthetical also confirms the broad

sweep of “repairs or modifications.” We know from the par-

enthetical that a tractor that has been wrecked can be restored

to working condition without the refurbishing constituting

the manufacture of a new tractor, so long as the cost of resto-

ration falls below the 75% threshold. See § 4052(f)(1). A trac-

tor, for example, might sustain major damage in a head-on

collision and require a new engine and cab (perhaps bundled

in a powered glider kit) to be restored to working condition.

The parenthetical in § 4052(f)(1) confirms that such a large-

scale “repair” can qualify for the safe harbor so long as the

cost does not exceed the 75% limit.

We also know from the parenthetical that “repairs or mod-

ifications” encompass alterations “which change[] the trans-

portation function of the article.” Id. Thus, a company that

takes a tractor in good working order and changes its trans-

portation function, by, for example, converting it into a

wrecker vehicle with a crane, or altering it from a straight

truck (with the trailer attached to the cab) to a truck tractor

(pulling a load on a separate semitrailer), can also qualify for

the safe harbor if the modifications meet the 75% condition.

These examples demonstrate that “repairs or modifica-

tions” can be extensive and substantial, and yet still qualify

for the safe harbor if they satisfy the 75% test. The limiting

condition for the safe harbor’s protection, then, is not found

in definitions of “repairs or modifications” versus “manufac-

ture,” but rather derives from the 75% threshold.

The conditionality of the safe harbor works in the other

direction as well. Some repairs and modifications will be sig-

nificant enough to constitute manufacture of a tractor subject

to the 12% tax—when the cost of repairs surpasses the 75%

No. 20-3354 13

limit. See id. Suppose, for example, that the cost of upgrading

a worn tractor (with over one million miles) with a top-of-the-

line engine costs 80% of the retail price of a comparable new

tractor. There is no question that the safe harbor would not

apply—not because an engine replacement cannot be a “re-

pair,” but instead because the cost of that alteration exceeds

75% of a comparable new article.

The takeaways are clear. Congress’s establishment of the

75% limit as a condition for qualifying for the safe harbor

means that the question whether a repair or a manufacture

occurred is not answered by looking at what replacement

parts—which ones or how many—were used as part of refur-

bishing. What marks the line between “repairs or modifica-

tions” and “manufacture” is the 75% cost measurement. That

Schneider elected to refurbish its tractors using powered

glider kits does not disqualify those tractors from the safe har-

bor. What would disqualify them, though, is if the cost of re-

furbishments exceeds 75% of the retail price of a comparable

tractor.

B

The government begs to differ with these conclusions.

First, it urges us to focus on the reality of what Schneider’s

refurbishment process looked like: a used tractor was disman-

tled, a few parts were recovered and combined with ones

from a new glider kit, and any components left behind were

scrapped. In practical terms, the government contends,

Schneider’s process resembled the production of a new trac-

tor, and calling it a repair or modification is to read absurdity

into the statute.

14 No. 20-3354

At one level we agree. No doubt the terms “repair” and

“modification” have distinct meanings and are not one and

the same as “manufacture.” Compare Repair, MERRIAM-

WEBSTER’S COLLEGIATE DICTIONARY 991 (10th ed. 1994) (defin-

ing “repair” as “to restore by replacing a part or putting to-

gether what is torn or broken; to restore to a sound or healthy

state”), Repair, BLACK’S LAW DICTIONARY 1553 (11th ed. 2019)

(defining the noun “repair” as “[t]he process of restoring

something that has been subjected to decay, waste, injury, or

partial destruction, dilapidation, etc.”), Modification,

MERRIAM-WEBSTER’S COLLEGIATE DICTIONARY 748 (defining

“modification” as “the making of a limited change in some-

thing”), and Modification, BLACK’S LAW DICTIONARY 1203

(meaning a “change to something; an alteration or amend-

ment”), with Manufacture, MERRIAM-WEBSTER’S COLLEGIATE

DICTIONARY 709 (defining the noun “manufacture” as “some-

thing made from raw materials by hand or by machinery” and

the verb form as “to make into a product suitable for use”),

and Manufacture, BLACK’S LAW DICTIONARY 1154 (meaning a

“thing that is made or built by a human being (or by a ma-

chine), as distinguished from something that is a product of

nature”).

But we cannot interpret these words divorced from the

statute, so any initial intuition that the terms bear distinct

meanings must account for how Congress used them in the

text of § 4052(f)(1) itself. See Parker Drilling Mgmt. Servs., Ltd.

v. Newton, 139 S. Ct. 1881, 1888 (2019) (emphasizing that “the

words of a statute must be read in their context and with a

view to their place in the overall statutory scheme” (quoting

Roberts v. Sea-Land Servs., Inc., 566 U.S. 93, 101 (2012)).

No. 20-3354 15

By its terms, § 4052(f)(1) tells us that some, but not neces-

sarily all, “repairs” may be so extensive that they result in new

“manufacture.” The safe harbor then directs us not to define

what does (and does not) constitute “manufacture” with qual-

itative standards. Rather, the statute provides a quantitative

test based on cost, precisely the type of definitive and me-

chanical assessment emblematic of a tax safe harbor. Taken in

context, then, the term “repair” includes restoring and refur-

bishing an older tractor, including by using a glider kit—so

long as the taxpayer stays within the 75% test.

What most stands out from the government’s position is

what is missing. The government offers no principled test (for

that matter, no test of any kind) for deciding when changes to

a tractor cross the line from repairs to new manufacture—it

only insists that the facts here fall on the manufacturing side

of the line. Such an undefined standard offers no standard at

all, and indeed is antithetical to the nature of a safe harbor,

which is intended to offer clear and certain guidance to tax-

payers. See Asher v. Baxter Int'l Inc., 377 F.3d 727, 729 (7th Cir.

2004), as amended (Sept. 3, 2004) (recognizing that ambiguity

in the meaning of a statutory requirement to claim a safe har-

bor is problematic because, “[u]nless it is possible to give a

concrete and reliable answer, the harbor is not ‘safe’”); see also

Carter v. Welles-Bowen Realty, Inc., 736 F.3d 722, 729 (6th Cir.

2013) (emphasizing that Congress enacted a safe harbor to

eliminate legal uncertainty and used “precision in defining

the boundaries,” and rejecting an interpretation that “would

reintroduce much of the uncertainty the safe harbor meant to

eliminate”).

What the government too discounts is that Congress pre-

scribed the dividing line through a measurement of cost, not

16 No. 20-3354

on some less-than-objective assessment of whether the over-

hauling and refurbishing process visually resembled the cre-

ation of a new tractor. The best reading is that the safe harbor

itself supplies the demarcation between repairs and manufac-

ture through this 75% limit on the cost of modifications and

repairs. That interpretation gives effect to the conditional way

Congress chose to write the safe harbor.

The government fares no better in its alternate argument

that the critical limiting term in the statute is the phrase “the

article.” The safe harbor instructs that “[a]n article described

in section 4051(a)(1) shall not be treated as manufactured or

produced solely by reason of repairs or modifications to the

article.” 26 U.S.C. § 4052(f)(1) (emphasis added). Congress’s

use of the definitive “the,” the government contends, de-

mands that the same identifiable article exist before and after

the repairs or modifications. True enough, the safe harbor

speaks in terms of a single article. But § 4052(f)(1) does not

contemplate an assessment—separate and apart from the 75%

test—of whether the refurbishments are so fundamental that

the core identity of the original article is lost and a new article

comes into existence.

Here, too, the government offers no test for determining

whether the same identifiable article survived the refurbish-

ment process. When pressed at oral argument, the govern-

ment posited that the immutable core of a single, identifiable

tractor is comprised of the parts that make it a self-propelled

vehicle. But this position finds no basis in the language of

§ 4052(f)(1) or its implementing regulations. And the statu-

tory text contradicts the government’s view. We know from

the statute that a wrecked tractor needing a replacement en-

gine is a circumstance within the safe harbor, so long as the

No. 20-3354 17

cost of the overhauled or new engine fell under the 75% limit.

Congress did not limit the safe harbor’s application to repairs

and modifications that affect only ancillary components out-

side of the powertrain that propels the vehicle.

The government’s inability to offer any competing inter-

pretation of the terms “repairs” and “modifications” is telling.

Only one part of the statute addresses how many changes to

a tractor are too many to constitute mere repair and thus re-

sult in the manufacture of a new tractor: the 75% limit on the

cost of repairs. The plain text of the safe harbor does not con-

template any measurement apart from this 75% test.

C

Our construction and interpretation of § 4052(f)(1) find re-

inforcement in historical context, which reveals that the IRS

has long recognized that the safe harbor applies to refurbish-

ments that extend a worn tractor’s useful life.

Before Congress first proposed a statutory safe harbor, the

task of determining whether modifications to a tractor quali-

fied as the manufacture of a new vehicle triggering the excise

tax fell to the courts, with the analysis proceeding on a case-

by-case basis. See, e.g., Ruan Fin. Corp. v. United States, 976 F.2d

452, 455 (8th Cir. 1992); Boise Nat. Leasing, Inc. v. United States,

389 F.2d 633, 634 (9th Cir. 1968).

In Boise National Leasing, for example, the Ninth Circuit ap-

proved a qualitative test that involved looking at the extent

and nature of changes to a vehicle to decide whether they

crossed the line from repair to manufacturing. See 389 F.2d at

636. The court acknowledged that the “dismantling of an old

truck, with a repairing, reconditioning, replacing of some

parts, and a reassembling of the truck elements” might not

18 No. 20-3354

“constitute the manufacturing of another truck.” Id. But mod-

ifications did qualify as manufacture when “what was done

constituted on its form, substance, and result, not a repairing

or reconditioning of the old truck structures or entities with

an incidental replacement of some existing part or parts

thereof, but the creating of other structural assemblies and

functional entities.” Id. at 635. If that reasoning sounds famil-

iar, it is because it parallels the government’s position here.

But Congress moved away from this qualitative approach

in 1988, when a committee first proposed a bright-line safe

harbor set at the 75% cost mark for repairs or modifications

that extended a vehicle’s useful life. See H.R. 4333, 100th

Cong. (1988). The proposal failed, but the IRS reacted in 1991

by adopting the congressional committee’s proposed safe har-

bor in Revenue Ruling 91-27. The advisory ruling considered

two distinct scenarios: one involving a “worn” vehicle that is

extensively restored to extend its useful life, and the other in-

volving a “wrecked” vehicle that incurred damage after a col-

lision and required extensive repairs to restore it to a func-

tional condition. See Rev. Rul. 91-27, 1991-1 C.B. 192. In the

former situation only—where restorations extend the useful

life of a worn tractor, even through the use of a glider kit—the

IRS expressly instructed that no excise tax would apply if the

cost of restoration did not exceed 75% of the price of a com-

parable new vehicle. See id. (explaining that “[t]his holding

will also apply in cases where the owner uses a glider kit to

repair the vehicle, so long as the cost of the repair does not

exceed 75 percent of the price of a comparable new vehicle”).

As the IRS itself recognized, this Revenue Ruling replaced the

subjective, fact-specific approach characterized in Boise Na-

tional Leasing with a bright-line rule set at 75% of the cost of a

comparable new vehicle. See id.

No. 20-3354 19

Both parties agree (and the government further confirmed

during oral argument) that when Congress enacted

§ 4052(f)(1) six years later, it codified the IRS’s safe harbor in

the Tax Code and also extended eligibility to two other cate-

gories of modifications—for wrecked articles and changes in

transportation function. There is no evidence that Congress,

by expressly identifying wrecked articles and changes in

function in the parenthetical within the text of § 4052(f)(1), al-

tered the preexisting, IRS-recognized safe harbor protection

for a worn vehicle that has been extensively restored to extend

its useful life. As we see it, Schneider’s use of powered glider

kits to refurbish 912 tractors were refurbishments to extend

the useful life of worn tractors, the precise scenario addressed

in Revenue Ruling 91-27 that carried through in Congress’s

enactment of § 4052(f)(1).

Right to it, then, whether Schneider’s refurbishments re-

sembled manufacturing as a practical matter is not dispositive

to the applicability of the safe harbor. Section 4052(f)(1) itself

provides that what otherwise might look like the manufacture

of a new tractor “shall not be treated as manufacture[]” when

the taxpayer complies with the 75% cost limitation. The dis-

trict court erred in concluding otherwise.

III

Remember, though, that it is not enough that Schneider’s

refurbishments using glider kits constituted repairs or modi-

fications. The safe harbor is conditional, and only exempts re-

paired tractors from the excise tax “if the cost of such repairs

and modifications does not exceed 75 percent of the retail

price of a comparable new article.” 26 U.S.C. § 4052(f)(1). The

parties agree on what tractor model is a comparable new arti-

cle—the Freightliner Cascadia 125 tractor—but disagree on

20 No. 20-3354

the meaning of “retail price.” The answer matters because

75% of that “retail price” establishes the ceiling for the cost of

repairs and modifications that can be performed without trig-

gering the excise tax.

Schneider contends that “retail price” means the price at

which products are sold to consumers in small quantities in

the open market. The company offered expert testimony at

the bench trial that a resource called the Truck Blue Book pro-

vides retail price information by aggregating data from actual

transactions to determine the ordinary price paid by consum-

ers in the open market. The government, on the other hand,

asserts that “retail price” reflects the price the taxpayer actu-

ally paid for comparable tractors, including any discount off

the market price. Here, the price Schneider paid was closer to

a wholesale price, because the company purchased 61 Cas-

cadia tractors in bulk directly from the manufacturer rather

than through a distributor or dealer.

Congress did not define the “retail price of a comparable

new article” in the § 4052(f)(1) safe harbor. Nor do the imple-

menting regulations supply any definition. Regardless, Con-

gress elected to use the term “retail price,” and we “ordinarily

assume, ‘absent a clearly expressed legislative intention to the

contrary,’ that ‘the legislative purpose is expressed by the or-

dinary meaning of the words used.’” Jam v. Int'l Fin. Corp., 139

S. Ct. 759, 769 (2019) (quoting Am. Tobacco Co. v. Patterson, 456

U.S. 63, 68 (1982)).

The plain meaning of the noun “retail” is “the sale of com-

modities or goods in small quantities to ultimate consumers,”

and the adjective form of “retail” means “of, relating to, or

engaged in the sale of commodities at retail.” Retail, MERRIAM-

WEBSTER’S COLLEGIATE DICTIONARY 999; see also Retail,

No. 20-3354 21

BLACK’S LAW DICTIONARY 1573 (defining retail as “[t]he sale of

goods or commodities to ultimate consumers, as opposed to

the sale for further distribution or processing”). We also know

that the term “price” is “the amount of money given or set as

consideration for the sale of a specified thing.” Price,

MERRIAM-WEBSTER’S COLLEGIATE DICTIONARY 924; see also

Price, BLACK’S LAW DICTIONARY 1439 (defining price as “[t]he

amount of money or other consideration asked for or given in

exchange for something else; the cost at which something is

bought or sold”).

Reading the two words together, then, “retail price” re-

flects the amount at which an article is sold in individual,

arms-length transactions to end consumers on the open mar-

ket. Accord Oshkosh Truck Corp. v. United States, 123 F.3d 1477,

1480 (Fed. Cir. 1997) (“When a manufacturer sells directly to

the end-user, i.e. at a retail sale, the price at which it sells is the

‘retail price’ as that is the price at which these items are being

sold in the marketplace.”).

This construction finds reinforcement in the fact that Con-

gress used different language in other parts of the excise tax

statute when referring to the price the taxpayer actually paid.

In the provision imposing the excise tax, § 4051(a)(1), Con-

gress specifically directed that the tax be imposed on “the

amount for which the article is so sold.” Yet the safe harbor

uses the term “retail price” and not “price paid” or “cost

paid.” If Congress had intended to set the benchmark for the

75% calculation in the safe harbor at the price that the tax-

payer actually paid for comparable tractors—for Schneider,

an amount closer to wholesale prices—it could have instead

referenced “the amount for which a comparable new article is

so sold.” But the safe harbor includes the term “retail,” and

22 No. 20-3354

we must assume Congress intended each word of the statute

to have meaning. See Parker Drilling Mgmt. Servs., 139 S. Ct. at

1890 (reiterating the “‘cardinal principle’ of interpretation

that courts ‘must give effect, if possible, to every clause and

word of a statute’” (quoting Loughrin v. United States, 573 U.S.

351, 358 (2014)); Scalia & Garner, Reading Law 174 (emphasiz-

ing the same point).

The broader context in which the safe harbor operates fur-

ther reinforces our interpretation of “retail price.” See Merit

Mgmt. Grp., LP v. FTI Consulting, Inc., 138 S. Ct. 883, 893 (2018)

(explaining that statutory context can be probative). The pro-

vision imposing the excise tax, § 4051(a)(1), is written in terms

of single transactions of individual articles, and the safe har-

bor in § 4052(f)(1) likewise concerns repairs made to discrete

articles. The safe harbor envisions a scenario where the owner

of a used tractor has a choice to make, and decides to under-

take “repairs or modifications” to an existing tractor instead

of purchasing a new one at “retail.” The plain import of this

framework, crafted in terms of a single transaction, is that the

relevant comparator is the price of a single comparable tractor

in the open market. Neither the safe harbor (in § 4052(f)(1)),

nor the provision imposing the tax (in § 4051(a)(1)), contem-

plates a metric for the maximum permitted cost of “repairs

and modifications” that differs for large versus small trucking

companies, or for bulk versus individual purchases.

The government’s contrary position would leave practical

questions unanswered. Schneider happened to have pur-

chased comparable tractors during the tax periods at issue, so

we know the price it actually paid for the Cascadia tractors.

But that will not always be so. In the precise situation contem-

plated by the safe harbor—where a company chooses to

No. 20-3354 23

modify or repair a worn or wrecked tractor instead of pur-

chasing a new one—the taxpayer would necessarily need to

look at the price paid by other buyers in the open market by,

for example, consulting the Truck Blue Book.

Another aspect of the government’s position warrants a

response. By the government’s reading, the term “retail price”

must refer to the price paid at the “first retail sale” as that term

is defined in § 4052(a)(1). Here, the “first retail sale” of the

comparable Cascadia tractors occurred when Schneider pur-

chased them from Daimler during the relevant tax years. The

government therefore takes the position that the discounted

price Schneider paid in this “retail sale” should supply the

“retail price of a comparable new article” when assessing the

safe harbor. Not so in our view.

We do not read the statutory language in § 4052(f)(1) to

impose such a price matching requirement. Yes, we generally

presume that identical words used in different parts of the

same statute bear the same meaning. See Henson v. Santander

Consumer USA Inc., 137 S. Ct. 1718, 1722 (2017). But the obser-

vation that the word “retail” appears in both the safe harbor

and the provision imposing the tax does not convince us that

the “retail price of a comparable new article” in the safe har-

bor must be fixed at what that same taxpayer would pay if they

bought the comparable tractor in a “first retail sale.”

Congress used the term “retail” in various places through-

out the statute. See, e.g., § 4051(a)(1) (imposing the tax on the

“first retail sale”); § 4052(b)(2) (instructing that where an arti-

cle is sold at less than fair market price, the tax shall be calcu-

lated “on the price for which similar articles are sold at retail

in the ordinary course of trade”); § 4052(a)(3)(C) (providing

that, when use is treated as the first sale, the “tax shall be

24 No. 20-3354

computed on the price at which similar articles are sold at re-

tail in the ordinary course of trade”); § 4052(b)(3)(B) (defining

a presumed markup percentage as “the average markup per-

centage of retailers of the articles of the type involved”);

§ 4052(b)(4)(B)(ii) (providing an exception for a “permanent

retail establishment”). These provisions show that Congress

sometimes used the term “retail” as a noun and other times

as an adjective. But, contrary to the government’s insistence,

we cannot conclude that in each instance Congress meant the

taxpayer’s precise purchase and the price it actually paid. The

question before us is not as easily answered as the govern-

ment would have it.

The “fundamental canon of statutory construction”—that

“unless otherwise defined, words will be interpreted as tak-

ing their ordinary, contemporary, common meaning”—re-

solves this issue. Sandifer v. U.S. Steel Corp., 571 U.S. 220, 227

(2014) (quoting Perrin v. United States, 444 U.S. 37, 42 (1979)).

The statute offers no definition for the “retail price of a com-

parable new article,” so we presume that the ordinary mean-

ing of the language expresses Congress’s intent. See Park 'N

Fly, Inc. v. Dollar Park & Fly, Inc., 469 U.S. 189, 194 (1985). What

that means here is that the “retail price” referred to in

§ 4052(f)(1) is the price at which a comparable tractor could

be acquired in the open market. Our determination necessi-

tates a new assessment by the district court of whether the

cost of Schneider’s refurbishments exceeded 75% of the “retail

price of a comparable new article.” 26 U.S.C. § 4052(f)(1).

For these reasons, we REVERSE and REMAND for further

proceedings consistent with this opinion.