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Revenue Ruling 59-163

1959-1 C.B. 353

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Headnote

M company, a corporation, manufacturers articles which are subject to the manufacturers excise tax. N company, a corporation, handles all of the domestic sales of the articles produced by M. The two companies have the same stockholders, they occupy the same premises, and the same employees maintain the books and records of both companies. No sales invoices are made for transactions between M and N, but a journal entry is made at the end of each month to account for such transaction. Held, under these circumstances, there is no actual sale of articles by M to N, but only a bookkeeping transaction. The taxable sale occurs when title to the articles passes to the first independent distributor or jobber. Furthermore, advertising and selling expenses are not to be excluded from the selling price in computing the manufacturers excise tax irrespective of whether these expenses are incurred by M or N.

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ISSUE

Advice has been requested concerning the determination of the taxable selling price of certain articles which are subject to the manufacturers excise tax and are sold under the circumstances described below.

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FACTS

M company, a corporation, manufactures articles, which are subject to the manufacturers excise tax, for sale in both domestic and foreign markets. The officers and stockholders of M formed N company, a corporation, to handle all of the domestic sales. The two companies have the same stockholders. The books and records of the two companies are maintained by the same employees in the same office space. No sales invoices are prepared for transactions between M and N, but a journal entry is made at the end of each month to account for the transactions between the two companies. The articles are not delivered by M to N, but are delivered to carriers for shipment to customers directly from M’s production line. N purportedly incurs advertising and selling expenses in promoting the sale of the articles.

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LAW AND ANALYSIS

In setting forth special provisions applicable to the manufacturers excise tax, section 4216(a) of the Internal Revenue Code of 1954 provides that in determining the price for which an article is sold, a transportation, delivery, insurance, installation or other charge (not otherwise required to be included) shall be excluded from the price for which an article is sold. Section 4216(b) of the Code provides that, if an article is sold (otherwise than through an arm’s length transaction) at less than fair market price, the manufacturers excise tax shall (if based on the price for which the article is sold) be computed on the price for which such articles are sold, in the ordinary course of trade, by manufacturers or producers thereof, as determined by the Secretary of the Treasury or his delegate. Section 316.1(f) of Regulations 46, made applicable to the 1954 Code by Treasury Decision 6091, C.B. 1954-2, 47, defines the term “sale” as an agreement whereby the seller transfers the property (that is, the title or the substantial incidents of ownership) in goods to the buyer for a consideration called the price, which may consist of money, services, or other things. Section 316.15(c) of the regulations provides that all sales at wholesale are subject to the tax on the basis of the actual sale price of each article so sold. In the case of Kin-Septic Co. v. United States, 64 Fed.Supp. 142, the United States Court of Claims held that the Commissioner of Internal Revenue could treat two corporations as one organization for purposes of computing the manufacturers excise tax where the same stockholder owned and managed both corporations and both corporations used the same premises and the same employees. In refuting the petitioner’s contention that certain advertising and selling expenses fall within the term “other charge” as used in language similar to that now included in section 4216(a) of the Code, the Supreme Court of the United States held in the case of The F. W. Fitch Co. v. United States of America, 323 U.S. 582, Ct.D. 1625, C.B. 1945, 433, that such expenses incurred by the manufacturer clearly fall within the class of charges which Congress intended to be included in the tax base. The Court stated, “Regardless of whether we consider such expenses technically as manufacturing costs, it is obvious that they are incurred prior to the actual shipment of articles to wholesale purchasers and that they enter into the composition of the wholesale selling price. Even if the purchaser accepts delivery at the factory, he pays for the advertising and selling expenses. Thus, they must be included in the taxable sales price.”

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HOLDING

Accordingly, under the circumstances set forth above, it is held that there is no actual sale of articles by M to N but only a bookkeeping transaction; and the taxable sale or transaction occurs when title to the articles passes to the first independent distributor or jobber, and the manufacturers excise tax is based upon the actual wholesale price for which the articles are sold in each instance. It is further held that advertising and selling expenses incurred by M and N are not to be excluded from the selling price in determining the price for which the articles are sold.