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Rev. Rul. 72-485 1972-2 C.B. 639

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Revenue Ruling 72-485

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Headnote

Credit or refund of manufacturers tax is not allowable on a tax-paid article leased by a dealer to a State or local government with an option, which is subsequently exercised, to purchase the article upon termination of the lease.

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ISSUE

Advice has been requested whether, pursuant to the provisions of section 6416(b)(2)(C) of the Internal Revenue Code of 1954, a credit or refund of manufacturers excise tax is allowable under the circumstances described below.

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FACTS

Various manufacturers produce articles that are subject to the ad valorem excise taxes imposed under Chapter 32 of the Code when sold by the manufacturer, producer, or importer. Some of these articles are sold tax-paid by the manufacturers thereof to dealers who are engaged in leasing new articles to States or local governments for their exclusive use. Under a typical lease arrangement, the State or local government has an option to purchase the article at the termination of the lease. The specific question is whether manufacturers of articles that are leased by dealers as described above are entitled to credits or refunds of the manufacturers excise tax that had been paid with respect to the sale of the articles to the dealers, when, at the termination of a lease, the States or local governments exercise their options and purchase the articles.

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LAW AND ANALYSIS

Section 4217(a) of the Code provides that, for purposes of the manufacturers excise tax, the lease of an article (including any renewal or any extension of a lease or any subsequent lease of such article) by the manufacturer, producer, or importer shall be considered a sale of such article. Section 4221(a)(4) of the Code provides that no manufacturers excise tax shall be imposed on the sale by the manufacturer of an article to a State or local government for the exclusive use of a State or local government, but only if such use is to occur before any other use. Section 6416(b)(2)(C) of the Code provides that any manufacturers excise tax paid on any article shall be deemed to be an overpayment if such article was sold by any person to a State or local government for the exclusive use of a State or local government. Under the provisions of that section, the overpayment applies in respect of an article only if the use referred to occurs before any other use, or, in the case of a sale or resale, the use referred to is to occur before any other use. The exemption provided by section 4221(a)(4) of the Code does not apply to a manufacturer’s sale of taxable articles to a dealer, since that exemption applies only to the sale of articles by the manufacturer to a State or local government. It should also be noted that the provisions of section 4217(a) of the Code, which equate a lease with a sale, relate only to the lease of an article by the manufacturer, producer, or importer of that article. The section does not apply to a lease entered into by a vendee of the manufacturer, producer, or importer. Thus, articles leased to a State or local government by a dealer cannot be considered as “sold” to the State or local government during the lease period for purposes of the credit or refund provision of section 6416(b)(2)(C) of the Code. See Rev. Rul. 63-75, C.B. 1963-1, 306. Under the provisions of section 6416(b)(2)(C) of the Code, the use of an article by a State or local government must occur before any other use of the article, in order for the credit or refund provisions of that section to apply. Moreover, the lease of an article by a manufacturer’s vendee (as distinguished from a lease by the manufacturer) is a “use” of that article within the meaning of sections 4221(a) and 6416(b) of the Code.

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HOLDING

Accordingly, in the instant case it is held that even though a State or local government exercises its option and purchases a leased article at the termination of the lease arrangement, no credit or refund of the tax paid by the manufacturer of the article is allowable, inasmuch as the article has been used (leased) by the dealer in his trade or business (of leasing) prior to the ultimate sale of the article to the State or local government. On the other hand, if a purported lease arrangement between a manufacturer’s vendee and a State or local government is in substance a “conditional sale,” or similar type of transaction, so that at the outset an actual sale of the article to the State or local government has taken place, the provisions of section 6416(b)(2)(C) of the Code are applicable, and in such case credit or refund of the tax paid by the manufacturer of the article is allowable at the time the purported lease arrangement is entered into. For guidance in determining whether an agreement is a lease or a conditional sales contract, see Revenue Rulings 55-540, C.B. 1955-2, 39, and 55-542, C.B. 1955-2, 59.