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Rev. Rul. 74-201 1974-1 C.B. 314

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Revenue Ruling 74-201

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Headnote

Manufacturers sale price; tools and dies. A separate charge made by a manufacturer for the cost of tools and dies to which he retains title is includible in the sale price on which manufacturers excise tax is computed unless future production is contemplated to which a portion of the cost may be allocated. If the tools and dies become the property of the vendee and their usefulness has been exhausted, the full charge is includible in the manufacturer’s sale price; however, if some usefulness remains, then only that part of the charge equal to the depreciation incurred, computed under the “production output” method, is included. Rev. Rul. 54-414 superseded.

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FACTS AND BACKGROUND

The Internal Revenue Service has reconsidered Rev. Rul. 54-414, 1954-2 C.B. 415, which relates to whether costs of tools and dies may be excluded from the manufacturer’s sale price for purposes of computing manufacturers excise tax liability. Rev. Rul. 54-414 contains two holdings: The first is to the effect that in computing manufacturers excise tax, expenses incurred by a manufacturer for tools and dies are considered merely elements of the cost of manufactured articles and any separate charges made by the manufacturer for such expenses with respect to the sale of the articles must be included in the tax base (sale price). The second holding concludes that the cost to a manufacturer of tools and dies may be excluded from the manufacturer’s selling price for the purpose of computing manufacturers excise tax liability if there is a written contract or other written evidence of an agreement between the manufacturer and the customer showing that the tools and dies become the property of the customer either by payment therefor by the customer in a lump sum or by amortization. With respect to the second holding, the Revenue Ruling states that if the charge for the tools and dies is not stated separately on the invoice, the contract or agreement must show the amount of the charge attributable to the tools and dies.

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LAW AND ANALYSIS

Section 4216(a) of the Internal Revenue Code of 1954 provides that in determining for purposes of the manufacturers excise tax, the price for which an article is sold, there shall be included any charge for coverings and containers of whatever nature, and any charge incident to placing the article in condition packed ready for shipment, but there shall be excluded the amount of the manufacturers excise tax, whether or not stated as a separate charge. That section further provides that a transportation, delivery, insurance, or any other charge (not required by the foregoing sentence to be included) shall be excluded from the price only if the amount thereof is established to the satisfaction of the Secretary of the Treasury or his delegate in accordance with the regulations. Section 316.1(f) of Regulations 46, made applicable to the Internal Revenue Code of 1954 by T.D. 6091, 1954-2 C.B. 47, provides that the term “sale” means 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 330.1-1(b) of the Regulations on Determination of Price and Price Readjustments provides that any charge which is required to be paid by a manufacturer, producer, or importer as a condition to his sale, and which is not attributable to an expense falling within one of the exclusions provided in section 3441(a) of the Internal Revenue Code of 1939 [section 4216(a) of the Internal Revenue Code of 1954] is includible in the sale price upon which the tax is based. In computing manufacturers excise tax liability, all items of consideration flowing from the vendee to the vendor must be included in the tax base. Thus, when parts are furnished to the vendor by the vendee, the Service has required that the vendor include the value of such parts in the tax base when computing manufacturers excise tax liability. See Rev. Rul. 69-437, 1969-2 C.B. 208. Upon reconsideration of the first holding in Rev. Rul. 54-414, which pertains to situations where title to the tools and dies remains in the manufacturer, the Service has concluded that the factual situation therein should be amplified. Although it is not so stated in the ruling, it was assumed that the contract involved did not provide for future production in which the tools and dies might be used. Where there is no such provision in the contract, the conclusion in Rev. Rul. 54-414 is correct. However, if the contract provides for future production in which the manufacturer will use the tools and dies without further charge to the vendee, then only that portion of the charge for tools and dies that is properly attributable to the articles in the original purchase should be included in the sale price of such articles. In order to allocate a portion of the charge to future purchases, however, the invoice must clearly show that a portion of the charge pertains to future purchases, or the contract or agreement of sale must show that a portion of the charge is for future purchases. If this cannot be done, then the vendor must include the full amount of the charge for tools and dies in the sale price. With respect to the second holding in Rev. Rul. 54-414, which involves transfer of ownership of the tools and dies to the vendee, the Internal Revenue Service is now of the opinion that a factor representing the value to the manufacturer of the use of the tools and dies must be included in the tax base to properly reflect the total consideration flowing from the vendee to the manufacturer. Rev. Rul. 69-437, supra. Accordingly, if the total usefulness of the tools and dies has been exhausted when the vendee takes ownership thereof, then the full charge for tools and dies must be included in the tax base. However, if some usefulness remains in the tools and dies when ownership is transferred, then only that part of the charge for tools and dies equal to the depreciation incurred computed under the “production output” method should be included in the tax base. For example, if (a) the purchase is for 100 units, (b) the useful life of the tools and dies is estimated to be 500 units, and (c) the charge for the tools and dies is 1,000,then1/5th(100/500)ofthelifeofthetoolsanddieshasbeenexpendedinconnectionwiththeorder.Accordingly,1/5thofthe1,000, then 1/5th (100 / 500) of the life of the tools and dies has been expended in connection with the order. Accordingly, 1/5th of the 1,000 charge ($200) would be includible in the tax base of the sale.

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HOLDING

Since conclusions with respect to the facts presented in Rev. Rul. 54-414 are incorporated herein, Rev. Rul. 54-414 is hereby superseded.

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EFFECTIVE DATE

Under the provisions of section 7805(b) of the Code, the conclusion with respect to the value of the use of tools and dies being includible in the tax base will not be applied to sales of articles by manufacturers prior to May 6, 1974.