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Rev. Rul. 78-126 1978-1 C.B. 434

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Revenue Ruling 78-126

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Headnote

Refund or credit; manufacturers tax; reacquired articles. A manufacturer’s reacquisition of tax-paid articles from the inventory of a former distributor, together with acquisition of trademarks previously used by the distributor, at a total negotiated price higher than that for which the articles were originally sold is a repurchase rather than a rescinded sale under section 48.6416(b)-1(b)(2)(i) of the regulations. No price readjustment results from the transaction and no credit or refund of the tax paid on the original sale is allowable. Since no credit or refund is allowable no tax liability is incurred on resale of these articles.

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ISSUE

Advice has been requested whether, under the circumstances described below, where a manufacturer reacquires taxable articles, a credit or refund of a manufacturers excise tax, imposed by chapter 32 of the Internal Revenue Code of 1954, is allowable.

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FACTS

A corporation is a manufacturer of articles subject to a manufacturers excise tax imposed under chapter 32 of the Code. A sold articles in taxable transactions to B corporation which had an exclusive agreement to distribute A’s products. The agreement was terminated and B had on hand a substantial inventory of unsold articles of A. At this time, A and B entered into an arrangement whereby A reacquired the unsold inventory of B at an agreed price of 210x dollars. A had originally sold these articles to B for 200x dollars. Under the same arrangement, A was granted the use of certain trademarks previously used by B in selling articles purchased from A.

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LAW AND ANALYSIS

Under section 6416(b)(1) of the Code, if the price, of any article on which a tax, based on such price, imposed by chapter 32, is readjusted by reason of the return or repossession of the article or a covering or container, or by a bona fide discount, rebate, or allowance, including the allowable readjustment for local advertising, the part of the tax proportionate to the part of the price repaid or credited to the purchaser shall be deemed to be an overpayment. Section 48.6416(b)-1(b) of the Manufacturers and Retailers Excise Regulations provides in part: (2) Return of an article. If a taxable article is returned to the person who paid the tax to the United States on the sale of such article, a price readjustment giving rise to an overpayment results— (i) Before use. If the article is returned before use, and all of the purchase price is repaid to the vendee or credited to his account, or (ii) Under warranty. If the article is returned under an express or implied warranty as to quality or service, and all or a part of the purchase price is repaid to the vendee or credited to his account, or (iii) Before passage of title. If title is still in the seller, as, for example, in the case of certain installment sales contracts, and all or a part of the purchase price is repaid to the vendee or credited to his account. That section further provides that, except as stated in (i), (ii), and (iii), a price adjustment does not result when a taxable article is returned to the person who paid the tax to the United States on the sale of such article, even though all or a part of the purchase price is repaid to the vendee or credited to his account, since such a transaction is considered to be a repurchase of the article by such a person. Although the articles remaining unsold in B’s inventory that were purchased from A were physically returned to A, they were returned under a new agreement whereby A reacquired the articles at a negotiated price that was higher than the price for which they had originally been sold to B. Since as part of the agreement A was entitled to use certain trademarks of B, a portion of the reacquisition price was attributable to the granting of this right by B. Therefore, the reacquisition of the articles by A in this case was not a rescinded sale resulting in a return of the articles within the meaning of section 48.6416(b)-1(b)(2)(i) of the regulations, but was a separate repurchase of the articles by A.

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HOLDING

Accordingly, such transaction does not give rise to a price readjustment under that section and no credit or refund of the manufacturers excise tax paid by A on the original sale of the articles to B is allowable. Since no credit or refund is allowable, A incurs no tax liability on its resales of such articles.