Rev. Rul. 84-116 1984-2 C.B. 203, 1984-31 I.R.B. 8.

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Revenue Ruling 84-116

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Headnote

Manufacturers; firearms; components supplied by customer; personal use exemption. For purposes of section 4181 of the Code, a gunsmith’s customer is considered the manufacturer of a rifle if the customer supplies the parts used by the gunsmith in the fabrication of the rifle. If the transaction is not a regular practice of the customer and the rifle is produced for the customer’s personal use, the customer is exempt from tax by reason of section 48.4218-2 of the regulations.

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ISSUES

1. Is a custom gunsmith or his customer the manufacturer of a custom rifle for purposes of the manufacturers excise tax imposed by section 4181 of the Internal Revenue Code when the customer supplies the action and receiver used by the gunsmith in fabricating the rifle?
2. If the customer is the manufacturer, does the manufacturers excise tax apply if the rifle is intended for the customer’s personal use?

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FACTS

An individual who has inherited an old unworkable rifle orders a new rifle to be fabricated by a custom gunsmith using the action and receiver from the old firearm. The gunsmith installs a new sight, fabricates a new rifle barrel and stock from blanks, and assembles a new firearm from these components and those supplied and owned by the customer. After custom-engraving, the rifle is delivered to the customer who displays it in his home and uses it on his annual hunting trip.

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LAW AND ANALYSIS

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ISSUE 1

Section 4181 of the Code imposes a tax upon the sale by the manufacturer, producer, or importer of firearms. Section 48.4181-1(a)(2) of the Manufacturers and Retailers Excise Tax Regulations provides that no tax is imposed by section 4181 on the sale of parts or accessories of firearms when sold separately, or when sold with a complete firearm. Section 48.0-2(a)(4)(i) of the regulations defines the term “manufacturer” as including any person who produces a taxable article from scrap, salvage, or junk material, or from new or raw material, by processing, manipulating, or changing the form of an article or by combining or assembling two or more articles. Section 48.0-2(a)(4)(ii) provides that under certain circumstances, as when a person manufactures or produces a taxable article for another person who furnishes materials under an agreement whereby the person who furnished the materials retains title thereto and to the finished article, the person for whom the taxable article is manufactured or produced, and not the person who actually manufactures or produces it, will be considered the manufacturer. Revenue Ruling 58-586, 1958-2 C.B. 806, holds in situation (3) that when a person assembles a firearm for a customer’s personal use and the customer furnishes the barrel and action, such person incurs no tax liability because there has been no sale of a firearm to a customer. That revenue ruling does not address the question of whether the customer incurred any liability. In the present case, although there has been an act of manufacturing of a custom rifle, the transfer of the rifle fabricated by the gunsmith, using an action and receiver owned and furnished by the customer, is not considered a sale of the firearm by the gunsmith for manufacturers excise tax purposes. The payment by the customer to the gunsmith is for the labor involved in fabricating the rifle and for the parts provided by the gunsmith in the operation. The customer, not the gunsmith, is considered the manufacturer of the rifle for manufacturers excise tax purposes. Additionally, under section 48.4181-1(a)(2) of the regulations, the parts and accessories provided by the gunsmith in the fabrication operation are also not subject to tax.

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ISSUE 2

Section 4218(a) of the Code provides that if any person manufactures, produces or imports an article and uses it (otherwise than as material in the manufacture or production of, or as a component part of, another taxable article under Chapter 32 to be manufactured or produced by him), then he shall be liable for tax under the chapter in the same manner as if such article were sold by him. Section 48.4218-2 of the regulations provides that section 4218 of the Code applies to the use by a person, in the operation of any business in which he is engaged, of a taxable article which has been manufactured, produced, or imported by him or his agent. The tax on use of a taxable article does not attach in cases where an individual incidentally manufactures, produces or imports a taxable article for his personal use or causes a taxable article to be manufactured, produced, or imported for his personal use. Rev. Rul. 65-317, 1965-2 C.B. 422, dealt with the manufacturers excise tax imposed at that time on automobiles by section 4061(a)(2) of the Code. Addressing the applicability of the personal use regulatory exemption provision to the importation of automobiles, the ruling held that the term “incidentally … imports” does not describe any situation where the primary objective is the acquisition of the article imported. The term instead refers to circumstances where the importation is incidental or consequent to other primary purposes, such as the return of an individual to the United States with his personal effects after residence abroad. The primary purpose test of Rev. Rul. 65-317, however, is not applicable to the manufacture of a taxable article. In almost every instance, the primary objective of the act of manufacture, or causing the manufacture, is the production of the firearm or other end product. As used in section 48.4218-2(b) of the regulations, the term “incidentally manufactures” for personal use refers to an infrequent, casual act of repair, reconstruction, or remodeling of a taxable article for other than a business use by the party who, in effect, has manufactured or caused the manufacture of the article within the meaning of the statute. In the instant case the customer has technically caused the manufacture of the custom firearm but the transaction was not a regular practice of the customer and the taxable article was produced for his personal use. Consequently, the customer is exempt from the tax by virtue of the transaction being an incidental manufacture for personal use.

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HOLDING

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ISSUE 1

The customer is the manufacturer for purposes of the manufacturers excise tax imposed by section 4181 of the Code.

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ISSUE 2

The customer is not liable for the manufacturers excise tax by reason of the exemption provided by section 48.4218-2(b) of the regulations. Rev. Rul. 84-116, 1984-2 C.B. 203, 1984-31 I.R.B. 8.