Rev. Rul. 56-361

The Internal Revenue Service has been requested to explain the application of the manufacturers excise taxes, imposed by the Internal Revenue Code of 1954, where taxable articles shipped by the manufacturer to a customer are damaged or destroyed while in the possession of the carrier.

The manufacturers excise tax is imposed upon the sale of certain articles by the manufacturer, producer, or importer. Under the provisions of section 316.5 of Regulations 46, made applicable to the 1954 Code by Treasury Decision 6091, C.B. 1954-2, 47, the tax attaches when title to the article sold passes from the manufacturer to the purchaser. When title passes is dependent upon the intention of the parties as gathered from the contract of sale and the attendant circumstances. Generally, title passes upon delivery of the article to the purchaser or to a carrier for the purchaser.

Where title to an article passes from the manufacturer to the purchaser upon delivery to the carrier, the manufacturer incurs liability for tax at that time and the subsequent damage to or destruction of the article has no relationship to the manufacturer's liability for tax on the sale of the article.

Under circumstances where title to an article shipped by the manufacturer to his customer remains in the manufacturer until delivered by the carrier and the article is destroyed in transit, no liability for tax is incurred. Under such circumstances, where the article is damaged but is still is usable condition, the tax consequences will be determined by the manner in which the transaction is subsequently handled. If, in such a case, the customer agrees to accept the damaged but usable article at a reduced price, the tax attaches, based upon the reduced price. If title to the damaged but usable article is transferred from the manufacturer to the carrier for salvage in adjustment of a damage claim, such transfer is not considered to be a sale of the article within the meaning of the statute and is not subject to tax. However, under the provisions of section 4219 of the Code, relating to sales of taxable articles by a person other than the manufacturer, the carrier will be liable for tax on its sale of the usable article. Where the article acquired by the carrier is damaged to the extent that its only value is as scrap, no tax will attach to its sale.