Rev. Rul. 58-467

Advice has been requested concerning the applicability of the manufacturers excise tax to sales of lubricating oil by the manufacturer thereof for use in processing steel on a Wein Trap Line in the manner described below.

Rolled sheet steel, to be made into stampings, is drawn by the rolls of a Wein Trap Line through lubricating oil which is in a tank on the Wein Trap Line. The function of the oil is to flush or cleanse contaminants from the surface of the steel and also to prevent the formation of rust until the steel is used in the stamping operation. Following the flushing and washing operation the steel is drawn into another series of rolls, where it is straightened preparatory to being cut into the desired lengths at the end of the machine. The lubricating oil not remaining on the surface of the steel drains back into the oil tank through which the sheet steel has passed. After the steel has been cut into desired lengths it is stored until processed by another piece of equipment that performs a drawing operation.

The Internal Revenue Service has been informed that the operation of the Wein Trap Line does not involve a `rolling' operation, the purpose of which is to bring the metal to the desired shape and form and to improve its qualify by favorably affecting the structure and properties of the metal. Instead, in the instant case the previously `rolled' sheet steel is drawn between rolls merely to straighten the metal, and this operation is in no way assisted by the presence of the oil on the steel.

Section 4091 of the Internal Revenue Code of 1954 imposes a tax upon the sale by the manufacturer or producer of cutting oils and other lubricating oils. Section 4092(b) of the Code defines the term `cutting oils' to mean oils sold for use in cutting and machining operation (including forging, drawing, rolling, sheering, punching, and stamping) on metals. Section 314.43(a) of Regulations 44, made applicable to the 1954 Code by Treasury Decision 6091, C.B. 1954-2, 47, provides that no tax attaches where oil is sold by the manufacturer direct to a purchaser who uses it for nonlubricating purposes, porvided the manufacturer has definite knowledge, prior to or at the time of sale, that the product is purchased for such purposes, and he obtains from such purchaser a certificate of nonlubricating use in the form prescribed by that section. No sale of oil may be made tax free by the manufacturer to a dealer for resale for nonlubricating uses even though it is known at the time of sale that the oil will be so resold. However, where any dealer resells tax-paid oil for nonlubricating uses, the manufacturer who paid the tax on his sale of the oil may secure a refund or credit in accordance with the provisions of section 314.64 of the regulations.

Therefore, it is held that lubricating oil used solely as a cleaning and rust preventive material on a Wein Trap Line as described above is not considered to perform a lubricating function. Accordingly, the manufacturers excise tax does not attach to the sale of the oil by the manufacturer thereof direct to a purchaser for such use, provided the sale is supported by the required certificate of nonlubricating use.