Rev. Rul. 61-179

The Internal Revenue Service has been asked to determine whether X or Y is the importer of electric chord organs, for purposes of the manufacturers excise tax, under the circumstances described below.

X corporation was organized for the purpose of importing electric chord organs into the United States. To this end, an agreement was entered into with a foreign supplier. Among other things, the agreement provided that letters of credit would be established in favor of the foreign supplier's bank and that payment for the organs would be made upon the foreign supplier's presentation of shipping documents to the bank.

Subsequently, the organizing stockholders sold all of their X corporation stock to an unrelated individual and formed Y company for the purpose of selling the imported organs to local distributors.

Pursuant to this transaction, X and Y entered into an agreement which provided that Y would purchase all of the organs which would be imported under the agreement between X and the foreign supplier; that Y would determine the number of organs to be ordered each month; and that Y would advance to X such sums of money as would be required by X to support the letters of credit in connection with the purchase of the organs from the foreign supplier. To secure these advances, X assigned to Y all its right, title, and interest in and to the letters of credit and in and to all organs sold to X by the foreign supplier.

The agreement also provided that Y would pay to X for each organ an amount equal to the cost of the organ plus three percent of that cost. The establishment of that price was influenced by the fact that Y advanced funds to X . The organs are distributed under the trade name of Y .

Although the organs are shipped to X by the foreign supplier, they are delivered to the premises of Y . Consequently, X does not maintain any inventory of the organs, has no employees, and has no business premises except desk space at which one of the officers keeps the necessary records of the corporation's transactions pursuant to its separate agreements with the foreign supplier and with Y .

Section 4151 of the Internal Revenue Code of 1954 imposes a tax upon the sale of musical instruments by the manufacturer, producer, or importer thereof.

In determining who is an importer for purposes of the manufacturers excise taxes, consideration must be given to the substance of the transaction. In the instant case, X corporation maintains no inventories, the importation of the organs is financed by Y company, and Y determines how many organs will be imported. All right, title, and interest in and to the organs pass to Y prior to the time they are imported into this country, and the organs are delivered to the premises of Y . Consequently, Y company, in effect, controls the importation.

Therefore, it is held that Y company is the importer of the organs for purposes of the manufacturers excise tax imposed by section 4151 of the Code and is liable for the tax imposed by that section on its sales of the organs.