Rev. Rul. 59-114

For purposes of determining liability for the manufacturers excise tax, advice has been requested with respect to who is the manufacturer of phonograph records which are produced and distributed under the circumstances described below.

Situation (1). X corporation is engaged in manufacturing phonograph records for various customers. Under a special contract, X agrees to produce for Y company a specified number of records which will reproduce a message contained in a magnetic tape recording furnished by Y. X corporation sends Y company's tape recording to a processing firm, which transcribes the message on a steel plate, usually called a `master record.' A so-called `printer' then is made from the master record. The processing firm sends this printer to X corporation, which uses the printer in `pressing' the phonograph records which are shipped to Y company. Y company either sells the records or uses them in its business.

X corporation pays the processing firm for making the master record and the printer, this cost being one of the factors which X takes into account in establishing its charge to Y company. The master record is stored by the processing firm in the name of X corporation for possible further use in making additional printers. However, Y company retains the right of ownership of the tape recording, the master record, and the printer.

Situation (2). A owns certain copyrighted magnetic tape recordings. Under a contract with Z corporation, A authorized Z to have a record company produce master records and a specified number of phonograph records from these tape recordings. In accordance with the terms of the contract, the distribution and sale of the phonograph records are controlled by Z corporation, and Z pays A a royalty on each record produced. Title to the master records is vested in Z corporation, but the tape recordings remain the property of A .

Section 4141 of the Internal Revenue Code of 1954 imposes a tax upon the sale by the manufacturer, producer, or importer of certain enumerated articles, including phonograph records.

Generally, the ownership of a master record vests in the owner the right to control the production and sale of any phonograph records which are produced from that master record. In the absence of arrangements whereby the owner of the master record transfers that right to someone else, he is considered to be the manufacturer of the phonograph records for purposes of the manufacturers excise tax. Likewise, the ownership of a tape recording vests in the owner the right to control the production and use of any master records which are produced from that tape recording. In the absence of a transfer of that right, it is considered to remain with the owner of the tape recording.

The manufacturers excise tax is imposed upon the sale of phonograph records by the manufacturer, producer, or importer thereof. The person who controls the production and sale of phonograph records often is not the person who actually presses the records. Liability for the manufacturers excise tax is incurred by the person who has the right to control the production and sale of the phonograph records. The right to that control is usually determined by the ownership of the master record. Where a tape recording is utilized as the medium for transmitting sound to a master record, the ownership of the tape recording and any arrangement regarding its use are factors to be considered in establishing who is the owner of the master record.

In situation (1), since Y company retains title to the master record and does not transfer its right to control the production and sale of the phonograph records produced from the master record, it is held that Y company is the manufacturer of the phonograph records. Therefore, upon its sale or use of the phonograph records, Y company becomes liable for the manufacturers excise tax imposed by section 4141 of the Code. X corporation incurs no manufacturers excise tax liability with respect to its charge for labor and materials used in producing the phonograph records from the master record owned by Y company.

However, in situation (2), it is held that Z corporation is the manufacturer of the phonograph records produced under the contract with A , since Z becomes the owner of the master record and controls the production and sale of the phonograph records. Therefore, z corporation is liable for the manufacturers excise tax upon its sale of the phonograph records. A does not incur any liability for the manufacturers excise tax upon the royalties which he receives under the contract.