Rev. Rul. 63-94

Advice has been requested relative to the application of the manufacturers excise tax to the leasing of parts or accessories for a business machine at a time subsequent to the lease and installation of the machine.

A company which manufactures and sells business machines which are subject to the manufacturers excise tax imposed by section 4191 of the Internal Revenue Code of 1954 also leases such machines to various customers. Some of its machines were leased prior to January 1, 1959, and others are leased on or after January 1, 1959, the effective date of section 117 of the Excise Tax Technical Changes Act of 1958, Public Law 85-859, C.B. 1958-3, 92, at 97, which amended section 4217 of the Code. Since that amendment changed the method of applying the tax to leases of articles subject to the manufacturers excise tax, the company has asked several questions concerning the proper application of section 4217 of the Code, as amended.

Section 4191 of the Code imposes a tax upon the sale by the manufacturer, producer, or importer of certain enumerated articles or any combination thereof (including in each case parts or accessories of such articles sold on or in connection therewith, or with the sale thereof). The articles enumerated in that section are commonly referred to as `business machines.'

Section 4217 of the Code reads, in part, as follows:

(a) LEASE CONSIDERED AS SALE.-For purposes of this chapter, the lease of an article (including any renewal or any extension of a lease or any subsequent lease of such article) by the manufacturer, producer, or importer shall be considered a sale of such article.

(b) LIMITATION ON TAX.-In the case of any lease described in subsection (a) of an article taxable under this chapter, if the tax under this chapter is based on the price for which such articles are sold, there shall be paid on each lease payment with respect to such article a percentage of such payment equal to the rate of tax in effect on the date of such payment, until the total of the tax payments under such lease and any prior lease to which this subsection applies equals the total tax.

(c) DEFINITION OF TOTAL TAX.-For purposes of this section, the term `total tax' means-

(1) except as provided in paragraph (2), the tax computed on the constructive sale price for such article which would be determined under section 4216(b) if such article were sold at retail on the date of the first lease to which subsection (b) applies; or

(2) if the first lease to which subsection (b) applies is not the first lease of the article, the tax computed on the fair market value of such article on the date of the first lease to which subsection (b) applies. Any such computation of tax shall be made at the applicable rate specified in this chapter in effect on the date of the first lease to which subsection (b) applies.

(d) SPECIAL RULES.-

*

(4) TRANSITIONAL RULES.-For purposes of this subsection and subsections (b) and (c), in the case of any lease entered into before the effective date of subsection (b) and existing on such date-

(A) such lease shall be considered as having been entered into on such date;

(B) the total tax shall be computed on the fair market value of the article on such date; and

(C) the lease payments under such lease shall include only payments attributable to periods on and after such date.

Section 48.4191-2(a) of the Manufacturers and Retailers Excise Tax Regulations provides that the tax attaches in respect of parts or accessories for articles specified in section 4191 sold on or in connection therewith or with the sale thereof at a rate applicable to the sale of the basic articles. The tax attaches in such case whether or not the parts or accessories are billed separately. On the other hand, no tax attaches in respect of parts or accessories for articles specified in section 4191 which are sold otherwise than on or in connection with such articles or with the sale thereof.

The specific questions and the answers thereto are as follows:

Question (1) : Prior to January 1, 1959, the company leased a taxable business machine to a customer for use in his business. Later, but also prior to January 1, 1959, the company separately leased and installed a part or accessory in the leased machine. The part or accessory was still in use with the leased machine on January 1, 1959.

Since the separate lease and installation of the part or accessory was determined to be not in connection with the original lease of the machine, no tax was incurred with respect to the lease payments made prior to January 1, 1959, which were attributable to the part or accessory.

Under the provisions of section 4217(d)(4) of the Code, the question arises whether the part or accessory is to be included in determining the fair market value of the machine in establishing the `total tax.' Stated otherwise, the question is whether the fact that the part or accessory was not subject to tax prior to January 1, 1959, operates to exclude the fair market value of such part or accessory in establishing the `total tax' for the machine?

Answer: The fair market value of the part or accessory must be taken into account in establishing the `total tax' under the provisions of sections 4217(b) and 4217(d)(4)(B) of the Code. It is immaterial that the part or accessory was not subject to tax prior to January 1.1959.

Question (2) : The lessee of a taxable business machine, which was leased subsequent to January 1, 1959, requests the company to decrease the capacity or utility of the leased machine or to remove a part or accessory from the leased machine. The question here is whether this change affects the `total tax' established for the machine at the time of the initial lease of the machine.

Answer: This change does not affect the `total tax' established for the machine.

Question (3) : Because the lessee of a taxable business machine desires to make greater use of the machine subsequent to the date of the initial lease of the machine, the company makes the adjustments necessary to increase the capacity or utility of the machine. This may be accomplished by making various adjustments or by adding certain parts or accessories. Does this increase in the capacity or utility of the machine affect the `total tax' established at the time of the initial lease of the machine?

Answer: The `total tax' for the machine, properly established under the provisions of section 4217(b) of the Code at the time of its initial lease, is not affected by an increase in the capacity or utility of the machine, unless the facts in a particular case indicate (A) that the lease of the machine or (B) that the adjustments to the machine or the lease of the parts or accessories was made in connection with the initial adding of the parts or accessories results in the manufacture of a new machine.

Question (4) : The lessee of a taxable business machine, which is leased subsequent to January 1, 1959, requests the company to increase the capacity of the leased machine by adding an accessory. This increase in capacity is made several months after the machine had been installed. As a result of the increase in the capacity of the machine, the lease payments are increased. The question here is whether tax is imposed upon that portion of the increased lease payments attributable to the accessory.

Answer: In the absence of evidence which shows (1) that the lease of the accessory was made in connection with the initial lease of the machine or (2) that the addition of the accessory results in a new machine, no tax shall be imposed upon that portion of the lease payments attributable to the accessory.

For a series of questions and answers relating to the application of the provisions of section 4217 of the Code to various other situations involving leases of business machines, see Revenue Ruling 63-93, page 244 of this Bulletin.