Rev. Rul. 63-93

The Internal Revenue Service has been asked a series of questions relative to the application of section 4217 of the Internal Revenue Code of 1954 as amended by section 117 of the Excise Tax Technical Changes Act of 1958, Public Law 85-859, C.B. 1958-3, 92, at 97, effective January 1, 1959.

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 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.-

(1) Lessor Must Also Be Engaged In Selling.-Subsection (b) shall not apply to any lease of an article unless at the time of making the lease, or any prior lease of such article to which subsection (b) applies, the person making the lease or prior lease was also engaged in the business of selling in arm's length transactions the same type and model of article.

(2) Sale Before Total Tax Becomes Payable.-If the taxpayer sells an article before the total tax has become payable, then the tax payable on such sale shall be whichever of the following is the smaller:

(A) the difference between (i) the tax imposed on lease payments under leases of such article to which subsection (b) applies, and (ii) the total tax, or

(B) a tax computed, at the rate in effect on the date of the sale, on the price for which the article is sold. For purposes of subparagraph (B), if the sale is at arm's length, section 4216(b) shall not apply.

(3) Sale After Total Tax Has Become Payable.-If the taxpayer sells an article after the total tax has become payable, no tax shall be imposed under this chapter on such sale.

(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.

The specific questions and the answers thereto are as follows:

Question (1) : What is the meaning of the terms `type' and `model' as used in section 4217(d)(1) of the Code, insofar as those terms are applicable to articles taxable under section 4191 of the Code?

Answer: As it relates to business machines, the term `type' refers to a category of articles as listed in section 4191, such as `adding machines,' `addressing machines,' or `autographic registers,' etc. The term `model' refers to the manufacturer's classification of the machines, such as by model name or number, within each category (type) of articles listed in section 4191.

Question (2) : If a business machine (for which a `total tax' has been established) is lost, destroyed, or scrapped before the `total tax' has been fully paid and the lessee is not liable for any further lease payments, will the manufacturer (lessor) be liable for the unpaid balance of the `total tax?'

Answer: Under these circumstances, the manufacturer will not be liable for the unpaid balance of the `total tax' established at the time of the lease.

Question (3) : In the case of the lease of a taxable business machine on or after January 1, 1959, which is not the first lease of the machine, may the basis for computing the `total tax' be limited to the constructive sale price of the same machine if sold new?

Answer: If the basis for computing the `total tax' under the provisions of section 4217(c)(2) of the Code is greater than the constructive sale price of the particular machine when sold new, the basis for the `total tax' computation may be limited to the constructive sale price.

Question (4) : In the case of a taxable business machine which was leased prior to January 1, 1959, and which continued under lease on or after that date, may the basis for computing the `total tax' be limited to the constructive sale price of the same machine if sold new?

Answer: If the basis for computing the `total tax' under the provisions of section 4217(d)(4) of the Code is greater than the constructive sale price of the particular machine when sold new, the basis for the `total tax' computation may be limited to the constructive sale price.

Question (5) : Will the `total tax' which was properly established for a particular business machine at the time of its initial lease be changed because of a subsequent increase or decrease in the retail list price for the same type and model machine or because of an lncrease or decrease in the amount of the lease payments received for the machine?

Answer: The `total tax' established for a business machine at the time of its initial lease will not be affected by such subsequent events.

Question (6) : Will the `total tax' which was properly established for a particular machine be affected if the machine is transferred to various lessees before the `total tax' has been fully paid?

Answer: The `total tax' for a particular machine will not be affected by the transfer of the machine to various lessees. Each machine retains its own `total tax' throughout its tax life. All taxes paid on lease payments with respect to the machine will be applied against the `total tax' so established.

Question (7) : Occasionally, in order to fulfill his obligation under a lease agreement, a manufacturer (lessor) will replace a machine which is on lease to a customer with a machine which has never been sold, leased, or used. What is the proper application of the provisions of section 4217 of the Code with respect to the replacement machine?

Answer: Since this is the initial lease of the replacement machine, a `total tax' must be established for it as of the date of its installation. Thereafter, each payment under the lease agreement is subject to the manufacturers excise tax at the rate in effect at the time of the payment. The tax computed on each payment is applied against the `total tax' for the replacement machine.

Question (8) : What is the proper application of the provisions of section 4217 of the Code (A) where a business machine was leased by the manufacturer to a State or other `exempt lessee' prior to January 1, 1959, and was still under lease to the `exempt lessee' on that date, (B) where a machine is first leased by the manufacturer to an `exempt lessee' on or after January 1, 1959, and (C) where a machine leased to an `exempt lessee' on or after January 1, 1959, had previously been leased to a `nonexempt lessee' and the `total tax' established for it had not been fully paid?

Answer: No tax applies to the lease payments received from the State or other `exempt lessee' in these situations, provided the tax-exempt character of the lease is supported as required by the regulations. However, if a machine under lease to an `exempt lessee,' as in (A) or (B) above, is subsequently leased to a `nonexempt lessee,' tax applies to the lease payments received from the latter lessee. The `total tax' must be established as of the date of the lease to the `nonexempt lessee' and must be computed on the fair market value of the machine as of that date, except that the `total tax' should not be greater than a `total tax' computed on a constructive sale price for a new machine of the same type, model, and capacity as the machine being leased.

If a machine is leased to an `exempt lessee,' as in (C) above, after is has been leased to a `nonexempt lessee,' the lease payments received from the `exempt lessee' are not subject to tax. However, if the machine is subsequently leased to a `nonexempt lessee,' tax must be paid on the lease payments received. These tax payments will be credited against the balance of the `total tax' originally established until the `total tax' is fully paid.

Question (9) : A manufacturer leases one of his machines to a customer and properly establishes a `total tax.' After the lease period expires, but before the `total tax' has been fully paid, the manufacturer puts the machine to use in his own business. What is the manufacturer's liability for tax in this situation?

Answer: Under the provisions of section 4218 of the Code, the use of the machine by the manufacturer is treated `in the same manner as if such article were sold by him.' Therefore, the manufacturer's liability is determined under the provisions of section 4217(d)(2) of the Code. Thus, the tax payable on the manufacturer's use of the machine is whichever of the following is the smaller: (1) the difference between the `total tax' and the tax imposed on the lease payments received for periods after December 31, 1958, or (2) the tax computed under the provisions of section 4218(e) of the Code on the date the machine is put into use by the manufacturer.

For an application of the provisions of section 4217 of the Code to certain leases of parts or accessories for business machines, see Revenue Ruling 63-94, below.