Rev. Rul. 68-254

Advice has been requested whether a manufacturer may use its selling company's price of taxable articles to unrelated distributors for export as the `lowest established resale price for the articles to unrelated wholesale distributors in the ordinary course of trade' for purposes of Revenue Ruling 62-68, C.B. 1962-1, 216.

Revenue Ruling 62-68 provides that on intercompany sales at less than arm's length and at less than fair market price, a manufacturer of an article taxable under Chapter 32 of the Internal Revenue Code of 1954 (where tax is based on sale price) may elect to use as a basis for tax, pursuant to section 4216(b)(1)(C) of the code, a constructive sale price equal to 95 percent of its selling company's lowest established resale price for the article to unrelated wholesale distributors in the ordinary course of trade.

In the instant case, the manufacturer elects to use, for purposes of computing its excise tax under section 4216(b)(1)(C) of the Code, a constructive sale price equal to 95 percent of its selling company's lowest established resale price to unrelated wholesale distributors in the ordinary course of trade. In addition to selling the articles to distributors for the United States market, the selling company sells the articles to distributors for export. The sales of articles to distributors for export are at a lower price than the sales of articles to distributors for the United States market.

The specific question is whether the manufacturer, in exercising the election set forth in Revenue Ruling 62-68, may use as the selling company's lowest established resale price to unrelated wholesale distributors the price at which the articles are sold by the selling company to unrelated distributors for export.

The price contemplated by section 4216(b)(1)(C) of the Code and by Revenue Ruling 62-68 is the price for which the articles are sold to unrelated wholesale distributors for distribution in the United States market, the only market wherein the manufacturers excise tax imposed by Chapter 32 of the Code applies to the sale of the articles. Moreover, prices determined by a company with respect to sales of articles for export need not and normally do not reflect all of the factors incident to structuring prices to compete with manufacturers in the ordinary course of trade for the United States market.

Accordingly, in the instant case, the selling company's resale price to unrelated distributors who export may not be used as its lowest established resale price to unrelated wholesale distributors, for purposes of determining the manufacturer's constructive sale price under the election provided in Revenue Ruling 62-68. The price to be used by the manufacturer is the selling company's lowest established resale price to the unrelated wholesale distributors who distribute the articles in the United States.

Revenue Ruling 62-68 is hereby clarified.