Rev. Rul. 63-199

Advice has been requested whether the retailers excise tax imposed on various articles by section 4001 of the Internal Revenue Code of 1954 applies to the retail sales of the so-called `in-the-ear' hearing aid described below.

A company produces and sells at retail a small, self-contained, hearing aid which is designed to be worn inside a person's outer ear. The essential components (including a microphone, receiver, transistors, amplifier, battery, etc.) are enclosed in a very small metal case. This case is affixed to a piece of clear plastic which is custommolded to fit inside the auditory canal and the folds of the wearer's outer ear.

Because of various engineering factors, the metal case which contains the components of the hearing aid is made of brass. In order to prevent the corrosive action of the acids in perspiration, the entire brass case is plated with gold by a process of electrolysis. It is necessary that this gold plating be applied in a thickness in excess of one one-hundred-thousandth of an inch in order to withstand the repeated handling of the device in normal use. The question is whether this gold plating brings the hearing aid within the scope of the retailers excise tax.

In support of its contention that the tax should not apply to this hearing aid, the company has emphasized that the gold plating is not applied to the case for any decorative purpose whatsoever. In fact, since the hearing aid is worn to compensate for a hearing impairment, inconspicuousness is one of the most desirable characteristics of the device. For that reason, the gold plating is undesirable, and it is used only because of the overriding need for a material which is highly resistant to the corrosive action of perspiration.

Section 4001 of the Internal Revenue Code of 1954 imposes a retailers excise tax upon several categories of articles. First, the tax is imposed upon `all articles commonly or commercially known as jewelry, whether real or imitation.' The second category includes a list of specifically enumerated stones, commonly referred to as `gem' stones, which are not involved in this case. In the third category, the tax is imposed upon `articles made of, or ornamented, mounted or fitted with precious metals or imitations thereof.' Section 4001 also imposes the tax upon various other specifically enumerated articles, which are not involved in this case.

With respect to the first category, section 48.4001-2(a) of the Manufacturers and Retailers Excise Tax Regulations provides that jewelry in general includes articles designed to be worn on the person or on apparel for the purposes of adornment and which in accordance with custom or ordinary usage are worn so as to be displayed, such as rings, chains, brooches, bracelets, cuff buttons, necklaces, earrings, beads, charms, pendants, etc. The tax is imposed on the sale of any of such articles at retail, regardless of the substance of which made and without reference to their utilitarian value or purpose, unless for a purpose specifically exempted by law.

With respect to the third category, the most significant in this case, section 48.4001-4(a) of the regulations provides that the tax imposed by section 4001 applies to the sale at retail of articles (as distinguished from those articles commonly or commercially known as jewelry as described in section 48.4001-2) which are made of, or ornamented, mounted or fitted with, precious metals or imitations thereof. Examples of articles which become subject to the tax when made of, or ornamented, mounted or fitted with, precious metals or imitations thereof are as follows: photograph frames, book ends, ash trays, vanity cases, mesh bags, cigarette cases and lighters, glassware, china, pottery, umbrellas, and walking sticks. Buttons, belts, belt buckles, and shoe buckles, made of, or ornamented, mounted or fitted with, imitations of precious metals are in the nature of dress or shoe findings and are not subject to the tax.

Section 48.4001-4(b)(1) of the regulations provides that, for purposes of section 4001 of the Code, the term `precious metals' includes platinum, gold, silver, or other metals of similar or greater value.

Section 48.4001-4(b)(2) of the regulations provides that the term `imitations thereof' includes (i) alloys of precious metals, and (ii) platings of precious metals and platings of alloys of precious metals, provided such platings are one one-hundred-thousandth of an inch or more in thickness.

It is recognized that the hearing aid described above is not designed to be worn for the purpose of adornment. Therefore, it does not come within the scope of the provisions of section 48.4001-2(a) of the regulations and is not an article `commonly or commercially known as jewelry' within the meaning of section 4001 of the Code.

The remaining question, then, is whether the gold plating on the case brings the hearing aid within the scope of the term `articles made of, or ornamented, mounted or fitted with precious metals or imitations thereof' as it is used in section 4001 of the Code.

From 1918 until 1926, a tax was imposed upon dealers' sales to consumers of substantially the same classes of articles covered by the current statute. It seems relevant, then, to refer to interpretations under those earlier statutes in determining the intent of Congress concerning the scope of the statute as it relates to the hearing aid in the instant case.

S.T. 1-20-55, S.T. C.B. 1920, 60, which was based on Law Opinion 882, held that `coffins or burial caskets which are made of, or ornamented, mounted or fitted with, precious metals or imitations thereof, or ivory, are not subject to the tax imposed by section 905 of the Revenue Act of 1918.'

Solicitor's Memorandum 2068, C.B. III-1, 465 (1924), related to the taxability of phonographs, victrolas, etc., ornamented, mounted or fitted with precious metals or imitations thereof, under section 905(a) of the Revenue Act of 1921 . In discussing this question, the memorandum quoted with approval the following paragraph from Law Opinion 882:

It appears that Congress intended to tax such articles as are designed for personal use or adornment or for ornament or display in connection with the home . This intention is evidenced by the fact that practically all articles which are commonly or commercially known as `jewelry' serve such purposes. The same is true of those articles which are specially mentioned, such as watches, clocks, opera glasses, lorgnettes, etc. It would seem therefore that the reason for inserting the words `articles made of, or ornamented, mounted or fitted with, precious metals or imitations thereof, or ivory' was to subject to tax all other articles of similar character which are designed for similar uses but which are not known as `jewelry' and are not specially mentioned in the law. Emphasis supplied

Although a literal interpretation of the statute and regulations would lead to a contrary conclusion, it does not appear to have been the intention of Congress to impose the tax upon all articles which are `made of, or ornamented, mounted or fitted with precious metals or imitations thereof,' but only upon those articles which are similar in character or use to the articles more specifically designated in the statute. It is a general characteristic of those articles that they are designed for personal use or adornment or for ornament or display in connection with the home.

Based upon the facts that the hearing aid in the instant case is not designed in any manner for adornment or ornamentation and that the only purpose of the gold plating is to prevent corrosion of the article rather than to enhance its appearance for display purposes, it is held that this hearing aid is not subject to the retailers excise tax imposed by section 4001 of the Code.