Rev. Rul. 69-580

The Internal Revenue Service has been asked to determine a constructive sale price, under the authority provided by section 4216(b)(1) of the Internal Revenue Code of 1954, for motor vehicle articles sold at retail under the circumstances described below.

A company is engaged in the manufacture and sale of heavy-duty truck chassis that are subject to the manufacturers excise tax imposed by section 4061(a)(1) of the Code. The company does not sell the chassis through independent dealers and does not maintain an inventory of truck chassis for sale. The chassis are manufactured pursuant to special orders submitted by individual consumers through the company's regional salesmen. When placing an order, the customer selects one of several basic model truck chassis offered by the company and also supplies the company with information as to the conditions under which the truck chassis will operate and the specifications and options desired. The company furnishes the customer with price lists of the basic models but only as a starting point for purposes of negotiating the contract. The actual price charged by the company is based on its estimated cost plus a varying profit percentage. Since the manufacturer has a contract assuring sale of the finished chassis before going into production, the profit markup involved in this type of transaction is normally much lower than the markup involved where a company manufactures chassis and inventories them for future sale.

Section 4216(b)(1)(A) of the Code provides that if an article is sold at retail, the manufacturers excise tax shall (if based on the price for which the article is sold) be computed on the price for which such articles are sold, in the ordinary course of trade, by manufacturers or producers thereof, as determined by the Secretary of the Treasury or his delegate. The section further provides that, in the case of an article sold at retail, the computation shall be on whichever of the following prices is the lower: (i) the price for which such article is sold, or (ii) the highest price for which such articles are sold to wholesale distributors, in the ordinary course of trade, by manufacturers or producers thereof, as determined by the Secretary or his delegate.

Section 148.1-5(b)(1) of the temporary rules, Treasury Decision 6355, C.B. 1959-1, 795, provides that where a manufacturer, producer, or importer sells an article at retail, the tax on his retail sale ordinarily will be computed upon the highest price for which similar articles are sold by him to wholesale distributors. However, in such cases it must be shown that he has an established bona fide practice of selling such articles in substantial quantities to wholesale distributors. If he has no such sales to wholesale distributors, a fair market price will be determined by the Commissioner. In any case the price so determined shall not be in excess of the actual price for which the article is sold by him at retail.

Where a manufacturer does not sell similar articles to wholesale distributors, the constructive sale price for the manufacturer's sales of truck and trailer chassis at retail has been determined to be 75 percent of the established retail price of the chassis. See Rev. Rul. 54-61, C.B. 1954-1, 259.

In Revenue Ruling 68-519, C.B. 1968-2, 513, the problem of determining an "established retail price" was considered in a situation where articles are never sold by the manufacturer at the published retail list price, but always for less than list price. Revenue Ruling 68-519 holds that in such a situation the "established retail price" is the price resulting from the minimum discount off the retail list price. That Revenue Ruling also defines "established retail price" for purposes of section 4216(b)(1) of the Code as "the highest price for which a manufacturer sells or offers to sell a single article for use by an independent purchaser who would not ordinarily be expected to buy more than one."

Revenue Ruling 68-202, C.B. 1968-1, 477, covers a situation wherein a manufacturer of automotive chassis and bodies sells at retail under such circumstances that he does not have an "established retail price" for the articles. That Revenue Ruling holds that the constructive sale price (tax exclusive) in that situation is whichever of the following amounts is the higher: (1) 75 percent of the actual sale price (excluding the amount representing manufacturers excise tax), or (2) the total cost to manufacture and sell the chassis or body, plus ten percent.

The specific question presented in this case is whether (a) the facts are such that the manufacturer has available an "established retail price" so that the constructive sale price should be computed under the holding in Revenue Ruling 68-519, or (b) the facts are such that there is no "established retail price" and the constructive sale price should be computed under the holding in Revenue Ruling 68-202.

Although the company maintains list prices for its basic model truck chassis and for optional equipment, the actual selling price of the delivered chassis under a special order contract will always be less than, and will fluctuate irregularly from, the sum of the list prices for the basic model and the optional equipment. Consequently, there is absent from the circumstances in this case a regular selling pattern evidencing a "highest price for which the manufacturer regularly sells or offers to sell" taxable articles (a condition that was essential to the conclusion reached in Revenue Rulings 54-61 and 68-519). Furthermore, as indicated previously, the average profit markup in the type of transaction described in the instant case is substantially lower than in those cases where articles are manufactured and inventoried for sale without the benefit of prior contracts to sell, as in the situations contained in Revenue Rulings 54-61 and 68-519.

Accordingly, under the facts presented in the instant case there is no "established retail price" available, and it is held that the constructive sale price is to be computed under the method set forth in Revenue Ruling 68-202. Therefore, under the provisions of that Revenue Ruling, the constructive sale price (tax exclusive) to be used by the company is the higher of (1) 75 percent of the actual sale price charged the customer (excluding the amount representing manufacturers excise tax), or (2) the total cost to manufacture and sell the completed truck chassis, plus ten percent. The tax due is computed at the applicable statutory percentage of the higher of (1) or (2).

However, in any case in which application of the foregoing constructive sale price results in a tax that would exceed the tax based on the actual price for which the chassis are sold, the tax should be computed on the price for which the chassis are sold.