Rev. Rul. 65-15

Advice has been requested as to the allowability of a credit or refund of the manufacturers excise tax on mechanical lighters under the circumstances set forth below.

A manufacturer sold a quantity of 1,000 mechanical lighters for a price of $1,040.00 (or $1.04 each), including all charges which must be included in determining the price for which the lighters were sold, under the provisions of section 4216(a) of the Internal Revenue Code of 1954, but excluding the manufacturers excise tax and all other charges excludable under that section.

Under the provisions of section 4201(b) of the Code, the manufacturer paid manufacturers excise tax upon the sale of the lighters at the specific or unit rate of 10 cents for each lighter. Thus, the tax on the 1,000 lighters was $100.00, and the tax-included price was $1,140.00.

Subsequently, the manufacturer adjusted the price by a bona fide discount, rebate, or allowance in the amount of $205.00, resulting in an adjusted tax-included price of $935.00. In view of the foregoing, the manufacturer asks whether he may recompute the tax on the basis of the adjusted price, in accordance with the ad valorem limitation provided by section 4201(b) of the Code, and claim a credit or a refund of a part of the tax previously paid.

Section 4201(b) of the Code, as amended by Public Law 86-779, C.B. 1960-2, 709, effective October 1, 1960, imposes upon the sale by the manufacturer, producer, or importer of mechanical lighters for cigarettes, cigars, and pipes a tax of 10 cents for each lighter but not more than 10 percent of the price for which so sold.

Therefore, under the provisions of section 4201(b) of the Code, as amended, all lighters sold by the manufacturer at a price of $1.00 or more are subject to tax at the rate of 10 cents per lighter; whereas, those sold for loss than $1.00 are subject to a lesser tax determined by the ad valorem limitation.

Section 6416(b) of the Code, which authorizes credits or refunds with respect to overpayments of retailers and manufacturers excise taxes resulting from various `price readjustments,' provides in pertinent part as follows:

SPECIAL CASES IN WHICH TAX PAYMENTS CONSIDERED OVERPAYMENTS.-Under regulations rescribed by the Secretary or his delegate, credit or refund (without interest) shall be allowed or made in respect of the overpayments determined under the following paragraphs:

(1) PRICE READJUSTMENTS.-If the price of any article in respect of which a tax, based on such price, is imposed by chapter 31 or 32, is readjusted by reason of * * * a bona fide discount, rebate, allowance, * * * the part of the tax proportionate to the part of the price repaid or credited to the purchaser shall be deemed to be an overpayment.

The applicability of the ad valorem limitation provided by section 4201(b) of the Code is not precluded by the fact that a bona fide discount, rebate, or allowance occurs subsequent to the payment of the tax. Consequently, where the tax has been paid at the rate of 10 cents per lighter because the initial unit price was $1.00 or more, a subsequent bona fide reduction of the price to less than $1.00 per lighter is a `price readjustment' which results in an `overpayment' of the tax within the meaning of section 6416(b)(1) of the Code.

Therefore, in the illustrative situation set forth above, the ad valorem limitation on the tax is $85.00 ( 10/110 ths of the readjusted price of $935.00), resulting in an overpayment of $15.00.