Rev. Rul. 71-584

Advice has been requested whether the assembly of a so-called "glider kit" with salvaged parts from a used truck-tractor is the manufacture of a motor vehicle article subject to tax under section 4061(a)(1) of the Internal Revenue Code of 1954.

A company has a fleet of truck-tractors and semitrailers that it uses in its transportation business. Periodically, a truck-tractor is removed from the fleet when major repairs or overhauling are required. Company employees completely disassemble the vehicle retaining many of the components such as the rear axle, rear suspension system, wheels and tires, engine, transmission, air cleaner, fifth wheel, and fuel tanks. The remaining components are purchased by the company in "glider kit" form.

A glider kit usually consists of a cab, fenders, dash instruments, wiring, steering wheel, steering gear, seats, chassis frame, front axle, and copper tubing for the brake system. The glider kit and retained used components are assembled by the company employees into a truck-tractor, adding any other necessary new parts.

Section 4061(a)(1) of the Code imposes a tax upon the sale by the manufacturer, producer, or importer of certain enumerated motor vehicle articles including tractors of the kind chiefly used for highway transportation in combination with trailers or semitrailers.

Section 316.4(a) of Regulations 46, made applicable to the 1954 Code by Treasury Decision 6091, C.B. 1954-2, 47, provides in part, that the term "manufacturer" includes a person who produces a taxable article from scrap, salvage, or junk material, as well as from new or raw material, (1) by processing, manipulating, or changing the form or an article, or (2) by combining or assembling two or more articles.

Section 4218(a) of the Code provides that if any person manufactures and uses an article, then he shall be liable for the manufacturers excise tax in the same manner as if such article were sold by him.

Section 4218(e) of the Code provides that the tax on use shall be based on the price at which such or similar articles are sold, in the ordinary course of trade, by manufacturers, producers, or importers, thereof, as determined by the Secretary or his delegate.

Section 48.4218-5(b) of the Manufacturers and Retailers Excise Tax Regulations states, in part, that if a manufacturer producer, or importer of an article does not regularly sell such articles at wholesale in arm's length transactions, a constructive price on which the use tax shall be computed will be determined by the Commissioner.

Section 4216(g) of the Code provides that, in determining the price for which an article subject to the manufacturers excise tax imposed by section 4061(a)(1) (relating to trucks, buses, etc.) is sold, the value of any component of such article shall be excluded from the price if (1) such component is furnished by the first user of such article, and (2) such component has been used prior to such furnishing.

It is held that the assembly of the glider, kit and used parts by the company's employees constitutes the production or manufacture of an article taxable under section 4061(a)(1) of the Code. Accordingly, under the provisions of section 4218 of the Code, the company is liable for the tax imposed by section 4061(a)(1) on its use of the truck-tractor. This conclusion is consistent with the result reached in the case of Boise National Leasing, Inc. v. United States, 389 F. 2d 633 (1968).

The manufacturers excise tax on use of the truck-tractor in the instant case is to be computed under the provisions of section 4218(e) of the Code, and section 48.4218-5(b) of the regulations, since the manufacturer does not sell the article in question.

The Commissioner has determined that the constructive tax base for use of a truck-tractor is an amount equal to the manufacturer's total cost of producing the truck-tractor, plus 10 percent of such cost. In computing total cost of manufacture, there shall be excluded the value of any component of the truck-tractor that would be excludible from sale price under the provisions of section 4216(g) of the Code. Where a manufacturer believes the facts and circumstances in his particular case are so different as to justify using a tax base lower than one computed under the foregoing method upon receipt of a statement as to the facts and circumstances involved, the Internal Revenue Service will issue a specific ruling in the matter. See Rev. Rul. 54-490, C.B. 1954-2, 416.

Under the provisions of section 4221(a)(1) of the Code, the company may purchase parts or accessories on a tax-free basis from the manufacturer for use as component parts in the manufacture of the truck-tractor, provided the registration requirements of section 4222 have been met by the parties to the transaction. Alternatively, under the provisions of section 6416(b)(3)(B) of the Code, the company is entitled to claim credit or refund of the manufacturers excise tax paid on any unused parts or accessories purchased and used by the company as material in the manufacture of the vehicle.