Rev. Rul. 71-170

Advice has been requested as to the tax consequences of the addition of a fifth wheel to a highway-type tractor under the circumstances described below, for purposes of the manufacturers excise tax imposed on motor vehicle articles by section 4061(a)(1) of the Internal Revenue Code of 1954.

Situation (1) A dealer purchases a new highway-type tractor from a tractor manufacturer, and purchases a new fifth wheel from a fifth wheel manufacturer. Both articles were sold by the original manufacturers thereof in transactions subject to the manufacturers excise taxes imposed by section 4061(a)(1) and 4061(b) of the Code, respectively. The tractor is sold by the manufacturer for $11,300. Of this amount $300 represents transportation, cooperative advertising, and price adjustments excluded from the manufacturers excise tax base under section 4216 (a) and (f). Also included in the sale price is $1,000, which represents the tractor manufacturer's 10 percent excise tax liability computed upon the tractor manufacturer's adjusted tax base of $10,000. This tax liability was satisfied by a tax payment of $950 and a $50 tire tax credit determined under section 6416(c) of the Code. The fifth whel was sold by the manufacturer for $440. Of this amount $8 represents transportation and other adjustments excluded from the fifth wheel manufacturer's tax base, and $32 represents the 8 percent truck parts tax imposed by section 4061(b)(1) of the Code, computed upon the fifth wheel manufacturer's adjusted tax base of $400. The dealer installs the fifth wheel at a cost of $100, which represents the cost of labor and allocable overhead, and sells the assembled vehicle for $13,000. It is represented that it is the custom in the industry for the selling price not to include any profit for the dealer on the installation of the fifth wheel.

Situation (2) A trucking operator purchases a new highway type tractor from a retail dealer for $12,430. The trucking operator also purchases a new fifth wheel from another retail dealer for $470. Both articles were sold by the original manufacturers thereof in transactions subject to the manufacturers excise taxes imposed by sections 4061(a)(1) and 4061(b) of the Code, respectively, and the manufacturers' tax bases were the same as in Situation (1). The trucking operator installs the fifth wheel at a cost of $100, and uses the tractor in the operation of his business.

The first question presented is whether the assemblage of a fifth wheel with a highway-type tractor in the situations described is an act of manufacture for purposes of the manufacturers excise tax imposed by section 4061(a)(1) of the Code.

Section 4061(a)(1) of the Code imposes a tax upon certain enumerated articles (including in each case parts or accessories therefor sold on or in connection therewith or with the sale thereof) sold by the manufacturer, producer, or importer thereof, including tractors of the kind chiefly used for highway transportation in combination with a trailer or semitrailer.

Section 4218(a) of the Code provides that if any person manufactures, produces, or imports a taxable article and uses it, he shall be liable for the tax in the same manner as if such article were sold by him. 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 by combining or assembling two or more articles.

In both situations, the installation of the fifth wheel on the tractor constitutes the assembling of two articles to produce a taxable article (a tractor equipped with fifth wheel) within the meaning of the regulations. Therefore, it is held that the dealer in Situation (1), and the trucking operator, in Situation (2), are "manufacturers" of articles enumerated in section 4061(a)(1) of the Code, and are liable for the tax imposed by that section on the sale or use of the tractors complete with fifth wheels.

The second question presented concerns the amount of tax due on the sale or use of the completed tractors.

Section 4216(b)(1) of the Code provides that if an article is sold at retail the tax shall 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 or his delegate. 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 regulations relating to constructive sale price provides that where a manufacturer, producer, or importer regularly 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 a 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.

Section 4218(e) of the Code provides that in any case (other than situations in which section 4223(b) applies) where a person is made liable for the tax by the provisions of section 4218, the tax (if based on the price for which the article is sold) shall be computed 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 provides that where a manufacturer does not regularly sell a taxable article at wholesale in an arms length transaction, a constructive price (tax base) on which the use tax must be computed will be determined by the Commissioner after considering the selling practice and price structures of manufacturers of similar articles.

Since the manufacturer (dealer) who assembles the tractor and fifth wheel in Situation (1) does not make sales to wholesale distributors, a constructive sale price must be determined by the Commissioner. In view of section 48.4218-5(b) of the regulations a constructive sale price must be determined by the Commissioner for the manufacturer (truck operator) in Situation (2).

In Situations (1) and (2), since there is further manufacture of tax-paid articles the constructive sales price for the new tractor complete with new fifth wheel is to be determined as stated below.

Although the tractor complete with fifth wheel is, for purposes of the manufacturers excise tax, a single article, the constructive sales price of the complete vehicle in the situations described herein should be considered as consisting of two elements: one which relates to the tractor, and the other to the fifth wheel installed. The element relating to the new tractor is an amount equal to the tax base (sales price as determined under section 4216(a) and (f) of the Code) on which the original manufacturer of the tractor computed his manufacturers excise tax liability on the sale of the tractor to the dealer (in Situations (1) and (2) $10,000). The element relating to the new fifth wheel installed is an amount equal to the original fifth wheel manufacturer's tax base plus the cost of installation, and the normal markup allocable to such manufacturing, which in this case is represented to be zero. In Situations (1) and (2) the tax base is $400, installation is $100, and markup is zero. Therefore, the constructive sales price of the complete vehicle in Situations (1) and (2) is $10,500.

Section 6416(b)(3)(A) of the Code provides with respect to articles subject to the tax imposed by section 4061(a) (automotive chassis and bodies) that if the tax imposed by chapter 32 has been paid with respect to the sale of such articles by the manufacturer, producer, or importer thereof, and such articles are sold to a subsequent manufacturer before being used, such tax shall be deemed to be an overpayment by the subsequent manufacturer if such articles are used by the subsequent manufacturer as material in the manufacture or production of, or as a component part of, another article taxable under chapter 32 manufactured or produced by him. Section 6416(b)(3)(B) of the Code provides similarly for parts and accessories taxable under section 4061(b) when the taxable parts and accessories are used by the subsequent manufacturer as material in the manufacture or production of, or as a component part of, any other article manufactured or produced by him.

Section 6416(c) of the Code provides for a tax credit based on the purchase price of tires and inner tubes if the tires or inner tubes are sold on or in connection with the sale of, another article taxable under chapter 32, for example, a tractor. Section 48.6416(c)-1 of the regulations provides that this credit shall be determined by multiplying the purchase price of the tires and inner tubes by the applicable percentage rate of tax for such other article (tractor).

Therefore, in Situations (1) and (2) in computing its tax liability the subsequent manufacturer is entitled to a credit for the manufacturers excise tax previously paid on the tractor and fifth wheel, and the special tax credit for the tires and tubes based on the amount computed by the original manufacturer of the tractor.

Accordingly, under the facts presented the dealer in Situation (1) and the trucking operator in Situation (2) will owe a net manufacturers excise tax of $18. This is computed as follows:

 Gross tax due (10% of constructive sale

Under the authority granted by section 7805(b) of the Code, the conclusions set forth herein will not be applied to sales or uses made prior to July 1, 1971, with respect to the situations described.