Rev. Rul. 74-200

Advice has been requested whether the oil product described below is considered to be "lubricating oil" for purposes of the manufacturers excise tax and, if so, whether it may be sold tax free as a product seldom used as a lubricant.

A company manufactures and sells a controlled blend of petroleum base stocks used almost exclusively for quality control purposes by various manufacturers to determine whether their rubber compounds conform to certain requirements. The composition of the oil is subject to such rigid quality control requirements that the cost of the oil would prohibit its use as a lubricant. The rubber compound is immersed in the product for a period of time after which the compound's physical properties are analyzed, to determine whether the compound meets the manufacturer's quality standards.

Section 4091 of the Internal Revenue Code of 1954 imposes a tax of 6 cents a gallon on lubricating oil (other than cutting oils) sold by the manufacturer or producer.

Section 48.4091-2(a) of the Manufacturers and Retailers Excise Tax Regulations defines the term "lubricating oils" to include all oils, regardless of origin, which: (1) are suitable for use as a lubricant, or (2) are sold for use as a lubricant.

Section 48.4091-6(a) of the regulations provides that if the Commissioner determines that an oil suitable for use as a lubricant is seldom so used, but is used almost exclusively for nonlubricating purposes, the sale by the manufacturer of such oil direct to a purchaser for nonlubricating use by him or for resale by him for nonlubricating use may be made tax free. The manufacturer must obtain from the purchaser and retain in his possession a properly executed exemption certificate.

Rev. Rul. 70-55, 1970-1 C.B. 225, contains a list of lubricating oils under four categories that may be sold free of the manufacturers excise tax imposed by section 4091 of the Code, by reason of being oils "seldom used as lubricants" within the meaning of section 48.4091-6(a) of the regulations. Category 4 in the list describes certain oils, not used as lubricants, that have a primary function of performing physical or mechanical functions other than lubrication.

A chemical analysis of the product described above discloses that it comes within the regulations definition of "lubricating oil" in that it is an oil which is suitable for use as a lubricant. However, since the expense of the product would prohibit lubricating use, and since the product is used almost exclusively for the quality control purposes described above, the sale by the manufacturer of such oil to a purchaser for such nonlubricating use or for resale by him for such nonlubricating use may be made tax free provided he obtains a properly executed exemption certificate from his vendee.

Rev. Rul. 70-55 is hereby amplified to include under category 4 the following: Oils used for quality control purposes.