Rev. Rul. 76-292

The Internal Revenue Service has been asked for further clarification of the meaning of the term "cost" as it is used in Revenue Rulings dealing with situations wherein the sale of a taxable article by a manufacturer, producer, or importer at retail necessitates the use of a constructive sale price in the computation of the manufacturers excise tax liability under section 4216(b)(1)(A) of the Internal Revenue Code of 1954.

Rev. Rul. 54-61, 1954-1 C.B. 259, Rev. Rul. 68-202, 1968-1 C.B. 477, Rev. Rul. 68-519, 1968-2 C.B. 513, and Rev. Rul. 69-580, 1969-2 C.B. 209, present formulas for arriving at such a constructive sale price in the situations discussed therein. In each of these formulas a computation of the cost to manufacture and sell the taxable article is pertinent.

Rev. Rul. 62-173, 1962-2 C.B. 249, holds that for purposes of computing the manufacturers excise tax in those cases in which a manufacturer's cost of taxable articles becomes relevant, cost should be determined in accordance with accepted accounting methods. Thus, the cost of the taxable articles should include all manufacturing, selling, and administrative expenses attributable to the articles except those expenses relating to charges that are excludable from the sale price under section 4216(a) of the Code. Rev. Rul. 62-221, 1962-2 C.B. 251, also refers to the term cost in a similar context.

Rev. Rul. 68-202 holds that in the case of a sale at retail, where the manufacturer sells only at retail, and has no "established retail price," the constructive sale price of chassis and bodies is the higher of: (1) 75 percent of the actual sale price, or (2) the "total cost" to manufacture and sell the chassis or body, plus ten percent. In any case where the price so constructed is more than the actual sale price, the actual sale price will be used.

The specific question is whether the term cost as used in the cited Revenue Rulings should include those costs and expenses incurred solely by reason of the fact that the sales in question are at retail rather than at wholesale.

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 the Secretary's delegate. The section further provides that such computation shall be on whichever of the following prices is the lower: (i) the price for which the 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 the Secretary's delegate.

Since the purpose of section 4216(b)(1)(A) of the Code is to construct a price that approximates the price at which the manufacturer (who only sells at retail) would sell to wholesale distributors it would be inconsistent with the statute to reflect in such a constructive price an amount representing a recovery by the manufacturer of expenses not ordinarily incurred by a manufacturer selling at wholesale.

Accordingly, as used in the Revenue Rulings cited herein, the term cost does not include retail expenses in excess of ordinarily incurred wholesale selling expenses. Thus, the term cost as used in those Revenue Rulings includes all manufacturing expenses, overhead expenses, and selling expenses to the extent they do not exceed ordinarily incurred wholesale selling expenses. Further, those expenses relating to charges that are excludable from the sale price under section 4216(a) of the Code are not included in the term cost.

Rev. Rul. 54-61, Rev. Rul. 62-173, Rev. Rul. 62-221, Rev. Rul. 68-202, Rev. Rul. 68-519, and Rev. Rul. 69-580 are clarified.