Rev. Rul. 76-181

The Internal Revenue Service has been requested to determine, under the circumstances described below, who is the manufacturer of an automotive part or accessory for purposes of the manufacturers excise tax imposed by section 4061(b)(1) of the Internal Revenue Code of 1954.

X company is engaged in manufacturing a certain patented automotive part or accessory under trademarks and trade names of its own and of others. X entered into an agreement with Y, one of its customers, whereby the patents on the article and some of the trademarks and trade names were sold to Y. However, X retained a nonexclusive, unlimited, and irrevocable license for the use of the patents. In this country X can only sell to Y those articles X manufactures with the Y trademarks and trade names, and X has agreed to supply a certain percent of Y's yearly needs of those articles. The raw materials, tools, dies, machinery and equipment used in the manufacture of the article by X are purchased and owned by X. Y does not have the exclusive or first right to the output of X produced under the patent license.

Section 316.4(a) of Regulations 46, made applicable to the 1954 Code by Treasury Decision 6091, 1954-2 C.B. 47, defines the term "manufacturer" to include 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 of an article, or (2) by combining or assembling two or more articles. Section 316.4(b) provides that, under certain circumstances, as where a person manufactures or produces a taxable article for a person who furnishes materials and retains title thereto, the person for whom the taxable article is manufactured or produced, and not the person who actually manufactures or produces it, will be considered the manufacturer.

Rev. Rul. 60-42, 1960-1 C.B. 474, holds, in part, that among the factors to be considered in determining whether a fabricator or his vendee is liable for the manufacturers excise tax are (1) the ownership of the raw materials used in producing the articles and (2) who has the right to control the production and sale of the article.

Generally where a company not only owns the patents under which a taxable article is fabricated by another company, but also exercises control as to the amounts to be so fabricated and has exclusive rights to the output so that the fabricator is not free to sell elsewhere, the company owning the patents is the manufacturer for purposes of the manufacturers excise tax. See Polaroid Corporation v. United States, 235 F. 2d 276 (1st Cir. 1956), cert. denied, 352 U.S. 953 (1956).

In the instant case X has title to the materials, tools, dies, machinery and equipment used to manufacture the article. X can produce and sell the article anywhere except that articles with the trademark or trade name of Y can only be sold to Y. This exception is not uncommon where manufacturers of articles sold under the manufacturer's name also sell the same articles under the private brand name of some of their customers and thus this exception is not determinative, by itself, of the issue. Therefore, Y does not have the requisite control over the production or sale of the automotive part or accessory produced under the patent license by X that would make Y the producer of such article. Rather, X is the manufacturer liable for the excise tax on all sales of such article produced by it.

The above conclusions are equally applicable to similar transactions involving motor vehicle articles taxable under section 4061(a) of the Code, tires and tubes taxable under section 4071(a), sporting goods taxable under section 4161, and firearms taxable under section 4181.

By contrast see Rev. Rul. 58-134, 1958-1 C.B. 395, where the patent owner has the exclusive or first right to the output and the fabricator is not free to sell the product elsewhere with the exception of a certain assigned territory. In such case the patent owner was held to be the manufacturer of those articles fabricated for the patent owner.

Rev. Rul. 58-134 is distinguished.