Rev. Rul. 76-119

Advice has been requested as to the application of the manufacturers excise tax imposed on shells and cartridges under the circumstances described below.

A manufacturer of taxable pistols, revolvers, and other firearms also manufactures shells and cartridges. Some of the shells and cartridges are used by the manufacturer to test pistols, revolvers, and other firearms of its own manufacture and some other shells and cartridges are sold to other manufacturers of taxable pistols, revolvers, and other firearms for use in testing such articles.

Section 4181 of the Internal Revenue Code of 1954 imposes a tax on the sale of shells and cartridges by the manufacturer, producer or importer.

Section 4218(a) of the Code provides (with certain exceptions not pertinent here) that a manufacturer, producer or importer of an article is liable for the tax if it uses the article other than as material in the manufacture or production of, or as component part of, another taxable article manufactured or produced by it.

Section 4221(a)(1) of the Code provides that no tax shall be imposed on the sale by the manufacturer of an article for use by the purchaser for further manufacture, or for resale by the purchaser to a second purchaser for use by such second purchaser in further manufacture.

Section 4221(d)(6)(A) of the Code provides (with certain exceptions not relevant here) that an article shall be treated as sold for use in further manufacture if it is sold for use by the purchaser as material in the manufacture or production of, or as a component part of, another article subject to the manufacturers excise tax to be manufactured or produced by it.

Section 48.4218-4 and section 40.4220-1(d) of the Manufacturers and Retailers Excise Tax Regulations state that an article "consumed in the manufacturing process so that it is not a physical part of the manufactured article is not used as material in the manufacture or production of, or as a component part of, such other article."

Rev. Rul. 67-356, 1967-2 C.B. 378, holds that a manufacturer of shells and cartridges is liable for the tax imposed by section 4181 of the Code whether it uses the ammunition to test firearms of its own manufacture or sells them to a purchaser for use in testing firearms of its manufacture.

In Remington Arms Co., Inc. v. United States, 461 F. 2d 1268 (2d Cir. 1972) (per curiam), aff'g 30 AFTR 2d 72-5928 (D. Conn. 1971), the court held that a manufacturer of shells and cartridges who uses some of them to test firearms of its own manufacture is not liable for excise tax on such use. That decision affirmed an earlier decision in the Second Circuit, Western Cartridge Co. v. Smith, 121 F. 2d 593 (2d Cir. 1941) (per curiam). The court also held that, to the extent they conflict with Western Cartridge, section 48.4218-4 of the regulations and Rev. Rul. 67-356 are invalid.

The Service will follow the decisions in the Remington Arms and Western Cartridge cases. Therefore, a manufacturer of firearms who uses shells and cartridges in testing taxable firearms of its manufacture has used the shells and cartridges in the further manufacture of another taxable article within the meaning of the Code.

Accordingly, in the instant case, the manufacturer of shells and cartridges that uses them to test firearms of its own manufacture or sells them to a purchaser for use in testing firearms of the purchaser's own manufacture, is not liable for the tax imposed by section 4181 of the Code.

Rev. Rul. 67-356 is revoked. Consideration is being given to modifying the regulations in accordance with the position set forth herein.