Rev. Rul. 77-394

Advice has been requested whether, under the circumstances described below, the payment provided by section 6424 of the Internal Revenue Code of 1954 is available with respect to lubricating oil placed in nonhighway vehicles.

A manufacturer of construction equipment purchases lubricating oil tax-paid from the producer thereof. The manufacturer places the lubricating oil into various nonhighway vehicles of its manufacture. The oil remains in the vehicles after they are sold.

Section 4091 of the Code imposes a tax on lubricating oil (other than cutting oils) sold in the United States by the manufacturer or producer thereof.

Section 6424(a) of the Code provides that if lubricating oil (other than cutting oils, as defined in section 4092(b), and other than oil which has previously been used) is used otherwise than in a highway motor vehicle, the Secretary shall pay (without interest) to the ultimate purchaser of such lubricating oil an amount equal to 6 cents for each gallon of lubricating oil so used, except with respect to any lubricating oil which the Secretary determines was exempt from the tax imposed by section 4091.

Section 48.4218-4 of the Manufacturers and Retailers Excise Tax Regulations provides that lubricating oil in the crankcase of an automobile is an example of a taxable article used as material in the manufacture or production of, or as a component part of, another article.

Under Rev. Rul. 59-204, 1959-2 C.B. 358, lubricating oil placed in the enclosed assembly or housing of an article by the manufacturer thereof is considered to be a component material in the manufacture of the article, regardless of whether it is sealed in or whether it serves as a power transmission medium.

Under Rev. Rul. 68-108, 1968-1 C.B. 561, where a producer of lubricating oil blends or mixes "new" or virgin oil with reclaimed oil and sells the resultant nontaxable product to consumers for use in nonhighway vehicles, it is held that the producer is not entitled to the payment provided by section 6424, since the "new" oil is not consumed in the blending process but becomes a part of the resultant product that the producer sells to consumers. That Revenue Ruling further holds that since the consumers are not using "new" or previously unused lubricating oil in their nonhighway vehicles within the meaning of section 6424, but are using the nontaxable blended product, the consumers also are not entitled to the payment.

This case is distinguishable from Rev. Rul. 68-108. When the lubricating oil is placed in the nonhighway vehicles by the manufacturer thereby becoming a component part thereof, the oil has been put to its ultimate application. By contrast, the new or virgin oil mixed or blended with the reclaimed oil in Rev. Rul. 68-108 remains fit for further use as part of the resultant lubricating product to be sold or used. The manufacturer in this case, therefore, has used the oil otherwise than in a highway motor vehicle as contemplated by section 6424 of the Code. Accordingly, the manufacturer is the ultimate purchaser of the oil and is entitled to the payment provided by section 6424.

Rev. Rul. 68-108 is distinguished.