Rev. Rul. 58-620

Advice has been requested concerning the manufacturers excise tax consequences of restoring automobile generators to serviceable condition.

An automotive shop operator receives quantities of unserviceable automobile generator from various customers. The customers understand that they will, in turn, receive from the operator a like quantity of similar generators which have been restored to serviceable condition. When the unserviceable generators are received by the operator, they are dismantled and cleaned, and, where necessary, the armatures are rewound. The components of the generators are segregated, i.e. , the housings are collected at one point, the armatures at another, the armature frames at still another, etc. As orders are received, the necessary components are withdrawn from the several points and assembled into complete serviceable generators. Since the various components have been commingled so that their identification with any particular generator is lost, it is not known whether a restored generator is assembled from components which came from the same unserviceable generator.

Section 4061(b) of the Internal Revenue Code of 1954 imposes a tax upon parts or accessories (other than tires and inner tubes and other than automobile radio and television receiving sets) for any of the articles enumerated in section 4061(a) of the Code sold by the manufacturer, producer, or importer. The tax is not limited to new parts but applies also to rebuilt or manufactured parts. The regulations applicable to the tax embody this concept by defining a manufacturer as a person who produces a taxable article from scrap, salvage, or junk materials, 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.

In any transaction involving the restoration of a used taxable article there are two identities which are crucial to the tax consequences flowing from that transaction. The two identities are identity of ownership of the article and identity of the article itself as such. The essentials of the position of the Internal Revenue Service in this respect can be expressed in four situations:

(1) If the identity of the article is retained and the identity of ownership of the article is retained ( i.e. , ownership remains in the customer), the operation performed in restoring the unserviceable unit to serviceable condition is a repair operation, regardless of whether any machining or rewinding, etc., is done on the restored unit. In such a situation, no tax is incurred by the operator on the operation as such. For guidance in determining whether identity of ownership of the article is retained in the customer, see Revenue Ruling 57-593, C.B. 1957-2, 723.

(2) If the identity of the article is retained but identity of ownership of the article is not retained ( i.e. , ownership passes to the operator) and no machining or rewinding, etc., is done in the restoration of the unit, the operation is considered a reconditioning operation. In this situation, no tax is incurred by the operator on the sale of the reconditioned unit.

(3) If the identity of the article is retained but identity of ownership of the article is not retained, and machining or rewinding, etc., is done in restoring the unit to serviceable condition, the operation is considered a rebuilding operation. The operator is liable for tax on his sale of the rebuilt unit.

(4) If the identity of the article is not retained ( i.e. , the components of the unserviceable article are segregated and commingled with other similar components at various points or in various bins), then it necessarily follows that identity of ownership of the article also is not retained. Therefore, when the compenents are withdrawn from the various points or bins and assembled into a serviceable unit, the operation is a manufacturing operation within the meaning of that term as set forth in section 316.4(a) of Regulations 46, made applicable to the 1954 Code by Treasury Decision 6091, C.B. 1954-2, 47, regardless of whether any machining or rewinding, etc., is performed in the restoration. The sale of serviceable units so restored is subject to tax.

Since the identity of the articles is not retained under the circumstances in the instant case, it is held that the manufacturers excise tax applies to the operator's sales of the restored generators, without regard to whether machining or rewinding, etc., is performed.

Revenue Ruling 54-329, C.B. 1954-2, 405; Revenue Ruling 56-189, C.B. 1956-1, 503; Revenue Ruling 57-572, C.B. 1957-2, 722; and Revenue Ruling 57-604, C.B. 1957-2, 724, are modified. Under the authority of section 7805(b) of the Code, this Revenue Ruling will not be applied to sales made prior to July 1, 1959, of restored articles assembled from commingled components where no machining or rewinding operations, etc., are performed in the restoration process, as in situation (4) described above.