Rev. Rul. 59-204

Advice has been requested whether sales of lubricating oil by the manufacturer or producer thereof may be made tax-free, direct to a manufacturer or to a distributor for resale to a manufacturer, for use in the manufacture of a taxable article, such as, for example, a phonograph mechanism. The oil is to be placed in an enclosed assembly or housing for the purpose of providing lubrication for gears, bearings, etc.

Section 4091 of the Internal Revenue Code of 1954 imposes a tax on cutting oils and other lubricating oils sold by the manufacturer or producer thereof. Under the provisions of section 4221(a)(1) of the Code, no manufacturers excise tax shall be imposed on the sale by the manufacturer or producer 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 422-1(d)(6)(A) of the Code provides that an article shall be treated as sold for use in further manufacture if such article 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 him.

S.T. 571, C.B. XI-2, 451 (1932), holds that lubricating oil sold to a manufacturer of automobiles who furnished this oil in the crankcase of automobiles when sold to consumers is not a component part of the automobiles. However, in S.T. 581, C.B. XI-2, 451 (1932), it is held that oil which is sealed in the crankcase of the compressor of a mechanical refrigerator is a component material in the manufacture of such compressor. Moreover, Revenue Ruling 58-477, C.B. 1958-2, 782, holds that oil placed in automatic transmissions by the manufacturer of new automobiles for the purpose of serving as a hydraulic medium and lubricant, and which is contained in the automatic transmissions at the time the automobiles are sold by the manufacturer, is used as material in the manufacture of, or as a component part of, the new automobiles.

In the case of Chrysler Corporation v. The United States , 149 F.Supp. 381, relating to a claim for credit of the manufacturers excise tax paid on gasoline and oil used in the manufacture of automobiles, the United States Court of Claims held as follows:

* * * But the gasoline and oil used for testing, in spraying the pistons and rings, in propelling intraplant lift trucks, and in lubricating manufacturing machinery, were no part of the automobile sold. They had been consumed in the manufacturing process.

*

The only oil that could be said to have been sold was the oil left in the engine and other parts when the finished automobile was sold. * * * We are of opinion that the manufacturer is entitled to a credit for the amount of the oil in the automobile when sold. This was the oil `to fill the crankcases of tested engines,' `to fill tested transmissions,' `to fill rear-axle assemblies,' and `to fill carburetor air cleansers.'

*

* * * Component parts were sold with the automobile, and any material that went into its construction were sold with it; but things that were consumed in the manufacturing process were not sold.

*

Consequently, where the manufacturer of a taxable article places lubricating oil in an enclosed assembly or housing of that taxable article in such a manner that it is a part of the taxable article which is sold by the manufacturer, the oil is considered as being used as a component material in the manufacture of the taxable article, regardless of whether it is sealed in or whether it serves as a power transmission medium. Therefore, under the provisions of section 4221(a)(1) of the Code, it is held that lubricating oil may be sold by the manufacturer or producer thereof, free of the tax imposed by section 4091, for use in the manufacture of a taxable article, or for resale for such use, provided the requirements of the applicable regulations with respect to tax-free sales and registration are met. On the other hand, the exemption provided by section 4221(a)(1) of the Code does not apply where oil is sold for use as a component material in the manufacture of a nontaxable article.

However, it should be noted that, under the provisions of section 314.43 of Regulations 44, made applicable to the 1954 Code by Treasury Decision 6091, C.B. 1954-2, 47, oil may be sold tax free for use as a nonlubricating component material in the manufacture of a nontaxable article.

S.T. 581, C.B. XI-2, 451 (1932), and Revenue Ruling 58-477, C.B. 1958-2, 782, are modified. S.T. 571, C.B. XI-2, 451 (1932), is hereby revoked.