Rev. Rul. 58-134

The Internal Revenue Service has been requested to determine, under the circumstances below, which company is the manufacturer or producer of an automobile part or accessory for the purposes of the manufacturers excise tax.

M corporation is the owner of a patent on a certain automobile part or accessory. It entered into an agreement with N company under which N company has been granted manufacturing rights to fabricate the article under the patent to M corporation's order. N company furnishes all materials and labor and packs the completed article. If N company is unable to meet M corporation's requirements, M may have additional articles fabricated by other companies. N company is permitted to produce articles in excess of M corporation's requirements and has been assigned the exclusive right to sell such excess articles to companies other than M . However, N company's sales of the excess articles must be made within a certain territory designated by M . There are no financial or other relationships between the two companies except those arising out of the agreement itself.

Section 316.4(a) of Regulations 46, made applicable to the 1954 Code by Treasury Decision 6091, C.B. 1954-2, 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 material 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.

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, and where the fabricator is not free to sell elsewhere, the company owning the patents is considered to be the manufacturer for purposes of the manufacturers excise tax. See Polaroid Corporation v. United States , 235 F.2d 276, cert. den. 352 U.S. 953.

Based on the facts and circumstances of the present case, it is held that (1) where N company fabricates the automobile part or accessory for M corporation to M's order, M controls the output of N company to the extent that M has the exclusive or first right to the output, and N , the fabricator, is not free to sell the product elsewhere, with the exception of sales in the assigned territory mentioned above, M corporation is considered to be the manufacturer of all those parts and accessories which it takes from N company's output and is liable for the manufacturers excise tax on its sales of such parts or accessories; and (2) where, under the agreement with M, N company is assigned the exclusive right to sell the excess of its output over M's requirements within a specific territory N company, as the fabricator and also the company which actually makes the sales and collects the royalties thereon for transmission to M , is considered to be the manufacturer and liable for the tax on all sales of its additional output of automobile parts and accessories.