Rev. Rul. 68-40

Advice has been requested as to the applicability of the manufacturers excise tax imposed by section 4061(a)(1) of the Internal Revenue Code of 1954 under the circumstances described below.

A company purchases surplus truck chassis from the United States Department of the Army. As purchased, such truck chassis are in a condition that precludes any further practical use as highway motor vehicles. The vehicles are subjected to a restoration process entailing disassembly of the chassis by removing the major components such as the engine, front and rear axles, transmission, transfer case, and tires. The components are individually inspected and cleaned and new parts for the components are added where necessary. In all cases, however, the engine and tires are discarded and replaced with new articles.

The frame of the truck chassis is cleaned by sandblasting, reinforced, and painted. The cab is also cleaned and painted and is rewired in accordance with Interstate Commerce Commission regulations. Some of the cabs have open tops, in which case the company supplies new or used enclosed tops. The chassis components are then reassembled with a new engine and new tires.

The specific question at issue is whether the restoration process results in the production of an article subject to the tax imposed by section 4061(a)(1) of the Code when sold by the company.

Section 4061(a)(1) of the Code imposes a tax upon the sale by the manufacturer, producer, or importer of certain enumerated motor vehicle articles including automobile truck chassis.

Section 316.4(a) of Regulations 46, made applicable to the 1954 Code by Treasury Decision 6091, C.B. 1954-2, 47, provides that the term `manufacturer' includes 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.

In the instant case, the surplus Army truck chassis as purchased by the company have no practical value as motor vehicles. The operations performed to restore the chassis to serviceable condition result in the production of articles that have real commercial utility and marketability. As a corollary, the values of the restored truck chassis far outweigh the nominal values of the surplus chassis as originally purchased.

It is held that the restoration process described above is so extensive and complete as to constitute the manufacture of an automobile truck chassis different from that purchased as surplus. Accordingly, sales of such restored truck chassis by the company are subject to the manufacturers excise tax imposed by section 4061(a)(1) of the Code.

Under the provisions of section 4221(a)(1) of the Code, the company may purchase parts or accessories on a tax-free basis for use in further manufacture. Alternatively, under the provisions of section 6416(b)(3)(B) of the Code, the company is entitled to claim credit or refund of the manufacturers excise tax paid on any parts or accessories purchased from the manufacturer thereof and used by the company as material in the restoration process or as component parts of the restored truck chassis.