Rev. Rul. 59-201

The Internal Revenue Service has been asked whether the manufacturers excise tax upon sales of phonographs applies to sales of stereophonic phonographs converted from high fidelity phonographs on which the manufacturers excise tax previously had been paid.

A wholesale dealer purchased a large quantity of high fidelity phonographs from a manufacturer who paid the manufacturers excise tax upon the sale. Later on, because of increased consumer interest in stereophonic sound, the wholesale dealer arranged to return the high fidelity phonographs to the original manufacturer for conversion into stereophonic phonographs. The wholesale dealer retained title to the phonographs. Conversion from high fidelity into stereophonic sound reproduction necessitated adding new power amplifiers and speaker jacks, revising the pre-amplifiers and record changers, and exchanging escutcheon plates. Upon completion of the converting operation, the phonographs were returned to the wholesale dealer for resale.

Section 4141 of the Internal Revenue Code of 1954 imposes a tax upon the sale by the manufacturer, producer, or importer of certain enumerated articles, including phonographs. Section 6416(b) of the Code, as amended by the Excise Tax Technical Changes Act of 1958, Public Law 85-859, C.B. 1958-3, 92, provides for allowance of a credit or refund (without interest) of certain excise taxes determined to be overpayments. Section 6416(b)(3)(A) of the Code provides that where the manufacturers excise taxes have been paid with respect to sales by the manufacturer, producer, or importer of certain articles, including phonographs, to a second manufacturer or producer and such articles are used by the second manufacturer or producer as material in the manufacture or production of, or as component parts of, other articles subject to the manufacturers excise taxes, the tax paid by the first manufacturer shall be deemed to be an overpayment by the second manufacturer.

It is held that the conversion operation described above constitutes the manufacture of stereophonic phonographs from high fidelity phonographs. Therefore, sales of the stereophonic phonographs are subject to the manufacturers excise tax imposed by section 4141 of the Code. It is further held that under the arrangement whereby the wholesale dealer retains title to the phonographs he becomes the manufacturer of the stereophonic phonographs and is liable for payment of the manufacturers excise tax when the phonographs are sold. However, pursuant to section 6416(b)(3)(A) of the Code, a credit or refund may be allowed the dealer-manufacturer in the amount of tax paid on the first manufacturer's original sale of the high fidelity phonographs used in the manufacture of the stereophonic phonographs. Likewise, under the provisions of section 6416(b)(3)(B) of the Code, the dealer is entitled to a credit or refund in the amount of any tax which may have been paid on radio or television components used in the manufacture of the stereophonic phonographs.