Rev. Rul. 60-42

The Internal Revenue Service has been requested to determine who is liable for the manufacturers excise tax on sporting goods with respect to artificial fishing lures which are produced and sold under the circumstances described below.

A , a fabricator engaged in general machine work, produced artificial fishing lures for B under a verbal agreement. The agreement provided that A would (1) make the dies from which the lures were to be produced and retain ownership of such dies, (2) produce the completed lures and imprint thereon B's trade name, (3) box them and insert advertising material in each box, and (4) sell the lures to B at fixed unit price. Under the agreement, B purchased hooks for the lures, the boxes, and the advertising materials. B either billed A for such materials or received credit for them against the charges for the completed lures. During periods of metal shortages, B also purchased metal for the basic spoon part of the lure. In each case, the materials purchased by B were delivered to A and title therein was passed to A . Title to the completed lures remained with A until they were sold to B . Although A's entire output was sold to B , there was nothing in the agreement to prohibit A from selling to others. No limitations were set on the number of lures A could produce, and B did not guarantee to purchase any agreed number of the lures.

Section 4161 of the Internal Revenue Code of 1954 imposes a tax upon the sale by the manufacturer, producer or importer of certain enumerated articles of sporting goods, including artificial fishing lures, baits, and flies.

Section 316.4(a) of Regulations 46, made applicable to the Internal Revenue Code of 1954 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 the article, or (2) by combining or assembling two or more articles.

Among the factors to be considered in determining whether a fabricator or his vendee is liable for the manufacturers excise tax are (1) the ownership of the raw materials used in producing the articles and (2) who has the right to control the production and sale of the articles.

In the instant case, B merely purchased the material for A as a convenience, and title thereto was acquired by A . Moreover, under the agreement, A maintained control over the manufacturing operations and had the right to sell the lures to purchasers other than B if he so desired.

Accordingly, it is held that A is the `manufacturer' for purposes of the manufacturers excise tax and is liable for the tax imposed by section 4161 with respect to his sales of the lures produced by him.