Rev. Rul. 59-314

The Internal Revenue Service has been asked to explain the application of the manufacturers excise tax to home radio-intercommunication systems.

Example (1) . The M company manufactures a combination radio-intercommunication system consisting of a master unit and one or more remote speaker units which may be installed throughout the home. The speaker in the master unit and those in the remote units are used both for radio reception and for intercommunication. The system is designed to permit two-way communication between the master unit and remote units. The radio receiving set used in the manufacture of the master unit is identical to a radio receiving set sold by the company in its regular line.

Example (2) . The N company manufactures a similar radio-intercommunication system. However, the radio receiving set is produced as an integral part of the combination radio-intercommunication system and is not of a type that is sold separately.

Section 4141 of the Internal Revenue Code of 1954 imposes a tax on the sale by the manufacturer, producer, or importer of radio receiving sets. No tax is imposed on intercommunication systems as such. Under the provisions of section 4218(a) of the Code, a tax is imposed on the manufacturer's use of an article subject to the manufacturers excise tax in producing an article that will not be subject to the manufacturers excise tax. The exceptions provided in section 4218(b) of the Code for certain parts, accessories, and components, do not apply to the use of radio receiving sets.

In the examples above, the manufacturers are considered to be producing combination radio-intercommunication systems, the sales of which are not subject to the manufacturers excise tax imposed by section 4141 of the Code. However, it is held that the manufacturers are liable for tax, under section 4218(a) of the Code, on their use of the radio receiving sets in the production of the complete systems. If the radio receiving set is of the type that is sold separately, as in example (1), the tax may be based on the lowest established wholesale selling price of the separate radio receiving set.

However, if the radio receiving set is not sold separately, as in example (2), the tax base should be determined on the basis of the comparative costs of (A) the radio receiving portion and (B) the intercommunication portion of the system. In computing the tax in this manner, the ratio of the cost of (A) to the sum of the costs of (A) and (B) is applied to the lowest established wholesale price of the complete system in order to obtain the basis for tax on the use of the set. Costs of (A) and (B) include assembly labor as well as parts required to produce each portion. The costs of parts and assembly labor common to both the radio receiving portion and inter-communication portions are allocable in the same ratio and, therefore, may be disregarded in determining the ratio since they do not affect the final result.

As a guide in allocating parts and production labor costs, the radio portion (A) of the system includes the tuning, detector, and other circuits for reception of radio broadcasts together with the tuning and `on-off' volume controls. The intercommunication portion (B) includes the station switches, all room or door speaker-mikes, wire, and special panels furnished with a particular system. The common parts include the audio-frequency amplifier and speaker in the master station together with the `radio-listen-talk' control switch and the panel or base on which the radio, intercommunication, and common parts are mounted.