Rev. Rul. 70-44

Advice has been requested concerning the method of computing the manufacturers excise tax under section 4216(b)(1)(C) of the Internal Revenue Code of 1954, in the situation described below.

X manufactures several types of heavy-duty truck batteries subject to the manufacturers excise tax on automotive parts and accessories imposed by section 4061(b)(1) of the Code. All of X's output of these truck batteries is sold to Y, a wholly-owned sales subsidiary of X. All truck batteries of a certain type are sold by X to Y at the same price (e.g. all "type 3" batteries are sold for $14.00 each). Sales to Y are otherwise than at arm's length and at less than fair market price. Y resells these batteries to independent wholesale distributors. M and O, two of the distributors, arranged through Y to have their brand names imprinted by X on the batteries. Thus, a type 3 heavy-duty truck battery may be imprinted with X's, M's, or O's brand name. Y resells type 3 batteries as follows: X's brand, $20.00 each; M's brand, $18.00 each; and O's brand, $17.00 each.

Section 4216(b)(1)(C) of the Code provides for the determination of a constructive sale price by the Secretary or his delegate, in cases where an article subject to the manufacturers excise tax on the basis of sale price, is sold (otherwise than through an arm's length transaction) at less than the fair market price of the article. In such cases the manufacturers excise tax is to be computed on the price for which the article is sold, in the ordinary course of trade, by manufacturers or producers thereof, as determined by the Secretary or his delegate.

Revenue Ruling 62-68, C.B. 1962-1, 216, by way of implementing section 4216(b)(1) of the Code, provides an elective method for determining a constructive sale price in cases involving intercompany sales similar to those in the instant case. An election is available where a related selling corporation resells taxable articles to unrelated wholesale distributors, and where such a constructive price would not be less than the price paid in the intercompany sale. In such cases, the manufacturing corporation may elect to use as a tax base for its intercompany sales, a constructive sale price equal to 95 percent of the related sales corporation's lowest established resale price of the articles to unrelated wholesale distributors. This five percent margin is an allowance for those exclusions from, and readjustments of, the selling company's resale price which, under sections 4216 and 6416 of the Code, the law would allow a manufacturer selling in the ordinary course of trade to unrelated distributors.

If a manufacturing corporation sells physically similar taxable articles to a related sales corporation, and some of the articles bear the brand name of the manufacturer but others bear the brand names of the sales corporation's vendees, a separate constructive sale price must be established for each of the differently branded articles. Articles that bear different brand names, but are in all other respects identical, are different articles for purposes of the manufacturers excise tax and cannot be treated as the same articles in establishing a constructive sale price.

Accordingly, it is held that X must determine a separate constructive sale price for type 3 batteries with X's, M's, or O's brand names. In this case, assuming X makes the election provided by Revenue Ruling 62-68, the constructive sale price for each of the type 3 batteries is determined as follows:

                        Y's established         X's constructive