Rev. Rul. 76-182

Advice has been requested whether the constructive sale price provisions of section 4216(b)(3), 4216(b)(4), and 4216(b)(5) of the Internal Revenue Code of 1954 must be used in computing manufacturers excise tax where taxable articles are sold by manufacturers in the situations specified in those sections.

Section 4216(b)(1)(C) of the Code provides that if an article is sold (otherwise than through an arm's length transaction) at less than the fair market price, the manufacturers excise tax shall (if based on the price for which the article is sold) be computed on the price for which such articles are sold, in the ordinary course of trade, by manufacturers or producers thereof, as determined by the Secretary of the Treasury or his delegate.

Section 4216(b)(3) of the Code provides that, except as provided in sections 4216(b)(4) and 4216(b)(5), for purposes of section 4216(b)(1), if (A) the manufacturer, producer, or importer of an article regularly sells such article to a distributor that is a member of the same affiliated group of corporations (as defined in section 1504(a)) as the manufacturer, producer, or importer, and (B) such distributor regularly sells such article to one or more independent retailers, but does not regularly sell to wholesale distributors, the constructive sale price of such article shall be 90 percent of the lowest price for which such distributor regularly sells such article in arm's-length transactions to such independent retailers.

Section 4216(b)(4) of the Code provides that, for purposes of section 4216(b)(1), if (A) the manufacturer, producer, or importer of an article regularly sells (except for tax-free sales) only to a distributor that is a member of the same affiliated group of corporations (as defined in section 1504(a)) as the manufacturer, producer, or importer, (B) the distributor regularly sells (except for tax-free sales) such article only to retailers, and (C) the normal method of sales for such articles within the industry by manufacturers, producers, or importers is to sell such articles in arm's-length transactions to distributors, the constructive sale price for such article is to be the price at which the article is sold to retailers by the affiliated distributor, reduced by a percentage equal to the markup used by independent distributors in that industry.

Section 4216(b)(5) of the Code provides that in the case of articles the sale of which is taxable under section 4061(a), for purposes of section 4216(b)(1), if (A) the manufacturer, producer, or importer of the article regularly sells such article to a distributor that is a member of the same affiliated group of corporations (as defined in section 1504(a)) as the manufacturer, producer, or importer, and (B) such distributor regularly sells such article to one or more independent retailers, the constructive sale price of such article shall be 981/2 percent of the lowest price for which such distributor regularly sells such article in arm's-length transactions to such independent retailers.

Rev. Rul. 71-240, 1971-1 C.B. 372, holds that, for purposes of Rev. Rul. 62-68, 1962-1 C.B. 216, which provides an elective method of computing manufacturers excise tax on sales between related companies where the selling company resells to one or more independent distributors, any intercompany sale price that is less than 95 percent of the selling company's lowest established resale price to unrelated wholesale distributors is considered less than fair market price.

Sections 4216(b)(3) and 4216(b)(4) were added to the Code by the Tax Reform Act of 1969, section 932, 1969-3 C.B. 10, 156. The Excise, Estate, and Gift Tax Adjustment Act of 1970, section 301, 1971-1 C.B. 533, 537, added section 4216(b)(5) to the Code, and substituted "constructive sale price" in lieu of "fair market price" each place it appeared in sections 4216(b)(3) and 4216(b)(4).

With respect to those sections of the Code, the Senate Finance Committee Report to accompany the Excise, Estate, and Gift Tax Adjustment Act of 1970, S. Rep. 91-1444, 91st Cong., 2d Sess., 1971-1 C.B. 574, 584, 585, contains the following statements:

Present law (sec. 4216(b)) provides for a constructive sale price (as a substitute for the actual sale price) as a base for the various ad valorem manufacturers excise taxes in several different types of situations. One of these involves the situation where the article is sold at less than the "fair market price" if the transaction is not at arm's length (sec. 4216(b)(1)(C)). Sales between related companies are examples of sales which are not considered to be at arm's length. As a result, in the case of a sale by a manufacturer or importer to its selling affiliate, a determination must be made as to whether the sale is at less than fair market price, and where this is true, the appropriate constructive sale price must be determined by general standards. * * *

Under the bill, as amended, where the manufacturer of an automobile, truck, trailer, bus, etc., regularly sells to an affiliated distributor which then regularly sells to independent retailers, the constructive sale price (for purposes of sec. 4216(b)(1)) is to be 98.5 percent of the lowest price for which the affiliated distributor regularly sells those items in arm's-length transactions to independent retailers. * * *

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In connection with this change, the committee has added a number of clarifying amendments. The two rules added in 1969 define "fair market price." Although the fair market price thus determined has been used as the constructive sale price, it has been suggested that it is possible to interpret the statute to permit determination of a different constructive sale price. In order to avoid future uncertainty on this score, the bill provides that the price determined under the two rules added in 1969, as well as the price determined under the special auto industry rule added by this bill, will be the constructive sale price--the amount upon which the tax will be computed.

Although the committee has changed the rules provided in present law to make clear that they are constructive sale price rules and has also added a provision specifying another constructive sale price rule, it recognizes that in many situations it is difficult, if not impossible, for the Internal Revenue Service to determine a "fair market price." Such a determination is necessary since (under sec. 4216(b)(1)) the constructive sale price rules are applicable only if there are sales at less than "fair market price." In the case of sales between related parties, however, unless another "fair market price" is clearly applicable, the committee believes that it is reasonable for the Internal Revenue Service to use the constructive sale price rules provided by these three provisions in determining what constitutes the "fair market price" for purposes of the sales involved.

The foregoing quotation from the Senate Finance Committee Report expresses the intention of Congress that sections 4216(b)(3), 4216(b)(4), and 4216(b)(5) of the Code are inapplicable when sales between affiliated companies are at fair market price, but that the prices provided in those sections will be considered the fair market price unless another price is clearly applicable. When a sale price between related companies is less than fair market price, those sections provide constructive sale prices upon which the tax is to be computed for the sales involved.

Accordingly, the provisions of sections 4216(b)(3), 4216(b)(4), and 4216(b)(5) of the Code are subject to the provisions of section 4216(b)(1), and the constructive sale price rules provided by the former sections are rebuttable. Thus, where the actual sale price between the affiliated companies indicated in section 4216(b)(3), 4216(b)(4), or 4216(b)(5) is the fair market price, the section is inoperative, and the tax is to be computed on the actual sale price, subject to the inclusions and exclusions provided by sections 4216(a) and (f), even though the actual sale price is lower than the constructive sale price provided in the section that would otherwise be applicable. However, the Internal Revenue Service will use the constructive sale price rules in sections 4216(b)(3), 4216(b)(4) and 4216(b)(5) in determining the fair market price unless the taxpayer shows that a lower price is clearly applicable.

Likewise, the 95 percent rule stated in Rev. Rul. 71-240 is presumptive of fair market price. Thus, where an inter-company sale price that is less than 95 percent of the selling company's lowest established resale price to unrelated wholesale distributors is the fair market price, the tax is to be computed on such price, subject to the inclusions and exclusions provided by sections 4216(a) and (f) of the Code.

Whether the sale price between affiliated companies is the fair market price for purposes of sections 4216(b)(3), 4216(b)(4), and 4216(b)(5) of the Code, and Rev. Rul. 71-240, depends on the facts and circumstances in each case.

Rev. Rul. 71-240 is modified to indicate that the rule stated therein is rebuttable.