Rev. Rul. 77-66

The Internal Revenue Service has been requested to clarify the meaning of the phrase "clearly applicable" in Rev. Rul. 76-182, 1976-1 C.B. 343. Rev. Rul. 76-182 holds that certain rules prescribed for determining constructive sale price for purposes of computing manufacturers excise tax will also be used in determining fair market price for purposes of section 4216(b)(1)(C) of the Internal Revenue Code of 1954 unless another price is clearly applicable.

Under section 4216(b)(1)(C) of the Code, manufacturers excise tax is computed on a constructive sale price rather than on the actual sale price if an article is sold (otherwise than through an arm's length transaction) at less than the fair market price. That section provides that in such instance the tax shall 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. However, certain specific rules for determining constructive sale price in particular situations are prescribed in sections 4216(b)(3), 4216(b)(4) and 4216(b)(5).

Rev. Rul. 62-68, 1962-1 C.B. 216, provides for an elective method of computing manufacturers excise tax under section 4216(b)(1)(C) of the Code where the taxpayer manufacturing company sells only to an affiliated company at less than fair market price. The affiliated company resells the articles to one or more independent wholesale distributors in the ordinary course of trade. Under these circumstances, the manufacturing company may elect to use a constructive sale price of 95 percent of the related selling company's lowest established price to the unrelated wholesale distributors, with no further exclusions from, or readjustments of, such resale price under section 4216 or 6416, respectively. If the election is not made, the ruling holds that tax will be imposed upon the actual price at which the article was sold by the related selling company to the unrelated wholesale distributors, subject to the exclusions and readjustments authorized under sections 4216 and 6416.

Rev. Rul. 71-240, 1971-1 C.B. 372, amplifies Rev. Rul. 62-68 by holding that for purposes of that ruling, any intercompany sale price which 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" for purposes of section 4216(b)(1)(C).

Rev. Rul. 76-182 also dealt with determination of "fair market price" for purposes of section 4216(b)(1)(C) of the Code. It holds that the constructive price determined under the rules contained in sections 4216(b)(3), 4216(b)(4), and 4216(b)(5) will be the fair market price unless the taxpayer shows that a lower price is clearly applicable. This holding was based on language contained in the Senate Finance Committee Report accompanying the Excise, Estate, and Gift Tax Adjustment Act of 1970, S. Rep. 91-1444, 91st Cong., 2d Sess., 1971-1 C.B. 574, 585, to the effect that it is reasonable for the Internal Revenue Service to use such constructive sale price provisions in determining "fair market price" unless another fair market price is clearly applicable. Rev. Rul. 76-182 further holds that the 95 percent rule in Rev. Rul. 71-240 is likewise presumptive of fair market price and Rev. Rul. 76-182 modified Rev. Rul. 71-240 to indicate that the rule stated therein is also rebuttable.

When a manufacturer sells a taxable product to a distributor and such sale is at other than arm's length (such as sales to a distributor affiliated with the manufacturer), then, if the sale is at a fair market price or higher, the actual price (subject to applicable adjustments) is used in computing the tax and no constructive sale price may be used. However, where such sale is made at less than fair market price, then a constructive sale price is to be determined. If that sale meets the conditions set forth in section 4216(b)(3), 4216(b)(4), or 4216(b)(5) of the Code or Rev. Rul. 62-68, then the applicable method thereunder for constructing a sale price is to be used. Since such methods are prescribed for the purpose of arriving at an equitable tax base, a sale price so constructed is considered to be a fair market price unless the taxpayer shows that a lower price is clearly applicable. See S. Rep. 91-1444.

Sales by the manufacturer or the affiliated distributor to unrelated wholesale distributors in the ordinary course of trade indicate a clearly applicable fair market price. It may occur, due to exceptional circumstances, that sales by the manufacturer or the affiliated distributor to an unrelated wholesale distributor will be at a distorted price which does not actually represent a fair market price for the product. Such sales are not in the ordinary course of trade and do not represent a fair market price.

Where neither the manufacturer nor the affiliated distributor sells the product in the ordinary course of trade to unrelated wholesale distributors there is no clearly reliable or feasible means of determining a fair market price for its sales of the product.

This was recognized by Congress in enacting section 4216(b)(2) of the Code when it referred to a sale of the particular product to an unrelated wholesale distributor as establishing a "readily available" tax base and to the administrative difficulties of attempting to construct a price in the absence of such sales. See H. Rep. 481, 85th Cong., 1st Sess., 1958-3 C.B. 372, 393; S. Rep. 2090, 85th Cong., 2d Sess., 1958-3 C.B. 584, 605.

Where the manufacturer sells in other than arm's length transactions (i.e. to an affiliated distributor) and the facts are such that if these sales are at less than fair market price a constructive sale price will be determined under section 4216(b)(3), 4216(b)(4) or 4216(b)(5), the following rules will be used in determining what is the fair market price for this purpose.

If the facts are such that a constructive sale price would be determined under section 4216(b)(3), and if the manufacturer sells the products in question not only in other than arm's length transactions but also to unrelated wholesale distributors in the ordinary course of trade, then the price to the unrelated wholesale distributors is a clearly applicable fair market price for purposes of Rev. Rul. 76-182 and will be used as the fair market price. If there are no such sales by the manufacturer to unrelated wholesale distributors, there is no clearly applicable fair market price other than the constructive sale price provided by section 4216(b)(3), and such price is the fair market price.

If the facts are such that a constructive sale price would be determined under section 4216(b)(4), the manufacturer and the affiliated distributor necessarily make no sales to unrelated wholesale distributors in the ordinary course of trade because that section applies by its terms only where the manufacturer, producer or importer of an article regularly sells (except for tax-free sales) only to a distributor which is a member of the same affiliated group of corporations (as defined in section 1504(a)) as the manufacturer, producer, or importer and the distributor regularly sells (except for tax-free sales) only to retailers. Accordingly there is no clearly applicable fair market price other than the constructive sale price provided by section 4216(b)(4), and such price is the fair market price.

If the facts are such that a constructive sale price would be determined under section 4216(b)(5), and if the manufacturer sells the product in question not only in other than arm's length transactions but also to unrelated wholesale distributors in the ordinary course of trade, then the price to the unrelated wholesale distributors is a clearly applicable fair market price for purposes of Rev. Rul. 76-182 and will be used as the fair market price. If there are no such sales of the product by the manufacturer to unrelated wholesale distributors in the ordinary course of trade but there are such sales by the manufacturer's affiliated distributor, that sales price is the fair market price. If there are no such sales by either the manufacturer or the affiliated distributor, there is no clearly applicable fair market price other than the constructive sale price provided in section 4216(b)(5) and such price is the fair market price.

Under the conditions of Rev. Rul. 62-68 the manufacturer sells only to the related selling company and it sells to unrelated wholesale distributors in the ordinary course of trade. Therefore, the price at which the latter sales occur is the only clearly applicable fair market price. Accordingly, the fair market price determined under Rev. Rul. 71-240 is not rebuttable.

Rev. Rul. 76-182 is clarified as to what is a clearly applicable fair market price and modified to eliminate the statement that the 95 percent rule of Rev. Rul. 71-240 is presumptive.