Rev. Rul. 78-10

Advice has been requested as to the proper constructive sale price to be computed where, under the circumstances described below, articles subject to the manufacturers excise tax are sold by the manufacturer to a related distributing company for resale to independent retailers and the related companies are not members of an affiliated group defined in section 1504(a) of the Internal Revenue Code of 1954.

X corporation is a manufacturer of flat-bed truck bodies taxable under section 4061(a)(1) of the Code and cranes taxable under section 4061(b)(1) when sold separately. The cranes are taxable under section 4061(a)(1) when sold with the taxable truck bodies.

X corporation sells all its truck bodies and cranes to Y corporation that, in turn, resells such equipment to independent retailers but does not regularly sell to wholesale distributors. X and Y are owned by common stockholders and are a brother-sister controlled group as defined by section 1563 of the Code. As such, they are not members of an affiliated group within the definition of section 1504(a), but sales between them are not at arm's length. Also, the intercompany sales have been determined to be at less than fair market price.

Under section 4216(b)(1)(C) of the Code, when certain taxable articles are sold other than at arm's length and not at fair market price, a constructive sale price is made based on the Commissioner's determination of the price at which such articles are sold by manufacturers, producers, or importers in the ordinary course of trade.

Sections 4216(b)(3), (4), and (5) of the Code provide for constructive sale prices where certain articles are sold by the manufacturer to a related distributor, who, in turn, sells to independent retailers. However, under those sections the related parties must be members of an affiliated group as defined in section 1504(a).

Under section 4216(b)(3) of the Code, where a manufacturer, producer, or importer of a taxable article regularly sells such article (other than an article taxable under section 4061(a)(1) of the Code) to a related distributor (members of an affiliated group defined by section 1504(a)) in oher than arm's length transactions and at less than fair market price, and such distributor regularly sells such article to one or more independent retailers but does not regularly sell to wholesale distributors, the constructive sale price shall be 90 percent of the lowest price for which the related distributor regularly sells such article in arm's length transactions to such independent dealers.

Under section 4216(b)(5) of the Code, where an article taxable under section 4061(a)(1) is involved, the constructive sale price should be 981/2 percent of the lowest price for which the related distributor regularly sells such article in arm's length transactions to independent retailers.

In either case, the constructive sale price so determined is not to be adjusted for any exclusion (except for the tax imposed on such article) or readjustment under sections 4216(a) and (e) or under section 6416(b)(1). In any case where the actual intercompany price is higher than the price so constructed, the intercompany price is a fair market price and the actual intercompany price is to be used in computing the tax. Further, in any case in which application of the constructive sale price results in a tax that would exceed the tax based on the actual price for which the articles are sold by the related distributor to independent retailers, the tax should be computed on the price for which the articles are actually sold to such retailers.

Since, in this case, the related corporations are not members of an affiliated group, as defined in section 1504(a) of the Code, sections 4216(b)(3), (4), and (5) are not applicable. In such case, the Commissioner determines a constructive sale price under the general provisions of section 4216(b)(1)(C). Even though X and Y are not members of an affiliated group under section 1504(a), the Internal Revenue Service has determined that the same constructive sales price percentages prescribed in sections 4216(b)(3) and (5) should be applied under section 4216(b)(1)(C) in determining such constructive sale price in cases in which there are sales between related corporations that are not at arm's length and their sales practices are the same as those set forth in sections 4216(b)(3) and (5).

Accordingly, the constructive sale price with respect to sales of cranes by X corporation to Y corporation is to be computed at 90 percent of the lowest price for which Y regularly sells such cranes to independent retailers. Further, the constructive sale price with respect to sales of truck bodies by X to Y is to be computed at 981/2 percent of the lowest price for which Y regularly sells such bodies to independent retailers. Where the cranes are sold on or in combination with the truck bodies by X to Y, the constructive sale price is to be computed at 981/2 percent of the lowest price for which Y regularly sells the combination to independent retailers.

If the actual intercompany sale price between X corporation and Y corporation (after taking into account the adjustments provided by sections 4216(a) and (e) of the Code) is greater than the constructive sale price as determined by the methods above, then the actual adjusted intercompany sale price is the tax base upon which the manufacturers excise tax is to be computed.

However, in any case in which application of the constructive sale price results in a tax that would exceed the tax based on the actual price for which the cranes or truck bodies are sold by Y corporation to independent retailers, the tax should be computed on the price for which the articles are sold.