Rev. Rul. 83-149

ISSUES

1. In the situations described below, is the sale or use of a trailer, constructed from parts of two or more used trailers, subject to the manufacturers excise tax imposed by section 4061(a) of the Internal Revenue Code?

2. If the sale or use is taxable, does the exclusion of the value of used components provided by section 4216(f) of the Code apply in each situation?

FACTS

X, a manufacturer and repairer of trailers, fabricates 45 foot trailers from identical used 40 foot trailers. To fabricate the 45 foot trailer X cuts the 40 foot trailers into front and rear sections of various lengths and attaches the front section of one to the rear section of the other. For example, X may take a 15 foot front section and attach it to a 30 foot rear section to create a 45 foot trailer. The remaining parts of the two 40 foot trailers may be either scrapped or used in the fabrication of other 45 foot trailers. Ordinarily, X will use seven 40 foot trailers to produce six 45 foot trailers.

The procedure described above may occur in any of four situations:

Situation 1

X fabricates a 45 foot trailer from parts of two used trailers it purchased or accepted in trade and then sells the 45 foot trailer to a customer who uses it.

Situation 2

X fabricates a 45 foot trailer from parts of two used trailers it purchased or accepted in trade and then uses the 45 foot trailer in its business.

Situation 3

A customer provides seven used trailers to X, has X fabricate six 45 foot trailers from their salvaged parts, and is the first user of the 45 foot trailers.

Situation 4

X sells a customer seven used trailers it has purchased or accepted in trade. Although the customer takes title to the trailers, the customer never takes possession of the trailers. After a period of time X fabricates six 4.5 foot trailers for the customer using the seven 40 foot trailers X sold to the customer. The customer takes delivery of the 45 foot trailers on completion and places them in use. X is unable to show a bona fide business reason for the purported sale of the 40 foot trailers to the customer.

LAW AND ANALYSIS

Section 4061 (a)(1) of the Code imposes a tax on the sale by the manufacturer, producer, or importer of trailer and semitrailer chassis and bodies and other enumerated articles.

Section 4216(f) of the Code provides that for purposes of the tax imposed by section 4061(a)(1), in determining the price for which an article is sold, the value of any component of the article is to be excluded from the price if (1) the component is furnished by the first user of such articles, and (2) the component has been used prior to being furnished.

Section 4218(a) of the Code provides that if any person manufactures, produces, or imports an article (other than specified articles not in question here) and uses it (otherwise than as material in the manufacture or production of, or as a component part of, another article taxable under chapter 32 of the Code) the liability for the tax under chapter 32 applies in the same manner as if the article were sold by the manufacturer, producer, or importer.

Under section 48.0-2(a)(4)(i) of the Manufacturers and Retailers Excise Tax Regulations, the term "manufacturer" includes any person who produces a taxable article from scrap, salvage, or junk material, or from new or raw material, by processing, manipulating, or changing the form of an article or combining or assembling two or more articles.

Under section 48.0-2(a)(4)(ii) of the regulations, when a person manufactures or produces a taxable article for another person who furnishes materials and that person retains title to the materials and to the finished article, the person for whom the article is manufactured, and not the person who actually manufactures, or produces it, will be considered the manufacturer.

The procedure of cutting two trailer bodies and chassis and combining parts salvaged from them to fabricate a 45 foot trailer is the manufacture of a new and different article. See Rev. Rul. 78-205, 1978-1 C.B. 345, for a similar conclusion with respect to the use of kits to lengthen trailers. In situations I and 2, X has manufactured a new and different article. In situation 3, because the customer provided the materials and retained title to them and to the completed 45 foot trailers, the customer is considered to have manufactured 45 foot trailers even though X performed all acts necessary to fabricate them. In situation 4, even though the conversion process is structured as two separate transactions, the sale of 40 foot trailers and a subsequent agreement for X to convert them into 45 foot trailers, it is in substance a single transaction through which X sells 45 foot trailers of its manufacture to the customer. The customer in situation 4 is merely being used by the manufacturer as a conduit through which to pass the used components prior to incorporating them in a new trailer to avoid the manufacturer's excise tax. Despite the passage of a period of time between the sale of the 40 foot trailers and their subsequent conversion in a situation where the customer does not take possession of the trailers, the arrangement is nevertheless viewed by the Service as a single transaction for purposes of the manufacturers excise tax absent a showing by X of a bonafide business reason for the purported sale of the 40 foot trailers to the customer.

Under section 4216(f) of the Code, in determining the price for which an article taxable under section 4061 (a) is sold, the value of components of the article may be excluded if two conditions are met. The component must be furnished by the person who first uses the completed article and the component must be a used component at the time it is furnished. Rev. Rul. 79-36, 1979-1 C.B. 336, in its discussion of section 4216(f), implies that the used component must have been used by the person supplying it. Even though the component often will have been used by the person supplying it, neither section 4216(f) nor the regulations thereunder require that it be used by that person.

HOLDINGS

Situation 1

X is subject to tax on its sale of the 45 foot trailer it manufactured.

Section 4216(f) of the Code is not applicable in determining the price for which the trailer is sold because X, who supplied the used components, is not the first user of the 45 foot trailer.

Situation 2

X is subject to tax on its use of the 45 foot trailer it manufactured.

The value of the used components may be excluded in determining the basis upon which tax is imposed because X is both the supplier of the used components and the first user the 45 foot trailer.

Situation 3

The customer is subject to tax on its use of the 45 foot trailers X fabricated from the used 40 foot trailers supplied by the customer. As in situation 2, above, the value of the used components supplied by the customer may be excluded in determining basis for tax.

Situation 4

Because the substance of the transaction is that of the sale to the customer of 45 foot trailers manufactured by X, X is subject to tax on the sale of the trailers. Section 4216(f) of the Code does not apply and the value of the used components may not be excluded since the components are viewed as furnished by X and not the customer.

The tax imposed by section 4061 (a) of the Code was repealed with respect to sales or uses on or after April I 1983. The holdings in this reverts; ruling are equally applicable under the retailers excise tax imposed by section 4051 of the Code, which took effect on April 1, 1983, with respect to sales or uses after March 31, 1983.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 79-36 is clarified to eliminate the indication that section 4216(f) of the Code requires the supplier of a used part to be the person who used it.