FLOOR STOCK REFUNDS SHOULD BE TREATED AS COST REDUCTION FOR TIRES IN ENDING INVENTORY OR AS AN ITEM OF GROSS INCOME IF TIRES ARE NOT IN ENDING INVENTORY

Rev. Rul. 85-30

ISSUE

What is the proper treatment by a retail dealer of highway vehicle tires for a reimbursement of a manufacturer's federal excise tax refund with respect to the dealer's floor stocks under the circumstances described below?

FACTS

The taxpayer, a domestic corporation, is a retail dealer of highway vehicle tires. The taxpayer utilizes the accrual method of accounting and keeps its books on a calendar year. The taxpayer values its inventory of tires under the last-in, first-out (LIFO) method. The invoice price used for inventory costing includes federal excise taxes.

Before July 1, 1984, the taxpayer submitted to the manufacturer of the tires held in the taxpayer's inventory on January 1, 1984, a request for reimbursement of the manufacturer's federal excise tax refund in respect of the taxpayer's floor stocks, which refund was occasioned by a change in law. Prior to October 1, 1984, the taxpayer received reimbursement from the manufacturer in an amount equal to the request.

LAW AND ANALYSIS

Section 514 of the Highway Revenue Act of 1984 (the "Act") (Title V of the Surface Transportation Assistance Act of 1982, Pub. L. No. 97-424, 1983-1 C.B. 405) amended section 4071(a) of the Internal Revenue Code. The amendment repealed the federal excise tax on the sale by manufacturers, producers, or importers of highway-type tires weighing 40 pounds or less, non-highway tires, inner tubes, tread rubber and laminated tires, and imposed a tax at a new rate on highway-type tires weighing over 40 pounds sold on and after January 1, 1984.

Section 522(a) of the Act, read in conjunction with section 523(b), provides that with respect to any tax-repealed article which had been sold to a dealer before January 1, 1984, and the dealer held the article on January 1, 1984, the manufacturer, producer, or importer of the article may file a claim with the Secretary of the Treasury before October 1, 1984 if such claim is for credit or refund of the federal excise tax previously paid based upon a request submitted by the dealer before July 1, 1984, and on or before October 1, 1984, reimbursement has been made to the dealer by the manufacturer, producer, or importer, or a consent has been obtained from the dealer to allowance of the credit or refund.

Section 1.471-3(a) of the Income Tax Regulations provides that, in the case of merchandise on hand at the beginning of the taxable year, cost means the inventory price of such goods.

Section 1.471-3(b) of the regulations provides in pertinent part that, in the case of merchandise purchased since the beginning of the taxable year, cost means the invoice price less trade or other discounts, and to this net invoice price transportation or other necessary charges incurred in acquiring possession of the goods should be added.

Section 61(a) of the Code provides generally that gross income means all income from whatever source derived. The regulations under section 61 indicate that, unless excluded by law, gross income includes all income realized in any form.

Section 451(a) of the Code provides that the amount of any item of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under the method of accounting used in computing taxable income, such amount is to be properly accounted for as of a different period.

Section 1.451-1(a) of the regulations provides that under an accrual method of accounting, income is includible in gross income when all the events have occurred which fix the right to receive such income and the amount thereof can be determined with reasonable accuracy.

In Rev. Rul. 84-41, 1984-1 C.B. 130, the taxpayer, an automobile dealer, was entitled to a two percent rebate from the automobile manufacturer based upon the cost to the taxpayer of new automobiles purchased during the tax year. The taxpayer actually received the rebate in the tax year subsequent to the tax year in which the automobiles were purchased. The Service, relying upon Rev. Rul. 76-96, 1976-1 C.B. 23, concluded that the cash rebate should be treated as a reduction in the cost of the automobile purchased and not as an item of gross income. Moreover, the ruling held that the taxpayer's method of recording the cost of new automobiles in inventory (and cost of goods sold) without reduction of the manufacturer's rebate was improper because it distorted the taxpayer's income. In accordance with the rationale in Rev. Rul. 76-96 and Rev. Rul. 84-41, therefore, a rebate is treated as a reimbursement of the purchase price and not an accession to wealth.

Similarly, in the instant situation, a retail tire dealer, to the extent the tires (for which the refund was received) have not been expensed through cost of goods sold under the taxpayer's LIFO cost assumption, has had no accession to wealth that is includible in gross income, but merely has had its purchase price reduced by virtue of the statutorily-authorized reimbursement. In such a situation, the taxpayer should adjust to its ending inventory for calendar year 1984 to the extent the reimbursed excise tax relates to tires the cost of which remains in the taxpayer's ending inventory.

The taxpayer would be required to include in its gross income the refunded excise taxes only if the taxpayer had derived some prior tax benefit. See Turtle Wax, Inc. v. Commissioner, 43 T.C. 460 (1965). If the taxpayer, because it utilizes the LIFO method, has deducted the cost of the tires, which includes the excise tax being refunded, in calculating its cost of goods sold, then the taxpayer will have derived a prior tax benefit. Accordingly, under the rationale of Turtle Wax, the taxpayer will be required to treat the reimbursement as an item of gross income in its calendar year 1984 under these circumstances.

HOLDING

(1) To the extent the cost of the tires for which the taxpayer received reimbursement of excise taxes remains in ending inventory, the taxpayer, under its LIFO method for calendar year 1984, should treat such reimbursement as a reduction of the cost of such tires in ending inventory.

(2) To the extent the cost of the tires, for which the taxpayer received reimbursement of excise taxes, does not remain in ending inventory and has been deducted through cost of goods sold, the taxpayer should treat the reimbursement as an item of gross income in its calendar year 1984.