MANUFACTURERS CAN REBUT CONSTRUCTIVE SALES PRICE, EVEN IF THERE ARE NO SALES BY THE MANUFACTURER TO UNRELATED WHOLESALE DISTRIBUTORS.

Rev. Rul. 89-47

ISSUE

The Internal Revenue Service has reconsidered Rev. Rul. 77-66, 1977-1 C.B. 338, in light of the decision in Storm Plastics, Inc. v. United States, 770 F.2d 148 (10th Cir. 1985).

LAW AND ANALYSIS

Under the constructive sale price provisions of section 4216(b)(1)(C) of the Internal Revenue Code, when an article subject to a manufacturers excise tax imposed under Chapter 32 is sold otherwise than in an arm's length transaction and at less than fair market price, the Service may construct a sale price for purposes of computing excise tax liability.

Rev. Rul. 77-66 concludes that if there are no sales by the manufacturer/taxpayer or an affiliated distributor to unrelated wholesale distributors, then there is no clearly reliable or feasible means of determining fair market price other than the constructive sale price provided by section 4216(b) of the Code. Therefore, in such circumstances, the constructive sale price is the fair market price for purposes of computing excise tax liability. Absent sales in the ordinary course of trade to unrelated wholesale distributors, the manufacturer may not rebut this constructive sale price.

In Storm Plastics, the court held that, even if there are no sales to unrelated wholesale distributors, the manufacturer is entitled to rebut the constructive sale price provided by section 4216(b)(1)(C) of the Code with the use of industry data, expert testimony, etc. The court indicated that Congress intended that the constructive sale price be used as the fair market price or tax base for the manufacturer's sales in such circumstances unless the taxpayer could show that another price was clearly applicable. See S. Rep. No. 91-1444, 91st Cong., 2d Sess. 21 (1970), 1971-1 C.B. 574, 585. The court further held that the conclusion in Rev. Rul. 77-66 does not manifest the intent of Congress because taxpayers may be able to establish, in a variety of ways, that a price is a fair market price.

HOLDING

The Service will follow the Storm Plastics decision and allow the manufacturer to rebut the constructive sale price of section 4216(b)(1) even if there are no sales by the manufacturer to unrelated wholesale distributors.

If a manufacturer does not have sales to unrelated wholesale distributors in the ordinary course of trade, the constructive sale price of section 4216(b)(1) of the Code will apply unless the manufacturer carries its burden of establishing that its product was sold at a fair market price.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 71-240, 1971-1 C.B. 372, concludes that in computing the manufacturers excise tax on sales between related companies, 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. Rev. Rul. 76- 182, 1976-1 C.B. 343, modifies Rev. Rul. 71-240 by concluding that if a manufacturer sells taxable articles to an affiliated distributor, a fair market price will be determined pursuant to the constructive sale price provisions of section 4216(b) of the Code unless the manufacturer can show that a lower price is clearly applicable. Rev. Rul. 76-182 further concludes that the 95 percent rule of Rev. Rul. 71-240 creates a rebuttable presumption. Rev. Rul. 77-66 modified Rev. Rul. 76-182 by concluding that the 95 percent rule of Rev. Rul. 71-240 creates a rebuttable presumption only when the manufacturer makes sales to unrelated third party distributors.

Rev. Rul. 77-66 is revoked. Rev. Rul. 76-182's conclusion that the 95 percent rule of Rev. Rul. 71-240 is rebuttable even when the manufacturer makes no sales to unrelated third party distributors is reinstated.

PROSPECTIVE APPLICATION

Pursuant to the authority granted in section 7805(b) of the Code, the holding in this revenue ruling will not be applied retroactively to the extent that it has adverse tax consequences to a taxpayer.

DRAFTING INFORMATION

The principal author of this revenue ruling is Theodore Margopulos of the Office of Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling contact Mr. Margopulos on (202) 343-8555 (not a toll-free call).