Rev. Ruling 66-124

Cigars and Cigarettes Removed from a Factory for Testing

Advice has been requested whether cigars and cigarettes to be removed from a factory for testing by a selected panel, primarily by human consumption, would be exempt from tax.

Section 5704(a) of the Internal Revenue Code of 1954 provides in pertinent part that cigars and cigarettes may be furnished by a manufacturer of such products, without payment of tax, for experimental purposes in such manner as the Secretary of the Treasury or his delegate shall by regulation prescribe.

26 CFR 270.232 prescribes that removal of cigars and cigarettes without determination and payment of tax will be authorized only for bona fide experimental purposes, such as for use by producers of machines designed to package such products for testing and experimenting in the operation of these machines, or for use in laboratories, hospitals, medical centers, institutes, colleges, and universities, for scientific, technical, or medical research. Further, cigar and cigarettes may not be removed without payment of tax for such purposes as advertising, salesmen's or customers' samples, or for consumer testing.

Accordingly, it is held that, where cigars and cigarettes are to be removed from a factory for testing by a selected panel, primarily by human consumption, the results must serve a public interest with the detailed findings of the experiment made available to all interested persons in order that the removal may be considered as for experimental purposes and thus exempt from tax. Removals without payment of tax cannot be authorized where the results are primarily for the benefit of any particular person, such as through secret process, patent, copyright, or where findings, as a result of the human consumption, are used basically for commercial research and product development, rather than scientific or medical research.

Revenue Ruling 65-71, C.B. 1965-1, 601, is hereby superseded.

26 U.S.C. 5704; 27 CFR 270.232