Internal Revenue Service
Revenue Ruling sm

Rev. Rul. 69-568

1969-2 C.B. 209

IRS Headnote

Where a manufacturer sells taxable articles to a subsidiary and to unrelated dealers at the same prices, the manufacturers tax on sales to the subsidiary is computed on the intercompany price rather than a constructive sale price.

Full Text

Rev. Rul. 69-568

Advice has been requested as to the computation of the manufacturers excise tax due on the sale of articles subject to ad valorem manufacturers excise taxes imposed under Chapter 32 of the Internal Revenue Code of 1954 in the situation described below.

X corporation is a manufacturer of articles subject to an ad valorem manufacturers excise tax imposed under Chapter 32 of the Code. X sells its own brand articles to independent dealers regularly and in substantial quantities. X also sells identical articles to Y corporation, its wholly-owned sales and distribution subsidiary, at the same prices as those charged the independent dealers.

Y has its own employees, place of business, adequate working capital, and property. In general, the relationship between the corporations is such as to indicate that Y operates separate and apart from X, and that the transactions between X and Y are valid sales for manufacturers excise tax purposes.

The question presented is whether section 4216(b)(1)(C) of the Code is applicable to the sales made by X to Y, so that the manufacturers excise tax must be computed on a constructive sale price, rather than on the intercompany sale price.

Section 4216(b)(1)(C) of the Code provides that if an article is sold otherwise than through an arm's length transaction at less than the fair market price, the manufacturers excise tax shall (if based on the price for which the article is sold) be computed on the price for which such articles are sold, in the ordinary course of trade, by manufacturers and producers thereof, as determined by the Secretary of the Treasury or his delegate.

The relationship between X and Y is such that the intercompany sales are otherwise than at arm's length. Accordingly, if the intercompany sale price is also at less than the fair market price the provisions of section 4216(b)(1)(C) of the Code will be applicable in this case, and manufacturers excise tax liability will be computed on a constructive sale price determined by the Commissioner of Internal Revenue, rather than on the actual intercompany price.

An intercompany sale price is not less than the fair market price where additional bona fide sales of like articles bearing the same brand name are made by the manufacturer regularly and in substantial quantities to unrelated vendees at a price that is not in excess of the intercompany price. In such case, the manufacturers excise tax on the intercompany sale is to be computed on the actual sale price.

In the instant case, X sells taxable articles to Y at the same price it sells like articles to unrelated dealers. Accordingly, it is held that the intercompany price is not less than the fair market price of such articles and the basis for computing tax on the intercompany sales is the actual intercompany sale price.