Rev. Rul. 81-268 1981-2 C.B. 212, 1981-46 I.R.B. 7. Internal Revenue Service MANUFACTURER'S CONSTRUCTIVE SALE PRICE OF TRUCK AT RETAIL; ALLOWANCE ON TRADE-IN Published: November 16, 1981 26 CFR 48.4216(b)-1: Constructive sale price; scope and application (Also Section 4061; 48.4061(a)-1.) Manufacturer's constructive sale price of truck at retail; allowance on trade-in. When a manufacturer sells a truck at retail and receives cash plus a trade-in vehicle, the amount stated as allocable to the trade-in will be presumed to be equal to the fair market value of the trade-in unless the manufacturer can establish that the fair market value was less than this stated amount. Rev. Rul. 73-594 superseded. ISSUE For purposes of determining the manufacturers excise tax liability in a retail transaction, is the full amount of a trade-in allowance includible in establishing the constructive sale price in the situation described below? FACTS Certain manufacturers sell at retail trucks and truck trailers that are subject to the manufacturers excise tax imposed by section 4061(a) of the Internal Revenue Code. Many of their trucks and trailers are sold for cash plus a traded-in used vehicle. The manufacturers appraise the value of the trade-ins at what they consider to be the current fair market value, as determined on the basis of each manufacturer's experience with similar vehicles. In negotiating a sale price, however, the manufacturers often allow a trade-in allowance in excess of the appraised value of the trade-in. LAW AND ANALYSIS Section 4216(b)(1)(A) of the Code provides that if an article is sold at retail, the manufacturers excise tax (if based on the price for which the article is sold) must be computed on the price for which manufacturers or producers sell such articles in the ordinary course of trade, as determined by the Secretary. As amended by Pub. L. 95-458, 1978-2, C.B. 367, effective January 1, 1979, section 4216(b)(1)(A) further provides that if an article is sold at retail and the sale is taxable under section 4061(a), the tax must be computed on a constructive sale price that is a percentage (not greater than 100 percent) of the actual selling price. This percentage must be based on the highest price for which manufacturers and producers sell such articles in the ordinary course of trade (determined without regard to any individual manufacturer's or producer's cost). The Internal Revenue Service has determined that for truck chassis and bodies or truck trailer and semi-trailer chassis and bodies sold at retail, the basis for computing the tax imposed by section 4061(a)(1) of the Code on and after January 1, 1979, is 90 percent of the actual selling price of the articles after taking into account the adjustments provided by section 4216(a), unless it can be shown that a lower percentage should apply to a particular segment of the industry. See Rev. Ruls. 79-32, 1979-1 C.B. 355, and 79-33, 1979-1 C.B. 356. Since the manufacturers sell their trucks and truck trailers at retail, they must base the manufacturers excise tax on 90 percent of the actual selling price in accordance with section 4216(b)(1)(A) of the Code and Rev. Ruls. 79-32 and 79-33. Section 48.4216(a)-1(a) of the Manufacturers and Retailers Excise Tax Regulations provides that the 'price' for which an article is sold includes the total consideration paid for the article, whether that consideration is in the form of money, services, or other things. Section 48.4216(a)-3(a) of the regulations provides that if an article is sold subject to the manufacturers excise tax imposed on sales price, and the manufacturer receives from the buyer another article in exchange as part of the consideration paid, the tax on the manufacturer's sale must be computed on the basis of the amount allowed for the article received from the buyer, plus any additional amount charged the buyer. Rev. Rul. 73-594, 1973-2 C.B. 360, deals with the same factual situation as described above but under prior law and regulations. Rev. Rul. 73-594 holds that when parties to a sale deal at arm's length in determining the proper allowance for a traded-in vehicle, the Service will presume that the allowance reflects the fair market value of the trade-in. However, under that revenue ruling if a manufacturer can establish to the satisfaction of the Service that the actual fair market value of the trade-in at the time of sale was less than the allowance stated on the customer invoice, then only the fair market value of the trade-in need be included in determining the 'actual sale price.' Rev. Rul. 73-594 further holds that when determining for purposes of section 4216(b)(1) of the Code the 'price for which such articles are sold' or the 'highest price for which such articles are sold,' the Service will also presume that the agreed on allowance for a traded-in vehicle is the fair market value, unless the manufacturer can establish to the satisfaction of the Service that the actual fair market value of the trade-in at the time of sale was less than the allowance stated on the customer invoice. Section 48.4216(a)-3(a) of the regulations contemplates that the amount allowed for an article accepted in exchange for a taxable article will ordinarily be the fair market value of the trade-in article. HOLDING When a manufacturer in an arm's length transaction makes an allowance for a traded-in vehicle, the Service will presume that the agreed on allowance is the fair market value of the trade-in vehicle and that the amount is fully includible in determining actual selling price for purposes of computing the tax. However, if the manufacturer can establish that the fair market value of the trade-in at the time of sale was less than the agreed on allowance stated on the customer's invoice, the Service will recognize the actual fair market value as the amount allowed within the meaning of the regulations. The Service may in any case require a manufacturer to substantiate that the stated invoice amount is not less than the fair market value of the trade-in. EFFECT ON OTHER REVENUE RULINGS Rev. Rul. 73-594 is superseded. Rev. Rul. 81-268, 1981-2 C.B. 212, 1981-46 I.R.B. 7. |