Rev. Rul. 86-16

1986-1 C.B. 321, 1986-6 I.R.B. 24.

COAL; SALE PRICE DETERMINATION; FREEZE CONDITIONING ADDITIVE

Published: February 10, 1986

Section 4121.-Imposition of Tax, 26 CFR 48.4121-1: Imposition and rate of tax on coal

(Also Section 4216, 48.421(a)-2.)

  Coal; sale price determination; freeze conditioning additive. In computing the taxable sale price of coal for purposes of the tax imposed by section 4121 of the Code, a charge for the application of a freeze conditioning additive to the coal is includible.

ISSUE

  In the situation described below, if a coal producer charges a coal purchaser for the application of a freeze conditioning additive to the coal before delivery, is the charge includible in the taxable sale price for purposes of the tax imposed by section 4121 of the Internal Revenue Code?

FACTS

  X, a producer of coal, agrees to sell cleaned coal to Y f.o.b. X's cleaning plant. Under the terms of the contract, Y may request that X, for an additional charge per ton, apply to the coal a freeze conditioning additive. Under the agreement, the failure of X to add the additive does not cause the coal to become rejectable by Y.

  Application of the freeze conditioning additive is helpful to Y during sustained periods of low temperatures. Since the additive is glycol based, its application to the coal modifies the formation of ice crystals, and thus prevents the coal from sticking together. If the additive were not applied during cold weather, the coal would not unload easily from the bottom of the railroad cars at Y's unloading facility, and more expensive methods would have to be used by Y to remove the coal. The additive is applied by X as the cleaned coal goes into silos for loading into railroad carts at X's cleaning plant.

LAW AND ANALYSIS

  Section 4121(a) of the Code imposes a tax on the producer's sale of coal at the rate of 50 cents per ton for coal from underground mines and 25 cents per ton for coal from surface mines, but in each case section 4121(b) limits the tax to 2 percent of the sale price per ton. Section 4121(e) provides for a temporary increase of the rates for coal sold after December 31, 1981, to one dollar for coal from underground mines and 50 cents for coal from surface mines, with a limit of 4 percent of the sale price per ton.

  Section 48.4121-1(d)(4) of the Manufactures and Retailers Excise Tax Regulations provides that, for purposes of determining both the amount of coal sold by a producer and the sales price of the coal, the point of sale is f.o.b. mine, or f.o.b. cleaning point if the producer cleans the coal before selling it.

  Section 4216(a) of the Code provides that in determining, for purposes of section 4121, the price for which an article is sold, there shall be included any charge for coverings and containers of whatever nature, and any charge incident to placing the article in condition packed ready for shipment, but there shall be excluded the amount of tax imposed by section 4121, whether or not stated as a separate charge. A transportation, delivery, insurance, installation, or other charge (not required by the foregoing sentence to be included) shall be excluded from the price only if the amount is established to the satisfaction of the Secretary in accordance with the regulations.

  X cleans the coal before delivery. Thus, under section 48.4121-1(d)(4) of the regulations, the tax base for the coal sold is f.o.b. X's cleaning plant. The tax is computed under section 4121(a) of the Code at 50 cents or one dollar per ton (according to whether the coal is from a surface mine or an underground mine), but the tax is limited to no more than four percent of the per ton price charged by X.

  In this case, X sells coal to Y at one of two prices: a regular price per ton of coal, and a higher price that includes the per ton charge for the additive when Y elects to have X apply the freeze conditioning additive. The question is whether, for the purpose of the limitation under section 4121(b), the per ton price includes the charge for the additive. The answer to this question is determined by whether, pursuant to section 4216(a), the charge is excludible as a delivery charge and, if not, whether it is includible as a charge incident to placing the coal in condition ready for shipment.

  The freeze conditioning additive is applied before the coal is loaded into railroad cars for transportation to Y's facility. Section 4216(a) of the Code excludes charges for the actual transportation of a completed product to the customer's premises. Section 48.4216(a)- 2(b)(1) of the regulations provides that the charges excluded by section 4216(a) 'include all items of transportation, delivery, insurance, installation, and similar expense incurred AFTER SHIPMENT TO A CUSTOMER BEGINS, in response to the customer's order pursuant to a bona fide sale.' (Emphasis added.) On the other hand, section

48.4216(a)-2(b)(3) of the regulations provides: 'All expenses incurred in placing an article packed, ready for shipment on the loading dock at the manufacturer's factory are not excludible transportation or delivery expenses.' The closest analogy to this in the coal industry is the placing of the coal in silos ready for loading onto railroad cars. Thus, a charge for treating coal prior to the loading of the coal onto railroad cars for transportation to the customer's premises is not a transportation or delivery charge, even though the treatment is intended to facilitate the delivery of the coal.

  Furthermore, section 4216(a) of the Code expressly includes in the taxable price any charge incident to placing an article in condition packed ready for shipment. Under section 48.4216(a)-(1)(d) of the regulations, this includes charges for any special parking services, such as for extra protection of the article. Accordingly, a charge for a treatment of the coal which is done before the coal is loaded onto the cars and which is part of the preparation of the coal for shipment is includible as a packing charge under section 4216(a).

HOLDING

  In computing its taxable sale price for purposes of the tax imposed by section 4121 of the Code, X must include the charge for the application of the freeze conditioning additive to the coal.

Rev. Rul. 86-16, 1986-1 C.B. 321, 1986-6 I.R.B. 24.