Rev. Rul. 86-28

1986-1 C.B. 317, 1986-8 I.R.B. 22.

SALE PRICE OF TRUCK; TIRE EXCLUSION; USE OF PREDETERMINED PRICE

Published: February 24, 1986

Section 4052.-Definitions and Special Rules, 26 CFR 145.4052-1: Special rules and definitions

(Also Section 4051.)

  Sale price of truck; tire exclusion; use of predetermined price. A vehicle retailer that does not have an established retail price of tires may use the tire manufacturer's predetermined price established by the manufacturer under Federal Trade Commission (FTC) regulations in determining the retail fair market value of the tire pursuant to section 4052(b)(1)(B)(iii) of the Code.

ISSUE

  For purposes of determining the taxable sale price of a highway vehicle under section 4052(b) of the Internal Revenue Code, if a vehicle dealer does not have an established lowest retail price of tire, may the dealer exclude, as the fair market value at retail of the tires, a predetermined price established by the tire manufacturer under Federal Trade Commission (FTC) regulations for warranty adjustment purposes?

FACTS

  X, a vehicle dealer, sells at retail trucks and trailers that are subject to the tax imposed by section 405(a)(1) of the Code. Some of the vehicles sold by X are equipped with tires manufactured by Y. X does not make separate sales of Y's tires at retail, and Y does not provide X with manufacturer's suggested retail prices for any of its tires. Title 16 C.F.R. section 228.16 (1985) contains the FTC rules concerning the advertising of tire warranties. Section

228.16(b) provides that to avoid deception of purchasers as to the value of guarantees, adjustments should be made on the bases of a price which realistically reflects the actual selling price of the tire. Under section

228.16(b)(3), a predetermined price which fairly represents the actual selling price of the tire is considered to be an appropriate price base for making such guarantee adjustments.

  In accordance with this FTC regulation, Y has published a predetermined price list which consists of the average selling prices for which its retail dealers sell their tires. It is based on an annual survey that Y performs in its markets in the United States.

LAW AND ANALYSIS

  Section 4051(a)(1) of the Code imposes on the first retail sale of certain truck and trailer chassis and bodies (including in each case parts or accessories sold on or in connection therewith or with the sale thereof) a tax of 12 percent of the amount for which the article is so sold.

  Section 4052(b)(1)(B)(iii) of the Code provides that in determining the price for which an article is sold, there shall be excluded the fair market value

(including any tax imposed by section 4071) at retail of any tires (not including any metal rim or rim base).

  Section 145.4052-1(d)(2)(iii) of the Temporary Excise Tax Regulations, as amended by T.D. 8050, 50 Fed. Reg. 37350, 37351 (1985), 1985-42 I.R.B. 12 provides that the fair market value at retail of tires shall be determined by the lowest established price for which the vehicle retailer would sell such tires at retail in the ordinary course of trade. The lowest established price is the lowest price for which the vehicle retailer sells, or offers to sell, a single tire to an independent purchaser who would not ordinarily be expected to buy more than one. If the vehicle retailer has no lowest established price, the Commissioner will accept any price, provided that, under the facts and circumstances, such price is not unreasonable. (For vehicles sold on or after April 1, 1983, and before October 13, 1985, a price will not be considered unreasonable if it is no more than an amount equal to 50 percent of the manufacturer's suggested retail price.)

  As X does not make separate sales of Y's tires at retail, it does not have a lowest established price for which it sells, or offers to sell, such tires to independent purchasers within the terms of section 145.4052- 1(d)(2)(iii) of the temporary regulations. In the absence of a lowest established price for Y's tires, the Commissioner will accept from X, as the fair market value at retail of the tires, any price that is not unreasonable. The use of Y's predetermined price (which was developed for purposes of 16 C.F.R. section 228.16 and which is computed annually on the average actual sale price of Y's tires by its dealers) is not unreasonable.

  In lieu of using the tire manufacturer's predetermined price, however, a vehicle retailer can continue to use any price not unreasonable under the facts and circumstances test, as set forth in section 145.4052-1(d)(2)(iii) of the Temporary Excise Tax Regulations.

HOLDING

  A vehicle retailer that does not have an established lowest retail price of tires because such retailer does not make separate sales of tires at retail may use, but is not required to use, the tire manufacturer's predetermined price as defined in 16 C.F.R. section 228.16(b)(3) in determining the retail fair market value of a tire pursuant to section 4052(b)(1)(B)(iii) of the Code.

Rev. Rul. 86-28, 1986-1 C.B. 317, 1986-8 I.R.B. 22.