Rev. Rul. 86-93

1986-2 C.B. 178, 1986-31 I.R.B. 20.

SALE PRICE OF TRUCK; TIRE EXCLUSION; USE OF COST COMPARISON FORMULA

Published: August 4, 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 cost comparison formula. For purposes of computing the taxable sale price of a highway vehicle under section

4052(b) of the Code, a cost comparison formula may be used to determine the amount that may be excluded as the fair market value at retail of the tires.

ISSUE

  For purposes of the retailers excise tax on heavy trucks and trailers imposed by section 4051(a) of the Internal Revenue Code, may a dealer, in computing taxable sale price, exclude as the fair market value at retail of the tires an amount determined under a cost comparison formula?

FACTS

  X, a vehicle dealer, sells at retail trucks and truck trailers that are subject to the tax imposed by section 4051(a)(1) of the Code. X mounts on some of these vehicles tires purchased from tire manufacturers Y and Z. X does not ordinarily make separate sales of Y or Z tires. In accordance with Federal Trade Commission (FTC) rules under 16 C.F.R. section 228.16 (1985), pertaining to the advertising of tire warranties, Y publishes a predetermined price list that reflects the average selling price for which its dealers sell Y tires. Z does not publish a predetermined price list under the FTC rules, and neither Y nor Z publishes manufacturers suggested retail price lists.

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 should 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), 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 15, 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.

  X does not ordinarily make separate sales of Y or Z tires and thus does not have, within the meaning of section 145.4052- 1(d)(2)(iii) of the temporary regulations, a lowest established price for which it sells, or offers to sell, such tires to independent purchasers. In the case of X's sale of Y tires mounted on X's trucks, the Commissioner will accept as the fair market value at retail of the tires Y's predetermined price as computed under 16 C.F.R. section

228.16(b)(3). See Rev. Rul. 86-28. 1986-8 I.R.B. 22.

  In those instances in which X purchases competitive tires of a comparable size from manufacturers Y and Z and only Y publishes a predetermined price list, X may use the amount determined under the following formula as the fair market value at retail (FMV) of Z tires:

FMV Z = (Cost Z x FMV Y)/Cost Y

  This formula is based on the assumption that the percentage mark- up from cost to fair market value is the same for both the Y and the Z tires. In other words, the ratio that the actual cost to X of a Z tire bears to the actual cost to X of a comparable Y tire is assumed to be the same as the ratio that the fair market value at retail of a Z tire bears to the fair market value at retail (predetermined price under 16 C.F.R. section 228.16(b)(3)) of a Y tire. For example, if the actual cost to X of a Y tire is $300, the actual cost to X of a Z tire is $280, and the fair market value at retail of a Y tire is $320, the fair market value of a Z tire can be determined to be $298.67, as seen below.

FMV Z = ($280 x $320)/$300 = $298.67

HOLDING

  For purposes of determining the taxable sale price of a highway vehicle under section 4052(b) of the Code, X may exclude an amount for the fair market value at retail of the tires as determined under the cost comparison formula set forth above.

Rev. Rul. 86-93, 1986-2 C.B. 178, 1986-31 I.R.B. 20.