Facts. Advice has
been requested on whether the manufacturers excise tax on firearms and
ammunition is imposed in the following situations. A manufacturer makes firearms and
loans them to its employees or writers for trade publications. The employees
receive the firearms for display or demonstration to prospective customers
or to familiarize themselves with the firearms. The writers receive the
firearms for the purpose of familiarization and technical evaluation.
During the period the firearms are loaned, usually no more than 180 days,
the employees display or demonstrate the firearms to prospective customers
which may include firing them. During a similar period of time the writers
examine the firearms which may involve firing them.
At the end of the
loan period, the manufacturer offers the firearms for sale to the employees
or the writers. Firearms that the employees or writers do not purchase
are returned to the manufacturer for sale to other persons. Because of
the condition of the firearms or the expense in restocking and examining
for possible defects or damage, the manufacturer normally sells the firearms
at reduced sale prices.
General. The provisions
of 26 U.S.C. 4181 and 27 CFR 53.61 impose an excise tax on the sale of
firearms or ammunition by the manufacturer or importer. The provisions of 26 U.S.C.
4218 and 27 CFR 53.111 impose this excise tax on the use of firearms or
ammunition by the manufacturer or importer in the same manner as if they
had been sold.
Prior Rulings. Two
rulings issued by the Internal Revenue Service (IRS), Rev. Rul. 60-290,
1960-2 C.B. 331, and Rev. Rul. 63-256, 1963-2 C.B. 534, addressed the
use of taxable articles by the manufacturer for purposes of display or
Rev. Rul. 60-290
concerned the use of typewriters in the manufacturer's showroom as demonstrators.
The ruling held as follows:
It is held, therefore,
that the use of a taxable business machine as a demonstrator by the manufacturer,
producer, or importer thereof, in the operation of a business in which
he is engaged, makes such person liable, under the provisions of section
4218(a) of the Code, for the manufacturers excise tax imposed by Section
4191 of the Code in the same manner as if the business machines were sold
by him. It is further held that the liability for such tax is incurred
at the time the demonstrator is placed in use and is computed on the price
for which such or similar business machines are sold by manufacturers
in the ordinary course of trade as determined by the Secretary of the
Treasury or his delegate.
Rev. Rul. 63-256
further elaborated on the principles set forth in Rev. Rul. 60-290. Rev.
Rul. 63-256 involved a situation in which a corporation maintained exhibition
halls where its products were put on display. Only a small portion of
the articles (radio and television receiving sets, phonographs, and combinations
thereof) were actually turned on and operated. In addition, some of the
articles were placed in the homes and offices of the corporation's executives
for display purposes or to familiarize themselves with the company's products.
The ruling held as follows:
The articles in the
instant case are used in the operation of the corporation's business in
a manner similar to the typewriters involved in Revenue Ruling 60-290, irrespective of whether
they are actually operated while on display. Therefore, it is concluded
that the principles set forth in that Revenue Ruling are equally applicable
to the use of the radio receiving sets, etc., which are displayed in the
manner described in this case.
Applying these principles
to the display and demonstration of firearms in the present case, it is
apparent that the firearms manufacturer's loan of firearms to its employees or writers is
an integral part of its business. In the present situations the display,
demonstration, or evaluation is intended to benefit the manufacturer through
increased sales or by advertising when a technical evaluation of the firearm
is published. In the case of display or demonstration by employees of
the manufacturer , there is an express agency relationship so that use
by the employee amounts to use by the manufacturer. Similarly, evaluation
of the firearms by writers for trade publications results in an implied
agency relationship between the parties so that use by the writers amounts
to use by the manufacturer.
Therefore, the firearms
manufacturer is liable for the tax on the use of the firearms when they
are loaned to its employees or the writers. Tax is imposed at the time the articles are
placed in use by the manufacturer. Computation of the tax is based upon the provisions of 26 U.S.C. 4218(c).
The fact that the firearms are later sold at reduced sale prices does
not reduce the liability for the excise tax on the manufacturer's use.
Held: The tax imposed
under 26 U.S.C. 4181 and 4218 applies to the loan of a firearm by the
manufacturer to employees for the purposes of display or demonstration. Tax also applies
to the manufacturer's loan of a firearm to writers for trade publications
for purposes of familiarization and technical evaluation. Tax liability
is incurred at the time the firearms are placed in use by the manufacturer
and is calculated pursuant to 26 U.S.C. 4218(c).
26 U.S.C. 4181 and
4218 and 27 CFR 53.61 and 53.111: Tax on Use by Manufacturer, Producer
or Importer of Firearms or Ammunition.