paid on the first manufacturer's original sale of the high fidelity phonographs used in the manufacture of the stereophonic phonographs. Likewise, under the provisions of section 6416 (b) (3) (B) of the Code, the dealer is entitled to a credit or refund in the amount of any tax which may have been paid on radio or television components used in the manufacture of the stereophonic phonographs. SECTION 4142.-DEFINITION OF RADIO AND Taxability of a portable radio carrying case. See Rev. Rul. 59-202, page 34. SECTION 4216.-DEFINITION OF PRICE [SPECIAL PROVISIONS APPLICABLE TO MANUFACTURERS TAX] (Also Section 4211.) Rev. Rul. 59-203 A weighted average formula for computing excludable transportation and delivery charges may be used in determining the basis for the manufacturers excise tax imposed by section 4211 of the Internal Revenue Code of 1954, with respect to sales of matches in those instances where the tax computed at two cents per 1,000 is more than ten percent of the manufacturer's selling price. The Internal Revenue Service has been asked to approve the use of a weighted average formula for computing excludable transportation and delivery charges in determining the basis for the manufacturers excise tax with respect to sales of matches in those instances where the tax computed at two cents per 1,000 is more than ten percent of the manufacturer's selling price. Section 4211 of the Internal Revenue Code of 1954 imposes upon the sale by the manufacturer, producer, or importer of matches, a tax of two cents per 1,000 matches but not more than ten percent of the price for which so sold, except that in the case of fancy wooden matches and wooden matches having a stained, dyed, or colored stick or stem, packed in boxes or in bulk, the tax shall be five and one-half cents per 1,000 matches. Under the provisions of section 4216(a) of the Code, in determining the price for which an article is sold there shall be excluded charges for transportation and delivery costs actually incurred in connection with the delivery of an article to a purchaser pursuant to a bona fide sale. Thus, in determining whether the ten percent limitation will apply, the manufacturer may exclude the applicable transportation or delivery costs in determining the price for which the matches are sold. A company manufactures several types of matches. The matches are sold on a tax-included, delivered basis. In order to reduce the clerical expense involved in computing the excludable transportation and delivery expense in determining the adjusted price for which the matches are sold, the manufacturer proposes to use a weighted average cost of such expenses for each type of matches sold. This weighted average cost, which would be excluded from the tax-included, delivered selling price of matches in those instances where the tax computed at two cents per 1,000 is more than ten percent of the price for which sold, would be determined as follows: Total transportation and delivery costs for the preceding calendar year--- Deduct: Nonexcludable transportation costs-- $1, 000, 000 100,000 $900,000 Net excludable transportation and delivery costs__. $0.18 per pound This resulting cost per case for each kind of matches would be deducted from the tax-included, delivered selling price of each case of such matches sold during the current calendar year in arriving at the portion of the selling price subject to tentative computation of the ad valorem tax for comparison with the computation of tax at the rate of two cents per 1,000 matches. Therefore, if a case of type "A" matches were sold for $10.25 and contained 50,000 matches, the tax would be computed as follows: (1) Tentative tax at 2¢ per 1,000 matches (.02 x 50)------ Tax-included sale price of matches .468 $1.00 9.782 .89 (3) Tentative ad valorem tax (10/110 x 9.78)‒‒‒‒‒. Thus, since the tax computed at two cents per 1,000 would exceed ten per cent of the selling price, the tax due on this sale would be 89 cents. The Service will approve the use of a weighted average cost formula similar to the one described above for determining the excludable transportation and delivery charges on an individual basis for each match manufacturer, producer, or importer. This formula may be used in determining the basis for the manufacturers excise tax imposed by section 4211 of the Code, with respect to the sale of matches in those instances where the tax computed at two cents per 1,000 would exceed ten percent of the manufacturer's selling price. The weighted average cost of transportation and delivery should be computed by using the applicable sales, transportation, and delivery cost figures for the preceding calendar year. The resulting transportation and delivery cost per case for each kind of matches should be deducted from the tax-included, delivered selling price of each case sold during the current calendar year. A new formula should be developed for each subsequent year based upon the prior year's transportation and delivery costs. Each year's formula must be forwarded for approval to the office of the District Director of Internal Revenue for the district in which the manufacturer is located. In determining the net excludable transportation and delivery costs for a given year, the following items should be eliminated: 1. All shipping expense up to the time of delivery of the merchandise to the carrier. 2. All freight charges on returned goods. 3. All freight charges on matches subject to tax at the rate of two cents per thousand. 4. All freight charges on nontaxable sales. See G.C.M. 21114, C.B. 1939-1 (Part I), 351, which sets forth guides governing the inclusion or exclusion of cost of transportation and delivery charges in determining the prices for which certain articles are sold. SECTION 4211.-IMPOSITION OF TAX Whether a weighted average formula for computing excludable transportation and delivery charges may be used in determining the basis for the manufacturers tax with respect to sales of matches in those instances where the tax computed at two cents per 1,000 is more than ten percent of the manufacturers selling price. See Rev. Rul. 59-203, page 36. SECTION 4221.-CERTAIN TAX-FREE SALES (Also Section 4091.) Rev. Rul. 59-204 Lubricating oil which is placed by a manufacturer in an enclosed assembly or housing of a taxable article, whether or not it is sealed in, is a component material used in the manufacture of such article. Therefore, by virtue of section 4221(a)(1) of the Internal Revenue Code of 1954, lubricating oil may be sold by the manufacturer thereof for such use, or for resale for such use, free of the manufacturers excise tax imposed by section 4091 of the Code. S.T. 581, C.B. XI-2, 451 (1932), and Revenue Ruling 58-477, I.R.B. 1958-39, 98, modified; S.T. 571, C.B. XI-2, 451 (1932), revoked. Advice has been requested whether sales of lubricating oil by the manufacturer or producer thereof may be made tax-free, direct to a manufacturer or to distributor for resale to a manufacturer, for use in the manufacture of a taxable article, such as, for example, a phonograph mechanism. The oil is to be placed in an enclosed assembly or housing for the purpose of providing lubrication for gears, bearings, etc. Section 4091 of the Internal Revenue Code of 1954 imposes a tax on cutting oils and other lubricating oils sold by the manufacturer or producer thereof. Under the provisions of section 4221(a)(1) of the Code, no manufacturers excise tax shall be imposed on the sale by the manufacturer or producer of an article for use by the purchaser for further manufacture, or for resale by the purchaser to a second purchaser for use by such second purchaser in further manufacture. Section 4221 (d) (6) (A) of the Code provides that an article shall be treated as sold for use in further manufacture if such article is sold for use by the purchaser as material in the manufacture or production of, or as a component part of, another article subject to the manufacturers excise tax to be manufactured or produced by him. S.T. 571, C.B. XI-2, 451 (1932), holds that lubricating oil sold to a manufacturer of automobiles who furnished this oil in the crankcase of automobiles when sold to consumers is not a component part of the automobiles. However, in S.T. 581, C.B. XI-2, 451 (1932), it is held that oil which is sealed in the crankcase of the compressor of a mechanical refrigerator is a component material in the manufacture of such compressor. Moreover, Revenue Ruling 58-477, I.R.B. 1958-39, 98, holds that oil placed in automatic transmissions by the manufacturer of new automobiles for the purpose of serving as a hydraulic medium and lubricant, and which is contained in the automatic transmissions at the time the automobiles are sold by the manufacturer, is used as material in the manufacture of, or as a component part of, the new automobiles. In the case of Chrysler Corporation v. The United States, 149 F. Supp. 381, relating to a claim for credit of the manufacturers excise tax paid on gasoline and oil used in the manufacture of automobiles, the United States Court of Claims held as follows: But the gasoline and oil used for testing, in spraying the pistons and rings, in propelling intraplant lift trucks, and in lubricating manufacturing machinery, were no part of the automobile sold. They had been consumed in the manufacturing process. * The only oil that could be said have been sold was the oil left in the engine and other parts when the finished automobile was sold. *** We are of opinion that the manufacturer is entitled to a credit for the amount of the oil in the automobile when sold. This was the oil "to fill the crankcases of tested engines," "to fill tested transmissions," "to fill rear-axle assemblies," and "to fill carburetor air cleansers." Component parts were sold with the automobile, and any material that went into its construction were sold with it; but things that were consumed in the manufacturing process were not sold. * Consequently, where the manufacturer of a taxable article places lubricating oil in an enclosed assembly or housing of that taxable article in such a manner that it is a part of the taxable article which is sold by the manufacturer, the oil is considered as being used as a component material in the manufacture of the taxable article, regardless of whether it is sealed in or whether it serves as a power transmission medium. Therefore, under the provisions of section 4221(a)(1) of the Code, it is held that lubricating oil may be sold by the manufacturer or producer thereof, free of the tax imposed by section 4091, for use in the manufacture of a taxable article, or for resale for such use, provided the requirements of the applicable regulations with respect to tax-free sales and registration are met. On the other hand, the exemption provided by section 4221(a)(1) of the Code does not apply where oil is sold for use as a component material in the manufacture of a nontaxable article. However, it should be noted that, under the provisions of section 314.43 of Regulations 44, made applicable to the 1954 Code by Treasury Decision 6091, C.B. 1954–2, 47, oil may be sold taxfree for use as a nonlubricating component material in the manufacture of a nontaxable article. S.T. 581, C.B. XI-2, 451 (1932), and Revenue Ruling 58-477, I.R.B. 1958-39, 98, are modified. S.T. 571, C.B. XI-2, 451 (1932), is hereby revoked. Rev. Rul. 59-205 The exemption from the manufacturers excise tax of certain supplies for vessels and aircraft, provided by section 4221(a)(3) of the Internal Revenue Code of 1954, as redesignated and amended by the Excise Tax Technical Changes Act of 1958, Public Law 85-859, applies to the sale of articles for use on vessels and aircraft of the United States Coast Guard. Advice has been requested whether the exemption from the manufacturers excise tax of certain supplies for vessels and aircraft, provided by section 4221(a)(3) of the Internal Revenue Code of 1954 (section 4222 prior to its redesignation and amendment by the Excise Tax Technical Changes Act of 1958, Public Law 85-859), applies to the sale of taxable articles for use on vessels and aircraft of the United States Coast Guard. Section 4221(a)(3) of the Code, as amended, provides that no manufacturers excise tax shall be imposed on the sale of an article for use by the purchaser as supplies for vessels or aircraft, if such use is to occur before any other use. Section 4221(d) (3) of the Code defines the term "supplies for vessels or aircraft" to mean fuel supplies, ships' stores, sea stores or legitimate equipment on vessels of war of the United States or of any foreign nation, and certain other types of vessels not pertinent here. Section 316.28 (e) of Regulations 46, made applicable to the 1954 Code by Treasury Decision 6091, C.B. 1954-2, 47, provides that the term "vessels of war of the United States" includes (1) every description of watercraft or other contrivance used, or capable of being used as a means of transportation on water and constituting a part of the armed forces of the United States and (2) aircraft owned by the United States and constituting a part of the armed forces thereof. Prior to August 1949, Section 1 of Title 14 of the United States Code provided that the Coast Guard should be a military service and constitute a branch of the land and naval forces of the United States at all times and should operate under the Treasury Department in time of peace and operate as a part of the Navy, subject to the orders of the Secretary of the Navy, in time of war or when the President should so direct. Accordingly, it was held in S.T. 724, C.B. XIII-1, 390 (1934), that sales made to vessels of the Coast Guard were not exempt as sales |