20023

                              FEB 11 1966



Dear

     This refers to your letter dated December 24, 1965, requesting
to be informed whether you could engage in a program of leasing
submachine guns to law enforcement agencies without incurring
additional tax liabilities under the National and Federal Firearms
Acts.

     Section 5812(a)(1) of the National Firearms Act provides an
exemption from tax on transfers of firearms to specified
Governmental entities and subdivisions thereof.  The term
"transfer" as defined in the Act includes "to sell, assign, pledge,
lease, loan, give away, or otherwise dispose of."  26 U.S.C.
5848(10)  The transfer provisions of the Act are intended to cover
all transactions in which the possession of firearms passes.  Von
Eichelberger v. United States, 252 F.2d 184 (C.A. 9, 1958).  Thus,
there would be two transfers involved in your leasing proposal--the
transfer of possession of the firearm to the law enforcement
agency, and a second transfer when the firearm is returned to you.

     There is no specific exemption from the transfer tax in the
Act covering transfers by law enforcement agencies to licensed
dealers.  The exemption from such a tax would have to depend on the
implied immunity from federal taxation as a State instrumentality. 
This immunity

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would not extend to the peace officers, designated in regulations
at section 179.104, 26 CFR, to whom National Firearms Act firearms
may, pursuant to section 5812(a)(2) of the Act, be transferred tax
exempt; and leased firearms returned by such peace officers to a
dealer--lessor would be subject to the transfer tax.  In this
regard it is pointed out that, under section 5811(b) of the
National Firearms Act, although the transferor is primarily liable
the transferee may become jointly and severally liable for the tax.

     This office will interpose no objection to a machine gun
leasing arrangement between a dealer qualified under the National
Firearms Act and any of the Governmental entities designated in
section 5812(a)(1), as "... the United States Government, any
State, Territory, or possession of the United States, or to any
political subdivision thereof, or to the District of Columbia." 
Such a leasing arrangement, if conducted in conformance with the
pertinent regulatory provisions of Part 179, 26 CFR, would be
exempt from the transfer tax imposed by section 5811 of the Act. 
Law enforcement agencies which are official instrumentalities of
the Governmental entities designated in section 5812(a)(1) would be
eligible for such a tax exempt leasing arrangement.  Individual
"peace officers" would not.

     As to the procedure for tax-exempt leasing to a Governmental
agency, the regulatory instructions relative to tax-exempt
transfers should be followed.  I am enclosing a copy of the
National Firearms Act regulations and call your attention
particularly to sections 179.104, 179.105 and 179.106.  There is no
requirement that the transferee Government agency sign any
document.  When a leased machine gun is returned to the lessor
under a tax-exempt leasing arrangement, the Government agency
transferor should execute a Form 5 (firearms) following the
instructions in section 179.105 of the regulations.  You are
reminded that as lessor, you would have the responsibility of
establishing the exempt status of 

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the transferee and the bona fides of the transaction in order to be
eligible for the exemption.

     Under the provisions of section 179.151, 26 CFR, a Form 3
(Firearms) need not be filed by you when you have reported the tax-
exempt transfer on a Form 5 (Firearms).  However, when the firearms
are returned, you should report their receipt on a Form 2
(Firearms) even though the Law enforcement agency has reported the
transfer on a Form 5 (Firearms).

     In connection with your question concerning the applicability
of the Federal Firearms Act to a Government lease arrangement, it
is pointed out that the provisions of that act would not apply to
firearms shipped to those Governmental entities designated in
section 5812(a)(1) of the National Firearms Act.

                         Very truly yours,



                         Harold A. Serr
                         Director, Alcohol and Tobacco Tax Division

Enclosure