Legally Armed: V19N5

By by Teresa G. Ficaretta, Esq. & Johanna Reeves, Esq.

Legal News from the Nation’s Capital

ATF Publishes Ruling 2015-1 with New Rules for Persons Who Machine Unfinished Frames/Receivers

On January 2, 2015, the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) published ATF Rul. 2015-1, reversing its longstanding position that persons who machine unfinished receivers or otherwise produce a firearm with parts or materials furnished by customers are not required to have manufacturer’s licenses. The ruling is accessible on ATF’s website at www.atf.gov/sites/default/files/assets/Firearms/FirearmsIndustry/atf-ruling-2015-1-manufacturing-and-
gunsmithing.pdf.

Background

The Gun Control Act of 1968 (GCA), 18 U.S.C. Chapter 44, requires persons who engage in the business of importing, manufacturing, or dealing in firearms to obtain a license from ATF. The term “manufacturer” is defined in 18 U.S.C. § 921(a)(10) as any person engaged in the business of manufacturing firearms or ammunition for purposes of sale or distribution. The term “dealer” is defined by 18 U.S.C. § 921(a)(11)(B) and in ATF regulations at Title 27 of the Code of Federal Regulations to include “any person engaged in the business of repairing firearms or of making or fitting special barrels, stocks, or trigger mechanisms to firearms…” (27 C.F.R. § 478.11). This type of dealer is commonly referred to as a “gunsmith.” The marking requirements of the GCA apply to firearms imported by a licensed importer or manufactured by a licensed manufacturer. 18 U.S.C. § 923(i). Firearms altered or manufactured by a licensed dealer/gunsmith are not subject to the
marking requirements.

Before issuance of Ruling 2015-1, ATF took the position that persons who repair, alter, or manufacture firearms from parts or materials supplied by a customer are not required to obtain a manufacturer’s license. ATF allowed such activities to be accomplished with a gunsmith/dealer license on the basis that there was no sale or distribution of the firearms that were altered or manufactured. This position is apparent in ATF Rul. 2009-1, addressing gunsmiths who camouflage or engrave firearms and do not need a manufacturer’s license; ATF Rul. 2009-2, addressing persons who install drop-in replacement parts on firearms and do not require a manufacturer’s license; and ATF Rul. 2010-10, addressing gunsmiths who repair or alter firearms on behalf of licensed manufacturers or licensed importers. All of these rulings discuss the determinative factor of whether operations conducted are done for the purposes of sale or distribution. Even minor alterations to firearms, such as bluing, powder-coating, or heat-treating, require a manufacturer’s license if done for purposes of sale or distribution. By contrast, assembling a firearm from component parts or raw materials could be lawfully accomplished with a dealer/gunsmith license if done with materials furnished by an individual customer, who is charged merely for labor and parts. See ATF Rul. 2010-10, citing Rev. Rul. 55-342, issued by ATF’s predecessor, the Internal Revenue Service. Indeed, even if some or all of the materials are furnished by the gunsmith, ATF has allowed licensed gunsmiths to conduct such operations if done on the order of a particular customer. See Rev. Rul. 55-342.

A Question and Answer on ATF’s website as of the date of this writing (http://www.atf.gov/faq-page/336#t336n12581), makes ATF’s position clear. The question and relevant portions of the answer are as follows:

May a person engage in gunsmithing under a dealer’s license (type 01), or do gunsmiths need to be licensed as “manufacturers” of firearms?

Generally, a person engaged in gunsmithing requires only a dealer’s license (type 01). There are circumstances in which a gunsmith might require a manufacturing license. Generally, a person should obtain a license as a manufacturer of firearms if the person is: 1. performing operations which create firearms or alter firearms (in the case of alterations, the work is not being performed at the request of customers, rather the person who is altering the firearms is purchasing them, making the changes, and then reselling them), 2. is performing the operations as a regular course of business or trade, and 3. is performing the operations for the purpose of sale or distribution of the firearms.

This FAQ cites several examples of operations performed on firearms, and guidance as to whether or not ATF would consider such operations to be manufacturing under the Gun Control Act (GCA). Example number 5 is as follows:

5. A company receives firearm frames from individual customers, attaches stocks and barrels and returns the firearms to the customers for the customers’ personal use.

The operations performed on the firearms were not for the purpose of sale or distribution. The company should be licensed as a dealer or gunsmith, not as a manufacturer of firearms.

This question and answer make it clear that even where the gunsmith provides some of the parts for assembly of the complete firearm, no sale or distribution occurs as long as the manufacture takes place on behalf of a particular customer. ATF Rul. 2015-1 does not change this long-standing position, as the holdings are limited to persons who create firearms frames or receivers from raw materials or blanks or alter frames/receivers on behalf of unlicensed customers. However, we wish to provide a complete picture of ATF’s pre-ruling positions to put ATF Rul. 2015-1 in context.

Significantly, the GCA does not prohibit the manufacture of a firearm by an unlicensed person for his or her personal use. ATF has long recognized this right, most recently in questions and answers on unfinished receivers posted on its website on October 23, 2014 (see the “Pressroom” heading on ATF’s website, question 9 accessible at http://www.atf.gov/content/contact-us/pressroom/receiver-blanks-Q%26As). Firearms manufactured by an individual for personal use are not subject to the marking requirements of the law, and ATF has recently expressed concern over its inability to trace such firearms if they are recovered by Federal, State, or local law enforcement agencies. See questions 6 and 7 in the October 23, 2014, ATF press release at http://www.atf.gov/content/contact-us/pressroom/receiver-blanks-Q%26As).

ATF Rul. 2015-1

ATF Rul. 2015-1 states that ATF has received inquiries from the public asking whether Federal firearms licensees (FFLs) or unlicensed machine shops may engage in the business of completing or assisting in the completion of firearm frames or receivers for unlicensed individuals without being licensed as a manufacturer of firearms.

The ruling notes that unlicensed individuals occasionally purchase castings or machined bodies, sometimes referred to as “blanks” or “80 percent receivers,” that have not yet reached a stage of manufacture where they are classified as “firearm frames or receivers” under the GCA. The ruling then states that such items generally require substantial additional machining before they can accommodate fire control components such as a trigger, hammer, or sear and be used to expel a projectile. ATF states that unlicensed purchasers propose to take unmarked blanks, frames or receivers to a licensed gunsmith or a machine shop for further machining and finishing so it can be assembled into a complete firearm. The FFLs or machine shops would use their equipment to finish the blank or frame or receiver into one that can be used to assemble a complete, functional firearm.

After summarizing the relevant statutory definitions, the ruling then cites ATF Rul. 2010-10 in which the agency addressed the repair, modification, and assembly of firearms by licensed gunsmiths on behalf of licensed manufacturers or licensed importers. This ruling gives an excellent summary of ATF’s historical positions on gunsmithing versus manufacturing and includes a
citation to the 1955 Revenue Ruling, which may be the oldest published evidence of these positions. ATF Rul. 2010-10 held that gunsmiths who alter firearms owned by and on behalf of licensed importers or licensed manufacturers may do so without obtaining a manufacturer’s licensed as long as certain conditions are met. These conditions include (1) the firearms must not be owned, in whole or part, by the gunsmith; (2) the firearms must be returned to the importer or manufacturer upon completion of the gunsmith’s alterations or other processes; (3) The firearms must already be properly marked by the importer or manufacturer before the gunsmith receives them.

Significantly, before ATF issued Rul. 2010-10, the agency took the position that all alterations and assembly of firearms (except those outlined in ATF Rul. 2009-1 and 2009-2) for purposes of sale or distribution required a manufacturer’s license. Thus, ATF Rul. 2010-10 was a liberalizing ruling that allowed more firearms processes to be conducted with a gunsmith’s license rather than a manufacturer’s license. The language in ATF Rul. 2010-10 referring to the operations performed by gunsmiths under contract with manufacturers or importers has been widely viewed by members of the firearms industry as including all possible firearms processes that were not already addressed in the 2009 rulings.

ATF distinguishes ATF Rul. 2010-10 on the basis that it addresses only activities “traditionally performed by gunsmiths.” These activities are identified as “repairing, modifying, embellishing, installing parts, or specialized finishing of functional frames or receivers.” This summary of the holding of ATF Rul. 2010-10 ignores the language that references “repairs, modifies, embellishes, refurbishes, or installs parts in or on firearms (frames, receivers, or otherwise).” ATF states that these traditional gunsmith activities do not include, and the Ruling does not directly address, the machining/manufacturing necessary for the frame/receiver to be created or the steps to make it suitable for use in assembling a weapon which will expel a projectile by the action of an explosive. Readers should carefully compare this conclusion with the language in the holding of ATF Rul. 2010-10. As noted, the 2010 ruling is viewed within the firearms industry as running the gamut of possible manufacturing activities, including machining blanks and finishing receivers. The language that refers to installing parts in or on firearms (including receivers) is easily and credibly interpreted to include machining so that fire control components can be installed. ATF also distinguishes ATF Rul. 2010-10 on the basis it was limited to FFL-to-FFL transfers, concluding that as to these types of transfers, no sale or distribution occurs that would require a manufacturing license.

Machining or Manufacturing of Frames or Receivers

ATF Rul. 2015-1 then addresses activities it characterizes as “machining or other manufacturing of frames or receivers.” The ruling notes that machining a blank or otherwise manufacturing an existing frame or receiver to make it suitable for use as a weapon which will expel a projectile by the action of an explosive, results in an act of manufacturing that is not the type of activity that can be conducted with a gunsmith license. ATF then gives as an example of manufacturing activity machining of an AR-type blank or receiver by removing material from the cavity so that fire-control components may be installed. The ruling then again mentions ATF Rul. 2010-10, which it notes does not mention machining or other manufacturing necessary for the frame or receiver to be created or any steps necessary to assemble a weapon which will expel a projectile by the action of an explosive.

ATF’s Definition of “Distribution”

The concept of “distribution” is critical in determining the type of license required for different types of repairs, alterations, and other firearms production activities, as the term is used in the statutory definitions of “manufacturer” and “dealer.” If there is no “distribution” of the firearms that are manufactured or altered, then no manufacturer’s license is required.

The term “distribution” is not defined in the law or regulations, but ATF creates a definition for “distribution” in ATF Rul. 2015-1, as follows:

No distribution occurs if:

1. The processes used by the gunsmith do not actually create a frame/receiver and do not make an existing frame/receiver suitable for use in assembling a weapon capable of expelling a projectile. These activities would not amount to a distribution when the firearm is returned to a customer even if the customer is unlicensed. Accordingly, a gunsmith’s license is sufficient for such activities.

2. The gunsmith receives marked frames/receivers or firearms from a licensed importer or licensed manufacturer, then alters them in accordance with a contract from the transferor, then returns them to the licensed importer or licensed manufacturer. Although this is not crystal clear from the ruling, the language suggests that even if such activities cross the line into manufacturing (i.e., making an existing frame/receiver suitable for use in assembling a
weapon capable of expelling a projectile), no distribution occurs when the firearm is returned to the licensee. ATF notes that these activities occur as part of the manufacturing process and may take place with a gunsmith’s license.

Conversely, a distribution occurs if:

1. A gunsmith receives from unlicensed individuals raw materials, a blank, or a receiver that is not suitable for use in assembling a weapon capable of expelling a projectile. The gunsmith machines the items so that a frame/receiver or a complete, functional firearm is made, then returns it to the unlicensed individual. ATF advises that return of the firearm amounts to a “distribution” and that a manufacturer’s license is required. This is the case even if all parts and materials are furnished and owned by the customer.

Machine Shops Assisting Consumers with Manufacturing Firearms

The last portion of ATF Rul. 2015-1 addresses use of machine shops, whether licensed under the GCA or not, by unlicensed individuals who bring in raw materials, blanks, unfinished frames or receivers and/or other firearms parts for the purpose of creating operable firearms. The ruling notes that customers are assisted by the FFL or machine shop in using the machinery, tools, or equipment needed to complete the frame or receiver or complete weapon. A fee is generally charged for such activity or some other compensation or benefit given in return for the machine shop’s services.

ATF states that businesses may not avoid the manufacturing license, marking, and record keeping requirements of the GCA by allowing unlicensed persons to use their machinery and equipment to make firearms. ATF Rul. 2015-1 holds that by allowing use of their equipment in the manufacture of firearms the businesses are engaged in the business of manufacturing the firearms and that a “distribution” of the firearm occurs when the firearm is returned to the customer.

Impact of ATF Rul. 2015-1

ATF’s interpretation as expressed in the ruling will require unlicensed machine shops and licensed gunsmiths who machine blanks or complete receivers so they can be used to assemble operational firearms to obtain manufacturer’s licenses under the GCA if they are conducting such operations on behalf of unlicensed purchasers. This is true even if all the materials are furnished by the customer and the customer performs machining or finishing operations using equipment owned by the business. The ruling will also require that such firearms be marked, recorded in acquisition and disposition records, and transferred in accordance with the Brady law and all other provisions of the GCA. The ruling will also result in a requirement for newly licensed manufacturers to register as manufacturers under the Arms Export Control Act, as required by State Department regulations in 22 C.F.R. §122.1. Current registration fees are at a minimum $2,250 per year, a significant sum, particularly for small businesses. The combination of fees and government regulation may result in
closing of businesses.

The ruling will have a significant impact on consumers who choose to manufacture their own firearms with the assistance of gunsmiths or unlicensed machine shops. Consumers rely on this method of firearms acquisition to save money and, in some cases, to avoid having their names recorded in FFL records that are available to the government. Only consumers with the equipment and know-how to manufacture their firearms without assistance from others will be able to continue this practice.

Consumers who need the services of a gunsmith or machine shop to machine blanks or complete a firearm frame or receiver would be well advised to ask whether the business holds a license as a manufacturer under the GCA. Doing business with unlicensed entities or licensed gunsmiths could implicate consumers in inadvertent violations of the licensing and marking provisions of the statute. It is unlikely the United States Attorneys’ offices would be interested in indicting consumers for conspiring with the machine shops to violate these provisions or aiding and abetting in their commission. However, firearms involved in violations of the GCA are subject to administrative seizure and forfeiture, a tool within reach of ATF without the involvement of the United States Attorney. Unlicensed persons who wish to avoid this risk should steer clear of unlicensed and improperly licensed machine shops and gunsmiths and deal only with licensed manufacturers.

Conclusion

ATF Rul. 2015-1 reverses over 50 years of agency practice allowing the lawful manufacture of firearms by gunsmiths and machine shops on behalf of unlicensed consumers. ATF and the Department of Justice argue they are concerned about unmarked and untraceable firearms making their way into commercial channels. As valid a concern this may be, one cannot escape the fact that this “absurd result” has been going on without government intervention since before the GCA was enacted in 1968. Such a dramatic change in position without public input through the rulemaking process may indeed result in litigation and/or legislative action.

The information in this article is for informational purposes only and is not intended to be construed or used as legal advice.

About the authors

Johanna Reeves is the founding partner of the law firm Reeves & Dola, LLP in Washington, DC (www.reevesdola.com). For more than ten years she has dedicated her practice to advising and representing U.S. companies on compliance matters arising under the federal firearms laws and U.S. export controls.

Teresa Ficaretta is one of the country’s foremost experts on ATF regulations under the Gun Control Act, the National Firearms Act, the Arms Export Control Act and Federal explosives laws. Before joining Reeves & Dola in 2013, Teresa served as legal counsel to ATF for 26 years, followed by two years as Deputy Assistant Director in Enforcement Programs and Services. They can be reached at (202) 683-4200.