• Home
• Federal Income Taxes
• State Tax Laws
• Estate Planning
• Publications
• Professional Research
  • Master Index
  • Case Law
  • Revenue Rulings
  • Private Letter Rulings
  • Regulations
  • Internal Revenue Code
  • Public Laws
  • Research Process
• Tax Workshops/Education
• Tax Policy
• Links

Revenue Ruling 75-429, 1975-2 CB 312

REV-RUL, DISC's grain conditioning; export property., Rev. Rul. 75-429, 1975-2 CB 312, (Jan. 01, 1975)

Section 993.--Definitions

[IRS Headnote] DISC's grain conditioning; export property.--
The blending, drying, aerating, and cleaning of grain by aerating, and cleaning of grain by a DISC at its storage and barge loading facilities, the cost of which accounts for no more than 5 percent of the cost of the grain sold, do not constitute manufacturing or production within the meaning of section 993(c)(1)(A) of the Code and the grain qualifies as export property; Rev. Rul. 71-359 distinguished.

[Text]

Advice has been requested whether the blending, drying, aerating, and cleaning of grain is manufacturing or production within the meaning of section 993(c)(1)(A) of the Internal Revenue Code of 1954.

A Domestic International Sales Corporation (DISC) acts as a commission agent for its parent corporation's export sales of domestically grown grain. The DISC also maintains facilities for barge loading of grain and grain storage bins at which the DISC conditions some of the grain purchased by its parent corporation by blending, drying, aerating, and cleaning. The cost of blending, drying, aerating, and cleaning a batch of grain accounts for no more than 5 percent of the cost of goods sold of each batch.

Section 991 of the Code provides that for purposes of the Federal income tax, a DISC shall not be subject to Federal income taxes except those imposed by chapter 5, subtitle A of the Code.

Section 992(a) of the Code provides, in part, that 95 percent or more of the gross receipts of a DISC must consist of "qualified export receipts."

Section 993(a) of the Code provides, in part, that qualified export receipts include gross receipts from the sale, exchange, or other disposition of "export property."

Section 993(c)(1)(A) of the Code provides, in part, that export property must be property that is manufactured, produced, grown, or extracted in the United States by a person other than a DISC.

Property is manufactured or produced by a person for purposes of section 993(c) of the Code: (1) if such property is substantially transformed by such person; (2) if the operations performed by such person in connection with such property are substantial in nature and are generally considered to constitute the manufacture or production of property; or (3) if with respect to such property conversion costs (direct labor and factory burden including packaging or assembly) of such person account for 20 percent or more of the cost of goods sold or inventory amount of such person for such property if such property is sold or held for sale.

The conditioning processes performed on a batch of grain by the DISC in this case do not result in a substantial transformation, are not substantial in nature, and their cost does not account for 20 percent or more of the cost of goods sold of each batch. Thus, the processes are other than manufacturing or production by the DISC within the meaning of section 993(c)(1)(A) of the Code.

Compare Schuyler Grain Co. v. Commissioner, 50 T.C. 265 (1968), acq., 1971-2 C.B. 3, aff'd, 411 F.2d 649 (7th Cir. 1969), in which the Tax Court of the United States held that aerating, drying, and blending of grain were production activities and that the taxpayer's grain storage facilities were used in connection with those activities. Rev. Rul. 71-359, 1971-2 C.B. 61, provides that the Service will no longer litigate the issue presented in Schuyler and on this basis holds that a structure used for the storage of raw peanuts prior to processing qualifies as "section 38 property" for investment credit purposes.

The Schuyler case and Rev. Rul. 71-359 are distinguishable from the instant case. The aerating, drying, and blending of grain described in Schuyler (and referred to in Rev. Rul. 71- 359) were held by the court to be activities in connection with production as that phrase was used in section 48. However, these activities are only a few in a line of activities necessary to produce the property, and such activities do not, in and of themselves, constitute production within the meaning of section 993(c) of the Code.

Accordingly, the grain in the hands of the taxpayer qualifies as export property, as defined in section 993(c) of the Code.