Income & Expenses Summary

S Corporation Qualifies For Relief From Built-in Gains Tax.
The Service has ruled that an S corporation will qualify for transitional relief from the built-in gains tax of section 1374.
The S corporation, formerly organized as a C corporation, grows, harvests, and cuts its own timber. The corporation has had an election to consider cutting of timber as a sale or exchange, under section 631(a), for over fifty years. The corporation elected S corporation status effective 1993.
The Service ruled that the corporation's gain under section 631(a) on cutting timber during the recognition period is not subject to tax under section 1374. The Service also ruled that the corporation's income from the sale of logs and wood chips during the recognition period from timber the corporation cut on its timberland during the recognition period is not subject to tax under section 1374.
Full Text: LTR 9712027

S Corporation Qualifies For Relief From Built-in Gains Tax.
The Service has ruled that an S corporation will qualify for transitional relief from the built-in gains tax of section 1374.
A C corporation manufactures and sells products. The corporation owns timberland, cuts timber into logs on its timberland, and purchases logs from other timber growers to supply its facility. The corporation proposes to transfer its operating assets, including all of its inventory and a portion of its timberlands, to a newly formed C corporation subsidiary. The shareholders of the parent C corporation will sell some of their stock interest to the parent who in turn will contribute all of its stock to the newly formed subsidiary. The parent will make an S corporation election effective January 1, 1997. The parent will also make a section 631(a) election effective January 1, 1997.
The Service ruled that the parent corporation's gain under section 631(a) on cutting timber during the recognition period is not subject to tax under section 1374. The Service also ruled that the parent's income from processing and selling its products during the recognition period from timber it cut on its timberlands during the recognition period is not subject to tax under section 1374. Finally, the Service ruled that the parent's income from processing and selling its products during the recognition period from logs it purchases from other timber growers during the recognition period is not subject to tax under section 1374.
Full Text: LTR 9712028

S Corporation Qualifies For Relief From Built-in Gains Tax.
The Service has ruled that an S corporation will qualify for transitional relief from the built-in gains tax of section 1374.
A C corporation grows and harvests timber. The corporation intends to make an S corporation election and a section 631(a) election, both effective in 1997.
The Service ruled that the corporation's gain under section 631(a) on cutting timber during the recognition period is not subject to tax under section 1374. The Service also ruled that the corporation's income from sale of logs during the recognition period from timber it cuts on its timberlands during the recognition period is not subject to tax under section 1374.
Full Text: LTR 9719032

Timber Not Subject to Built-In Gains Tax
The Service has ruled that an S corporation will qualify for transitional relief from the built-in gains tax of section 1374 for gain on timber.
A C corporation grows and harvests timber. The corporation intends to make an S corporation election and a section 631(a) election, both effective in 1997.
The Service ruled that the corporation's gain under section 631(a) on cutting timber during the recognition period is not subject to tax under section 1374. The Service also ruled that the corporation's income from sale of logs during the recognition period from timber it cuts on its timberlands or purchases from other timber growers during the recognition period is not subject to tax under section 1374.
Full Text: LTR 9726015

S Corporation Qualifies For Relief From Built-in Gains Tax.
The Service has ruled that an S corporation will qualify for transitional relief from the built-in gains tax of section 1374.
A C corporation grows and harvests timber. The corporation intends to make an S corporation election and a section 631(a) election, both effective in 1997.
The Service ruled that the corporation's gain under section 631(a) on cutting timber during the recognition period is not subject to tax under section 1374. The Service also ruled that the corporation's income from sale of logs during the recognition period from timber it cuts on its timberlands during the recognition period is not subject to tax under section 1374.
Full Text: LTR 9729017

S Corporation Qualifies For Relief From Built-in Gains Tax.
The Service has ruled that an S corporation will qualify for transitional relief from the built-in gains tax of section 1374.
A C corporation grows and harvests timber. The corporation intends to make an S corporation election and a section 631(a) election, both effective in 1997.
The Service ruled that the corporation's gain under section 631(a) on cutting timber during the recognition period is not subject to tax under section 1374. The Service also ruled that the corporation's income from sale of logs during the recognition period from timber it cuts on its timberlands during the recognition period is not subject to tax under section 1374. An entity owned by the corporation will no longer be eligible to be treated as a partnership, the Service also concluded.
Full Text: LTR 9732030

S Corporation Qualifies For Relief From Built-In Gains Tax
The Service has ruled that an S corporation will qualify for transitional relief from the built-in gains tax of section 1374.
A C corporation grows and harvests timber. The corporation made an S corporation election effective January 1, 1997, and has a section 631(a) election currently in effect.
The Service ruled that the corporation's gain under section 631(a) on cutting timber during the recognition period is not subject to tax under section 1374. The Service also ruled that the corporation's income from sale of logs during the recognition period from timber it cuts on its timberlands during the recognition period is not subject to tax under section 1374.
Full Text: LTR 9739046

Timber Income Not Subject to Built-in Gains Tax
The Service has ruled that an S corporation will not be subject to the built-in gains tax of section 1374 on the disposition of timber under a pay-as-cut contract.
The S corporation, formerly organized as a C corporation, grows, harvests, and cuts its own timber. The corporation plans to sell timber under a pay-as-cut contract under which payments the corporation receives are for timber actually cut.
The Service ruled that provided the period of the contract does not exceed two years, the corporation's income under the contract during the recognition period will not be subject to tax under section 1374. The Service also ruled that the corporation's income from the sale of logs during the recognition period from timber the corporation cuts during the recognition period will not be subject to tax under section 1374.
Full Text: LTR 9802005

Amounts Realized by Foundation Under Timber Contract Are Not UBTI
The Service has ruled that amounts realized by a foundation under timber cutting contracts will not be unrelated business taxable income under section 512(b)(5).
The private foundation is recognized as exempt under 501(c)(3). One of its trustees proposes to make contributions of timber (via donative timber deeds) to the foundation to enable it to accomplish its charitable purposes. Under the conveyance, if the foundation fails to complete logging and removal of the timber within seven years, any timber remaining will revert to the trustee. The reversion provision will remove the burdens and responsibilities of maintaining nonproductive timber assets imposed by the state. The foundation proposes to dispose of the donated timber by entering into agreed volume timber cutting contracts or scaled volume timber cutting contracts.
The Service determined that the gains from sale of the timber interests should not be considered capital gain income for purposes of the tax on net investment income under section 4940. The Service further determined that the foundation will not be engaged in a business enterprise under section 4943(d)(3). The expiration of interests in uncut timber and reversion to the trustee will not be an act of self-dealing under section 4941(d)(1) or a taxable expenditure under section 4945, the Service continued. Finally, the Service ruled that the amount realized from the dispositions under the scaled volume timber cutting contract and the agreed volume timber cutting contracts will not be unrelated business taxable income under section 512(b)(5).
Full Text: LTR 9815056

Nursery May Deduct Cost of Trees
The Service has ruled in technical advice that a nursery may deduct the cost of trees under reg. section 1.162-12. The nursery purchases bare root trees, many as whips (essentially a stick with roots and no branches), and grows them for a minimum of five years before their ultimate sale. When the nursery sells the trees, they are sold with the dirt ball attached. The nursery purchases new bare root trees annually to replenish trees that are sold or that do not survive. The nursery elected under section 263A(d)(3) not to be subject to the uniform capitalization rules.
The Service concluded that because the trees require significant development and cultivation by the nursery to ensure their survival and future marketability, the purchased trees are subject to the treatment accorded "seeds and young plants" under reg. section 1.162- 12 and their cost is deductible in the year of purchase.
Full Text: LTR 9818006

Timber Contract Satisfies Gain or Loss Provisions
The Service has ruled that a private foundation's disposition of donated timber in which the foundation has a retained interest will satisfy the requirements of section 631(b).
A contributor donated timber to a private foundation and held the timber for more than one year before the donation. The foundation plans to sell the timber to a buyer who has agreed to cut and remove it.
The Service said the buyer has a contractual obligation to cut specified timber that satisfies section 631(b).
Full Text: LTR 9822020

Income From Sale of Engineered Wood Products Is 'Qualifying Income'
The Service has ruled that a publicly traded partnership's income from the sale of engineered wood products is qualifying income under section 7704(d)(1)(E).
A publicly traded partnership produces engineered wood products that it sells to domestic and foreign customers. It also provides ancillary marketing services in conjunction with the sales.
The Service also ruled that income earned from the marketing services also qualified under section 7704(d)(1)(E).
Full Text: LTR 9822034

Income From Sale of Wood Products Is "Qualifying Income"
The Service has ruled that a limited partnership's income from the sale of wood products is qualifying income under section 7704(d)(1)(E).
Full Text: LTR 9822035

Coal Royalties Not Passive Investment Income
The Service has ruled that coal royalties that qualify for gain treatment under section 631(c) will not be passive investment income under section 1362(d)(3)(C) and the gains will not be subject to the built-in gains tax under section 1374.
The common parent of an affiliated group is in the coal business. The parent's income and that of its subsidiaries consists of coal royalties and overriding royalties from coal reserves. The parent plans to liquidate three of its subs in an upstream merger. After the merger, the parent will make an S election and will file elections to treat its remaining subs as qualified subchapter S subsidiaries.
Full Text: LTR 9825008

Timber Not Subject to Built-In Gains Tax
The Service has ruled that an S corporation will qualify for transitional relief from the built-in gains tax of section 1374 for gain on timber.
A C corporation grows and harvests timber. It has a long-term contract with another logging operation B, in which B harvests timber from tracts owned by the C corporation. B compensates the C corporation for timber it cuts and removes. The C corporation intends to make an S corporation election and a section 631(a) election, both effective in 1999.
The Service ruled that the corporation's gain under section 631(a) on cutting timber during the recognition period is not subject to tax under section 1374. The Service also ruled that the corporation's income from the deemed sale of timber under section 631(b) is not subject to tax under section 1374.
Full Text: LTR 9825018

Timber Not Subject to Built-In Gains Tax
The Service has ruled that an S corporation's timber income will not be subject to the built-in gains tax under section 1374.
The corporation grows and harvests timber and sells timber products such as logs. The corporation plans to elect to treat the cutting of timber as a sale or exchange under section 631(a). The Service concluded that gain during the recognition period on the cutting of timber under section 631(a) or from the sale of logs will not be subject to tax under section 1374.
Full Text: LTR 9826016

Timber Not Subject to Built-In Gains Tax
The Service has ruled that an S corporation's timber income will not be subject to the built-in gains tax under section 1374.
The corporation grows and harvests timber and sells timber products such as logs. When the corporation was a C corporation, it elected to treat the cutting of timber as a sale or exchange under section 631(a). The corporation also disposes of timber under a cutting contract. The corporation elected S corporation status.
The Service concluded that gain during the recognition period on the cutting of timber under section 631(a), from the sale of logs, or from the disposition of timber under section 631(b) will not be subject to tax under section 1374.
Full Text: LTR 9826017

Group's Restructuring Is Tax-Free
The Service has ruled that the restructuring of a consolidated group is tax-free under section 351, and that timber income won't be subject to the tax on built-in gain after the corporations elect subchapter S status.
A holding company was the parent of a consolidated group that conducted two business through multiple-tiers of subsidiaries. The holding company owned Sub 1; Sub 1 owned Sub 2, Sub 3, and Sub 4; and Sub 3 owned Sub 5, Sub 6, Sub 7, and Sub 8. Sub 1 uses the LIFO inventory method. Sub 2, which is a foreign sales corporation, uses the administrative pricing rules under section 925(a)(1) or (2). Sub 3 is engaged in timber operations and it elected to treat the cutting of timber as a sale or exchange under section 631(a). Sub 3 also disposes of timber under a cutting contract.
Sub 6, Sub 7, and Sub 8 liquidated under sections 332 and 337. Sub 1 transferred its business assets, including inventory, and Sub 2 to Newco in exchange for Newco stock and Newco's assumption of Sub 1's business liabilities. The holding company merged into Sub 1, and Sub 1 will now elect subchapter S status and elect to treat Sub 3, Sub 4, and Sub 5 as qualified subchapter S subsidiaries. Sub 2 and Newco will remain C corporations.
The service ruled the transfer by S1 to Newco is tax-free and that Newco is not required to treat inventory received in the exchange as separate from otherwise identical inventory. Further, Sub 1 does not have to include in income any LIFO recapture, and section 1248 does not apply to the S election or the transfer of Sub 2 to Newco. The Service also concluded that Sub 3's gain during the recognition period on the cutting of timber under section 631(a), from the sale of logs, or from the disposition of timber under section 631(b) will not be subject to tax under section 1374.
Full Text: LTR 9827020

Receivables Marked to Market
The Service has ruled in technical advice that a lumber dealer that changed to the mark-to-market method of accounting must mark to market its transition receivables generated on sales of lumber and building materials. The dealer extends credit to customers on the sale of lumber and building materials.
The dealer has not sold any of its receivables. It used the automatic consent procedure in Rev. Proc. 97-43, 1997-39 IRB 12, to change its accounting method to the mark-to-market method and elected to waive the customer paper exception to the mark-to- market rules.
The dealer's books and records when transition receivables (those acquired before November 1, 1997) were generated did not contain statements that the transition receivables were either held for investment or held for sale to customers. Under holding 15 of Rev. Proc. 97-39, 1997-39 IRB 4, the dealer resolved the ambiguity as to whether the transition receivables were properly identified by placing a statement in its books and records that the transition receivables are not exempt from the mark-to-market rules as either held for investment or not held for sale.
Full Text: LTR 9836002

Timber Not Subject to Built-In Gains Tax�
The Service has ruled that a timber company will not recognize gain from net unrealized built-in gains or the sale of timber on the date it converts into a real estate investment trust (REIT).
A corporation grows and harvests timber on large tracts of unimproved timberlands. It has a contract with another company in which the second company will cut, remove, and pay for the timber it cuts on the corporation's land. The contract will be governed under section 631(b). Under a restructuring, it will change its tax year to conform to a calendar year on a specific date and elect REIT status. Moreover, the corporation also plans to make an election to be subject to rules similar to section 1374.
The Service ruled that the corporation's disposition of timber cut under the contract will meet the requirements of section 631(b) for timber held for more than one year at the time it is cut. Also, the Service ruled that, provided the company makes the election provided for in Notice 88-19, it will not be subject to tax on its net unrealized built-in gains on the date it elects REIT status. Further, the Service said that the company's gain on dispositions of timber under the contract will not be subject to tax under section 1374.
Full Text: LTR 9911035

Partnership Gains Treated as Qualifying Income�
The Service has ruled that income and gains recognized by a limited partnership (LP) from the sale of glued wood products, including plywood and particle board, will be treated as qualifying income when determining gross income requirements under section 7704.
The LP owns and operates timberland properties and timber processing operations. Through several operating limited partnerships, the LP primarily grows timber for sale in domestic and export markets and the processing of timber into lumber and chips. It also owns and operates a wood products purchase and resale business. The LP wants to expand into the business of selling glued wood products that it will either buy from other producers or produce itself. It will sell the glued wood products to a variety of purchasers including home improvement chains, lumber yards, furniture companies, cabinet makers, prefabricated home builders, and residential and commercial construction companies.
Full Text: LTR 9932024

Fig Tree Growers Subject to Uniform Capitalization Rules�
The Service has ruled in technical advice that fig tree growers are subject to cost capitalization under section 263A because the nationwide weighted average preproductive period of fig trees is more than two years. The Service also ruled that to qualify as a marketable quantity under reg. section 1.263A-4T(c)(4)(ii)(B), a crop or yield must generate sufficient revenues to cover both the direct costs of its harvest and to contribute more than a de minimus amount towards recovering the direct and indirect costs of producing the plants and the crop or yield.
The Service said that the preproductive period of fig trees begins when the plant is propagated and ends when the first marketable crop or yield is produced. The Department of Agriculture provided information indicating that fig trees do not begin to produce in commercially significant quantities until the sixth year after planting. Accordingly, the Service concluded that the nationwide weighted average preproductive period for all varieties of fig trees is in excess of two years, thereby subjecting all fig trees growers to cost capitalization under section 263A.
In so deciding, the Service rejected the grower's evidence regarding the preproductive period of fig trees because it improperly measured the preproductive period by indivisible tax years in which the events that begin and end the preproductive period were deemed to occur on the first day of the year rather than using calendar days. Additionally, the Service rejected the grower's reliance on a university study, which stated that fig trees generally begin bearing an "economic crop" in the third year after planting. The Service found that the grower equated "economic crop" with a marketable crop or yield for purposes of temp. reg. section 1.263A-4T(e)(3)(A)(l) and argued that the preoproductive period of fig trees is two years because their third year is productive. However, the Service found that the harvesting of the marketable crop occurs within the third year, and thus the study describes a preproductive period that exceeds two years as measured in calendar length.
With respect to producing marketable quantities, the Service stated that there were no authorities that directly discuss when a plant becomes productive in marketable quantities for purposes of temp. reg. section 1.263A-4T(c)(4)(ii)(B). However, the Service noted that Rev. Rul. 71-488, 1971-2 CB 60, Rev. Rul. 78-264, 1978-2 CB 9, and Ribbon Cliff Fruit Company v. Commissioner, 12 BTA 13, 15 (1928) considered the similar issue of when plants are sufficiently productive to be considered as being placed into service for purposes of depreciation.
A marketable quantity, the Service held, means something more than a de minimus crop or yield. Rather, to qualify as a marketable quantity, a crop or yield must generate sufficient revenues both to cover the direct costs of its harvest and to contribute more than a de minimus amount towards recovering the direct and indirect costs of producing the plants and the crop or yield. The Service noted that because production of a plant is not profitable on a financial or tax accounting basis during a particular tax year does not, in itself, preclude the production of a marketable crop from that plant during the year. Profitability is affected by many variables unrelated to the productive capacity of the plants such as weather, commodity prices, disease, and pests.
Full Text: TAM 9929001

Grape Vine Growers Subject to Capitalization under Section 263A�
The Service has ruled in technical advice that wine grape vine growers are subject to cost capitalization under section 263A because the nationwide weighted average preproductive period of wine grape vines is more than two years.
The Service found that the actual preproductive period of wine grape vines ends with the harvest of a marketable quantity of wine grapes. Based on information provided by the Department of Agriculture indicating that grape vines do not begin to produce in commercially significant quantities until the fourth year after planting, the Service concluded that the nationwide average preproductive period for wine grape vines is in excess of two years thereby subjecting all growers to cost capitalization under section 263A. The Service rejected the grower's evidence regarding the preproductive period of grape vines because the growers calculated the preproductive period by counting the number of annual growing cycles completed rather than the calendar time elapsed and failed to include in the preproductive period the time between the grafting of the varietal grapes onto the rootstock and the planting of the resulting plant in the field.
The Service also determined the year in which the growers produced a marketable quantity of wine grapes to be the year when the actual preproductive period of the vines ended. To qualify as a marketable quantity, a crop or yield must generate sufficient revenues both to cover the direct costs of its harvest and to contribute more than a de minimus amount towards recovering the direct and indirect costs of producing the plants and the crop or yield. The Service rejected the growers claim that a crop is marketable when the income from that crop exceeds the direct costs of harvest.
The Service also found that the growers failed to make an effective election for the cost capitalization rules not to apply to their wine grape vine production. The growers failed to make the election by including an express statement on the return for the tax year of election, did not make an implicit election by failing to capitalize costs of producing property in a farming business as otherwise required by section 263A, and did not use the alternative depreciation system for all depreciable property placed in service as required by section 263A(e).
Full Text: TAM 9946003