PLR 1314025: IRS finds orchard processing and bulk-kernel sales closely related to an existing partnership business

Plain-English summary

An electing 1987 publicly traded partnership that grew and harvested a redacted crop planned to add drying, cracking, and shelling operations and sell the resulting bulk kernels to non-retail buyers. The partnership asked whether those activities would be closely related to its pre-existing business and therefore would not be a substantial new line of business under IRC § 7704(g)(2). The IRS approved the request based on the processing steps, the relationship between the activities, and the shared industry classifications. The ruling did not cover smaller sales, retail sales, or additional processing such as roasting, salting, or flavoring.

Ruling snapshot

• Question: Are the specified crop-processing and bulk-kernel sales activities closely related to the partnership's pre-existing business under § 7704(g)(2)?
• Outcome: Approved, based solely on the submitted facts and representations.
• Key authorities: IRC § 7704(g); Treas. Reg. § 1.7704-2

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201314025 Third Party Communication: None
Release Date: 4/5/2013 Date of Communication: Not Applicable
Index Number: 7704.05-00
Person To Contact:
-------------------------------------------------- -----------------------, ID No. -------------------
------------------------------------------ ---------------------------------------------------
---------------------------------- Telephone Number:
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Refer Reply To:
CC:PSI:B01
PLR-138329-12
Date:
January 08, 2013

Legend

X= -------------------------------------------

Y= ----------------------------------------------

Crop = -----------------------

State = ----------

a= --

b= ---------------

Date1 = ---------------------------

Year1 = -------

Dear -----------------:

This letter responds to a letter, dated September 5, 2012, submitted on behalf of X by
X’s authorized representative, requesting a ruling under § 7704(g)(2) of the Internal
Revenue Code.

                                                 FACTS

According to the information submitted, X is a publicly traded partnership within the
meaning of § 7704(b). X is an electing 1987 partnership under § 7704(g). Y holds a
a% general partner interest in X and serves as Managing Partner.
PLR-138329-12 2

X is engaged in the business of acquiring, owning, managing, operating, developing,
leasing, and disposing of Crop orchard properties, and processing and marketing Crop
production from its orchards. X’s orchards are located in State.

X currently engages in the planting of orchards, the cultivation of Crop trees, the
harvesting of Crop, and husking, sorting and transporting wet-in-shell Crop to a buyer
who dries, cracks, and shells Crop in order to produce bulk kernels. Wet-in-shell Crop
will deteriorate and spoil if not dried and cracked within a limited amount of time. Crop
cannot be transported from State until Crop is dried. Consequently, X can currently only
market Crop to buyers within State.

X represents that all other majors growers of Crop in Location process their harvest into
bulk kernel. X intends to undertake the drying, cracking, and shelling of Crop and will
produce and market bulk kernels to non-retail buyers in packages of at least b pounds.

Drying, cracking, and shelling are the last steps necessary to transform Crop into an
edible product. Under U.S. Customs Service regulations, shelling is not viewed as a
process that substantially alters or transforms Crop. Similarly, X’s pre-existing business
of husking harvested Crop is classified under the same SIC and NAICS codes as
drying, shelling, and selling bulk kernels to an intermediary user.

X requests a ruling that the drying and shelling process and the sale of the resulting
bulk kernels are activities closely related to a pre-existing business of X, and therefore
not the addition of a new line of business within the meaning of § 7704(g)(2).

                              LAW AND ANALYSIS

Section 7704(a) provides that, except as provided in § 7704(c), a publicly traded
partnership will be treated as a corporation.

Section 7704(b) provides that the term “publicly traded partnership” means any
partnership if (1) interests in that partnership are traded on an established securities
market, or (2) interests in that partnership are readily tradable on a secondary market
(or the substantial equivalent thereof).

Section 7704(g)(1) provides that § 7704(a) shall not apply to an electing 1987
partnership. An electing 1987 partnership is any publicly traded partnership that was an
“existing partnership” as defined in Section 1021(c)(2) of the Revenue Reconciliation
Act of 1987 that elects to be treated as a partnership and agrees to pay the tax imposed
by § 7704(g)(3).

Section 7704(g) also provides that an electing 1987 partnership shall cease be treated
as a partnership as of the first day after December 31, 1997, on which there has been
an addition of a substantial new line of business.

Section 1.7704-2(b)(1) provides, in relevant part, that the term “existing partnership”
means any partnership if the partnership was a publicly traded partnership (within the
PLR-138329-12 3

meaning of § 7704(b)(1)) on December 17, 1987, or a registration statement indicating
that the partnership was to be a publicly traded partnership was filed with the Securities
and Exchange Commission with respect to the partnership on or before December 17,
1987.

Section 1.7704-2(b)(2) provides that a partnership will not qualify as an existing
partnership after a new line of business is substantial.

Section 1.7704-2(c) provides that a new line of business is substantial as of the earlier
of (i) the taxable year in which the partnership derives more than 15 percent of its gross
income from that line of business, or (ii) the taxable year in which the partnership
directly uses in that line of business more than 15 percent (by value) of its total assets.

Section 1.7704-2(d)(1) provides that a new line of business is any business activity of
the partnership not closely related to a pre-existing business of the partnership to the
extent that the activity generates income other than “qualifying income” within the
meaning of § 7704 and the regulations thereunder.

Section 1.7704-2(d)(2) provides, in relevant part, that a business activity is a pre-
existing business of the partnership if the partnership was actively engaged in the
activity on or before December 17, 1987.

Section 1.7704-2(d)(3) provides that all of the facts and circumstances will determine
whether a new business activity is closely related to a pre-existing business of the
partnership. The following factors, among others, will help to establish that a new
business activity is closely related to a pre-existing business of the partnership and
therefore is not a new line of business.

i. The activity provides products or services very similar to the products or services
   provided by the pre-existing business.

ii. The activity markets products and services to the same class of customers as
that of the pre-existing business.

iii. The activity is of a type that is normally conducted in the same business location
as the pre-existing business.

iv. The activity requires the use of similar operating assets of those used in the pre-
existing business.

v. The activity’s economic success depends on the success of the pre-existing
business.

vi. The activity is of a type that would normally be treated as a unit with the pre-
existing business in the business’ accounting records.

vii. If the activity and the pre-existing business are regulated or licensed, they are
regulated or licensed by the same or similar governmental authority.
PLR-138329-12 4

viii. The United States Bureau of the Census assigns the activity the same four-digit
Industry Number Standard Identification Code as the pre-existing business.

                                  CONCLUSION

Accordingly, based solely on the facts submitted and the representations made, we
conclude that the drying, cracking, and shelling of Crop and the sale of bulk kernels in
packages of at least b pounds are activities closely related to a pre-existing business of
X and will not constitute a new line of business within the meaning of § 7704(g)(2).

Except as specifically set forth above, no opinion is expressed or implied as to the
federal income tax consequences of the facts described above under any other
provision of the Code. Specifically, no opinion is expressed concerning whether X is a
partnership for federal tax purposes. Furthermore, this ruling does not cover (1) sales
of Crop in amounts less than b pounds; (2) retail sales of Crop; or (3) roasting, salting,
flavoring, or other further processing and packaging of Crop.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

                                               Sincerely,


                                               David R. Haglund
                                               David R. Haglund
                                               Branch Chief, Branch 1
                                               Office of Associate Chief Counsel
                                               (Passthroughs & Special Industries)

Enclosures (2)
Copy of this letter
Copy for § 6110 purposes

cc: