PRODUCTION INCLUDES GROWING

A U.S. shareholder of a controlled foreign corporation (CFC) has gross income on its share of the CFC's subpart F income. This income includes “foreign base company sales income” or FBCSI. FBCSI generally involves income from the related party purchases or sales of property.

However, Treas. Regs. §1.954-3(a)(4)(i) excludes from FBCSI income derived in connection with the sale of personal property manufactured, produced or constructed by the CFC. A recent private letter ruling addressed the question whether planting and growing activities constitute manufacturing or production for this purpose.

The IRS did allow for the growing activities to constitute production under the facts of the ruling. So it is useful that the IRS did not declare that growing activities cannot be production.

Beyond that, it is hard to say what the IRS meant. Did they say that growing activities in conjunction with other related production activities can give rise to excluded production income for the combined activities, but that pure growing activities alone will not? Or did they say that growing activities alone can constitute production if and when it meets the specific tests provided in the regulations, such as the substantial transformation test, the substantial in nature test, or substantial contribution test?

PLR 201340010