Rev. Rul. 56-226

Advice has been requested whether facilities constructed by a taxpayer to accommodate the storage of hybrid seed corn produced under certain types of contracts with farmers are amortizable under the provisions of section 169(a)(1) of the Internal Revenue Code of 1954.

The taxpayer is engaged principally in the business of breeding, developing, raising and selling hybrid corn for seed purposes. He entered into contracts with certain farmers under which the farmers, by using seed corn belonging to the taxpayer, agreed to grow corn for his use and sale. The farmers at no time own the seed corn nor can they produce its equivalent. The farmers are either guaranteed a satisfactory return for the use of their land and their efforts in certain experimental projects or are paid on an agreed basis per bushel for growing regular crops. They merely contract to perform services for the taxpayer. Facilities suitable primarily for the storage of grain were constructed by the taxpayer for storage of the seed corn produced.

Section 169 of the 1954 Code provides in part as follows:

(a) ALLOWANCE OF DEDUCTION.-

(1) * * * Any person who constructs, reconstructs, or erects a grain-storage facility (as defined in subsection (d)) shall, at his election, be entitled to a deduction with respect to the amortization of the adjusted basis (for determining gain) of such facility based on a period 60 months. * * *

*

(d) DEFINITION OF GRAIN-STORAGE FACILITY.-For purposes of this section, the term `grain-storage facility' means-

(1) any corn crib, grain bin, or grain elevator, or any similar structure suitable primarily for the storage of grain, which crib, bin, elevator, or structure is intended by the taxpayer at the time of his election to be used for the storage of grain produced by him * * *

* the construction, reconstruction, or erection of which was completed after December 31, 1952, and on or before December 31, 1956. * * *

In the case of any structure as described above, the taxpayer at the time of his election to take the amortization deduction with respect to the structure must intend to use the facility for the storage of grain produced or to be produced by him. See section 39.124B-2(b) of Regulations 118, as amended by T.D. 6112, C.B. 1954-2, 184, at 187, applicable to section 169 of the 1954 Code pursuant to T.D. 6091, C.B. 1954-2, 47. The deduction for amortization of grain-storage facilities is allowable not only to individuals but also to corporations, partnerships, estates and trusts.

In the instant case, the taxpayer at all times was the owner of the parent hybrid seed corn, the plants produced by the parent corn, and the corn produced by such plants. The seed corn is grown under definite instructions and rules of the taxpayer; in fact, he shares certain expenses connected with the growing of it. The farmer may not use the corn for seeding purposes, he may not sell the seed corn; and he may not permit any other person to use for seed any of the crop produced from the parent seed corn supplied by the taxpayer.

Accordingly, it is held that the taxpayer is a producer of seed corn and the facilities constructed by him are grain-storage facilities with respect to which the amortization deduction provided by section 169(a)(1) of the 1954 Code is allowable, provided all the other requirements of such section are met.