Rev. Rul. 89-26

1989-1 C.B. 87, 1989-9 I.R.B. 6.

                       Internal Revenue Service

                                 Revenue Ruling

                     INVENTORIES; GROSS RECEIPTS EXCEPTION

                          Published: February 27, 1989

26 CFR 1.263A-1T; Capitalization and inclusion in inventory costs of certain expenses.

  Inventories; gross receipts exception. Retailers and wholesalers with annual gross receipts of less than $10 million are exempt from the capitalization rules of section 263A of the Code.  Gross receipts from all businesses of the taxpayer are included in the computation for purposes of the $10 million test.

  A domestic corporation, which primarily performs credit reporting, collection, and data processing services, sells and repairs data terminal equipment as a convenience to its customers. The corporation purchases the terminals from an unrelated entity. For the three years preceding the current tax year, the corporation had average gross receipts of $42,000,000. But, the average gross receipts from the sale of the data-terminal equipment were only $400,000.

  ISSUE. At issue is whether the corporation is subject to the uniform capitalization rules under section 263A if its annual gross receipts from all of its businesses exceed $10,000,000, but its average annual gross receipts from the sale of personal property acquired for resale do not.

  HOLDING. The Service has held that the corporation must include the costs from the resale of the computers in its inventory costs, even though its average annual gross receipts from the resale alone do not exceed $10,000,000.

  ANALYSIS. The Service reasoned that since the corporation's average annual gross receipts from all trades and businesses exceed $10,000,000, the gross receipts exception set forth in section 263A(b)(2)(B) does not apply. This conclusion, the Service said, is not mitigated by the fact that the corporation primarily provides services, or by the fact that the annual gross receipts from the sale of the computer inventory alone do not exceed $10,000,000.

ISSUE

  If a taxpayer's average annual gross receipts from all of its businesses exceed $10,000,000 but its average annual gross receipts from the sale of personal property acquired for resale do not, is the taxpayer subject to the uniform capitalization rules under section 263A of the Internal Revenue Code?

FACTS

  X corporation is primarily engaged in the performance of credit reporting services, collection services, and data processing services. As a convenience to its customers, X sells and repairs data-terminal equipment that is used to gain access to X's credit history data base. X does not manufacture the data terminals but purchases them from an unrelated entity and resells them to X's customers.

  For the three tax years preceding the current tax year, X had averaged annual gross receipts of $42,000,000. Of these gross receipts, the average annual gross receipts from the sale of data-terminal equipment was $4,000,000.

LAW AND ANALYSIS

  Section 263A(a) of the Code provides that in the case of property to which section 263A applies and which is inventory in the hands of the taxpayer, certain specified direct and allocable indirect costs must be included in inventory costs.

  Section 263A(b)(2)(A) of the Code provides that, in general, section 263A applies to real or personal property described in section 1221(1) that is acquired by the taxpayer for resale. Section 1221(1) property is stock in trade or other property of a kind properly includable in inventory or property held primarily for sale to customers in the ordinary course of a trade or business.

  Section 263A(b)(2)(B) of the Code provides, however, that section 263A(b)(2)(A) does not apply to any personal property acquired during any tax year by the taxpayer for resale if the average annual gross receipts of the taxpayer (or any predecessor) for the 3-tax year period ending with the tax year preceding the year of acquisition do not exceed $10,000,000.

  Section 1.263A-1T(d)(2)(iv)(A) of the temporary Income Tax Regulations provides that the term 'gross receipts' means the total amount, as determined under the taxpayer's method of accounting, received from all trades or businesses carried on by the taxpayer (e.g., revenue derived from the sale of inventory before reduction for cost of goods sold).

  In determining whether the exception contained in section 263A(b)(2)(B) of the Code applies, section 1.263A-1T(d)-(2)(iv)(A) of the temporary regulations requires that receipts from all of a taxpayer's trades or businesses be included in gross receipts. The parenthetical reference to 'revenue derived from the sale of inventory' in this section is an example intended to demonstrate that, for purposes of applying the exception, gross receipts are not reduced by such basis items as cost of goods sold; it does not restrict 'gross receipts' to receipts from sales of property in general.

  X's average annual gross receipts from all of its trades or business for the three tax years preceding the current tax year exceed $10,000,000. Accordingly, the gross receipts exception, set forth in section 263A(b)(2)(B) of the Code and the temporary regulations under that provision, does not apply, and X is subject to the provisions of section 263A with respect to its data terminal inventory acquired for resale. This result is not changed by either the fact that X is principally engaged in providing services or the fact that the average annual gross receipts from the sale of data-terminal inventory, alone, do not exceed $10,000,000.

HOLDING

  A taxpayer is required to include certain costs in its inventory costs under section 263A of the Code if its average annual gross receipts from all its businesses exceed $10,000,000 even though its average annual gross receipts from the sale of personal property acquired for resale do no exceed $10,000,000.

  An optional simplified method of accounting for resale cost is provided in section 1.263A-1T(d)(3) of the temporary regulations.

DRAFTING INFORMATION

  The principal author of this revenue ruling is Ellen McElroy of the Office Assistant Chief Counsel (Income Tax and Accounting). For further information regarding this revenue ruling, contact Ellen McElroy on (202) 566-3731 (not a toll-free call).

Rev. Rul. 89-26, 1989-1 C.B. 87, 1989-9 I.R.B. 6.