Rev. Rul. 79-216

ISSUE

How is the arm's length price of iron ore determined under section 482 of the Internal Revenue Code, under the circumstances described below?

FACTS

S, a wholly owned foreign mining subsidiary of domestic corporation P, operates an iron ore mine in a foreign country. The ore is extracted from the ground and loaded at the mine for shipment by rail to a seaport. The ore is a direct shipping grade ore suitable for blast furnace feed and needs no concentration. After nonmining transportation, the ore is unloaded from rail cars at the seaport and loaded on seagoing vessels for shipment to the purchasers. All of the ore is sold at the port to various customers, including P and unrelated customers, located in the foreign country, the United States, and other countries. The prices received by S from the sale of ore at the seaport vary depending upon the customer involved. The sales to P are not at arm's length.

LAW AND ANALYSIS

The applicable sections of the Code and Income Tax Regulations are 482, 1.482-2(e)(1), and 1.482-2(e)(2), relating to the rules to be followed in establishing a sales price for tangible property transferred between or among related parties, and 613 and 1.613-4, relating to gross income for depletion purposes.

Section 1.482-2(e)(1) of the regulations provides the general rule that where one member of a group of controlled entities sells or otherwise disposes of tangible property to another member of such group at other than arm's length price, the district director may make appropriate allocations to reflect an arm's length price for such sale or disposition. An arm's length price is the price that an unrelated party would have paid for the property under the same circumstances. Subdivision (ii) discusses the three pricing methods described in subparagraph (2), (3) and (4). Subdivision (v) contains a special rule for determining the price for a mineral product.

Section 1.482-2(e)(1)(v) of the regulations provides that when a mineral product is sold to a related party at the stage at which mining ends, the selling price for purposes of section 482 of the Code will be determined under the provisions of section 1.613-4.

Section 1.613-4 of the regulations provides rules for the determination of gross income from the property in the case of minerals other than oil and gas.

Section 1.482-2(e)(2) of the regulations discusses the comparable uncontrolled price method of pricing where the arm's length price is equal to the price paid in comparable uncontrolled sales.

Under the facts of this case, the direct shipping grade ore was extracted and shipped by rail to the seaport. The only processes applied at the mine were extraction and loading for shipment to the port. Therefore, mining ended when the ore was loaded for shipment to the port. This was followed by nonmining transportation to the port prior to sale. Because a nonmining process involving transportation occurred before the sale, the special rule in section 1.482-2(e)(1)(v) of the regulations does not apply.

The determination of the selling price under section 1.482-2(e)(2) of the regulations is primarily a factual determination. In this case, since all of the uncontrolled sales are made at the same port, there is a single market at the port. That market consists of purchasers from a number of countries and is not limited to United States purchasers. HOLDING

The provisions of section 1.482-2(e)(2) of the regulations are applicable under the circumstances described and all unrelated sales at the port, regardless of point of ultimate consumption, are to be considered in establishing an arm's length selling price for purposes of section 482 of the Code.