No, not “when can I get this (colorful metaphors and expletives deleted) thing off my back?” Rather, these are plastic clamshells, cardboard trays and cartons, wherein are packed the raspberries, strawberries and similar growths that feed our vegetative dependencies.
The packer is Agro-Jal Farming Enterprises, Inc., et al., 145 T. C. 5, filed 7/30/15. The question is when can Agro-Jal deduct these fieldpacking materials, when bought or when actually used, Agro-Jal accounting for this stuff on the cash basis. Agro-Jal says when paid for, IRS says when used.
And who shall field, or unpack, this conundrum?
Why, whom else but The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, a/k/a The Implacable, Illustrious, Imperturbable, Indefatigable, Incomparable and Irreplaceable Foe of the Partitive Genitive, and Old China Hand, Judge Mark V. Holmes?
Agro-Jal is “…in many ways the Maldonaldo family farm, whose patriarch founded it many years ago. The business has grown greatly over the years, and most of its income now comes from the efficient production of a few crops–strawberries, broccoli, cauliflower, iceberg and romaine lettuce, and celery. It is a year-round business but somewhat unpredictable because of the farmer’s oldest adversary, the weather, as well as fluctuations in market demand.” 145 T. C. 5, at p. 3.
But it’s much more than Grapes of Wrath technology. The pickers grade and pack carefully in the fields themselves, making sure the goodies are market-worthy and wind up on the dinner table or lunchbox in shape worthy of the Maldonado heritage. Judge Holmes expatiates extensively on the process, and if you want to know how what’s on the shelf at West Side Market et hoc genus omne got there, Judge Holmes is the man to tell you.
Labeling is a big deal; it’s not just what’s in the pack, it’s what the label says and must say. So timing deliveries of pack and labels is quite a ballet. No, I won’t start a diatribe on genetically-modified organisms, nor does Judge Holmes.
Agro-Jal is a cash-basis taxpayer but an accrual-method bookkeeper, because its lenders want GAAP certified statements, so there’s inventory for each year at issue.
IRS says Agro-Jal can only expense what it uses in any tax year. Anything left over must go to the next year.
You can see this is a big deal for any farmer bigger than a roadside stand operator.
Farmers get a lot of tax breaks. They can use cash-method even though other C Corps can’t. Payment must be a payment to be deductible, not a deposit, and there’s a two-year limit to get around capitalization rules.
But since sheltermongers were playing games with leveraged advance purchases of supplies to throw off big deductions with no offsetting income, Section 464 prevents farming syndicates from taking deductions for “feed, seed, fertilizer, or other similar farm supplies” in any year earlier than when consumed.
“Both parties agree that this section does not directly apply to Agro-Jal, but both also argue that the section helps us figure out the meaning of the regulation that does.” 145 T. C. 5, at p. 10. (Footnote omitted, but it tells us what a farming syndicate is, and Agro-Jal isn’t.)
Also in the mix is old Reg. 1.162-3: “Taxpayers carrying materials and supplies on hand should include in expenses the charges for materials and supplies only in the amount that they are actually consumed and used in operation during the taxable year for which the return is made, provided that the costs of such materials and supplies have not been deducted in determining the net income or loss or taxable income for any previous year.” 154 T. C. 5, at p. 11. (Emphasis by the Court.)
Note old Reg. 1.162-3 quoted here was superseded.
“Both parties also analyze what caselaw there is on the subject. Nothing’s directly on point, but the Ninth Circuit, to which this case is appealable, see sec. 7482, has spoken a couple times about the timing of farmers’ deductions.” 145 T. C. 5, at pp. 11-12. And Judge Holmes has once again dissed the partitive genitive.
However, he is strong on ejusdem generis, which means “the same sort of stuff”. And while the packs are very important to Agro-Jal, they aren’t “feed, seed, or fertilizer,” which are things you need to grow the stuff, not to package or sell it.
But that’s not the end of the story. Section 464 is an anti-abuse provision, aimed at the sheltermongers’ syndicates.
And Judge Holmes, ever the grammarian and syntaxtician, goes extensively into the phrases “provided that” and “on hand”, to give Agro-Jal a win.
“Agro-Jal can deduct its field-packing materials for the year it bought them. The materials that it buys that are not ‘on hand’ are governed by the general rules of cash-method accounting, which allow current deduction. The materials that it buys that are ‘on hand’ are governed by section 1.162-3, which we hold does not require a cash-method taxpayer to defer its deductions until the materials are used or consumed, if the taxpayer deducted their costs for a prior tax year. The ‘one-year rule’–the rule that a taxpayer has to use those supplies within an approximately one-year period–might limit deductibility in some other case.
“But not here.” 145 T. C. 5, at pp. 26-27 (Footnote omitted.)