Attorney-at-Law

JUDGE BUCH GOES TO THE NUT FARM

In Uncategorized on 12/13/2016 at 15:56

Well, not actually. It’s just that Tax Court again deals with farmers and the Section 263A capitalization rules, in Wasco Real Properties I, LLC, Gardiner Family Trust, Tax Matters Partner, et al., 2016 T. C. Memo. 224, filed 12/13/16.

I don’t know Judge Buch’s background for dealing with nuts, but in this case it’s an almond farm or two or three, that the Wasco gang picked up from the rose growers who were there before. Saying “nuts” to flowers, they borrowed the money to buy the parcels, planted almond trees, and wanted to deduct currently loan interest payments and real estate taxes.

Now trees aren’t row crops, like carrots, roses, corn and wheat. “Row crops are nonpermanent crops that have a specific growing season.” 2016 T. C. Memo. 224, at p. 11. And Judge Buch has a great deal to say about why trees are one with the land whereon they grow, and thus expenses of the land must be capitalized, and recovered accordingly, against income when the nuts are sold.

There’s no question the taxes and interest are deductible, even the interest for some intrafamily loans. The only question is when to deduct these.

And what would a T. C. Memo. be, without a quick flip through the digital dictionary?

“The entities’ growing of the almond trees is a production of those trees within the reach of section 263A.  The uniform capitalization rules apply to ‘[r]eal * * * property produced by the taxpayer’ for the taxpayer’s use in a trade or business or in an activity conducted for profit.  Sec. 263A(b)(1), (c)(1).  While the statute does not define the term “real property” for purposes of section 263A, section 1.263A-8(c)(1) and (2), Income Tax Regs., defines the term to include ‘land’ and ‘unsevered natural products of land’ and states further that ‘unsevered natural products of land’ generally include ‘[g]rowing crops and plants’ where the preproductive period of the crop or plant exceeds two years.  That definition, although included in the regulations explicitly made applicable to the capitalization of interest but not included in the regulations explicitly made applicable to the capitalization of other costs, is consistent with the term’s ‘ordinary meaning.’  See Nw. Forest Res. Council v. Glickman, 82 F.3d 825, 833 (9th Cir. 1996) (observing that a statutory term that the statute does not define may be construed in accordance with its ‘ordinary meaning’).  The ordinary meaning of the term ‘real property’ includes ‘property consisting of land, buildings, crops, or other resources still attached to or within the land’.  Merriam-Webster’s Online Dictionary, http://www.merriam-webster.com/dictionary/property (last visited Nov. 15, 2016); see also Black’s Law Dictionary 1412 (10th ed. 2014) (defining the term ‘real property’ to include ‘[l]and and anything growing on, attached to, or erected on it, excluding anything that may be severed without injury to the land’).  In that the almond trees grow on the land and otherwise fit within the ordinary meaning of the term ‘real property’, we conclude that the almond trees are “real property” for all purposes of section 263A.” 2016 T. C. Memo. 224, at pp. 25-26. (Footnote omitted).

See my blogpost “Raspberries, Strawberries,” 2/22/13. Almonds didn’t make the Notice 2013-18 cut.

Joyce Kilmer may be right that “only God can make a tree,” but IRS can sure capitalize it.

So the Wasco gang gets a Section 481 adjustment, and must capitalize the taxes and interest.

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