IRS Lists Plants That Must Be Capitalized.

Notice 2000-45

PURPOSE

[1] This notice provides guidance to taxpayers engaged in the trade or business of farming in determining whether a plant has a preproductive period in excess of 2 years for purposes of section 263A(d) of the Internal Revenue Code. This guidance is derived from the nationwide weighted average preproductive period for various plants grown in commercial quantities in the United States.

BACKGROUND

[2] Section 263A requires generally that the direct costs and an allocable share of indirect costs of real or tangible personal property produced by a taxpayer be capitalized. Under section 263A, taxpayers generally are required to capitalize the costs of producing property in a farming business (including animals and plants without regard to the length of their preproductive period).

[3] Sections 263A(d) and (e) set forth special rules for property produced in the trade or business of farming. Under section 263A(d)(1) and section 1.263A-4(a)(2) of the Income Tax Regulations, taxpayers neither required by section 447 to use an accrual method nor prohibited by section 448(a)(3) from using the cash method (qualified taxpayers) are not required to capitalize the costs of producing plants that have a preproductive period of 2 years or less or animals. In addition, under section 263A(d)(3) and section 1.263A-4(d), a qualified taxpayer may elect to have section 263A not apply to the cost of producing plants in a farming business. Thus, unless an election is made to have section 263A not apply in accordance with section 263A(d)(3), qualified taxpayers generally are required to capitalize the costs of producing plants that have a preproductive period in excess of 2 years.

[4] Section 263A(e)(3)(B) and section 1.263A-4(b)(2)(i)(B) provide that, for purposes of determining whether a plant has a preproductive period in excess of 2 years, the preproductive period of plants grown in commercial quantities in the United States must be based on the nationwide weighted average preproductive period for such plants. The legislative history of section 263A explains that Congress expected the Treasury Department to periodically publish a list of the preproductive periods of various plants based on the nationwide weighted averages for such plants. See H.R. Rep. No. 426, 99th Cong., 1st Sess. 628 (1985), 1986-3 (Vol. 2) C.B. 628. A proposed list was included in the preamble of the proposed section 1.263A-4 regulations (62 FR 44542). The Internal Revenue Service and Treasury Department received and considered comment letters relating to this proposed list.

[5] Based upon information provided by the United States Department of Agriculture, the Service and Treasury Department have determined that plants producing the following crops or yields have a nationwide weighted average preproductive period in excess of 2 years:

     almonds, apples, apricots, avocados, blackberries, blueberries,

DRAFTING INFORMATION

[7] The principal author of this notice is Richard C. Farley, Jr. previously of the Office of the Associate Chief Counsel (Income Tax and Accounting). For further information regarding this notice contact Grant D. Anderson at (202) 622-4970 (not a toll-free call).