Rev. Rul. 79-263

ISSUE

Are expenditures incurred by a cattle farmer as a result of a disaster-related loss of feed deductible under section 162 of the Internal Revenue Code if the expenditures are subject to partial reimbursement by the Federal Government under a program carried out pursuant to section 305 of the Disaster Relief Act of 1974, 42 U.S.C. section 5145 (1976)?

FACTS

A taxpayer, who is in the trade or business of cattle farming and files federal income tax returns on a calendar year basis using the cash receipts and disbursements method of accounting, suffered a significant loss of feed as a result of a drought. During the year of the loss, the taxpayer applied for and received authorization for partial reimbursement of the anticipated cost of replacing the destroyed feed pursuant to the Emergency Livestock Feed Assistance Program administered by the Federal Disaster Assistance Administration. Shortly thereafter, the taxpayer purchased the authorized replacement feed, but was not reimbursed for the expenditures until the following year.

LAW AND ANALYSIS

The Emergency Livestock Feed Assistance Program has been developed under the authority of section 305 of the Disaster Relief Act of 1974 to protect livestock foundation herds by providing emergency livestock feed assistance to eligible livestock owners in designated emergency areas. The purpose of the program is to prevent widespread liquidation or undue culling of livestock because of flood, drought, hurricane, tornado, earthquake, disease, insect infestation, or other catastrophe.

Under the feed assistance program, a farmer or rancher may be reimbursed for a limited part of the cost of feed or feed grain equivalent, provided the farmer or rancher (1) resides in a disaster-affected county, (2) suffers a substantial loss of livestock feed normally produced on the farm or the ranch for the livestock, (3) has insufficient feed for the livestock, (4) is required to purchase more feed than normal, and (5) does not receive duplicate assistance from any other source.

Section 162(a) of the Code provides, in part, that there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.

Section 1.162-12 of the Income Tax Regulations provides that generally amounts expended by farmers for feed to be consumed by their livestock in the taxable year the expenditures are incurred or in the following taxable year are ordinary and necessary business expenses. However, taxpayers are not allowed deductions under section 162(a) of the Code for expenditures for which they have a right or expectation of reimbursement. See Rev. Rul. 78-388, 1978-2 C.B. 110, relating to moving expenditures and losses subject to reimbursement.

Under the feed assistance program, the Government reimburses disaster-stricken farmers and ranchers for a portion of the actual cost of replacement feed. When the farmer or rancher purchases replacement feed with prior authorization from the Government, the farmer or rancher suffers no economic detriment with respect to the portion of the feed expenditures that the farmer or rancher knows will be reimbursed.

HOLDING

The portion of the feed expenditures incurred as a result of the drought for which the taxpayer had received prior authorization for partial reimbursement before the feed costs were incurred are not deductible under section 162 of the Code. The remaining portion of the feed expenditures for which reimbursement is not available is deductible under section 162. Further, the reimbursement payments are not includible in the taxpayer's gross income.