Rev. Rul. 83-128

ISSUE

Does section 278(a) of the Internal Revenue Code require citrus and almond growers to capitalize expenses that would otherwise be deductible business expenses and that are incurred at any time before the close of the fourth taxable year beginning with the year in which the trees are planted in their permanent grove?

FACTS

The taxpayer, who is a grower of citrus fruits, does not grow the fruit trees from seed in the orchard. Instead, seedlings are first grown from seed in small pots, then transplanted into larger pots for further growth, and finally transplanted again in their permanent orchard location. The period from initial planting of the seeds to the final transplant may be as long as three years. During the period before the final transplant, the taxpayer incurs out-of-pocket expenses in maintaining the growing trees. These expenses would, apart from section 278 of the Code, be considered deductible business expenses under section 162.

LAW AND ANALYSIS

Section 278(a) of the Code generally requires a taxpayer to charge to capital account any amount otherwise deductible that is attributable to the planting, cultivation, maintenance, or development of any citrus or almond grove, and is incurred before the close of the fourth taxable year beginning with the taxable year in which the trees were planted.

Section 1.278-1(a)(2)(iv) of the Income Tax Regulations states that, for purposes of section 278 of the Code, a citrus or almond tree is "planted," when it is placed in the permanent grove from which production is expected.

Rev. Rul. 80-25, 1980-1 C.B. 65, which concerns a different issue arising under section 278 of the Code, states that section 278(a) requires a taxpayer to capitalize for four years the daily out-of- pocket expenses that would otherwise be deductible business expenses under section 162. This statement implies that section 278(a) applies only to expenses incurred in the four-year period beginning with the year of final planting, so that expenses incurred before the year of final planting need not be capitalized.

The language of section 278 of the Code states only that the capitalization requirement of that section ends at the end of the fourth year beginning with the year of final planting. That provision does not state that the capitalization requirement begins with the year of final planting.

HOLDING

Section 278(a) of the Code requires a citrus grower to capitalize expenses that would otherwise be deductible business expenses and that are incurred at any time before the close of the fourth taxable year beginning with the year in which the trees are planted in their permanent grove.

The principles of this revenue ruling also apply to a grower of almonds.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 80-25 is clarified.