Special Treatment Accorded Farmers Under the Current Income Tax Law

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SPECIAL TREATMENT ACCORDED FARMERS UNDER THE CURRENT INCOME TAX LAW

A T h esis P r e s e n t e d t© t h e F a c u l t y ©f t h e D ep artm en t ©f T a x a t i o n C o ll e g e o f W i lli a m and' Mary

In P a r t i a l F u lfillm e n t o f t h e R e q u ire m e n ts f o r t h e Degree M a s te r o f A r t s

by W esley R. G o f e r , J r . June 1950

ProQuest Number: 10614525

All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is d e p e n d e n t upon th e quality of th e copy submitted. In th e unlikely ev en t th a t th e author did not send a co m p lete manuscript an d th ere are missing p ag es, th e se will b e noted. Also, if material had to b e rem oved, a n o te will indicate th e deletion.

uest ProQuest 10614525 Published by ProQuest LLC (2017). Copyright of th e Dissertation is held by th e Author. All rights reserved. This work is p ro tected against unauthorized copying under Title 17, United States C o d e Microform Edition © ProQuest LLC. ProQuest LLC. 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, Ml 48106 - 1346

TABLE OF CONTENTS

CHAPTER I.

II.

PAGE

THE PROBLEM AND DEFINITIONS OFTERMS U S E D ................................... The p r o b l e m ............................

1

D e f i n i t i o n s o f te r m s u s e d ...................................................................

2

O r g a n i z a t i o n ..................................................................

3

INTRODUCTION.................................................................................................... Farms and f a r m e r s

........................................................

D e c la ra tio n of e stim a te d ta x W i th h o l d i n g

IV.

.......................................................................

6 8

•

10

PRELIMINARY MATTERS.....................................................................................

11

Form IOI4.O F and o t h e r f o r m s ..............................................................

11

R e c o rd s and a c c o u n t i n g m ethods

..................................

12

INVENTORIES........................................................................................................

20

..................................

20

What may be i n v e n t o r i e d

V.

5 5

...........................................................

S o c i a l s e c u r i t y , unemployment and i n f o r m a t i o n r e t u r n s III.

1

V a l u a t i o n o f i n v e n t o r y .....................................

21

S p e c i a l fa rm v a l u a t i o n m ethods

.....................................................

22

GROSS I N C O M E ...................................................................................................

25

E x c lu sio n s

..................................

25

I n c l u s i o n s ...................................................

25

V a lu a tio n of in c lu s io n s

27

................................................ . . . . .

S a l e s o f p r o p e r t y ......................................................................................

30

CHAPTER VI.

PAGE

DEDUCTIONS...............................................

35

E a rn e x p e n s e s . . . . . . . . . . . . . . . . . . . . . D evelepm ent e x p e n d i t u r e s

35

............................................ •

yQ

L o s s e s ...............................................................................................................

'P|

A P P E N D IX .............................................................................................................................

i+6

D e p r e c i a t i o n .........................................................

L i s t o f A b b r e v ia ti@ n s 1,

US - The o f f i c i a l r e p r i n t o f t h e d e c i s i o n o f t h e U n ite d S t a t e s Su­

preme C o u rt p u b l i s h e d by t h e G overnment P r i n t i n g O f f i c e . 2.

SCt - Supreme C o u rt Re p o r t e r .

D e c i s i o n o f t h e U n ite d S t a t e s Supreme

C o u rt a s r e p o r t e d by t h e West P u b l i s h i n g Company. 3*

LEd * L a w y e r s ’ C o o p e r a t iv e e d i t i o n o f t h e U n ite d S t a t e s Supreme

C o u rt d e c i s i o n s . J4 .

F ed . - F e d e r a l R e p o r t e r .

The e a r l y d e c i s i o n s o f t h e F e d e r a l C o u rts

p u b l i s h e d by t h e West P u b l i s h i n g Company. 5*

F2d. - F e d e r a l R e p o r t e r , s e c o n d s e r i e s .

D e c is io n s o f t h e U n ite d

S t a t e s C i r c u i t C o u rt o f A p p e a ls b e g i n n i n g w here t h e F ed. s t o p s .

P u b lish e d

by We s t • 6.

F .S u p p . - F e d e r a l S u p p le m e n t.

t h e d e e i s i o n s ©f t h e U n ite d S t a t e s 7.

T h is c o m p lim en ts t h e F2d.

re p o rtin g

D i s t r i c t C o u r t s . P u b l i s h e d b y West*

TC ©r BTA - D e c i s i o n s ©f t h e U n ite d S t a t e s Tax C o u r t , f o r m e r l y t h e

U. S, Board ©f Tax A p p e a ls . 8.

AFTR - A m erican F e d e r a l Tax R e p o r t s .

c a s e s , p u b l i s h e d by P r e n t i c e H a l l ,

A re p rin t of a l l fe d e ra l ta x

In co rp o rated .

C o u rt d e c i s i o n s a r e c i t e d a s 10 US U97 j w h ic h means t h e c a s e

in p rin t

w i l l be fo u n d i n volume 10 o f t h e o f f i c i a l r e p r i n t o f t h e d e c i s i o n s o f t h e U n ite d S t a t e s Supreme C o u rt a t page U97*

9*

R u l i n g s ©f th e U n ite d S t a t e s T r e a s u r y D epartm ent a r e c i t e d as fo llo x v s: ARR - Committee on A p p e a ls and Review re c o m m e n d a tio n , GCM - G e n e r a l C o u n s e l s ’ Memorandum, IT - Income Tax U n it R u l i n g , Mim - Mimeograph l e t t e r ,

0 ®r LO - S o l i c i t o r ' s Law O p in io n , OD - O f f i c e D e c i s i o n ©f Income Tax U n i t , S o r SM - S o l i c i t o r s ’ memorandum, TD - T r e a s u r y d e c i s i o n . 10.

DC - U n i t e d S t a t e s D i s t r i c t C o u r t .

11.

CCA - U n i t e d S t a t e s C i r c u i t C o u rt o f A p p e a l s .

12.

CB - C u m u la tiv e B u l l e t i n ©f t h e B u reau ©f I n t e r n a l Revenue

©f t h e

T r e a s u r y D ep artm en t e © n t a i n i n g t h e r u l i n g s s p e c i f i e d i n item. 9*

T h is

B u l l e t i n a l s o c o n t a i n s r e p r i n t s o f c a s e s s e l e c t e d b y t h e B u re a u . 13*

A f f . ©r A f f ’d - A f f i r m e d .

D eno tes t h a t a h i g h e r c o u r t h a s s u s t a i n e d

t h e d e c i s i o n ©f t h e lo w e r c o u r t . 11+.

Rev. ©r R e v 'd - R e v e r s e d .

D e c i s i o n o f a l©wer c o u r t r e v e r s e d by t h e

h ig h e r c o u rt. 15 .

S e e . - S e c t i o n o f t h e I n t e r n a l Revenue Code ©r

su ry R e g u la tio n s i f c i t e d Sec. "29n *

o fth e c u r r e n t

T rea­

CHAPTER I

THE PROBLEM AW DEFINITIONS OP TERMS USED

U n t i l v e r y r e c e n t l y t a x a t i o n was t h o u g h t o f i n te rm s ©f p r o p e r t y v a l u a t i o n s , a s s e s s m e n t s and l o c a l g o v e r n m e n ts .

Taxes b r o u g h t t o mind

m a i n l y p r o p e r t y t a x e s and i f t h e t h i n k e r was i n an a r g u m e n tiv e mood, t h e n he m i g h t p o s s i b l y remember t o f u s s a l i t t l e

a b o u t t h e F e d e r a l Income

Tax and w h a t a n u i s a n c e i t was t o have t o b o t h e r w i t h as f a r as he was concerned. W ith t h e i n c r e a s e d g o v e r n m e n ta l a c t i v i t i e s , t h e s h i f t from l o c a l t o c e n t r a l r e s p o n s i b i l i t i e s an d t h e i n c r e a s i n g sco p e o f n a t i o n a l d e f e n s e , $11 b r i n g i n g e n o rm o u s ly i n c r e a s e d r e v e n u e r e q u i r e m e n t s , i t h a s b e e n n e c e s ­

s a r y t® i n c r e a s e t a x e s u n t i l now t h e a t t e n t i o n p a i d t o t a x p ro b le m s o f ­ t e n means t h e d i f f e r e n c e b e tw e e n w h e t h e r a n econom ic u n i t shows a p r o f i t ®r a l e s s .

I.

THE PROBLEM

For v a r i o u s r e a s o n s n o t i m p o r t a n t t o t h e p u r p o s e s o f t h i s p a p e r , t h e governm ent d e c i d e d t© © b ta in t h i s a d d i t i o n a l r e v e n u e by income t a x e s . As a r e s u l t ©f t h i s d e c i s i o n and t h e i n c r e a s e d t a x b a s e n e c e s s a r y t o c a r ­ r y i t ©ut a lm o s t e v e r y p e r s o n i n o u r s o c i e t y i s a c c u t e l y c o n s c io u s o f i n ­ come t a x e s .

Many b©oks have b e e n w r i t t e n c o v e r i n g t h e I n t e r n a l Revenue

Cede, b o t h s p e c i f i c a l l y and g e n e r a l l y , and t h e r e have b e e n works on th e p r a c t i c a l s i d e r e l a t i n g t o how t h e o r d i n a r y f a r m e r s h o u l d ’ f i l l ou t h i s

2 r e t u r n , b u t s i n c e t h e I n t e r n a l Revenue Cede d o e s n o t t r e a t f a r m e r s as a s e p a r a t e c l a s s i f i c a t i o n , t h e r e 1i s a p a u c i t y o f w r i t i n g s p r e s e n t i n g a c o m p re h e n s iv e c o m p a r is o n ©f a l l t h e p r o v i s i o n s as t o f a r m e r s a s c o n t r a s ­ te d w ith o rd in a ry tre a tm e n t of th e p o in t. The p u r p o s e o f t h i s s t u d y was ( l ) t o s e g r e g a t e a l l p r o v i s i o n s i n t h e Cede r e l a t i n g t© f a r m e r s ;

(2) t o compare t h e t r e a t m e n t o f f a r m e r s

w i t h o t h e r income r e c i p i e n t s ; and ( 3 ) t o r e l a t e t h e p r o v i s i o n s t o t h e p r o p e r ite m s ©m t h e Income Tax Forms.

II.

DEFINITIONS OF TERMS USED

A c c o u n tin g P e r .i e d . T a x a b le Y e a r . cal y ear.

The t a x a b l e y e a r ©f t h e t a x p a y e r .

The t a x a b l e y e a r can be e i t h e r a c a l e n d a r o r a f i s ­

I t i s a f i s c a l y e a r i f i t en d s ©n t h e l a s t day o f any month

© th er t h a n December.

I n e i t h e r c a s e i t m u st be tw e l v e m onths u n l e s s t h e

C©nmissi©m d i r e c t s o t h e r w i s e .

The books and r e c o r d s ©f t h e t a x p a y e r

must be k e p t on t h e same y e a r . Cash R e c e i p t s and D is b u r s e m e n ts B a s i s .

A m ethod o f a c c o u n t i n g

w h ich i s m a n d a to ry f o r t h e t a x p a y e r s who k e e p in a d e q u a t e books o r r e c o r d s . Under t h i s m ethod w h e th e r income o r e x p e n s e s o c c u r in t h e t a x a b l e y e a r ©r n o t i s d e t e r m in e d by when t h e y a r e a c t u a l l y o r c o n s t r u c t i v e l y r e c e i v e d ©r p a i d .

I t i s n o t n e c e s s a r y t h a t r e c e i p t o r payment be made i n c a s h .

A ccrual B a s is .

The income i s t a x a b l e when i t i s e a r n e d and e x ­

p e n s e s a r e d e d u c t i o n s as so o n a s i n c u r r e d .

T h is form o f a c c o u n t i n g m ust

be f o ll o w e d i n b u s i n e s s e s r e q u i r i n g i n v e n t o r i e s .

A n o th e r way o f s t a t i n g

3 th is

r e q u i r e m e n t i s t h a t t h e a c c r u a l b a s i s m u st be u s e d w h ere p r o d u c t i o n ,

p u r c h a s e ©r s a l e o f m e r c h a n d is e i s an income p r o d u c in g f a c t o r . B a sis.

A t e r m g e n e r a l l y m ean in g t h e c o s t o f p r o p e r t y .

th e re fe re n c e p o in t f o r d ete rm in in g g ain o r l o s s . © est ©f t h e p r o p e r t y .

B a s is i s

B a s is g e n e r a l l y i s t h e

The I n t e r n a l Revenue Code som etim es r e q u i r e s t h a t

b a s i s be a d j u s t e d t© a l l o w f o r t a x a d v a n t a g e s o r d i s a d v a n t a g e s a c c r u i n g t® t h e t a x p a y e r , t h i s i s c a l l e d t h e " a d j u s t e d b a s i s " .

The b a s i s o f th e

t a x p a y e r may u n d e r some c o n d i t i o n s be a " s u b s t i t u t e d b a s i s " s u c h as when p r o p e r t y h as b een a c q u i r e d by g i f t t h e n t h e b a s i s be s u b s t i t u t e d and become t h a t o f t h e t a x p a y e r .

t o th e donor w i l l

The b a s i s t o t h e t a x ­

p a y e r may be © th e r t h a n c o s t d e p e n d in g on th e p u r p o s e f o r w h ich t h e d e t e r ­ m i n a t i o n i s m ade. T axpayer.

For t h e p u r p o s e s ©f t h i s p a p e r a " t a x p a y e r " may be an

in d iv id u a l, a p a rtn e rsh ip or a c o rp o ra tio n .

Where t h e p r o v i s i o n s o f t h e

I n t e r n a l Revenue Code t r e a t any o f t h e above i n a d i f f e r e n t manner su c h / t r e a t m e n t and t h e c l a s s ©f " t a x p a y e r " i t i s a p p l i c a b l e t o w i l l be s p e ­ c ifie d ,

III.

ORGANIZATION

An a t t e m p t h a s b e e n made t o o r g a n i z e t h i s p r e s e n t a t i o n a l o n g t h e lin e s of a ta x re tu rn .

T h ere w i l l be a g e n e r a l e x a m i n a t i o n o f t h e r e ­

q u ir e m e n ts ©f t h e Code and p a r t i c u l a r i t y t o whom i t a p p l i e s f o ll o w e d by a d e t a i l e d d i s c u s s i o n o f t h e main ite m s o f a r e t u r n . l i n e d b r i e f l y as f o l l o w s :

These may be o u t ­

k 1.

w h a t may be e x c l u d e d fro m fa rm income i n t h e

e n e r a l econom ic

s e n s e t o a r r i v e a t g r o s s income f o r t a x p u r p o s e s , 2.

w h a t d e d u c t i o n s a r e a l l o w a b l e f o r a d j u s t e d g r o s s incom e,

3.

w h a t r e q u i r e m e n t s m u s t be met t o c o n s t i t u t e e x p e n d i t u r e s a s

© th e r d e d u c t i o n s t© a r r i v e a t n e t incom e, l±. in@©me.

w h a t e x e m p tio n s may t h e f a r m e r t a k e t o t a r r i v e a t t a x a b l e n e t By t r e a t i n g th e above it e m s i n s l i g h t l y d i f f e r e n t ways c e r t a i n

t a x a d v a n t a g e s w i l l be g a i n e d .

CHAPTER I I

INTRODUCTION

I. The R e g u l a t i o n s

FARMS AND FARMERS

(See A p pendix f o r a l l p e r t i n e n t r e g u l a t i o n s . )

d e f i n e t h e t e r m "farm " a s e m b ra c in g a l l t h a t t h e t e r m c o n o t e s i n t h e o r ­ d i n a r y s e n s e i n w h ic h i t i s u s e d .

T h is u s a g e i n c l u d e s s t o c k , d a i r y , p o u l ­

t r y , f r u i t , t r u c k f a r m s , r a n c h e s , p l a n t a t i o n s and any la n d u sed f o r f a r 1 mimg o p e r a t i o n s * S t r a n g e l y t h o u g h , a l l p e o p le who o p e r a t e farm s a r e n o t f a r m e r s n o r a r e f a r m e r s o n ly p e o p l e w i t h i n t h e t a x c o n c e p t .

The same

s e c t i o n ©f t h e R e g u l a t i o n s c o n f i n e s t h e te r m “ f a r m e r s 1* t o t h o s e o p e r a t i n g a farm, f o r p r o f i t w h e th e r t h e y be i n d i v i d u a l s , p a r t n e r s h i p s o r c o r p o r a ­ t i o n s i f t h e y c u l t i v a t e , o p e r a t e , o r manage farm s e i t h e r a s owners o r te n a n ts.

C l e a r l y t h i s e x c l u d e s so c a l l e d “ g e n tle m a n f a r m e r s “ wh© o p e r a t e

©r c u l t i v a t e fa rm s s o l e l y a s a h ob b y , f o r p l e a s u r e o r t o t a k e a d v a n ta g e ©f t a x l o s s e s i f t h e y hav e c o n t i n u e d l o s s e s fro m y e a r t o y e a r . a f a r m e r i s a “g e n tle m a n f a r m e r 1* d ep en d s on h i s i n t e n t i o n .

YJhether

Where t h e

B ureau c a n p ro v e h i s i n t e n t i o n he w i l l n o t be a l lo w e d any l o s s e s n o r w i l l h i s e x p e n s e s be d e d u c t i b l e , b u t he m u st s t i l l r e p o r t any income a r i ­ s i n g fro m h i s fa rm a c t i v i t i e s . F arm ers a r e n o t a s e p a r a t e c l a s s o f t a x p a y e r and t h e p r o v i s i o n s ©f t h e I n t e r n a l Revenue Code g o v e r n in g f a r m e r s , t h e i r incom e, d e d u c t i o n s I R e g . I l l , S ec.29 *2 2(;a')-7 .

6 and r a t e s ©f t a x a r e t h o s a p p l i c a b l e t o t a x p a y e r s g e n e r a l l y .

In s p ite

©f a l l @f t h i s , t h e r e a r e many p r o v i s i o n s o f t h e Code and R e g u l a t i o n s (Se© A pp end ix f o r a l l p e r t i n e n t r e g u l a t i o n s . ) w h ich g i v e s p e c i a l t r e a t ­ m ent t o fa rm income and e x p e n s e s .

I t has been s a id t h a t th e s p e c ia l t r e a t ­

m ent i s n e c e s s a r y b e c a u s e t h e f a r m e r r a i s e s t h e p r o d u c t s , t h e s a l e o f w h ic h r e s u l t s i n h i s g r o s s in c o m e, and f u r t h e r t h a t f a r m e r s a r e n o t o r i o u s 2 l y p o o r a t k e e p i n g a c c o u n t s and r e c o r d s . W h eth er t h e s e r e a s o n s j u s t i f y t h e s p e e i a l t r e a t m e n t o r w h e th e r t h e s p e c i a l t r e a t m e n t i s p ro v e d t r e a t ­ m ent o r n o t i s b ey o n d t h e sc o p e o f t h i s s t u d y .

II.

DECLARATION OF ESTIMATED TAX

E v ery i n d i v i d u a l whose g r o s s income from wages c a n r e a s o n a b l y be e x p e c t e d t o e x c e e d $J+,5'00 p i n s $60 0 f o r "each e x e m p tio n o r whose g r o s s income from © th er s o u r c e s c a n r e a s o n a b l e be e x p e c t e d t o ex ce ed $100 and h i s g r o s s income t o be $ 6 0 0 o r m o re , s h a l l make a d e c l a r a t i o n o f h i s e s ­ tim a te d ta x f o r th e ta x a b le y e a r.

Such d e c l a r a t i o n s h a l l be f i l e d on o r

b e f o r e March 15 o f t h e t a x a b l e y e a r o r p r i o r t o Ju ne 15 o r Septem ber 15 p r o v i d e d t h e r e q u i r e m e n t s f o r f i l i n g a r e f i r s t met p r i o r t o t h e d a t e o f 3 filin g . The e s t i m a t e d t a x s h a l l be p a i d i n e q u a l i n s t a l l m e n t s on March 1 5 , Ju n e 1 5 , S ep tem b er 15 and J a n u a r y 15 o f t h e s u c c e e d in g t a x a b l e y e a r .

2 P r e n t i c e H a ll F e d e r a l Tax S e r v i c e V0 I . 1 7 2 3 U P« 715U* 3 I . R . C . , S e c . 58 & s e e R e g . I l l , h I . R . C . , S e c • 59.

S ec. 29*5^*

7 The code f u r t h e r p r o v i d e s f o r prom pt amendment i f t h e e s t i m a t e i s n o t p r o v i n g out*

T h ere i s a p e n a l t y p r e s c r i b e d i f t h e t a x w i t h h e l d a t t h e 5 s o u r c e p l u s t h e e s t i m a t e d t a x i s l e s s t h a n d0% o f t h e f i n a l t a x . Farm ers u s i n g t h e c a l e n d a r y e a r whose e s t i m a t e d g r o s s income from f a r m in g i s a t l e a s t t w o - t h i r d s h i s t o t a l e s t i m a t e d g r o s s income from a l l s o u r c e s f o r t h e t a x a b l e y e a r , may f i l e

a d e c l a r a t i o n and pay t h e e s t i m a t e d

t a x on ©r b e f o r e J a n u a r y 15 o f t h e s u c c e e d in g t a x a b l e y e a r .

I f he p r e ­

f e r s t h i s p r o c e d u r e he m ust f i l e h i s r e t u r n and pay t h e ' b a l a n c e o f h i s t a x on o r b e f o r e March 15*

He may, i n l i e u o f t h e a b o v e , f i l e a r e t u r n

f o r t h e t a x a b l e y e a r on o r b e f o r e J a n u a r y 31 y e a r and pay t h e t a x I n f u l l .

s u c c e e d in g t a x a b l e

I f th e farm er fo llo w s t h i s l a t t e r p ro c e ­

d u r e he i s n o t r e q u i r e d t o f i l e a d e c l a r a t i o n .

The p e n a l t y p r o v id e d f o r

s u b s t a n t i a l u n d e r s t a t e m e n t o f t h e e s t i m a t e d t a x does n o t a p p ly t o f a r -

6 m ers i f t h e e s t i m a t e d t a x was a t l e a s t t w o - t h i r d s o f t h e f i n a l l i a b i l i t y . I f t h e t a x p a y e r i s 011 a f i s c a l y e a r th e c o r r e s p o n d i n g d a t e s o f h i s t a x y e a r m u st be s u b s t i t u t e d f o r t h e d a t e s s p e c i f i e d a b o v e .

F arm ers,

l i k e o t h e r i n d i v i d u a l t a x p a y e r s , can f i l e j o i n t d e c l a r a t i o n s w i t h t h e i r w iv es.

I f t h e d e c l a r a t i o n i s b a s e d on t h e p r o c e e d in g y e a r s t a x l i a b i l i t y ,

t h e p e n a l t y f o r s u b s t a n t i a l u n d e r s t a t e m e n t does n o t a p p l y .

D ec la ra tio n s

a r e made on Form IOI4.OES. 7 Samuel M. M o n a tt recommends t h a t t h e f a r m e r i s d e f i n i t d l y b e t t e r

I.R .C . Sec. 29W d)

(2 ) 1- Keg. XIX, S ec. 29.291+-1; (b) ( 3 ) .

6 I . R . C . S ec. 6 0 . 7 Monatt 1950 Farmers Income Tax on 19^9 Income, Commerce Clearing H ouse, I n c . , 19b9) P* 6 5 .

8 © ff t© f i l e t h e d e c l a r a t i o n i n J a n u a r y 15 i n l i e u o f t h e t a x r e t u r n on J a n u a r y 31«

He © f f e r s i n s u p p o r t t h a t t h e t a x p a y e r h a s a d d i t i o n a l t i m e ,

t i l March l 1?* t o i n s u r e h i s r e t u r n i s c o r r e c t and f u r t h e r , t h e t a x p a y e r h a s t h e u se o f t h e a d d i t i o n a l money f o r s i x t y days a t no d i s a d v a n t a g e s .

III.

WITHHOLDING

E v ery e m p lo y e r m aking paym ent o f wages s h a l l d e d u c t and w it h h o l d 8 a c e r t a i n amount p r e s c r i b e d from such w a g e s . Wages o r r e m u n e r a t i o n f o r la b o r 9 a g r i c u l t u r a l / a r e s p e c i f i c a l l y exem pted from su ch w i t h h o l d i n g . I.R .C ., S e c . llj.26(h) s p e c i f i e s t h a t : The te rm " a g r i c u l t u r a l l a b o r " i n c l u d e s a l l s e r v i c e s p e r f o r m e d — ( 1 ) On a f a r m , I n t h e employ o f an y p e r s o n , i n c o n n e c t i o n w i t h c u l t i v a t i n g th e s o i l , o r in c o n n ec tio n w ith r a is in g or h a rv e s tin g any a g r i c u l t u r a l o r h o r t i c u l t u r a l com m odity, i r c l u d i n g t h e r a i s i n g , s h e a r i n g , f e e d i n g , c a r i n g f o r , t r a i n i n g , and management o f l i v e ­ s t o c k , b e e s , p o u l t r y , and f u r - b e a r i n g a n im a ls and w i l d l i f e . ( 2 ) In t h e em ploy o f t h e owner o r t e n a n t o r o t h e r o p e r a t o r o f a f a r m , i n c o n n e c t i o n w i t h t h e o p e r a t i o n , m anagem ent, c o n s e r v a t i o n , im p ro v e m e n t, o r m a in te n a n c e o f s u ch farm and i t s t o o l s and e q u i p ­ m e n t, o r i n s a l v a g i n g t i m b e r o r c l e a r i n g la n d o f b r u s h and o t h e r d e b r i s l e f t by a h u r r i c a n e , i f t h e m a jo r p a r t o f such s e r v i c e i s p e r f o r m e d on a fa r m . ( 3 ) I n c o n n e c t i o n w i t h th e p r o d u c t i o n o r h a r v e s t i n g o f maple s i r u p o r m aple s u g a r o r any commodity d e f in e d a s an a g r i c u l t u r a l commodity i n s e c t i o n 1 5 (g ) o f t h e A g r i c u l t u r a l M a rk e tin g A c t, as am ended, o r i n c o n n e c t i o n w i t h t h e r a i s i n g o r h a r v e s t i n g o f mush­ room s, o r i n c o n n e c t i o n w i t h t h e h a t c h i n g o f p o u l t r y , o r i n connec­ t i o n w i t h t h e g in n i n g o f c o t t o n , o r i n c o n n e c tio n w i t h t h e o p e r a ­ t i o n o r m a in te n a n c e o f d i t c h e s , c a n a l s , r e s e r v o i r s , o r w aterw ay s u s e d e x c l u s i v e l y f o r s u p p ly in g and s t o r i n g w a t e r f o r fa rm in g p u r ­ poses. ~8-------------------------

I . R . C . , S e c . 1622.

9 I . R . C . , S e c . 1621.

9 (k) h a n d l i n g , p l a n t i n g , d ry in p j, p a c k i n g , p a c k a g i n g , p r o c e s ­ s in g , f r e e z i n g , g ra d in g , s t o r i n g , or d e liv e r in g to s to ra g e or to m a r k e t o r t o a c a r r i e r f o r t r a n s p o r t a t i o n t o m a r k e t , any a g r i c u l ­ t u r a l ®r h e r t i e u l t u r a l com m odity; b u t o n ly i f s u ch s e r v i c e i s p e r ­ fo rm ed a s an i n c i d e n t t o o r d i n a r y f a r m in g o p e r a t i o n s o r , i n t h e c a s e ©f f r u i t s and v e g e t a b l e s , a s an i n c i d e n t t o t h e p r e p a r a t i o n ®f s u c h f r u i t s o r v e g e t a b l e s f o r m a r k e t . The p r o v i s i e n s o f t h i s p a r a g r a p h s h a l l n o t be deemed t o be a p p l i c a b l e w i t h r e s p e c t t o s e r ­ v i c e p e r f o rm e d i n c o n n e c t i o n w i t h co m m e rc ia l c a n n in g o r co m m ercial f r e e z i n g o r i n c o n n e c t i o n w i t h an y a g r i c u l t u r a l o r h o r t i c u l t u r a l G cnm odity a f t e r i t s d e l i v e r y t o a t e r m i n a l m a rk e t f o r d i s t r i b u t i o n f o r c o n s u m p tio n . As u s e d i n t h i s s u b s e c t i o n , t h e te r m ftfa rm ,f i n c l u d e s s t o c k , d a i r y , p o u l t r y , f r u i t , f u r - b e a r i n g a n i m a l , and t r u c k f a r m s , p l a n t a t i o n s , ra n c h e s , n u r s e r i e s , ra n g e s , greenhouses o r o th e r s im ila r s t r u c t u r e s used p rim a rily f o r th e r a is in g of a g r ic u ltu r a l or h o r ti c u lt u r a l c o m m o d itie s , and o r c h a r d s . But t h e R e g u l a t i o n s ( See A ppendix f o r a l l p e r t i n e n t r e g u l a t i o n s . ) e x p r e s s l y s t a t e t h a t a g r i c u l t u r a l l a b o r does n o t i n c l u d e s e r v i c e s p e r fo rm e d i n c o n 10 n e e t i o n w i t h f o r e s t r y , lu m b e r in g o r l a n d s c a p i n g . The e f f e c t o f t h i s same r e g u l a t i o n t h o u g h , i s t o i n c l u d e a n y t h i n g t h a t i s done a s an i n c i d e n t t© f a r m i n g .

But i f t h e e m p l o y e r 's b u s i n e s s i s s o m e th in g o t h e r t h a n farm ­

i n g , even th o u g h a f a r m e r m ig h t have o c c a s i o n t o do t h e same t h i n g , i t w i l l n o t be a g r i c u l t u r a l l a b o r .

For ex am p le, s e r v i c e s such as h a n d l i n g ,

d r y i n g , g r a d i n g and p a c k i n g f r u i t s o r v e g e t a b l e s f o r a co m m ercial h a n d l e r 11 w ould n o t be a g r i c u l t u r a l l a b o r . A l l wages i n a p a y r o l l p e r i o d m ust be 12 tre a te d a lik e . I f t h e s e r v i c e s p erfo rm e d d u r in g o v e r o n e - h a l f t h e p a y ­ r o l l c o n s t i t u t e wages t h e n a l l paym ent f o r t h a t p e r i o d w i l l be w ag es. --------------- TS---------

R e g . 116, S e c . 1+05.1 0 2 (e )

(l).

11

h im . 6 2 1 9 , f e e . 3 1 , 19^7; Him. 62 1 9 , F a r . 1 , 191*8.

12 I . R . C . , S ec, 1622 ( g ) .

10 IV.

SOCIAL SECURITY, UNEMPLOYMENT AND INFOB/EATION RETURNS

L ik e w is e , farm ers a re n o t s u b je c t t o th e p r o v is io n s o f th e S o c ia l 13 lU S e c u r ity A ct or t© th e p r o v is io n s o f th e Unemployment Com pensation A c t. I f th e farm er does pay more th an $600 t o h is h ir e d hand th e farm er i s r e ­ q u ired t© f i l e th e a p p r o p r ia te in fo r m a tio n r e t u r n s .

Forms 1096 and 1099

must be f i l e d f o r d o m estic h e lp as w e l l a s f o r th e farm h e lp .

The $600

n eed n ot be c a sh ; i f th e farm er f u r n is h e s t h in g s o f v a lu e t o th e h elp th e v a lu e t o th e la b o re rs must be r e p o r te d .

But room and board fu r n ish e d h elp

w i l l n o t e o n s t i t u t e wages t o t h e h e lp i f he i s req u ir ed to l i v e on th e farm , f©r th e co n v e n ie n c e ©f th e fa rm er.

T his r u le i s o f im portance o n ly t o th e

wage e a r n e r , i t must be c a r e f u l l y d is t in g u is h e d from th e r u le used t© d eterm in e w h eth er ©r n o t t h e s e are d e d u c t ib le t o th e farm er and th e amount o f such d e d u c tio n .

A c©py o f Form 1099 sh ould be g iv e n t o each w ork er.

Ferm 1099 must a l s o be f i l e d

i f $600 or more i s p a id in ren t or i n t e r e s t

t® any in d iv id u a l n ot a r e a l e s t a t e agen t or c o r p o r a tio n . “

13 I . R . C . , S e e . II jlOO; I . R . C . , S e c . l2 j£ 6 (h ). ih S e c . I 6 OO5 I . R . C . , S e e . 1 6 0 7 .

CHAPTER I I I

PRELIMINARY MATTERS

The r e q u i r e m e n t s f©r f i l i n g r e t u r n s a r e g e n e r a l l y t h e same as f o r a l l © th e r t a x p a y e r s *

H owever, a s an a i d t o t h e f a r m e r s , t h e governm ent

a l l e w s them t o u s e a s u p p le m e n ta r y form vj-hich i s n o t o n l y c o n v e n i e n t , b u t in a d d itio n l i s t s

a l l o f t h e item s o f income and d e d u c t i o n s r e l a t i n g t o

fa rm in g * I.

FORM 10l*0 F AND OTHER FORMS

J50LLEGE OF WILLIAM & MARY

Any i n d i v i d u a l w i t h t h e r e q u i s i t e income m ust f i l e a t a x r e t u r n . Which form t h e t a x p a y e r w i l l r e p o r t ©n, d ep en ds upon h i s c l a s s i f i c a t i o n . I f he i s an i n d i v i d u a l he w i l l r e p o r t ©n Form. IOI4.O (IOI4.OA i n c a s e s w i t h w h ic h we a r e n o t c o n c e r n e d . ) w i l l be a Form 11 2 0 .

I f th e ta x p a y e r i s a c o rp o ra tio n th e r e tu r n

P a r t n e r s h i p s , a l t h o u g h n o t t a x e d , u se Form IO 65

s e r v i n g t h e p u r p e s e o f an i n f o r m a t i o n r e t u r n .

In a d d itio n to f i l i n g a

r e t u r n , t h e Code im poses a d u t y ©n t a x p a y e r s t o s u p p le m e n t t h e i r r e t u r n s w i t h such s t a t e m e n t s o r s c h e d u l e s as a r e n e c e s s a r y t o d i s c l o s e i n f u l l t h e s i t u a t i o n o f th e ta x p a y e r. Form IOI4.OF f i l l s

j u s t such a p u rp o se .

S c h e d u le ©f Farm Income and E x p en ses and i t ferrn.

The s c h e d u le l i s t s

Form 101+0F i s t i t l e d

i s no m ore; i t i s n o t a r e t u r n

ite m s o f income and d e d u c t i o n s and by i n s e r t i n g

t h e p r o p e r am ounts t h e f a r m e r i s a b l e t o a r r i v e a t n e t p r o f i t or l o s s from f a r m i n g , vdaich i s t h e n t r a n s f e r r e d t o t h e p r o p e r p l a c e on t h e t a x p a y e r r e t u r n form .

Any f a r m e r t a x p a y e r can use th e form as a s c h e d u le w h e th e r

12 he i s Am i n d i v i d u a l , p a r t n e r s h i p o r c o r p a r a t i o m .

A c c ru a l b a s i s t a x p a y e r s

a s w e l l as t h e s e ©m t h e e r e p b a s i s may a l s o u s e t h i s f o r a .

The s c h e d u le

i s m a n d a to r y ©nly f o r f a r m e r s who k eep i n a d e q u a t e r e c o r d s and t h o s e wh@ 15 © l e s t t© r e p o r t on t h e c a s h b a s i s .

II.

RECORDS MD ACCOUNTING METHODS

R e g u l a t i o n 1 1 1 , S e c . 2 9 .5 U -1 s t a t e s : E v ery p e r s o n s u b j e c t t o t h e t a x , e x c e p t p e r s o n s whose g r o s s incom e ( l ) c o n s i s t s s o l e l y o f s a l a r y , w a g e s , o r s i m i l a r c o m p e n s a tio n f o r p e r s o n a l s e r v i c e s r e n d e r e d , ©r ( 2 ) a r i s e s s o l e l y from t h e b u s i ­ n e s s ©f grow ing and s e l l i n g p r o d u c t s o f t h e s o i l , s h a l l , f o r t h e p u r p o s e o f e n a b l i n g t h e c o m m is s io n e r t o d e t e r m in e t h e c o r r e c t amount ©f income s u b j e c t t o t h e t a x , keep s u c h p erm an ent books o f a c c o u n t ©r r e c o r d s , i n c l u d i n g i n v e n t o r i e s , as a r e s u f f i c i e n t t o e s t a b l i s h t h e amount o f t h e g r o s s income and t h e d e d u c t i o n s , © r e d i t s , and © th e r m a t t e r s r e q u i r e d t o be shown i n any r e t u r n u n d e r c h a p t e r 1 . . • W h ile i t

i s c l e a r from t h e above a u t h o r i z a t i o n t h a t f a r m e r s do n o t

have t o keep books and r e c o r d s c e r t a i n c o n s e q u e n c e s accompany t h e e l e c t i o n n o t t© do s o .

Any t a x p a y e r c h o o s in g n o t t o keep r e c o r d s m ust u se t h e c a l e n ­

d a r y e a r as h i s t a x y e a r .

He m ust r e p o r t h i s income and d e d u c t i o n s ©n t h e

c a s h r e c e i p t s and d i s b u r s e m e n t s b a s i s .

F u r t h e r , t h e Bureau p u t s t h e b u r ­

den upon any t a x p a y e r t o s a t i s f y t h e Com m issioner t h a t h i s t a x r e t u r n c l e a r ­ l y r e f l e c t s h i s incom e.

I f t h i s b u r d e n c a n n o t be m e t, w h ich i s d i f f i c u l t t o

d© i n t h e a b s e n c e o f r e c o r d s , t h e r e s u l t s may be d i s a s t r o u s . sio n e r is au th o riz e d

The Commis­

t o d e t e r m in e t h e t a x p a y e r ' s income by s e v e r a l r a t h e r

a r b i t r a r y m e th o d s w h ic h may r e s u l t i n a much h i g h e r income and t a x t h a n t h e t r u e ®ne. T a x p a y e rs who compute t h e i r income f o r a c a l e n d a r y e a r , u n l e s s

R e g . I l l , S e c . 2 9 * 2 2 (a )-7 *

13 t h e y d© s© b e c a u s e t h e y . f a i l t® k eep a d e q u a t e r e c o r d s , and t h o s e t a x p a y e r s u sin g th e b a sis.

f i s c a l y e a r may c h e e s e t© compute t h e i r in c o n e on t h e a c c r u a l

The C om m issioner h a s r u l e d t h a t f a r m i n g i s n o t a b u s i n e s s i n w hich

16 i n v e n t o r i e s m u st b e k e p t t o p r o p e r l y r e f l e c t in com e,

b u t t h e a c c r u a l me­

t h o d i s d e p e n d e n t u p e n i n v e n t o r i e s and t h e m ethod c a n n o t be u sed u n l e s s i n ­ v e n to rie s are k e p t.

.S till it

a p p e a r s t o be a d v a n ta g e o u s t o t h e f a r m e r t©

u s e t h e a c c r u a l b a s i s s i n c e i t g e n e r a l l y w i l l r e s u l t i n a more u n ifo rm ta x l i a b i l i t y .

R e g a r d l e s s w h ic h a c c o u n t i n g p e r i o d ( c a l e n d a r o r f i s c a l ) o r

w h ic h a c c o u n t i n g method (©ash o r a c c r u a l ) i s c h o s e n , I t m ust be u s e d con­ s i s t e n t l y u n t i l t h e C om m issioner a u t h o r i z e s a c h a n g e . T h ere i s a t h i r d m ethod o f a c c o u n t i n g w h ich i s a v a i l a b l e t o f a r ­ m ers.

I f t h e f a r m e r i s en g a g e d i n p r o d u c in g c r o p s w hich t a k e more t h a n

a y e a r t© grow , i t w ould be v e r y u n j u s t t o t h e f a r m e r t o t a k e most o f h i s d e d u c t i o n s f o r t h e c o s t o f p r o d u c in g i n one y e a r and have t o r e p o r t h i s i n ­ come from t h e s a l e in t h e n e x t y e a r .

To a v o id t h i s s i t u a t i o n a f a r m e r ,

may, w i t h t h e c o n s e n t o f t h e C o m m issio n er, t a k e t h e e n t i r e c o s t o f p r o d u ­ c i n g t h e c r o p a s a d e d u c t i o n f o r t h e y e a r t h e s a l e i s e f f e c t e d and t h e p r o 17 f i t made. I t was s t a t e d above t h a t t h e c r o p b a s i s .was a t h i r d ty p e o f a c c o u n t i n g m e th o d ; h u t t h i s

i s n o t e x a c t ly t r u e , s in c e th e crop b a s i s i s

n o t a m ethod i n and ©f i t s e l f , b u t c a n o n ly be u s e d i n c o n j u n c t i o n w i t h e i t h e r t h e c a s h o r a c c r u a l m e th o d s .

The c r o p b a s i s i s n e c e s s i t a t e d by t h e

f a c t t h a t c ro p s p ri© r t o m a tu r ity are g e n e r a lly n ot i n v e n t o r i a l .

B u reau l e t t e r , 8 - 3 0 - 2 3 .

17 R eg. I l l ,

S ee, 2 2 ( a ) - 7 .

Hi

18 P r i o r t® D ecem ber, 191+8

t h e Tax C o u r t h e l d t h a t c h a n g in g from t h e

c a s h b a s i s t o am i n v e n t o r y m e th o d , by m e r e ly co m p ly in g w i t h t h e r e q u i r e ­ m ents ©f t h e Cad®,was a s p e c i a l p r i v i l e g e o r r i g h t e x t e n d e d t o f a r m e r s and s u c h ch an g e d i d n o t r e q u i r e t h e p r i o r c o n s e n t o f t h e C om m issio ner. I n l i g h t @f t h i s d e c i s i o n t h e R e g u l a t i o n now s t a t e s : F orm al a p p l i c a t i o n f o r p e r m i s s i o n t o chang e frem t h e c a s h r e ­ c e i p t s and d i s b u r s e m e n t s b a s i s t o an i n v e n t o r y b a s i s ©f a c c o u n t i n g s h a l l n@t b© r e q u i r e d i n t h e c a s e o f a change made f o r a t a x a b l e y e a r b e g i n n i n g b e f o r e December 3 0 9 191+8, t h e d a t e o f a p p r o v a l o f T re a su ry D ecisio n 5 6 8 3 * I n any change ©f a c c o u n t i n g from t h e c a s h r e c e i p t s and d i s ­ b u r s e m e n t s b a s i s t o an i n v e n t o r y b a s i s , w h e th e r made f o r a t a x a b l e y e a r b e g i n n i n g b e f o r e o r a f t e r December JO, 191+8, a d j u s t m e n t s s h a l l be m ade, a t t h e o p t i o n o f t h e t a x p a y e r , i n a c c o r d a n c e w i t h ®ne ©r t h e © th er ©f t h e two m ethods o u t l i n e d i n ( l ) and ( 2 ) b e la w : 20

By m ethod ( l ) o p e n in g and c l o s i n g I n v e n t o r i e s o f a l l fa rm p r o ­ d u e t s ©n hand m ust be u s e d f o r t h e y e a r o f c h a n g e .

f,A l l farm p r o d u c t s ”

i n c l u d e s l i v e s t o c k and t h e r e i s n© d i s t i n c t i o n made betw ee n w h e th e r p r o ­ d u c t s w ere r a i s e d ©r p u r c h a s e d .

E s t i m a t e s may be made o f t h e i n v e n t o r i e s

and i f t h e C om m issioner i s s a t i s f i e d t h a t t h e y s u b s t a n t i a l l y r e f l e c t t h e p r e e e e d i n g y e a r s i n v e n t o r y incom e, th e y w i l l be a c c e p te d #

These in v e n ­

t o r i e s ©r e s t i m a t e s w i l l be t h e b a s i s f o r an a d j u s t m e n t s h e e t which must be s u b m i t t e d a d j u s t i n g t h e p r e e e e d i n g y e a r s income t o an i n v e n t o r y b a s i s . I f , i n t h e © p in io n o f t h e C o m m issio n er, t h e p r e v i o u s o r s u b s e q u e n t income w i l l s t i l l b e d i s t o r t e d , he may r e q u i r e t h a t t h e t a x p a y e r a d j u s t f r mere t h a n j u s t th e one y e a r . 18 T .D . 5 6 8 3 , Dec. 3 0 , 191+8. 19

K en neth S. B & t t e l l e e t a l , 9 TC; Angel M ila n i e t a l , I4.7 , 280 P-H# Memo TC. 20 R eg. I l l , S e c , 2 9 « 2 2 ( c ) - 6 .

15 Under m eth o d (2 ) n e t income i s com puted i n t h e y e a r ®f change w i­ t h o u t d e d u c t i n g t h e r e f r o m t h e v a lu e o f t h e b e g i n n i n g i n v e n t o r y , e x c e p t t© t h e e x t e n t t h a t i t

i n c l u d e s t h e c o s t o f p r o d u c t s on hand a t th e be­

g i n n i n g ©f t h e y e a r , w h ich h a d n o t b e e n c h a r g e d t o ex p en se i n t h e p r e v i o u s y ear.

YJhen t h i s m ethod i s u s e d , no a d j u s t m e n t s h e e t i s n e c e s s a r y . T© make any change i n a c c o u n t i n g m e th o d , a p p l i c a t i o n m ust be made

t© t h e C om m issioner w i t h i n 90 days a f t e r t h e b e g i n n i n g o f t h e t a x y e a r t o 21 b© c o v e r e d by t h e r e t u r n . The e n t i r e p r o c e s s i s n o t a s smooth as i t f i r s t a p p e a r s and th er® h a s b e e n mush l i t i g a t i o n o v e r i t .

I t h a s been

h e l d t h a t a f a r m e r d e s i r i n g t© change fro m t h e c a s h r e c e i p t s and d i s b u r s e ­ m e n ts b a s i s t o t h e a c c r u a l b a s i s may i n c l u d e i n h i s i n v e n t o r y , i n v e n t o r i a l a s s e t s @m h a n d , t h a t he c a n e s t a b l i s h t o t h e s a t i s f a c t i o n o f t h e C om m issioner,

22 w ere h e l d p r i © r t© t h e f i r s t y e a r i n w h ic h he was t a x e d .

The change from

e a s h t© a e c r u & l b a s i s h a s b e e n d e n i e d b e c a u s e t h e t a x p a y e r s r e c o r d s wore 23 ©n t h e c a s h b a s i s ; b e c a u s e t h e change w a s , r e q u e s t e d on t h e l a s t day o f t h e 2 l+ ta x a b le y e a r; b e c a u s e t h e r e t u r n had p r e v i o u s l y b een f i l e d on t h e c a s h 25 b a s i s and amendment on t h e a c c r u a l b a s i s was s o u g h t . Where t h e change i s d i r e c t e d by t h e C o m m issio n er, t h e t a x p a y e r n eed n o t s e c u r e fo rm a l

21 R eg. I l l , S ec. 2 9 * 2 2 ( o ) - 6 . 22 0D 1+81, CB June 1920 , p . 6 0 , ; 0D 6 3 6 , CB Dec. 1920, p . 8 0 . 25 OD 9 7 7 , CB Dec. 1 921 , p . 6 7 . 21+

0D1113, CB Dec. 1921, p . 79*

25

S tro n g v. W ille u ts

(DC Mim) j 17AFTR 1027•

16 26 p e r m is s io n , t© ch ang e i n @©mplian©e w i t h t h e R e g u l a t i o n .

I n some c a s e s

®©msent o f t h e C om m issioner w i l l he i m p l i e d from h i s a c c e p t a n c e o f a 27 ©hanged m e th o d , w i t h r e j e c t i o n . As t© ch an g e s fr©m t h e c a s h r e c e i p t s and d is b u r s e m e n t s b a s i s t o t h e c ro p b a s i s , t h e f o l l o w i n g Income Tax U n it R u lin g sum m arizes t h e s i ­ tu a tio n th u sly : The B ureau i s n o t u n m in d fu l t h a t t h e U n ite d S t a t e s Board o f Tax A p p e a ls h a s u n i f o r m l y h e l d t h a t t h e r e m ust be c o n s i s t e n c y o f t r e a t ­ ment w i t h r e s p e c t t o ite m s o f income and d e d u c t i o n w i t h i n t h e t a x ­ a b l e p e r i o d u n d e r t h e method o f a c c o u n t i n g em ploy ed . Where t h e p r a c t i c a l a p p l i c a t i o n ©f t h i s r u l e works t o t h e d e t r i m e n t o f t h e t a x p a y e r w i t h r e s p e c t t o p r e v i o u s l y t a x e d incom e, t h e Board h a s n o t been u n ifo rm ly s u s t a in e d . P r io r t o th e p ro m u lg atio n of t h i s ru le by t h e B o a rd , t h e B ureau had f o r many y e a r s g r a n t e d a p p l i c a t i o n s f o r a c c o u n t i n g c h a n g e s , i n t h e a b s e n c e ©f some e x c e p t i o n a l d i s t o r ­ t i o n ©f in c o m e, on t h e b a s i s ©f p i c k i n g up i n t h e y e a r o f change a l l p r e v i o u s l y n o n t a x - p a i d ite m s o f d e d u c t i o n . S in ce t h e prom u l­ g a t i o n o f t h e Board d e c i s i o n s t h e Bureau h a s d e n i e d su ch a p p l i c a ­ t i o n s u n l e s s t h e t a x p a y e r and t h e Com m issioner m u t u a l l y a g r e e as t© t h e a d j u s t m e n t s t o be made i n c o n n e c t i o n w i t h t h e c h a n g e . The t a x p a y e r i s n o t b e i n g f o r c e d by t h e Bureau t o change i t s a c c o u n t i n g m e th o d . The B ureau i s w i l l i n g t o m eet t h e t a x p a y e r ' s a c c o u n t i n g c o n v e n i e n c e , b u t i s c o n s t r a i n e d t o h o ld t h a t p e r m i s s i o n t o change w i l l s o t be g r a n t e d on a b a s i s w h ich u l t i m a t e l y d e f e a t s t h e rev en u e b y means o f p e r m i t t i n g d o u b le d e d u c t i o n s . A t a x p a y e r d e s i r i n g t o change i t s method o f a c c o u n t i n g from t h e c a s h r e c e i p t s and d i s ­ b u r s e m e n t s b a s i s t o t h e c ro p b a s i s w i l l be r e q u i r e d t o i n c o r p o r a t e i n i t s a p p l i c a t i o n , a s an i n s e p a r a b l e t e r n and c o n d i t i o n t h e r e o f , a n a g re e m e n t t o e l i m i n a t e p r e v i o u s l y d e d u c te d ite m s o f e x p e n d i tu r e * I n t h e i n s t a n t e a s e , t h e r e f o r e , as a c o n d i t i o n p r e c e d e n t t o t h e g r a n t i n g o f p e r m i s s i o n t o make t h e change f o r t h e c a l e n d a r y e a r 1 9 3 1 , t h e t a x p a y e r m ust a g r e e t h a t any e x p e n s e o f p l a n t i n g , c u l ­ t i v a t i n g , and o t h e r w i s e p r o d u c in g t h e c ro p w hich was i n c u r r e d p r i o r t© J a n u a r y 1 , 1 9 3 1 , a n ^ p r e v i o u s l y c la im e d as a d e d u c t i o n on t h e c a s h b a s i s , may n o t a g a i n be d e d u c te d i n 1931 any s u b s e q u e n t ■ 36

Gus B la s s C o ., 9 TC 15 , d is m i s s e d (OCA-8 ; -191+8) 168 F . ( 2 d ) AFTR11 33 ; R eyno lds C a t t l e C o ., 31 B TA 206 .

2;

t * Gus B la s s C o ., l o c . o i t . ; S. R o s s in oc S o n s, I n c . v . Comm. (CCA191+0), 113 F. (2 d ) 6 5 2 , ” 25 AFTR 1+1+0, a f f i r m i n g on t h i s p o i n t 1+0 B TA 1271+* 27

833,

17 year* O t h e r w i s e , t h e t a x p a y e r m ust c o n t i n u e t o r e p o r t income f o r F e d e r a l income t a x p u r p o s e s ©n t h e b a s i s p r e s e n t l y employed by i t * O f f i c e D e c i s i o n 81+1 and Mimeograph 3 1 8 0 , t o t h e e x t e n t t h a t same a r e i n c o n s i s t e n t h e r e w i t h , a r e revoked* The c r o p

b a s i s m ethod ca n

be

o f t h e c a s e s a r i s i n g from i t i n d i c a t e .

v e r y b e n e f i c i a l t© t h e

f a r m e r a s some

W hile engaged i n p l a n t i n g , c u l ­

t i v a t i n g and m a r k e t i n g s u g a r c a n e , an o p e r a t i o n e x t e n d i n g ©ver a t h r e e y e a r p e r i o d , t h e t a x p a y e r s u f f e r e d a v e r y e x p e n s iv e s t r i k e . s i n c e t h e t a x p a y e r s a c c o u n t s w ere on t h e c ro p b a s i s ,

H e ld , t h a t

l o s s e s c a u s e d by

strik e

s h o u ld be h a n d l e d t h e same as any e x p e n s e o f t h e c ro p and d e d u c te d 29 i n t h e y e a r ©f s a l® . Where t h e t a x p a y e r u s e d t h e c r o p b a s i s ©n t h r e e

y e a r c r o p s and i t s r e n t was p a y a b l e i n a p e r c e n t a g e o f t h e p r o d u c e .

H e ld ,

t h e r e n t a l was p r o p e r l y c h a r g e a b l e a g a i r s t th e c ro p from w hich i t was p a id 30 and d e d u c t i b l e a s an e x p e n s e o f p r o d u c in g t h a t c r o p . S i m i l a r r e s u l t s a r e a r r i v e d a t by t h e t r e a t m e n t a f f o r d e d t o Commo­ d i t y C r e d i t Loans u n d e r t h e Code.

At f i r s t , ad v a n c e s u n d e r l o a n a g r e e ­

m ents fr©m t h e Commodity C r e d i t C o r p o r a t i o n w ere t r e a t e d a s l e a n s from 31 a jay © th e r s o u r c e . The r e s u l t o f s u ch t r e a t m e n t was t h a t t h e f a r m e r i n ­ c u r r e d h i s e x p e n s e s when p l a n t i n g t h e c ro p and had t o t a k e h i s d e d u c t i c n s

IT 26ll+, CB June 19 3 2 , P* 1+8; Cf* N a t i o n a l Bank o f S ou th C a r o l i n a v . L u c a s , 36 F . ( 2 d ) 1013 (8 AFTR 991+2), and J a c o b B ro s . Co. v . Commission­ e r , 50 F. (2 d ) 39l+ (10 AFTR 1+. ) 29 Kahuku P l a n t a t i o n C o ., 12BTA977, m o d i f ie d i n 1 3 BTA2 9 2 . Oahu Sugar Co. L t d . , I 3 BTAI+0I+. Ewa P l a n t a t i o n C o ., I 3 BTA6 2 5 * Kekaha Sugar C o ., L t d . , 13BTA690 ( m o d i f ie d and a f f ' d , 60 App. DC 1 ? 2 , 50 F .2 d 3 2 2 , 9 AFTR 1 6 5 3 ) . 30 - K e k a h u S u g ar C o ., L t d . , l o c . c i t . 31 IT 2 9 3 1 , CB Dec. 19 35, P* 5 6 .

18 t h e r e , b u t he d i d h e t r e e e i v e t h e iaeem e frem t h e ©rep u n t i l a l a t e r y e a r . U©w t h e Cede p r o v i d e s t h a t t h e t a x p a y e r ©am e l e c t t© t r e a t t h e '*1 earns" is

when r e c e i v e d , ©r w a i t u n t i l t h e c r o p s a r e a c t u a l l y sold. and 32 t r e a t t h a t as t h e ti m e o f income r e c e i p t . Once an e l e c t i o n i s made i t t i s b i n d i n g on t h e t a x p a y e r u n t i l t h e C om m issioner a u t h o r i z e s a c h a n g e . I f , when t h e c r o p i s s o l d i t b r i n g s a g r e a t e r amount t h a n t h e rtl® ah n , t h e a d d i t i o n i s income a t t h e t i m e o f t h e s a l e .

T a x p a y e rs e l e c t i n g t© i n c l u d e

Commodity C r e d i t C o r p o r a t i o n lo a n s i n g r o s s income, m ust f i l e a s t a t e m e n t show ing t h e d e t a i l s t h e r e o f . I n 1921+, t h e Income Tax U n it d e c i d e d t h a t a d v a n c e s r e c e i v e d by e o t t e n g r o w e r s , on t h e c a s h b a s i s , u n d e r m a r k e tin g a g r e e m e n ts w i t h c o o p e r a ­ t i v e s a l e s a s s o c i a t i o n s w h ereb y a l l t h e c o t t o n r a i s e d by eac h g ro w er was s o l d t© t h e a s s o c i a t i o n and r e s o l d by i t ,

p roceed s l a t e r b ein g d i s t r i b u t e d

t© t h e g ro w e rs b a s e d ©n t h e amount ©f eoods d e l i v e r e d t o t h e a s s o c i a t i o n , 33 w ere t© be r e p o r t e d a s income i n t h e y e a r r e c e i v e d . S i m i l a r l y i n 193®, t h e Income Tax U n it d e c id e d t h a t amounts w h ich t h e t a x p a y e r '- e x p e c t s t o r e c e i v e as c e n d i t i o n a l p aym ents u n d e r t h e S ugar A c t , s h o u ld be r e p o r t e d a s income f o r t h e t a x a b l e y e a r i n w h ich s u c h paym ents w ere a u t h o r i z e d b y 3k t h e S e c r e t a r y ©f A g r i c u l t u r e . The t a x p a y e r i n t h e l a t t e r c a s e was ©n th e a c c r u a l b a s i s .

W hile b o t h o f t h e s e c a s e s a r e c o n s i s t e n t w i t h t h e

t r e a t m e n t u s u a l l y a c c o r d e d it e m s u n d e r t h e i r r e s p e c t i v e b a s i s m e th o d s , 32 I . R . C . , S e c . 123. 33 IT 2 1 0 7 , CB Dec. 192 k, p . 7U-

3k IT 3 1 8 7 , CB 1 9 3 6 - 1 , p . 1 59.

i t i s p o s s i b l e t h a t t h e y m ig h t be d e c i d e d d i f f e r e n t l y i n l i g h t o f t h e new c h a p t e r ®f t h e Cede (1 23)* C re d it L eans, but i t be e x t e n d e d .

*£ke Code d o e s s p e c i f i c a l l y d e a l w i t h Commodity

i s © eiaceivable t h a t t h e o p t i o n o f f e r e d t h e r e m ig h t

CHAPTER IV

INVENTORIES

I . WHAT MAY BE INVENTORIED

The p u r p o s e o f i n v e n t o r i e s i s t o more c o r r e c t l y r e f l e c t t h e t r u e in@©me ©f t h e ta x p a y e r *

T© c o r r e c t l y r e f l e c t t h e income i t i s n e c e s s a r y

t® know w hat s h o u ld be i n c l u d e d i n a n in v e n t o r y *

The r u l e s f o r t a x p a y e r s

g e n e r a l l y d i r e c t t h a t t h e y s h o u ld i n c l u d e a l l f i n i s h e d o r p a r t l y f i n i s h e d g®®ds w h ic h w ere a c q u i r e d f o r , o r h ave p h y s i c a l l y become a p a r t ©f t h e m e r e h a n d is e h e l d f o r s a l e .

T h is d e f i n i t i o n n e c e s s a r i l y i n c l u d e s some raw

m a t e r i a l s an d s u p p l i e s , b u t o n ly i f t h e y a r e h e l d f©r s a l e .

The R e g u l a t i o n

sp e c ifie s th a t th is

i n c l u d e s c o n t a i n e r s , b o t t l e s , kegs and e a s e s , w h e th e r 35 r e tu r n a b le o r n o t , p ro v id e d th e t i t l e p a sse s to th e p u rc h a s e r. Item s a r e n o t p r o p e r l y a p a r t ©f i n v e n t o r y u n t i l t h e t i t l e p ay e r, th e r e f o r e , u n le ss th e passage o f t i t l e s ic a l p o sse ssio n is im m a te ria l.

p asses to th e ta x ­

i s d e p e n d e n t up©n i t , ph y­

D e p r e c i a b l e p r o p e r t y may n e v e r be in c l u d e d

in in v e n to ry . The i t e m s t h a t a r e i n v e n t © r i a l t© t h e f a r m e r a r e f o r t h e m ost p a r t c o n s is te n t w ith th e g en era l r u le .

I t i s re q u ire d t h a t a l l p ro d u c ts r a is e d

©r p u r c h a s e d f o r s a l e , i n c l u d i n g l i v e s t o c k , m ust be i n v e n t o r i a l i f t h e f a r m e r i s ©m t h e a c c r u a l b a s i s . c lu d e d i n i n v e n t o r y .

S ta n d i n g o r p l a n t e d c r o p s a r e n o t p r o p e r l y i n ­

N urserym en may i n v e n t o r y t h e i r young t r e e s o n ly when

35

R eg. I l l ,

S ec. 2 9 . 2 2 ( c ) - ! .

21

36 t h e y have r e a e h e d a m a r k e t a b l e s i z e and s t a g e o f d e v e l o p m e n t .

On t h e

© e n t r a r y , im ma tu re e a t t l e a r e i n v e n t o r i e d g e n e r a l l y , a t o o s t t© d a t e when t h e f a r m e r i s r a i s i n g the m.

C a t t l e p u r c h a s e d f o r u s e as work o r b r e e d i n g

a n i m a l s ©r f o r u s e i n t h e d a i r y b u s i n e s s have b e e n h e l d p r o p e r l y i n e l u d e d 37 i n i n v e n t o r y a t t h e ®pti@n ®f t h e t a x p a y e r .

II.

VALUATION OF INVENTORY

The r u l e u n i v e r s a l t® a l l i n d u s t r i e s i s t h a t i n v e n t o r i e s s h o u l d 38

be t a k e n ©n t h e b a s i s ” ( a ) c © s t , o r ( b ) c o s t o r m a r k e t , w h i c h e v e r i s l o w e r . ” B u t , s i n c e t h e R e g u l a t i o n p r o v i d e s t h a t v a l u a t i o n o f i n v e n t o r i e s must conform t® a c c o u n t i n g p r a c t i s e s i n t h e b u s i n e s s and must c l e a r l y r e f l e c t inc ome, t h e r e ea n be l i t t l e

u n if o r m ity as t o v a l u a t i o n methods.

The Bureau r e q u i r e s

o n l y t h a t t h e method u s e d be m e r e l y i n s u b s t a n t i a l a c c o r d w i t h t h e Regu­ la tio n s provided the taxpayer is c o n s is te n t.

I t is often d i f f i c u l t ,

in

seme i n d u s t r i e s , t© d e t e r m i n e a c c u r a t e l y t h e o o s t j and i t h as b e e n h e l d i n su eh e a s e s t h a t t h e m a r k e t p r i c e may be r e d u c e d by an amount s u f f i c i e n t t© e l i m i n a t e p r o f i t and t h e r e s u l t u s e d a s c o s t . s p e c i f i c a l l y as su ch a b u s i n e s s .

59

Farming was d e s i g n a t e d

Cos t i n t h e c a s e o f p u r c h a s e d goods

i s t h e i n v o i c e p r i c e p l u s t h e e x p e n d i t u r e s n e c e s s a r y t o r e d u c e t h e it em 35

I . T . 1363 CB J u n e , 1 9 22 , p . 7 2 . 37 P e v e l y D a i r y C o . , 1 BTA 3^5• 38 Reg. I l l ,

See. 2 9 * 2 2 ( c ) - 2 .

39 0.

SI4I+, CB 1 91 9, p . 59.

22

t© p o s s e s s i n g @r u s e .

In t h e e a s e ©f a r t i c l e s p r o d u c e d , c o s t u s u a l l y

i m e l u d e s m a t e r i a l s , l a b o r and e x p e n s e s .

I f t h e it e m s were i n v e n t o r i e d

i n t h e p r e v i o u s y e a r , t h e v a l u e t o be u s e d i n t h e b e g i n n i n g i n v e n t o r y

1*0 w i l l be t h a t u s e d i n t h e p r e v i o u s y e a r s c l o s i n g i n v e n t o r y .

I f sim ilar

l o t s ©f i n v e n t o r i e d a r t i c l e s

have b e e n i n t e r m i n g l e d s© t h a t i d e n t i t y ,

in r e l a t i o n to the d if f e r in g

c o s t o f e a c h , i s l e s t and some a r e s o l d ,

t h o s e r e m a i n i n g w i l l be deemed t o b© t h o s e l a s t p u r c h a s e d . is called the " f i r s t - i n , f i r s t- o u t " ru le .

'

Thi s r u l e

The t a x p a y e r i s n o t bound t©

f e l l o w t h i s r u l e , f o r r e g a r d l e s s o f l o s s ©f i d e n t i t y o r t h e c h a r a c t e r o f h i s b u s i n e s s , he c a n s e c u r e p e r m i s s i o n from t h e Commissioner t o t r e a t it em s he s p e c i f i e s , u n d e r t h e " l & s t - i n , f i r s t - o u t " r u l e .

Under t h e " l a s t - i n ,

f i r s t - @ u t " r u l e t h e s e i t e m s l e f t on hand a r e deemed t o be t h o s e f i r s t i+2 acquired. This i s c a l l e d t h e " e l e c t i v e me tho d" o f i n v e n t o r i n g . The " e l e c t i v e me tho d" i s a p p l i c a b l e o n l y i f c o s t i s u s e d ,

III.

SPECIAL FARM VALUATION METHODS

A f a r m e r may d i s r e g a r d a l l o f t h e methods m e n t i o n e d above and us e t h e " f a r m - p r i e e m e t h o d . " i s t h e m a rk e t p r i c e .

The s t a r t i n g p o i n t when u s i n g t h i s method

The m a r k e t p r i c e i s r e d u c e d by t h e amount o f t h e

d i r e c t c©st o f d i s p o s i t i o n .

To change t o t h i s method o f v a l u i n g i n v e n t o r i e s ,

IjX) Reg* 11 1 , S e c . 2 9 . 2 2 ( e ) - 3 .

l+l Reg. I l l , i+2 Reg. I l l ,

Sec. 2 9 * 2 2 (c )-2 . Sec. 2 9 . 2 2 ( d ) - ! .

23 t h e C o & m i s s i e n a r ' s a p p r o v a l must be s e c u r e d .

I f t h e Commissioner a p p r o v e s

t h e e l e e t i e n i t must be f o l l o w e d f o r t h e e n t i r e i n v e n t o r y e x e e p t l i v e s t o c k

h3 w h i c h may be v a l u e d by t h e " u n i t - l i v e s t e c k - p r i c © m e t h o d . "

Th is e l e c t i o n

t©®, must have t h e p r i o r © onsent o f t h e C o m m is s io n e r. The " u m i t - l i v e s t o c k - p r i e e me th od " p r o v i d e s f o r t h e a d o p t i o n by th© f a r m e r ©f a r e a s o n a b l e c l a s s i f i c a t i o n o f t h e a n i m a l s i n h i s i n v e n t o r y w i t h r e s p e o t t© age and k i n d . animal w i t h i n th e c l a s s . raise liv esto ck .

A s ta n d a rd u n i t p r i c e i s th e s e t f o r each

T h i s method i s o n l y a v a i l a b l e t o f a r m e r s who

I f s u ch f a r m e r ha s p r e v i o u s l y v a l u e d h i s i n v e n t o r y on

t h e b a s i s ©f c o s t o r c o s t o r m a r k e t , w h i c h e v e r i s l o w e r , and d e s i r e s t o ad®pt t h e " u n i t - l i v e s t o c k - p r i e e me tho d" f o r a y e a r s u b s e q u e n t t o December 3 1 , 191*3, he does n o t n ee d t h e p e r m i s s i o n o f t h e Com m is sio ner .

T h i s method

must be a p p l i e d t o a l l l i v e s t o c k r a i s e d , w h e t h e r f o r s a l e , d r a f t , b r e e d i n g ©r d a i r y p u r p o s e s .

Animals p u r c h a s e d f o r d r a f t , b r e e d i n g o r d a i r y p u r p o s e s

©an be t r e a t e d a s i n v e n t o r y o r as c a p i t a l i n v e s t m e n t s u b j e c t t o d e p r e c i a t i o n a fte r m aturity.

The c o s t o f immature a n i m a l s s h o u l d be i n c r e a s e d e a c h

y e a r in accordance w ith the u n it p r i e e s except in th e event o f purchases made d u r i n g t h e l a s t s i x months of s u ch y e a r , no a d j u s t m e n t s h o u l d be made in th a t y ear.

Upon s u b s e q u e n t d i s p o s i t i o n t h e " f i r s t - i n , f i r s t - o u t method"

s h o u l d be u s ed i f t h e a n i m a l s can n o t be i d e n t i f i e d . Case d e c i s i o n s on i n v e n t o r y methods a r e nu me rous.

I f the taxpayer

h a s u s e d a n i n v e n t o r y method b u t t h e Commissioner deems h i s r e c o r d s I n -

I . R . C . , Sets. 2 2 ( o ) .

a d e q u a t e , t h e income s h o u l d be computed on t h e c a s h r e c e i p t s and d i s bh bursements b a s i s . The t a x p a y e r v a l u e d h i s i n v e n t o r y a t d ou bl e t h e amount he t h o u g h t t h e bank s would lo a n him on h i s c a t t l e ; h e l d , no r e l a t i o n 45 ship t o c o s t , disapproved. L i k e w i s e , where t h e t a x p a y e r k e p t no r e c o r d s i n v e n t o r i e s p r e p a r e d a t t h e t i m e o f making t h e r e t u r n from h i s r e c o l l e c t i o n U6 held not perm issible. A f a r m e r u s i n g an i n v e n t o r y method may n o t v a l u e 1+7 h i s ©reps ©n han d a t y e a r s end i n e x c e s s o f t h e c o s t o f r a i s i n g them. V a l u i n g i n v e n t o r i e s o f l i v e s t o c k a t a " c o n s t a n t p r i c e " ha s b ee n d i s a p p r o v e d I n t h e l a s t c a s e , t h e Board o f Tax A pp ea ls a l s o h e l d t h a t i n com puting c o s t , f o r i n v e n to r y p u rp o s e s , i t i s p ro p er to a p p o r ti o n t h e c o s t of main­ t a i n i n g th e b re e d in g animals t o t h e animals b o rn during th e y e a r , b u t t h a t d e a t h l o s s e s may n o t be so a p p o r t i o n e d .

I T . 16 73 , CB June 1923, p . 3 0 .

k5 C h a r l e y Yf. P e t e r s o n , Se c. 1+5, 108 P-H Memo TC.

1+6 C. E. C l a r k , S e c . 1+2, 098 P-H Memo BTA. hi 0.

81+ii., CB 1 919 , p . 59.

1+8 E s t a t e o f C o r n e l i a A d a i r , 1+3

30l+.

CHAPTER V

GROSS INCOME

I.

EXCLUSIONS

The g r o s s ineome o f f a r m e r s , as i s t h e g e n e r a l r u l e w i t h o t h e r i n d i v i d u a l t a x p a y e r s , i n c l u d e s t o t a l income from a l l s o u r c e s .

One e x c e p t i o n

o c c u r s when p r o d u c t s a r e r a i s e d by t h e f a r m e r and consumed by h i s f a m i l y . The v a l u e o f s u c h p r o d u c t s i s n o t income t o t h e f a r m e r . Tax A p p ea ls h a s h e l d t h a t ,

The Board o f

. . . nI t i s o b v io u s t h a t su ch it em s a r e com­

p a r a b l e t o t h e r e n t a l v a l u e o f a p r i v a t e r e s i d e n c e , w h ic h has n e v e r been

k-9 r e g a r d e d as income o r as a f a c t o r i n t h e d e t e r m i n a t i o n o f t a x l i a b i l i t y . ” But w he re a s o l e p r o p r i e t o r o f a b u s i n e s s o f s e l l i n g p r o v i s i o n s made w i t h ­ d r a w a l s f o r p e r s o n a l and f a m i l y u s e , t h e Income Tax U n i t r u l e d t h a t he must s u b t r a c t e i t h e r t h e c o s t o f suc h P r o v i s i o n s from h i s t o t a l p u r c h a s e s 50 f o r t h e y e a r o r add su ch c o s t t o h i s t o t a l s a l e s .

II.

INCLUSIONS

The it e m s o f g r o s s Income t o f a r m e r s r e p o r t i n g on t h e c a s h r e c e i p t s 51 and d i s b u r s e m e n t s b a s i s a r e s u g g e s t e d b r o a d l y by t h e R e g u l a t i o n s . Gross income s h a l l i n c l u d e

( l ) t h e amount o f c a s h o r t h e v a l u e o f m e r c h a n d i s e

-------------- 59--------Homer P. M o r r i s , 9 BTA 1273* 50 IT 9 9 8 , CB Dec. 1921, p . 8 6 ; P . P . Swe eten , 3 BTA 37 ; F e l l i p o D i c e n s o , 11 BTA 6 2 0 ; T . J . F r a n c i s , 2 BTA IO 8 7 . 51

Reg. I l l ,

S e c . 2 9 * 2 2 ( a ) -7*

26

©r o t h e r p r o p e r t y r e c e i v e d d u r i n g t h e t a x a b l e y e a r from t h e s a l e o f l i v e sttnsk and p r o d u c e w hic h w ere r a i s e d d u r i n g t h e t a x a b l e y e a r o r p r i o r years,

( 2 ) t h e p r o f i t s from t h e s a l e o f any i t e m s p u r c h a s e d , i n c l u d i n g

l i v e s t o c k , and ( 3 ) g r o s s income from a l l o t h e r s o u r c e s . I f t h e f a r m e r u s e s t h e a c c r u a l b a s i s , h i s g r o s s p r o f i t s a r e found by a d d i n g t© h i s c l o s i n g i n v e n t o r y t h e amount r e c e i v e d from t h e s a l e o f l i v e s t o c k and p r o d u c t s , and a l l m i s c e l l a n e o u s r e c e i p t s d u r i n g t h e y e a r , and d e d u c t i n g from t h i s sum t h e b e g i n n i n g i n v e n t o r y v a l u e and t h e c o s t o f l i v e ­ s t o c k and p r o d u c t s p u r c h a s e d d u r i n g t h e y e a r . Gr oss income from a l l o t h e r s o u r c e s , i n t h e c as e o f a c a s h b a s i s t a x p a y e r and m i s c e l l a n e o u s Income r e c e i p t s , i n t h e c a s e o f a c c r u a l b a s i s t a x p a y e r s , a p p a r e n t l y c o v e r t h e same i t e m s .

I t s h o u l d be n o t e d t h a t a l l

o f t h e i t e m s o f g r o s s income c o v e r e d so f a r a r e i t e m s w hic h a r e u s e d t o d e t e r m i n e t h e f a r m e r s - 1 p r o f i t from f a m i n g and a l l a r e u s ed i n compu­ t a t i o n s ©n f or m 10l.|,0 F.

There a r e many o t h e r i t e m s o f income t h a t must

be- i n c l u d e d i n g r o s s income b u t n o t n e c e s s a r i l y f i g u r i n g i n p r o f i t from farming.

Due t o t h e m e c h a n i c s o f t h e forms t h e s e o t h e r i t e m s a r e h a n d l e d

i n s e p a r a t e s c h e d u l e s on t h e r e t u r n form.

An example o f s u c h an it e m would

be t h e g a i n from t h e s a l e o r exchange o f c a p i t a l a s s e t s

( i n some c a s e s ,

farm a n i m a l s ) , w hic h wo uld be t r e a t e d s e p a r a t e l y i n ^S c h ed u le D - Gains and L o s s e s from S a l e s and Exchanges of P r o p e r t y ” foun d on form IOI4O.

27 III.

VALUATION OF INCLUSIONS

S im p l y s t e - i n g w h i c h Item s a r e i n c l u d i b l e f o r g r o s s income p u r p o s e s does n o t s o l v e t h e e n t i r e p r o b l e m ,

J u s t as i m p o r t a n t i s t h e p r o b le m o f

how much o f t h e i t e m is, i n c l u d e d . Receipts o th e r th a n cash When a f a r m e r s e l l s h i s l i v e s t o c k o r p r o d u c e f o r m e r c h a n d i s e o r o t h e r p r o p e r t y , h e sh o u ld i n c l u d e a s income t h e f a i r m a r k e t v a l u e o f t h e p r o p ­ e rty received. P r o f i t s from p u r c h a s e d i t e m s The p r o f i t s from t h e s a l e o f i t e m s p u r c h a s e d , i n c l u d i n g l i v e s t o c k a r e d e t e r m i n e d by d e d u c t i n g t h e t a x b a s i s from, t h e s a l e p r i c e . d i f f e r e n c e i s t h e amount t h a t i s i n c l u d e d i n g r o s s inc ome. ment i s v e r y d i f f e r e n t f r o m - t h a t d i r e c t l y a b o v e .

Thi s

Thi s t r e a t ­

In th e preceeding item ,

concerning s a l e s of products r a i s e d , th e e n t i r e proceeds are included in g r o s s income b e c a u s e t h e e x p e n s e s i n c o n n e c t i o n t h e r e w i t h w i l l have be en p r e v i o u s l y d e d u c t e d i f t h e y were i n c u r r e d o r p a i d i n a p r i o r y e a r .

Under

th e tr e a tm e n t of p ro d u cts purchased th e t a x b a s i s is deducted r e g a r d le s s o f when t h e p u r c h a s e was made.

The t a x b a s i s g e n e r a l l y i s t h e c o s t l e s s

the d e p r e c ia tio n allo w ab le. M i s c e l l a n e o u s income r e c e i p t s The R e g u l a t i o n s p e c i f i e s t h a t m i s c e l l a n e o u s income r e c e i p t s must be i n c l u d e d .

These it em s u s u a l l y a r e e a s i l y h a n d l e d s u c h as c a s h r e c e i v e d

f a r t h e h i r e o f t e a m s , m a c h i n e r y and t h e l i k e t o n e i g h b o r s .

26 M i s c e l l a n e o u s income r e c e i p t s a r e a l s o c a l l e d fto t h e r f arm inc om e” it e m s and i n c l u d e s u c h t h i n g s a s ; R e c e i p t s fr om wood and lu m b e r Breeding fe e s Work ©ff farm County f a i r p r i z e s R e c o v e r y f o r h a i l and f i r e i n s u r a n c e on c r o p s Commodity C r e d i t Loans Such l o a n s may be t r e a t e d as l o a n s and n o t g r o s s income o r i f t h e t a x p a y e r f o r m a l l y e l e c t s , t h e l o a n may be t r e a t e d as income i n t h e y e a r received.

I f l a t e r the crop i s sold a t a p ric e in excess of the lo a n ,

w h ic h ha d p r e v i o u s l y b e e n t r e a t e d as in c o m e, su ch e x c e s s i s f u r t h e r income. R e c e i p t s from c r o p s h a r e r e n t s When a t e n a n t pays h i s farmer, l a n d l o r d r e n t i n s h a r e s o f h i s c r o p s , t h e y a r e income t o t h e f a r m e r o n l y when r e d u c e d t o money o r i t s e q u i v a l e n t , and o n l y t o t h a t amount.

I t makes n© d i f f e r e n c e w h e t h e r t h e t a x p a y e r i s

©n t h e c a s h o r a e c r u a l m e th od , e x c e p t w i t h t h e l a t t e r , t h e f a r m e r s h o u l d be c a r e f u l n o t t o i n c l u d e s u c h s h a r e s i n h i s i n v e n t o r i e s . A g r i c u l t u r a l p r o g r a m payments Payments made t o t h e t a x p a y e r u n d e r any o f t h e g o v e r n m e n t ’ s a g r i 52 c u l t u r a l pr o gr am s a r e Income i n t h e amount o f t h e p ay m en t, unless they 52 D e c i s i o n s u n d e r d i f f e r e n t a c t s - IT 297 6 , CB Ju ne 193&* P* 13®S IT 2 7 6 7 , CB J u n e 1931+, p . 35 ; IT 299 2, CB Dec. 1936, p . 75; Baboquiv&ri C a t t l e C©., I4.7 BTA 129 , a f f ' d (CCA-9; 191+3), 135 F .2 d lll+, CT.D. 1 5 8 8 , 30 AFTR 1 3 6 6 . Clara D r i s c o l l , S e c . 1+1+,021 P-H Memo TC m o d if ie d w ith o u t d i s c u s s i o n o f t h i s p o i n t , D r i s c o l l v . Comm. (CCA-S; 191+5)* ll+7 F .2 d 1+93* 33 AFTR 70l+s Gr.A. S t a f f o r d & C o . , I n c . v . P e d r i c k (DC, N .Y .j 191+8), 78 F.Supp 8 9 ; S e c . 7 2 , 1+85 P-H Fed. 191+8, a f f d (2 C i r . ; 191+8), 171 F . ( 2 d ) 1+2; S e c . 7 2 , 61+6 P-H Fe d. 191+8.

29 a r e [email protected] f o r amounts exp en d e d ©n c a p i t a l a s s e t s ,

i n w hic h c a s e t h e y

a r e r e d u c t i o n s ©f o o s t . G i f t s made by & f a r m e r F arme rs d o n a t i n g p r o d u c t s , t h e y have r a i s e d , t o c h a r i t a b l e o r g a n i z a t i o n s a r e r e q u i r e d t o i n c l u d e t h e f a i r m a r k e t v a l u e ©f su ch c o n t r i feutiems i n t h e i r g r o s s income

Like wis r:,} a f a r m e r who made a g i f t t©

h i s son ©f c a t t l e he had r a i s e d i s r e q u i r e d t o i n c l u d e t h e i r f a i r m a r k e t

5h v a l u e , a t t h e t i m e ©f t h e g i f t ,

i n h i s g r o s s inc om e.

The Income Tax U n it

s a i d t h i s c o n c l u s i o n was b a s e d on t h e t h e o r y o f an a s s i g n m e n t o f t h e d o n o r ' s r i g h t t© income. Patronage dividends P a t r o n a g e d i v i d e n d s a r e i^efunds o r r e b a t e s -^aid t o a f a r m e r b e c a u s e he i s a p a t r o n o f s. c o o p e r a t i v e t h a t m a r k e t s h i s p r o d u c t s o r s e l l s him h i s s u p p l i e s .

The r u l e s r e g a r d i n g p a t r o n a g e d i v i d e n d s a r e s u c c i n c t l y

s t a t e d as f o llo w s : F armers- who m a r k e t p r o du ce t h r o u g h a c o o p e r a t i v e s h o u l d add t o t h e s a l e s p r i c e o f t h e p r o d u c e , o r t o o r d i n a r y income, any p a t r o n a g e d i v i d e n d s r e c e i v e d i n t h e t a x a b l e y e a r a s a r e s u l t o f such t r a n s a c t i o n s . Farmers who b u y , t h r o u g h a c o o p e r a t i v e , i m p l e m e n t s , g a s o l i n e , s e e d , f e r t i l i z e r , or o th e r item s f o r use in t h e i r b u sin ess should e i t h e r r e d u c e t h e i r d e d u c t i o n s f o r s u c h it e m s by t h e amount o f p a t r o n a g e d i v i d e n d s r e c e i v e d o r add p a t r o n a g e d i v i d e n d s t o income. P a t r o n ­ age d i v i d e n d s r e c e i v e d as r e b a t e s f o r p u r c h a s e s o f i t e m s n o t use d i n y o u r b u s i n e s s s h o u l d b© o m i t t e d from y o u r t a x r e t u r n . P a t r o n ­ age d i v i d e n d s a r e c o n s i d e r e d p a i d t o you when r e m i t t e d i n c a s h , m e r c h a n d i s e , s t o c k c e r t i f i c a t e s , o r when c r e d i t e d t o y o u r a c c o u n t . 53 I . T . 391 0, CB 194.8-1, p . 1 5 . 54 I . T . 39 3 2 , CB 1 9 4 8 - 2 , p . 7 .

30 IV.

SALES OF PROPERTY

The r u l e was s t a t e d above t h a t p r o f i t on s a l e s o f p r o p e r t y must be i n c l u d e d i n g r o s s inc ome , w h i l e t h i s

is t r u e , not a l l p ro fita b le sales

a r e t a x e d on t h e f u l l m o u n t o f t h e p r o f i t .

When c a p i t a l a s s e t s a r e s o l d

®r e x c h a n g e d , t h e r e s u l t s a r e a c a p i t a l g a i n o r l o s s .

I f the c a p i ta l a s s e t

h as b e e n h e l d f o r more t h a n 6 months t h e g a i n o r l o s s i s l o n g - t e r m ; i f h e l d f©r 6 months o r l e s s , t h e g a i n o r l o s s i s s h o r t - t e r m .

I f the gain is long­

t e r m , o n l y o n e - h a l f t h e amount i s t a k e n i n t o a c c o u n t ; i f s h o r t - t e r m , t h e e n t i r e amount o f g a i n o r l o s s i s t a k e n i n t o a c c o u n t .

L o n g - t e r m and s h o r t ­

t e r m c a p i t a l g a i n s and l o s s e s a r e t h u s com bin ed, r e s u l t i n g i n a n e t c a p i t a l gain or lo s s .

A n e t c a p i t a l g a i n i s i n c l u d e d i n income, b u t a n e t c a p i t a l \ l o s s i s a l l o w a b l e i n t h e y e a r o f l o s s o n l y t o a maximum o f $ 1 0 0 0 , t h e r e s t b e i n g c a r r i e d f o r w a r d f o r a t o t a l o f 5 y e a r s i f n o t us ed us s o o n e r . The r e l i e f p r o v i s i o n w h ic h u n i t s t h e r a t e a t vdrich a n e t l o n g - t e r m c a p i t a l ca n be t a x e d i s t h e same f o r f a r m e r s as f o r o t h e r t a x p a y e r s . The law d e f i n e s c a p i t a l a s s e t s n e g a t i v e l y a s : . . . p r o p e r t y h e l d by t h e t a x p a y e r ( w h e t h e r o r n o t c o n n e c t e d w i t h h i s t r a d e o r b u s i n e s s ) , b u t does n o t i n c l u d e s t o c k i n t r a d e ©f t h e t a x p a y e r o r o t h e r p r o p e r t y o f a k i n d w hic h would p r o p e r l y be i n c l u d e d i n t h e i n v e n t o r y o f t h e t a x p a y e r I f on hand a t t h e c l o s e o f t h e t a x a b l e y e a r , o r p r o p e r t y h e l d by t h e t a x p a y e r p r i m a r i l y f o r s a l e t o customers i n th e o rd in a ry course of h is t r a d e or b u s in e s s , o r p r o p e r t y , u s e d i n t h e t r a d e o r b u s i n e s s , o f a c h a r a c t e r w h ic h i s s u b j e c t t© t h e a l l o w a n c e f o r d e p r e c i a t i o n p r o v i d e d I n s e c t i o n 23 ( l ) > o r an o b l i g a t i o n o f t h e U n i t e d S t a t e s o r any o f i t s p o s s e s s i o n s , o r o f a S t a t e o r T e r r i t o r y , or any p o l i t i c a l s u b d i v i s i o n t h e r e o f , o r o f t h e D i s t r i c t o f Colu mb ia, i s s u e d on o r a f t e r March 1 , 19^1? on a d i s c o u n t b a s i s and p a y a b l e w i t h o u t i n t e r e s t a t a f i x e d m a t u r i t y d a t e n o t e x c e e d i n g one y e a r from t h e d a t e o f i s s u e , or r e a l p r o ­ p e r t y used in th e t r a d e or b u s in e s s of th e t a x p a y e r ; ^

55 I . R . C . , Sec. 117(a)*

31 The exelusi©®. @f s t o c k i n t r a d e o r i n v e n t o r y p r o p e r t y and p r o p e r t y h e ld p r im a r ily fo r s a le to custom ers, in e f f e c t , excludes the sa le of products r a i s e d ©r p u r c h a s e d f o r r e s a l e by t h e f a r m e r .

Sales of investm ents, r e ­

s i d e n t i a l p r o p e r t y and p e r s o n a l a u t o m o b i l e s a r e c a p i t a l a s s e t s common t o farm ers.

Of c o u r s e , a l t h o u g h g a i n s from t h e s a l e ©f t h e l a s t two a r e

t r e a t e d as c a p i t a l g a i n s , l o s s e s t h e r e f r o m wo uld n o t be d e d u c t i b l e s i n c e the tra n s a c tio n s are not entered into fo r p r o f i t . A r e l i e f p r o v i s i o n i n t h e Code h a s b r o a d e n e d c o n s i d e r a b l y t h e scope 56 o f a s s e t s w h i c h may b e n e f i t f r o m c a p i t a l a s s e t t r e a t m e n t . Th is s e c t i o n . ; i s e n t i r e l y i n f a v o r ©f t h e t a x p a y e r .

I t ap p lies to depreciable property

and r e a l p r o p e r t y , and t i m b e r u n d e r some c o n d i t i o n s .

As a r e s u l t o f t h e

t r e a t m e n t p r e s c r i b e d t h e r e i n , i f t h e t o t a l o f t h e ”117 J ” t r a n s a c t i o n s i s a n e t g a i n , t h e t r a n s a c t i o n s a r e t r e a t e d as l o n g - t e r m c a p i t a l g a i n s and l o s s e s and t h e r e f o r e , ©nly ©ne-h&lf ©f t h e a c t u a l g a i n s and l o s s e s are taken into account.

I f t h e ”117 J n t r a n s a c t i o n s r e s u l t i n a n e t l o s s ,

t h e n t h e s e c t i o n i s n o t a p p l i c a b l e and t h e t r a n s a c t i o n s a r e t r e a t e d as o r d i n a r y g a i n s and l o s s e s , I . e . t h e n e t l o s s i s f u l l y d e d u c t i b l e . F or a t r a n s a c t i o n t o be a ”117 J ” t r a n s a c t i o n , t h e r e must have a s a l e o r e x c ha n ge o r an i n v o l u n t a r y c o n v e r s i o n o f su ch p r o p e r t y a f t e r i t had b e e n h e l d f o r more t h a n 6 m o n t h s . p r o p e r t y m u s t be u s e d i n t h e b u s i n e s s . 55

I . R . C . , Sec. 1 1 7 (a ).

In a d d i t i o n to the fo re g o in g , the An i n v o l u n t a r y c o n v e r s i o n i s d e -

32 s © r i b e d as eomdeBoajttiefc, s e i z u r e , d e s t r u c t i o n , t h e f t and s i m i l a r l o s s e s . The i n v o l u n t a r y c o n v e r s i o n p r e v i s i o n c a n be a p p l i e d t o c a p i t a l a s s e t s to© . A nim als, w hether r a i s e d or acq u ired f o r d r a f t , breeding or d a iry p u r p o s e s i f h e l d f o r more t h a n 6 months m e et t h e r e q u i r e m e n t s o f S e c . 1 1 7 ( j ) . The B u re au h a s r u l e d t h a t t h e i n c l u s i o n o f t h e above a n i m a l s i n i n v e n t o r y i s i m m a t e r i a l s i n c e i t i s done by t h e f a r m e r m e r e l y as a n a c c o u n t i n g c o n 57 venienee. When s u c h l i v e s t o c k a r e s o l d t h e o p e n i n g i n v e n t o r y must be a d j u s t e d t o show t h e i r t r a n s f e r t o t h e c a p i t a l a s s e t a c c o u n t .

The Com­

m i s s i o n e r a p p a r e n t l y c o n s i d e r s t h e t r e a t m e n t i n t h i s p a r a g r a p h , w hi ch h a s b e e n ap pro ved by t h e c o u r t s , i s t o o b r o a d . A c c o r d i n g t o t h e c o u r t , f o r a t r a n s a c t i o n t o come u n d e r 117 ( j ) i t i s encumbent upon t h e s e l l e r t o show: ( l ) t h a t t h e a n i m a l s s o l d were used i n h i s t r a d e o r b u s i n e s s ; ( 2 ) w ere s u b j e c t t o a l l o w a n c e f o r d e p r e c i a t i o n ; ( 3 ) were h e l d f o r more t h a n 6 m o n t h s ; (I4.) w er e n o t p r o p e r t y o f t h e k i n d i n c l u d i b l e i n t h e s e l l e r ' s i n v e n t o r y i f on hand a t t h e c l o s e o f t h e t a x a b l e y e a r ; ( 5 ) t h a t t h e a n i m a l s were n o t h e l d p r i m a r i l y f o r s a l e ^ t o customers in th e o rd in a ry course o f h i s tr a d e or b u s in e s s . From a l l i n d i c a t i o n s , i t i s co nc e de d by t h e Commissioner t h a t such a n i m a l s a r e u s e d i n t h e t r a d e o r b u s i n e s s o f f a r m i n g and t h a t t h e y a r e p r o p e r t y s u b j e c t t o allowance f o r d e p r e c i a t i o n .

The Commissioner i s con­

t e n d i n g t h a t t h e a n i m a l s a r e h e l d p r i m a r i l y f o r s a l e t o c u s t o m e r s and t h a t th e y are p ro p e rty of th e kind in c lu d ib le in in v e n to ry .

I t is strange to

mote t h e C o m m i s s i o n e r ' s c o n t e n t i o n or t h e l a t t e r p o i n t , s i n c e t h e B’-roau h a s r u l e d t h a t t h e f a c t t h a t l i v e s t o c k have be en i n c l u d e d i n I n v e n t o r y i s im m aterial.

Thi s Bureau r u l i n g has had t h e f u l l s u r p o r t o f t h e c o u r t s

57 I . T . 3 6 6 6 , CB 19 L1U, p. 2 7 0 . 58

A lb r ig h t v . U. S. (8 C i r . j 19 k9 ) , 173 F*2d 3 3 9 , Seo. 7 2 , 381 P-H F ed . 191+9.

w h i c h have f a c e d t h e i s s u e . I®, t h e A l r i g h t e a s e t h e c o u r t r e j e c t e d t h e C o m m is s io n er ' s c o n t e n t i o n t h a t " c u l l s 11 f r om a b r e e d i n g h e r d a r e h e l d p r i m a r i l y f o r s a l e t o c u s t o m e r s and i n s o d o i n g r e j e c t e d t h e pr im a f a c i e t e s t w hic h had b e e n imposed by Bureau r u l i n g .

Under t h e t e s t ,

i f t h e number o f a n i m a l s s o l d d u r i n g t h e

y e a r e x c e e d e d t h e r a i s e d a n i m a l s added t o t h e b r e e d i n g h e r d d u r i n g t h e y e a r , them t h e e x c e s s

s o l d would be presumed t o be h e l d f o r b r e e d i n g p u r ­

poses; i f the reverse

were t r u e , t h e n none o f t h e a n i m a l s s o l d were t o be 60 c o n s i d e r e d s u b j e c t t o 1 1 7 ( j )* S in ce most f a r m e r s a r e n o t engaged i n t h e b u s i n e s s o f l u m b e r i n g , g e n e r a l l y , s t a n d i n g t i m b e r on t h e l a n d o f a f a r m e r i s a c a p i t a l a s s e t . The Code p r o v i d e s t h a t i f a f a r m e r c u t s t i m b e r t h a t he ha s owned more t h a n

6 m o n t h s , he can e l e c t t o t r e a t t h e c u t t i m b e r as th o u g h s o l d s t a n d i n g .

I f t h e f a r m e r so e l e c t s , t h e d i f f e r e n c e b e t w e e n t h e f a i r m a rk e t v a l u e o f t h e s t a n d i n g t i m b e r and t h e a d j u s t e d b a s i s o f t h e f e l l e d t i m b e r i s t r e a t e d a s a ”H 7 J ” t r a n s a c t i o n . Some i n t e r p r e t a t i o n s o f t h e Code p r o v i s i o n s as t o c a p i t a l a s s e t s

62 f o ll o v r : F e e d e r c a t t l e

a r e n o t c a p i t a l a s s e t s n o r a r e t h e ”117 J M a s s e t s ;

I f c a p ita l assets are

s o l d i n e x c e s s o f O .P.A. c e l l i n g p r i c e ,

the excess

59 Fawn Lake Ranch C o . , 12 1C 153? I s s a c Emerson, 12 TC 115* 60

I . T . 3 71 2, CB 191+5, p . 176. 61

I . R . C . , Sec. 1 1 7 ( k ) .

62 I . T . , 3 9 32 , CB 191+8 - 2 , p . 7 .

3k 63

i s ©rdimary g a i n ;

Where e i t r u s g r o v e s a r e s o l d w i t h f r u i t ©n t h e t r e e s ,

t h e g a i n a l l o c a b l e t o t h e f r u i t i s o r d i n a r y income and t h a t a l l o c a b l e t o t h e l a n d and t r e e s may be t r e a t e d as ”117 U” t r a n s a c t i o n . 53

I . T . 3 8 11 , CB 191+6-2; p . 7 0 .

CHAPTER VI

DEDUCTIONS

I.

FARM EXPENSES

The g e n e r a l r u l e r e g a r d i n g f a r m e x p e n s e s i s t h a t a f a r m e r may d e d u e t a l l expenses n e e e s s a r y t o t h e b u sin e ss o f farming.

The most eom.mon t y p e s o f

d e d u c t i b l e an d n o n - d e d u c t i b l e e x p e n d i t u r e s f o l l o w : D eductible expenses Kages p a i d h i r e d h e l p . C©st o f b o a r d f o r u s e o f h i r e d h e l p . R a t i o n s p u r c h a s e d and f u r n i s h e d s h a r e c r o p p e r s . Feed p u r c h a s e d ( g r a i n , h a y , s i l a g e , m i l l f e e d s , c o n c e n t r a t e s and o t h e r r o u g h a g e s , and c o s t o f g r i n d i n g , m i x i n g , and p r o c e s s i n g feed). Machine h i r e (payments f o r use o f t h r e s h i n g , co m b in in b , s i l o f i l l i n g , b a l i n g , g i n n i n g , and o t h e r m a c h i n e s ) . Seeds and p l a n t s p u r c h a s e d . Supplies purchased (spray m a te r ia l, p oisons, d i s i n f e c t a n t , cans, b a r r e l s , b a s k e t s , egg c a s e s , b a g s , e t c . ) . R e p a i r s and m a i n t e n a n c e o f farm b u i l d i n g s , f e n c e s , d r a i n s . R e p a i r s and m a i n t e n a n c e o f f arm m a ch in es and e q u i p m e n t . S ma ll t o o l s ( s h o v e l s , r a k e s , e t c . ) . Breeding f e e s . F e r t i l i z e r s and li m e ( c o s t o f co m me rci al f e r t i l i z e r s , l i m e , and manure p u r c h a s e d d u r i n g t h e y e a r , t h e b e n e f i t o f w hich i s o f short duration). V e t e r i n a r y and m e d i c i n e f o r l i v e s t o c k . G a s o l i n e , o t h e r f u e l and o i l f o r fa rm b u s i n e s s . S t o r a g e and w a r e h o u s i n g e x p e n s e . S t a t e and l o c a l t a x e s oh f arm b u s i n e s s p r o p e r t y . I n s u r a n c e on farm p r o p e r t y , e x c e p t f a r m e r ' s d w e l l i n g ( b u i l d i n g s , i m p r o v e m e n t s , e q u i p m e n t , c r o p s and l i v e s t o c k ) . I n t e r e s t on farm n o t e s and m o r t g a g e s . Water r e n t (far® sh are of expense). E l e c t r i c i t y (farm share o f e x p e n se ). Te le ph on e ( f a r m s h a r e o f e x p e n s e ) . Rent p a i d i n c a s h . A u te r ao b i le upkeep e x p en s e (farm s h a r e ) . B l a c k s m i t h and h a r n e s s r e p a i r . Bookkeeping s e r v i c e . S u b s c r i p t i o n t o farm j o u r n a l s . T r a v e l ex p e n s e c o n n e c t e d w i t h f ar m b u s i n e s s .

36 D edu cti ®a s mot a l l o w a b l e Value ©f p r o d u e t s r a i s e d by f a r m e r and u s e d f o r b o a r d o f h i r e d he l p • Wages p a i d employ ees en g age d s o l e l y i n h o u s e h o l d wo rk . Expense o f r a i s i n g p r o d u c t s eonsumed by f a r m e r and h i s f a m i l y . Value o f l a b o r o f f a r m e r , h i s w i f e , o r m i n o r c h i l d r e n . I n s u r a n c e on farm d w e l l i n g . R e p a i r s t o b u i l d i n g u s e d as f a r m e r ' s d w e l l i n g . F e d e r a l in c om e, e s t a t e and g i f t taxesv. C a p i t a l e x p e n d i t u r e s ( p u r c h a s e s o f m a c h i n e r y and e q u i p m e n t , i m p r o v e ■■ m e n ts t o b a r n s and farm b u i l d i n g s ) . S ha re o f a u t o m o b i l e upkeep and d e p r e c i a t i o n n o t a p p l i c a b l e t o farm b u s in e s s but r e l a t e d t o p e rso n a l or fam ily u se. Loss o f p r o s p e c t i v e c r o p by s t o r m , f l o o k , ©r f i r e . Ex pen se s o f farm o p e r a t e d f o r r e c r e a t i o n o r p l e a s u r e * h O t h e r mere t r o u b l e s o m e e x p e n s e s w i l l be t r e a t e d , s e p a r a t e l y . G i f t s and c o n t r i b u t i o n s o f t h e f a r m e r When, t h e f a r m e r d o n a t e s p r o d u c t s he ha s r a i s e d t o a c h a r i t a b l e ' o r g a n i z a t i o n , he i s e n t i t l e d t o d e d u c t t h e f a i r m a r k e t v a l u e o f suc h p r o 65 duets.

The e x p e n s e s o f p r o d u c t i o n a r e d e d u c t i b l e t o o , w i t h o u t a d j u s t m e n t .

Where t h e f a r m e r siakes an o r d i n a r y g i f t , he can d e d u c t t h e e x p e n s e s o f

66 r a i s i n g the b a t t l e given. Wages p a i d m in or c h i l d r e n In th e l i s t heading t h i s c h a p t e r under deductions no t allow able w i l l be found " v a l u e o f l a b o r o f f a r m e r , h i s w i f e , o r m i n o r c h i l d r e n . "

Th is

c a t e g o r y s h o u l d n o t be m i s t a k e n f o r wages p a i d t o mi no r c h i l d r e n , w hic h may be d e d u c t i b l e .

The Commissioner ha s r u l e d t h a t r e a s o n a b l e wages p a i d

by a f a t h e r t o h i s u n e ^ a n c i p a t e d min or c h i l d f o r p e r s o n a l s e r v i c e s , a c t u a l ­ l y r e n d e r e d as a bona f i d e employee i n t h e co n du ct o f t h e f a t h e r ' s b u s i n e s s , 5U P r e n t i c e H a l l F e d e r a l Tax S e r v i c e , Vo l. 1 , 19 5 0 » P* 7156* 65

I . T . 3 9 1 0 , CB 191+8, p. 15.

66 I . T . 3 95 2, CB 191+8-2, p . 7 .

37 © ©i n st itu te s a d e d u c t i b l e e x p e n s e .

He may a t t h e same ti m e be d e p r i v i n g

h i m s e l f ©f am e x e m p ti o n i f t h e wages e x c e e d 1500. lodging fu rn ish e d t h i s

The v a l u e o f m e al s and

same m i n o r c h i l d i s n o t d e d u c t i b l e as w a g e s .

Hired l a b o r A f a r m e r may d e d u c t room and b o a r d p u r c h a s e d f o r h i r e d l a b o r r e ­ g a r d l e s s o f t h e u s u a l d i s t i n c t i o n as t o w h e t h e r I t i s f o r t h e e m p l o y e r ' s ©r t h e e m p l o y e e ' s c o n v e n i e n c e .

The l a b o r e r mus t draw t h e d i s t i n c t i o n i n

d e t e r m i n i n g w h e t h e r su ch i t e m s a r e income t o him. Exp ens es and Commodity C r e d i t Loans I f t h e f a r m e r h a s o b t a i n e d l o a n s from t h e Commodity C r e d i t Cor­ p o r a t i o n an d he e l e c t e d t o t r e a t t h e l o a n as income, he may d e d u c t h i s e x p e n s e s c o n n e c t e d w i t h t h e cro p f o r t h e y e a r i t ' s . i n c l u d e d i n income. I f t h e e l e c t i o n h a s n o t b e e n made, t h e f a r m e r may d e d u c t e x p e n s e s o f t h e c r o p t h i s y e a r , even th o u g h he wont have income u n t i l t h e c r o p i s s o l d . Crop e x p e n s e s o f ©rop b a s i s f a n n e r Ex pe ns es i n c u r r e d i n r e g a r d t o c r o p s p l a n t e d i n p r i o r y e a r s may be d e d u c t e d i n t h e c u r r e n t y e a r i f t h e c r o p i s s o l d i n t h e c u r r e n t y e a r . The C o m m i s s i o n e r ' s c o n s e n t i s r e q u i r e d . O ffice expenses When a f a r m i s o p e r a t e d as a b u s i n e s s , o f f i c e e x p e n s e s i n c o n 68 n©®tion w i t h t h e o p e r a t i o n ©f t h e f ar m a r e d e d u c t i b l e . 57

I . T . 3 7 6 7 , CB 19l*5, p . 1 0 1 .

68 George W. C u t t i n g e t a l . ,

Sec. 1+7, 3^7 R-H Memo TC.

38 Development e x p e n s e s E xp ens es i n c u r r e d w h i l e d e v e l o p i n g f a r m t o a p r o d u c t i v e s t a t e a r e d e d u c t i b l e u n l e s s t h e o p t i o n h a s b e e n e x e r c i s e d t o c a p i t a l i z e th em . Once t h e e l e c t i o n i s made i t i s b i n d i n g and t h e t a x p a y e r w i l l n o t be a l l o w e d 69 t® go b a c k and amend h i s r e t u r n t o t r e a t s u ch i t e m s i n a d i f f e r e n t way.

II.

DEVELOPMENT EXPENDITURES

The Bu rea u d i v i d e s t h e l i f e

o f a farm, o rehard or ranch in to t h r e e

p e r i o d s : t h e p r e p a r a t o r y , t h e d e v e l o p m e n t p e r i o d , and t h e p r o d u c t i v e p e r i o d . 70 Dur ing t h e p r e p a r a t o r y p e r i o d , p r e p a r a t o r y e x p e n d i t u r e s must be c a p i t a l i z e d . P r e p a r a t o r y e x p e n s e s a r e t h o s e e x p e n d i t u r e s made p r i o r t o t h e d ev el op me nt s t a g e , w h ic h a r e n o t c o n s i d e r e d o r d i n a r y and n e c e s s a r y e x p e n s e s i n t h e business f i e l d the tax pay er is e n te rin g . When t h e d e v el o pm en t s t a g e i s e n t e r e d t h e t a x p a y e r has an o p t i o n t© c a p i t a l i z e o r d i n a r y and n e c e s s a r y b u s i n e s s e x p e n s e s .

A fte r the business

e n t e r s t h e p r o d u c t i v e s t a g e t h e o r d i n a r y and n e c e s s a r y b u s i n e s s e x p e n s e s ea n n o t be c a p i t a l i z e d b u t must be d e d u c t e d c u r r e n t l y as e x p e n s e s .

III.

DEPRECIATION

The R e g u l a t i o n r e g a r d i n g d e p r e c i a t i o n by f a r m e r s s t a t e s a d e f i n i t e r u l e t h a t f ar m b u i l d i n g s , o t h e r t h a n t h e owners r e s i d e n c e , f arm m a c h in e r y 59 I . T . 195 2, CB Jun e 1921+, p . 1 3 9 .

70 Min. 6 030 , Supp. 1 , Dec. 11.337*

39 and © t h e r p h y s i c a l p r o p e r t i e s i n c l u d i n g l i v e s t o c k , a r e s u b j e c t t o a d e d u c t i o n 71 f©r d e p r e c i a t i o n . The p r o p e r t y mu st be u s e d i n t h e t r a d e o r b u s i n e s s and i t must n o t be i n c l u d e d i n i n v e n t o r y .

I f p a r t of the f a r m e r 's dw elling

i s u s e d i n h i s f a r m o p e r a t i o n s he may d e p r e c i a t e such p o r t i o n .

Land i s

n o t d e p r e c i a b l e j t h e r e f o r e when b u i l d i n g s a r e d e p r e c i a t e d , t h e v a l u e o f t h e l a n d s h o u l d n o t be i n c l u d e d ,

*

T© compute d e p r e c i a t i o n , t h e c o s t o r o t h e r t a x b a s i s must be a s ­ c e r t a i n e d . and t h e d e p r e c i a t i o n a l l o w e d o r a l l o w a b l e i n p r i o r y e a r s must be deducted.

The r e s u l t r e p r e s e n t s t h e v a l u e t o be r e c o v e r e d by d e p r e c i a t i o n .

T© f i n d t h e a n n u a l d e d u c t i o n s f o r d e p r e c i a t i o n t h i s l a s t f i g u r e must be d i v i d e d by t h e r e m a i n i n g u s e f u l l i f e

of the a s s e t s ta t e d in y e a rs .

The Bur eau h as r e c o g n i z e d t h a t f a r m m a c h i n e r y d e p r e c i a t e s w h e t h e r c r o p s a r e p l a n t e d i n t h a t y e a r o r n o t and r e g a r d l e s s o f t h e maimer o f com put ing in c om e, d e p r e c i a t i o n may be d e d u c t e d o n l y i n t h e y e a r o f o c 72 curence. Even th o u g h t h e l i f e o f a n o r c h a r d i s somewhat i n d e f i n i t e , t h e r e i s no doubt t h a t i t s u s e f u l l i f e

is lim ite d .

A ll expenses n ece ssary t o

b r i n g a n o r c h a r d t o i t s p r o d u c t i v e s t a g e may be c a p i t a l i z e d and t h e r e a f t e r a f a i r amd r e a s o n a b l e a n n u a l d e d u c t i o n f o r d e p r e c i a t i o n w i l l be a l l o w e d .73 71 Reg. I l l ,

Sec. 2 9 - 2 3 ( l ) - 1 0 .

72 I . T . 1700 I I - ICB 102. 73 0 . 797, CB 1 9 1 9, p . 1305 K&weah Lemon Co . , 5 BTA 992.

I4.0

The f o l l o w i n g s u g g e s t e d u s e f u l l i v e s f o r d e p r e c i a b l e farm a s s e t s a r e p r e s e n t e d i n t h e Bureau B u l l e t i n rtFu as a g u i d e t o t h e f a r m e r i n h a n d l i n g h i s d e p r e c i a t i o n and o b s o l e s c e n c e p r o b l e m s : Average u s e f u l l i f e ( y e a r s ) A nim al s .8 C a t t l e , b r e e d i n g o r "1a i r y ......................................................... G o a t s , b r e e d i n g . ............................................................................................................ 5 Hogs, b r e e d i n g ............................................................................................................ 5 H o r s e s , b r e e d i n g o r w o r k .................................................................................. 10 Mules, work. . ....................................................................... 10 Sheep, b r e e d i n g . . . . . . . ................................................ . . . . . 5 B a r r e l s , d i p ......................................................................................................................6 B e e h i v e s . ............................................................. .... ................................................... 10 B e n c h e s ............................ . . . 2 0 B inders: C o r n ................................................................................................... .12 G r a i n ................................................. lb B i n s . ................................. .20 .................................................20 B oilers . . . . . . . . . . . . . . . . B u n c h e r s , c l o v e r ...................................................................... .1 5 Burners, o i l . ............................................................................................IB . . . . 3 C a b l e s ....................................................................... Canals: S t e e l and c o n c r e t e ......................................................................................... . . 5 0 Wood s y p h o n ................................ ................................................................................. 25 Canning m a c h i n e s ...................................................................... . . ............................. 15 C arriers: Feed • ....................................................................... .20 Hay. . . . . . . . . . . . . . . ......................................................... .2 5 L i t t e r ............................ 5 C arts: Dump and f a r m ........................... ................................................................................. 8 Hand ...................................................................... .5 .......................................... C ellars, root JO Cesspools 9 .................................................... 15 .................................................... .33 C isterns. C l e a n e r s and g r a d e r s ....................................................................................... . .15 C l i p p e r s , h o r s e . . ..................................................... . . . . . . . . . . 8 Convey ors and e l e v a t o r s . . . . . . ............................................................. 15 Covers, canvas. ........................................................................... 8 C r i b s , c o r n ............................................................................................................ . 30 C r u s h e r s , co rn and co b. . . . . . . . . . . . ...................................... 15

hi Average u sefu l l i f e (years) C u l t i v a t o r s ..................................... 15 C ulverts: Masonry and c a s t - i r o n p i p e . 50 G a l v a n i z e d c o r r u g a t e d i r o n ................................. .2 5 R i v e t e d s t e e l ...................................... 53 Cups , t u r p e n t i n e ............................................................ 5 C utters: Fe ed . .................................................... .12 R o t a r y s t u m p .............................................................................................................. 20 Diggers, p o ta to . . .......................................... 15 D istrib u to rs, f e r ti liz e r • ................................. 12 D rills: G rain ........................................................................................................ .15 W e l l ................................................................................................................................. 10 D ro ss p l a n t s ............................................... 10 E le v a to r machinery, g r a in . . . . . ...................................... . . . .18 E l e v a t o r and wagon dump, g r a i n .............................................................. .1 2 Engines: G asoline. . . . . . . . . . . . . ..........................................................10 D i e s e l .......................................................................................................................... .15 S t a t i o n a r y , s t e a m ................................................................................................20 T r a c t i o n , s t e a m ............................................... .20 Feeders. . . . . . . . . . . . . . . ........................................... . . 8 Fence m a c h i n e s ............................................................................................... .... * 5 Fence p o s t s , s t e e l ............................ .3 0 Fences: Snow...................................... . . 8 Weed. ....................... .15 F e n c i n g , woven w i r e .................................................................. .15 25 F l u m e s ............................................................. F o r g e s , p o r t a b l e ..................................... 12 Fumigators . . . . . . . . . . . . . . 1 0 Furnaces: E v a p o r a t o r , d r y ..............................................................* ................................. 15 H eating . . . . . .......................................................................................... .20 Furrow o p e n e r s , d i s k ..................................... . * • 15 G at es , f a r m .......................................... 15 G e n e r a t o r s , g» s , a c e t y l e n e ................................................... . . . . . 1 5 G r i n d e r s , g r a i n and f e e d 15 Groves (See T r e e s and v i n e s . ) Harness

7

1+2

Average u sefu l l i f e (years) H ar r ow s . ..................................... . . . . .15 H a r v e s t e r s , g r a i n ............................ .15 Headers. .......................................... 13 H e i s t s and f o r k s , h a y . • • • • . • • • • . . . . . . . . . . . 1 2 15 H u l l e r s , c l o v e r and a l f a l f a ................................. H u s k e r s ................................................................................................................................. 15 lee boxes.. . . ................................. . . . . . . . . . . . . . . . . .12 l e e h a r v e s t i n g and h o i s t i n g m a c h i n e r y .......................................................... 10 I n c u b a t o r s and b r o o d e r s . . . . . . . • • ....................... 15 10 L a b o r a t o r y e q u i p m e n t ............................................................. L i s t e r s ................................................................................................................................. 15 .1 0 L o a d e r s , h ay and s e e d .......................................... M i l k i n g m a c h i n e s ......................................................................................................... 20 M i l l s and p r e s s e s , c i d e r ..................................... 15 M ills: Com, p o rta b le . ................................................ . . 1 2 F ee d. . ........................................... . . . . . . . . . . . . . . . . .15 ....................... 25 G rist Smut....................... 15 Mowers: Farm...................................................................... ll+ Lawn. ...................................... B O r ch ar d t o o l s . . . . . . ................... O r c h a r d s . (See T r e e s and v i n e s . )

•

7

P a c k i n g t o o l s ...................................................................................................................10 F e n s ............................ 20 P i c k i n g m a c h in e s ................... . . . . . . . . . . . 5 Planters ......................................................................................................... 15 P l o w s . . ....................................... . . . . . . . . . . . . . . . . . . . 1 5 P ress, hay, baling ............................................... 12 P u l l e r s , b e e t ..................................................................................................................18 P u l l e r s and g r u b b e r s , stu mp ......................................................................... . . .20 Pumps: Bucket. . . . . . . . . . .2 2 C en trifu g al or r o ta r y .............................................................................20 P l u n g e r ....................................................................................................... .15 Hacks: F e e d . • . ................... *10 Hay and s t a c k ..................................... . . . . . . . . 1 5 R a k e s ................................................................................................................ .15

h3 Average u sefu l R e f r i g e r a t o r s , e l e c t r i c . .................................

life (y e a r s) 15

Saddles. 10 .......................................... 15 Saws, c i r c u l a r Seales: P e r t a b l e ............................................................................................................................. 15 T r u c k or wag ©a, ........................................................................................... 25 S e e d e r s , a l l t y p e s ..................................................................................................... IS S e p a r a t o r s , cream o r g r a i n ................................................ . . . . . . .15 S e tte rs , plant .......................................................................................12 18 S h e a r i n g m a c h i n e s , hand and p o w e r ................................. S h e l l e r s , c o r n .............................................................................................................. 20 S h r e d d e r s . • ........................................................................................ . . . . . .15 S ilos: Concrete. .............................................................................................. . * 5 0 .2 5 M e t a l .................................. . . . . . . . . . . . . . . . . . . . Wooden....................... .20 S l e d s and s l e i g h s . ................................................... ,15 Smudge p o t s . ................................. 10 S o r t e r s , p o t a t o ............................ 20 Sowers: Grain, b ro a d c a st. .......................................... 15 ....................................................................................... . . . . S Li me S p r a y e r s .................................................................. 15 S p r e a d e r s , m a n u r e ......................................................................................................... 15 ..20 S t a c k e r s , h a y ................................. Subsoilers . . . . . . . .1 0 Tanks: Grain Concrete ....................... 50 M etal. ......................................................................................................... 25 T u r p e n t i n e ....................................................................................................... . . . . 5 W a g o n ................................................................................................................................. 10 Water S teel. ....................... .1;0 Wood . ....................... .2 0 W a t e r i n g . ............................ 20 Tarpaulins . ................................................................................................................ 8 Threshing; m a c h i n e s ................................................................................. . . . . 1 5 T r a c t o r s ............................................................................................................................ 10 T r e e s and v i n e s : Almond............................................... ij.0 A p p l e ........................................................................... 50 25 A p r i c o t ...................................................................... Ba na na .............................................................................................. .1 0

1+1+ Ave rag e u s e f u l l i f e ( y e a r s ) Cherry. ............................................................................................^0 F ig . . .......................... ................................................................................................. 60 Grape ....................... 33 G rapefruit. . ......................................................................................................... lj.0 ............................ ij.0 Lemon N e c t a r i n e ..................... . . . . . . ,15 Olive .......................................................................................... . . . . . 50 Z4.0 O r a n g e ............................................................. Peac h • ................................. 15 P e a r ....................... [j.0 Plum. . . . . . . . . . . . . . . . . . . ,33 Prune ........................................................ , 33 Walnut. ....................... q.0 T r o u g h s , i r o n and s t e e l ............................ .1 5 V a t s , d i p p i n g .................................

10

Wag ex b e d s and r a c k s ....................... 6 Wagon g e a r - wood w h e e l s .................... . . . . . . . . . . . . . . 1 2 Wagons: .1 2 L i g h t ....................................................................... T ru c k in g , heavy d u ty . ........................................................ , 1 0 .20 W e i g h e r s and b a g g a g e , g r a i n ..................................................................... W i n d m i l l s ............................................... 20 'OEf ca 'farm is--j&ejjem'ined;tP;;be;"held--|‘-o:r. j>l«.asrure . o r (. . r e c r e a t i o n p u r p o s e s and n o t f o r a b u s i n e s s p u r p o s e , n o n e o f t h e e x p e n s e s , i n c l u d i n g ik d e p r e c i a t i o n , w i l l be a l l o w e d . In e x t r e m e c a s e s a d e d u c t i o n f o r ob so ­ l e s c e n c e h a s b e e n a l l o w e d as t o l a n d .

Such a c a s e w ould be w here a fa rm

u s ed f o r r a i s i n g wine g r a p e s and n o t s u i t a b l e f o r a n y t h i n g e l s e i s p r a c t i c a l ­ l y p u t o u t o f b u s i n e s s by p r o h i b i t i o n l e g i s l a t i o n . 75 i n c l u d e t h e v a l u e of t h e v i n e s and im p ro ve me n ts.

IV.

Thi s a l l o w a n c e would

LOSSES

L o s s e s i n c u r r e d i n t h e b u s i n e s s o f f a m i n g a r e d e d u c t i b l e from

7IJ E s t a t e o f John son V. Camden e t a l . , If7 BTA 9 2 6 , a f f Td (CCA- 6 ; 191+3), 139 F . 2 d 6 9 7 , 31 AFTR 1125. 75 0 . 8 6 2 , CB 1919, p . 1 2 7 .

U5 g r o s s in c o m e.

The w o r d i n g o f t h e R e g u l a t i o n a u t o m a t i c a l l y e x c l u d e s l o s s e s 76 i n c u r r e d i n o p e r a t i n g a farm when n o t done a s a b u s i n e s s . Thi s r e q u i r e ­

ment i s aimed a t t h o s e who o p e r a t e farms a s h o b b i e s * f o r p l e a s u r e o r f o r recreation. has s a id i t

The f a c t t h a t l o s s e s o c c u r i s n o t d e t e r m i n a t i v e f o r t h e c o u r t 77 i s th e e x p e c ta tio n of gain t h a t is im p o rtan t.

L o s s e s i n c u r r e d by t h e d e s t r u c t i o n o f a p r o s p e c t i v e c r o p a r e n o t deductible profits..

s i n c e o t h e r t r e a t m e n t would r e s u l t i n a l o s s from a n t i c i p a t e d The same r u l e a p p l i e s t o l o s s e s o f c a t t l e r a i s e d by t h e f a r m e r ,

a l t h o u g h su ch l o s s w i l l p o s s i b l y be r e f l e c t e d i n i n v e n t o r y .

To t h e c o n t r a r y

a l o s s am ou nt in g t o t h e c o s t o f p r e p a r a t i o n and p l a n t i n g h a s b e e n a l l o w e d 73 w here a c r a n b e r r y bog was c o m p l e t e l y d e s t r o y e d due t o s e e p a g e . Losses due t o s h r i n k a g e i n c r o p s , w h ic h a r e b e i n g s t o r e d t o a w a i t a more f a v o r a b l e m ark et, are not allo w a b le . M l l o s s e s connected w ith th e b u s in e s s o f farming are lo s s e s f o r a d j u s t e d g r o s s income p u r p o s e s .

L o s s e s from f a r m i n g as a b u s i n e s s may

p r o p e r l y be u s e d t o o f f s e t g a i n s o f o t h e r b u s i n e s s e s o p e r a t e d by t h e farmer.

The f a r m e r can t a k e a d v a n t a g e o f t h e same ^ c a r r y - b a c k 3 and. ,Tc a r r y -

f o r w a r d ” p r o v i s i o n s as o t h e r t a x p a y e r s u n d e r t h e n e t o p e r a t i n g l o s s p r o 79 v i s i o n s o f t h e Code. 76 Reg. I l l ,

Sec. 2 9 . 2 3 ( e ) - 5 .

77 Samuel R i k e r , J r . , E x e c u t o r o f E s t a t e o f J . Amory H a s k e l l , 6 BTA 8 9 0 . •78 J o h n B. Hadaway, 13 BTA 93 6 .

79 I . R . C . , S ec . 122.

BIBLIOGRAPHY

BIBLIOGRAPHY

-American F e d e r a l Tax R e p o r t s . Hew York: P r e n t i c e - H a l l , I n c . , 192l+.3'6 v o l s . I n t e r n a l Revenue B u l l e t i n s . W a s h i n g t o n : U .S. Government P r i n t i n g O f f i c e . I n t e r n a l Revenue B u l l e t i n HFn . W a s h i n g t o n : U.S. Government P r i n t i n g O f f i c e . M a g u i r e , J ohn M. and Ro sw e ll M a g i l l , e d i t o r s , Code and R e g u l a t i o a s - P e d e r a l T a x e s . ^ ew York:Commerce C l e a r i n g House, I n c . , 1:l|.c7 M o n a t t , Samuel M . , 1950 Farmers Income Tax Commerce C1 e a r in'gH ous eR XncV,' "V3L\F)~.

on 19'-1*9 Income.Hew York:

P r e n t i c e -Ha 11 Tax C o u r s e .Hew York:. P r e n t i c e - H a l } , I n c . , I 9 I4.8 . P r e n t e e - H a l l Tax S e r v i c e 1950* Ffew York: P r e n t i c e - H s . l l , I n c . , 19^-9* R e p o r t s o f Tax C o u r t o f U . S . . W a s h i n g t o n : U.S. Government P r i n t i n g O f f i c e . T r e a s u r y D e c i s i o n s » W a s h i n g t o n : U.S.Government P r i n t i n g O f f i c e . R a b k i n , J a c o b and Mark H. J o h n s o n , F e d e r a l Income, G i f t and E a t a t e T a x a t i o n . Hew York: Matthews Bender and Company. 19li5.~

APPENDIX

FORM 1040 F

P ate 1

(Sensed July IMS)

UNITED STATES

«asnry Department rnal Revenue Service

kl

SCHEDULE OF FARM INCOME AND EXPENSES

Attach T h is F orm to Your In c o m e Tax R eturn F orm 1040 and F ile I t Wth th e C o llecto r f Internal R ev en u e for Your D istr ict

*=

F or C a len d a r Y ear 194.. Or for year beginning_________ , 194.., andending__________ ., 194„ N am e

F ill in P a g es 1 a n d 3 if Y o u r A c c o u n ts Are K e p t o n a C a sh B a sis.

_ _ _ _ _ _ _ _ _ _ _ _ _ __

A d d ress

If Y o u K eep B ook s o n a n A c cr u a l B a sis a n d D esire to U se T h is F o rm , F ill in P a g es 2 a n d 3 In ste a d

___ ___ ______

L o c a tio n o f fa r m or fa r m s N u m b e r o f a cres in e a c h fa rm FARM IN CO M E FOR TAXABLE PER IO D

1. SALE OF UVESTOCK RAISED Q u a n tity

K in d

ittle.—........—

2. SALE OF PRODUCE RAISED

A m ount

K in d

Q u a n tity

Grain__________

$

orses_______

3. OTHER FARM INCOME A m ount

I te m s

A m ount

M dse, rec’d for produce..

$

H a y ..........................

M achine work______ . . . ____ Hire of tea m s..

ules...............

C otton________

ieep________

T obacco_______

Breeding fees

rine............ .

P o ta to e s...............

R en t rec’d in crop shares

Sugar b eets...........

Work off farm

V e getab les..........

W ood and lum ber

hickens...........

F ru its......................

Other forest products

arkeys______

N u ts ................... .

A gricultural program p ay­

ucks................

D airy prod u cts...

bats.................

E ggs........ .............. .

*s..............

M eat p rod u cts...

[her (specify) :

P oultry, dressed.

$

................

m en ts___________________ Other (sp ecify):

W ool and m o­ hair..................... H o n ey ........... ......... Sirup and sugar.. O ther (specify): Tf)T A T,

___

$

T otal.

___

$

_______

... .......

T o t a l ........................................ $ » . ( E n t e r o n lin e 3 of s u m m a r y be low )

( E n t e r o n lin e 2 of s u m m a r y b elo w )

( E n t e r o n lin e 1 of s u m m a r y b e lo w )

4. SALE OF LIVESTOCK AND OTHER ITEMS PURCHASED

2. D a t e a c q u ir e d

1. D e s c r ip tio n

3. G ro ss sa le s p ric e ( c o n tr a c t p ric e )

$ ..........................

4. C o s t o r o t h e r b a s is

$ ______ _____

_

5. D e p r e c ia tio n a l­ lo w e d (o r a llo w ­ a b le) s in c e a c q u i­ s itio n o r M a rc h 1, 1913 $ . . . . . ......... ..

6. P r o f i t ( c o lu m n 3 p lu s c o lu m n 5 m in u s c o lu m n 4)

$ ........................

.

$ . ..................... ..

$

......... .

6. Expenses (from page 3 ) ........................................... .

$ .......................... ..

7. D epreciation (from page 3 )................................... . Other farm incom e . . . . . .

— __

__________

8. N e t

purchased G ross

operating

loss

deduction

(attach

sta tem en t)___ ___________________ _________

Profit on sale of livestock and other item s „ . ........................... P r o f i t s .......................... ........ ..............................

9.

T o ta l

D e d u c t i o n s .................................................... $

L Net farm profit (line 5 m inus line 9) to be reported on line 22, Schedule C, page 2, Form 1040...................................

_______

,, 4

$ ............................. -

16-41284-2

Page 2

farm inventory for income computed on an accrual basis 0 N I I AND a t B e o iiin u ig o f Y

D e s c r ip t io n

P ear

Kind of liv e s to c k , cro p s, o r o t h e r p r o d u c ts )

Q uan­ tity

In v e n to ry

u r c h a s e d D u r in g Y ear

Q uan­ tity

v a lu e

R

Y

Q uan­ tity

Am ount p a id

___

$ ( E n t e r on lin e 5)

T otals _ . ( E n t e r o n lin e 4)

a is e d

D

u r in g

ear

In v e n to ry v a lu e

$

____

C

on su m ed D u r in g

Q uan­ tity

o r L ost Y ear

In v e n to ry

Q uan­ tity

v a lu e

$

S old D

____

u r in g

Y

On H

ear

A m ount re c e iv e d

and

OF Y Q uan­ tity

____

$ ( E n t e r o n lin e 2) |

at ear

E

nd

In v e n to ry v a lu e

____

$ ( E n t e r o n lin e 1)

SUMM ARY OF IN CO M E AND D EDU CTION S CO M PU TED ON AN ACCRUAL BASIS

Inventnrv nf livestnnk. nrrvns and nroduct.s a t end of vear

$_________

Sales of livestock , crops, and p rod u cts during vear I.

7. E xpenses (from page 3 )............

$ .......... .

8, D ep reciation (from page 3 ). . 9. N e t operating loss deduction

Other m iscellaneous receip ts (specify):

(a tta ch statem en t) .............

!

-----

---------------- “““------------

$..... ..........

-------------

• Inventory o f livestock , crops, and products $ ........... . '• Cost of liv esto ck and p rodu cts purchased ^ during year ______ ___ ___________ — kGross profits (line 3 m inus th e sum of lin es 4 and It Net farm profit (line 6 m inus lin e

10)

5 ) ________

$_________

10.

T

otal

D

e d u c t i o n s ___

$_________

to be reported on line 22, Schedule C, page 2, Form 1040_________________ $_________

16—41264-2

FARM INVENTORY FOR INCOME COMPUTED ON AN ACCRUAL BASIS D e s c r ip t io n

[Kind of liv e s to c k , crops, or o th e r pro d u cts)

B

O n H and at e g in n in g o f Y e a r

Q uan­ tity

In v e n to ry v a lu e

$ ...............

P

urchased

Y

Q uan­ tity

.

D

a is e d

Y

Q uan­ tity

A m ount p a id

$.

R

u r in g

ear

........

D u r in g ear

In v e n to ry v a lu e

$

--

C

o n su m ed D u r in g

Q uan­ tity

o r L ost ear

Y

Page 2 S old D

Q uan­ tity

In v e n to ry v a lu e

Y

On H and

ear

A m ount re c e iv e d

of

Y

at ear

E

nd

In v e n to ry v a lu e

Q uan­ tity

$

$

$

-

u r in g

____

'

T otals

$ ( E n t e r o n lin e 4)

$. ( E n t e r on lin o 5)

$

____

$

____

____

$ ( E n t e r o n lin e 2)

( E n t e r on lin e 1)

SUMMARY OF INCOM E AND DEDUCTIONS COM PUTED ON AN ACCRUAL BASIS

|. Inventory of livestock, crops, and products at end of year __ $_________

7. Expenses (from page 3 ).............. $

!. Sales of livestock, crops, and products during year__________

8. D epreciation (from page 3 )__

!a. Other m iscellaneous receipts (sp ecify ):

9. N e t operating loss deduction (attach sta te m en t)________

$................. Inventory of livestock , crops, and products fit beginning of year------- ---------------- -------— $ ________ ....................... ....................... ............ 6- Cost of livestock and products purchased during year - ____ _____ ______ ?• Gross profits (line 3 m inus th e sum of lin es 4 and

5 ) ____

___

U. Net farm profit (line 6 m inus line 10) to be reported on line |

...... — . 22,

......

10.

Schedule C, page

T o ta l 2,

Form

D

e d u c t i o n s ___

1 0 4 0 ________________

$_____ ___ $ .............1 6 —4 1 2 6 4 - 2

FORM 1040 F Page 1

(ftgrlsed July IMS)

'rosary Department arnal Revenue Service

UNITED STATES

SCHEDULE OF FARM INCOME AND EXPENSES F or C a len d a r Y ea r 194.. Or for year beginning-------------- - 194.., and ending .................194

Attach T h is F o rm to Y our In c o m e Tax R e tu r n F o rm 1040 an d F ile It With th e C o llec to r >f In ternal R e v e n u e for Y our D istr ic t

F ill in P a g es 1 a n d 3 K ep t o n a C a sh B a sis.

N a m e ....... .............

If Y o u K eep B o o k s o n a n A c cr u a l B a sis a n d D esire t o U se T h is F o r m , F ill in P a g es 2 a n d 3 In ste a d

A d d ress . . . ____ L o c a tio n o f fa r m or f a r m s .......... N u m b e r o f a c re s in e a c h fa r m FARM INCOME FOR TAXABLE PERIOD

1. SALE OF LIVESTOCK RAISED Q u a n tity

K in d

attle—

-----

2. SALE OF PRODUCE RAISED

A m ount

K in d

Q u a n tity

I te m s

A m ount

G rain......................

$ _____________

3. OTHER FARM INCOME

M dse rec’d for produce

$

Worses------ -----

H a y ..........................

[ules.................

C otton ....................

A m ount

---------

h e e p .......... - ............

T obacco.................

B reeding fees

urine...................... -

P o ta to es...............

R e n t rec’d in crop shares

Sugar b e e ts...........

Work off farm

V egetab les.............

W ood and lum ber

hickens______

F ru its_____

urkeys........ .

N u ts _____ ______ _

ucks___________

D airy produ cts __

oats

E ggs ___ _

........ ............

$

M achine work__ ...

Other fo r est products

______

A gricultural program p a y ­

.

m en ts O ther (sp ecify):

ees....................

M eat p rodu cts __

ther (specify):

P ou ltry, dressed. W ool and m o­ hair .............................. H o n e y ............................. Sirup and su gar. .

i

O ther (sp ecify): > T

*

o t at.

T

a r e e x c l u ­

90 ded f o r t h e p u r p o s e o f d e t e r m i n i n g t h e a p p l i c a t i o n o f t h e r e l i e f p r o v i s i o n u n d e r s e c t i o n 29h ( d ) ( 2 ) .

As u s ed i n t h i s s u b s e c t i o n t h e e x p r e s s i o n

" p e r s o n a l e x e m p t i o n and c r e d i t f o r d e p e n d e n t s ” s h a l l f o r t a x a b l e y e a r s I

b e g i n n i n g a f t e r December

, 19U3* t>e t a k e n t o r e f e r t o t h e n o r m a l - t a x

e x e m p t i o n and s u r t a x e x e m p t i o n s ; a l s o f o r suc h y e a r s , t h e e x p r e s s i o n " e a c h q u a r t e r ” s h a l l be t a k e n t o i n c l u d e t h e p e r i o d ( e n d in g w i t h t h e l b t h day o f t h e f i r s t month o f t h e s u c c e e d i n g t a x a b l e y e a r ) w i t h i n which t h e l a s t i n s t a l l m e n t o f t h e e s t i m a t e d t a x i s r e q u i r e d t o be p a i d , and t h e e x ­ p r e s s i o n " l a s t q u a r t e r " s h a l l mean t h e p e r i o d ( s i m i l a r l y e n d i n g w i t h t h e l*5t h da y o f t h e f i r s t month o f t h e s u c c e e d i n g t a x a b l e y e a r ) w i t h i n which f a r m e r s e x e r c i s i n g an e l e c t i o n u n d e r s e c t i o n 60 (a) a r e r e q u i r e d t o pay the estim ated ta x . The a p p l i c a t i o n o f s e c t i o n 29U (d)

(2) f o r a t a x a b l e y e a r b e g i n n i n g

i n 19 i ).3 i n t h e c a s e o f t a x p a y e r s n o t e n t i t l e d t o e l e c t u n d e r s e c t i o n 60 ( a ) , r e l a t i n g t o f a r m e r s may be illustrated by t h e f o l l o w i n g ex am p les :

S ec. / 4O9 . 102. •

«

Exclusions fro n T J a g e s .— *

(c)

*

•

•

•

*

•

•

•

•

•

•

•

•

•

•

•

•

•

•

Remuneration paid f o r a g r i c u l t u r a l l a b o r . — ( l )

•

•

•

•

•

*

In g e n e r a l . — The

t e r m "wages" does n o t i n c l u d e r e m u n e r a t i o n f o r s e r v i c e s which c o n s t i t u t e a g r i c u l t u r a l l a b o r as d e f i n e d i n s e c t i o n l/;26 ( h ) .

The term, " a g r i c u l ­

t u r a l l a b o r " a s so d e f i n e d i n c l u d e s s e r v i c e s o f a c h a r a c t e r d e s c r i b e d in paragraphs

(2),

( 3 ) , ( U ) » and ( 5 ) o f t h i s s u b s e c t i o n .

In g e n e r a l ,

91 h o w e v e r , t h e t e rr a " a g r i c u l t u r a l l a b o r " does n o t i n c l u d e s e r v i c e s p e r f o r m e d in co n n ec tio n w ith f o r e s t r y , lum bering, or la n d sca p in g . ( 2) S e r v I c e s d e s c r i b e d i n s e c t i o n 1/426 ( h ) ( l ) « — R e m u n e r a t i o n p a i d f o r s e r v i c e s p e r f o r m e d on a f ar m by an employee o f any p e r s o n in c o n n e c t i o n w i t h any ©f t h e f o l l o w i n g a c t i v i t i e s

i s e x c e p t e d as r e m u n e r a t i o n f o r

a g r ic u ltu r a l labor: ( i ) The c u l t i v a t i o n o f t h e s o i l ; ( i i ) The r a i s i n g , s h e a r i n g , f e e d i n g , c a r i n g f o r , t r a i n i n g , o r manage­ ment o f •l i v e s t o c k , b e e s , p o u l t r y , f u r - b e a r i n g a n i m a l s , o r w i l d l i f e ; ©r ( i i i ) The r a i s i n g o r h a r v e s t i n g o f any o t h e r a g r i c u l t u r a l o r h o r t i ­ c u l t u r a l commodity. The t e r m "farm." as u s e d i n t h i s s u b s e c t i o n i n c l u d e s s t o c k , d a i r y , p o u l t r y , f r u i t , f u r - b e a r i n g a n i m a l , and t r u c k f a r m s , p l a n t a t i o n s , r a n c h e s , n u r s e r ­ ies,

r a n g e s , o r c h a r d s , and such g r e e n h o u s e s and o t h e r s i m i l & r s t r u c t u r e s

as a r e u s e d p r i m a r i l y f o r t h e r a i s i n g of a g r i c u l t u r a l o r h o r t i c u l t u r a l commodities.

G re en h ou se s and o t h e r s i m i l a r s t r u c t u r e s u s ed p r i m a r i l y

f o r o t h e r p u r p o s e s ( f o r ex a m p le , d i s p l a y , s t o r a g e , and f a b r i c a t i o n o f w r e a t h s , c o r s a g e s , and b o u q u e t s ) , do n o t c o n s t i t u t e " f a r m s " . ( 3 ) S e r v i c e s d e s c r i b e d i n s e c t i o n 1/426 (h) ( 2 ) . — The r e m u n e r a t i o n paid f o r t h e f o l l o w i n g s e r v i c e s p e r f o r m e d by an employee i n t h e employ o f t h e owner o r t e n a n t o t o t h e r o p e r a t o r o f one o r more farms i s e x c e p t e d as r e m u n e r a t i o n f o r a g r i c u l t u r a l l a b o r , p r o v i d e d t h e m a jo r p a r t o f su ch s e r ­ v i c e s i s p e r f o r m e d on a farm : ( i ) S e r v i c e s p e r f o r m e d i n c o n n e c t i o n w i t h t h e o p e r a t i o n , management,

92

c o n s e r v a t i o n , im p r o v em en t , o r m a i n t e n a n c e o f any o f such farms o r i t s t o o l s o r equipment; or (ii)

S e r v i c e s p e r fo r m e d i n s a l v a g i n g t i m b e r , o r c l e a r i n g l a n d of

b r u s h and o t h e r d e b r i s ,

l e f t by a h u r r i c a n e .

The s e r v i c e s d e s c r i b e d I n ( i ) above may i n c l u d e , f o r e x a m p l e , s e r v i c e s p e r f o r m e d b y c a r p e n t e r s , p a i n t e r s , m e c h a n i c s , farm s u p e r v i s o r s , i r r i g a t i o n e n g i n e e r s , b o o k k e e p e r s , and o t h e r s k i l l e d o r s e m i s k i l l e d w o r k e r s , w h i c h c o n t r i b u t e i n an y way t o t h e c o n d u c t of t h e f arm o r f a r m s , a s s u c h , o p e r a ­ t e d by t h e p e r s o n emp lo y in g th e m ,' as d i s t i n g u i s h e d from any o t h e r e n ­ t e r p r i s e , In w hi ch su ch p e r s o n may be e n g a g e d .

S inc e t h e s e r v i c e s d e s ­

c r i b e d i n t h i s p a r a g r a p h mu st be p e r f o r m e d i n t h e employ o f t h e owner o r t e n a n t o r o t h e r o p e r a t o r o f t h e f a r m , t h e e x c e p t i o n does n o t e x t e n d t o r e m u n e r a t i o n p a i d f o r s e r v i c e s p e r f o r m e d by employees o f a com mercial p a i n t i n g c o n c e r n , f o r ex am p le , w hic h c o n t r a c t s w i t h a f a r m e r t o r e n o v a t e h i s farm p r o p e r t i e s . (I4 ) S e r v i c e s d e s c r i b e d i n s e c t i o n II4.26 ( h ) ( 3 ) . — R em un er at i on p a i d f o r s e r v i c e s p e r f o r m e d by an employee i n t h e employ o f any p e r s o n i n c o n n e c ­ t i o n w i t h any o f t h e f o l l o w i n g o p e r a t i o n s i s e x c e p t e d as r e m u n e r a t i o n f o r a g r i c u l t u r a l l a b o r w i t h o u t r e g a r d t o t h e p l a c e where suc h s e r v i c e s a r e performed: ( i ) The g i n n i n g o f c o t t o n ; (ii) (iii)

The h a t c h i n g o f p o u l t r y ; The r a i s i n g or h a r v e s t i n g o f mushrooms;

( i v ) The o p e r a t i o n or m a i n t e n a n c e o f d i t c h e s , c a n a l s , r e s e r v o i r s ,

93 ©r w a t e r w a y s u s e d e x c l u s i v e l y f o r s u p p l y i n g o r s t o r i n g w a t e r f o r f a r m i n g p u r ­ poses ; (v) The p r o d u c t i o n ©r h a r v e s t i n g o f maple s a p i n t o maple s i r u p o r m ap le s u g a r ( b u t n o t t h e s u b s e q u e n t b l e n d i n g o r o t h e r p r o c e s s i n g o f s u ch • s i r u p or s u g a r w i t h o t h e r p r o d u c t s ) ; o r ( v i ) The p r o d u c t i o n o r h a r v e s t i n g o f c r u d e gum ( o l e o r e s i n ) from a l i ­ v i n g t r e e o r t h e p r o c e s s i n g o f s u ch cru de gum i n t o gum s p i r i t s o f t u r ­ p e n t i n e and gum r o s i n , p r o v i d e d such p r o c e s s i n g i s c a r r i e d on by t h e o r i g i n a l p r o d u c e r o f suc h c r u d e gum. ( 5) S e r v i c e s d e s c r i b e d i n s e c t i o n li\2 6 (h)

(I4 ) . — ( i ) R em u n er at i o n

p a i d f o r s e r v i c e s p e r fo r m e d by a n employee i n t h e employ o f a f a r m e r o r a f a r m e r s ’ c o o p e r a t i v e o r g a n i z a t i o n or gro up i n t h e h a n d l i n g , p l a n t i n g , d r y i n g , p a c k i n g , p a c k a g i n g , p r o c e s s i n g , f r e e z i n g , grading., s t o r i n g , o r d e l i v e r i n g t o s t o r a g e o r t o ma rket o r t o a c a r i e r f o r t r a n s p o r t a t i o n t© m a r k e t , o f any a g r i c u l t u r a l o r h o r t i c u l t u r a l commodity, o t h e r t h a n f r u i t s and v e g e t a b l e s

( s e e s u b d i v i s i o n ( i i ) b e l o w ) , pr o d u ce d by s u c h f a r m e r or

fa rm e r-m em be rs o f su ch o r g a n i z a t i o n o r group o f f a r m e r s i s e x c e p t e d , p r o v i d e d s u c h s e r v i c e s a r e p e r f o r m e d as an i n c i d e n t t o o r d i n a r y f a r m i n g o perations. G e n e r a l l y s e r v i c e s a r e perfo rme d " as an i n c i d e n t t o o r d i n a r y f a r m i n g o p e r a t i o n s " w i t h i n t h e meaning o f t h i s p a r a g r a p h i f t h e y a r e s e r v i c e s of t h e c h a r a c t e r o r d i n a r i l y p e r f o r m e d by t h e employees o f a f a r m e r or o f a f a r m e r s ’ c o o p e r a t i v e o r g a n i z a t i o n o r group a s a p r e r e q u i s i t e t o t h e mar­ k e t i n g , i n i t s u n m a n u f a c tu r e d s t a t e ,

of any a g r i c u l t u r a l o r h o r t i c u l ­

t u r e ! commodity oroduc ed by such f a r m e r o r by t h e members o f s ^ ch f a r ­ m e r s ’ o r g a n i z a t i o n or g r o u p .

S e r v i c e s perfor med by employees o f such

f a r m e r o r f a r m e r s ’ o r g a n i z a t i o n o r group i n t h e h a n d l i n g , p l a n t i n g ,

d ry in g , packing, packaging, p ro c e ss in g , fr e e z in g , g rading, s t o r i n g , or d e liv e I n g t© st@rage ©r t o m a r k e t o r t o a c a r r i e r f o r t r a n s p o r t a t i o n t o m a r ­ k e t , o f co m m o di ti es p r o d u c e d by p e r s o n s o t h e r t h a n such f a r m e r o r mem­ b e r s of suc h f a r m e r s ’ o r g a n i z a t i o n o r group a r e n o t p erf or me d "a s an i n ­ c i d e n t t o o rd in a ry farming o p e r a t io n s " , (ii)

R e m u n e r a t i o n p a i d f o r s e r v i c e s p e r f o r m e d by an employee i n t h e

employ o f any p e r s o n i n t h e h a n d l i n g , p l a n t i n g , d r y i n g , p a c k i n g , p a c k a g ­ in g , p ro cessin g , fr e e z in g , grading, s to r in g , or d e liv e rin g to storage or t© m a r k e t o r t o a c a r r i e r f o r t r a n s p o r t a t i o n t o m a r k e t , o f f r u i t s and v e g e t a b l e s , w h e t h e r o r n o t o f a p e r i s h a b l e n a t u r e , i s e x c e p t e d as r e m u n e r a ­ t i o n f o r a g r i c u l t u r a l l a b o r , p r o v i d e d such s e r v i c e s a r e pe rf o r m e d as an i n c i d e n t t o t h e p r e p a r a t i o n o f such f r u i t s and v e g e t a b l e s f o r m a r k e t . For example, i f s e r v i c e s in th e s o r t i n g , g ra d in g , or s t o r i n g of f r u i t s , o r i n t h e c l e a n i n g o f b e a n s , a r e p e r f o rm e d a s an i n c i d e n t t o t h e i r p r e p a r a ­ t i o n f o r m a r k e t , r e m u n e r a t i o n p a i d f o r such s e r v i c e s may be e x c e p t e d w h e t h e r t h e s e r v i c e s a r e p e r f o r m e d I n t h e employ o f a f a r m e r , a f a r m e r s ' c o o p e r a t i v e , o r a commercial h a n d l e r o f s u ch c o m m o d it ie s . ( i i i ) The s e r v i c e s d e s c r i b e d i n s u b d i v i s i o n s

( i ) and ( i i ) , a b o v e ,

do n o t I n c l u d e s e r v i c e s p er f o rm e d i n c o n n e c t i o n w i t h commercial c a n n i n g o r c o m m er ci al f r e e z i n g , o r i n c o n n e c t i o n w i t h any commodity a f t e r I t s d e l i ­ v e r y t o a t e r m i n a l m a rk e t f o r d i s t r i b u t i o n f o r c o n s u m p t i o n .

M or eo v er ,

s i n c e t h e s e r v i c e s d e s c r i b e d i n such s u b d i v i s i o n s raust be r e n d e r e d i n th e a c tu a l h a n d lin g , p la n tin g , d ry in g , packing, packaging, p ro c e s s in g , f r e e z i n g g r a d i n g , s t o r i n g , o r d e l i v e r i n g t o s t o r a g e o r t o ma rk e t o r t o

95 a. c a r r i e r f o r t r a n s p o r t a t i o n t o m a r k e t , o f t h e commodity, suc h s e r v i c e s do n o t , f o r e x a m p le , i n c l u d e s e r v i c e s p e r f o r m e d as s t e n o g r a p h e r s , boo k­ k e e p e r s , c l e r k s , and o t h e r o f f i c e e m p l o y e e s , even t h o u g h such s e r v i c e s may be i n c o n n e c t i o n w i t h suc h a c t i v i t i e s .

However, t o t h e e x t e n t t h a t t h e

s e r v i c e s o f such i n d i v i d u a l s a r e p erf or me d i n t h e employ o f t h e owner or t e n a n t o r o t h e r o p e r a t o r o f a f a r m and a r e r e n d e r e d i n m a j o r p a r t on a f a r m , t h e y may be w i t h i n t h e p r o v i s i o n s o f p a r a g r a p h ( 3 ) o f t h i s s u b s e c t i o n .