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ligustrum tree business. Sec. 1.263A-4T(c)(4)(i)(A), Temporary
Income Tax Regs., 59 Fed. Reg. 39960 (Aug. 5, 1994). Expenses
incurred in the farming business may be placed into three
categories: (1) The preparatory period; (2) the development or
preproductive period; and (3) the productive period. Expenses
incurred during the preparatory period include drilling, clearing
brush, laying pipes, and installing ditches and drainage pipes.
Such expenses are generally required to be capitalized. Maple v.
Commissioner, T.C. Memo. 1968-194, affd. 440 F.2d 1055 (9th Cir.
1971). In contrast, ordinary and necessary expenses incurred
during the productive period, after the farm produces or is
reasonably expected to produce its first yield, are generally
required to be deducted. Id. Farm expenditures that are clearly
capital in nature are not deductible at any time. Thompson &
Floger Co. v. Commissioner, 17 T.C. 722, 724-726 (1951).
During the development or preproductive period, farmers are
given the option under section 1.162-12(a), Income Tax Regs., to
either deduct or capitalize ordinary and necessary expenses.
This section provides in part:
If a farmer does not compute income upon the crop method,
the cost of seeds and young plants which are purchased for
further development and cultivation prior to sale in later
years may be deducted as an expense for the year of
purchase, provided the farmer follows a consistent practice
of deducting such costs as an expense from year to year. * *
* Amounts expended in the development of farms, orchards
and ranches prior to the time when the productive state is
reached may, at the election of taxpayer, be regarded as
investments of capital. * * *
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