John and Louisa A. Hodel - Page 6

          pursuant to section 263A(b)(2)(A) and section 1.263A-3(a)(1),               
          Income Tax Regs.  Section 1.263A-4T(c)(4)(ii)(B), Temporary                 
          Income Tax Regs., supra, describes the preproductive period as              
          follows:  "The preproductive period of a plant begins when the              
          plant or seed is first planted or acquired by the taxpayer.  The            
          preproductive period ends when the plant becomes productive in              
          marketable quantities or when the plant is reasonably expected to           
          be sold or otherwise disposed of."  Petitioners planted the                 
          seedlings in 1986 and reasonably expected to sell them after 3              
          years.  Because the productive period of the trees was more than            
          2 years, preproductive expenses attributable thereto are subject            
          to the UCR, and, accordingly, petitioners are required to                   
          capitalize such expenses unless an exception applies.                       
               Under section 263A(d)(3), a farmer may elect out of the UCR,           
          and, instead, deduct his expenses in accordance with the                    
          provisions of section 162, with the requirement that the property           
          produced is then treated as section 1245 property, and any gain             
          resulting from the disposition thereof is recaptured to the                 
          extent of the deductions which, but for the election under                  
          section 263A(d)(3), would have been capitalized.  The election              
          must be made for the first taxable year beginning after December            
          31, 1986, during which the taxpayer engages in the farming                  
          business.  Sec. 1.263A-4T(c)(6)(iii), Temporary Income Tax Regs.,           
          supra.  "A taxpayer * * * shall be treated as having made the               
          election if such taxpayer does not capitalize the costs of                  

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