1

The Honorable Brian S. Miller, United States District Judge for the Eastern

District of Arkansas, sitting by designation. 

2

The Honorable Stephen J. Swift, United States Tax Court Judge.

United States Court of Appeals

FOR THE EIGHTH CIRCUIT

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Nos. 08-2912/08-2916/08-2918 

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Jon W. Nelson; Kristi Nelson; *

Steven P. Nelson; Jaime Nelson; *

Wayne E. Nelson; Joann Nelson, *

*

Appellants, * Appeals from the United States

* Tax Court.

v. *

*

Commissioner of Internal Revenue, *

*

Appellee. *

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Submitted: May 13, 2009

Filed: June 10, 2009

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Before LOKEN, Chief Judge, BYE, Circuit Judge, and MILLER, District Judge.1

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BYE, Circuit Judge.

Jon W. Nelson, Kristi Nelson, Steven P. Nelson, Jaime Nelson, Wayne E.

Nelson, and Joann Nelson (collectively the Nelsons), appeal the tax court's2

 decision
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disallowing their deferment, under Internal Revenue Code (IRC) § 451(d), of crop

insurance proceeds to the tax year following their receipt. We affirm.

I

The Nelsons are engaged in two joint farming operations, WJS Nelson, Ltd.

LLP, and WJS Nelson Partnership. Among other crops, the Nelsons raise sugar beets.

Their normal business practice would be to report sixty-five percent of the income

from sugar beet production in the tax year the crop is produced and thirty-five percent

of the income in the following tax year. In 2001, the Nelsons' sugar beet crop was

destroyed by unusually wet conditions. The crop was covered by insurance, and the

farming operations collected $201,919 in crop insurance payments that year. Had the

crop not been destroyed, the Nelsons' normal practice would have been to report sixtyfive percent of the income derived from sugar beets in tax year 2001 and thirty-five

percent in tax year 2002. Instead, in tax year 2001, the Nelsons reported the thirtyfive percent of sugar beet income carried over from their 2000 sugar beet crop and

reported the $201,919 in insurance proceeds as income in tax year 2002.

The Internal Revenue Service (IRS) disallowed the deferment and assessed tax

deficiencies for tax year 2001. The Nelsons petitioned the tax court and it held

§ 451(d)'s election to defer crop insurance payments was not available to them

because it only applies when all the income from a year's crop production is deferred

to another tax year. Because the Nelsons' practice was to defer thirty-five percent of

their sugar beet crop income, the tax court held the insurance payment could not be

deferred. On appeal, the Nelsons argue the tax court erred in holding § 451(d)

inapplicable unless their customary practice was to defer all of their sugar beet income

to the tax year following the year the crop was produced. They argue the

Commissioner of Internal Revenue has held it sufficient to show a "substantial

portion" of the income is deferred, and the thirty-five percent they customarily defer

is a substantial portion. Alternatively, the Nelsons argue they qualify for the § 451(d)
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deferment because the farming operations defer more than fifty percent of the

combined income derived from all crop production.

II

The court of appeals has exclusive jurisdiction to review the decisions of the tax

court "in the same manner and to the same extent as decisions of the district courts in

civil actions tried without a jury." 26 U.S.C. § 7482(a). When the issue on appeal is

purely legal, our review is de novo. Estate of Robertson v. Comm'r, 15 F.3d 779, 781

(8th Cir. 1994) (citation omitted). The sole issue in this appeal is whether the

language of § 451(d) supports the Nelsons' deferment of the crop insurance proceeds

received in 2001 to tax year 2002.

Section 451(d) states:

In the case of insurance proceeds received as a result of destruction or

damage to crops, a taxpayer reporting on the cash receipts and

disbursements method of accounting may elect to include such proceeds

in income for the taxable year following the taxable year of destruction

or damage, if he establishes that, under his practice, income from such

crops would have been reported in the following taxable year . . . . An

election under this subsection for any taxable year shall be made at such

time and in such manner as the Secretary prescribes.

Treasury Regulation § 1.451-6(a)(1), implementing § 451(d), provides in part:

[A] taxpayer reporting income on the cash receipts and disbursements

method of accounting may elect to include insurance proceeds received

as a result of the destruction of, or damage to, crops in gross income for

the taxable year following the taxable year of the destruction or damage,

if the taxpayer establishes that, under the taxpayer's normal business

practice, the income from those crops would have been included in gross
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income for any taxable year following the taxable year of the destruction

or damage . . . .

The rationale for § 451(d) was Congress' recognition that many farmers sell

their crops the year after they are produced. On those occasions when major crop

losses occur that are covered by insurance, farmers receive income by selling the

previous year's crop and from the current year's crop in the form of insurance

proceeds. Absent § 451(d)'s provision allowing deferment of the insurance payments

to the following tax year, a farmer would be unable to spread out the two years of

income to comport with normal business practices and would be required to report two

years of income in one tax year. S. Rep. No. 91-552, at 106-107 (1969), reprinted in

1969 U.S.C.C.A.N. 2027, 2137-2138.

To alleviate problems occasioned by having to report two years of income in

a single tax year, § 451(d) permits a taxpayer to defer crop insurance payments to the

following tax year if "income from such crops would have been reported in the

following taxable year." Treasury Regulation § 1.451-6(a)(1) is nearly identical, but

refers to "the income from those crops . . . ." (Emphasis added). Neither provision,

however, clearly indicates whether the deferment is available to farmers who

customarily defer all of their crop income or only a portion of the income. Thus, in

Revenue Ruling 74-145, 1974-1 C.B. 113, the IRS clarified § 451(d), holding:

A cash-method taxpayer who receives crop insurance proceeds in the

same calendar year his grain crops were damaged and who establishes

that more than 50 percent of the crop income would have been reported

in the following year under his normal business practice is entitled to

elect under section 451(d) of the Code to include the proceeds in income

in the following year, but he may not allocate the proceeds between the

two years.

The revenue ruling established what is known as the "substantial portion" test,

and clearly states the deferment is only available to farmers who customarily defer
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more than fifty percent of the income from the damaged crop. Nonetheless, the

Nelsons argue we should reject the IRS's requirement of more than fifty percent, and

instead hold that the thirty-five percent they customarily defer constitutes a substantial

portion of their sugar beet crop. Alternatively, the Nelsons argue they meet the

substantial portion test because when viewed in the aggregate, their farming

operations customarily defer more than half the income from total crop production.

The Supreme Court has yet to decide what deference revenue rulings are

entitled to by the courts. It has held that reasonable interpretations of the agency's

regulations as embodied in revenue rulings "attract[] substantial judicial deference."

United States v. Cleveland Indians Baseball Co., 532 U.S. 200, 220 (2001). Similarly,

we have held revenue rulings are not binding, but they are authoritative. See Oetting

v. United States, 712 F.2d 358, 362 & n.3 (8th Cir. 1983). In Skidmore v. Swift &

Co., 323 U.S. 134, 140 (1944), the Supreme Court set out the framework we follow

when considering what weight to give rulings, interpretations and opinions of agencies

charged with implementing their congressional mandate.

[W]hile not controlling upon the courts by reason of their authority, [the

rulings, interpretations and opinions] do constitute a body of experience

and informed judgment to which courts and litigants may properly resort

for guidance. The weight of such a judgment in a particular case will

depend upon the thoroughness evident in its consideration, the validity

of its reasoning, its consistency with earlier and later pronouncements,

and all those factors which give it power to persuade, if lacking power

to control.

Section 451(d) could be read as allowing a taxpayer to defer income from

insurance proceeds if the customary practice is to defer any portion of the income

from those crops to a subsequent tax year. It could also be read as allowing the

deferment only when all of the income from the crops would have been deferred. The

legislative history, however, indicates Congress intended § 451(d) to ameliorate the

effects of forcing farmers to report two years of income in a single tax year. Because
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of Congress' clearly expressed intent, the IRS's revenue ruling reasonably concludes

only farmers who customarily defer all or a substantial portion of their crop income

to the tax year following production were intended to benefit from a § 451(d)

deferment of insurance proceeds.

In this instance, if the Nelsons deferred the insurance proceeds received in

2001, the problem Congress sought to resolve by enacting § 451(d) would not be

avoided. Section 451(d) requires the taxpayer to defer all of the insurance proceeds

if he makes the deferment election. Accordingly, the Nelsons would have been

required to defer 100% of the insurance proceeds, even though their normal practice

was to only defer thirty-five percent of the income from sugar beet production. Thus,

in 2001 they would have paid tax on thirty-five percent of their sugar beet crop, but

in tax year 2002 they would have paid tax on 165% of their sugar beet production.

We conclude the IRS's interpretation of § 451(d), which avoids a result that is clearly

at odds with the legislative history, is reasonable and deserving of substantial judicial

deference.

III

We also reject the Nelsons' alternative argument that they satisfy the substantial

portion test because in the aggregate their farming operations defer more than fifty

percent of annual crop income. The Nelsons note Treas. Reg. § 1.451-6(a)(2) requires

a farmer who receives crop insurance proceeds from two or more damaged crops, and

elects to defer insurance proceeds under § 451(d), to defer all insurance proceeds

attributable to crops constituting a single trade or business. They argue this language

compels a finding that the substantial portion test applies to their entire farming

operation, i.e., "single trade or business" and is not limited to a single crop.

Section 1.451-6(a)(2) only applies "[i]n the case of a taxpayer who receives

insurance proceeds as a result of the destruction of, or damage to, two or more specific
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crops . . . ." Here the insurance proceeds relate only to the Nelsons' sugar beet crop.

Additionally, a farmer seeking to take advantage of the § 451(d) deferral when two

or more crops are damaged must first establish qualification for such deferral. In other

words, a farmer seeking to defer insurance proceeds from damage to two or more

crops must show as to any of the individual crops the customary practice was to defer

more than fifty percent of the income. Thus, § 1.451-6(a)(2) does not alter the

substantial portion test in the way the Nelsons contend.

VI

For the reasons stated herein, the judgment of the tax court is affirmed.

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