Court Opinion

ID: 4483826
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:16:19.53748+00
Date Added: 2024-06-11T15:04:08.037151
License: Public Domain

Tannenwald, J., concurring: To me there is a straightforward answer to the issue of deductibility of prepaid feed expenses and it is rooted in the historical treatment accorded farmers. See United States v. Catto, 384 U.S. 102, 116 (1966); Maple Leaf Farms, Inc. v. Commissioner, 64 T.C. 438, 447 (1975). Such being the situation, I think the issue is sui generis and that cases involving the proration of other prepaid expenses are beside the point. For a long time, the respondent has sought to persuade the courts to extricate him from the box in which he finds himself as to his ability to modify the option he has given to farmers to choose between the cash or accrual basis of accounting. Sec. 1.471-6(a), Income Tax Regs. Initially, his attack focused primarily upon the question of whether the amount sought to be deducted was a true prepayment or merely a deposit. See Owens v. Commissioner, 568 F.2d 1233, 1243-1246 (6th Cir. 1977), revg. as to this issue 64 T.C. 1, 16-19 (1975); Lillie v. Commissioner, 45 T.C. 54 (1965), affd. per curiam 370 F.2d 562 (9th Cir. 1966). In this focus, he met with varying degrees of success. See L. Ward, “Tax Postponement and the Cash Method Farmer: An Analysis of Revenue Ruling 75-152,” 53 Texas L. Rev. 1119, 1123-1145 (1975). A second line of attack by respondent involved his attempt to apply the requirement of section 446(b) (or its predecessor, section 41 of the Internal Revenue Code of 1939) that a taxpayer’s methods of accounting clearly reflect income. Until the decision of the Court of Claims in Clement v. United States, 217 Ct. Cl. , 580 F.2d 422 (1978), that approach was also generally unsuccessful. See Owens v. Commissioner, supra at 1245-1246; Cravens v. Commissioner, 272 F.2d 895 (10th Cir. 1959), revg. on other grounds 30 T.C. 903 (1958). Cf. Ernst v. Commissioner, 32 T.C. 181, 186-187 (1959). And even the Clement case found it necessary to buttress the application of section 446(b) by relying ultimately on section 1.461-l(a)(l), Income Tax Regs. Respondent’s latest attack is represented by Rev. Rui. 75-152, 1975-1 C.B. 144, in which he lays down the three-pronged test outlined in the majority opinion and buttresses his distortion-of-income position under section 446(b) by reference to section 461 and section 1.461-l(a)(l), Income Tax Regs. The Court of Claims upheld the applicability of section 461 and section 1.461-l(a)(l), Income Tax Regs., in Clement v. United States, supra. In my opinion, section 461 and section 1.461-l(a)(l), Income Tax Regs., simply do not apply. Section 461 (except for specific provisions not applicable herein) merely states: “The amount of any deduction or credit allowed by this subtitle shall be taken for the taxable year which is the proper taxable year under the method of accounting used in computing taxable income.” Clearly, a farmer is entitled to use the cash basis “method of accounting” and is not required to use inventories. It is his option as to which method he uses. Sec. 1.471-6(a), Income Tax Regs.1 Respondent seeks to avoid the effect of this dispensation by relying on the portion of section 1.461-l(a)(l), Income Tax Regs., which provides: “If an expenditure results in the creation of an asset having a useful life which extends substantially beyond the close of the taxable year, such an expenditure may not be deductible, or may be deductible only in part, for the taxable year in which made.” That sentence is preceded by provisions dealing with depreciation, depletion, and losses, i.e., noncash items, and followed by an example of leasehold improvements. In short, the regulation was intended to deal with assets which have an inherently declining value with the passage of time, i.e., items which have traditionally been considered capital in nature, and perhaps additionally with assets whose cost was inherently keyed to more than one taxable period, e.g., rent, interest, etc. Feed simply does not fall within such categories. There is no escape from the fact that feed is an element of cost of goods sold where cattle is inventoried. Even though respondent is not requiring the partnership herein to inventory cattle, he is in effect requiring it to distill out an inventory cost and treat it as an inventoriable item. This, in my opinion, he should not be permitted to do in the case of a farmer. To characterize feed expenditures as “period costs,” as the Court of Claims does in Clement v. United States, supra, so as to avoid the inventory categorization of feed expense and bring such a prepaid item within the ambit of section 1.461-l(a)(l), Income Tax Regs., is sheer semantic legerdemain. “A rose is a rose, is a rose, is a rose.” See G. Stein, Geography and Plays: Sacred Emily, p. 187 (1922). The fact of the matter is that respondent’s action amounts to nothing more than requiring the partnership to inventory its feed separate and apart from its cash basis treatment of the cattle itself, i.e., to take away from a farmer a portion of his option not to compute his income under an inventory method, section 1.471-6(a), Income Tax Regs., to the contrary notwithstanding. Unquestionably, the special privilege accorded to farmers has its limits (see Zaninovich v. Commissioner, 69 T.C. 605, 608 (1978)), but those limits do not apply to the instant situation. In short, I disagree with the Court of Claims’ approach reflected in Clement. I think that respondent’s historical concession, giving a farmer the right to choose between a cash expenditures and inventory method of accounting in respect of items which would normally be part of the cost of goods sold, i.e., inventoriable, amounts to his agreement that the “clearly reflect income” requirement of section 446(b) is deemed to have been satisfied. Cf. Fribourg Navigation Co. v. Commissioner, 383 U.S. 272 (1966). If respondent is dissatisfied wich this result, his course of action is to persuade the legislature to open up a path from the corner into which he has historically painted himself. He should not expect the courts to do it for him. In this connection, I note that, for whatever his reasons, respondent limited his attack on the problem in connection with sections 278(b) and 464 (enacted by the Revenue Act of 1976) to deductions of feed expenses by “farming syndicates” and not farmers generally. See Fribourg Navigation Co. v. Commissioner, supra at 284. I note also that the conclusion in the majority opinion that the partnership had a valid business purpose in purchasing a 12-months’ supply of feed in advance is not entirely free from doubt. However, I am satisfied that there was a sufficient basis for a finding of business purpose, in respect of the instant purchase, to satisfy that condition of Rev. Rui. 75-152, supra, and to provide the required economic substance for the transaction. Under these circumstances, I think the principle that a taxpayer has the right to engage in a transaction that has substance beyond its tax benefits, even though his motivation may have been to obtain a deduction to offset taxable income, is applicable. See McLane, Jr. v. Commissioner, 46 T.C. 140 (1966), affd. per curiam 877 F.2d 557 (9th Cir. 1967), wherein we stated (at page 145): The building may not be constructed entirely from tax advantage, but, if the foundations and bricks have economic substance, the economic or financial inducement of the tax advantage can provide the mortar. Hanover Bank v. Commissioner, 369 U.S. 672, 682 (1962). [Fn. ref. omitted.][2] Additionally, I am constrained to mention that it is arguable whether the issue of business purpose is an appropriate consideration in determining the treatment of prepaid feed expenses. See L. Ward, supra, 58 Texas L. Rev. at 1172-1173, 1178.1 recognize, however, that the parties in this case are in agreement that this element of Rev. Rui. 75-152, supra, should be placed in issue and that the question of business purpose has been dealt with in some of the decided cases involving the deduction of prepaid feed expenses. See L. Ward, supra, 53 Texas L. Rev. at 1174-1177. Finally, I see no need to go beyond my conclusion that the partnership was entitled to deduct the prepaid feed expenditures in question in the year of payment and analyze whether there was a distortion of income at the partner level. See Resnik v. Commissioner, 66 T.C. 74, 82 (1976), affd. per curiam 555 F.2d 634, 636 (7th Cir. 1977). As the majority points out (note 4), the respondent did not press this issue. Beyond this, I do not believe that examination of the distortion-of-income point, at the partner level, would be appropriate. Once it is determined that the partnership had a sufficient business reason for expending the sums in question, the fact that the individual partners got a tax benefit from the loss is beside the point. Dawson, Irwin, Sterrett, and Hall, JJ., agree with this concurring opinion.  See also sec. 1.162-12(a), Income Tax Regs.   Compare Ginsburg v. Commissioner, T.C. Memo. 1976-199.