Tax Court: Timing of field-packing material deductions by farming corporation

Tax Court: Timing of field-packing material deductions

The U.S. Tax Court today held that a farming corporation can deduct the cost of field-packing materials for the year of purchase—not, as the IRS asserted, that the taxpayer could deduct the costs of these materials only for the years in which the taxpayer actually used the materials, and then must defer its deduction of the rest. Agro-Jal Farming Enterprises, Inc. v. Commissioner, 145 T.C. No. 5 (July 30, 2015)

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Read the Tax Court’s opinion [PDF 127 KB]

Summary

The taxpayer followed the cash method of accounting for tax purposes and the accrual method for its financial statements. The taxpayer deducted the amounts it paid for field-packing materials. Because of federal and state laws on labeling and packaging, the packing materials were customized, and it took between two and four months for delivery of an order. The taxpayer purchased in bulk and regularly pre-paid for large quantities so that its crops would not spoil for want of packing.

The IRS challenged the timing of the taxpayer’s deductions for these customized packing materials.

The Tax Court—addressing “an issue never before addressed by any court” and an issue “of considerable interest to farmers generally”—agreed with the taxpayer’s interpretation that the materials that it bought, and that were “on hand” were governed by Reg. section 1.162-3 which, the court held, does not require a cash-method taxpayer to defer its deductions until the materials are used or consumed, if the taxpayer deducted their costs for a prior tax year.

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