1978 U.S. Tax Ct. LEXIS 58">*58
Prior to the sale of farmland to the taxpayer, the seller had summer fallowed the land, incurring expenses of $ 1,800. The sales agreement allocated $ 5,500 of the purchase price to the increase in the fair market value of the land due to its being summer fallowed.
70 T.C. 904">*904 Respondent determined a deficiency of $ 1,210 in petitioner's corporate income tax return for the fiscal year ending August 31, 1973.
The only issue presented for our consideration is whether a purchaser of farmland may deduct the portion of the purchase1978 U.S. Tax Ct. LEXIS 58">*59 70 T.C. 904">*905 price attributable to the value of summer fallow as a trade or business expense under
FINDINGS OF FACT
Most of the facts have been stipulated. The stipulation of facts, together with the exhibits attached thereto, are incorporated herein by this reference.
Petitioner is a corporation which had its principal place of business in Colfax, Wash., at the time it filed its petition. Petitioner is a cash basis taxpayer and filed corporate income tax returns for the fiscal years ending August 31, 1971, through August 31, 1973, with the Internal Revenue Service Center at Ogden, Utah.
Pursuant to an executory contract of sale entered into on September 30, 1970, petitioner purchased from Henry and Matilda Schmick a 408-acre farm in the area of Colfax, Wash. The total purchase price was $ 220,000; this total was specifically allocated in the contract between the land ($ 156,200), eight1978 U.S. Tax Ct. LEXIS 58">*60 separately listed improvements and "summerfallow" ($ 5,500).
At the time of petitioner's purchase of the farm approximately 200 acres were in summer fallow. Summer fallowing is a method of farming utilized by some farmers in areas where the annual rate of rainfall or precipitation is insufficient to grow a crop to maturity each year on the same land. Therefore, crops are planted every other year rather than annually. During the year that a crop is not planted, the land is maintained in a fallow condition by cultivation. This process consists of a series of operations which are part of preparing the seedbed for the next crop to be grown. The farmer must till the soil during the year that it is being fallowed in order to kill the weeds and break the capillary action of moisture rising to the surface, thus preventing loss of moisture in the soil. This maximizes the crop yield the following year and a greater yield of crops is produced than if the farmer had planted crops each year. The value of the summer fallow is fully utilized and exhausted in the production of the crop when the crop is harvested. If a crop seeded on land that has been summer fallowed is destroyed by drought, 1978 U.S. Tax Ct. LEXIS 58">*61 fire, etc., then the value of the previous summer fallow is also lost. 70 T.C. 904">*906 The costs for summer fallow include the costs of plowing, harrowing, and weeding the land.
The Schmicks had leased the farmland to their son-in-law, Reuben Zimmermann (hereafter Zimmermann), for several years prior to its sale. Zimmermann completed all of the work in connection with the summer fallow prior to the sale and had been paid $ 1,800 by the Schmicks for this work. Normally, if a tenant has leased farmland and summer-fallowed it, and then transfers the lease, he will be paid by either the landlord or new tenant for the value of the fallow. The land in summer fallow on the date of purchase was seeded to winter wheat by petitioner immediately after the purchase, and the wheat was harvested in July 1971.
The executory contract of sale allocated $ 156,200 of the purchase price to the land and an additional $ 5,500 to the summer fallow representing the increase in fair market value of the land attributable to the summer fallow. Petitioner paid $ 44,000 of the purchase price during its taxable year ending August 31, 1971, representing the downpayment. Subsequent installment payments of $ 11,733.331978 U.S. Tax Ct. LEXIS 58">*62 have been made on each November 1, beginning on November 1, 1971.
On Schedule F of its U.S. Corporation Income Tax Return for the taxable year ending August 31, 1971, petitioner deducted, as a "growing crop" expense, the entire $ 5,500 allocated in the contract to the summer fallow. The deduction was disallowed on audit, causing a corresponding reduction in an investment credit carryover for the years ended August 31, 1972, and August 31, 1973. Consequently, a deficiency was determined with respect to the year ending August 31, 1973.
Petitioner also deducted all expenses incurred by it with respect to the crop of winter wheat it planted on the summer-fallowed acreage immediately after the purchase from the Schmicks on its corporation income tax return for the taxable year ending August 31, 1971.
OPINION
Petitioner contends that the amount paid for the value of summer fallow is an ordinary and necessary business expense attributable to the next crop to be grown on the land and deductible under
In
Initially, we agree with petitioner that the cost of summer-fallowing is an ordinary and necessary expense deductible under
However, the situation here is one in which petitioner purchased land already summer-fallowed and then planted and harvested a crop. The expense incurred in summer-fallowing had already been paid by Schmick to Zimmermann. Although this expense was deductible by Schmick, it does not follow that it is deductible by petitioner. The simple fact is that petitioner did not incur the expense, Schmick did. The fact that had Schmick not incurred the expense, petitioner would have had to summer-fallow the land (assuming there would still have been time to do 70 T.C. 904">*908 so after the sale) is irrelevant. The expense incurred was Schmick's current operating expense, not petitioner's, and the general rule is that a taxpayer may not deduct the expenses of another taxpayer.
1978 U.S. Tax Ct. LEXIS 58">*66 Although the increase in value of the land produced by summer-fallowing may be ascertained, the summer fallow is not itself an asset that may be segregated from land. It cannot be sold nor leased apart from the land or any right to possess the land. The expense incurred in summer-fallowing is simply a current operating expense of the farming business of the owner. A broad application of the principle urged upon us by petitioner would permit a purchaser of a business to deduct the prior operating expenses of the business purchased which were already properly deducted by the prior owner. For example, where the owner of an apartment building incurs a repair expense he is entitled to a current deduction under
1978 U.S. Tax Ct. LEXIS 58">*68 70 T.C. 904">*909 Accordingly, we hold that the portion of the purchase price attributable to the value of the summer fallow is an amount paid by the purchaser for the farmland as part of the value of land and is a capital investment in the land, and not deductible by the purchaser.
1. All section references are to the Internal Revenue Code of 1954, as in effect during the taxable years in issue.↩
2. $ 5,500 (or 2.5 percent) of the $ 220,000 total purchase price was allocated to the summer fallow. Therefore, respondent argues that 2.5 percent of the downpayment and of each installment payment should be allocated to the summer fallow and deductible only in the years payment is made. Petitioner deducted the full $ 5,500 in the year of purchase.↩
3. Although appeal in this case would lie to the Ninth Circuit, the rule of
4. Respondent relies on the well-settled proposition that an expenditure of a preceding owner of property which has accrued, but which is paid by one acquiring that property, becomes part of the basis of the property acquired and may not be deducted when paid by the acquirer of that property, regardless of what would be the tax character of the expenditure to the prior owner.
5. This is to be distinguished from those situations in which the assets may be segregated, such as in the case of supplies purchased by a business and whose cost was properly deducted as an ordinary and necessary business expense under
