UNITED STATES TAX COURT



    PELAEZ AND SONS, INC., CHRISTINA P. HOOKER, TAX
     MATTERS PERSON, Petitioner v. COMMISSIONER OF
              INTERNAL REVENUE, Respondent



Docket No. 18049-97.                      Filed May 30, 2000.



     Sec. 263A, I.R.C., enacted in 1986, requires the
capitalization of developmental costs. For plants with
preproduction periods that are 2 years or less, farmers
may be excepted from the capitalization requirements.
For certain plants, including citrus plants grown in
commercial quantities in the United States, the statute
requires that the standard for the 2-year test is to be
based on a national weighted average preproductive
period for that type of plant. If the preproductive
period, so determined, is 2 years or less, citrus
farmers could be excepted from the capitalization
requirement of sec. 263A, I.R.C. No guidance had been
issued as to the national weighted average
preproductive period for citrus trees as of 1989, when
P began growing citrus trees. Due to the lack of
guidance, P did not deduct its developmental costs for
the first 2 years and then determined, based on its
growing experience, that some of its citrus trees were
productive within 2 years. Based on that experience,
                               - 2 -

     P, in 1991, claimed to be excepted from the
     capitalization requirement of sec. 263A, I.R.C., and
     deducted the preproductive costs for 1989, 1991, and
     1992. R determined that P was not entitled to deduct
     the costs.
          Held: P is not entitled to use its own growing
     experience to measure whether it meets the 2 years or
     less standard. Held, further, P must capitalize its
     preproductive development costs for its citrus trees.



     Philip A. Diamond and Daniel C. Johnson, for petitioner.

     Charles A. Baer and James F. Kearney, for respondent.



     GERBER, Judge:   Respondent issued a notice of final S

corporation administrative adjustment (FSAA) for Pelaez and Sons,

Inc.’s (corporation), taxable years ended September 30, 1992,

1993, and 1994, reflecting net adjustments in the amounts of

$1,514,209, $46,148, and ($155,814), respectively.   The question

we consider is whether the corporation is required, under the

provisions of section 263A,1 to capitalize developmental expenses

in connection with citrus trees.   Respondent did not issue

guidance as to the “nationwide weighted average preproductive

period” for citrus trees (the standard in section 263A), and we

must decide whether the corporation’s use of its own experience

will suffice to meet the statutory standard.   If, under section

263A, the corporation is required to capitalize, it argues that


     1
       Unless otherwise indicated, section references are to the
Internal Revenue Code, as amended and in effect for the taxable
periods under consideration.
                                - 3 -

respondent is precluded from making any adjustment concerning the

corporation’s 1991 taxable year due to the expiration of the

limitation period.

                          FINDINGS OF FACT2

     Pelaez and Sons, Inc., a Florida corporation, was

incorporated during 1955 and has continuously had its principal

place of business and engaged in commercial farming, through the

time of trial, in the State of Florida.       Since 1989, S

corporation status has been elected for Federal tax purposes, and

the corporation was a cash basis taxpayer for the years under

consideration.

     Beginning in 1955, the corporation engaged in commercial

cattle ranching and during the early 1960’s began raising sugar

cane.    In the late 1980’s the corporation entered into citrus

growing operations to increase profits and minimize risk by means

of diversification.    After successfully accelerating the

reproduction time in its cattle-raising activity, the

corporation, in a favorable citrus market, attempted to

accelerate the production of citrus crops.       The land to be used

for the citrus grove had been used for cattle grazing, which made

it most suitable for citrus production.




     2
       The parties’ stipulation of facts and the attached
exhibits are incorporated by this reference.
                                - 4 -

     Innovations in citrus growing permitted accelerated growing

experiences.    Some of the innovations include:    Improved

irrigation, fertigation systems, higher density planting, virus-

free trees, disease control, pesticides, intensive fertilization,

and genetic development.    Fertigation is a technology that

combines fertilization and irrigation to permit continuous

fertilizer application and thereby promote more rapid growth.

The corporation invested in and employed the above-described

technologies.    The corporation invested extensively in land

preparation, water management, fertilization, and other measures

to maximize tree growth and fruit production.      Generally, the

corporation exploited techniques that would accelerate the growth

of its citrus crop and maximize its crop output.      The corporation

employed Henry Hooker, educated in mechanized agriculture and

experienced in fertigation, to assist in its citrus growing

activities.

     Most citrus trees are grafted trees that consist of two

parts, the scion or variety which is grafted or “budded” onto the

rootstock, which comprises the tree’s root system.      In the citrus

industry, it is customary to measure a tree’s life from the date

it is permanently planted, and prior development is disregarded.

     During May through July 1989, 39,382 citrus fruit trees

(1989 trees) were planted.    Eight varieties of citrus were

acquired from a commercial nursery and planted by a commercial
                               - 5 -

planting service under Mr. Hooker’s supervision.   The parties

agree that the costs incurred in establishing the citrus grove,

including purchase, bedding, installation of fertigation, and

irrigation of the trees are depreciable costs deductible over a

period of years.

     After the 1989 trees were planted, the corporation incurred

certain developmental or cultivation expenses (including

herbicides, fertilizer, pesticides, interest, depreciation, and

care taking) that were not deducted for the years ended September

30, 1989 or 1990, but they were deducted in later years.   The

corporation deferred the deduction of the developmental expenses

due to a lack of regulatory guidelines and because it was not

known whether the citrus grove would produce a marketable crop

within 2 years of planting the 1989 trees.   At the end of a 2-

year productive period, the corporation reviewed the sales of

citrus in late 1990 and the potential for a 1991 crop based on

the spring blooms and decided to deduct, on its 1991 return, the

developmental expenses for the 1989 and 1990 taxable years.   The

corporation did not deduct the cost of the trees but depreciated

them over a rateable period.   For 1992 and subsequent taxable

years, the corporation deducted the developmental costs (i.e.,

herbicides, fertilizer, interest, depreciation, and care taking

expenses) for the 1989 trees for each year as incurred.
                                  - 6 -

     Additional citrus trees were planted during late 1991 (1991

trees), and the planting costs were capitalized and depreciated.

Based on the performance of the 1989 trees, it was believed that

the 1991 trees would be productive within their first 2 years.

The corporation, for its 1992 year and successive years, deducted

the developmental expenses and depreciation for the 1991 trees.

     Respondent, in the FSAA notice, under section 263A,

disallowed the following deductions claimed with respect to the

1989 and 1991 trees:

Taxable year ended           1989 trees           1991 trees
                         1
   Sept. 30, 1991         $1,171,949                 -0-
   Sept. 30, 1992            244,692               $90,513
   Sept. 30, 1993             -0-                  116,980
     1
      $649,126.11 of the amount claimed was paid in the 1991 tax
year and the remainder in the 1989 and 1990 tax years.

     Production History--1989 Trees--The 1989 trees bore blossoms

during early 1990, fruit was visible during the spring 1990, and

80 boxes of grapefruit were sold for $220, which was net of the

cost of harvest borne by the buyer.       The $220 of income was

reported on the corporation’s 1991 return.       The 1989 trees were

affected by a 1989 frost, causing a loss of about 50 percent of

the grove.   The 1989 trees also bloomed in early 1991, and fruit

was visible during the spring of 1991.       The harvest began in

October 1991, and the corporation sold the second crop for

approximately $14,600 net of the harvesting costs borne by the

buyer.
                                - 7 -

     Production History--1991 Trees--There were blooms on the

1991 trees during early 1993, fruit was visible during the spring

1993, and the corporation sold the fruit from the harvest

beginning in October 1993.   Fruit from the 1991 trees won an

award, based on size and quality, in a 1993 county fair.

     The corporation, for the taxable periods 1991 through 1994,

harvested and sold boxes of fruit as follows:

                                                     Tangerines/
Taxable year ended    Oranges        Grapefruit       tangelos

 Sept.   30,   1991      -0-                80          -0-
 Sept.   30,   1992     4,465              967           118
 Sept.   30,   1993    28,906           30,439         3,469
 Sept.   30,   1994    36,242           36,836         9,413

Production information for 1989 trees and 1991 trees was not

segregated.

     During October 1993, a group described as the “Florida

Citrus Liaison Team” was formed, and it consisted of five citrus

industry representatives, two tax practitioners, and six

representatives from the Internal Revenue Service (IRS).       The

IRS’ Specialization Program coordinator (for the citrus industry)

was a participant in the liaison group.     The group sought

guidance from the Office of Chief Counsel of the IRS with respect

to issues concerning section 263A.      There was a belief within the

liaison group that IRS examiners were not uniformly applying the

section 263A provisions.
                               - 8 -

     Albert W. Todd, a C.P.A. with 37 years of experience,

prepared the corporation’s Federal income tax returns, and he was

experienced in agricultural accounting issues.   He had more than

one client with exposure to section 263A, and, prior to the time

of the filing of the corporation’s 1991 return, Mr. Todd

concluded that deferral of the decision to deduct the

developmental costs was prudent and that the 1989, 1990, and 1991

expenses would be deductible on the 1991 return.   After

researching section 263A, Mr. Todd concluded that the U.S.

Department of the Treasury had not issued regulations and/or

guidance as to the nationwide weighted averages for citrus

plants, that no other guidelines existed, and that there was no

requirement that taxpayers determine nationwide guidelines.    In

that setting, Mr. Todd advised the corporation to make a decision

based on its individual experience as to whether section 263A

applied.

      Pelaez and Sons, Inc.’s, 1991 tax return was mailed on or

about January 10, 1992, and was received by the IRS on January

13, 1992.   The notice upon which this case is based was mailed

June 2, 1997.   The corporation’s 1991 taxable year was closed

when the June 2, 1997, notice was mailed.   In calculating the

adjustments in the notice, respondent reversed and included in

1992 income the 1991 deduction of $1,171,949 for the 1989 tree

developmental expenses.
                               - 9 -

                              OPINION

     The parties have conflicting interpretations of section

263A.   Petitioner argues that the statutory requirement that the

standard be based on a national weighted average is invalid and

should be disregarded in favor of an approach where each

taxpayer’s experience should be the measure of whether the

section 263A “within 2 years test” is met.     Respondent argues

that the nationwide average is valid even though no guidance had

been issued.   Respondent also notes that any guidance that could

have been issued would not have supported petitioner’s position.

     The statute requires taxpayers to capitalize certain direct

and indirect expenses or costs.   See sec. 263A(a)(1).    Section

263A does not apply to “any plant which has a preproductive

period of 2 years or less” if produced by the taxpayer in a

farming business.   Sec. 263A(d)(1)(A)(ii).    A “preproductive

period” means “in the case of a plant which will have more than 1

crop or yield, the period before the 1st marketable crop or yield

from such plant”.   Sec. 263A(e)(3)(A)(i).    For plants grown in

commercial quantities in the United States, that crop will be

within or without the 2-year period based on “the nationwide

weighted average preproductive period for such plant.”     Sec.

263A(e)(3)(B).   Section 263A(i) provides that the “Secretary

shall prescribe such regulations as may be necessary or

appropriate to carry out the purposes of this section”.     Section
                              - 10 -

263A was enacted during 1986, and, through the years in

controversy, no regulations3 or other notification had been

issued to provide guidance regarding the nationwide weighted

average preproductive period for citrus trees.4

     In these circumstances, respondent argues that petitioner

has failed to show the nationwide average preproductive period

for citrus trees and that the corporation should not be entitled

to meet the statutory requirement by using its own citrus tree

experience.   Respondent also argues that congressional intent was

to include citrus trees within the capitalization requirements of

section 263A; i.e., that Congress knew that the preproductive

period for citrus trees was more than 2 years.

     Petitioner argues that the corporation is not responsible

for determining the nationwide weighted average preproductive

period for citrus trees and that it should be allowed to meet the

requirements by showing that its actual experience resulted in a



     3
       Respondent makes the observation that the periodic
publication of a list of the national weighted averages for
preproductive periods for various plants would, as a matter of
practice, have been issued in some form of notice and not be
published in the more formal vehicle of a regulation.
     4
       No final regulation on this point has been issued.
Subsequent to the taxable years under consideration, however, the
U.S. Department of the Treasury issued temporary regulations,
which included a statement that the U.S. Department of the
Treasury intended to publish a list of 37 plants, including
orange, grapefruit, and tangerine trees, that were expected to
have a preproductive period in excess of 2 years. See T.D. 8729,
1997-2 C.B. 38.
                               - 11 -

less than 2-year preproductive period.    In essence, petitioner’s

argument is that the section 263A(e)(3)(B) nationwide weighted

average requirement has no effect unless respondent issues a

regulation or guidance providing the average.    Petitioner, in the

alternative, argues that any adjustment that is sourced in the

corporation’s 1991 tax year is time barred.    The first question

we consider is whether the absence of guidance and/or regulations

changes the statutory requirements.5

     Petitioner’s argument assumes that the only possible source

for a nationwide weighted average is the Commissioner or the

Secretary.    Although the statute requires that regulations be

prescribed as may be necessary or appropriate, the statute does

not specifically mandate that the Secretary calculate the

national averages for various plants.    The statute does require

that the period in question be measured based on the nationwide

weighted average.6   Accordingly, if taxpayers were able to show


     5
       Generally, where regulations have been necessary to
implement a statutory scheme providing favorable taxpayer rules,
this Court has found that the statute’s effectiveness is not
conditioned upon the issuance of regulations. See Estate of
Maddox v. Commissioner, 

, 233-234 (1989); First
Chicago Corp. v. Commissioner, 

, 676-677 (1987), affd.

(7th Cir. 1988); Occidental Petroleum Corp. v.
Commissioner, 

, 829 (1984). We have held that the
U.S. Department of the Treasury’s failure to provide the needed
guidance should not deprive taxpayers of the benefit or relief
Congress intended. See Hillman v. Commissioner, 

,
___ (2000) (slip op. at 14).
     6
         Congress expected the Secretary periodically to publish
                                                     (continued...)
                              - 12 -

the nationwide weighted average was less than 2 years, they could

be excepted from the capitalization requirement of section 263A.

In other words, Congress has provided for a standard that is not

static and could change from year to year.

     Next, we consider respondent’s argument that Congress

intended that the section 263A capitalization requirement apply

to citrus farmers.   We first consider the statute to discern

congressional intent.    See United States v. American Trucking

Associations, Inc., 

, 542-543 (1940); Hospital Corp.

of Am. v. Commissioner, 

, 128 (1996).   If the

language of the statute is clear, we need look no further in

deciding its meaning.   See Sullivan v. Stroop, 

, 482

(1990).   If the statute is silent or ambiguous, the legislative

history may reveal congressional intent.   See Burlington No. R.R.

v. Oklahoma Tax Commn., 

, 461 (1987); United States

v. American Trucking Associations, Inc., supra at 543-544;

Hospital Corp. of Am. v. Commissioner, supra at 129.

     Respondent contends that Congress’ intent is demonstrated by

the language of section 263A(d)(3)(C).   That section prohibits

farmers from electing out of the section 263A capitalization



     6
      (...continued)
lists of preproductive periods for various plants. H. Rept. 99-
426, at 628 (1985), 1986-3 C.B. (Vol. 2) 1, 628 & n.45. The
legislative history, however, is silent on the effect, if any, of
the Secretary’s failure to so publish the preproductive periods
as expected, the very question we consider.
                              - 13 -

requirement with respect to the costs incurred to develop and

maintain a citrus or almond grove for the first 4 years after the

trees are planted.   We note that growers of plants that produce

other than citrus and almonds may elect out of these

requirements.   Respondent also points out that section

263A(d)(3)(C) is similar to former section 278 and reflects that

Congress considered the preproductive period for citrus trees to

be more than 2 years.7

     Subsection (d) of section 263A provides for exceptions from

the capitalization requirements for certain farming businesses.

As explained above, section 263A(d)(1)(A)(ii) excepts farmers

growing plants with a preproductive period of 2 years or less

from the section 263A capitalization requirements.    Paragraph (3)

of subsection (d) permits certain farming businesses to elect out

of the section 263A capitalization requirements (i.e., the

requirements otherwise applicable to growers of plants with a

preproductive period of more than 2 years).   One exception from

the election out provisions is contained in section

263A(d)(3)(C), as follows:

     SPECIAL RULE FOR CITRUS AND ALMOND GROWERS.--An
     election under this paragraph shall not apply with
     respect to any item which is attributable to the
     planting, cultivation, maintenance, or development of
     any citrus or almond grove (or part thereof) and which
     is incurred before the close of the 4th taxable year


     7
       Sec. 263A(d)(3)(C) and former sec. 278, in effect, contain
a 4-year threshold period of mandatory capitalization.
                              - 14 -

     beginning with the taxable year in which the trees were
     planted. For purposes of the preceding sentence, the
     portion of a citrus or almond grove planted in 1
     taxable year shall be treated separately from the
     portion of such grove planted in another taxable year.

Respondent contends that the 4-year limit on the ability of

citrus farmers to elect out of section 263A reflects a statutory

inference and congressional recognition that citrus farmers were

subject to section 263A.8

     Petitioner argues that section 263A(d)(3)(C) simply provides

that the subsection (d)(3) election out of section 263A is not

generally available to citrus farmers.   Petitioner contends that

section 263A(d)(1) defines which farmers are subject to section

263A, whereas section 263A(d)(3) allows certain farmers to elect

not to be subject to 263A.   In other words, petitioner contends

that section 263A(d)(1) should be read separately from section

263A(d)(3).   Finally, petitioner contends that respondent’s

comparison of section 263A(d)(3)(C) to repealed section 278,

creates, rather than solves, any ambiguity in section 263A.

     We agree with respondent that the inclusion of section

263A(d)(3)(C), as part of section 263A(d), is an indication that

Congress intended or expected that the section 263A

capitalization rules would apply to citrus farmers (i.e., citrus



     8
       Respondent also surmises that by setting a 4-year
threshold on election out of sec. 263A, Congress was aware that
the nationwide weighted average preproductive period for citrus
trees would exceed 2 years.
                                - 15 -

farmers would not meet the “2 years or less” standard).      In

general, it would be incongruous to include section

263A(d)(3)(C), if it was expected or intended that citrus farmers

would meet the “2 years or less” standard.

     Former section 278 provided that expenses, incurred before

the close of the fourth year, for planting, cultivation,

maintenance, or development of citrus groves, were to be “charged

to [the] capital account.”     Sec. 278(a).9   Section 278 was

repealed in connection with the enactment of section 263A in the

Tax Reform Act of 1986, Pub. L. 99-514, sec. 803(b)(6), 100 Stat.

2350.     The 4-year limitation on electing out of section 263A

comports with a similar 4-year requirement that such expenses

were to be charged to the capital account under section 278.

Accordingly, for citrus farmers, the requirement that expenses be

capitalized, at least for the first 4 years, did not change by

repeal of section 278 and the enactment of section 263A.         We are

not in a position to say, however, that the 4-year limit in

either statute indicates recognition by Congress that the

preproductive period for citrus trees was or is 4 years.10


     9
       Sec. 278 was added in 1969 as part of the Tax Reform Act
of 1969, Pub. L. 91-172, sec. 216(a), 83 Stat. 615.
     10
       In the General Explanation of the Tax Reform Act of 1969,
the staff of the Joint Committee on Taxation (J. Comm. Print
1970), explained the reason for enacting the now repealed sec.
278 was to address a situation where certain high-income
taxpayers were taking advantage of the benefit of ordinary
                                                   (continued...)
                               - 16 -

     The evidence in this case appears to reflect that during the

1989 through 1994 years, the preproductive period for citrus

trees was, generally, more than 2 years.   It is evident that in

1989 when the corporation entered into the citrus growing

business it employed the latest technological advances.

Employing the most current technology, the corporation produced

only limited amounts of citrus from a limited number of its trees

within the first 2 years.   We cannot assume that, nationally,

other citrus farmers had achieved the same technological state of

the art.   It therefore appears possible, if not likely as argued

by respondent, that the nationwide average preproduction period

for citrus was more than 2 years.

     The reports and testimony of the parties’ trial experts and

the reference sources provided by the parties also demonstrate

that the preproductive period for citrus plants was at least 2

years.    A text on Florida citrus growing (received as Exhibit 23-


     10
      (...continued)
deductions currently available against ordinary income and
eventual capital gain upon sale of citrus groves. This benefit
had resulted in “unfavorable economic consequences for the citrus
industry”, in the form of overproduction and depression of
prices. The capitalization requirement specifically addressed
that problem by requiring that the expenses be “charged to [the]
capital account” at least until the end of the third year after
the year of planting (4-year rule). The legislative history,
however, did not contain specific recognition of an established
or recognized preproduction period with respect to citrus trees.
Congress, however, may have set the 4-year period to coincide
with the then (1969 or 1986) preproduction period for citrus
trees. As evidenced in this case, however, the period may be
becoming shorter due to advanced farming technology.
                              - 17 -

R), in the opening two paragraphs of a chapter on “Bringing

Citrus Trees into Production”, contains the following:

     During the first two or three years after planting a
     citrus tree, growers should not seek to obtain the
     earliest possible production of fruit but to develop a
     sturdy tree to good size so that it will bear
     productively over a long life. * * * Growers need to
     aid the growth of the trees only by supplying favorable
     conditions for their development. With no crop to
     consider, growers can devote all attention to promoting
     vegetative growth. Sometimes growers will give minimum
     attention to these young trees because they are not yet
     returning any income, but to neglect them is a mistake
     that will be regretted for a long time because of its
     adverse effect on the trees’ future bearing.
          By established custom in Florida, citrus trees are
     classed as nonbearing during the first four years after
     they are planted as yearling trees. Although they may
     bear a few fruits as early as the second or third year,
     all efforts are correctly directed toward tree growth,
     and any fruit production is incidental. * * *
     [Jackson, Bringing Citrus Trees into Production,
     Citrus Growing in Florida, 137 (3d ed. 1991).]

The last paragraph of the same chapter, contains the following

statement:

          Beginning with the fourth or fifth year, when the
     trees are considered of bearing age, practices in grove
     management differ somewhat from those outlined above.
     The following chapters are devoted to the care of
     bearing trees. [Id. at 146.]

     Other contemporaneous materials offered by respondent

generally reflect that no meaningful production occurs until the

third year, with full production commencing in the fourth to

sixth year of tree growth.   Petitioner’s experts highlighted the

fact that the corporation’s particular experience demonstrates

that citrus trees are capable of producing some fruit by the end
                              - 18 -

of the second year.   Statistically, however, any such production

was incidental and not necessarily representative of an average

pattern for preproductive periods.     Petitioner’s experts also

confirmed that the corporation took full advantage of the newest

technology.   In that regard, one of petitioner’s experts opined

that technology was to a point where the fourth year standard or

convention for citrus development, as had been contained in

repealed section 278, was no longer the standard.     Petitioner’s

experts concluded that the corporation’s use of advanced

technology likely caused the citrus trees to begin producing

earlier than would have been experienced under older technology.

During the years under consideration, it appears that technology

and methodology existed that permitted the possibility of some

production within 2 years of “planting”.11

     Similarly, one of respondent’s experts opined that a citrus

tree needed about 18 months after planting to reach a minimum

size to flower and that “Young trees are typically about 24

months old and have reached their second flowering opportunity

when small amounts of fruit are produced.”     Respondent’s expert



     11
        The parties differed in their views concerning when the
2-year preproductive period began. Essentially, petitioner
argues for a later starting period, when the farmer plants as
opposed to the time when the plant may have been prepared by a
commercial nursery for use by farmers. There is no need to
decide when the preproductive period begins because the result in
this case would be the same no matter which party’s belief we
follow.
                               - 19 -

concluded that, industrywide, citrus plants begin their

productive life at about 30 to 36 months old.    Respondent’s other

experts concluded that, generally, citrus is ready for harvest in

the third year.    The experts did not preclude the possibility

that production could occur earlier.    Accordingly, petitioner’s

and respondent’s experts are relatively close in their views.

Their opinions permit the conclusion that citrus trees can

produce a small amount of fruit within 2 years, but they vary

regarding whether that production is commercially viable within

the second year.    None of the parties’ experts was able to

provide empirical or statistical evidence of a “nationwide

weighted average preproductive period” for citrus plants.

     We can deduce from the election-out provisions applicable

exclusively to citrus farmers, that it was expected that citrus

tree farmers would not meet the section 263A(d)(1)(A)(ii) 2-year

test for being excepted from the section 263A capitalization

requirements.    To conclude that citrus trees would meet the 2-

year test would render section 263A(d)(3)(C) superfluous.      In

addition, the 4-year limitation on electing-out of section 263A

requirements comports with the similar 4-year capitalization

requirement in repealed section 278 that, to some extent, section

263A replaced.    This supports our holding that Pelaez and Sons,

Inc., is subject to the capitalization requirements of section

263A.
                              - 20 -

     Petitioner’s argument that the corporation should be allowed

to use its individual experience because respondent failed to

issue regulations or guidance as to the national weighted average

preproduction period for citrus trees is without merit.    The

plain language of section 263A requires that for a citrus farmer

such as petitioner, the preproductive period in the section

263A(d)(1)(A)(ii) exception from section 263A capitalization is

measured by means of the nationwide weighted average

preproductive period for citrus trees.    As indicated above,

neither party was able to show that average.

     Petitioner also argues that the use of a nationwide average

preproduction period for each type of plant is a vague standard

or concept and that the statutory standard is vague and should be

invalidated.   Respondent counters that although no guidance was

published by the Secretary or respondent, the standard is not

vague.   Respondent also explained that the reason that Congress

used a nationwide weighted average preproductive period for each

type of plant was to ensure that one region of the country did

not have an economic advantage over another region because of

more favorable growing conditions.     So, e.g., if southern farmers

enjoy a longer growing season, they may be able to meet the 2-

year test and currently deduct their cost of production, whereas

northern farmers would not be able to take the current deductions

and would be required to capitalize the same expenses or costs.
                               - 21 -

That is a reasonable explanation for the nationwide average

requirement for each type of plant.

     Accordingly, the corporation must meet the statute’s 2-year

threshold based on the nationwide weighted average preproductive

period for citrus trees.   Though neither the Secretary nor

respondent has published guidelines, we are not in a position to

hold that the statute is “invalid” as petitioner suggests.    In

that regard, the terms of the standard are not vague, and there

is reasonable justification for the statutory requirement that

the exception from section 263A be on a uniform or nationwide

basis for each type of crop.

     Finally, we consider petitioner’s argument that respondent

is time barred from making any adjustments to the corporation’s

income for the years before the Court to prevent duplication of

amounts that had been deducted in the corporation’s 1991 year, a

year that the parties agree is closed.   Respondent, admitting

that the corporation’s 1991 tax year was otherwise closed at the

time the notice was mailed, contends that the corporation’s 1991

choice no longer to capitalize its production costs constitutes a

change of accounting method that triggers section 481(a) and

permits adjustments in the 1992 tax year with respect to items

deducted in the 1991 year.   Accordingly, respondent’s ability to

make an adjustment in the 1992 year for deductions taken in the

1991 year is solely dependent on whether the corporation’s 1991
                                - 22 -

choice to deduct rather than capitalize the production costs was

a change in the accounting method.

     Respondent explains that the corporation, under section

263A, had capitalized (not deducted)12 its citrus grove

production costs for its taxable years ended September 30, 1989

and 1990.     Beginning in 199113 and in later years, the

corporation began deducting its production costs for the 1989 and

1991 trees.     Respondent contends that the corporation changed its

method of accounting for costs of citrus production in its 1991

taxable year.     Under respondent’s change in the accounting method

contention, respondent would be entitled to rely on section 481

to make an adjustment(s) to prevent a distortion of taxable

income.   See sec. 481; Graff Chevrolet Co. v. Campbell, 

, 572 (5th Cir. 1965); W.S. Badcock Corp. v. Commissioner, 

(1972), revd. on other grounds 

(5th Cir.

1974).    Under section 481 respondent increases the corporation’s

1992 tax year income to adjust for the 1991 tax year deductions



     12
       Petitioner argues that it did not capitalize the 1989 and
1990 costs for the 1989 trees, but that it deferred deducting
them until it could be determined whether they met the 2-year
test of sec. 263A(d)(1)(A)(ii). Petitioner’s characterization of
the corporation’s actions as deferring the deductions as opposed
to choosing to capitalize, however, is a distinction without a
difference. In the context of this case and the subject statute,
the failure to deduct is necessarily the equivalent of a choice
to capitalize.
     13
       In 1991, the corporation deducted the costs for its 1989,
1990, and 1991 taxable years.
                               - 23 -

that should have been capitalized under section 263A.   Our

holding sustains respondent’s position that the corporation must

use capitalization principles, beginning in 1992, to account for

the expenditures of developing its trees.   Unless a section 481

adjustment is made, the amounts already deducted for the 1991

year as development costs of the 1989 and 1991 trees would in

effect be deductible a second time, in 1992 and later years, if

not through depreciation, then as accumulated costs set off

against the proceeds realized from the sale of fruit grown on

these trees.

     Petitioner does not question respondent’s authority to make

the adjustment under section 481 but argues that there has not

been a change in the accounting method that would make section

481 available to respondent.   Without section 481, petitioner

contends that respondent is time barred from adjusting the 1992

taxable year.   Accordingly, we must decide whether respondent, by

requiring the corporation to capitalize such costs under section

263A for 1992 and future years, has changed the corporation’s

method of accounting for such costs.

     Respondent relies on the definition for change of accounting

method contained in Rev. Proc. 92-20, 1992-1 C.B. 688, as

follows:

          Section 1.446-1(e)(2)(ii)(a) of the regulations
     provides that a change in method of accounting includes
     a change in the overall plan of accounting for gross
     income or deductions, or a change in the treatment of
                              - 24 -

     any material item. A material item is any item that
     involves the proper time for the inclusion of the item
     in income or the taking of a deduction. In determining
     whether a practice involves the proper time for the
     inclusion of an item in income or the taking of a
     deduction, the relevant question is generally whether
     the practice permanently changes the amount of taxable
     income over the taxpayer’s lifetime. If the practice
     does not permanently affect the taxpayer’s lifetime
     taxable income, but does or could change the taxable
     year in which taxable income is reported, it involves
     timing and is therefore considered a method of
     accounting. See Rev. Proc. 91-31, 1991-1 C.B. 566.

     Petitioner argues that the corporation was on the cash

method of accounting and did not change from that for any year,

including 1991.   In addition, petitioner contends that in 1989

and 1990 the corporation intended to defer deducting the costs

until such time as it was able to determine whether it met the “2

years or less” test.   In that regard, petitioner argues that

exercising the election to deduct or capitalize in section 1.162-

12(a), Income Tax Regs., does not constitute a change in the

accounting method.   Petitioner, relying on Wilbur v.

Commissioner, 

(1964), contends that the choice

available under the regulation is not a change in the accounting

method.   Respondent contends that the holding in Wilbur is

contrary to petitioner’s interpretation.

     Wilbur, which was decided prior to the 1969 enactment of

section 278, does not address the question of change of

accounting method, and, accordingly does not support either

party’s argument on that point.   See Wilbur v. Commissioner,
                              - 25 

, involved an interpretation of section 162 and section

1.162-12(a), Income Tax Regs., concerning a farmer/taxpayer’s

ability to make or change an election to either deduct or

capitalize maintenance expenses in connection with preproductive

fruit and nut trees.   The regulation was interpreted by this

Court to permit a farmer/taxpayer to choose to capitalize some

and deduct some expenditures in the same taxable period.

Further, it was held that a taxpayer may not be required to

capitalize certain expenditures that were inadvertently not

included with related expenditures that had been capitalized.

See Wilbur v. Commissioner, supra at 326.   It was also held that

with respect to the expenditures that were capitalized, the

election was irrevocable.

     In the setting of this case, section 263A governs whether or

not the corporation is required to capitalize the costs incurred

in connection with the citrus trees.   In the context of section

263A, the corporation did not have the choice to capitalize or

deduct due to the prohibition contained in section 263A(d)(3)(C).

The choice not to deduct was based on the self-conceived

predicate that the question of whether the outlays were

deductible could not be determined until it was known whether the

trees had a preproductive period of 2 years or less under section

263A(d)(1)(A)(ii).   As discussed above, the statute did not offer

that choice.   By not deducting the costs for 1989 and 1990, the
                              - 26 -

corporation actually complied with the section 263A

capitalization requirement.   As we have held, Pelaez and Sons,

Inc., was not entitled to deduct the 1989, 1990, and 1991 costs

on its 1991 return.

     There is no doubt that the question of whether to capitalize

or deduct the preproduction costs is, in the setting of this

case, a timing question and not a one-time inclusion or

deduction.   Our holding that Pelaez and Sons, Inc., must

capitalize rather than deduct such costs beginning with 1992

involves a “material item” so as to constitute a change in the

accounting method that would trigger section 481.    Accordingly,

within the established definition for change in the accounting

method, Pelaez and Sons, Inc., as a result of being required to

capitalize the preproduction costs beginning in 1992, has changed

its accounting method for the deduction of a material item.      Such

a change warrants respondent’s use of section 481 to make the

adjustment necessary to prevent a distortion of income.

     To reflect the foregoing,

                                      Decision will be entered

                                 for respondent.