Robert L. And Dorothy G. Maple v. Commissioner of Internal Revenue, William M. And Eleanor A. Smith v. Commissioner of Internal Revenue

The Commissioner of Internal Revenue appeals from a decision of the Tax Court allowing taxpayers Robert Maple and William Smith 1 to deduct as business expenses certain amounts incurred or expended in connection with the development of an orchard.

The taxpayers were limited partners in the Maple Corona Ranch Company (“Corona”), a partnership organized to develop and operate a citrus orchard. In June of 1961, Corona entered into an agreement with M&M Company (“M&M”), a nursery, whereby Corona purchased 26,000 seedlings at $.30 apiece from M&M and M&M agreed to maintain, cultivate, and bud the seedlings in its nursery for $2.45 per tree. The risk of loss due to causes other than the poor workmanship of M&M was upon the seedlings’ owner, Corona. The taxpayers deducted the full cost of their maintenance contract as a business expense in 1961. The Commissioner assessed deficiencies against them, asserting that the costs of the contract should be capitalized. The Tax Court found that only about half of the cost was incurred in 1961 and held that the costs of budding were capital expenditures because a citrus seedling will never become a producer of edible fruits until a bud from a…

I respectfully dissent:

The majority sustains the Tax Court judgment on the ground that the government has exempted farmers from the rules and regulations which are so onerous to the rest of the nation’s taxpayers. The taxpayers involved here are corporate executives who operate an orange grove in their spare time.

The thrust of the majority’s opinion is that farmers have the option to treat all expenditures, made prior to reaching the productive state, as either deductions or capital expenditures. This position is *1058 imbedded in the following Treasury regulation which reads in pertinent part:

The belief that this regulation gives a farmer an unlimited option in determining the tax consequences of his expenditures has been rejected. In Thompson & Folger Co. v. Commissioner of Internal Revenue, 17 T.C. 722, 725-726 , the court held that this regulation only permits a taxpayer to capitalize a deductible business expense:

The expenditures 1 which taxpayers seek to deduct were all incurred by the nursery (M&M) — not the taxpayers. An accountant called as a witness by the taxpayers, when asked if Corona incurred any expense for balling or budding, replied “No, they contracted X…

440 F.2d 1055 Robert L. and Dorothy G. MAPLE, Petitioners-Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant. William M. and Eleanor A. SMITH, Petitioners-Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant. No. 24462. No. 24463. United States Court of Appeals, Ninth Circuit. April 15, 1971. Gilbert E. Andrews (argued), Atty., Tax Division; Richard M. Hahn, Acting Chief Counsel; Meyer Rothwacks, William A. Friedlander, John S. Stephan, Attys., Dept. of Justice; Johnnie M. Walters, Asst. Atty. Gen., Washington, D. C., for appellant. Dean S. Butler (argued), Don M. Pearson (argued), of Willis, Butler & Scheifly, Los Angeles, Cal., for appellees. Before MERRILL and HUFSTEDLER, Circuit Judges, and BYRNE, * District Judge. HUFSTEDLER, Circuit Judge: 1 The Commissioner of Internal Revenue appeals from a decision of the Tax Court allowing taxpayers Robert Maple and William Smith 1 to deduct as business expenses certain amounts incurred or expended in connection with the development of an orchard. 2 The taxpayers were limited partners in the Maple Corona Ranch Company ("Corona"), a partnership organized to develop and operate a citrus orchard. In…