Kahuku Plantation Co. v. Commissioner

This is a review of a decision and order of the Board of Tax Appeals, now Tax Court of the United States, in a consolidated proceeding in which is questioned the validity of deficiency determinations of the Commissioner of Internal Revenue for each of the above petitioners for the tax year 1938. The identical contention is presented as to each. They do not question the Commissioner’s following statement of facts.

The production of a mature crop of sugar cane in the Hawaiian Islands requires three years. The cane is planted in the first year, fertilized and cultivated in the second year, and harvested in the third year. Thus, there are three distinct crops in process in each year.

Prior to 1936 the taxpayers kept their books of account and made their income tax returns on the so-called “crop basis,” charging to each crop all of the expenses incurred in its production, both “direct” and “indirect” expenses, and applying the total of such expenses against the selling price in the year when the crop was sold. The difference between those amounts was the gain or loss on the crop which the taxpayers reported in their income tax returns. This method of accounting and reporting income…