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Rev. Rul. 76-242, 1976-1 CB 132

REV-RUL, Inventories; crops, trees, and plants., Rev. Rul. 76-242, 1976-1 CB 132, (Jan. 01, 1976)

Section 471.--General Rule for Inventories

26 CFR 1.471-6: Inventories of livestock raisers and other farmers.
(Also Sections 61, 162, 7805; 1.61-4, 1.162-12, 301.7805-1.)

Inventories; crops, trees, and plants.

Accrual-method taxpayers operating farms, nurseries, and florist shops must inventory growing crops, trees, and plants, respectively, unless the taxpayer uses the crop method of accounting in computing gross income; I.T. 1368 and O.D. 995 revoked.

The Internal Revenue Service has been asked to reconsider its position set forth in I.T. 1368, I-1 C.B. 72 (1922), and O.D. 995, 5 C.B. 63 (1921).

I.T. 1368 provides as follows:

While farmers may report their gross income upon the accrual basis (in which an inventory to determine profits is used), they are not permitted to inventory growing crops for the reason that the amount and value of such crops on hand at the beginning and end of the taxable year cannot be accurately determined. If a farmer is engaged in producing crops which take more than a year from the time of planting to the time of gathering and disposing, the income therefrom may be computed upon the crop basis; but in any such case the entire cost of producing the crops must be taken as a deduction in the year in which the gross income from the crop is realized. (See arts. 38 and 1586.) Nurserymen may inventory their young trees only where they have reached a marketable size and stage of development and where the market value is definitely known. If desired, the farm-price method of inventory described in article 1568 of Regulations 62 may be adopted.

O.D. 995 is similar in that it provides as follows:

Florists are not required to use inventories of growing plants for the purpose of calculating their net income for income tax purposes and should not compute the cost of goods sold during the year by using an inventory value of growing plants on hand at the beginning and end of the taxable year.

The questions are: (1) whether farmers using an accrual method of accounting must inventory growing crops; (2) whether a taxpayer operating a nursery using an accrual method of accounting must inventory young trees that have not reached a marketable size; and (3) whether florists using an accrual method of accounting must inventory growing plants?

Section 1.61-4(b) of the Income Tax Regulations provides that a farmer using an accrual method of accounting must use inventories to determine gross income.

Section 1.471-6(a) of the regulations provides that a farmer may make a return upon an inventory method instead of the cash receipts and disbursements method. It is optional with the taxpayer which of these methods of accounting is used, but, having elected one method, the option so exercised will be binding upon the taxpayer for the year for which the option is exercised and for subsequent years unless another method is authorized by the Commissioner of Internal Revenue as provided in paragraph (e) of section 1.446-1.

Section 1.471-6(c) of the regulations provides, in part, that because of the difficulty of ascertaining actual costs of livestock and other farm products, farmers who render their return upon an inventory method may value their inventories according to the "farm-price method." The farm-price method provides for the valuation of inventories at market price less direct cost of disposition. See section 1.471-6(d).

Farmers may also use the crop method of accounting (which is not an inventory method within the meaning of section 471 of the Internal Revenue Code of 1954) when the process of gathering and disposal of crops is not completed within the taxable year in which such crops were planted. See section 1.162-12(a) of the regulations.

Although the Service stated in I.T. 1368 and O.D. 995 that farmers are not permitted to inventory growing crops, that a taxpayer operating a nursery may not inventory young trees until they have reached a marketable size, and that florists are not required to inventory growing plants, it has been determined by the Service that growing crops, trees, and plants are capable of being inventoried.

Accordingly, for the purpose of computing gross income: (1) farmers using an accrual method of accounting must inventory growing crops; (2) a taxpayer operating a nursery using an accrual method of accounting must inventory growing trees; and (3) florists using an accrual method of accounting must inventory growing plants, unless such taxpayer uses the crop method. The inventories may be determined under the farm-price method as provided for by section 1.471-6(c) of the regulations. Adequate accounting records must be maintained to permit proper determination and verification of such inventories.

Any change in the taxpayer's present method of accounting to the method of accounting described herein is a change in the method of accounting, except as otherwise provided in the Code, to which the provisions of section 446 and the applicable regulations thereunder apply.

Under the authority contained in section 7805(b) of the Code, the provisions of this Revenue Ruling will not be applied to the taxable years beginning before June 28, 1976, the date this Revenue Ruling is published in the Internal Revenue Bulletin.

I.T. 1368 and O.D. 995 are revoked.