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Revenue Ruling 71-228, 1971-1 CB 53

REV-RUL, Business expenses., Revenue Ruling 71-228, 1971-1 CB 53, (Jan. 01, 1971)
Section 162.--Trade or Business Expenses
26 CFR 1.162-1: Business expenses.
(Also Sections 263, 611, 7805; 1.263(a)-1, 1.611-3, 301.7805-1.)

Costs incurred in taxable years ending after May 24, 1971, for shearing and basal pruning of trees grown for the Christmas tree market are deductible business expenses; Revenue Ruling 66-18 modified.

The Internal Revenue Service has reconsidered Revenue Ruling 66-18, C.B. 1966-1, 59, insofar as it relates to the treatment of costs incurred for the shearing and basal pruning of trees grown for the Christmas tree market. Revenue Ruling 66-18 holds that such costs represent capital expenditures under section 263(a) of the Internal Revenue Code of 1954.

In Daniel D. Kinley v. Commissioner, 51 T.C. 1000 (1969), affirmed per curiam -- F. 2d -- (1970), the Tax Court of the United States held that the cost incurred by the petitioner for the annual shearing of Christmas trees was an ordinary and necessary business expense deductible under section 162 of the Code. The court's holding is in accord with Ransburg v. United States, 281 F. Supp. 324 (1967).

The decision in Kinley is premised upon the Tax Court's findings of the unique conditions present in the Christmas tree industry. The Tax Court found that the sole use of the trees grown by the petitioner was for ornamental Christmas trees and that the seedlings planted by the petitioner were planted as Christmas trees. Under this view of the facts, the shearing did not adapt the trees to any use other than their use as Christmas trees. The court found that shearing, rather than improving or increasing the value of the trees, simply maintained and preserved the marketability of the trees as ornamental Christmas trees.

Upon reconsideration of the issue, the Service accepts the court's characterization of the ultimate facts involved.

Accordingly, based on the trees being planted and grown as Christmas trees rather than being converted into Christmas trees, the costs incurred for the shearing and basal pruning of trees grown for the Christmas tree market are deductible business expenses under section 162 of the Code.

Revenue Ruling 66-18, insofar as it relates to the treatment of costs incurred for the shearing and basal pruning of trees grown for the Christmas tree market is hereby modified.

Pursuant to the authority contained in section 7805(b) of the Code, the conclusions of this Revenue Ruling will not be applied for taxable years ending on or before May 24, 1971, the date this Revenue Ruling is published in the Internal Revenue Bulletin, to require an adjustment to basis where such costs were capitalized for prior taxable years.