Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 66-58

1966-1 C.B. 186

IRS Headnote

An upland cotton acreage allotment may qualify as a capital asset having an indeterminate useful life. The basis of an allotment is usually its cost. Where land and allotment are acquired as a unit the cost should be allocated between the land and the allotment in accordance with the relative fair market values of such properties. Payments therefore are not deductible but should be capitalized. The cost of the allotment is not subject to depreciation or amortization.

Full Text

Rev. Rul. 66-58 /1/

Advice has been requested (1) whether the proceeds received from the sale of an upland cotton acreage allotment will be treated for Federal income tax purposes as proceeds from the sale or exchange of a capital asset; and (2) whether the cost of purchasing such an allotment by a cotton producer is deductible as an ordinary and necessary business expense.

The national acreage allotment for cotton was established by the Agricultural Adjustment Act of 1938. This law, as amended, authorizes the Secretary of Agriculture to determine and proclaim a national acreage allotment for each calendar year's crop of cotton and to apportion such allotment among the states. Each state's acreage allotment is then apportioned among the counties therein and thence through local committees to individual farms.

At present, an upland cotton acreage allotment entitles the owner thereof to (1) price support payments for cotton grown on allotted acreage; (2) acreage diversion payments for allotted acreage diverted from cotton production to approved conservation practices; and (3) price support loans. Penalties for producing upland cotton in excess of allotted acreage are substantial to the extent that such production is not profitable. Thus, it would generally be necessary for a taxpayer engaging in the business of growing and selling upland cotton to have an upland cotton acreage allotment.

For upland cotton only, section 405 of the Food and Agriculture Act of 1965, Public Law 89-321, Eighty-ninth Congress, H.R. 9811, November 3, 1965, 79 Stat. 1187, amended the Agricultural Adjustment Act of 1938, as amended, by permitting,

* * * the owner and operator of any farm for which a cotton acreage allotment is established to sell or lease all or any part or the right to all or any part of such allotment * * * to any other owner or operator of a farm for transfer to such farm * * *.

From the above, it is concluded that an upland cotton acreage allotment is an intangible property right which qualifies as a capital asset under section 1221 of the Internal Revenue Code of 1954, if held by a taxpayer who is not a dealer in such allotments. Therefore, gains or losses from the separate sale of such upland cotton acreage allotments will be treated as gains or losses from the sale of capital assets. Of course, amounts received by the lessor of upland cotton acreage allotments from the lease thereof are ordinary income.

For the purpose of determining gain or loss from the separate sale of a cotton allotment, the basis of the allotment is usually its cost. Where a taxpayer has acquired such an allotment along with the land to which it relates, as a unit, the cost or other basis of the entire unit should be allocated between the land and the allotment in accordance with the relative fair market values of such properties on the date of acquisition. Of course, no portion of the basis of land, acquired prior to the issuance of the cotton allotment, can be allocated to such allotment.

Since cotton acreage allotments can be expected to continue as income producing assets for a period longer than one year, the amount expended by a cotton producer to purchaser such an allotment is not deductible for Federal income tax purposes. Accordingly, the amount must be capitalized. Since these upland cotton acreage allotments have an indeterminate useful life, they are not subject to depreciation or amortization.

/1/ Also released as Technical Information Release 80-0, dated Feb. 17, 1966.