Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 68-87

1968-1 C.B. 216

Sec. 61

Sec. 471

IRS Headnote

Eggs in the process of incubation and growing and pre-market chickens must be included in inventory by an accrual basis taxpayer engaged in the hatchery business.

Full Text

Rev. Rul. 68-87

Advice has been requested whether eggs in the process of incubation and growing and pre-market chickens have value and, as such, must be included in inventory, under section 471 of the Internal Revenue Code of 1954, by a taxpayer engaged in the hatchery business and using the accrual method of accounting.

The taxpayer is engaged in the hatchery business and uses the accrual method of accounting to reflect income. For the taxable years in question, the taxpayer did not include eggs in the process of incubation and growing and pre-market chickens in inventory.

In United States v. Louis A. Chemell , 243 F.2d 944 (1957), it was held that operators of breeder or broiler hatcheries were engaged in the business of farming. Section 1.61-4(b) of the Income Tax Regulations provides that a farmer using the accrual method of accounting must use inventories to determine his gross income.

Section 471 of the Code provides that whenever in the opinion of the Commissioner the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer on such basis as the Commissioner may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income. Generally, the most common methods of valuation of items in inventory are `cost' and `cost or market, whichever is lower.' In addition, section 1.471-6 of the regulations contains special inventory valuation rules available to livestock raisers and other farmers. Paragraph (c) of section 1.471-6 of the regulations provides that because of the difficulty of ascertaining actual cost of livestock and other farm products, farmers who render their returns upon an inventory method may value their inventories according to the `farm-price method.'

In Peterson Produce Co. v. United States , 313 F.2d 609 (1963), affirming 205 F.Supp. 229 (1962), the taxpayer was engaged in the feed and hatchery business. Taxpayer attempted to change to the cash receipts and disbursements method from the accrual method of accounting. The United States Court of Appeals held that to clearly reflect income the taxpayer must continue to use the accrual method and include  growing and pre-market chickens in inventory.

Accordingly, the taxpayer who is engaged in the hatchery business and who uses the accrual method of accounting must, in computing his inventory, take into account eggs in the process of incubation and growing and pre-market chickens.

Nevertheless, in order to change to the method of inventorying eggs in the process of incubation and growing and pre-market chickens a taxpayer must, under section 1.446-1(e)(3) of the regulations, obtain the prior consent of the Commissioner of Internal Revenue by filing Form 3115, Application For Change In Accounting Method, within 90 days after the beginning of the taxable year in which the change is to be made.