Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 75-37

1975-1 C.B. 148

Section 61 -- Gross Income Defined
Sec. 162
Sec. 471
Sec. 1231

IRS Headnote

Inventory; farm-price method; poultry. An accrual-method corporation that purchases and raises chicks for commercial sale of their eggs, selling the hens to meat processing plants only after they no longer produce eggs in marketable quantities, may inventory its flocks under the farm-price method described in section 1.471-6(d) of the regulations; however, a change to that method is a change in accounting method.

Full Text

Rev. Rul. 75-37

Advice has been requested whether, under the circumstances described below, taxpayer may inventory its flocks of chickens under the farm-price method described in section 1.471-6 (d) of the Income Tax Regulations.

The taxpayer, a domestic corporation using the accrual method of accounting, is engaged in the raising of purchased day-old chicks for the production and commercial sale of eggs. The day-old chicks are placed in pullet flock houses and ranges where they are raised until the age of 18 to 20 weeks at which time they are placed in laying houses. The normal laying cycle of a flock is approximately 12 months from the time they become laying hens at the age of 24 to 26 weeks. At the point a flock of laying hens no longer produces eggs in a commercially marketable quantity, taxpayer sells them to meat processing plants.

The taxpayer has consistently inventoried its chicken flocks at the price for which they could be sold to meat processing plants less direct costs of disposition. The taxpayer determined its flock inventories by actual physical count at the end of each year. The actual costs incurred each year in purchasing and raising the chickens were currently expensed. Although a market existed for the sale of started pullets at approximately 20 weeks of age on contracts for future delivery, the taxpayer did not engage in such business. No market existed, however, for the sale of chickens as layers once they were placed in laying houses because of their unstable nature.

Section 1.61-4(d) of the regulations provides, in part, that the term "farm" includes poultry farms. Section 1.61-4(b) provides, in part, that a farmer using an accrual method of accounting must use inventories to determine his gross income. In addition, section 1.61-4(b) provides in the case of farmers that livestock acquired for draft, breeding or dairy purposes and not for sale may be included in inventory instead of being treated as capital assets subject to depreciation if such practice is consistently followed.

Section 1.471-6(c) of the regulations provides: "Because of the difficulty in ascertaining the 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', and farmers raising livestock may value their inventories of animals according to either the 'farm-price method' or the 'unit-livestock-price method'." Under the farm-price method described in section 1.471-6(d) inventories are valued at market price less direct costs of disposition.

Under similar facts the United States Tax Court held in W.P. Garth, 56 T.C. 610 (1971), acquiescence, page 1, this Bulletin, that the use of the farm-price method of inventory was proper, rejecting an argument that the costs of purchasing and raising egg-producing chickens must be capitalized and depreciated over their productive lives. See Rev. Rul. 60-191, 1960-1 C.B. 78, which holds that a cash method taxpayer may deduct currently the costs of baby chicks and egg-laying hens in the year of payment therefor, provided such method is consistently followed and clearly reflects income. The United States Tax Court in Garth stated in pertinent part as follows:

Notwithstanding that poultry is specifically excluded from the term "livestock" under section 1231(b)(3), for purposes of section 1231, we think poultry is without question "livestock" as that term is used in the regulations under section 471. The reason for the exclusion of poultry from the definition of livestock in section 1231 appears to stem solely from the fact that Congress did not want to provide capital gains treatment from the sale of poultry flocks in view of their transitory nature. See 79 Cong., Rec. 12336 (1951).

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Garth's valued its poultry flocks at the price for which they could be sold to meat-processing plants. This was the only market in which Garth's sold its chickens, and, in part, was the only market for its chickens once they became laying hens. While there was a limited market for pullets, Garth's was not in the business of selling pullets and, as the evidence clearly shows, Garth's did not during its existence ever sell any of its pullets. Thus, as we view it, Garth's used the proper market price in valuing its chickens for inventory purposes * * *.

Accordingly, it is held in the instant case that the taxpayer may inventory its chicken flocks under the farm-price method described in section 1.471-6(d) of the regulations. A change to the farm-price method of accounting is a change in method of accounting to which sections 446 and 481 of the Internal Revenue Code of 1954 and the regulations thereunder apply.