Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 77-12

1977-1 C.B. 161

Section 611

IRS Headnote

Depletion; sod and balled nursery stock. Cost depletion of top soil is allowable to a taxpayer upon the sale of sod and balled nursery stock; Rev. Rul. 54-241 revoked.

Full Text

Rev. Rul. 77-12

The Internal Revenue Service has reconsidered the holding in Rev. Rul. 54-241, 1954-1 C.B. 63, that sod and balled nursery stock are not subject to the allowance for depletion, in light of the decision of the United States Tax Court in John W. Meyers, 66 T.C. 235 (1976), to which the Internal Revenue Service acquiesces, page 1 this Bulletin.

Rev. Rul. 54-241 holds that sod and balled nursery stock are not subject to the allowance for depletion because the productivity of the land could be restored by various ground conditioning procedures, and that the activity of growing and selling sod and balled nursery stock is essentially a farming operation.

In Meyers the court held that sod sold by the petitioner was a natural deposit subject to the depletion allowed under section 611 of the Internal Revenue Code of 1954. The court found that the raising of sod necessitates seeding, fertilization, watering, mowing, rolling and spraying for insect control, which requires approximately 2 years. Mature sod is ultimately harvested by cutting and rolling into strips. The depth of a cut is determined by the adjustment of the harvesting machine. Each cutting of sod necessarily takes with it some top soil. It was determined that the petitioner's property would be able to sustain 16 harvestings before the top soil was exhausted.

The court in John W. Meyers concluded that if the petitioner were engaged in the severance and sale of top soil per se, such soil in place would be considered a "natural deposit," the proceeds from the sale of which would be subject to a cost depletion allowance. The court saw no distinction between the sale of top soil per se and the sale of sod (which according to the definition adopted by the Court is "the upper stratum of the soil or humus that is filled with the roots of grass or other herbs") since both will eventually result in exhaustion of the topsoil.

Removing balled nursery stock from the ground in which the nursery stock grows similarly removes a certain amount of the top soil that adheres to the roots of plants.

Section 611 of the Code provides, in part, that there shall be allowed as a deduction in computing taxable income a reasonable allowance for depletion in the case of mines and other natural deposits.

Section 613(b)(7) of the Code specifies, for percentage depletion purposes, that the term "all other minerals" does not include soil, sod, dirt, turf, water, or mosses.

Section 1.612-1 of the Income Tax Regulations provides that the basis upon which the deduction for cost depletion is allowed, with respect to a mineral property, is the adjusted basis provided in section 1011 of the Code for purposes of determining gain upon the sale or other dispositions of such property.

Rev. Rul. 78, 1953-1 C.B. 18, holds that soil in place is a natural deposit. If such top soil is severed and sold by the land owner, the proceeds from the sale are ordinary income subject to the allowance of cost depletion.

Harvesting sod or balled nursery stock requires the removal and sale of some of the taxpayer's top soil, which is a natural deposit. Each cutting of sod or removal of balled nursery stock necessarily takes with it some top soil. Some reduction of the quantity of top soil occurs.

Accordingly, cost depletion of top soil is allowable to taxpayers upon the sale of sod or balled nursery stock. However, taxpayers claiming cost depletion of top soil upon the sale of sod or balled nursery stock must establish their basis for depletion in the top soil, and the amount of top soil exhausted with the removal and sale of sod or balled nursery stock during the taxable year.

Rev. Rul. 54-241 is revoked.