Rev. Rul. 83-67

1983-1 C.B. 74.

                       Internal Revenue Service
                                 Revenue Ruling

            CAPITAL EXPENDITURES;  CITRUS GROVE;  IRRIGATION SYSTEM

                           Published: April 18, 1983

SECTION 278. - -CAPITAL EXPENDITURES INCURRED IN PLANTING AND DEVELOPING CITRUS AND ALMOND GROVES; CERTAIN CAPITAL EXPENDITURES OF FARMING SYNDICATES, 26 CFR 1.278-1: Capital expenditures incurred in planting and developing citrus and almond groves

(Also Sections 167, 263, 7805; 1.167(a)-1, 1.263(a)-2, 301.7805-1.)

  Capital expenditures;  citrus grove;  irrigation system. The taxpayer placed in service an irrigation system used in the development of a citrus grove. Depreciation on the irrigation system prior to the time the grove reaches the income producing stage must be capitalized and recovered over the useful life of the grove, beginning in the year the grove reaches an income producing stage.  Rev. Rul. 80-25 modified.

ISSUES

  May the taxpayer properly deduct depreciation for the cost of its irrigation system, used in the development of a citrus grove, beginning in the year the system is placed in service?

FACTS

  In 1974 a taxpayer, who was developing a citrus grove, planted citrus trees and installed and placed in service an irrigation system with a useful life of 20 years.  In 1977 the citrus grove first reached an income producing stage.

  These facts are the same as those in Rev. Rul. 80-25, 1980-1 C.B. 65, in which it was held that the taxpayer was entitled to depreciate the irrigation system beginning in the year the irrigation system was placed in service.

LAW AND ANALYSIS

  Section 278(a) of the Internal Revenue Code provides that any amount  (allowable as a deduction without regard to section 278) that is attributable to the planting, cultivation, maintenance, or development cost of any citrus or almond grove (or part thereof), and that is incurred before the close of the fourth taxable year beginning with the taxable year in which the trees were planted, shall be charged to capital account.

  Section 1.278-1(a)(2)(iii) of the Income Tax Regulations provides that section 278 of the Code applies only to expenditures allowable as deductions without regard to section 278 and has no application to expenditures otherwise chargeable to capital accounts, such as the cost of land and preparatory expenditures incurred in connection with the citrus grove.  Here, section 278 does not apply to the cost of the irrigation system because the cost of the system is not allowable as a deduction without regard to section 278 but is chargeable to capital.

  In Commissioner v. Idaho Power Co., 418 U.S. 1 (1974), 1974-2 C.B. 85, the Supreme Court of the United States held that depreciation on trucks and other transportation equipment used in constructing capital facilities must be capitalized and recovered over the useful life of the constructed facilities.

  The capital cost of the irrigation system needed for the development of the taxpayer's citrus grove is similar to the costs of the trucks and other transportation equipment used in the construction of the capital facilities described in Idaho Power.  In both instances the depreciation is assimilated into the cost of the capital assets created.

HOLDING

  The depreciation on the irrigation system for the period prior to the grove reaching an income producing stage must be capitalized and recovered over the useful life of the citrus grove beginning in the year the grove first reaches an income producing stage.

EFFECT ON OTHER REVENUE RULINGS

  Rev. Rul. 80-25 is modified to reflect that the depreciation for the irrigation system prior to the time the citrus grove reaches the income producing stage is not deductible but must be capitalized and recovered over the useful life of the trees.

PROSPECTIVE APPLICATION

  Pursuant to the authority contained in section 7805(b) of the Code the holding of this revenue ruling will not be applied adversely with respect to an irrigation system acquired for a citrus grove (1) before April 18, 1983, the date of publication of this revenue ruling in the Internal Revenue Bulletin, or (2) pursuant to a binding written contract entered before April 18, 1982, the date of publication of this proposed revenue ruling in the Internal Revenue Bulletin, when such contract is in effect on such date and at all times thereafter until such system is acquired.

Rev. Rul. 83-67, 1983-1 C.B. 74.