Rules for Property Produced in a Farming Business

DEPARTMENT OF THE TREASURY              
Internal Revenue Service 26 CFR Part 1 [TD 8897] RIN 1545-AQ91

TITLE: Rules for Property Produced in a Farming Business

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations relating to the
application of section 263A of the Internal Revenue Code to property
produced in the trade or business of farming. These regulations also
provide guidance regarding the election available to certain
taxpayers to not have section 263A apply to any plant produced by
the electing taxpayers in each taxpayer�s farming trade or business.
These regulations affect taxpayers engaged in the trade or business
of farming.

DATES: Effective Date: These regulations are effective August 21,
	   2000. Applicability Date: For dates of applicability, see
	   �1.263A-4(f) of these regulations.

FOR FURTHER INFORMATION CONTACT: Grant D. Anderson, (202) 622-4970
(not a toll-free call).

SUPPLEMENTARY INFORMATION:

Background

       On March 30, 1987, the IRS published in the Federal Register
a notice of proposed rulemaking (REG-208151-91) (52 FR 10118) by
cross reference to temporary regulations published the same day (TD
8131, 52 FR 10052). Amendments to the notice of proposed rulemaking
and temporary regulations were published in the Federal Register on
August 7, 1987, by a notice of proposed rulemaking (52 FR 29391)
that cross referenced to temporary regulations published the same
day (TD 8148, 52 FR 29375). Notice 88-24 (1988-1 C.B. 491), provided
that forthcoming regulations would modify the proposed regulations
and the regulations under �1.471-6. Notice 88-86 (1988-2 C.B. 401),
provided that forthcoming regulations would clarify the definition
of members of family for purposes of the election out of section
263A. In addition, Notice 88-86 provided that forthcoming
regulations would provide that certain taxpayers could elect to use
the simplified production method for property used in the trade or
business of farming. On August 5, 1994, the temporary regulations
relating to property produced in a farming business were reissued
and published in the Federa Register (TD 8559, 59 FR 39958). On
August 22, 1997, proposed and revised temporary regulations were
issued and published in the Federal Register (TD 8729, 62 FR 44542).
A public hearing was held on November 19, 1997.

       Written comments responding to the notice of proposed
rulemaking were received. After consideration of all the public
comments, the regulations are adopted as revised by this Treasury
decision and the corresponding temporary regulations are withdrawn.

Explanation of Provisions and Summary of Comments

       Section 263A provides uniform capitalization rules that
govern the treatment of costs incurred in the production of
property or the acquisition of property for resale. Section 263A
generally requires taxpayers to capitalize the direct costs and an
allocable portion of indirect costs of producing property in a
farming business (including both plants and animals). However,
taxpayers that are neither required to use an accrual method by
section 447 nor prohibited by section 448(a)(3) from using the cash
receipts and disbursements method (qualified taxpayers) are
eligible for two exceptions provided in section 263A(d). First,
under section 263A(d)(1), section 263A does not apply to a
qualified taxpayer�s cost of producing plants with a preproductive
period of two years or less or animals in a farming business.
Second, pursuant to section 263A(d)(3), a qualified taxpayer may
elect to have section 263A not apply to the cost of producing
plants in a farming business.

Property Produced in a Farming Business

       Consistent with sections 263A(d)(1)(A) and 263A(d)(3)(A),
the proposed regulations provided that the special rules of section
263A(d) apply only to property produced by a taxpayer in a farming
business. The term farming business means the cultivation of land
or the raising or harvesting of any agricultural or horticultural
commodity. Examples include operating a nursery or sod farm; the
raising or harvesting of trees bearing fruit, nuts, or other crops;
the raising of ornamental trees (other than evergreen trees that
are more than 6 years old at the time they are severed from their
roots); and the raising, shearing, feeding, caring for, training,
and management of animals.

       The proposed regulations explained that taxpayers engaged in
contract harvesting, reselling of plants or animals that are not
produced by the taxpayer, and processing that is not incident to
growing, raising, or harvesting of agricultural or horticultural
commodities, are not producing property in a farming business.
Several commentators requested that the final regulations permit
some of these taxpayers to use the special rules of section
263A(d). However, sections 263A(d)(1)(A) and 263A(d)(3)(A) limit
the special rules of section 263A(d) to property produced by the
taxpayer in a farming business. As discussed below, the IRS and
Treasury Department continue to believe that taxpayers that merely
contract harvest, resell plants or animals that they do not raise
or grow, or engage in processing agricultural or horticultural
commodities that is not incident to growing, raising, or harvesting
of these commodities, are not producing property in a farming
business and therefore do not meet this requirement. Accordingly,
the final regulations do not adopt these suggestions.

       The proposed regulations provided that, for purposes of the
definition of farming business, harvesting, does not include
contract harvesting of an agricultural or horticultural commodity
that is not grown or raised by the taxpayer. Some commentators were
concerned that this language may be used to disqualify otherwise
legitimate farmers who make arrangements with their neighbors to
harvest each others crops. First, the IRS and Treasury Department
believe that whether and to what extent a taxpayer is engaged in a
farming business is to be determined based on all the facts and
circumstances. No inference is intended that merely because a
taxpayer engages in nonfarm activities, such as contract
harvesting, in addition to farm activities, that such taxpayer is
not engaged in a farming business. Further, the exception under
section 263A(d) is relevant only to taxpayers whose costs are
otherwise subject to capitalization under section 263A. Thus, for
example, while taxpayers that grow plants are generally subject to
section 263A with respect to that production activity, taxpayers
that contract harvest horticultural commodities are not, because
they are engaged in a service activity. A taxpayer that harvests
crops grown by the taxpayer and contract harvests crops grown by
another is subject to section 263A (and the exception contained in
section 263A(d)), but only for the costs of harvesting its own
crops. Accordingly, the final regulations do not adopt the
commentators� suggestion to include contract harvesting in the
special rules of section 263A(d).

        Similarly, the proposed regulations provided that the
special rules of section 263A(d) do not apply to a taxpayer that
merely buys and resells plants or animals grown or raised by
another taxpayer. The preamble to the proposed regulations
indicated that in evaluating whether the taxpayer is engaged in the
production, or merely the resale, of plants or animals, it is
anticipated that ill be given to factors including: the length of
time between the taxpayer�s acquisition of a plant or animal and
the time the plant or animal is made available for sale to the
taxpayer�s customers, and, in the case of plants, whether plants
acquired by the taxpayer are planted in the ground or kept in
temporary containers.

        Many commentators expressed concern that the proposed
regulations� concept of merely buying and reselling plants grown by
another could be interpreted to mean that only taxpayers growing a
plant from seed would be regarded as engaged in a farming business.
For example, the commentators were concerned that a taxpayer that
buys a partially grown plant, grows the plant to a larger size, and
then sells the plant would not be engaged in a farming business. The
final regulations clarify that a taxpayer is engaged in the
production of property in a farming business, rather than the mere
resale of plants or animals, if the plant or animal is held for
further cultivation and development prior to sale. In addition, the
final regulations include an example illustrating that a taxpayer
that buys plants, grows them, and sells them, is producing property
in a farming business; whereas a taxpayer that buys plants and,
without further cultivation and development, resells them is not
producing property in a farming business. The example also
illustrates that a taxpayer engaged in both farming activities and
resale activities is not required to capitalize costs under section
263A with respect to the resale activities if the taxpayer has
average annual gross receipts of less than $10 million. See also,
Ann. 97-120 (1997-50 I.R.B. 61 (Dec. 15, 1997)) (confirming that
nursery growers using the farming exception may deduct the costs of
young plants purchased for further development and cultivation prior
to sale as well as the costs of growing the plants).

        Some commentators suggested that the final regulations
disregard whether a plant is kept in its container out of concern
that taxpayers who grow plants in containers would not be
considered to be producing property in a farming business. The IRS
and Treasury Department continue to believe that this is a factor
to be considered in addition to all the other facts and
circumstances. Accordingly, the final regulations retain this
factor. However, the final regulations have been clarified to
explain that a plant that is grown by a taxpayer in a container is
regarded as a plant produced in a farming business.

        One commentator requested that the value added to a plant
or animal by a taxpayer also be a factor in determining whether a
taxpayer is engaged in the production, or the mere resale, of
plants or animals. The final regulations provide that a taxpayer�s
addition of value to plants or animals through agricultural or
horticultural processes is a factor to be considered in evaluating
whether a taxpayer is producing property in a farming business.

        Some commentators requested that the list of factors
contained in the preamble be included in the regulations. In
response to these comments, the final regulations contain a list of
factors, modified as discussed above, to assist in the
determination of whether a plant or animal is held for further
cultivation and development prior to sale or merely held for
resale.

        One commentator expressed concern that under the proposed
regulations a farming business only includes processing activities
that are normally incident to the growing, raising, or harvesting
of agricultural or horticultural commodities. This commentator also
suggested that farmers are engaging in processing activities as the
result of new technology and changes in the market for agricultural
or horticultural products. The IRS and Treasury Department believe
that processing activities that are not normally incident to the
growing, raising, or harvesting of agricultural or horticultural
products, such as the canning of an agricultural product or the
combination of an agricultural product with other ingredients to
produce a different edible item, are not farming activities.
Accordingly, the final regulations, like the proposed regulations,
include in the definition of farming business only those processing
activities that are normally incident to the growing, raising, or
harvesting of agricultural or horticultural products, such as the
washing, inspecting, and packaging of those products.

Exceptions to Section 263A for Certain Property

        Taxpayers generally must capitalize direct costs and an
allocable portion of indirect costs of producing all plants
(without regard to the length of the preproductive period) and
animals. Qualified taxpayers, however, are eligible for an
exception to this general rule. Under this exception, qualified
taxpayers are not required to capitalize under section 263A the
costs of producing plants that have a preproductive period of 2
years or less or with respect to animals. Thus, under this
exception, qualified taxpayers are required to capitalize only
those costs of producing plants that have a preproductive period in
excess of 2 years.

        A few commentators suggested that, for purposes of
determining the application of section 263A, the preproductive
period of a plant should be determined with reference to the length
of time a particular taxpayer grows a plant rather than with
reference to how long it takes the plant to reach a productive
stage. The commentators suggested this method would, in essence,
supplant the nationwide weighted average preproductive period used
for plants grown in commercial quantities in the United States and
the reasonable estimate of the preproductive period used for all
other plants. For example, a qualified taxpayer grows bushes that
have a preproductive period of 3 years and 3 months. If the
taxpayer purchases and plants the bushes when they are 2 years old,
the commentators suggest that the preproductive period of the
bushes should be regarded as 2 years or less (and the taxpayer
would, therefore, not be required to capitalize the costs
associated with growing the bushes) because this taxpayer grows the
bushes for only 15 months before the bushes become productive in
marketable quantities. If, however, another qualified taxpayer
purchased the same type of bushes when the bushes were 14 months
old and grew them for 2 years and 1 month, the preproductive period
of the bushes would be regarded as in excess of 2 years, and this
taxpayer would be required to capitalize the costs of growing the
bushes.

       The final regulations do not adopt this recommendation.
First, the statute requires that the preproductive period of a
plant grown in commercial quantities in the United States be based
on the nationwide weighted average preproductive period of the
plant. See Pelaez and Sons, Inc., et al. v. Commissioner, 114 T.C.
No. 28 (No. 18049-97 May 30, 2000). Further, the IRS and Treasury
Department continue to believe that, for purposes of determining
whether section 263A applies, the preproductive period of a plant
not grown in commercial quantities in the United States also should
be determined on a plant-by-plant basis rather than on a taxpayer-
by- taxpayer basis.

       In the case of a plant that is not produced in commercial
quantities in the United States, the proposed regulations provided
that, at or before the time the seed or plant is acquired or
planted, the taxpayer is required to reasonably estimate whether
the plant has a preproductive period in excess of 2 years. One
commentator suggested that the regulations provide that if the
United States Department of Agriculture (USDA) or a state
department of agriculture certifies that a plant is not grown in
commercial quantities in the United States, the plant will be
deemed to have a preproductive period of 2 years or less. The
effect of this suggestion would be to provide an exemption from
section 263A for all qualified taxpayers growing plants that are
not grown in commercial quantities in the United States. The IRS
and Treasury Department believe that such a rule would be
inconsistent with the statutory language of section 263A.
Accordingly, the final regulations do not adopt this suggestion.

        The proposed regulations provided that, for purposes of
determining whether a plant has a preproductive period in excess of
2 years, in the case of a plant grown in commercial quantities in
the United States, the nationwide weighted average preproductive
period of such plant is used. One commentator requested that a list
of plants with nationwide weighted average preproductive periods in
excess of 2 years be published and kept current as needed. Notice
2000-45 (2000-36 I.R.B. (Sept. 5, 2000)) issued contemporaneously
with the publication of these final regulations, provides a list of
plants grown in commercial quantities in the United States that
have a nationwide weighted average preproductive period in excess
of 2 years. Notice 2000-45 will be modified and superseded as
needed.

        Tax shelters, within the meaning of section 448(a)(3), are
not qualified taxpayers and are therefore not eligible for the
special rules of section 263A(d). A tax shelter, for purposes of
section 448(a)(3), means a farming business that is a farming
syndicate as defined under section 464(c) or any partnership,
entity, plan or arrangement that is a tax shelter within the
meaning of section 6662(d)(2)(C)(iii) (that is, its principal
purpose is to avoid or evade Federal income tax). See �1.448-1T(b)
(1)(iii). There is a presumption under section 448 that marketed
arrangements, in which persons carry on farming activities using
the services of a common managerial or administrative service, will
fall within the meaning of a tax shelter if a substantial portion
of farming expenses are prepaid with borrowed funds. See
�1.448-1T(b)(4). The proposed regulations repeated the text of
�1.448-1T(b)(1)(iii) and (4) to explain which farming businesses
are tax shelters.

        A commentator suggested that the marketed arrangement
presumption set forth in �1.448-1T(b)(4) and the proposed
regulations is too broad in scope and should be modified. The
commentator is concerned that this provision of the regulations
will cause taxpayers participating in farming cooperatives to be
treated as tax shelters and, therefore, require them to use an
accrual method of accounting and to capitalize the direct costs and
an allocable portion of indirect costs of producing all plants and
animals. The commentator explained that such a result is
unwarranted with respect to individual farmers and farming
businesses that join together to form farming cooperatives for non-
tax reasons, such as to obtain supplies at lower prices and have a
steady market for their farm products.

        The IRS and Treasury Department believe that the marketed
arrangement presumption is necessary to preclude taxpayers from
investing in farming operations in order to generate losses, often
without making economic outlays, that may be used to shelter income
from other sources. However, the IRS and Treasury Department do not
believe that the marketed arrangement presumption, as described in
the temporary Income Tax Regulations under section 448 and the
proposed section 263A regulations, would cause a taxpayer producing
property in a farming business to be regarded as a tax shelter
merely because the taxpayer joined a farming cooperative.
Therefore, the marketed arrangement presumption is not modified in
the final regulations.

Preparatory and Preproductive Period Costs

        The IRS and Treasury Department believe that, in general,
section 263A does not change the rules under section 263 regarding
the need to capitalize preparatory costs (that is, costs incurred
prior to raising agricultural or horticultural commodities or that
otherwise enable a farmer to begin the farming process). Thus, the
proposed regulations clarified that, as under prior law, taxpayers
generally must capitalize preparatory expenditures (for example,
the cost of seeds, seedlings, and animals; clearing, leveling and
grading land; drilling and equipping wells; irrigation systems;
budding trees, etc.). However, because section 263A requires the
capitalization of certain additional costs, the amount of
preparatory expenditures capitalized to property that is subject to
section 263A may be greater than under prior law. By requiring the
capitalization of all the direct costs and the allocable portion of
indirect costs incurred during the preparatory period, section 263A
ensures that the income from farming will be appropriately matched
with all of the costs of producing property in a farming business.

        Section 263A expanded the circumstances under which costs
that were once termed developmental expenditures or cultural
practices expenditures (that is, costs incurred by a taxpayer so
that the growing process can continue in the desired manner) must be
capitalized. The proposed regulations clarified that these costs are
included in the category of preproductive period costs that are
required to be capitalized under section 263A. Thus, the proposed
regulations provided that all appropriate costs incurred during the
preproductive period of property subject to section 263A must be
capitalized, including the costs of certain soil and water
conservation expenditures and fertilizing incurred during the
preproductive period.

       One commentator requested that expenditures for soil and
water conservation, described in section 175, and fertilizer,
described in section 180, be excepted from capitalization under
section 263A. However, the legislative history of former section
447(b) indicates that Congress believed that soil and water
conservation expenditures incurred during the preproductive period
were required to be capitalized into the basis of the plants
produced. See H.R. Rep. No. 658, 94 Cong., 1 Sess. 95 (1975), 1976-3
th st (Vol. 2) C.B. 787. See also, Staff of the Joint Committee on
Taxation, General Explanation of the Tax Reform Act of 1976, H.R.
Rep. No. 10612, 94 Cong., 2 Sess. th nd 55 (1976), 1976-3 (Vol. 2)
C.B. 67. In addition, the legislative history to section 464
indicates that Congress believed that the costs of fertilizer
incurred during the preproductive period was capitalized under
former section 278. See Senate Report No. 938, 94 Cong., 2 Sess. 62
(1976), 1976-3 (Vol. 3) C.B. 100. See also, Staff of th nd the Joint
Committee on Taxation, General Explanation of the Tax Reform Act of
1976, H.R. Rep. No. 10612, 94 Cong., 2 Sess. 49 (1976), 1976-3 (Vol.
2) C.B. 61. th nd

Because section 263A was intended to continue the principles of
sections 447 and 278, the IRS and Treasury Department believe that
expenditures for soil and water conservation and fertilizer
incurred during the preproductive period are costs of producing
those plants. Further, the IRS and Treasury Department believe that
providing a single rule regarding when expenditures for soil and
water conservation and fertilizer incurred during the preproductive
period must be capitalized is consistent with the intent of
Congress to provide uniform capitalization rules. Accordingly, the
final regulations retain the proposed regulations� provision that
these costs incurred during the preproductive period are included
in the category of costs that are required to be capitalized under
section 263A. However, the IRS and Treasury Department do not
believe that Congress intended to require capitalization of
expenditures for soil and water conservation deductible under
section 175 and fertilizer deductible under section 180 that are
not incurred during the preproductive period. Accordingly, the
final regulations clarify that these expenditures are not subject
to capitalization under section 263A except to the extent they are
required to be capitalized as a preproductive period cost.

Capitalization Period

       Preproductive period costs (for example, irrigating,
fertilizing, real estate taxes) are capitalized during the actual
preproductive period of a plant or animal. A taxpayer that grows a
plant that will have more than 1 crop or yield is engaged in the
production of two types of property, the plant and the crop or
yield of the plant (for example, the orange tree and the orange).
The proposed regulations clarified the capitalization period for
plants that will have more than 1 crop or yield, for crops or
yields of plants that will have more than 1 crop or yield, and for
other plants.

       The proposed regulations provided that the preproductive
period of a plant generally begins when a taxpayer first incurs
costs with respect to the plant, for example, when the plant is
acquired or the seed is planted. In the case of crops or yields of
a plant that has more than 1 crop or yield, the preproductive
period of the crop or yield begins when the plant has become
productive in marketable quantities and the crop or yield first
appears, whether in the form of a sprout, bloom, blossom, bud, etc.

       One commentator suggested that the preproductive period for
crops or yields that require several years of growth (for example,
biennial crops) begins upon first appearance of the crop in the
year the crop actually develops. For example, a biennial plant
produces fruit buds in the first year, but the buds do not develop
until the second year. In the second year, the plant produces
blossoms, which subsequently grow into an edible food product that
is harvested and sold in that year. However, if weather conditions
are harsh, the buds produced in the first year may not blossom and
develop in the second year. The commentator suggests that the
preproductive period begin not when the buds first appear in the
first year but when the blossoms appear in the second year as that
is the first sign of actual development. The IRS and Treasury
Department are concerned that the suggested rule would be difficult
to apply because a taxpayer may not know in any case whether the
appearance of a crop will actually develop.

Accordingly, the final regulations do not adopt this suggestion.

       In the case of a plant that will have more than 1 crop or
 yield, the preproductive period of the plant ends when the plant
 becomes productive in marketable quantities. In the case of the
 crop or yield of a plant that has more than 1 crop or yield that
 has become productive in marketable quantities, the preproductive
 period of the crop or yield ends when the crop or yield is
 disposed of. Finally, in the case of other plants, the
 preproductive period ends when the plant is disposed of.

         One commentator requested that the proper tax treatment of
 field costs (such as the costs of irrigating, fertilizing, etc.)
 that are incurred after a crop or yield is harvested but before
 the crop or yield is disposed of, which do not benefit and are
 unrelated to the crop or yield that has been harvested, be
 clarified. The commentator is concerned that the proposed
 regulations subject such field costs to capitalization under the
 general principles of section 263A. The IRS and Treasury
 Department agree with the commentator�s concerns. Accordingly, the
 final regulations provide that field costs incurred after a crop
 or yield is harvested but before the crop or yield is disposed of
 do not have to be capitalized to the harvested crop or yield
 because such costs relate to the plant or a future crop or yield
 rather than to the harvested crop or yield.

         One commentator requested that the definition of when a
 plant that will have more than 1 crop or yield becomes productive
 in marketable quantities be clarified. Under the proposed
 regulations such a plant becomes productive in marketable
 quantities when it is (or would be considered) placed in service
 for purposes of section 168 (without regard to the applicable
 convention). The commentator noted that some taxpayers regard a
 plant as being placed in service for purposes of depreciation at
 the time the preproductive period ends for purposes of section
 263A. The commentator requested that the final regulations adopt a
 rule that provides more guidance with respect to the end of the
 preproductive period.

       The IRS and Treasury Department agree with the commentator�s
concerns. Accordingly, the final regulations provide that a plant
becomes productive in marketable quantities once a crop or yield is
produced in sufficient quantities to be harvested and marketed in
the ordinary course of the taxpayer�s business. Factors that are
relevant in determining whether the crop or yield is produced in
sufficient quantities to be harvested and marketed in the ordinary
course include: whether a crop or yield is harvested that is more
than de minimis, although it may be less than expected at the
maximum bearing stage, based on a comparison of the quantities per
acre harvested in the year in question to the quantities per acre
expected to be harvested when the plant reaches full maturity; and
whether the sales proceeds exceed the costs of harvest and make a
reasonable contribution to an allocable share of farm expenses.

Election not to Capitalize Costs

       Qualified taxpayers may elect not to capitalize under
section 263A the costs of producing certain plants even though such
plants have a preproductive period in excess of 2 years and would
otherwise be subject to the capitalization requirements of section
263A. Taxpayers making this election may continue to deduct
(subject to other limitations of the Internal Revenue Code) the
costs that were deductible under the rules in effect before the
enactment of section 263A.

       A taxpayer may make this election automatically on its
original federal income tax return for the first taxable year in
which the taxpayer would otherwise be required to capitalize costs
under section 263A. The final regulations provide that if a taxpayer
does not make this election in this first taxable year, the taxpayer
may make this election by filing Form 3115, Application for Change
in Accounting Method, using the appropriate procedures that govern
the filing of the Form 3115.

        A taxpayer and any person related to the taxpayer
(including a member of the taxpayer�s family) electing to not
capitalize costs under section 263A for certain plants are required
to use the alternative depreciation system of section 168(g)(2) for
any property used predominantly in a farming business that is
placed in service in a taxable year for which the election is in
effect. In Notice 88-86, the IRS noted that commentators had
suggested that guidance be provided clarifying the definition of
members of a family. This guidance was provided in the proposed
regulations. One commentator suggested that this proposed guidance
be modified so that elections made by some family members do not
bind other family members. The statutory language provides that an
election affects family members and defines family members for this
purpose. Thus, the IRS and Treasury Department believe that
Congress�s intent was to bind all family members when one member
makes an election not to capitalize costs under section 263A.
Accordingly, the final regulations do not adopt the suggestion.

Casualty Loss Exception

        Section 263A(d)(2) provides an exception from
capitalization under section 263A for costs incurred with respect
to plants that are replacing certain plants that were lost by
reason of certain casualties. The proposed regulations clarified
that this exception does not apply to preparatory expenditures or
the costs of capital assets. In addition, the regulations clarified
that the casualty loss exception applies whether the plants are
replanted on the same parcel of land as the plants destroyed by
casualty or a parcel of land of the same acreage in the United
States. The regulations additionally clarified that the exception
applies to all plants replanted on such acreage, even if the plants
are replanted in greater density than the plants destroyed by the
casualty.

       One commentator requested that the casualty loss exception
be expanded to allow a current deduction for the expenditures
incurred for replacing capital assets. The final regulations do not
adopt this recommendation. Prior to the enactment of section 263A,
preparatory expenditures as well as acquisition costs incurred
during the preparatory period were generally capitalized under
section 263. Also, prior to the enactment of section 263A, certain
preproductive period costs were capitalized under former sections
447(b) and 278. Former section 278(c) provided an exception to the
capitalization of preproductive period costs where such costs were
incurred to replant a grove, orchard, or vineyard which had been
lost or destroyed by reason of a casualty. However, this exception
only applied to preproductive period costs capitalized under former
section 278 and did not apply to preparatory expenditures and
acquisition costs capitalized under section 263. The special
exception in section 263A(d)(2) was intended to be a continuation,
as modified to include all plants bearing an edible crop for human
consumption, of the exception found in former section 278(c).
Nothing in the statute or legislative history of section 263A
indicates an intention to expand the exception to include other
costs, such as the costs of replacing capital assets, in addition
to the preproductive period costs.

Unit Livestock Price Method

        The unit livestock price method provides for the valuation
of different classes of animals in inventory at a standard unit
price for each animal within a class. A taxpayer who elects to use
the unit livestock price method must apply it to all livestock
raised, whether for sale or for draft, breeding, or dairy purposes.
In Notice 88-24, the IRS indicated that forthcoming regulations
would modify the rule contained in �1.471-6 and require that
taxpayers adjust the unit prices upward, from time to time as
specified by those regulations, to reflect increases in costs
taxpayers experience in raising livestock. Contemporaneous with the
section 263A proposed regulations published August 22, 1997,
�1.471-6 was modified to require a taxpayer to annually reevaluate
the unit livestock prices and adjust the prices upward to reflect
increases in the costs of raising livestock. Under this regulation,
the consent of the Commissioner is not required to make such upward
adjustments; however, consent is required to make any other change
in animal classification or unit prices.

        One commentator expressed concern that if taxpayers are
required to annually reevaluate their unit prices, they should be
able to both increase and decrease the unit price to reflect all
changes in the cost of raising livestock. In addition, this
commentator suggested that the unit livestock price method should
be modified to allow a taxpayer to remove from inventory animals
that have been raised for use in the taxpayer�s trade or business
(such as a breeding cow) and depreciate the inventory value of the
animal.

        Although these comments are outside the scope of this
regulation, the IRS and Treasury Department understand the
commentator�s concerns. In addition, the IRS and Treasury
Department recognize a broader concern that the requirement to
annually reevaluate unit prices may have eliminated much of the
simplicity of the unit livestock price method, especially for
farmers neither required to use an accrual method by section 447
nor prohibited from using the cash method by section 448(a)(3).
Accordingly, the IRS and Treasury Department intend to study the
unit livestock price method to determine whether the method may be
made simpler to apply and will take into account the commentator�s
suggestions as part of this study.

Record Keeping Requirements

       Pursuant to 26 U.S.C. 7805(f)(1), copies of the 1997 notice
of proposed rulemaking and temporary rule were provided to the
Chief Counsel for Advocacy of the Small Business Administration for
comment. The Chief Counsel for Advocacy submitted comments
requesting that the IRS conduct a regulatory flexibility analysis
under the Regulatory Flexibility Act (5 U.S.C. chapter 6) (RFA) on
how the notice of proposed rulemaking would affect recordkeeping
burdens imposed on small business taxpayers engaged in a farming
business.

       Under the RFA, the IRS is required to prepare a regulatory
flexibility analysis if the proposed rule imposes a collection of
information requirement (including a recordkeeping requirement) on
small entities and that requirement is likely to have a significant
economic impact on a substantial number of small entities (5 U.S.C
603(a)). The RFA defines a recordkeeping requirement as a
requirement imposed by an agency on persons to maintain specified
records (5 U.S.C. 601(7) and (8)). Since neither the proposed nor
final regulation contain a collection of information requirement
(including a requirement that persons maintain specified records),
an analysis is not required by the RFA.

Effective Date And Method Changes

       The final regulations provide that, in the case of property
that is not inventory in the hands of the taxpayer, the regulations
are applicable to costs incurred after August 21, 2000, in taxable
years ending after August 21, 2000. In the case of inventory
property, the final regulations are applicable to taxable years
beginning after August 21, 2000.

       For property that is not inventory, a taxpayer is granted
the consent of the Commissioner to change its method of accounting
to comply with the provisions of these final regulations for costs
incurred after August 21, 2000, provided the change is made for the
first taxable year ending after August 21, 2000. For inventory
property, a taxpayer is granted the consent of the Commissioner to
change its method of accounting to comply with the provisions of
these final regulations for the first taxable year beginning after
August 21, 2000. To make such a change, a taxpayer must follow the
automatic consent procedures in Rev. Proc. 99-49 (1999-2 I.R.B.
725) (see �601.601(d)(2) of this chapter), as modified by these
regulations.

Effect on Other Documents

       The following publications are obsolete as of August 22,
2000: Notice 87-76 (1987-2 C.B. 384); Notice 88-24 (1988-1 C.B.
491); and section V of Notice 88-86 (1988-2 C.B. 401).

Special Analyses

      It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It has also been
determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations, and
because the regulations do not impose a collection of information on
small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Pursuant to section 7805(f) of the Internal Revenue
Code, the notice of proposed rulemaking that preceded these
regulations was submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on their impact on small
business.

Drafting Information

      The principal authors of these final regulations are Jan
Skelton and Richard C. Farley, Jr. previously of the Office of the
Associate Chief Counsel (Income Tax and Accounting). However, other
personnel from the IRS and Treasury Department participated in their
development.

List of Subjects in 26 CFR Part 1

      Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

      Accordingly, 26 CFR Part 1 is amended as follows:

PART 1--INCOME TAXES

      Paragraph 1. The authority citation for part 1 continues to
read in part as follows:

      Authority: 26 U.S.C. 7805 * * *

      Par. 2. Section 1.162-12 is amended by revising the ninth
sentence of paragraph (a) to read as follows:

�1.162-12 Expenses for farmers.

      (a) * * * For rules regarding the capitalization of expenses
of producing property in the trade or business of farming, see
section 263A of the Internal Revenue Code and

�1.263A-4. * * *

* * * * *

      Par. 3. Section 1.263A-0 is amended by revising the
introductory text and adding entries for �1.263A-4 to read as
follows:

�1.263A-0 Outline of regulations under section 263A.

      This section lists the paragraphs in ��1.263A-1 through
1.263A-4 and ��1.263A-7 through 1.263A-15 as follows:

* * * * *

�1.263A-4 Rules for property produced in a farming business.      
(a) Introduction.   
(1) In general.   
(2) Exception.    
(i) In general.   
(ii) Tax shelter.   
(A) In general.   
(B) Presumption.     
(iii) Examples.   
(3) Costs required to be capitalized or inventoried under another
provision.
(4) Farming business.      
(i) In general.   
(A) Plant.   
(B) Animal.    
(ii) Incidental activities. 

(A) In general.    
(B) Activities that are not incidental. 
(iii) Examples.   
(b) Application of section 263A to property produced in a farming
business.
(1) In general.    
(i) Plants.    
(ii) Animals.    
(2) Preproductive period.     
(i) Plant.    
(A) In general.    
(B) Applicability of section 263A.   
(C) Actual preproductive period.     
(1) Beginning of the preproductive period.     
(2) End of the preproductive period.     
(i) In general.    
(ii) Marketable quantities.   
(D) Examples.     
(ii) Animal.   
(A) Beginning of the preproductive period.     
(B) End of the preproductive period.     
(C) Allocation of costs between animal and first yield.   
(c) Inventory methods.     
(1) In general.    
(2) Available for property used in a trade or business.    
(3) Exclusion of property to which section 263A does not apply.      
(d) Election not to have section 263A apply.     
(1) Introduction.   
(2) Availability of the election.  
(3) Time and manner of making the election.      
(i) Automatic election.    
(ii) Nonautomatic election.    
(4) Special rules.    
(i) Section 1245 treatment.     
(ii) Required use of alternative depreciation system.    
(iii) Related person.   
(A) In general.    
(B) Members of family.     
(5) Examples.     
(e) Exception for certain costs resulting from casualty losses.   
(1) In general.    
(2) Ownership.     
(3) Examples.     
(4) Special rule for citrus and almond groves.    
(i) In general.    
(ii) Example.    
(f) Effective date and change in method of accounting.        
(1) Effective date.    
(2) Change in method of accounting.        

* * * * * 

�1.263A-0T [Removed]      

      Par. 4. Section 1.263A-0T is removed.     

      Par. 5. Section 1.263A-1 is amended as follows:     

      1. The last sentence of paragraph (b)(3) is revised.   

      2. The last sentence of paragraph (b)(4) is revised.   

      The revisions read as follows:  

�1.263A-1 Uniform capitalization of costs.   

* * * * * 

      (b) * * * 

      (3) * * * See �1.263A-4 for specific rules relating to
taxpayers engaged in the trade or business of farming.

      (4) * * * See �1.263A-4, however, for rules relating to
taxpayers producing certain trees to which section 263A applies.

* * * * *

      Par. 6. Section 1.263A-4 is revised to read as follows:

�1.263A-4 Rules for property produced in a farming business.

      (a) Introduction--(1) In general. This section provides
guidance with respect to the application of section 263A to
property produced in a farming business as defined in paragraph (a)
(4) of this section. Except as otherwise provided by the rules of
this section, the general rules of ��1.263A-1 through 1.263A-3 and
��1.263A-7 through 1.263A-15 apply to property produced in a
farming business. A taxpayer that engages in the raising or growing
of any agricultural or horticultural commodity, including both
plants and animals, is engaged in the production of property.
Section 263A generally requires the capitalization of the direct
costs and an allocable portion of the indirect costs that directly
benefit or are incurred by reason of the production of this
property. The direct and indirect costs of producing plants or
animals generally include preparatory costs allocable to the plant
or animal and preproductive period costs of the plant or animal.
Except as provided in paragraphs (a)(2) and (e) of this section,
taxpayers must capitalize the costs of producing all plants and
animals unless the election described in paragraph (d) of this
section is made.

        (2) Exception--(i) In general. Section 263A does not apply
to the costs of producing plants with a preproductive period of 2
years or less or the costs of producing animals in a farming
business, if the taxpayer is not--

        (A) A corporation or partnership required to use an accrual
method of accounting (accrual method) under section 447 in
computing its taxable income from farming; or

        (B) A tax shelter prohibited from using the cash receipts
and disbursements method under section 448(a)(3).

        (ii) Tax shelter--(A) In general. A farming business is
considered a tax shelter, and thus a taxpayer prohibited from using
the cash method under section 448(a)(3), if the farming business
is--

       (1) A farming syndicate as defined in section 464(c); or

       (2) A tax shelter, within the meaning of section 6662(d)(2)
		(C)(iii).

       (B) Presumption. Marketed arrangements in which persons
carry on farming activities using the services of a common
managerial or administrative service will be presumed to have the
principal purpose of tax avoidance, within the meaning of section
6662(d)(2)(C)(iii), if such persons prepay a substantial portion of
their farming expenses with borrowed funds.

       (iii) Examples. The following examples illustrate the
provisions of this paragraph

(a)(2):

       Example 1. Farmer A grows trees that have a preproductive
period in excess of 2 years, and that produce an annual crop.
Farmer A is not required by section 447 to use an accrual method or
prohibited by section 448(a)(3) from using the cash method.
Accordingly, Farmer A qualifies for the exception described in this
paragraph (a)(2). Since the trees have a preproductive period in
excess of 2 years, Farmer A must capitalize the direct costs and an
allocable portion of the indirect costs that directly benefit or
are incurred by reason of the production of the trees. Since the
annual crop has a preproductive period of 2 years or less, Farmer A
is not required to capitalize the costs of producing the crops.

       Example 2. Assume the same facts as Example 1, except that
Farmer A is required by section 447 to use an accrual method or
prohibited by 448(a)(3) from using the cash method. Farmer A does
not qualify for the exception described in this paragraph (a)(2).
Farmer A is required to capitalize the direct costs and an
allocable portion of the indirect costs that directly benefit or
are incurred by reason of the production of the trees and crops.

       (3) Costs required to be capitalized or inventoried under
another provision. The exceptions from capitalization provided in
paragraphs (a)(2), (d) and (e) of this section do not apply to any
cost that is required to be capitalized or inventoried under
another Internal Revenue Code or regulatory provision, such as
section 263 or 471.

        (4) Farming business--(i) In general. A farming business
means a trade or business involving the cultivation of land or the
raising or harvesting of any agricultural or horticultural
commodity. Examples include the trade or business of operating a
nursery or sod farm; the raising or harvesting of trees bearing
fruit, nuts, or other crops; the raising of ornamental trees (other
than evergreen trees that are more than 6 years old at the time
they are severed from their roots); and the raising, shearing,
feeding, caring for, training, and management of animals. For
purposes of this section, the term harvesting does not include
contract harvesting of an agricultural or horticultural commodity
grown or raised by another. Similarly, merely buying and reselling
plants or animals grown or raised entirely by another is not
raising an agricultural or horticultural commodity. A taxpayer is
engaged in raising a plant or animal, rather than the mere resale
of a plant or animal, if the plant or animal is held for further
cultivation and development prior to sale. In determining whether a
plant or animal is held for further cultivation and development
prior to sale, consideration will be given to all of the facts and
circumstances, including: the value added by the taxpayer to the
plant or animal through agricultural or horticultural processes;
the length of time between the taxpayer�s acquisition of the plant
or animal and the time that the taxpayer makes the plant or animal
available for sale; and in the case of a plant, whether the plant
is kept in the container in which purchased, replanted in the
ground, or replanted in a series of larger containers as it is
grown to a larger size.

        (A) Plant. A plant produced in a farming business includes,
but is not limited to, a fruit, nut, or other crop bearing tree, an
ornamental tree, a vine, a bush, sod, and the crop or yield of a
plant that will have more than one crop or yield raised by the
taxpayer. Sea plants are produced in a farming business if they are
tended and cultivated as opposed to merely harvested.

        (B) Animal. An animal produced in a farming business
includes, but is not limited to, any stock, poultry or other bird,
and fish or other sea life raised by the taxpayer. Thus, for
example, the term animal may include a cow, chicken, emu, or salmon
raised by the taxpayer. Fish and other sea life are produced in a
farming business if they are raised on a fish farm. A fish farm is
an area where fish or other sea life are grown or raised as opposed
to merely caught or harvested.

        (ii) Incidental activities--(A) In general. A farming
business includes processing activities that are normally incident
to the growing, raising, or harvesting of agricultural or
horticultural products. For example, a taxpayer in the trade or
business of growing fruits and vegetables may harvest, wash,
inspect, and package the fruits and vegetables for sale. Such
activities are normally incident to the raising of these crops by
farmers. The taxpayer will be considered to be in the trade or
business of farming with respect to the growing of fruits and
vegetables and the processing activities incident to their harvest.

        (B) Activities that are not incidental. Farming business
does not include the processing of commodities or products beyond
those activities that are normally incident to the growing,
raising, or harvesting of such products.

       (iii) Examples. The following examples illustrate the
provisions of this paragraph (a)(4):

       Example 1. Individual A operates a retail nursery.
Individual A has three categories of plants. The first category is
comprised of plants that Individual A grows from seeds or cuttings.
The second category is comprised of plants that Individual A
purchases in containers and grows for a period of from several
months to several years. Individual A replants some of these plants
in the ground. The others are replanted in a series of larger
containers as they grow. The third category is comprised of plants
that are purchased by Individual A in containers. Individual A does
not grow these plants to a larger size before making them available
for resale. Instead, Individual A makes these plants available for
resale, in the container in which purchased, shortly after
receiving them. Thus, no value is added to these plants by
Individual A through horticultural processes. Individual A also
sells soil, mulch, chemicals, and yard tools. Individual A is
producing property in the farming business with respect to the
first two categories of plants because these plants are held for
further cultivation and development prior to sale. The plants in
the third category are not held for further cultivation and
development prior to sale and, therefore, are not regarded as
property produced in a farming business for purposes of section
263A. Accordingly, Individual A must account for the third category
of plants, along with the soil, mulch, chemicals, and yard tools,
as property acquired for resale. If Individual A�s average annual
gross receipts are less than $10 million, Individual A will not be
required to capitalize costs with respect to its resale activities
under section 263A.

       Example 2. Individual B is in the business of growing and
harvesting wheat and other grains. Individual B also processes
grain that Individual B has harvested in order to produce breads,
cereals, and other similar food products, which Individual B then
sells to customers in the course of its business. Although
Individual B is in the farming business with respect to the growing
and harvesting of grain, Individual B is not in the farming
business with respect to the processing of such grain to produce
the food products.

       Example 3. Individual C is in the business of raising
poultry and other livestock. Individual C also operates a meat
processing operation in which the poultry and other livestock are
slaughtered, processed, and packaged or canned. The packaged or
canned meat is sold to Individual C�s customers. Although
Individual C is in the farming business with respect to the raising
of poultry and other livestock, Individual C is not in the farming
business with respect to the slaughtering, processing, packaging,
and canning of such animals to produce the food products.

       (b) Application of section 263A to property produced in a
farming business--(1) In general. Unless otherwise provided in this
section, section 263A requires the capitalization of the direct
costs and an allocable portion of the indirect costs that directly
benefit or are incurred by reason of the production of any property
in a farming business (including animals and plants without regard
to the length of their preproductive period). Section 1.263A-1(e)
describes the types of direct and indirect costs that generally
must be capitalized by taxpayers under section 263A and paragraphs
(b)(1)(i) and (ii) of this section provide specific examples of the
types of costs typically incurred in the trade or business of
farming. For purposes of this section, soil and water conservation
expenditures that a taxpayer has elected to deduct under section
175 and fertilizer that a taxpayer has elected to deduct under
section 180 are not subject to capitalization under section 263A,
except to the extent these costs are required to be capitalized as
a preproductive period cost of a plant or animal.

       (i) Plants. The costs of producing a plant typically
required to be capitalized under section 263A include the costs
incurred so that the plant�s growing process may begin (preparatory
costs), such as the acquisition costs of the seed, seedling, or
plant, and the costs of planting, cultivating, maintaining, or
developing the plant during the preproductive period (preproductive
period costs). Preproductive period costs include, but are not
limited to, management, irrigation, pruning, soil and water
conservation (including costs that the taxpayer has elected to
deduct under section 175), fertilizing (including costs that the
taxpayer has elected to deduct under section 180), frost
protection, spraying, harvesting, storage and handling, upkeep,
electricity, tax depreciation and repairs on buildings and
equipment used in raising the plants, farm overhead, taxes (except
state and Federal income taxes), and interest required to be
capitalized under section 263A(f).

       (ii) Animals. The costs of producing an animal typically
required to be capitalized under section 263A include the costs
incurred so that the animal�s raising process may begin
(preparatory costs), such as the acquisition costs of the animal,
and the costs of raising or caring for such animal during the
preproductive period (preproductive period costs). Preproductive
period costs include, but are not limited to, management, feed
(such as grain, silage, concentrates, supplements, haylage, hay,
pasture and other forages), maintaining pasture or pen areas
(including costs that the taxpayer has elected to deduct under
sections 175 or 180), breeding, artificial insemination, veterinary
services and medicine, livestock hauling, bedding, fuel,
electricity, hired labor, tax depreciation and repairs on buildings
and equipment used in raising the animals (for example, barns,
trucks, and trailers), farm overhead, taxes (except state and
Federal income taxes), and interest required to be capitalized
under section 263A(f).

       (2) Preproductive period--(i) Plant--(A) In general. The
preproductive period of property produced in a farming business
means--

       (1) In the case of a plant that will have more than one crop
or yield (for example, an orange tree), the period before the first
marketable crop or yield from such plant;

       (2) In the case of the crop or yield of a plant that will
have more than one crop or yield (for example, the orange), the
period before such crop or yield is disposed of; or

       (3) In the case of any other plant, the period before such
		plant is disposed of.

       (B) Applicability of section 263A. For purposes of
determining whether a plant has a preproductive period in excess of
2 years, the preproductive period of plants grown in commercial
quantities in the United States is based on the nationwide weighted
average preproductive period for such plant. The Commissioner will
publish a noninclusive list of plants with a nationwide weighted
average preproductive period in excess of 2 years. In the case of
other plants grown in commercial quantities in the United States,
the nationwide weighted average preproductive period must be
determined based on available statistical data. For all other
plants, the taxpayer is required, at or before the time the seed or
plant is acquired or planted, to reasonably estimate the
preproductive period of the plant. If the taxpayer estimates a
preproductive period in excess of 2 years, the taxpayer must
capitalize the costs of producing the plant. If the estimate is
reasonable, based on the facts in existence at the time it is made,
the determination of whether section 263A applies is not modified
at a later time even if the actual length of the preproductive
period differs from the estimate. The actual length of the
preproductive period will, however, be considered in evaluating the
reasonableness of the taxpayer�s future estimates. The nationwide
weighted average preproductive period or the estimated
preproductive period is only used for purposes of determining
whether the preproductive period of a plant is greater than 2
years.

       (C) Actual preproductive period. The plant�s actual
preproductive period is used for purposes of determining the period
during which a taxpayer must capitalize preproductive period costs
with respect to a particular plant.

       (1) Beginning of the preproductive period. The actual
preproductive period of a plant begins when the taxpayer first
incurs costs that directly benefit or are incurred by reason of the
plant. Generally, this occurs when the taxpayer plants the seed or
plant. In the case of a taxpayer that acquires plants that have
already been permanently planted, or plants that are tended by the
taxpayer or another prior to permanent planting, the actual
preproductive period of the plant begins upon acquisition of the
plant by the taxpayer. In the case of the crop or yield of a plant
that will have more than one crop or yield, the actual
preproductive period begins when the plant has become productive in
marketable quantities and the crop or yield first appears, for
example, in the form of a sprout, bloom, blossom, or bud.

       (2) End of the preproductive period--(i) In general. In the
case of a plant that will have more than one crop or yield, the
actual preproductive period ends when the plant first becomes
productive in marketable quantities. In the case of any other plant
(including the crop or yield of a plant that will have more than
one crop or yield), the actual preproductive period ends when the
plant, crop, or yield is sold or otherwise disposed of. Field
costs, such as irrigating, fertilizing, spraying and pruning, that
are incurred after the harvest of a crop or yield but before the
crop or yield is sold or otherwise disposed of are not required to
be included in the preproductive period costs of the harvested crop
or yield because they do not benefit and are unrelated to the
harvested crop or yield.

       (ii) Marketable quantities. A plant that will have more than
one crop or yield becomes productive in marketable quantities once
a crop or yield is produced in sufficient quantities to be
harvested and marketed in the ordinary course of the taxpayer�s
business. Factors that are relevant to determining whether a crop
or yield is produced in sufficient quantities to be harvested and
marketed in the ordinary course include: whether the crop or yield
is harvested that is more than de minimis, although it may be less
than expected at the maximum bearing stage, based on a comparison
of the quantities per acre harvested in the year in question to the
quantities per acre expected to be harvested when the plant reaches
full maturity; and whether the sales proceeds exceed the costs of
harvest and make a reasonable contribution to an allocable share of
farm expenses.

       (D) Examples. The following examples illustrate the
provisions of this paragraph (b)(2):

       Example 1. (i) Farmer A, a taxpayer that qualifies for the
exception in paragraph (a)(2) of this section, grows plants that
will have more than one crop or yield. The plants are grown in
commercial quantities in the United States. Farmer A acquires 1
year-old plants by purchasing them from an unrelated party,
Corporation B, and plants them immediately. The nationwide weighted
average preproductive period of the plant is 4 years. The
particular plants grown by Farmer A do not begin to produce in
marketable quantities until 3 years and 6 months after they are
planted by Farmer A.

       (ii) Since the plants are deemed to have a preproductive
period in excess of 2 years, Farmer A is required to capitalize the
costs of producing the plants. See paragraphs (a)(2) and (b)(2)(i)
(B) of this section. In accordance with paragraph (b)(2)(i)(C)(1)
of this section, Farmer A must begin to capitalize the
preproductive period costs when the plants are planted. In
accordance with paragraph (b)(2)(i)(C)(2) of this section, Farmer A
must continue to capitalize preproductive period costs to the
plants until the plants begin to produce in marketable quantities.
Thus, Farmer A must capitalize the preproductive period costs for a
period of 3 years and 6 months (that is, until the plants are 4
years and 6 months old), notwithstanding the fact that the plants,
in general, have a nationwide weighted average preproductive period
of 4 years.

       Example 2. (i) Farmer B, a taxpayer that qualifies for the
exception in paragraph (a)(2) of this section, grows plants that
will have more than one crop or yield. The plants are grown in
commercial quantities in the United States. The nationwide weighted
average preproductive period of the plant is 2 years and 5 months.
Farmer B acquires 1 month-old plants by purchasing them from an
unrelated party, Corporation B. Farmer B enters into a contract
with Corporation B under which Corporation B will retain and tend
the plants for 7 months following the sale. At the end of 7 months,
Farmer B takes possession of the plants and plants them in the
permanent orchard. The plants become productive in marketable
quantities 1 year and 11 months after they are planted by Farmer B.

       (ii) Since the plants are deemed to have a preproductive
period in excess of 2 years, Farmer B is required to capitalize the
costs of producing the plants. See paragraphs (a)(2) and (b)(2)(i)
(B) of this section. In accordance with paragraph (b)(2)(i)(C)(1)
of this section, Farmer B must begin to capitalize the
preproductive period costs when the purchase occurs. In accordance
with paragraph (b)(2)(i)(C)(2) of this section, Farmer B must
continue to capitalize the preproductive period costs to the plants
until the plants begin to produce in marketable quantities. Thus,
Farmer B must capitalize the preproductive period costs of the
plants for a period of 2 years and 6 months (the 7 months the
plants are tended by Corporation B and the 1 year and 11 months
after the plants are planted by Farmer B), that is, until the
plants are 2 years and 7 months old, notwithstanding the fact that
the plants, in general, have a nationwide weighted average
preproductive period of 2 years and 5 months.

       Example 3. (i) Assume the same facts as in Example 2, except
that Farmer B acquires the plants by purchasing them from
Corporation B when the plants are 8 months old and that the plants
are planted by Farmer B upon acquisition.

       (ii) Since the plants are deemed to have a preproductive
period in excess of 2 years, Farmer B is required to capitalize the
costs of producing the plants. See paragraphs (a)(2) and (b)(2)(i)
(B) of this section. In accordance with paragraph (b)(2)(i)(C)(1)
of this section, Farmer B must begin to capitalize the
preproductive period costs when the plants are planted. In
accordance with paragraph (b)(2)(i)(C)(2) of this section, Farmer B
must continue to capitalize the preproductive period costs to the
plants until the plants begin to produce in marketable quantities.
Thus, Farmer B must capitalize the preproductive period costs of
the plants for a period of 1 year and 11 months.

       Example 4. (i) Farmer C, a taxpayer that qualifies for the
exception in paragraph (a)(2) of this section, grows plants that
will have more than one crop or yield. The plants are grown in
commercial quantities in the United States. Farmer C acquires 1
month-old plants from an unrelated party and plants them
immediately. The nationwide weighted average preproductive period
of the plant is 2 years and 3 months. The particular plants grown
by Farmer C begin to produce in marketable quantities 1 year and 10
months after they are planted by Farmer C.

       (ii) Since the plants are deemed to have a nationwide
weighted average preproductive period in excess of 2 years, Farmer
C is required to capitalize the costs of producing the plants,
notwithstanding the fact that the particular plants grown by Farmer
C become productive in less than 2 years. See paragraph (b)(2)(i)
(B) of this section. In accordance with paragraph (b)(2)(i)(C)(1)
of this section, Farmer C must begin to capitalize the
preproductive period costs when it plants the plants. In accordance
with paragraph (b)(2)(i)(C)(2) of this section, Farmer C properly
ceases capitalization of preproductive period costs when the plants
become productive in marketable quantities (that is, 1 year and 10
months after they are planted, which is when they are 1 year and 11
months old).

       Example 5. (i) Farmer D, a taxpayer that qualifies for the
exception in paragraph (a)(2) of this section, grows plants that
will have more than one crop or yield. The plants are not grown in
commercial quantities in the United States. Farmer D acquires and
plants the plants when they are 1 year old and estimates that they
will become productive in marketable quantities 3 years after
planting. Thus, at the time the plants are acquired and planted
Farmer D reasonably estimates that the plants will have a
preproductive period of 4 years. The actual plants grown by Farmer
D do not begin to produce in marketable quantities until 3 years
and 6 months after they are planted by Farmer D.

       (ii) Since the plants have an estimated preproductive period
in excess of 2 years, Farmer D is required to capitalize the costs
of producing the plants. See paragraph (b)(2)(i)(B) of this
section. In accordance with paragraph (b)(2)(i)(C)(1) of this
section, Farmer D must begin to capitalize the preproductive period
costs when it acquires and plants the plants. In accordance with
paragraph (b)(2)(i)(C)(2) of this section, Farmer D must continue
to capitalize the preproductive period costs until the plants begin
to produce in marketable quantities. Thus, Farmer D must capitalize
the preproductive period costs of the plants for a period of 3
years and 6 months (that is, until the plants are 4 years and 6
months old), notwithstanding the fact that Farmer D estimated that
the plants would become productive after 4 years.

       Example 6. (i) Farmer E, a taxpayer that qualifies for the
exception in paragraph (a)(2) of this section grows plants from
seed. The plants are not grown in commercial quantities in the
United States. The plants do not have more than 1 crop or yield. At
the time the seeds are planted Farmer E reasonably estimates that
the plants will have a preproductive period of 1 year and 10
months. The actual plants grown by Farmer E are not ready for
harvesting and disposal until 2 years and 2 months after the seeds
are planted by Farmer E.

       (ii) Because Farmer E�s estimate of the preproductive period
(which was 2 years or less) was reasonable at the time made based
on the facts, Farmer E will not be required to capitalize the costs
of producing the plants under section 263A, notwithstanding the
fact that the actual preproductive period of the plants exceeded 2
years. See paragraph (b)(2)(i)(B) of this section. However, Farmer
E must take the actual preproductive period of the plants into
consideration when making future estimates of the preproductive
period of such plants.

       Example 7. (i) Farmer F, a calendar year taxpayer that does
not qualify for the exception in paragraph (a)(2) of this section,
grows trees that will have more than one crop. Farmer F acquires
and plants the trees in April, Year 1. On October 1, Year 6, the
trees become productive in marketable quantities.

       (ii) The costs of producing the plant, including the
preproductive period costs incurred by Farmer F on or before
October 1, Year 6, are capitalized to the trees. Preproductive
period costs incurred after October 1, Year 6, are capitalized to a
crop when incurred during the preproductive period of the crop and
deducted as a cost of maintaining the tree when incurred between
the disposal of one crop and the appearance of the next crop. See
paragraphs (b)(2)(i)(A), (b)(2)(i)(C)(1) and (b)(2)(i)(C)(2) of
this section.

       Example 8. (i) Farmer G, a taxpayer that qualifies for the
exception in paragraph (a)(2) of this section, produces fig trees
on 10 acres of land. The fig trees are grown in commercial
quantities in the United States and have a nationwide weighted
average preproductive period in excess of 2 years. Farmer G
acquires and plants the fig trees in their permanent grove during
Year 1. When the fig trees are mature, Farmer G expects to harvest
10x tons of figs per acre. At the end of Year 4, Farmer G harvests
.5x tons of figs per acre that it sells for $100x. During Year 4,
Farmer G incurs expenses related to the fig operation of: $50x to
harvest the figs and transport them to market and other direct and
indirect costs related to the fig operation in the amount of
$1000x.

       (ii) Since the fig trees have a preproductive period in
excess of 2 years, Farmer G is required to capitalize the costs of
producing the fig trees. See paragraphs (a)(2) and (b)(2)(i)(B) of
this section. In accordance with paragraph (b)(2)(i)(C)(2) of this
section, Farmer G must continue to capitalize preproductive period
costs to the trees until they become productive in marketable
quantities. The following factors weigh in favor of a determination
that the fig trees did not become productive in Year 4: the
quantity of harvested figs is de minimis based on the fact that the
yield is only 5 percent of the expected yield at maturity and the
proceeds from the sale of the figs are sufficient, after covering
the costs of harvesting and transporting the figs, to cover only a
negligible portion of the allocable farm expenses. Based on these
facts and circumstances, the fig trees did not become productive in
marketable quantities in Year

4.

       (ii) Animal. An animal�s actual preproductive period is used
to determine the period that the taxpayer must capitalize
preproductive period costs with respect to a particular animal.

       (A) Beginning of the preproductive period. The preproductive
period of an animal begins at the time of acquisition, breeding, or
embryo implantation.

       (B) End of the preproductive period. In the case of an
animal that will be used in the trade or business of farming (for
example, a dairy cow), the preproductive period generally ends when
the animal is (or would be considered) placed in service for
purposes of section 168 (without regard to the applicable
convention). However, in the case of an animal that will have more
than one yield (for example, a breeding cow), the preproductive
period ends when the animal produces (for example, gives birth to)
its first yield. In the case of any other animal, the preproductive
period ends when the animal is sold or otherwise disposed of.

       (C) Allocation of costs between animal and yields. In the
case of an animal that will have more than one yield, the costs
incurred after the beginning of the preproductive period of the
first yield but before the end of the preproductive period of the
animal must be allocated between the animal and the yield using any
reasonable method. Any depreciation allowance on the animal may be
allocated entirely to the yield. Costs incurred after the beginning
of the preproductive period of the second yield, but before the
first yield is weaned from the animal must be allocated between the
first and second yield using any reasonable method. However, a
taxpayer may elect to allocate these costs entirely to the second
yield. An allocation method used by a taxpayer is a method of
accounting that must be used consistently and is subject to the
rules of section 446 and the regulations thereunder.

       (c) Inventory methods--(1) In general. Except as otherwise
provided, the costs required to be allocated to any plant or animal
under this section may be determined using reasonable inventory
valuation methods such as the farm-price method or the unit-
livestock-price method. See �1.471-6. Under the unit-livestock-
price method, unit prices must include all costs required to be
capitalized under section 263A. A taxpayer using the unit-
livestock-price method may elect to use the cost allocation methods
in �1.263A-1(f) or 1.263A-2(b) to allocate its direct and indirect
costs to the property produced in the business of farming. In such
a situation, section 471 costs are the costs taken into account by
the taxpayer under the unit-livestock-price method using the
taxpayer's standard unit price as modified by this paragraph (c)
(1). Tax shelters, as defined in paragraph (a)(2)(ii) of this
section, that use the unit-livestock-price method for inventories
must include in inventory the annual standard unit price for all
animals that are acquired during the taxable year, regardless of
whether the purchases are made during the last 6 months of the
taxable year. Taxpayers required by section 447 to use an accrual
method or prohibited by section 448(a)(3) from using the cash
method that use the unit-livestock-price method must modify the
annual standard price in order to reasonably reflect the particular
period in the taxable year in which purchases of livestock are
made, if such modification is necessary in order to avoid
significant distortions in income that would otherwise occur
through operation of the unit-livestock-price method.

        (2) Available for property used in a trade or business. The
farm-price method or the unit-livestock-price method may be used by
any taxpayer to allocate costs to any plant or animal under this
section, regardless of whether the plant or animal is held or
treated as inventory property by the taxpayer. Thus, for example, a
taxpayer may use the unit-livestock-price method to account for the
costs of raising livestock that will be used in the trade or
business of farming (for example, a breeding animal or a dairy cow)
even though the property in question is not inventory property.

        (3) Exclusion of property to which section 263A does not
apply. Notwithstanding a taxpayer�s use of the farm-price method
with respect to farm property to which the provisions of section
263A apply, that taxpayer is not required, solely by such use, to
use the farm-price method with respect to farm property to which
the provisions of section 263A do not apply. Thus, for example,
assume Farmer A raises fruit trees that have a preproductive period
in excess of 2 years and to which the provisions of section 263A,
therefore, apply. Assume also that Farmer A raises cattle and is
not required to use an accrual method by section 447 or prohibited
from using the cash method by section 448(a)(3). Because Farmer A
qualifies for the exception in paragraph (a)(2) of this section,
Farmer A is not required to capitalize the costs of raising the
cattle. Although Farmer A may use the farm-price method with
respect to the fruit trees, Farmer A is not required to use the
farm-price method with respect to the cattle. Instead, Farmer A�s
accounting for the cattle is determined under other provisions of
the Code and regulations.

        (d) Election not to have section 263A apply--(1)
		 Introduction. This paragraph

(d) permits certain taxpayers to make an election not to have the
rules of this section apply to any plant produced in a farming
business conducted by the electing taxpayer. The election is a
method of accounting under section 446, and once an election is
made, it is revocable only with the consent of the Commissioner.

        (2) Availability of the election. The election described in
this paragraph (d) is available to any taxpayer that produces
plants in a farming business, except that no election may be made
by a corporation, partnership, or tax shelter required to use the
accrual method under section 447 or prohibited from using the cash
method by section 448(a)(3). Moreover, the election does not apply
to the costs of planting, cultivation, maintenance, or development
of a citrus or almond grove (or any part thereof) incurred prior to
the close of the fourth taxable year beginning with the taxable
year in which the trees were planted in the permanent grove
(including costs incurred prior to the permanent planting). If a
citrus or almond grove is planted in more than one taxable year,
the portion of the grove planted in any one taxable year is treated
as a separate grove for purposes of determining the year of
planting.

        (3) Time and manner of making the election--(i) Automatic
election. A taxpayer makes the election under this paragraph (d) by
not applying the rules of section 263A to determine the capitalized
costs of plants produced in a farming business and by applying the
special rules in paragraph (d)(4) of this section on its original
return for the first taxable year in which the taxpayer is
otherwise required to capitalize section 263A costs. Thus, in order
to be treated as having made the election under this paragraph

(d), it is necessary to report both income and expenses in
accordance with the rules of this paragraph (d) (for example, it is
necessary to use the alternative depreciation system as provided in
paragraph (d)(4)(ii) of this section). For example, a farmer who
deducts costs that are otherwise required to be capitalized under
section 263A but fails to use the alternative depreciation system
under section 168(g)(2) for applicable property placed in service
has not made an election under this paragraph (d) and is not in
compliance with the provisions of section 263A. In the case of a
partnership or S corporation, the election must be made by the
partner, shareholder, or member.

       (ii) Nonautomatic election. A taxpayer that does not make
the election under this paragraph (d) as provided in paragraph (d)
(3)(i) must obtain the consent of the Commissioner to make the
election by filing a Form 3115, Application for Change in Method of
Accounting, in accordance with �1.446-1(e)(3).

       (4) Special rules. If the election under this paragraph (d)
is made, the taxpayer is subject to the special rules in this
paragraph (d)(4).

       (i) Section 1245 treatment. The plant produced by the
taxpayer is treated as section 1245 property and any gain resulting
from any disposition of the plant is recaptured (that is, treated
as ordinary income) to the extent of the total amount of the
deductions that, but for the election, would have been required to
be capitalized with respect to the plant. In calculating the amount
of gain that is recaptured under this paragraph (d)(4)(i), a
taxpayer may use the farm-price method or another simplified method
permitted under these regulations in determining the deductions
that otherwise would have been capitalized with respect to the
plant.

        (ii) Required use of alternative depreciation system. If
the taxpayer or a related person makes an election under this
paragraph (d), the alternative depreciation system (as defined in
section 168(g)(2)) must be applied to all property used
predominantly in any farming business of the taxpayer or related
person and placed in service in any taxable year during which the
election is in effect. The requirement to use the alternative
depreciation system by reason of an election under this paragraph
(d) will not prevent a taxpayer from making an election under
section 179 to deduct certain depreciable business assets.

        (iii) Related person--(A) In general. For purposes of this
paragraph (d)(4), related person means--

        (1) The taxpayer and members of the taxpayer�s family;

        (2) Any corporation (including an S corporation) if 50
percent or more of the stock (in value) is owned directly or
indirectly (through the application of section 318) by the taxpayer
or members of the taxpayer�s family;

        (3) A corporation and any other corporation that is a
member of the same controlled group (within the meaning of section
1563(a)(1)); and

        (4) Any partnership if 50 percent or more (in value) of the
interests in such partnership is owned directly or indirectly by
the taxpayer or members of the taxpayer�s family.

        (B) Members of family. For purposes of this paragraph (d)
(4)(iii), the terms members of the taxpayer�s family, and members of
family (for purposes of applying section 318(a)(1)), means the
spouse of the taxpayer (other than a spouse who is legally separated
from the individual under a decree of divorce or separate
maintenance) and any of the taxpayer�s children (including legally
adopted children) who have not reached the age of 18 as of the last
day of the taxable year in question.

       (5) Examples. The following examples illustrate the
		provisions of this paragraph

(d):

       Example 1. (i) Farmer A, an individual, is engaged in the
trade or business of farming. Farmer A grows apple trees that have
a preproductive period greater than 2 years. In addition, Farmer A
grows and harvests wheat and other grains. Farmer A elects under
this paragraph (d) not to have the rules of section 263A apply to
the costs of growing the apple trees.

       (ii) In accordance with paragraph (d)(4) of this section,
Farmer A is required to use the alternative depreciation system
described in section 168(g)(2) with respect to all property used
predominantly in any farming business in which Farmer A engages
(including the growing and harvesting of wheat) if such property is
placed in service during a year for which the election is in
effect. Thus, for example, all assets and equipment (including
trees and any equipment used to grow and harvest wheat) placed in
service during a year for which the election is in effect must be
depreciated as provided in section 168(g)(2).

       Example 2. Assume the same facts as in Example 1, except
that Farmer A and members of Farmer A�s family (as defined in
paragraph (d)(4)(iii)(B) of this section) also own 51 percent (in
value) of the interests in Partnership P, which is engaged in the
trade or business of growing and harvesting corn. Partnership P is
a related person to Farmer A under the provisions of paragraph (d)
(4)(iii) of this section. Thus, the requirements to use the
alternative depreciation system under section 168(g)(2) also apply
to any property used predominantly in a trade or business of
farming which Partnership P places in service during a year for
which an election made by Farmer A is in effect.

       (e) Exception for certain costs resulting from casualty
losses--(1) In general. Section 263A does not require the
capitalization of costs that are attributable to the replanting,
cultivating, maintaining, and developing of any plants bearing an
edible crop for human consumption (including, but not limited to,
plants that constitute a grove, orchard, or vineyard) that were
lost or damaged while owned by the taxpayer by reason of freezing
temperatures, disease, drought, pests, or other casualty
(replanting costs). Such replanting costs may be incurred with
respect to property other than the property on which the damage or
loss occurred to the extent the acreage of the property with
respect to which the replanting costs are incurred is not in excess
of the acreage of the property on which the damage or loss
occurred. This paragraph (e) applies only to the replanting of
plants of the same type as those lost or damaged. This paragraph
(e) applies to plants replanted on the property on which the damage
or loss occurred or property of the same or lesser acreage in the
United States irrespective of differences in density between the
lost or damaged and replanted plants. Plants bearing crops for
human consumption are those crops normally eaten or drunk by
humans. Thus, for example, costs incurred with respect to
replanting plants bearing jojoba beans do not qualify for the
exception provided in this paragraph (e) because that crop is not
normally eaten or drunk by humans.

       (2) Ownership. Replanting costs described in paragraph (e)
(1) of this section generally must be incurred by the taxpayer that
owned the property at the time the plants were lost or damaged.
Paragraph (e)(1) of this section will apply, however, to costs
incurred by a person other than the taxpayer that owned the plants
at the time of damage or loss if--

       (i) The taxpayer that owned the plants at the time the
damage or loss occurred owns an equity interest of more than 50
percent in such plants at all times during the taxable year in
which the replanting costs are paid or incurred; and

        (ii) Such other person owns any portion of the remaining
equity interest and materially participates in the replanting,
cultivating, maintaining, or developing of such plants during the
taxable year in which the replanting costs are paid or incurred. A
person will be treated as materially or purposes of this provision
if such person would otherwise meet the requirements with respect
to material participation within the meaning of section 2032A(e)
(6).

        (3) Examples. The following examples illustrate the
		 provisions of this paragraph

(e):

        Example 1. (i) Farmer A grows cherry trees that have a
preproductive period in excess of 2 years and produce an annual
crop. These cherries are normally eaten by humans. Farmer A grows
the trees on a 100 acre parcel of land (parcel 1) and the groves of
trees cover the entire acreage of parcel 1. Farmer A also owns a
150 acre parcel of land (parcel 2) that Farmer A holds for future
use. Both parcels are in the United States. In 2000, the trees and
the irrigation and drainage systems that service the trees are
destroyed in a casualty (within the meaning of paragraph (e)(1) of
this section). Farmer A installs new irrigation and drainage
systems on parcel 1, purchases young trees (seedlings), and plants
the seedlings on parcel 1.

        (ii) The costs of the irrigation and drainage systems and
the seedlings must be capitalized. In accordance with paragraph (e)
(1) of this section, the costs of planting, cultivating,
developing, and maintaining the seedlings during their
preproductive period are not required to be capitalized by section
263A.

        Example 2. (i) Assume the same facts as in Example 1 except
that Farmer A decides to replant the seedlings on parcel 2 rather
than on parcel 1. Accordingly, Farmer A installs the new irrigation
and drainage systems on 100 acres of parcel 2 and plants seedlings
on those 100 acres.

        (ii) The costs of the irrigation and drainage systems and
the seedlings must be capitalized. Because the acreage of the
related portion of parcel 2 does not exceed the acreage of the
destroyed orchard on parcel 1, the costs of planting, cultivating,
developing, and maintaining the seedlings during their
preproductive period are not required to be capitalized by section
263A. See paragraph (e)(1) of this section.

        Example 3. (i) Assume the same facts as in Example 1 except
that Farmer A replants the seedlings on parcel 2 rather than on
parcel 1, and Farmer A additionally decides to expand its
operations by growing 125 rather than 100 acres of trees.
Accordingly, Farmer A installs new irrigation and drainage systems
on 125 acres of parcel 2 and plants seedlings on those 125 acres.

       (ii) The costs of the irrigation and drainage systems and
the seedlings must be capitalized. The costs of planting,
cultivating, developing, and maintaining 100 acres of the trees
during their preproductive period are not required to be
capitalized by section 263A. The costs of planting, cultivating,
maintaining, and developing the additional 25 acres are, however,
subject to capitalization under section 263A. See paragraph (e)(1)
of this section.

       (4) Special rule for citrus and almond groves--(i) In
general. The exception in this paragraph (e) is available with
respect to replanting costs of a citrus or almond grove incurred
prior to the close of the fourth taxable year after replanting,
notwithstanding the taxpayer�s election to have section 263A not
apply (described in paragraph (d) of this section).

       (ii) Example. The following example illustrates the
		provisions of this paragraph

(e)(4):

       Example. (i) Farmer A, an individual, is engaged in the
trade or business of farming. Farmer A grows citrus trees that have
a preproductive period of 5 years. Farmer A elects, under paragraph
(d) of this section, not to have section 263A apply. This election,
however, is unavailable with respect to the costs of producing a
citrus grove incurred within the first 4 years beginning with the
year the trees were planted. See paragraph (d)(2) of this section.
In year 10, after the citrus grove has become productive in
marketable quantities, the citrus grove is destroyed by a casualty
within the meaning of paragraph (e)(1) of this section. In year 10,
Farmer A acquires and plants young citrus trees in the same grove
to replace those destroyed by the casualty.

       (ii) Farmer A must capitalize the costs of producing the
citrus grove incurred before the close of the fourth taxable year
beginning with the year in which the trees were permanently
planted. As a result of the election not to have section 263A
apply, Farmer A may deduct the preproductive period costs incurred
in the fifth year. In year 10, Farmer A must capitalize the
acquisition cost of the young trees. However, the costs of
planting, cultivating, developing, and maintaining the young trees
that replace those destroyed by the casualty are exempted from
capitalization under this paragraph

(e).

       (f) Effective date and change in method of accounting--(1)
Effective date. In the case of property that is not inventory in
the hands of the taxpayer, this section is applicable to costs
incurred after August 21, 2000, in taxable years ending after
August 21, 2000. In the case of inventory property, this section is
applicable to taxable years beginning after August 21, 2000.

       (2) Change in method of accounting. Any change in a
taxpayer�s method of accounting necessary to comply with this
section is a change in method of accounting to which the provisions
of sections 446 and 481 and the regulations thereunder apply. For
property that is not inventory in the hands of the taxpayer, a
taxpayer is granted the consent of the Commissioner to change its
method of accounting to comply with the provisions of this section
for costs incurred after August 21, 2000, provided the change is
made for the first taxable year ending after August 21, 2000. For
inventory property, a taxpayer is granted the consent of the
Commissioner to change its method of accounting to comply with the
provisions of this section for the first taxable year beginning
after August 21, 2000. A taxpayer changing its method of accounting
under this paragraph (f)(2) must file a Form 3115, Application for
Change in Accounting Method, in accordance with the automatic
consent procedures in Rev. Proc. 99-49 (1999-2 I.R.B. 725) (see
�601.601(d)(2) of this chapter). However, the scope limitations in
section 4.02 of Rev. Proc. 99-49 do not apply, provided the
taxpayer's method of accounting for property produced in a farming
business is not an issue under consideration within the meaning of
section 3.09 of Rev. Proc. 99-49. If the taxpayer is under
examination, before an appeals office, or before a federal court at
the time that a copy of the Form 3115 is filed with the national
office, the taxpayer must provide a duplicate copy of the Form 3115
to the examining agent, appeals officer, or counsel for the
government, as appropriate, at the time the copy of the Form 3115 is
filed. The Form 3115 must contain the name(s) and telephone
number(s) of the examining agent, appeals officer, or counsel for
the government, as appropriate. Further, in the case of property
that is not inventory in the hands of the taxpayer, a change under
this paragraph (f)(2) is made on a cutoff basis as described in
section 2.06 of Rev. Proc. 99-49 and without the audit protection
provided in section 7 of Rev. Proc. 99-49. However, a taxpayer may
receive such audit protection for non-inventory property by taking
into account any section 481(a) adjustment that results from the
change in method of accounting to comply with this section. A
taxpayer that opts to determine a section 481(a) adjustment (and,
thus, obtain audit protection) for non-inventory property must take
into account only additional section 263A costs incurred after
December 31, 1986, in taxable years ending after December 31, 1986.
Any change in method of accounting that is not made for the
taxpayer�s first taxable year ending or beginning after August 21,
2000, whichever is applicable, must be made in accord with the
procedures in Rev. Proc. 97-27 (1997-1 C.B. 680) (see �601.601(d)
(2) of this chapter).

�1.263A-4T [Removed]

       Par. 7. Section 1.263A-4T is removed.

       Par. 8. Section 1.471-6 is amended as follows:

       1. The third sentence of paragraph (d) is revised.

       2. The last sentence of paragraph (f) is revised.

       The revisions read as follows:

�1.471-6 Inventories of livestock raisers and other farmers.

* * * * *

       (d) * * * However, see �1.263A-4(c)(3) for an exception to
		this rule. * * *

* * * * *

       (f) * * * See �1.263A-4 for rules regarding the computation
of costs for purposes of the unit-livestock-price-method.

* * * * *

Deputy Commissioner of Internal Revenue       
Robert E. Wenzel   
Approved: August 10, 2000      
Acting Assistant Secretary of the Treasury (Tax Policy)     
Jonathan Talisman

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