Facts.Taxpayer sold seeds, herbicides, fertilizers, and pesticides to
local farmers, and the owner provided advice and some financial assistance to
the taxpayer’s customers. Taxpayer used the cash method of accounting for the
years at issue. The IRS determined that the taxpayer was required to use the accrual
method of accounting and, accordingly, assessed tax deficiencies for the 1990
and 1992. The Tax Court held that the taxpayer must use the accrual method of
accounting since the taxpayer’s purchase and sale of merchandise was a material
income-producing factor and the taxpayer did not qualify as a farmer for purposes
of using the cash method of accounting. The Tax Court further held that the IRS’s
determination was not an abuse of discretion.
Issue
Issue 1. Whether the IRS’s determination was an abuse of discretion because,
in determining that taxpayer’s use of the cash method did not clearly reflect
income, the IRS compared only 3 years of taxpayer’s income under the cash and
accrual methods of accounting.
Issue 2. Whether taxpayer qualifies as a farmer for purposes of using the cash
method of accounting.
Issue 3. Whether taxpayer’s purchase and sale of merchandise was a material
income-producing factor.
Analysis and Holding
Issue 1. The IRS did not abuse its discretion when it required the to change
from the cash to the accrual method of accounting. It did not act arbitrarily
in basing its decision on an examination of the taxpayer’s returns for only three
tax years, even though the taxpayer alleged that, over a longer period of time,
its income and tax liability would be approximately equal under both accounting
methods.
Issue 2. The taxpayer did not qualify as a farming business eligible to use
the cash method of accounting. The taxpayer did not cultivate, operate or manage
a farm for profit. Its loans and extensions of credit to farmers did not expose
it to a substantial risk of loss from the growing process since they were secured
by collateral that was not limited to the current crop and the evidence did not
establish that all of its security interests were subordinated to its customers’
mortgages. The taxpayer produced no evidence to show that it had received any
income from the occasional farming activities of its founder. Since the taxpayer
did not retain title to the products that it sold to farmers, it did not have
control and management over any farming operation.
Issue 3. The taxpayer was properly required to use the accrual method of accounting
because nearly all of its income came from product sales. The taxpayer’s purchase
and sale of merchandise was a substantial income-producing factor and, thus, it
was required to use inventories.
[Ward Ag Products, Inc., v. Commissioner, 216 F.3d
1090 (11th Cir. 2000), unpublished opinion aff’g 75 T.C.M. (CCH) 1886
(1998)]
Taxation