November 12, 2012
By Jay Richardson
In Chief Counsel Advice (CCA) 201234024, the IRS made two very important decisions regarding vineyards:
1. Vineyards are eligible for the Code Sec. 179 expensing deduction.
2. A 1967 revenue ruling that arrived at the opposite conclusion no longer applies for the ’86 Code’s version of Code Sec. 179.
Why is this CCA so important to Oregon vineyards? Indulge us with this important background: Vineyards, like most taxpayers, can elect on Form 4562 to expense (deduct in lieu of depreciation) the cost of “section 179 property” when it is placed in service (Code Sec. 179(a), Code Sec. 179(b)(1)). The maximum amount that could be expensed for tax years beginning in 2009 (the tax year at issue in the CCA) was $250,000, and the maximum annual expensing amount was reduced dollar-for-dollar by the amount of section 179 property placed in service during the tax year in excess of $800,000 (the investment ceiling). (Code Sec. 179(b)(1); Code Sec. 179(b)(2), Code Sec. 179(b)(6)). For tax years beginning in 2010 and 2011, the maximum expensing amount is $500,000. For tax years beginning in 2012, it’s $139,000, and for tax years beginning after 2012, the maximum amount is $25,000. The investment ceiling is $2,000,000 for tax years beginning in 2010 and 2011, $560,000 for tax years beginning in 2012, and $200,000 for tax years beginning after 2012. The deduction amount under Code Sec. 179 is further limited to the amount of taxable income from any of taxpayer’s active trades or businesses. (Code Sec. 179(b)(3); Reg. § 1.179-2(c)(1)).
What property qualifies for section 170 treatment?
In general, section 179 property is property that is:
1. Tangible property to which Code Sec. 168 applies, or certain computer software if placed in service in a tax year beginning before 2013;
2. Code Sec. 1245 property (as defined in Code Sec. 1245(a)(3)); and
3. Acquired by purchase for use in the active conduct of a trade or business.
Under Code Sec. 1245(a)(3), the term “Code Sec. 1245 property” means property which is or has been property of a character subject to the allowance for depreciation under Code Sec. 167, and is (among other things) (A) personal property, or (B) other property (not including a building or its structural components) but only if such other property is tangible and has an adjusted basis in which there are reflected adjustments described in Code Sec. 1245(a)(2), for a period in which such property (or other property) was used as an integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electrical energy, gas, water, or sewage disposal services. Fruit bearing trees and vines aren’t considered placed in service until they have reached an income-producing stage. (Reg. § 1.46-3 (d)(2)(iii))
What did the IRS say in the CCA?
In the CCA, the taxpayers were individuals who attached Schedule F, Profit or Loss From Farming, to their federal income tax return, claiming to operate a vineyard business activity. In 2005, they began planting the vineyard and capitalized over three years the costs of land preparation, labor and rootstock. Land preparation costs claimed did not include any nondepreciable land costs. In 2009, when the plants became viable, Taxpayers placed the vineyard in service and took a Code Sec. 179 deduction for the costs incurred in planting the vineyard.
The issue was whether the taxpayers’ vineyard was section 179 property eligible for expensing. The vineyard is tangible property to which Code Sec. 168 applies (condition (1), above), and was acquired by purchase for use in the active conduct of the taxpayers’ trade or business (condition (2) above). The technical issue was whether the vineyard was Code Sec. 1245 property (condition (3), above).
What did the IRS conclude?
The CCA says that the vineyard is Code Sec. 1245 property for Code Sec. 179 purposes, whether or not it is an inherently permanent structure. The IRS held that is earlier, contrary ruling is obsolete. Rev Rul 67-51, 1957-1 CB 68, said that certain fruit bearing trees are not section 179 property because they do not qualify as tangible personal property within the meaning of Code Sec. 179 of the ’54 Code.
Does the CCA benefit your vineyard?
If the facts of the CCA apply to your vineyard, you should immediately contact your tax return preparer to see amount amending your tax return and claiming a section 179 deduction, which could result in a significant tax refund. For years after 2010, you may need to obtain the IRS’ consent before filing an amended return.