Coffin v. Commissioner

Winfield A. and Virginia Coffin, Petitioners, v. Commissioner of Internal Revenue, Respondent

Coffin v. Commissioner

Docket No. 2279-62 United States Tax Court 41 T.C. 83 ; 1963 U.S. Tax Ct. LEXIS 34 ; October 21, 1963 , Filed *34 Decision will be entered under Rule 50 .

Petitioners are entitled to deduct amounts expended for construction of an earthen dam and filling in eroded gullies on their farm under the provisions and limitations of section 175, I.R.C. 1954 .

Harold C. Brown , for the petitioners.

Daniel Lee Stewart , for the respondent.

*35 Arundell , Judge .

ARUNDELL *83 Respondent determined a deficiency in petitioners' income tax for the year 1958 in the amount of $ 2,827.53. The remaining issue left for decision arose out of respondent's holding that the sum of $ 8,202.16 expended for construction of an earthen dam and the leveling of land on petitioners' farm constituted soil and water conservation expenses and is deductible only under the provisions and limitations of section 175 of the Internal Revenue Code of 1954 . The respondent now concedes that the sum of $ 2,000 paid to petitioners by the Department of Agriculture under its soil and water conservation program constitutes gross income from farming within the meaning of section 175(b) of the 1954 Code. The respondent also conceded on brief that petitioners are entitled to a depreciation deduction of $ 910.25 on their automobile, which amount was disallowed in the deficiency notice.

FINDINGS OF FACT

Some of the facts were stipulated and are so found.

Petitioners are residents of San Francisco, Calif. They filed their joint Federal income tax return for 1958 with the district director of internal revenue at San Francisco, Calif.

Petitioner-husband *36 has been an employee of the Pacific Telephone & Telegraph Co. for a number of years. During the year 1958 he was an executive of this company.

Petitioner-wife worked as a clerk for the Pacific Telephone & Telegraph Co. during the year 1958.

In 1950 the petitioners purchased a farm containing 88.24 acres of eroded land near Calistoga, Calif. At the time the petitioners purchased the farm and for a number of years thereafter, the farm was used as a vineyard and for the grazing of livestock. Petitioners did not receive any gross receipts from the farm during the years 1950 to 1955, inclusive. Petitioners received nominal gross receipts from their farm from the sale of livestock during the years 1956 and 1957.

Pursuant to a plan worked out with representatives of the Soil and Water Conservation Section of the Department of Agriculture, petitioners expended $ 8,202.16 in 1958 for the construction of an earthen dam and for filling gullies on their farm. The Department *84 of Agriculture, pursuant to its soil and water conservation program, paid petitioners $ 2,000 in 1958 for construction of a dam and for filling gullies on their farm. The petitioners did not have any other gross *37 receipts from the farm during the year 1958.

Petitioners received nominal gross receipts from the farm from the sale of livestock in 1959.

After petitioners had the earthen dam built and the gullies filled in on their farm, they planted walnut trees to replace the vineyard.

The expenditures which petitioners incurred in the amount of $ 8,202.16 during the year 1958 for building an earthen dam and filling in gullies on their farm were for permanent improvements to their property and to put the property into a productive condition.

OPINION

In 1950 petitioners purchased 88.24 acres of eroded land near Calistoga, Calif. At the time of purchase, the land had an old vineyard on it and the rest of the land was used for the grazing of livestock. Petitioners received little or no income from the property during the entire period of their ownership up to the year 1958.

In 1958, pursuant to a plan worked out by petitioners and the Soil and Water Conservation Section of the Department of Agriculture, the petitioners had an earthen dam built on the farm and had the gullies filled in. The project cost petitioners a total of $ 8,202.16. The vineyard on the farm was removed at the time the petitioners *38 had the conservation work done and later this land was utilized for the planting of walnut trees.

It is respondent's position that the construction of an earthen dam and the filling of gullies on the petitioners' farm constituted permanent improvements to the property and increased the value of the property. It also made the cultivatable land subject to new uses, as shown by the planting of a walnut grove. Respondent disagrees with petitioners that the expenditures should be regarded as ordinary and necessary expenses incurred in carrying on petitioners' business of farming under the provisions of section 162 of the 1954 Code.

We agree with respondent. The work was of a permanent character which added value to the property and made possible its use for other purposes. Such work is capital in its nature and not an ordinary and necessary expense under section 162(a) of the 1954 Code. However, section 175(a) of the 1954 Code 1 *40 was designed to ease *85 this situation. That section provides that a taxpayer engaged in the business of farming may treat expenditures which are paid or incurred by him during the taxable year for the purpose of soil or water conservation in respect *39 of land used in farming or for the prevention of erosion of land used in farming as expenses which are not chargeable to capital account and the expenditures so treated may be taken as a deduction. There is a limitation, however, on the deduction. Sec. 175(b) . 2 Not more than 25 percent of the gross income from farming may be deducted in any one year. The respondent now concedes that the $ 2,000 received by petitioners from the Department of Agriculture is income from farming and as this is petitioners' only income from farming during the year, it would follow that their deduction under section 175(b) is limited to $ 500. The respondent concedes petitioners are entitled to a deduction in this amount.

The Rule 50 settlement will also give effect to the depreciation deduction on the automobile now conceded by respondent.

Decision will be entered under Rule 50 .

Footnotes

1. SEC. 175 . SOIL AND WATER CONSERVATION EXPENDITURES.

(a) In General. -- A taxpayer engaged in the business of farming may treat expenditures which are paid or incurred by him during the taxable year for the purpose of soil or water conservation in respect of land used in farming, or for the prevention of erosion of land used in farming, as expenses which are not chargeable to capital account. The expenditures so treated shall be allowed as a deduction. ↩

2. (b) Limitation. -- The amount deductible under subsection (a) for any taxable year shall not exceed 25 percent of the gross income derived from farming during the taxable year. * * * ↩