The Lawletter Vol 37 No 10
In a recent advisory opinion, the Chief Counsel for the Internal Revenue Service ("IRS") issued a decision that no doubt will be toasted by the rapidly growing vineyard industry in the United States. In IRS Chief Counsel Advisory ("I.R.S. C.C.A.") 2012-34-024 (Aug. 24, 2012), the Chief Counsel opined that individual taxpayers who developed a vineyard were entitled to claim a deduction under 26 U.S.C. § 179 (election to expense certain depreciable business assets) on their 2009 income tax returns with respect to expenses that they had incurred in planting the vineyard in 2005 and then placing it into service in 2009.
I.R.C. § 179 provides generally that "[a] taxpayer may elect to treat the cost of any section 179 property as an expense which is not chargeable to capital account" and that "[a]ny cost so treated shall be allowed as a deduction for the taxable year in which the section 179 property is placed in service." 26 U.S.C. § 179(a). "Section 179 property" is statutorily defined as including qualified tangible property to which § 168 (accelerated cost-recovery system) applies, which is also § 1245 property ("property which is or has been property of a character subject to the allowance for depreciation provided in section 167," id. § 1245(a)(3)), and which has been acquired by purchase for use in the active conduct of a trade or business. Id. § 179(d)(1). According to the Chief Counsel, "[s]ection 179(a) allows a taxpayer to elect to expense the cost (or a portion of the cost) of § 179 property, up to a limit, in the taxable year the property is placed in service by the taxpayer, instead of recovering the property by taking depreciation deductions over the applicable recovery period." I.R.S. C.C.A. 2012-34-024.
A key issue in I.R.S. C.C.A. 2012-34-024 was whether the taxpayers' vineyard was "tangible property," given the fact that in a 1967 Revenue Ruling, Rev. Rul. 67‑51, 1967‑1 C.B. 68, the IRS had concluded that certain fruit-bearing trees were not § 179 property because they did not qualify as tangible personal property within the meaning of § 179 of the 1954 Code. The Chief Counsel tackled that problem by pointing out that "[s]ince the issuance of Rev. Rul. 67‑51, the definition of § 179 property has significantly changed." I.R.S. C.C.A. 2012-34-024. The Chief Counsel noted that "[f]or the year in issue  and currently, § 179 property includes depreciable property that is tangible personal property or other tangible property under § 1245(a)(3) [of the Code]." Id. Accordingly, the Chief Counsel declared that "[b]ecause of the change in the definition of § 179 property, Rev. Rul. 67‑51 no longer applies for purposes of § 179 of the 1986 Code." Id.
I.R.S. C.C.A. 2012-34-024 indicates that as long as the requirements of § 179 of the Code are met, a vintner (or other similar farmer) can elect to expense the cost or a portion of the cost of the vineyard on Schedule F (Profit or Loss from Farming) of his or her federal income tax return. For an excellent, detailed discussion of I.R.S. C.C.A. 2012-34-024, the reader is urged to consult Vineyard Costs Deductible Under § 179, 53 Tax Mgmt. Mem. (BNA) No. 20, at 381 (Sept. 24, 2012).