LIMITATIONS ON DEDUCTIONS IN CASE OF FARMING SYNDICATES; CAPITALIZATION OF CERTAIN ORCHARD AND VINE-YARD EXPENSES; AND METHOD OF ACCOUNTING FOR CORPORATIONS ENGAGED IN FARMING.

SEC. 207. LIMITATIONS ON DEDUCTIONS IN CASE OF FARMING SYNDICATES; CAPITALIZATION OF CERTAIN ORCHARD AND VINE-YARD EXPENSES; AND METHOD OF ACCOUNTING FOR CORPORATIONS ENGAGED IN FARMING. (a) Prepaid Expenses.— (1) In general.— Subpart C of part II of subchapter E of chapter 1 (relating to taxable year for which deduction taken) is amended by inserting after section 463 the following new section: “SEC. 464. LIMITATIONS ON DEDUCTIONS IN CASE OF FARMING SYNDICATES. “(a) General Rule.— In the case of any farming syndicate (as defined in subsection (c)), a deduction (otherwise allowable under this chapter) for amounts paid for feed, seed, fertilizer, or other similar farm supplies shall only be allowed for the taxable year in which such feed, seed, fertilizer, or other supplies are actually used or consumed, or, if later, for the taxable year for which allowable as a deduction (determined without regard to this section). “(b) Certain Poultry Expenses.— In the ease of any farming syndicate (as defined in subsection (c))— “(1) the cost of poultry (including egg-laying hens and baby chicks) purchased for use. in a trade or business (or both for use in a trade or business and for sale) shall be capitalized and deducted ratably over the lesser of 12 months or their useful life in the trade or business, and “(2) the cost of poultry purchased for sale shall be deducted for the taxable year in which the poultry is sold or otherwise disposed of. “(c) Farming Syndicate Defined.— “(1) In general.— For purposes of this section, the term ‘farming syndicate’ means— “(A) a partnership or any other enterprise other than a corporation which is not an electing small business corporation (as defined in section 1371(b)) engaged in the trade or business of farming, if at any time interests in such partnership or enterprise have been offered for sale in any offering required to be registered with any Federal or State agency having authority to regulate the offering of securities for sale, or “(B) a partnership or any other enterprise other than a corporation which is not an electing small business corporation (as defined in section 1371(b)) engaged in the trade or business of farming, if more-than 35 percent of the losses during any period are allocable to limited partners or limited entrepreneurs. “(2) Holdings attributable to active management.— For purposes of paragraph (1)(B), the following shall be treated as an interest which is not held by a limited partner or a limited entrepreneur: “(A) in the case of any individual who has actively participated (for a period of not less than 5 years) in the man-90 STAT. 1537agement of any trade or business of farming, any interest in a partnership or other enterprise which is attributable to such active participation. “(B) in the case of any individual whose principal residence is on a farm, any partnership or other enter])rise engaged in the trade or business of farming such farm, “(C) in the case of any individual who is actively participating in the management of any trade or business of farming or who is an individual who is described in subparagraph (A) or (B), any participation in the further processing of livestock which was raised in such trade or business (or in the trade or business referred to in subparagraph (A) or (B)), “(D) in the case of an individual whose principal business activity involves active participation in the management of a trade or business of farming, any interest, in any other trade or business of farming, and”, “(E) any interest held by a member of the family (within the meaning of section 267(c)(4)) of a grandparent of an individual described in subparagraph (A), (B), (C), or (D) if the interest in the partnership or the enterprise is attributable to the active participation of the individual described in subparagraph (A), (B), (C),or (D). For purposes of subparagraph (A), where one farm is substituted for or added to another farm, both farms shall he treated as one farm. “(d) Exceptions.— Subsection (a) shall not apply to— “(1) any amount paid for supplies which are on hand at the close of the taxable year on account of fire, storm, flood, or other casualty or on account of disease or drought, or “(2) any amount required to be charged to capital account under section 278. “(e) Definitions.— For purposes of this section— “(1) Farming.— The term ‘farming’ means the cultivation of land or the raising or harvesting of any agricultural or horticultural commodity including the raising, shearing, feeding, caring for, training, and management of animals. For purposes of the preceding sentence, trees (other than trees bearing fruit or nuts) shall not be treated as an agricultural or horticultural commodity. “(2) Limited entrepreneur.— The term ‘limited entrepreneur’ means a person who— “(A) has an interest in an enterprise other than as a limited partner, and “(B) does not actively participate in the management of such enterprise.” (2) Clerical amendment.— The table of sections for such subpart C is amended by inserting after the item relating to section 463 the following new item: “Sec. 464. Limitations on deductions in case of farming syndicates.” (3) Effective dates.— (A) In general.— Except, as provided in subparagraph (B), the amendments made by tills subsection shall apply to taxable years beginning after December 31, 1975. (B) Transitional rule.— In the case of a fanning syndicate in existence on December 31, 1975, and for which there 90 STAT. 1538was no change of membership throughout its taxable year beginning in 1976, the amendments made by tins subsection shall apply to taxable years beginning after December 31, 1976. (b) Orchard and Vineyard Expenses.— (1) In general.— Section 278 (relating to capital expenditures incurred in planting and developing citrus and almond groves) is amended by striking out subsection (b) and by inserting in lieu thereof the following: “(b) Farming Syndicates.— Except as provided in subsection (c), in the case of any farming syndicate (as defined in section 464(c)) engaged in planting, cultivating, maintaining, or developing a grove, orchard, or vineyard in which fruit or nuts are grown, any amount— “(1) which would be allowable as a deduction but for the provisions of this subsection, “(2) which is attributable to the planting, cultivation, maintenance, or development of such grove, orchard, or vineyard, and “(3) which is incurred in a taxable year before the first taxable year in which such grove, orchard, or vineyard bears a crop or yield in commercial quantities, shall be charged to capital account. “(c) Exceptions.— Subsections (a) and (b) shall not apply to amounts allowable as deductions (without regard to this section) attributable to a grove, orchard, or vineyard which was replanted after having been lost or damaged (while in the hands of the taxpayer) by reason of freezing temperatures, disease, drought, pests, or casualty.” (2) Conforming amendments.— (A) The heading of section 278 is amended to read as follows: “SEC. 278. CAPITAL EXPENDITURES INCURRED IN PLANTING AND DEVELOPING CITRUS AND ALMOND GROVES; CERTAIN CAPITAL EXPENDITURES OF FARMING SYNDICATES”. (B) Subsection (a) of section 278 (relating to general rule) is amended by striking out “subsection (b)” and inserting in lieu thereof “subsection (c)”. (3) Effective date.— The amendments made by this subsection shall apply to taxable years beginning after December 31, 1975. The amendments made by this subsection shall not apply in the case of a grove, orchard, or vineyard referred to in the amendment made by subsection (b)(1) which was planted or replanted on or before December 31, 1975. For purposes of the preceding sentence, a tree or vine which, on or before December 31, 1975, was planted at a place other than the grove, orchard, or vineyard of the taxpayer but which, on such date, was owned by the taxpayer (or with respect to which the taxpayer had a binding contract to purchase) shall be treated as planted on December 31, 1975, in the grove, orchard, or vineyard of the taxpayer. (c) Method of Accounting for Corporations Engaged in Farming.— (1) General rule.— (A) Subpart A of part II of subchapter E of chapter 1 (relating to methods of accounting) is amended by adding at the end thereof the following new section: “SEC. 447. METHOD OF ACCOUNTING FOR CORPORATIONS ENGAGED IN FARMING. “(a) General Rule.— Except as otherwise provided by law, the taxable income from farming of— 90 STAT. 1539 “(1) a corporation engaged in the trade or business of firming, or “(2) a partnership engaged in the trade or business of farming, if a corporation is a partner in such partnership, shall be computed on an accrual method of accounting and with the capitalization of preproductive expenses described hi subsection (b). This section shall not apply to the trade or business of operating a nursery or to the raising or liar vesting of trees (other than fruit and nut trees). “(b) Preproductive Period Expenses.— “(1) In general.— For purposes of this section, the term ‘preproductive period expenses’ means any amount which is attributable to crops, animals, or any other property having a crop or yield during the preproductive period of such property. “(2) Exceptions.— Paragraph (1) she 11 not apply— “(A) to taxes and interest, and “(B) to any amount incurred on account of fire, storm, flood, or other casualty or on account of disease or drought. “(3) Preproductive period defined.— For purposes of this subsection, the term ‘preproductive period’ means— “(A) in the ease of property having a useful life of more than 1 year which will have more than 1 crop or yield, the period before the disposition of the first such marketable crop or yield, or “(B) in the case of any other property, the period before such property is disposed of. For purposes of this section, the use by the taxpayer in the trade or business of farming of any supply produced in such trade or business shall be treated as a disposition. “(c) Exception for Small Business and Family Corporations.— For purposes of subsection (a), a corporation shall be treated as not being a corporation if it is— “(1) an electing small business corporation (within the meaning of section 1371 (b)), “(2) a corporation of which at least 50 percent of the total combined voting power of all classes of stock entitled to vote, and at least 50 percent of the total number of shares of all other classes of stock of the corporation, are owned by members of the same family, or “(3) a corporation the gross receipts of which meet the requirements of subsection (e). “(d) Members of the Same Family.— For purposes of subsection (c)(2)— “(1) the members of the same family are an individual, such individual’s brothers and sisters, the brothers and sisters of such individual’s parents and grandparents, the ancestors and lineal descendants or any of the foregoing, a spouse of any of the foregoing, and the estate of any of the foregoing. “(2) stock owned, directly or indirectly, by or for a partnership or trust, shall be treated as owned proportionately by its partners or beneficiaries, and “(3) if 50 percent or more in value of the stock in a corporation (hereinafter in this paragraph referred to as ‘first corporation’) is owned, directly or through paragraph (2), by or for members of the same family, such members shall be considered as owning each class of stock in a second corporation (or a wholly owned 90 STAT. 1540subsidiary of such second corporation) owned, directly or indirectly, by or for the first corporation, in that proportion which the value of the stock in the first corporation which such members so own beans to the value of all the stock in the first corporation. For purposes of paragraph (1), individuals related by the half blood or by legal adoption shall be treated as if they were related by the whole blood. “(e) Corporations Having Gross Receipts of $1,000,000 or Less.— A corporation meets the requirements of this subsection if, for each prior taxable year beginning after December 31, 1975, such corporation (and any predecessor corporation) did not have gross receipts exceeding $1,000,000, For purposes of the preceding sentence, all corporations which are members of a controlled group of corporations (within the meaning of section 1563(a)) shall be treated as one corporation. “(f) Coordination With Section 481.— In the case of any taxpayer required by this section to change its method of accounting for any taxable year— “(1) such change shall be treated as having been made with the consent of the Secretary, “(2) for purposes of section 481 (a)(2), such change shall be treated as a change not initiated by the taxpayer, and “(3) under regulations prescribed by the Secretary, the net amount of adjustments required by section 481(a) to he taken into account by the taxpayer in computing taxable income shall (except as otherwise provided in such regulations) be taken into account in each of the 10 taxable years beginning with the year of change. “(g) Certain Annual Accrual Accounting Methods.— “(1) In general.— If— “(A) for its 10 taxable years ending with its first taxable year beginning after December 31, 1975, a corporation used an annual accrual method of accounting with respect to its trade or business of farming, “(B) such corporation raises crops which are harvested not less than 12 months after planting, and “(C) such corporation has used such method of accounting for all taxable years intervening between its first taxable year beginning after December 31, 1975, and the taxable year, such corporation may continue to employ such method of accounting for the taxable year with respect to its trade or business of farming. “(2) Annual accrual method of accounting defined.— For purposes of paragraph (1), the term ‘annual accrual method of accounting’ means a method under which revenues, costs, and expenses are computed on an accrual method of accounting and the preproductive expenses incurred during the taxable year are charged to harvested crops or deducted in determining the taxable income for such years. “(3) Certain reorganizations.— For purposes of this subsection, if a corporation acquired substantially all the assets of a farming trade or business from another corporation in a transaction in which no gain or loss was recognized to the transferor or transferee corporation, the transferee corporation shall be deemed to have computed its taxable income on an annual accrual method of accounting during the period for which the transferor corporation computed its taxable income, from such trade or business on an annual accrual method.” 90 STAT. 1541 (B) The table of sections for such subpart A is amended by adding at the end thereof the following: “Sec. 447. Method of accounting for corporations engaged in farming.” (2) Effective date.— The amendments made by paragraph (1) shall apply to taxable years beginning after December 31, 1976. (3) Election to change from static value method to accrual method of accounting.— (A) In general.— If— (i) a corporation has computed its taxable income on an annual accrual method of accounting together with a static value method of accounting for deferred costs of growing crops for the 10 taxable years ending with its first taxable year beginning after December 31, 1975, (ii) such corporation raises crops which are harvested not less than 12 months after planting, and (iii) such corporation elects, within one year after the date of the enactment of this Act and in such manner as the Secretary of the Treasury or his delegate prescribes, to change to the annual accrual method of accounting (within the meaning of section 447(g)(2) of the Internal Revenue Code of 1954) for taxable years beginning after December 31, 1976, such change shall be treated as having been made with the consent of the Secretary of the Treasury, and, under regulations prescribed by the Secretary of the Treasury or his delegate, the net amount of the adjustments required by section 4811a) of the Internal Revenue Code of 1954 to be taken into account by the taxpayer in computing taxable income shall (except as otherwise provided in such regulations) be taken into account in each of the 10 taxable years beginning with the year of change. (B) Coordination with section iii of the code.— A corporation which elects under subparagraph (A) to change to the annual accrual method of accounting shall, for purposes of section 447(g) of the Internal Revenue Code of 1954, be deemed to be a corporation which has computed its taxable income on an annual accrual method of accounting for its 10 taxable years ending with its first taxable year beginning after December 31, 1975. (C) Certain corporate reorganizations.— For purposes of this paragraph, if a corporation acquired substantially all the assets of a farming trade or business from another corporation in a transaction in which no gain or loss was recognized to the transferor or transferee corporation, the transferee corporation shall be deemed to have computed its taxable income on an annual accrual method of accounting together with a static value method of accounting for deferred costs of growing crops during the period for which the transferor corporation computed its taxable income from such trade or business on such accrual and static value method.