MEMORANDUM

TO: FROM: Ray Ishii Anh Chung

SUBJECT: Tax Research

I.

RELEVENT FACTS

Jeremiah bought a land in 2000 for $20,000. He invested $35,000 for winter wheat-crop on the land in 2011. Later on, he deducted $20,000 of planting expenses that he paid on 2011. He pays the remaining $15,000 of expenses in 2012. He then sells the land together with the unharvested wheat crop for $110,000 in 2012. II. TAX ISSUE

Issue at hand is when Jeremiah sold the land with the unharvested wheat-crop. III. CONCLUSION

According to Section 1231 property, the sales of the land and the including unharvested crops is a long term capital gain. Jeremiah has to fill out an amended return to eliminate the expenses amount that he deducted on 2011 ($20,000). IV. RESOLUTION/RULING

The general Sec. 1231 states that unharvested crops are subjected to the gainordinary loss rule. Code Sec. 1231(b)(4) states that in the case of an unharvested crop on land used in the trade or business and held for more than 1 year, if the crop and the land are sold or exchanged (or compulsorily or involuntarily converted) at the same time and the same person, the crop shall be considered as property used in the trade or business. Code Sec. 1016(A)(ii) states that items attributable to the production of the crop are included in the basis for gain. Code Sec. 268 and Reg. Sec 1.268-1 indicate that unharvested crop sold by the taxpayer is not allowed for deduction in computing taxable income. If the taxable year involved is not that of the sale, exchange, or conversion of such crop, a recomputation of the tax liability for such year shall be made; such recomputation should be in the form an amended return if necessary.

In Teget v U.S., Cite as 37 AFTR 2d 76-864 (U.S. District Court, Dist. Of South Dakota, Southern Div.), the Court held that the shareholder of liquidating Sub S seed and mail order nursery corp. couldnt deduct cost of unharvested crop inventory. V. ANALYSIS

Under the Code Sec. 1231 (b)(4), Jeremiah had used the land in business for more than 1 year (from 2000 to 2012). And he sold the land and the unharvested crops at the same time. Therefore, Jeremiah gains for selling the land is long term-capital gain. In 2011, Jeremiah had deducted $20,000 from his winter-wheat crop investment, and according to Code Sec, 268 and Reg. Sec 1.268-1, he is not allowed to take a deduction from his unharvested crop that he sold. Since the deduction is occurred before the sale happen, Jeremiah must fill out an amended return. Also, the decision from the U.S. District Court in Teget v. U.S. case also ruled that it is not allowed to deduct cost of unharvested crop inventory. When the sale occurred, Jeremiahs basis in the land had increased from $20,000 (the amount that he bought the land with) to $55,000 (plus $30,000 that he invested in 2011). Therefore, Jeremiah has a gain on his sales of the land, which is a long-term capital gain. Also, since he took $20,000 deduction from the invested amount in 2011, Jeremiah must fill an amended return to eliminate that $20,000 of expense.

Citation Code Sec. 1231(b)(4) Code Sec. 1016(A)(ii) Code Sec. 268 Reg. Sec 1.268-1 Teget v U.S., Cite as 37 AFTR 2d 76-864 (U.S. District Court, Dist. Of South Dakota, Southern Div.)