Pelaez and Sons, Inc. v. Commissioner ( 2000 )


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    114 T.C. No. 28
    UNITED STATES TAX COURT
    PELAEZ AND SONS, INC., CHRISTINA P. HOOKER, TAX
    MATTERS PERSON, Petitioner v. COMMISSIONER OF
    INTERNAL REVENUE, Respondent
    Docket No. 18049-97.                      Filed May 30, 2000.
    Sec. 263A, I.R.C., enacted in 1986, requires the
    capitalization of developmental costs. For plants with
    preproduction periods that are 2 years or less, farmers
    may be excepted from the capitalization requirements.
    For certain plants, including citrus plants grown in
    commercial quantities in the United States, the statute
    requires that the standard for the 2-year test is to be
    based on a national weighted average preproductive
    period for that type of plant. If the preproductive
    period, so determined, is 2 years or less, citrus
    farmers could be excepted from the capitalization
    requirement of sec. 263A, I.R.C. No guidance had been
    issued as to the national weighted average
    preproductive period for citrus trees as of 1989, when
    P began growing citrus trees. Due to the lack of
    guidance, P did not deduct its developmental costs for
    the first 2 years and then determined, based on its
    growing experience, that some of its citrus trees were
    productive within 2 years. Based on that experience,
    - 2 -
    P, in 1991, claimed to be excepted from the
    capitalization requirement of sec. 263A, I.R.C., and
    deducted the preproductive costs for 1989, 1991, and
    1992. R determined that P was not entitled to deduct
    the costs.
    Held: P is not entitled to use its own growing
    experience to measure whether it meets the 2 years or
    less standard. Held, further, P must capitalize its
    preproductive development costs for its citrus trees.
    Philip A. Diamond and Daniel C. Johnson, for petitioner.
    Charles A. Baer and James F. Kearney, for respondent.
    GERBER, Judge:   Respondent issued a notice of final S
    corporation administrative adjustment (FSAA) for Pelaez and Sons,
    Inc.’s (corporation), taxable years ended September 30, 1992,
    1993, and 1994, reflecting net adjustments in the amounts of
    $1,514,209, $46,148, and ($155,814), respectively.   The question
    we consider is whether the corporation is required, under the
    provisions of section 263A,1 to capitalize developmental expenses
    in connection with citrus trees.   Respondent did not issue
    guidance as to the “nationwide weighted average preproductive
    period” for citrus trees (the standard in section 263A), and we
    must decide whether the corporation’s use of its own experience
    will suffice to meet the statutory standard.   If, under section
    263A, the corporation is required to capitalize, it argues that
    1
    Unless otherwise indicated, section references are to the
    Internal Revenue Code, as amended and in effect for the taxable
    periods under consideration.
    - 3 -
    respondent is precluded from making any adjustment concerning the
    corporation’s 1991 taxable year due to the expiration of the
    limitation period.
    FINDINGS OF FACT2
    Pelaez and Sons, Inc., a Florida corporation, was
    incorporated during 1955 and has continuously had its principal
    place of business and engaged in commercial farming, through the
    time of trial, in the State of Florida.       Since 1989, S
    corporation status has been elected for Federal tax purposes, and
    the corporation was a cash basis taxpayer for the years under
    consideration.
    Beginning in 1955, the corporation engaged in commercial
    cattle ranching and during the early 1960’s began raising sugar
    cane.    In the late 1980’s the corporation entered into citrus
    growing operations to increase profits and minimize risk by means
    of diversification.    After successfully accelerating the
    reproduction time in its cattle-raising activity, the
    corporation, in a favorable citrus market, attempted to
    accelerate the production of citrus crops.       The land to be used
    for the citrus grove had been used for cattle grazing, which made
    it most suitable for citrus production.
    2
    The parties’ stipulation of facts and the attached
    exhibits are incorporated by this reference.
    - 4 -
    Innovations in citrus growing permitted accelerated growing
    experiences.    Some of the innovations include:    Improved
    irrigation, fertigation systems, higher density planting, virus-
    free trees, disease control, pesticides, intensive fertilization,
    and genetic development.    Fertigation is a technology that
    combines fertilization and irrigation to permit continuous
    fertilizer application and thereby promote more rapid growth.
    The corporation invested in and employed the above-described
    technologies.    The corporation invested extensively in land
    preparation, water management, fertilization, and other measures
    to maximize tree growth and fruit production.      Generally, the
    corporation exploited techniques that would accelerate the growth
    of its citrus crop and maximize its crop output.      The corporation
    employed Henry Hooker, educated in mechanized agriculture and
    experienced in fertigation, to assist in its citrus growing
    activities.
    Most citrus trees are grafted trees that consist of two
    parts, the scion or variety which is grafted or “budded” onto the
    rootstock, which comprises the tree’s root system.      In the citrus
    industry, it is customary to measure a tree’s life from the date
    it is permanently planted, and prior development is disregarded.
    During May through July 1989, 39,382 citrus fruit trees
    (1989 trees) were planted.    Eight varieties of citrus were
    acquired from a commercial nursery and planted by a commercial
    - 5 -
    planting service under Mr. Hooker’s supervision.   The parties
    agree that the costs incurred in establishing the citrus grove,
    including purchase, bedding, installation of fertigation, and
    irrigation of the trees are depreciable costs deductible over a
    period of years.
    After the 1989 trees were planted, the corporation incurred
    certain developmental or cultivation expenses (including
    herbicides, fertilizer, pesticides, interest, depreciation, and
    care taking) that were not deducted for the years ended September
    30, 1989 or 1990, but they were deducted in later years.   The
    corporation deferred the deduction of the developmental expenses
    due to a lack of regulatory guidelines and because it was not
    known whether the citrus grove would produce a marketable crop
    within 2 years of planting the 1989 trees.   At the end of a 2-
    year productive period, the corporation reviewed the sales of
    citrus in late 1990 and the potential for a 1991 crop based on
    the spring blooms and decided to deduct, on its 1991 return, the
    developmental expenses for the 1989 and 1990 taxable years.   The
    corporation did not deduct the cost of the trees but depreciated
    them over a rateable period.   For 1992 and subsequent taxable
    years, the corporation deducted the developmental costs (i.e.,
    herbicides, fertilizer, interest, depreciation, and care taking
    expenses) for the 1989 trees for each year as incurred.
    - 6 -
    Additional citrus trees were planted during late 1991 (1991
    trees), and the planting costs were capitalized and depreciated.
    Based on the performance of the 1989 trees, it was believed that
    the 1991 trees would be productive within their first 2 years.
    The corporation, for its 1992 year and successive years, deducted
    the developmental expenses and depreciation for the 1991 trees.
    Respondent, in the FSAA notice, under section 263A,
    disallowed the following deductions claimed with respect to the
    1989 and 1991 trees:
    Taxable year ended           1989 trees           1991 trees
    1
    Sept. 30, 1991         $1,171,949                 -0-
    Sept. 30, 1992            244,692               $90,513
    Sept. 30, 1993             -0-                  116,980
    1
    $649,126.11 of the amount claimed was paid in the 1991 tax
    year and the remainder in the 1989 and 1990 tax years.
    Production History--1989 Trees--The 1989 trees bore blossoms
    during early 1990, fruit was visible during the spring 1990, and
    80 boxes of grapefruit were sold for $220, which was net of the
    cost of harvest borne by the buyer.       The $220 of income was
    reported on the corporation’s 1991 return.       The 1989 trees were
    affected by a 1989 frost, causing a loss of about 50 percent of
    the grove.   The 1989 trees also bloomed in early 1991, and fruit
    was visible during the spring of 1991.       The harvest began in
    October 1991, and the corporation sold the second crop for
    approximately $14,600 net of the harvesting costs borne by the
    buyer.
    - 7 -
    Production History--1991 Trees--There were blooms on the
    1991 trees during early 1993, fruit was visible during the spring
    1993, and the corporation sold the fruit from the harvest
    beginning in October 1993.   Fruit from the 1991 trees won an
    award, based on size and quality, in a 1993 county fair.
    The corporation, for the taxable periods 1991 through 1994,
    harvested and sold boxes of fruit as follows:
    Tangerines/
    Taxable year ended    Oranges        Grapefruit       tangelos
    Sept.   30,   1991      -0-                80          -0-
    Sept.   30,   1992     4,465              967           118
    Sept.   30,   1993    28,906           30,439         3,469
    Sept.   30,   1994    36,242           36,836         9,413
    Production information for 1989 trees and 1991 trees was not
    segregated.
    During October 1993, a group described as the “Florida
    Citrus Liaison Team” was formed, and it consisted of five citrus
    industry representatives, two tax practitioners, and six
    representatives from the Internal Revenue Service (IRS).       The
    IRS’ Specialization Program coordinator (for the citrus industry)
    was a participant in the liaison group.     The group sought
    guidance from the Office of Chief Counsel of the IRS with respect
    to issues concerning section 263A.      There was a belief within the
    liaison group that IRS examiners were not uniformly applying the
    section 263A provisions.
    - 8 -
    Albert W. Todd, a C.P.A. with 37 years of experience,
    prepared the corporation’s Federal income tax returns, and he was
    experienced in agricultural accounting issues.   He had more than
    one client with exposure to section 263A, and, prior to the time
    of the filing of the corporation’s 1991 return, Mr. Todd
    concluded that deferral of the decision to deduct the
    developmental costs was prudent and that the 1989, 1990, and 1991
    expenses would be deductible on the 1991 return.   After
    researching section 263A, Mr. Todd concluded that the U.S.
    Department of the Treasury had not issued regulations and/or
    guidance as to the nationwide weighted averages for citrus
    plants, that no other guidelines existed, and that there was no
    requirement that taxpayers determine nationwide guidelines.    In
    that setting, Mr. Todd advised the corporation to make a decision
    based on its individual experience as to whether section 263A
    applied.
    Pelaez and Sons, Inc.’s, 1991 tax return was mailed on or
    about January 10, 1992, and was received by the IRS on January
    13, 1992.   The notice upon which this case is based was mailed
    June 2, 1997.   The corporation’s 1991 taxable year was closed
    when the June 2, 1997, notice was mailed.   In calculating the
    adjustments in the notice, respondent reversed and included in
    1992 income the 1991 deduction of $1,171,949 for the 1989 tree
    developmental expenses.
    - 9 -
    OPINION
    The parties have conflicting interpretations of section
    263A.   Petitioner argues that the statutory requirement that the
    standard be based on a national weighted average is invalid and
    should be disregarded in favor of an approach where each
    taxpayer’s experience should be the measure of whether the
    section 263A “within 2 years test” is met.     Respondent argues
    that the nationwide average is valid even though no guidance had
    been issued.   Respondent also notes that any guidance that could
    have been issued would not have supported petitioner’s position.
    The statute requires taxpayers to capitalize certain direct
    and indirect expenses or costs.   See sec. 263A(a)(1).    Section
    263A does not apply to “any plant which has a preproductive
    period of 2 years or less” if produced by the taxpayer in a
    farming business.   Sec. 263A(d)(1)(A)(ii).    A “preproductive
    period” means “in the case of a plant which will have more than 1
    crop or yield, the period before the 1st marketable crop or yield
    from such plant”.   Sec. 263A(e)(3)(A)(i).    For plants grown in
    commercial quantities in the United States, that crop will be
    within or without the 2-year period based on “the nationwide
    weighted average preproductive period for such plant.”     Sec.
    263A(e)(3)(B).   Section 263A(i) provides that the “Secretary
    shall prescribe such regulations as may be necessary or
    appropriate to carry out the purposes of this section”.     Section
    - 10 -
    263A was enacted during 1986, and, through the years in
    controversy, no regulations3 or other notification had been
    issued to provide guidance regarding the nationwide weighted
    average preproductive period for citrus trees.4
    In these circumstances, respondent argues that petitioner
    has failed to show the nationwide average preproductive period
    for citrus trees and that the corporation should not be entitled
    to meet the statutory requirement by using its own citrus tree
    experience.   Respondent also argues that congressional intent was
    to include citrus trees within the capitalization requirements of
    section 263A; i.e., that Congress knew that the preproductive
    period for citrus trees was more than 2 years.
    Petitioner argues that the corporation is not responsible
    for determining the nationwide weighted average preproductive
    period for citrus trees and that it should be allowed to meet the
    requirements by showing that its actual experience resulted in a
    3
    Respondent makes the observation that the periodic
    publication of a list of the national weighted averages for
    preproductive periods for various plants would, as a matter of
    practice, have been issued in some form of notice and not be
    published in the more formal vehicle of a regulation.
    4
    No final regulation on this point has been issued.
    Subsequent to the taxable years under consideration, however, the
    U.S. Department of the Treasury issued temporary regulations,
    which included a statement that the U.S. Department of the
    Treasury intended to publish a list of 37 plants, including
    orange, grapefruit, and tangerine trees, that were expected to
    have a preproductive period in excess of 2 years. See T.D. 8729,
    1997-
    2 C.B. 38
    .
    - 11 -
    less than 2-year preproductive period.    In essence, petitioner’s
    argument is that the section 263A(e)(3)(B) nationwide weighted
    average requirement has no effect unless respondent issues a
    regulation or guidance providing the average.    Petitioner, in the
    alternative, argues that any adjustment that is sourced in the
    corporation’s 1991 tax year is time barred.    The first question
    we consider is whether the absence of guidance and/or regulations
    changes the statutory requirements.5
    Petitioner’s argument assumes that the only possible source
    for a nationwide weighted average is the Commissioner or the
    Secretary.    Although the statute requires that regulations be
    prescribed as may be necessary or appropriate, the statute does
    not specifically mandate that the Secretary calculate the
    national averages for various plants.    The statute does require
    that the period in question be measured based on the nationwide
    weighted average.6   Accordingly, if taxpayers were able to show
    5
    Generally, where regulations have been necessary to
    implement a statutory scheme providing favorable taxpayer rules,
    this Court has found that the statute’s effectiveness is not
    conditioned upon the issuance of regulations. See Estate of
    Maddox v. Commissioner, 
    93 T.C. 228
    , 233-234 (1989); First
    Chicago Corp. v. Commissioner, 
    88 T.C. 663
    , 676-677 (1987), affd.
    
    842 F.2d 180
     (7th Cir. 1988); Occidental Petroleum Corp. v.
    Commissioner, 
    82 T.C. 819
    , 829 (1984). We have held that the
    U.S. Department of the Treasury’s failure to provide the needed
    guidance should not deprive taxpayers of the benefit or relief
    Congress intended. See Hillman v. Commissioner, 
    114 T.C. 103
    ,
    ___ (2000) (slip op. at 14).
    6
    Congress expected the Secretary periodically to publish
    (continued...)
    - 12 -
    the nationwide weighted average was less than 2 years, they could
    be excepted from the capitalization requirement of section 263A.
    In other words, Congress has provided for a standard that is not
    static and could change from year to year.
    Next, we consider respondent’s argument that Congress
    intended that the section 263A capitalization requirement apply
    to citrus farmers.   We first consider the statute to discern
    congressional intent.    See United States v. American Trucking
    Associations, Inc., 
    310 U.S. 534
    , 542-543 (1940); Hospital Corp.
    of Am. v. Commissioner, 
    107 T.C. 116
    , 128 (1996).   If the
    language of the statute is clear, we need look no further in
    deciding its meaning.   See Sullivan v. Stroop, 
    496 U.S. 478
    , 482
    (1990).   If the statute is silent or ambiguous, the legislative
    history may reveal congressional intent.   See Burlington No. R.R.
    v. Oklahoma Tax Commn., 
    481 U.S. 454
    , 461 (1987); United States
    v. American Trucking Associations, Inc., supra at 543-544;
    Hospital Corp. of Am. v. Commissioner, supra at 129.
    Respondent contends that Congress’ intent is demonstrated by
    the language of section 263A(d)(3)(C).   That section prohibits
    farmers from electing out of the section 263A capitalization
    6
    (...continued)
    lists of preproductive periods for various plants. H. Rept. 99-
    426, at 628 (1985), 1986-3 C.B. (Vol. 2) 1, 628 & n.45. The
    legislative history, however, is silent on the effect, if any, of
    the Secretary’s failure to so publish the preproductive periods
    as expected, the very question we consider.
    - 13 -
    requirement with respect to the costs incurred to develop and
    maintain a citrus or almond grove for the first 4 years after the
    trees are planted.   We note that growers of plants that produce
    other than citrus and almonds may elect out of these
    requirements.   Respondent also points out that section
    263A(d)(3)(C) is similar to former section 278 and reflects that
    Congress considered the preproductive period for citrus trees to
    be more than 2 years.7
    Subsection (d) of section 263A provides for exceptions from
    the capitalization requirements for certain farming businesses.
    As explained above, section 263A(d)(1)(A)(ii) excepts farmers
    growing plants with a preproductive period of 2 years or less
    from the section 263A capitalization requirements.    Paragraph (3)
    of subsection (d) permits certain farming businesses to elect out
    of the section 263A capitalization requirements (i.e., the
    requirements otherwise applicable to growers of plants with a
    preproductive period of more than 2 years).   One exception from
    the election out provisions is contained in section
    263A(d)(3)(C), as follows:
    SPECIAL RULE FOR CITRUS AND ALMOND GROWERS.--An
    election under this paragraph shall not apply with
    respect to any item which is attributable to the
    planting, cultivation, maintenance, or development of
    any citrus or almond grove (or part thereof) and which
    is incurred before the close of the 4th taxable year
    7
    Sec. 263A(d)(3)(C) and former sec. 278, in effect, contain
    a 4-year threshold period of mandatory capitalization.
    - 14 -
    beginning with the taxable year in which the trees were
    planted. For purposes of the preceding sentence, the
    portion of a citrus or almond grove planted in 1
    taxable year shall be treated separately from the
    portion of such grove planted in another taxable year.
    Respondent contends that the 4-year limit on the ability of
    citrus farmers to elect out of section 263A reflects a statutory
    inference and congressional recognition that citrus farmers were
    subject to section 263A.8
    Petitioner argues that section 263A(d)(3)(C) simply provides
    that the subsection (d)(3) election out of section 263A is not
    generally available to citrus farmers.   Petitioner contends that
    section 263A(d)(1) defines which farmers are subject to section
    263A, whereas section 263A(d)(3) allows certain farmers to elect
    not to be subject to 263A.   In other words, petitioner contends
    that section 263A(d)(1) should be read separately from section
    263A(d)(3).   Finally, petitioner contends that respondent’s
    comparison of section 263A(d)(3)(C) to repealed section 278,
    creates, rather than solves, any ambiguity in section 263A.
    We agree with respondent that the inclusion of section
    263A(d)(3)(C), as part of section 263A(d), is an indication that
    Congress intended or expected that the section 263A
    capitalization rules would apply to citrus farmers (i.e., citrus
    8
    Respondent also surmises that by setting a 4-year
    threshold on election out of sec. 263A, Congress was aware that
    the nationwide weighted average preproductive period for citrus
    trees would exceed 2 years.
    - 15 -
    farmers would not meet the “2 years or less” standard).      In
    general, it would be incongruous to include section
    263A(d)(3)(C), if it was expected or intended that citrus farmers
    would meet the “2 years or less” standard.
    Former section 278 provided that expenses, incurred before
    the close of the fourth year, for planting, cultivation,
    maintenance, or development of citrus groves, were to be “charged
    to [the] capital account.”     Sec. 278(a).9   Section 278 was
    repealed in connection with the enactment of section 263A in the
    Tax Reform Act of 1986, Pub. L. 99-514, sec. 803(b)(6), 
    100 Stat. 2350
    .     The 4-year limitation on electing out of section 263A
    comports with a similar 4-year requirement that such expenses
    were to be charged to the capital account under section 278.
    Accordingly, for citrus farmers, the requirement that expenses be
    capitalized, at least for the first 4 years, did not change by
    repeal of section 278 and the enactment of section 263A.         We are
    not in a position to say, however, that the 4-year limit in
    either statute indicates recognition by Congress that the
    preproductive period for citrus trees was or is 4 years.10
    9
    Sec. 278 was added in 1969 as part of the Tax Reform Act
    of 1969, Pub. L. 91-172, sec. 216(a), 
    83 Stat. 615
    .
    10
    In the General Explanation of the Tax Reform Act of 1969,
    the staff of the Joint Committee on Taxation (J. Comm. Print
    1970), explained the reason for enacting the now repealed sec.
    278 was to address a situation where certain high-income
    taxpayers were taking advantage of the benefit of ordinary
    (continued...)
    - 16 -
    The evidence in this case appears to reflect that during the
    1989 through 1994 years, the preproductive period for citrus
    trees was, generally, more than 2 years.   It is evident that in
    1989 when the corporation entered into the citrus growing
    business it employed the latest technological advances.
    Employing the most current technology, the corporation produced
    only limited amounts of citrus from a limited number of its trees
    within the first 2 years.   We cannot assume that, nationally,
    other citrus farmers had achieved the same technological state of
    the art.   It therefore appears possible, if not likely as argued
    by respondent, that the nationwide average preproduction period
    for citrus was more than 2 years.
    The reports and testimony of the parties’ trial experts and
    the reference sources provided by the parties also demonstrate
    that the preproductive period for citrus plants was at least 2
    years.    A text on Florida citrus growing (received as Exhibit 23-
    10
    (...continued)
    deductions currently available against ordinary income and
    eventual capital gain upon sale of citrus groves. This benefit
    had resulted in “unfavorable economic consequences for the citrus
    industry”, in the form of overproduction and depression of
    prices. The capitalization requirement specifically addressed
    that problem by requiring that the expenses be “charged to [the]
    capital account” at least until the end of the third year after
    the year of planting (4-year rule). The legislative history,
    however, did not contain specific recognition of an established
    or recognized preproduction period with respect to citrus trees.
    Congress, however, may have set the 4-year period to coincide
    with the then (1969 or 1986) preproduction period for citrus
    trees. As evidenced in this case, however, the period may be
    becoming shorter due to advanced farming technology.
    - 17 -
    R), in the opening two paragraphs of a chapter on “Bringing
    Citrus Trees into Production”, contains the following:
    During the first two or three years after planting a
    citrus tree, growers should not seek to obtain the
    earliest possible production of fruit but to develop a
    sturdy tree to good size so that it will bear
    productively over a long life. * * * Growers need to
    aid the growth of the trees only by supplying favorable
    conditions for their development. With no crop to
    consider, growers can devote all attention to promoting
    vegetative growth. Sometimes growers will give minimum
    attention to these young trees because they are not yet
    returning any income, but to neglect them is a mistake
    that will be regretted for a long time because of its
    adverse effect on the trees’ future bearing.
    By established custom in Florida, citrus trees are
    classed as nonbearing during the first four years after
    they are planted as yearling trees. Although they may
    bear a few fruits as early as the second or third year,
    all efforts are correctly directed toward tree growth,
    and any fruit production is incidental. * * *
    [Jackson, Bringing Citrus Trees into Production,
    Citrus Growing in Florida, 137 (3d ed. 1991).]
    The last paragraph of the same chapter, contains the following
    statement:
    Beginning with the fourth or fifth year, when the
    trees are considered of bearing age, practices in grove
    management differ somewhat from those outlined above.
    The following chapters are devoted to the care of
    bearing trees. [Id. at 146.]
    Other contemporaneous materials offered by respondent
    generally reflect that no meaningful production occurs until the
    third year, with full production commencing in the fourth to
    sixth year of tree growth.   Petitioner’s experts highlighted the
    fact that the corporation’s particular experience demonstrates
    that citrus trees are capable of producing some fruit by the end
    - 18 -
    of the second year.   Statistically, however, any such production
    was incidental and not necessarily representative of an average
    pattern for preproductive periods.     Petitioner’s experts also
    confirmed that the corporation took full advantage of the newest
    technology.   In that regard, one of petitioner’s experts opined
    that technology was to a point where the fourth year standard or
    convention for citrus development, as had been contained in
    repealed section 278, was no longer the standard.     Petitioner’s
    experts concluded that the corporation’s use of advanced
    technology likely caused the citrus trees to begin producing
    earlier than would have been experienced under older technology.
    During the years under consideration, it appears that technology
    and methodology existed that permitted the possibility of some
    production within 2 years of “planting”.11
    Similarly, one of respondent’s experts opined that a citrus
    tree needed about 18 months after planting to reach a minimum
    size to flower and that “Young trees are typically about 24
    months old and have reached their second flowering opportunity
    when small amounts of fruit are produced.”     Respondent’s expert
    11
    The parties differed in their views concerning when the
    2-year preproductive period began. Essentially, petitioner
    argues for a later starting period, when the farmer plants as
    opposed to the time when the plant may have been prepared by a
    commercial nursery for use by farmers. There is no need to
    decide when the preproductive period begins because the result in
    this case would be the same no matter which party’s belief we
    follow.
    - 19 -
    concluded that, industrywide, citrus plants begin their
    productive life at about 30 to 36 months old.    Respondent’s other
    experts concluded that, generally, citrus is ready for harvest in
    the third year.    The experts did not preclude the possibility
    that production could occur earlier.    Accordingly, petitioner’s
    and respondent’s experts are relatively close in their views.
    Their opinions permit the conclusion that citrus trees can
    produce a small amount of fruit within 2 years, but they vary
    regarding whether that production is commercially viable within
    the second year.    None of the parties’ experts was able to
    provide empirical or statistical evidence of a “nationwide
    weighted average preproductive period” for citrus plants.
    We can deduce from the election-out provisions applicable
    exclusively to citrus farmers, that it was expected that citrus
    tree farmers would not meet the section 263A(d)(1)(A)(ii) 2-year
    test for being excepted from the section 263A capitalization
    requirements.    To conclude that citrus trees would meet the 2-
    year test would render section 263A(d)(3)(C) superfluous.      In
    addition, the 4-year limitation on electing-out of section 263A
    requirements comports with the similar 4-year capitalization
    requirement in repealed section 278 that, to some extent, section
    263A replaced.    This supports our holding that Pelaez and Sons,
    Inc., is subject to the capitalization requirements of section
    263A.
    - 20 -
    Petitioner’s argument that the corporation should be allowed
    to use its individual experience because respondent failed to
    issue regulations or guidance as to the national weighted average
    preproduction period for citrus trees is without merit.    The
    plain language of section 263A requires that for a citrus farmer
    such as petitioner, the preproductive period in the section
    263A(d)(1)(A)(ii) exception from section 263A capitalization is
    measured by means of the nationwide weighted average
    preproductive period for citrus trees.    As indicated above,
    neither party was able to show that average.
    Petitioner also argues that the use of a nationwide average
    preproduction period for each type of plant is a vague standard
    or concept and that the statutory standard is vague and should be
    invalidated.   Respondent counters that although no guidance was
    published by the Secretary or respondent, the standard is not
    vague.   Respondent also explained that the reason that Congress
    used a nationwide weighted average preproductive period for each
    type of plant was to ensure that one region of the country did
    not have an economic advantage over another region because of
    more favorable growing conditions.     So, e.g., if southern farmers
    enjoy a longer growing season, they may be able to meet the 2-
    year test and currently deduct their cost of production, whereas
    northern farmers would not be able to take the current deductions
    and would be required to capitalize the same expenses or costs.
    - 21 -
    That is a reasonable explanation for the nationwide average
    requirement for each type of plant.
    Accordingly, the corporation must meet the statute’s 2-year
    threshold based on the nationwide weighted average preproductive
    period for citrus trees.   Though neither the Secretary nor
    respondent has published guidelines, we are not in a position to
    hold that the statute is “invalid” as petitioner suggests.    In
    that regard, the terms of the standard are not vague, and there
    is reasonable justification for the statutory requirement that
    the exception from section 263A be on a uniform or nationwide
    basis for each type of crop.
    Finally, we consider petitioner’s argument that respondent
    is time barred from making any adjustments to the corporation’s
    income for the years before the Court to prevent duplication of
    amounts that had been deducted in the corporation’s 1991 year, a
    year that the parties agree is closed.   Respondent, admitting
    that the corporation’s 1991 tax year was otherwise closed at the
    time the notice was mailed, contends that the corporation’s 1991
    choice no longer to capitalize its production costs constitutes a
    change of accounting method that triggers section 481(a) and
    permits adjustments in the 1992 tax year with respect to items
    deducted in the 1991 year.   Accordingly, respondent’s ability to
    make an adjustment in the 1992 year for deductions taken in the
    1991 year is solely dependent on whether the corporation’s 1991
    - 22 -
    choice to deduct rather than capitalize the production costs was
    a change in the accounting method.
    Respondent explains that the corporation, under section
    263A, had capitalized (not deducted)12 its citrus grove
    production costs for its taxable years ended September 30, 1989
    and 1990.     Beginning in 199113 and in later years, the
    corporation began deducting its production costs for the 1989 and
    1991 trees.     Respondent contends that the corporation changed its
    method of accounting for costs of citrus production in its 1991
    taxable year.     Under respondent’s change in the accounting method
    contention, respondent would be entitled to rely on section 481
    to make an adjustment(s) to prevent a distortion of taxable
    income.   See sec. 481; Graff Chevrolet Co. v. Campbell, 
    343 F.2d 568
    , 572 (5th Cir. 1965); W.S. Badcock Corp. v. Commissioner, 
    59 T.C. 272
     (1972), revd. on other grounds 
    491 F.2d 1226
     (5th Cir.
    1974).    Under section 481 respondent increases the corporation’s
    1992 tax year income to adjust for the 1991 tax year deductions
    12
    Petitioner argues that it did not capitalize the 1989 and
    1990 costs for the 1989 trees, but that it deferred deducting
    them until it could be determined whether they met the 2-year
    test of sec. 263A(d)(1)(A)(ii). Petitioner’s characterization of
    the corporation’s actions as deferring the deductions as opposed
    to choosing to capitalize, however, is a distinction without a
    difference. In the context of this case and the subject statute,
    the failure to deduct is necessarily the equivalent of a choice
    to capitalize.
    13
    In 1991, the corporation deducted the costs for its 1989,
    1990, and 1991 taxable years.
    - 23 -
    that should have been capitalized under section 263A.   Our
    holding sustains respondent’s position that the corporation must
    use capitalization principles, beginning in 1992, to account for
    the expenditures of developing its trees.   Unless a section 481
    adjustment is made, the amounts already deducted for the 1991
    year as development costs of the 1989 and 1991 trees would in
    effect be deductible a second time, in 1992 and later years, if
    not through depreciation, then as accumulated costs set off
    against the proceeds realized from the sale of fruit grown on
    these trees.
    Petitioner does not question respondent’s authority to make
    the adjustment under section 481 but argues that there has not
    been a change in the accounting method that would make section
    481 available to respondent.   Without section 481, petitioner
    contends that respondent is time barred from adjusting the 1992
    taxable year.   Accordingly, we must decide whether respondent, by
    requiring the corporation to capitalize such costs under section
    263A for 1992 and future years, has changed the corporation’s
    method of accounting for such costs.
    Respondent relies on the definition for change of accounting
    method contained in Rev. Proc. 92-20, 1992-
    1 C.B. 688
    , as
    follows:
    Section 1.446-1(e)(2)(ii)(a) of the regulations
    provides that a change in method of accounting includes
    a change in the overall plan of accounting for gross
    income or deductions, or a change in the treatment of
    - 24 -
    any material item. A material item is any item that
    involves the proper time for the inclusion of the item
    in income or the taking of a deduction. In determining
    whether a practice involves the proper time for the
    inclusion of an item in income or the taking of a
    deduction, the relevant question is generally whether
    the practice permanently changes the amount of taxable
    income over the taxpayer’s lifetime. If the practice
    does not permanently affect the taxpayer’s lifetime
    taxable income, but does or could change the taxable
    year in which taxable income is reported, it involves
    timing and is therefore considered a method of
    accounting. See Rev. Proc. 91-31, 1991-
    1 C.B. 566
    .
    Petitioner argues that the corporation was on the cash
    method of accounting and did not change from that for any year,
    including 1991.   In addition, petitioner contends that in 1989
    and 1990 the corporation intended to defer deducting the costs
    until such time as it was able to determine whether it met the “2
    years or less” test.   In that regard, petitioner argues that
    exercising the election to deduct or capitalize in section 1.162-
    12(a), Income Tax Regs., does not constitute a change in the
    accounting method.   Petitioner, relying on Wilbur v.
    Commissioner, 
    43 T.C. 322
     (1964), contends that the choice
    available under the regulation is not a change in the accounting
    method.   Respondent contends that the holding in Wilbur is
    contrary to petitioner’s interpretation.
    Wilbur, which was decided prior to the 1969 enactment of
    section 278, does not address the question of change of
    accounting method, and, accordingly does not support either
    party’s argument on that point.   See Wilbur v. Commissioner,
    - 25 -
    supra, involved an interpretation of section 162 and section
    1.162-12(a), Income Tax Regs., concerning a farmer/taxpayer’s
    ability to make or change an election to either deduct or
    capitalize maintenance expenses in connection with preproductive
    fruit and nut trees.   The regulation was interpreted by this
    Court to permit a farmer/taxpayer to choose to capitalize some
    and deduct some expenditures in the same taxable period.
    Further, it was held that a taxpayer may not be required to
    capitalize certain expenditures that were inadvertently not
    included with related expenditures that had been capitalized.
    See Wilbur v. Commissioner, supra at 326.   It was also held that
    with respect to the expenditures that were capitalized, the
    election was irrevocable.
    In the setting of this case, section 263A governs whether or
    not the corporation is required to capitalize the costs incurred
    in connection with the citrus trees.   In the context of section
    263A, the corporation did not have the choice to capitalize or
    deduct due to the prohibition contained in section 263A(d)(3)(C).
    The choice not to deduct was based on the self-conceived
    predicate that the question of whether the outlays were
    deductible could not be determined until it was known whether the
    trees had a preproductive period of 2 years or less under section
    263A(d)(1)(A)(ii).   As discussed above, the statute did not offer
    that choice.   By not deducting the costs for 1989 and 1990, the
    - 26 -
    corporation actually complied with the section 263A
    capitalization requirement.   As we have held, Pelaez and Sons,
    Inc., was not entitled to deduct the 1989, 1990, and 1991 costs
    on its 1991 return.
    There is no doubt that the question of whether to capitalize
    or deduct the preproduction costs is, in the setting of this
    case, a timing question and not a one-time inclusion or
    deduction.   Our holding that Pelaez and Sons, Inc., must
    capitalize rather than deduct such costs beginning with 1992
    involves a “material item” so as to constitute a change in the
    accounting method that would trigger section 481.    Accordingly,
    within the established definition for change in the accounting
    method, Pelaez and Sons, Inc., as a result of being required to
    capitalize the preproduction costs beginning in 1992, has changed
    its accounting method for the deduction of a material item.      Such
    a change warrants respondent’s use of section 481 to make the
    adjustment necessary to prevent a distortion of income.
    To reflect the foregoing,
    Decision will be entered
    for respondent.