22 Tax L. Rev. 237 (1966-1967)
Farm Expenses and General Accounting Principles

handle is hein.journals/taxlr22 and id is 245 raw text is: Farm Expenses and
General Accounting Principles
EDWIN A. HAWKINSON 
IN 1952 Secretary of the Treasury Snyder' unsuccessfully urged
legislation 2 that would have required the cost of raising livestock
held for draft, breeding, or dairy purposes to be capitalized.3 He
charged that serious inequities existed as cash method farmers were
permitted to expense production costs and to treat sale proceeds as
capital gain. As a result of having no basis in their livestock these
farmers were able to take as capital gain deductions 4 amounts
equal to one half of their sale proceeds. In contrast, accrual method
farmers who carried draft, breeding, or dairy livestock in inventory
were required to defer their costs to offset sale proceeds, and their
capital gain deductions were limited to one half of the excess of sale
proceeds over inventory values.5 Under his proposal cash method
* Edwin A. Hawkinson (University of Illinois, B.S., LTJ.B.) is a member of the
Illinois Bar.
'Letter from John W. Snyder, Secretary of the Treasury, to Walter F. George, Chair-
man, Committee on Finance, United States Senate, June 27, 1952 in 5 CCH S 6239
(1952).
2 Legislation was recommended because there was disagreement about the existence
of administrative authority to take corrective action. The argument against administra-
live action was that it was barred by the legislative history of the Revenue Act of 1951
which clarified the status of livestock as property used in the trade or business. The
committee reports for both the House of Representatives and the Senato included a
statement that [G]ains from the sale of livestock should be computed in accordance
with the method of livestock accounting used by the taxpayer and presently recognized
by the Bureau of Internal Revenue. S. REP. No. 781, 82d Cong., 1st Sess. 42 (1951);
H.R. REP'. No. 586, 82d Cong., 1st Sess. 32 (1951).
3 Capitalization is narrowly defined as the charging of an expenditure to a capital
assets account. Ml&Am WEnSTEr TamD NEW I TEaxATio. ,L DicrioNA uy 332 (1901).
However, it is frequently used in an extended sense to mean the deferral of deductions, ns
opposed to the taking of immediate deductions through expensing. For example, deduc-
tions can also be deferred through the use of inventories. In this paper capitalization
will be used in its extended sense, for its significant consequences result from the
deferral of deductions, not from the use of the capital account method.
41.R.C.  117(b) (1939), now I.R.C.  1202 (1954).
5LR.C.  113(a)(1) (1939) now I.R.C.  1013 (1954). Wilson v. United States,
7 COH   8155 (Trial Commir Rep. Ot. CL 1966). In 1955 the Commissioner of In-
ternal Revenue ruled that inventory values would have to be adjusted by adding
normal costs incurred during the year of sale, i.e., the costs incurred during the
237

Imaged with the Permission of N.Y.U. Law Review

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