However, if the farmer's accounts are kept on the accrual basis, he receives credit, in effect, for the loss of the destroyed crop because it appears in neither sales nor inventory (which enter into the determination of his gross income), while the cost of the crop is included among the deductions. If the accounts are kept on the cash basis, the destroyed crop would not appear in the gross income (sales of produce) but the cost would be allowed as a deduction.

LOSS FROM DEATH OF STOCK RAISED ON FARM.

REGULATION.

A farmer engaged in raising and selling stock, cattle, sheep, horses, etc., is not entitled to claim as a loss the value of animals that perish from among those animals that were raised on the farm, except as such loss is reflected in an inventory if used.

LOSS FROM DEATH OF STOCK PURCHASED.—

If live stock has been purchased for any purpose, and afterwards dies from disease, exposure, or injury, or is killed by order of the authorities of a State or the United States, the actual purchase price of such stock, less any depreciation allowed as a deduction in computing net income, with respect to such perished live stock, and less also any insurance or indemnity recovered, may be deducted as a loss. The actual cost of other property (less depreciation allowed as a deduction in computing net income), which is destroyed by order of the authorities of a State or of the United States, may in like manner be claimed as a loss; but if reimbursement is made by a State or the United States in whole or in part on account of stock killed or property destroyed, the amount received shall be reported as income for the year in which reimbursement is made. The cost of any feed, pasturage, or care which has been deducted as an expense of operation shall not be included as part of the cost of the stock for the purpose of ascertaining the amount of a deductible loss.

INVENTORY METHOD WHEN USED WILL REFLECT LOSS.

If gross income is ascertained by inventories, no deduction can be made for live stock or products lost during the year, whether purchased for resale or produced on the farm, as such losses will be reflected in the inventory by reducing the amount of live stock or products on hand at the close of the year. . . . . (Art. 145.)

PURCHASE PRICE OF CATTLE-WHEN DEDUCTIBLE?—

RULING. An amount expended by a farmer for the purchase of cattle is held to be a capital expenditure and deductible only from the selling price in the year in which the cattle are sold. It may not be deducted in the year in which the cattle are purchased unless they are also sold during that year. (C. B. II-2, page 71; I. T. 1878.)

Inventories of livestock raisers and other farmers.

REGULATION. (1) Farmers may change the basis of their returns from that of receipts and disbursements to that of an inventory basis provided adjustments are made in accordance with one of the two methods outlined in (A) and (B) below. It is optional with the taxpayer which method is used but having elected one method the option so exercised will be binding upon the taxpayer and he will be precluded from filing amended returns upon the basis of the other method.

(A) Opening and closing inventories shall be used for the year in which the change is made. There should be included in the opening inventory all farm products (including live stock) purchased or raised which were on hand at the date of the inventory and there must be submitted with the return for the current taxable year an adjustment sheet for the preceding taxable year based on the inventory method, upon the amount of which adjustment the tax shall be assessed and paid (if any be due) at the rate of tax in effect for that year. Ordinarily an adjustment sheet for the preceding year will be sufficient but if, in the opinion of the Commissioner, such adjustment is not sufficient to clearly reflect income, adjustments for earlier years may be accepted or required. Where it is impossible to render complete inventories for the preceding year or years, the Department will accept estimates which, in its opinion, substantially reflect the income on the inventory basis, for such preceding year or years; but inventories must not include real estate, buildings, permanent improvements or any other assets subject to depreciation.

(B) No adjustment sheets will be required, but the net income for the taxable year in which the change is made must be computed without deducting from the sum of the closing inventory and the sales and other receipts, the inventory of live stock, crops, and products at the beginning of the year; Provided, however,

(a) That if any live stock, grain, or other property on hand at the beginning of the taxable year has been purchased and the cost thereof not charged to expense, only the difference between the cost and the selling price should be reported as income for the year in which sold; (b) But if the cost of such property has been charged to expense for a previous year, the entire amount received must be reported as income for the year in which sold.

(2) Because of the difficulty of ascertaining actual cost of live stock and other farm products, farmers who render their returns upon an inventory basis may at their option value their inventories for the current taxable year according to the "farm-price method" which provides for the valuation of inventories at market price less cost of marketing. If the use of the "farm-price method" of valuing inventories for any taxable year involves a change in method of pricing inventories from that employed in prior years, the opening inventory for the taxable year in which the change is made should be brought in at the same value as the closing inventory for the preceding taxable year. If such valuation of the opening inventory for the taxable year in which the change is made results in an abnormally large income for that year, there may be submitted with the return for such taxable year an adjustment statement for the preceding year based on the "farm-price method" of valuing inventories, upon the amount of which adjustments the tax, if any be due, shall be assessed and paid at the rate of tax in effect for such preceding year. If an adjustment for the preceding year is not, in the

opinion of the Commissioner, sufficient clearly to reflect income, adjustment sheets for prior years may be accepted or required.

Where returns have been made in which the taxable net income has been computed upon incomplete inventories, the abnormality should be corrected by submitting with the return for the current taxable year a statement for the preceding year in which such adjustments shall be made as are necessary to bring the closing inventory for the preceding year into agreement with the opening complete inventory for the current taxable year. If necessary clearly to reflect income, similar adjustments may be made as at the beginning of the preceding year or years and the tax, if any be due, shall be assessed at the rate of tax in effect for such year or years. (Art. 1616.)

The Treasury makes it as easy as possible for a farmer to change from a cash receipts to an accrual basis. If taxpayers have not taken inventories heretofore, the information required for the years. prior to the current year may be supplied by estimating their inventories as of past dates.

It should be noted that the use of inventories is entirely optional with farmers.12 If it be desired, however, to use the inventory method, adequate records must be maintained, otherwise the use of the inventory method will not be permitted.13

RULING. Article 1586 of Regulations 45 and 62, as amended by T. D. 3399 (C. B. I-2, p. 31) [article 1616, Regulations 65], grants to a taxpayer the right to compute his taxable net income for the current taxable year on an inventory basis if he elects to adopt such basis during such year and submits an adjustment sheet for the preceding taxable year based on the inventory method. In the instant case it appears that the appellant did not elect or ask to make use of an inventory basis for the computation of his taxable net income for the year 1917 until some time after the beginning of 1923.

The taxpayer may not adopt in 1923 the "farm price" inventory method of computing net income for 1917 with respect to income derived from his farm and live-stock business, which business was entirely closed out in 1917 and was not resumed until 1919, and then only by the taxpayer as a member of a partnership engaged in such business. (C. B. III-1, page 362; A. R. R. 6207.)

FARM PRICE METHOD.-Article 1616 14 permits farmers to use market as the basis of inventory (in contrast with cost or market). This is apparently the only case in which appreciations would be taxed before realization, excepting when dealers in securities use the "market value" basis of inventorying permitted by article 1585.

12 For definition of farm, see Art. 38, quoted on page 1452. The definition is held to include cotton planters.

13

C. B. II-1, page 30; I. T. 1673.
See page 1460.

RULINGS. The purpose of the adjustment sheets required in article 1586, Regulations 45, [article 1616, Regulations 65] is properly to allocate over the period from 1917 to date, the net difference in gain or loss due to changing from a cash basis to an inventory basis.

Opening and closing inventories for these years are first ascertained from the best source of information available, and the gross income of each year is adjusted by adding or subtracting, as the case may be, the additional gain or loss due to the difference between the opening and closing inventory in each year. A separate adjustment sheet should be made for each year from 1917 to date, in order that the sheet for each year may be attached to the return for that particular year. The net income is then adjusted conformably, and from this information the tax on each return is recomputed in this office at the rate at which the tax was originally computed. (C. B. 5, page 64; O. D. 1105.)

Florists are not required to use inventories of growing plants for the purpose of calculating their net income for income tax purposes and should not compute the cost of goods sold during the year by using an inventory value of growing plants on hand at the beginning and end of the taxable year. (C. B. 5, page 63; O. D. 995.)

It should be noted that farmers are entitled to the benefit of section 206 of the 1924 law. See Chapter XXXIX.

Use of form 1040F optional.

RULING. The use of Form 1040F is optional since it is designed merely to assist farmers in computing their net income. Therefore, it is unnecessary to file same where the taxpayer has made return and paid the taxes due. (C. B. 1, page 71; O. D. 266.)

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