Vineyard Disputes Disallowance Of Method Of Computing Deferred Intercompany Gain.
Mayacamas Vineyard, et al. v. Commissioner
- CourtUnited States Tax Court
- DocketDocket No. 6647-93
- AuthorsBjornstrom, David G.
- Code Sections
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 93-73035
- Tax Analysts Electronic Citation93 TNT 105-108
Mayacamas Vineyard, et al. v. Commissioner
MAYACAMAS VINEYARDS AND SUBSIDIARY,
Petitioners,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent.
====== SUMMARY ======
Mayacamas Vineyards contest the IRS's disallowance of its method of computing "deferred intercompany gain" resulting from sale of grapes between the corporation and its subsidiary under regulations section 1.1502-13(c)(2).
Mayacamas adds that the IRS erroneously interpreted this regulation determining amounts of deferred gain and states that it is not required to offset the deferred intercompany gain by a cost of goods sold inventory calculation since the subsidiary's method of accounting does not require that under section 471 and 263A.
Period and Amount at Issue: Tax years ending March 31, 1986 -- $115,481 plus penalties; March 31, 1987 -- $21,517 plus penalties; March 31, 1988 -- $16,152 plus penalties
Code Section Classification: 1502, 263A, 471
====== FULL TEXT ======
PETITION
The petitioners hereby petition for a redetermination of the deficiency set forth by the COMMISSIONER OF INTERNAL REVENUE in the COMMISSIONER's Notice of Deficiency No. 161425 [symbols AP:SAC] dated February 3, 1993, attached hereto, and as a basis for the petitioners' case allege as follows:
1. The petitioners are corporations with mailing address and principal office now at 1155 Lokoya Road, Napa, California 94558-9714. Petitioners' taxpayer identification number is 94-1693709. The returns for the periods here involved were filed with the Office of the Internal Revenue Service at Ogden, Utah.
2. The Notice of Deficiency (a copy of which, including so much of the statement and schedules accompanying the Notice as is material, is attached and marked Exhibit A) was mailed to the petitioners on February 3, 1993, and was issued by the Office of the Internal Revenue Service at Sacramento, California.
3. The deficiencies as determined by the COMMISSIONER are in income taxes and penalties for the fiscal years ending March 31, 1986, 1987 and 1988 in the amounts of $115,481.00 tax and $39,899.00 penalties for 1986, $21,517.00 tax and $5,379.00 penalties for 1987, and $16,152.00 tax and $4,038.00 penalties for 1988. The entire amounts are in dispute.
4. The determination of the tax set forth in said Notice of Deficiency is based on the following errors:
A. Respondent erroneously disallowed taxpayers' method of
computing "deferred intercompany gain" resulting from sale of
grapes between the corporation (MAYACAMAS) and its subsidiary
(LOKOYA) under Regulation Section 1.1502-13(c)(2). Respondent
disallowed taxpayers' deferral of the gross sales proceeds,
erroneously claiming that in determining the subsidiary's
deferred gain, the subsidiary's gross sales proceeds should be
reduced by the costs related to the growing of the grapes.
B. Respondent erroneously interpreted Regulation Section
1.1502-13(c)(2) determining amount of deferred gain by reference
to "costs properly includible in costs of goods sold" as
determined under Regulation Section 1.263A-1T. MAYACAMAS'
subsidiary (LOKOYA) is not required to offset the deferred
intercompany gain by a "costs of goods sold" inventory
calculation, since the subsidiary's method of accounting does
not require that under Internal Revenue Code Sections 471 and
263A.
C. Respondent's interpretation of the regulation, if
upheld, would render that regulation invalid. Although Internal
Revenue Code Section 1502 allows the IRS to prescribe reasonable
regulations to ensure that the tax liability of the consolidated
group is determined in a manner to clearly reflect the income
tax liability, respondent exceeds its administrative authority
in attempting to require the group to surrender any of its
substantive rights under the code as a condition of filing a
consolidated return.
D. Respondent erroneously asserts a substantial
understatement penalty under Internal Revenue Code Section 6661
equal to 25 percent of the asserted underpayment,
notwithstanding the substantial authority for taxpayers'
position under the specific wording of the income tax
regulations and relevant case law.
E. Respondent erroneously asserts a late filing penalty for
the 1986 fiscal year return.
5. The facts upon which petitioners rely, as the basis of petitioners' case, are as follows:
A. LOKOYA (subsidiary corporation in the MAYACAMAS Group)
is a farming corporation eligible to use the cash method of
accounting under Internal Revenue Code Section 447. As a farming
corporation that has not elected to use the inventory method of
accounting, and which has properly elected out of Internal
Revenue Code Section 263A, LOKOYA is not required or permitted
to inventory crop costs. Since the entire grape sales price paid
by MAYACAMAS to its subsidiary (LOKOYA) represents "gain" under
LOKOYA's proper accounting method, the "deferred intercompany
gain" from the sale of grapes by LOKOYA to MAYACAMAS is the
selling price of the grapes with no reduction for costs of goods
sold. This deferred intercompany gain is not properly recognized
until the wine produced from the grapes is sold outside the
MAYACAMAS Group.
B. The sale of grapes by LOKOYA to MAYACAMAS qualifies as a
"deferred intercompany transaction" under Regulation Section
1.1502-13(a)(2) since the corporations are members of the same
consolidated group. LOKOYA is a farming corporation using the
cash-basis method of accounting, which has not elected to use
the inventory method of accounting under the regulations, and
has properly made the election under Internal Revenue Code
Section 263A(d)(3) not to have that section apply. Therefore,
there are no direct or indirect costs properly includible in
costs of goods sold since the farming corporation is not
required to maintain inventories. LOKOYA's proper method of
accounting results in no amount "includible in the costs of
goods sold" since, as a farmer, it is not required to capitalize
inventory costs.
C. The determination of a farmer's tax liability is based
on the current deduction of farming expenses as a tax benefit
specifically intended for qualifying farmers. Respondent's
adjustments to the taxpayers' return in this case would
improperly require the farming corporation to surrender a
clearly intended tax benefit as a condition of filing the
consolidated return.
D. The taxpayers followed the statutory law provided by the
Internal Revenue Code, the guidance provided in the applicable
Treasury Regulations interpreting the statutory provisions, and
various court decisions in cases with extremely similar fact
patterns. The IRS has presented no substantial authority to
support its position.
E. Taxpayers timely filed the 1986 return by placing it in
the mail, postage prepaid, by the required filing date. Their
return was mailed at the local post office in Napa, California,
on December 15, the extended due date for the return.
WHEREFORE, petitioners pray that the court determine that:
1. Taxpayers' method of determining the amount of "deferred intercompany gain" was correct;
2. Taxpayers' accounting method used in the consolidated returns was proper in all respects;
3. Respondent's proposed interpretation of Income Tax Regulation 1.1502-13(c)(2) is invalid and in excess of respondent's administrative authority;
4. The asserted substantial understatement penalty and late filing penalties are improper;
5. Respondent's proposed deficiency assessment shown on Exhibit A is erroneous; and
6. Petitioners are entitled to such other relief as may be proper.
Dated: March 26, 1993
David G. Bjornstrom, Esq.
Tax Court Bar No. BD0543
ANDERSON, ZEIGLER,
DISHAROON & GRAY
P.O. Box 1498
50 Old Courthouse Square,
5th Floor
Santa Rosa, CA 95402-1498
(707) 545-4910
Attorneys for Petitioners
MAYACAMAS VINEYARDS
AND SUBSIDIARY
- CourtUnited States Tax Court
- DocketDocket No. 6647-93
- AuthorsBjornstrom, David G.
- Code Sections
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 93-73035
- Tax Analysts Electronic Citation93 TNT 105-108
