The Commissioner of Internal Revenue appeals from a decision of the Tax Court allowing taxpayers Robert Maple and William Smith1 to deduct as business expenses certain amounts incurred or expended in connection with the development of an orchard.
The taxpayers were limited partners in the Maple Corona Ranch Company (“Corona”), a partnership organized to develop and operate a citrus orchard. In June of 1961, Corona entered into an agreement with M&M Company (“M&M”), a nursery, whereby Corona purchased 26,000 seedlings at $.30 apiece from M&M and M&M agreed to maintain, cultivate, and bud the seedlings in its nursery for $2.45 per tree. The risk of loss due to causes other than the poor workmanship of M&M was upon the seedlings’ owner, Corona. The taxpayers deducted the full cost of their maintenance contract as a business expense in 1961. The Commissioner assessed deficiencies against them, asserting that the costs of the contract should be capitalized. The Tax Court found that only about half of the cost was incurred in 1961 and held that the costs of budding were capital expenditures because a citrus seedling will never become a producer of edible fruits until a bud from a producing plant is grafted onto it. The Tax Court allowed the remainder of the deductions (Robert L. Maple [Memo 1968-194 (Aug. 29, 1968)] T.C.), and the Commissioner has appealed.
It is not the normal practice in the citrus farming industry for the grower to purchase his trees as seedlings and to undertake the risk of raising them into mature trees. A shortage of suitable seedlings in the area enabled M&M to dictate these unusual terms to Corona. The grower usually purchases his trees ready for the orchard and must, of course, capitalize their full cost.
The Commissioner argues that Maple and Smith cannot convert a capital expense to a business expense by changing the form of the transaction. Expenses incurred prior to production are capital in nature if they are necessary to make productive the item involved. The Commissioner suggests that if a man wishes to produce shoes, he can buy a shoe factory or he can build one. The cost of getting ready to begin the manufacture of shoes, however, must be capitalized whether that cost is embodied in the expense of building a factory or in the price paid for one that is already built.
The Commissioner is right about shoemakers. But shoemakers and farmers are not treated in parallel ways by the code and by the regulations. The costs of developing orchards, farms, or ranches, even prior to the time when they are productive, may often be deducted rather than capitalized, even though analogous developmental costs in other industries would have to be capitalized. (See Income Tax Regulations § 1.162-12; Estate of Richard R. Wilbur (1964) 43 T.C. 322.) In the field of agriculture the manner in which the expense was incurred will often determine whether it is a capital expenditure or a business expense. If a dairy farmer buys his cows fully mature, he must capitalize their purchase price; if he buys them as calves, he may deduct the cost of raising them to maturity, even though that expense is as much a cost of obtaining an income-producing business as is the purchase of the mature cows. We must analyze the precise path the taxpayer-farmer actually took and we must ask whether the expense in question was purely capital in nature or fell within what the Tax Court has termed the “band of grey” between capital and business expenses that exists only in agrieul*1057ture. (Estate of Richard R. Wilbur, supra at 328.)
The band of grey exists because many of the costs of running a producing farm are identical to the costs of creating a producing farm. A farmer feeds his mature cows to obtain continued milk production ; he gives the same feed to his calves to bring them to maturity. A strictly logical distinction can, of course, be drawn between these two expenditures based upon difference in their purposes, but the tax law does not distinguish them. Expenses of maintaining agricultural items in the preproductive state are deductible if they are sufficiently similar to the expenses that will be required to maintain them once they are productive. (See Estate of Richard R. Wilbur, supra.) At the times relevant to this case, the Commissioner had categorized such expenses in Mim. 6030, 1946-2 Cum.Bull. 45.2 Section 1.162-12 of the Income Tax Regulations allows farmers to capitalize business expenses incurred in the preproductive period, but not to deduct capital expenditures. Mim. 6030 defined those expenditures which were not purely capital and hence gave the farmer an option as to treatment. In dealing with orchards, Mim. 6030 stated:
“Expenditures incurred during the development period which represent ordinary and necessary expense items as an incident of current operations, such as the upkeep of a grove or orchard, taxes, water for irrigation purposes, and cultivating and spraying of trees may, under the provisions of [the predecessor of § 1.162-12] be either capitalized or deducted at the election of the taxpayer. * * * ”
The expenses in issue were incurred in watering and cultivating Corona’s citrus trees. They are precisely the sort of expenditures envisaged by Mim. 6030 as being deductible at the option of the grower.3
The Commissioner argues that, even if the cost of such cultivation would be deductible if the cultivation were done by the taxpayer himself on his own land, the costs incurred in this case are not deductible because the work was done by a nursery on its land. We can find no justification for that distinction. Whether or not one is a farmer for tax purposes does not depend on his tilling the soil by his own labor rather than by that of hired hands, tenant farmers, or even professional nurserymen. Where, as here, the taxpayers assume the risk that the crop will never be harvested due to unforeseen circumstances and the crop is related to the taxpayers’ farming endeavors, the expenses they incur with regard to that crop are farming expenses. (Cf. Income Tax Reg. §§ 1.61-4(d), 1.182-2, 1.175-3.) Our taxpayers bore that risk and are just as entitled to the tax benefits afforded farmers as if they had raised the trees with their own hands.
The judgment is affirmed.
. Taxpayers’ wives are a party to this action solely because joint returns were filed.
. The Commissioner declared Mim. 6030 obsolete and not considered determinative for future transactions in Rev.Rul. 67-123,1967-1 Cum.Bull. 383. Mim. 6030 was in effect, however, at all times relevant to this case.
. We are further persuaded that this conclusion is correct by the fact that Congress recently enacted § 278, requiring capitalization of expenses incurred in the first four years of developing a citrus grove. Were these sorts of expenses not deductible under the present law, there would have been little need for Congress to enact this section.