I respectfully dissent:
The majority sustains the Tax Court judgment on the ground that the government has exempted farmers from the rules and regulations which are so onerous to the rest of the nation’s taxpayers. The taxpayers involved here are corporate executives who operate an orange grove in their spare time.
The thrust of the majority’s opinion is that farmers have the option to treat all expenditures, made prior to reaching the productive state, as either deductions or capital expenditures. This position is *1058imbedded in the following Treasury regulation which reads in pertinent part:
“Amounts expended in the development of farms, orchards, and ranches prior to the time when the productive state is reached may be regarded as investments of capital.” Treas.Reg. § 1.-162-12.
The belief that this regulation gives a farmer an unlimited option in determining the tax consequences of his expenditures has been rejected. In Thompson & Folger Co. v. Commissioner of Internal Revenue, 17 T.C. 722, 725-726, the court held that this regulation only permits a taxpayer to capitalize a deductible business expense:
“The reasonable interpretation, and the one which in our view meets the test of simple logic, is that the provision was designed to allow a farmer to capitalize, rather than expense and deduct, expenditures made in the years prior to the bringing of the farm to a productive state, which expenditures were of such a character that in the course of regular farming operations they would be regarded as operating expenses and therefore currently deductible — To construe the regulation as providing the converse, that is, that the farmer was privileged at his option to expense and deduct capital items, would require us to re-write and expand the regulation.”
(Emphasis supplied).
The expenditures1 which taxpayers seek to deduct were all incurred by the nursery (M&M) — not the taxpayers. An accountant called as a witness by the taxpayers, when asked if Corona incurred any expense for balling or budding, replied “No, they contracted X number of dollars to handle the entire cultural care of the tree and have it set roadside”. The testimony established that the standard or going price for transplant-able orange trees had been a constant $2.75 for the past ten years. This is precisely the end result of the unusual agreement between the nursery and the taxpayers who agreed to pay 30 cents per seedling plus $2.45 per tree for cultural services. In reality the taxpayers were purchasing transplantable orange trees for $2.75 per tree.
The one case cited as authority by the majority is clearly distinguishable. In the Estate of Richard Wilbur, 43 T.C. 332, the taxpayer, who was engaged in farming on a large scale, planted his fruit trees and then expended large amounts of money for irrigation, cultivation, pruning, fertilizing, spraying “and other care of the trees which have not yet reached the productive state”. The Tax Court stated:
“To be sure, once an orchard has come into production, expenditures for irrigation, pruning, fertilizing, etc., are ordinary and necessary business expenses; they are a charge against current income and must be taken as deductions. But the situation is far less clear prior to the time that an orchard has reached the productive state. The expenditures prior to that time may be considered in every real sense as part of and directly related to the cost of acquiring a producing orchard, and as such have the characteristics of capital outlays. It is thus apparent that expenditures which upon superficial analysis may appear to be merely business expenses actually have strong characteristics of both capital outlays and business expenditures. It is not a choice between black or white. Rather, these expenditures fall in a band of gray between black and white, and we think that the Regulations giving the farmer an election to treat such expenditures either way was well within the authority of the Secretary of the Treasury under the Statute.”
The questionable propriety of applying Wilbur to the instant case is readily apparent. In Wilbur the actual planting of the transplantable trees in the orchards *1059antedated the taxpayer’s expenditures for “cultural practices”. Here, the money expended for such practices preceded the actual planting of the trees. It even preceded the time the transplantable orange trees came into existence. Also, unlike the situation in Wilbur, the instant case is concerned with the taxpayers contracting separately to purchase seedlings and to secure “tree-care services” to convert the seedlings to transplantable orange trees. In Wilbur, the taxpayer expended funds to develop his capital assets. Here, the taxpayers contracted to acquire these assets.
If our taxpayers were seeking to deduct as business expense, expenditures for irrigation, etc., during the approximately four years between the planting of transplantable trees and the production state, they would fall within what the Tax Court has termed the "band of gray”, but as pointed out above the transplantable tree is the capital asset, the cost of which they seek to deduct as a business expense.
As an example to illustrate its point, the majority says a farmer may deduct the cost of feeding his calves as they grow to maturity. With this I agree, but it misses the issue involved here. Like the transplantable trees, the calves are capital assets and when the farmer purchases them he must capitalize the cost even though, as stated by the Court, he may deduct the expense of raising them to the productive state.
The court places reliance on the Commissioner’s Mim. 6030 (since declared obsolete). Mim. 6030 relates to “the upkeep of a grove or orchard” not to the initial cost of capital assets. In our case there was no grove or orchard requiring “upkeep” at the time of the expenditures in issue. The majority states “The expenses in issue were incurred in watering and cultivating Corona’s citrus trees”. This is an inaccurate statement as Corona did not have any citrus trees at the time the expenses were incurred. If the court is referring to the 26,000 seedlings, which according to Corona’s agreement with the nursery they purchased for 30 cents apiece, the short answer is that they could have been watered and cultivated for 100 years and they would not have become orange or citrus trees.
An orange tree grows from a bud inserted in the trunk of the seedling. Subsequently all of the seedling, except the roots is cut off and disposed of. When it has progressed sufficiently, it is dug up, balled and transplanted in an orchard. It is only then that you have “a grove or orchard”. It is the upkeep of such “a grove or orchard” which is mentioned in Mim. 6030. The approximately three or four years before it reaches the productive state is “the development period” referred to in Mim. 30.
This court in agreement with the Tax Court, places considerable reliance upon the provision in the contract that risk of loss due to hazards beyond the control of M & M was to be borne by the taxpayers. ,.The plain and simple explanation for this is that it was not necessary for Corona to go through the form of assuming paper ownership of the seedlings in order to assume the risk of loss from natural causes.
As the Commissioner points out the same result could have been achieved very simply by having Corona agree to pay $2.75 (the amount the transplantable trees cost Corona) for each of the given lot of 26,000 trees which M & M later delivered at the three year old transplant-able stage except those which had failed to reach a given size and condition as a result of causes within the control of M & M (i. e., other than natural causes). Had the taxpayers and the nursery bargained in this fashion, and several trees were lost for reasons beyond the control of the nursery, could anyone reasonably contend the capital outlay was thus transformed into a deductible expenditure.
Testimony at the trial revealed that M & M sold transplantable trees to other farmers, including a large block to Irvine Ranch, for $2.75. Those transactions did not involve assumption of risk conditions. The assumption of risk was merely a part *1060of price bargaining. How could it change a capital outlay into a deductible business expense?
Assuming some trees were lost from natural causes which resulted in Corona’s cost of transplantable trees being increased from a net of $2.75 to a net of $2.80 or $2.85. Should the taxpayers not be required to capitalize this cost the same as his neighbor who purchased his trees from M & M for $2.75?
It is not even contended that Corona would ever have considered accepting anything other than the three year old transplantable trees. The formalistic paper change of ownership was without reality. It was not necessary to accomplish the assumption of risk or for any other reason except to sustain the hope of success in attaining the tax benefit sought here.
I would reverse.
. Among the specific services the nursery agreed to perform were the following: furnish labor, equipment, water, fertilizer, insecticides, budding and lopping, balling, spraying and weeding,