Publication Date - July 2006

NOTE: This guide is current through the publication date. Since changes may have occurred after the publication date that would affect the accuracy of this document, no guarantees are made concerning the technical accuracy after the publication date.

Publication Date - July 2006

NOTE: This guide is current through the publication date. Since changes may have occurred after the publication date that would affect the accuracy of this document, no guarantees are made concerning the technical accuracy after the publication date.

Chapter Five / Table of Contents / Chapter Seven
Tax Code, Regulations and Official Guidance Search

Chapter Six - Raisin Grapes

• Overview of Industry
• Growing Production Cycle for a Mature Vineyard
• Development of a New Vineyard
• Mature Productive Operating Vineyard
• Method of Accounting
• Rancher or Farmer
• Gross Income
• Expenses and Depreciation
• Related Party Transactions
• Exhibit A: Cites for Code, Regulations, Revenue Rulings and Court Cases

Development of a New Vineyard

A sample of vineyard development cost as complied by the University of California - Cooperative Extension “Raisins, Thompson Seedless in the San Joaquin Valley” (1997) is shown in Chapter 4, Expenses.

It takes approximately three years to develop a producing vineyard. For example, if the seedling vine were planted in March 1997, “first leaf,” March 1999 would represent “third leaf,” with the first marketable harvest being in September 1999. Therefore, the preproductive period would be, at a minimum, 2 ½ years. Within the regulations under IRC § 263A, “grapes” are identified as a plant that has a nationwide weighted average preproductive period in excess of two years and, thus, is subject to UNICAP rules. See Notice 2000-45, 2000-2 C.B. 256.

Audit Techniques:

1. If the grape grower has not properly elected out of UNICAP, all preproductive costs as defined in Treas. Reg. § 1.263A-4(b)(1)(i) are subject to capitalization. This is a very comprehensive list of costs. Also, this capitalization of costs under IRC § 263A supersedes cost deductions allowed under IRC § 175 and 180.
2. A general discussion of IRC § 263A and “Capitalization of Production Period Cost with Respect to Plants” is found in Chapter 4, Expenses.
3. Pre-audit indications that the grower may be developing a new ranch can be abnormally high fertilizer, labor and water costs, or large grape stake expense being taken as an IRC § 179 deduction. A deduction for “seedlings” may be claimed on the tax return. Spread analysis may show abnormally large nonrecurring expenses being claimed in a particular year.
4. Ask initial interview questions about any new ranch development. A field inspection of all ranches should reveal whether this potential issue exists.