SECTION 2. BACKGROUND

.01 Section 263A generally requires direct costs and an allocable portion of indirect costs of certain property produced or acquired for resale by a taxpayer to be included in inventory costs, in the case of property that is inventory in the hands of the taxpayer, or to be capitalized, in the case of other property.

.02 Section 263A(d)(3) and its accompanying regulations allow certain taxpayers that are not required to use an accrual method of accounting under § 447 (relating to certain corporations engaged in farming) or § 448(a)(3) (relating to tax shelters) to make an election to have § 263A not apply to certain costs related to certain plants produced in any farming business carried on by such taxpayer. Section 263A(e)(4) and § 1.263A-4(a)(4) of the Income Tax Regulations generally define the term “farming business” as a trade or business involving the cultivation of land or the raising or harvesting of any agricultural or horticultural

commodity, including: the trade or business of operating a nursery or sod farm; the raising or harvesting of trees bearing fruit, nuts, or other crops; the raising of ornamental trees (other than evergreen trees that are more than 6 years old at the time they are severed from their roots); and the raising, shearing, feeding, caring for, training, and management of animals. See § 1.263A-4 for specific guidance on the application of § 263A and the accompanying regulations to farming businesses.

.03 If the election under § 263A(d)(3) is made, the taxpayer and any related person in a farming business are subject to special rules provided in § 263A(e)(1) and (2). Under these special rules, the plants produced by the taxpayer are treated as § 1245 property, if not otherwise § 1245 property, and any gain resulting from any disposition of a plant is recaptured to the extent of the total amount of the deductions that, but for the election, would have been required to be capitalized with respect to the plant. In addition, the special rules require that the alternative depreciation system (ADS), as described in § 168(g)(2), be applied to all property used predominantly in any farming business of the taxpayer or related person and placed in service in any taxable year during which the election is in effect.

.04 Section 263A(d)(3)(D) and § 1.263A-4(d)(1) provide that an election under § 263A(d)(3) not to capitalize costs under § 263A for certain plants produced in the taxpayer’s farming business is a method of accounting under § 446 and, once made, may be revoked only with the consent of the Secretary of the Treasury or his delegate. A taxpayer must file a change in method of accounting request using the non-automatic change procedures of Rev. Proc. 2015-13, 2015-5 I.R.B. 419, (or its successor) to revoke its election under § 263A(d)(3) before applying § 263A to such capitalizable costs.

.05 Section 13102 of the TCJA added § 263A(i), which provides that § 263A does not apply to a taxpayer, other than a tax shelter prohibited from using the cash receipts and disbursements method under § 448(a)(3), for a taxable year in which the taxpayer meets the gross receipts test of § 448(c). Section 263A(i) applies to taxable years beginning after December 31, 2017.

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.06 The exemption provided in § 263A(i) does not require a taxpayer to apply the special rules provided in § 263A(e)(1) and (2) relating to the treatment of plants produced by the taxpayer as § 1245 property or, in the case of the taxpayer or related person, to use ADS for all property predominantly used in any farming business of the taxpayer or related person. However, any plant as defined in section 4.06 of this revenue procedure that is or has been treated as § 1245 property with respect to taxable years before the year in which the revocation is effective continues to be treated as § 1245 property. See §§ 263A(e)(1)(A)(ii), 1245(a)(3) and 1.1245-3(c). .07 Some taxpayers have inquired whether they must file a Form 3115, Appli- cation for Change in Accounting Method, to revoke the election under § 263A(d)(3) and to apply the exemption under § 263A(i) for the same taxable year. A taxpayer that revokes its election under § 263A(d)(3) and applies the exemption under § 263A(i) for the same taxable year is not changing its treatment of plants produced in the taxpayer’s farming business under § 263A. Consequently, there is not a change in method of accounting under § 446(e). However, the consent of the Commissioner of Internal Revenue (Commissioner) is needed to revoke the election under § 263A(d)(3) pursuant to §§ 263A(d)(3)(D) and 1.263A-4(d)(1). Section 5 of this revenue procedure provides the exclusive procedures for obtaining the consent of the Commissioner to revoke the election under § 263A(d)(3) by a taxpayer in a farming business if the taxpayer: (1) meets the requirements of § 263A(i); (2) previously elected under § 263A(d)(3) to have § 263A not apply to certain plants produced by the taxpayer in a farming business; and (3) wants to apply the exemption from § 263A provided in § 263A(i) for the same taxable year as the taxable year it revokes its election under § 263A(d)(3).

.08 The Department of the Treasury and the Internal Revenue Service (IRS) also are aware that a taxpayer in a farming business may become ineligible for the exemption to capitalization under § 263A(i) because, for example, the taxpayer no longer satisfies the gross receipts test in § 448(c). Such a taxpayer might

want to make an election under § 263A(d) (3) for the first taxable year the taxpayer is no longer eligible to apply § 263A(i). Section 6 of this revenue procedure provides the exclusive procedures for a taxpayer in a farming business if the taxpayer: (1) uses the exemption to capitalization under § 263A(i) with respect to a farming business; (2) is no longer eligible to use the exemption under § 263A(i) because the taxpayer no longer meets the requirements of § 263A(i); and (3) wants to make the election under § 263A(d)(3) and the accompanying regulations for the first taxable year the taxpayer is no longer eligible to apply § 263A(i).