[Congressional Record Volume 140, Number 35 (Thursday, March 24, 1994)]
[Extensions of Remarks]
[Page E]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: March 24, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
     INTRODUCTION OF LEGISLATION CLARIFYING APPLICATION OF UNIFORM 
        CAPITALIZATION RULES TO CERTAIN AGRICULTURAL CROP LOSSES

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                         HON. ROBERT T. MATSUI

                             of california

                    in the house of representatives

                        Thursday, March 24, 1994

  Mr. MATSUI. Mr. Speaker, today I am introducing legislation which 
would clarify the application of the uniform capitalization rules to 
certain agricultural crop losses. My interest in passage of this 
legislation is based primarily on my concern regarding the impact of 
the phylloxera infestation in my State. However, this legislation is 
not isolated to that type of casualty. For instance, farmers who 
experience frostkill, a serious problem in many of the fruit-growing 
regions of the country, would benefit from this clarifying proposal. 
Orchard, vineyard, and grove owners whose crops are destroyed by 
natural disasters, such as the hurricanes in 1992, which devastated the 
agricultural industry in southern Florida and Hawaii, would also 
benefit from this legislation. There are numerous other examples of 
similar weather and pest-related problems in other States.
  Diseases and other disasters have a devastating effect on farmers in 
this country. For example, various segments of the wine industry have 
been devastated by phylloxera B, a small aphid-like louse which cannot 
be combated by conventional pesticide methods; only the complete 
removal of the infested vineyards, including the intertwined irrigation 
equipment, drain tiles, and trellis systems, followed by the fumigation 
and replanting of roots stocks resistant to the pest, can remedy an 
infestation. In the wine-growing regions of California alone, growers 
have incurred $2 billion in losses relating to phylloxera infestation. 
The U.S. Department of Agriculture has warned that failure of grape 
growers to take effective action to protect themselves against the 
insects could lead to further devastating consequences for vast areas 
of vineyards.
  Mr. Speaker, U.S. farmers are usually smaller than industrial 
manufacturing entities and are often deficient in their ability to 
finance the capital expenditures necessary to recover from crop losses 
caused by diseases and other disasters. Congress acknowledged this 
problem when the special farming rule under code section 263A was 
passed in 1986. Specifically, section 263A(d)(2) provides an exception 
to the uniform capitalization requirements for losses of plants bearing 
edible crops. The provision states that the capitalization rules of 
section 263A ``shall not apply to any costs of the taxpayer of 
replanting plants bearing the same type of crop * * *'' that were lost 
or damaged ``by reason of freezing temperatures, disease, drought, 
pests, or casualty.''
  Although the statute speaks in terms of any costs, some Internal 
Revenue Service officials have recently indicated they support a narrow 
and restrictive interpretation of the rule, indicating that only a 
portion of the costs of replanting, specifically preproductive costs, 
may be deducted under section 263A(d)(2). I do not believe that this 
interpretation reflects the action we took in 1986.
  Although the legislative history governing section 263A(d)(2) does 
not explicitly address the interpretation of any costs, that history 
strongly suggests that we passed the loss exemption so that it would 
apply more broadly to all costs associated with replanting. The 
conference report on the Tax Reform Act of 1986, 1986 act, highlights 
the fact that prior to the imposition of section 263A(d)(2), the code 
had a former loss provision that permitted a taxpayer to deduct 
currently only otherwise deductible replanting and maintenance costs--
former section 278(c). The conference report further indicates that 
when we considered the loss provision in the 1986 act, we changed the 
language of the former loss exemption (Sec. 278(c)) to read that 
``replanting and maintenance costs incurred following loss of * * * [a] 
vineyard * * * are currently deductible even though replanting does not 
take place on the same property.'' We did not include the more 
limiting, otherwise deductible, language. The Senate amendment 
broadened our language to permit taxpayers, other than the person who 
owns the vineyard, to deduct replanting and maintenance costs. Nothing 
in the conference report explicitly mentioned or limited costs to those 
that were otherwise deductible.
  Moreover, the original House report to the 1986 act suggests that we 
intended to expand the former loss exemption of section 278(c). The 
House report stated that ``under the committee bill, the special rule 
of present law permitting expensing of amounts incurred in replanting 
after loss or damage due to freezing temperatures, disease, drought, 
pests, or casualty (sec 278(c)) is expanded with respect to edible 
crops to include expenditures in connection with planting or 
maintaining a field other than the field in which the damage 
occurred.'' While the House report does not explicitly discuss which 
costs can be deducted, the fact that we modified and expanded the old 
loss exemption implies a broader interpretation of section 263A(d)(2) 
was intended.
  The fact that we intended a broader interpretation of the types of 
costs that could be deducted is further evidenced by the decision not 
to incorporate the Senate amendment which maintained the former loss 
exemption and did not modify the otherwise deductible language in this 
code provision.
  The pre-1986 language was certainly easier to understand. The report 
language accompanying the former loss exemption (Sec. 278(c)) had 
explicitly stated that section 278(a), requiring capitalization of 
preproductive expenses, would not apply to amounts allowable as 
deductions for vineyard replanting caused by reason of disease or 
pests. Unfortunately no such clarity applies to the 1986 act loss 
provision, which changed the language to the more inclusive all costs 
terminology and which does not explicitly impose preproductive cost 
limits.
  The legislation I am introducing today would ensure that section 
263A(d)(2) fully reflects our original intent behind its enactment, 
without opening the provision to abuse. It provides a simple rule 
clarifying a taxpayer's ability to deduct, in the year incurred, all 
preproductive period costs and 80 percent of all other costs for 
replanting plants destroyed by freezing temperatures, disease, drought, 
pests or casualty. The 80-percent test provides an easy to administer 
rule which roughly approximates that amount of replanting expenditures 
which are true replacement costs and not costs for increasing the value 
of the taxpayer's assets. Preproductive period expenses would remain 
fully deductible, which has not been contested by IRS officials. The 
legislation also includes, first, language preventing a taxpayer from 
receiving a double benefit by taking loss deductions on the same assets 
which are being replaced under this rule, and second, language ensuring 
that new assets which are dissimilar to the original replanting's 
assets would not be eligible for the special treatment provided under 
section 263A(d)(2).
  By clarifying existing law, my legislation would greatly benefit our 
Nation's agricultural industry by ensuring that farmers can continue to 
raise the resources needed to recover from diseases and other 
disasters. I urge my colleagues to cosponsor this important legislation 
and support its enactment this year.

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