Court allows Wife to consider inherited farm inputs as part of the expenditure of carrying out farming business even when the deceased husband had deducted the same expenditure.
The court held that the petitioner could deduct the cost of all the farm inputs from the 2011 farm income. This is despite the husband tax returns indicating the same cost were deducted in calculating the tax payable in 2010. Thus, the court held that commissioner of internal revenue was wrong to disallow the petitioner from deducting the expense.
Facts
Steve Backemeyer used to carry out farming business while his wife Julie Backemeyer was not involved in the business in any way. Mr. Steve Backemeyer purchased farm inputs in 2010 with the intention of using them in the following year. In accordance to I.R.C sec. 162, he used cash-method in calculating his income and subsequently determining his tax liability. Thus, the expenditure was allowable in calculating his tax liability of 2010. However, he died in March 2011 without using any of the inputs previously purchased. His wife inherited the farm and used the inputs in the farming business in 2011 and 2012. In calculating her taxable income and determining the tax liability, she deducted the value of farm inputs inherited. This was despite the adoption of the cash method of calculating her taxable income.
According to the tax department, Mrs. Backemeyer is not entitled to deduct the farm inputs as an expense incurred in 2011. Disallowing the expenditure could increase Mrs. Backemeyer’s taxable income and tax liability. The respond argued that it could neither establish nor verify that the expenditure of the inherited inputs was incurred in 2011. Responded further insisted that the petitioner uses cash method in determining tax liability. Thus, 2010 prepayment could only be deductible in 2010 and not in the subsequent years. Allowing the petitioner to deduct the expense that was deducted by her deceased husband would contravene axiomatic principles of tax law. It could result to double deduction of farm input expenditure. The petitioner, Mrs. Backemeyer, cannot be allowed to step-up as per the requirement of section 1014 in the case of inherited farm inputs. The respond wanted the petitioner to repay all tax due without deducting the expenditure of inherited inputs. Moreover, she should pay an accuracy-related penalty because of material understatement of income tax as per section 6662 (a) and (b) 2. However, the responded said she based her tax calculation on the facts of the Bliss Dairy, a U.S. Supreme Court ruling on benefit tax rule.
Holding
The court decided in favor of the petitioner in allowing her to make all deductions of farm inputs inherited from her deceased husband. The court applied the tax benefit rule in its decision as per section 162 of farm inputs expenditure. It also applied the precedence provided by the Supreme Court in Bliss Dairy case. The court held that the case was similar in fact with the bliss dairy case. Thus, the inheritance of the farm inputs by Mrs. Backemeyer from her husband amounted to a transfer of the inputs from one taxpayer to another. The petitioner should deduct the cost of inherited farm inputs in determining her tax liability. The transfer cannot be subjected to income tax. Thus, petitioner should not be required to revise her returns. Besides, she is not liable to an accuracy-related penalty.
