Rev. Rul. 55-736

The Internal Revenue Service has been requested to clarify Revenue Ruling 55-188, C.B. 1955-1, 226, to indicate the taxpayers to whom it applies, the livestock covered, and the meaning to be attributed to the term `normal costs' as used in that Revenue Ruling.

Revenue Ruling 55-188, supra , holds that, where livestock farmers employing the accrual method of accounting for farm income use separate Schedule D (Form 1040) to compute gain or loss on the sale of animals born and raised on the farm, and held for a period of more than 12 months for breeding purposes, the cost or other basis of such animals is an amount representing the inventory value of the animals at the beginning of the year of sale together with any additional normal costs incurred with respect to these animals during that taxable year. It also holds that the inventory value of the animals at the beginning of the taxable year must be eliminated from the opening inventory of such year, and the additional normal costs incurred during the taxable year with respect to the animals, must be eliminated from the farm expenses of that year.

Revenue Ruling 55-188 has application only to farmers employing the accrual method of accounting who have elected (under section 39.22(a)-7(b) of Regulations 118) to include their livestock held for draft, breeding, or dairy purposes in inventory. It applies to all livestock held by farmers for draft, breeding, or dairy purposes, whether purchased or raised, which have been included in inventory.

To the extent that it provides for an adjustment for `normal costs' incurred during the year of sale, Revenue Ruling 55-188 applies only to inventoried animals which were immature at the beginning of the year. It contemplates that an adjustment be made to the basis of the animal and to farm expenses of the year of sale for costs incurred during such year in raising the animal to maturity. The amount of the adjustment should be determined by the same method regularly employed by the taxpayer in determining closing inventory values.

Thus, if the farmer has selected the cost method (`cost' or `cost or market, whichever is lower') for valuing inventories, he should add to the amount representing inventory value of the animals at the beginning of the year of sale the actual costs incurred during that year in raising the animals to maturity. These include such items as feed, direct labor, etc., together with that portion of any indirect costs properly attributable to the particular animals.

For the farmer who has selected the unit-livestock-price method for valuing inventories, the adjustment for normal costs is an amount representing a pro rata portion of the differential between the unit price at which the animals were included in the opening inventory for the year of the sale and the unit price of the next older classification of animals.

Farmers regularly employing the `farm-price method' of valuing inventories, will use as their basis the opening inventory values of the animals sold, without any adjustment for costs incurred in the year of sale in raising the animals to maturity