26 C.F.R. § 1.165-6

Farming losses

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(a) Allowance of losses. (1) Except as otherwise provided in this section, any loss incurred in the operation of a farm as a trade or business shall be allowed as a deduction under section 165(a) or as a net operating loss deduction in accordance with the provisions of section 172. See § 1.172-1.

(2) If the taxpayer owns and operates a farm for profit in addition to being engaged in another trade or business, but sustains a loss from the operation of the farming business, then the amount of loss sustained in the operation of the farm may be deducted from gross income, if any, from all other sources.

(3) Loss incurred in the operation of a farm for recreation or pleasure shall not be allowed as a deduction from gross income. See § 1.162-12.

(b) Loss from shrinkage. If, in the course of the business of farming, farm products are held for a favorable market, no deduction shall be allowed under section 165(a) in respect of such products merely because of shrinkage in weight, decline in value, or deterioration in storage.

(c) Loss of prospective crop. The total loss by frost, storm, flood, or fire of a prospective crop being grown in the business of farming shall not be allowed as a deduction under section 165(a).

(d) Loss of livestock—(1) Raised stock. A taxpayer engaged in the business of raising and selling livestock, such as cattle, sheep, or horses, may not deduct as a loss under section 165(a) the value of animals that perish from among those which were raised on the farm.

(2) Purchased stock. The loss sustained upon the death by disease, exposure, or injury of any livestock purchased and used in the trade or business of farming shall be allowed as a deduction under section 165(a). See, also, paragraph (e) of this section.

(e) Loss due to compliance with orders of governmental authority. The loss sustained upon the destruction by order of the United States, a State, or any other governmental authority, of any livestock, or other property, purchased and used in the trade or business of farming shall be allowed as a deduction under section 165(a).

(f) Amount deductible—(1) Expenses of operation. The cost of any feed, pasture, or care which is allowed under section 162 as an expense of operating a farm for profit shall not be included as a part of the cost of livestock for purposes of determining the amount of loss deductible under section 165(a) and this section. For the deduction of farming expenses, see § 1.162-12.

(2) Losses reflected in inventories. If inventories are taken into account in determining the income from the trade or business of farming, no deduction shall be allowed under this section for losses sustained during the taxable year upon livestock or other products, whether purchased for resale or produced on the farm, to the extent such losses are reflected in the inventory on hand at the close of the taxable year. Nothing in this section shall be construed to disallow the deduction of any loss reflected in the inventories of the taxpayer. For provisions relating to inventories of farmers, see section 471 and the regulations thereunder.

(3) Other limitations. For other provisions relating to the amount deductible under this section, see paragraph (c) of § 1.165-1, relating to the amount deductible under section 165(a); § 1.165-7, relating to casualty losses; and § 1.1231-1, relating to gains and losses from the sale or exchange of certain property used in the trade or business.

(g) Other provisions applicable to farmers. For other provisions relating to farmers, see § 1.61-4, relating to gross income of farmers; paragraph (b) of § 1.167(a)-6, relating to depreciation in the case of farmers; and § 1.175-1, relating to soil and water conservation expenditures.

Notes of Decisions

Cited in 11 cases, 1965–1985 · leading case: Rosenthal v. Comm'r, 48 T.C. 515 (Tax Ct. 1967).

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Rosenthal v. Comm'r, 48 T.C. 515 (Tax Ct. 1967). · cites it 4× “165-7(a) (1) and (4) and sec. 1.165-6(c) and (d), Income Tax Regs. The underlying theory of the limitation on the amount of a casualty loss which is deductible when the fair market value of the property lost is not the limiting factor is that the loss is limited by an amount…”

Ellis v. Comm'r, 47 T.C.M. 991 (Tax Ct. 1984). · cites it 8× “Although not labelled as a loss deduction, petitioners' computation of the amount appears to be correct and achieves the same result as a proper loss deduction.”

Bicha v. Comm'r, 28 T.C.M. 491 (Tax Ct. 1969). · cites it 6× “Respondent *211 contends that petitioners had no basis in the cows they had raised since they had in prior years deducted all the costs of raising the cows. Respondent argues that had petitioners made no recovery on their livestock, no loss for these cows would be allowable…”

Ginsburg v. Comm'r, 35 T.C.M. 860 (Tax Ct. 1976). · cites it 2× “Taxable Year 1964 Respondent takes the position that, except to the extent of interest paid on Arnold's mortgage of cattle purchased, the claimed farm loss is not deductible since Arnold's purpose in entering into the Briarcliff cattle breeding program was not to make *232 a…”

Holderness v. Comm'r, 36 T.C.M. 13 (Tax Ct. 1977). · cites it 2× “Farm Loss Section 165 permits an individual to deduct only those losses incurred in a trade or business or in a transaction entered into for profit.”

Wroblewski v. Comm'r, 32 T.C.M. 169 (Tax Ct. 1973). · cites it 2× “165-6(a), Income Tax Regs. The question of whether petitioner was farming for profit rather than for pleasure and recreation is a question of fact, and the burden rests with petitioner.”

Kirsch v. Comm'r, 49 T.C.M. 952 (Tax Ct. 1985). · cites it 2× “An estate, like an individual, is entitled to losses from a trade or business. Sec. 642(d). See also, e.g.”

Cooper v. Comm'r, 42 T.C.M. 418 (Tax Ct. 1981). · cites it 2× “Petitioner claimed a casualty loss in respect of the heifers but we need not explore his right to a deduction on that basis because we are satisfied that since the heifers were a part of the farm operation, the loss in the amount of $ 1,200 is deductible as a loss incurred in…”

Schley v. Comm'r, 24 T.C.M. 588 (Tax Ct. 1965). · cites it 2× “(2) If the taxpayer owns and operates a farm for profit in addition to being engaged in another trade or business, but sustains a loss from the operation of the farming business, then the amount of loss sustained in the operation of the farm may be deducted from gross income, if…”

Cinelli v. Comm'r, 32 T.C.M. 674 (Tax Ct. 1973). · cites it 2× “states that "Except as otherwise provided in this section, any loss incurred in the operation of a farm as a trade or business shall be allowed as a deduction under section 165(a) * * *.”

Cox v. Comm'r, 24 T.C.M. 23 (Tax Ct. 1965). · cites it 2× “1.165-6(a)(2), Income Tax Regs. (2) If the taxpayer owns and operates a farm for profit in addition to being engaged in another trade or business, but sustains a loss from the operation of the farming business, then the amount of loss sustained in the operation of the farm may…”

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