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Milk Quota

RoyS976
Level 3

Client purchased milk quota late 90s and early 2000s.  At that time my research indicated that milk quota were no amortizable but were treated as "land".  I can not find that research.  Now client considering selling the quota.  Should it have been amortized.

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qbteachmt
Level 15

Trademarks are renewed (have a legal life) or expire. You typically amortize goodwill over the useful life, and I remember reading how Goodwill assigned to a customer list was even expensed all at once for a business with recurring or subscription services, and they could show the loss of customers that did not renew. Pub 535 has info about this, and franchises are covered in there.

This looks useful: "The IRS disallowed the deduction on the basis that the rights had an indefinite duration."

There is a section for Government Allotments or Quotas. 

https://lawprofessors.typepad.com/agriculturallaw/2018/11/non-depreciable-items-on-the-farm-or-ranch...

"Because the actions of Congress were completely unpredictable, the Tax Court held that the peanut program base acreage allotment was indeterminant and the associated cost to the taxpayer was not depreciable.  Later, in C.C.A. [social security number removed] (Jul. 16, 2004), the IRS noted that three additional farm bills had become law since the Tax Court’s ruling in Wenzel and the peanut program continued.  That lead the IRS to conclude that the duration of the peanut program could not be determined with reasonable certainty or accuracy.  Consequently, the IRS determined, the peanut base acreage allotment did not have a determinable useful life and could not be depreciated."

"But a transferable right to receive a premium price for a fixed quantity of milk in accordance with a regional milk marketing order has been held to be amortizable (e.g., the cost could be spread over the useful life – 15 years) when it has a statutory expiration date and is not expected to be renewed.  For example, in Van de Steeg v. Comr., 60 T.C. 17 (1973), aff’d., 510 F2d 961 (9th Cir. 1975), the taxpayers were dairy farmers who marketed their milk production subject to a Federal Milk Marketing Order.  On several occasions they purchased an intangible asset (referred to as a "class I milk base") which they used in their dairy business. They claimed depreciation for the milk base and IRS disallowed the deduction on the basis that the asset had an indeterminable useful life – it depended on the will of the Congress whether or not to extend the program.  The Tax Court (affirmed by the Ninth Circuit) held that the program that created the class I milk base always contained an express termination date and the existence of two extensions did not change the fact that a termination date always existed, even though the date had changed.  While the IRS disagrees with the Van de Steeg opinion, it did announce that it would follow it.  Rev. Rul. 75-466, 1975-2 C.B. 74."

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13 Comments 13
qbteachmt
Level 15

"Should it have been amortized."

Amortization and Depreciation are processes that generally account for "starting value with changes over time that are a result of loss of that value, so let me write off part of it, each time"

"Now client considering selling the quota."

Which is likely why you treated it like land = does not Wear Out over time, has basis against future sale, and is subject to the Marketplace for ownership. For instance, land, and separately, the perpetual easement.

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IRonMaN
Level 15

I'm not sure what a milk quota is but it sounds more like an intangible that gets amortized than it does land.


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qbteachmt
Level 15

I think it's more like a liquor license in MT, which is issued under a lottery system, regulated, and starts at about $357,000; it's good in perpetuity until you sell it to another property owner in the same region, because there is a quota system in place.

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RoyS976
Level 3

Related to MT Liquor license.  

Are they amortized?

 

Also, since amortization was never taken, would that qualify as a change in accounting policy in order to avoid the "allowable" aspect of basis computation

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IRonMaN
Level 15

Can you give some more detail on exactly what a milk quota is?


Slava Ukraini!
BobKamman
Level 15

Are we talking about an American farmer?  All the references I find to milk quotas are in Canada, the UK, Ireland or New Zealand.  

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RoyS976
Level 3

yes California Farmer.  

To promote stability in the dairy industry, California’s milk marketing program establishes minimum prices that processors must pay for fluid grade or Grade A milk received from dairy farmers based on end product use. These prices are established within defined marketing areas where milk production and marketing practices are similar.

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BobKamman
Level 15

A good explanation:

https://www.capitalpress.com/ag_sectors/dairy/california-dairy-farmers-in-quandary-over-quota/articl...

So I guess all those things they say about California are true.  Land of fruits and nuts, and brown cows.  Well, OK, now they are newsom cows.  Doesn't look anything like a liquor license to me, because the purchase was voluntary.  There are enough special rules for farmers, I wouldn't be surprised if it could have been expensed when bought.  Sort of like field tile, but intangible.  

RoyS976
Level 3

Thanks to all. It appears I erred all these years.  So can I use 3115 change in accounting methods to correct this.  Retirement is looking better all the time

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BobKamman
Level 15

On second thought, maybe it is like a liquor license.  Or, one newspaper story from the 70s compared it to a seat on the New York Stock Exchange.  The milk quotas were pieces of paper that were doled out for free, under a governor Reagan era socialism-for-the-rich program, allowing certain cow owners to sell their milk at an inflated price subsidized by other cow owners.  You could call it a license to steal, if you were cynical.  There was an active market in trading these entitlements.  You could probably have amortized them back then, but that would have been more like an election than a mandatory accounting practice.  If someone is selling them now, because they may become worthless if the program is discontinued, then the cost basis probably does not have to be reduced.  Nine out of ten IRS agents probably don't know which end of the cow is milked.  

qbteachmt
Level 15

Section 197 covers rights:

https://www.law.cornell.edu/cfr/text/26/1.197-2

I've never seen an ongoing (flat out you own it and it is marketable) right treated as anything other than similar to Land.

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BobKamman
Level 15

Goodwill?  Franchises?  Trademarks? Patents? 

qbteachmt
Level 15

Trademarks are renewed (have a legal life) or expire. You typically amortize goodwill over the useful life, and I remember reading how Goodwill assigned to a customer list was even expensed all at once for a business with recurring or subscription services, and they could show the loss of customers that did not renew. Pub 535 has info about this, and franchises are covered in there.

This looks useful: "The IRS disallowed the deduction on the basis that the rights had an indefinite duration."

There is a section for Government Allotments or Quotas. 

https://lawprofessors.typepad.com/agriculturallaw/2018/11/non-depreciable-items-on-the-farm-or-ranch...

"Because the actions of Congress were completely unpredictable, the Tax Court held that the peanut program base acreage allotment was indeterminant and the associated cost to the taxpayer was not depreciable.  Later, in C.C.A. [social security number removed] (Jul. 16, 2004), the IRS noted that three additional farm bills had become law since the Tax Court’s ruling in Wenzel and the peanut program continued.  That lead the IRS to conclude that the duration of the peanut program could not be determined with reasonable certainty or accuracy.  Consequently, the IRS determined, the peanut base acreage allotment did not have a determinable useful life and could not be depreciated."

"But a transferable right to receive a premium price for a fixed quantity of milk in accordance with a regional milk marketing order has been held to be amortizable (e.g., the cost could be spread over the useful life – 15 years) when it has a statutory expiration date and is not expected to be renewed.  For example, in Van de Steeg v. Comr., 60 T.C. 17 (1973), aff’d., 510 F2d 961 (9th Cir. 1975), the taxpayers were dairy farmers who marketed their milk production subject to a Federal Milk Marketing Order.  On several occasions they purchased an intangible asset (referred to as a "class I milk base") which they used in their dairy business. They claimed depreciation for the milk base and IRS disallowed the deduction on the basis that the asset had an indeterminable useful life – it depended on the will of the Congress whether or not to extend the program.  The Tax Court (affirmed by the Ninth Circuit) held that the program that created the class I milk base always contained an express termination date and the existence of two extensions did not change the fact that a termination date always existed, even though the date had changed.  While the IRS disagrees with the Van de Steeg opinion, it did announce that it would follow it.  Rev. Rul. 75-466, 1975-2 C.B. 74."

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"Level Up" is a gaming function, not a real life function.