8th Circuit Affirms Conmac

Base Acres Not Amortizable - Judge Paris Upheld (Again)

Change in Tax Treatment of “Base Acres”

For those of you who attend my tax seminars, you know that I have been talking about the Conmac case for the past two years. It’s a case that involves USDA “base acres” and whether a switch by the landowner from not claiming amortization deductions to claiming such deductions was an accounting method change requiring the filing of Form 3115. Judge Paris of the U.S. Tax Court said Form 3115 was required and denied the deduction.

Tax Court Decision

In Conmac Investments, Inc. v. Comm’r, T.C. Memo. 2023-40, the petitioner was a corporation that owned and leased farmland to tenant farmers under oral leases. The petitioner did not personally farm any of the land. The farmland contained “base acres” –such as wheat, corn, soybeans, cotton, rice, etc., from the USDA. The farm program payments (paid pursuant to the 2008 and 2014 Farm Bills) were paid to the tenants. Under the oral leases, the tenants received all of the payments attributable to the base acres and the annual rent payment was generally 25 percent of the gross income from the farmland, with “gross income from the farmland” including any farm subsidy payments received on account of the base acres.

Before 2009, the petitioner did not claim any deductions for amortization or depreciation of the base acres. But, starting in 2009, the petitioner began claiming an amortization or depreciation deduction for base acres acquired and placed in service in 2004 through 2013 (i.e., asserting an ownership interest in an intangible asset). Changing the treatment of an asset from non-depreciable to depreciable or non-amortizable to amortizable (or vice-versa) is a change of accounting that results in an IRC §481 adjustment.

However, the petitioner did not attach Form 3115 (application for change in accounting method) to its Form 1120 (corporate tax return) or otherwise seek IRS consent to change its accounting method. The petitioner also did not file amended returns with an explanatory statement for all open years reclassifying the base acres as amortizable under IRC §197. The petitioner also did not adopt the same accounting treatment for all bases acres that it owned.

The IRS determined that the petitioner had adopted an impermissible method of accounting and asserted deficiencies of approximately $116,000 for 2013 and $114,000 for 2014, and that an IRC §481 adjustment of $141,614 for 2009-2012 was required. The petitioner claimed that it had not changed its accounting method because of a change in underlying facts impacting its business. In addition, the petitioner claimed that even if there weren’t a change in the underlying facts that supported an accounting method change, the lack of IRS consent didn’t matter because the relevant tax years had closed. The petitioner also claimed that an IRC §481 adjustment wasn’t necessary because it should have been made for the “year of change” (e.g., 2009) and that IRS could no longer require the adjustment because 2009 was a closed tax year.

The Tax Court (opinion by Judge Paris) agreed with the IRS noting that the petitioner had changed an accounting method in violation of IRC §446(e) which requires IRS consent for such a change, and that an IRC §481 adjustment was proper. The facts did not involve the application of an existing accounting method to a change in business practices. Indeed, there was no change in business practices - the petitioner continued to serve as landlord to the tenant farmers and didn’t change the terms of the leases. Instead, the only economic consequence was the tax benefit that the petitioner received on account of the change – there was no change in existing legal or economic relationships. In addition, the petitioner continued to treat base acres acquired and placed in service in other years as nonamortizable or non-depreciable. The Tax Court determined that the petitioner has simply made a business decision in 2009 to start claiming amortization deductions on farmland what it had acquired and placed in service beginning in 2004. The corporation, the Tax Court pointed out, failed to identify the facts that had changed that caused it to change its tax treatment of the rented farmland.

Note. Judge Paris brought up on her own the case of Comr. v. Brookshire Bros. Holding, Inc., 320 F.3d 507 (5th Cir. 2003), aff’g., TC Memo 2001-150. In that case, the appellate court, affirming the Tax Court, held that an IRS challenge to a method change for which consent was not given must be for the year of the improper change, and that failure to obtain prior consent did not serve as a basis to challenge the change for a closed year. In the present case, the Tax Court distinguished Brookshire on the basis that the corporation in the present case did not file amended returns with an explanatory statement for all open years reclassifying the base acres. In addition, based on the corporation’s inconsistent treatment of the base acres depending on the year the farmland was placed in service, the Tax Court determined that finding an unauthorized change in accounting would promote consistency and wouldn’t offend basic fairness.

The Tax Court also sustained the IRC §481 adjustment. The Tax Court rejected the petitioner’s argument that the IRC §481 adjustment was barred by the statute of limitations after finding that the “year of the change” was the oldest open tax year. The Tax Court explained that the only limitation on an IRC §481(a) adjustment is that no pre-1954 adjustments may be made. So long as a change in an accounting method has occurred, the IRS may adjust a taxpayer’s income in an open year to reflect amounts attributable to years for which the applicable statute of limitations has expired (i.e., time-barred years). See, e.g., Huffman v. Comr., 518 F.3d 357 (6th Cir. 2008), aff’g., 126 T.C. 322 (2006).

Eighth Circuit Opinion

On appeal, the Eighth Circuit affirmed. Conmac Investments, Inc. v. Comm’r., No. 24-1605 (8th Cir. Jun. 6, 2025). The appellate court noted that had the petitioner continued not deducting an amortized amount for base acres, it would have recovered the original cost at the time of eventual disposition (in the future). But by beginning to deduct an amount attributable to the base acres, the petitioner changed the time it recovered the original cost by spreading the cost over the years before disposition. It wasn’t simply a change in the character of whether the deduction was allowable, and the cases the petitioner cited were not on point..

The appellate court also agreed with the Tax Court that the change from not deducting to deducting was not based on a change in underlying facts and that the petitioner failed to identify any underlying facts that changed. The appellate court noted that the Code has allowed for many decades the amortization of intangibles. Again, the cases the petitioner cited were not helpful.

On the IRC Sec. 481 adjustment issue, the “year of change” was 2013 - the year the IRS changed the petitioner’s method of accounting. It wasn’t 2009, the year when the petitioner changed it’s method of accounting. The appellate court reasoned that to conclude otherwise would render the statute useless if it didn’t affect closed tax years.

Note: The Tax Court has stayed its opinion in another case from Nebraska on the same issue pending the outcome of Conmac in the Eighth Circuit. Now that opinion will be released, almost assuredly in the favor of the IRS.