                          110 T.C. No. 33



                      UNITED STATES TAX COURT



  KORAMBA FARMERS & GRAZIERS NO. 1, DEAN PHILLIPS, TAX MATTERS
        PARTNER, ET AL.,1 Petitioners v. COMMISSIONER OF
                  INTERNAL REVENUE, Respondent



     Docket Nos.   3679-96, 3680-96,            Filed June 29, 1998.
                   3681-96, 3682-96.



          Partnerships subject to U.S. income reporting
     made soil and water conservation expenditures in
     connection with their farming operations in New South Wales,
     Australia, during the years in issue. Under sec. 175,
     I.R.C., R allowed the deduction of such expenditures made by
     one of the partnerships during calendar year 1986, but
     applying sec. 175(c)(3)(A), I.R.C., denied deductions by
     both partnerships of such expenditures made after Dec.
     31, 1986. The Tax Reform Act of 1986, Pub. L. 99-514, sec.
     401(a), 100 Stat. 2221, added sec. 175(c)(3)(A) to the

     1
      Cases of the following petitioners are consolidated
herewith: Koramba Farmers & Graziers No. 1, Dean Phillips, Tax
Matters Partner, docket No. 3680-96; Koramba Farmers & Graziers
No. 2, Dean Phillips, Tax Matters Partner, docket No. 3681-96;
and Koramba Farmers & Graziers No. 2, Dean Phillips, Tax Matters
Partner, docket No. 3682-96.
                               - 2 -


     Internal Revenue Code effective for amounts paid or
     incurred after Dec. 31, 1986, in taxable years ending after
     that date.

          Held: Sec. 175(c)(3)(A)(i) and (ii), I.R.C., limits
     the deduction of soil and water conservation expenditures
     to those that are consistent with a soil conservation plan
     approved by the Soil Conservation Service (SCS) of the
     Department of Agriculture or a soil conservation plan of a
     State agency, which agency is comparable to the SCS. The
     area where the land to which the plan relates must be
     located within the United States, and not in a foreign
     country.



     John R. Wilson, Robert S. Rich, and Patrick A. Jackman, for

petitioners.

     Frederick J. Lockhart, Jr., for respondent.




                              OPINION

     NIMS, Judge:   Respondent issued a notice of final

partnership administrative adjustment (FPAA) to each of the two

subject partnerships, disallowing in each instance soil and water

conservation expenditure deductions under section 175, as

follows:


Partnership               Taxable Year        Amount of Deduction
                             Ending                Disallowed

Koramba Farmers &         June 30, 1987             $806,633
Graziers No. 1            June 30, 1988              519,004
(Koramba No. 1)

Koramba Farmers &         June 30, 1988            1,011,360
Graziers No. 2            June 30, 1989            2,683,415
(Koramba No. 2)
                                - 3 -




     All section references, unless otherwise specified, are to

sections of the Internal Revenue Code in effect for the years in

issue.   All Rule references are to the Tax Court Rules of

Practice and Procedure.

     By order, these cases were consolidated for trial, briefing,

and opinion.   They were submitted fully stipulated.

     The sole issue for our consideration is whether the Koramba

partnerships' soil and water conservation expenditures

(conservation expenditures) incurred after December 31, 1986,

with respect to land located outside the United States can

qualify for deductibility under section 175.

                             Background

     Koramba No. 1 was organized as a general partnership under

the laws of Australia.    At the time each of the Koramba No. 1

petitions was filed, the partnership had its principal place of

business at Koramba, Boomi, New South Wales, Australia.

     Koramba No. 2 was organized as a general partnership under

the laws of Australia.    At the time each of the Koramba No. 2

petitions was filed, the partnership had its principal place of

business at Koramba, Boomi, New South Wales, Australia.

     At all relevant times, Dean Phillips (Phillips) has been the

tax matters partner of Koramba No. 1 and Koramba No. 2

(partnerships).   Phillips' address at the time the petitions were
                                 - 4 -


filed was No. 326, 4132 S. Rainbow Boulevard, Las Vegas, Nevada

89013.

     Prior to 1985, William Michael Owen and Penelope Ann Owen

(the Owens) of New South Wales, Australia, were the owners of a

farm, named Koramba, located in New South Wales.   The Koramba

farmland was used for grazing sheep and cattle and for farming

dry-land wheat and sorghum.   The Owens, who were looking for a

financial partner to develop their farm, were introduced to

Phillips, who was interested in acquiring additional rural

properties in Australia.   In 1985, Phillips and Heetco, Inc.

(Heetco), a U.S. corporation in which Phillips is a shareholder,

acquired a 50-percent interest in the Koramba farm from the

Owens.   Phillips, Heetco, and the Owens thereupon formed Koramba

No. 1 to develop the farmland.

     The Koramba farmland is located in a floodplain along the

Macintyre and Barwon Rivers in northern New South Wales.     The

Koramba partners decided to use the nearby water resources to

develop a portion of the farmland to grow cotton, which requires

ample water supplies.   In 1986, Koramba No. 1 started the

construction of an irrigation system to raise cotton on the land.

With the subsequent purchase of two adjacent farms in 1987 and

1988, the scale of the cotton farming operations was expanded,

leading to the formation of Koramba No. 2, a second Australian

general partnership, between Phillips and the Owens.   By 1991,
                                 - 5 -


the partnerships' irrigation system covered 11,000 acres of

farmland.

     By following sound soil and water conservation

(conservation) practices in their cotton farming operations, the

partnerships minimize the consumption of irrigation water.

Pursuant to authorization from the New South Wales authorities,

the partnerships pump water from the Macintyre and Barwon Rivers

and store it in five reservoirs, together with excess water

captured during flood season.    From the reservoirs, the water is

delivered to the cotton fields through a comprehensive system of

irrigation pipes and channels.    The partnerships' 44 cotton

fields have been precisely leveled, using laser surveying

technology, to permit proper water application and drainage.

Run off water from the fields is recovered and returned to the

reservoirs for future use.   Using computer technology, the

partnerships continuously measure soil moisture during the

growing season, allowing precise determination of when and how

much irrigation is needed.

     In building their irrigation system, the partnerships

complied with the standards and procedures for floodplain

construction set forth by the New South Wales Government

Department of Water Resources (the Department of Water

Resources).   The Department of Water Resources encourages and

controls the implementation of sound conservation practices in
                               - 6 -


New South Wales, and exercises stringent controls over the

placement of levees, banks, water channels, and reservoirs to

ensure proper floodplain management.   Pursuant to Part VIII of

the New South Wales Water Act (the Water Act), the partnerships'

conservation expenditures received general approval from the

Department of Water Resources as being consistent with the

conservation guidelines and plan for the area.   Thus, the

conservation expenditures incurred by the partnerships were

consistent and in accordance with a conservation plan approved by

the Department of Water Resources for the floodplain in which the

land was located.

     In connection with the filing of Forms 1065, U.S.

Partnership Return of Income, the partnerships elected to deduct

conservation expenditures under section 175.   Respondent accepted

the deductibility of the conservation expenditures incurred

through December 31, 1986, but has disallowed the deductibility

of subsequent conservation expenditures.   In so doing, respondent

has taken the position that section 175, as modified by the Tax

Reform Act of 1986, Pub. L. 99-514, sec. 401(a), 100 Stat. 2221,

which added section 175(c)(3), no longer applies to conservation

expenditures incurred with respect to land located outside the

United States.   Respondent concedes that, but for the application

of section 175(c)(3)(A), all of the partnerships' conservation

expenditures would qualify for section 175 treatment.
                                  - 7 -


                                Discussion

     The relevant provisions of section 175 are as follows:

     SEC. 175.   SOIL AND WATER CONSERVATION EXPENDITURES.

          (a) In general.--A taxpayer engaged in the business of
     farming may treat expenditures which are paid or incurred by
     him during the taxable year for the purpose of soil or water
     conservation in respect of land used in farming, or for the
     prevention of erosion of land used in farming, as expenses
     which are not chargeable to capital account. The
     expenditures so treated shall be allowed as a deduction.

                 *     *    *     *       *   *    *

          (c)    Definitions.--For purposes of subsection(a)--

                 *     *    *     *       *   *    *

                 (3)   Additional limitations.--

                    (A) Expenditures must be
          consistent with soil conservation plan.
          --Notwithstanding any other provision of
          this section, subsection (a) shall not
          apply to any expenditures unless such
          expenditures are consistent with--

                           (i) the plan (if any)
                 approved by the Soil Conservation
                 Service of the Department of
                 Agriculture for the area in which
                 the land is located, or

                           (ii) if there is no plan
                 described in clause (i), any soil
                 conservation plan of a comparable
                 State agency.

     Until 1954, the resolution of the question of the treatment

for tax purposes of the expenditures made by farmers to improve

their land required a highly fact-intensive inquiry.    Compare,

e.g., Collingwood v. Commissioner, 20 T.C. 937 (1953)
                               - 8 -


(terracing), with Beltzer v. United States, 4 AFTR 2d 5595, 59-2

USTC par. 9701 (D. Neb. 1959) (land leveling).

     In 1954, Congress added section 175 to the Code, which was

intended to provide statutory rules under which taxpayers engaged

in the business of farming could "deduct certain expenditures for

the purpose of soil or water conservation in respect of land used

in farming or for the prevention of erosion of land used in

farming."   S. Rept. 1622, to accompany H.R. 8300, 83d Cong., 2d

Sess., 216.   Until 1986, section 175 remained substantially

unchanged from its original enactment in 1954, with the exception

of several amendments not relevant here.   Before 1986, neither

section 175, itself, nor its legislative history, nor the related

regulations, specified the locale in which the improved farmland

had to be situated.

     In 1991, the IRS issued Tech. Adv. Mem. 91-19-005 (Jan. 18,

1991) (TAM), in the first part of which the IRS concluded that

the partnerships' pre-1987 conservation expenditures could

qualify under section 175 even if paid or incurred with respect

to foreign land.   As a consequence, respondent has not challenged

Koramba No. 1's conservation expenditures paid or incurred in

calendar 1986.

     Unfortunately from the partnerships' perspective, however,

the IRS in the TAM also took the position (which is respondent's

position here) that, even if a proper section 175 election had
                              - 9 -


been made by the partnerships, postcalendar 1986 conservation

expenditures in a foreign country, in this instance Australia, do

not qualify under section 175 by reason of section 175(c)(3)(A).

     As stated previously, section 175(c)(3)(A) was added by the

Tax Reform Act of 1986, Pub. L. 99-514, sec. 401(a), 100 Stat.

2221, effective for amounts paid or incurred after December 31,

1986, in taxable years ending after that date.   Consequently,

since the June 30, 1987, taxable year of Koramba No. 1 ended

after December 31, 1986, only the last 6 months of its

conservation expenses for that year are subject to section

175(c)(3)(A).

     With the enactment of section 175(c)(3)(A), section 175 is

for the first time arguably site-specific (the partnerships

challenge site-specificity as to section 175(c)(3)(A)(ii)).    The

Congressional objective in enacting the 1986 amendment is

cogently articulated in the Senate report:

             The committee is concerned that certain
          Federal income tax provisions may be
          affecting prudent farming decisions adversely
          under present law. In particular, the
          committee is concerned that such provisions
          may have contributed to an increase in
          acreage under production, which in turn may
          have encouraged the present-day
          overproduction of agricultural commodities.
          * * * [S. Rept. 99-313, 1986-3 C.B. (Vol. 3)
          265.]

     Thus, the focus of the amendment is to discourage

overproduction of agricultural commodities by keying the
                                - 10 -


availability of conservation expenditure deductions to amounts

incurred that are consistent with a conservation plan approved by

the Soil Conservation Service (SCS) of the Department of

Agriculture, and if there is no SCS conservation plan for the

area in which the property is located, amounts incurred for

improvements that are consistent with a plan of a State

conservation agency.    S. Rept. 99-313, supra, 1986-3 C.B. (Vol.

3) at 265.

     Respondent argues that the consequence of the form in which

Congress chose to cast section 175(c)(3)(A) requires the

disallowance of deductions for conservation expenditures outside

the United States.     The partnerships, of course, dispute this.

     The partnerships agree with respondent that their

conservation expenditures obviously cannot qualify under section

175(c)(3)(A)(i) because in that provision it is expressly

provided that the conservation expenditures must be consistent

with an SCS-approved plan for the area in which the land is

located.   The Department of Agriculture through the SCS would be

unlikely, to say the least, to deal with land located outside the

United States.   The partnerships argue that their conservation

expenditures can, however, qualify under section

175(c)(3)(A)(ii).

     They first maintain that the term "State", as used in clause

(ii), should be read expansively so as to embrace governmental
                              - 11 -


entities over and beyond the 50 States constituting the United

States plus the District of Columbia.   We need not tarry long

over this first argument.   The partnerships argue, among other

things, that including foreign agencies is consistent with the

use of the term "State" in the international context.    We quote

from the partnerships' opening brief:

               Including foreign agencies in the
          definition of "comparable State agency" is
          also consistent with the general usage of the
          term "State" in the international tax
          context. Although "State" naturally is often
          limited to the U.S. states when used
          domestically, it more typically is used
          internationally to refer to national
          governments. For example, in the
          U.S./Australia income tax treaty, the term is
          defined as follows:

               The term "State" means any National
          State, whether or not one of the Contracting
          States.

          Convention Between the Government of the
          United States of America and the Government
          of Australia for the Avoidance of Double
          Taxation and the Prevention of Fiscal Evasion
          with Respect to Taxes on Income, Article
          3(1)(h), reprinted in 1986-2 C.B. 220.

Following this quotation, the partnerships simply state that,

based on the treaty definition, a broader reading of the term

"State" is more appropriate "in this context".

     We think it indisputable that the term "State", as it

appears in section 175(c)(3)(A)(ii), denotes one of the States

and the District of Columbia which, taken as a whole, constitute
                              - 12 -


the United States, as defined in sections 7701(a)(9) and (10).

Those sections provide:

          (9) United States.--The term "United States" when used
     in a geographical sense includes only the States and the
     District of Columbia.

          (10) State.--The term "State" shall be construed to
     include the District of Columbia, where such construction is
     necessary to carry out provisions of this title.

The language of the Senate report states that "amounts incurred

for improvements that are consistent with a plan of a State

conservation agency are deemed to satisfy the Federal standards."

S. Rept. 99-313, supra, 1986-3 C.B. (Vol. 3) at 265 (emphasis

added).   There isn't the slightest hint in the legislative

history or the statute itself that Congress had anything else in

mind when section 175(c)(3)(A) was enacted.

     Somewhat more plausibly, but nevertheless unconvincingly,

the partnerships urge that, even if a "comparable State agency"

excludes foreign agencies, section 175(c)(3)(A)(ii) still may be

construed so as to permit the partnerships to deduct their

conservation expenditures for the years in issue.   In this

connection, the partnerships contend that their conservation

expenditures need only be consistent with the plan of some State

agency to be deductible.   Insofar as the New South Wales plan

applicable to the area where the Koramba farmland is located may

be equivalent to the plan of an agency of any one of the States

of the United States or the District of Columbia, the
                              - 13 -


partnerships argue that they have satisfied the requirements of

section 175(c)(3)(A)(ii).

     We disagree.   For section 175(a) to apply, we believe the

statute requires that the improved land must lie within the State

whose agency is comparable to the SCS, and, as discussed above,

that the "State" referred to by the statute means one of the

States and the District of Columbia which together compose the

United States.   The structure of section 175(c)(3)(A), which

expressly refers in clause (i) to "the area in which the land is

located", by obvious implication engrafts the quoted words from

clause (i) onto the end of clause (ii).   Statutes "are to be

considered, each in its entirety and not as if each of its

provisions was independent and unaffected by the others."

Alexander v. Cosden Pipe Line Co., 290 U.S. 484, 496 (1934);

accord Union Carbide Corp. & Subs. v. Commissioner, 110 T.C. ___,

___ (1998).   It defies logic to suggest that Congress intended to

approve the deduction of conservation expenditures in Nevada, for

example, which are consistent with a conservation plan of an

agency of some other State.   The partnerships acknowledge as much

on brief in the domestic context, and we see no reason why the

site-specific requirement should be waived so as to permit

deductions for improved land located in a foreign country, in

this case Australia.
                               - 14 -


       The conference committee report dispels any doubt which may

remain as to the correctness of our analysis.    There it is stated

that

            the conferees wish to clarify that while
            prior approval of the taxpayer's particular
            project by the Soil Conservation Service or
            comparable State agency is not necessary to
            qualify the expenditure under this provision,
            there must be an overall plan for the
            taxpayer's area that has been approved by
            such an agency in effect at any time during
            the taxable year. [H. Conf. Rept. 99-841,
            1986-3 C.B. (Vol. 4) 110; emphasis added.]


The phrase "such an agency" unmistakably refers to the SCS or a

State agency comparable to the SCS, whose plan is in effect for

the taxpayer's area.

       To the extent the partnerships make other arguments

regarding the meaning of "State" and "comparable State agency" as

used in the instant statute, we find the arguments wholly

unconvincing and unnecessary to discuss.

       The partnerships are understandably aggrieved that, while

subject to U.S. income tax reporting, they are nevertheless

denied conservation deductions to which a similarly situated

owner of farmland located in the United States would be entitled.

We are convinced, nevertheless, that in order to discourage

overproduction of agricultural commodities as a result of

previously existing Federal income tax provisions, Congress found

it necessary to limit allowable conservation deductions to those
                              - 15 -


incurred with respect to land located within an area in the

United States that are consistent with statutorily specified

conservation plans for that area.    The unfortunate consequence of

this restricting enactment, from the partnerships' point of view,

is that as of 1987 conservation expenditure deductions related to

foreign farmland are no longer allowed by reason of section

175(c)(3)(A).   The partnerships' conservation expenditure

deductions must therefore be disallowed.

     To reflect the foregoing,



                                      Decisions will be

                                 entered for respondent.
