           AGRO-JAL FARMING ENTERPRISES, INC., ET AL., 1
            PETITIONERS v. COMMISSIONER OF INTERNAL
                     REVENUE, RESPONDENT
         Docket Nos. 15103–10, 3924–11.              Filed July 30, 2015.

            P—a farming corporation—deducted the cost of various
         field-packing materials for the year in which it bought them.
         R contends that under I.R.C. section 464 and 26 C.F.R. sec-
         tion 1.162–3 P may deduct the cost of those materials only for
         the year in which P uses them. Held: The class of items
         described under section 464 as ‘‘feed, seed, fertilizer, or other
         similar farm supplies,’’ does not include packing materials as
         ‘‘similar farm supplies.’’ Held, further, the ‘‘provided that’’
         clause of section 1.162–3 for the years at issue means that the
         cost of materials and supplies must be deducted as the items
         are used or consumed, on the condition that they haven’t been
         deducted for any prior year. P may therefore deduct the cost
         of field-packing materials for the year of purchase.

  Robert Warren Wood and Craig A. Houghton, for petitioner.
  Chong S. Hong and Thomas R. Mackinson, for respondent.

                                    OPINION

   HOLMES, Judge: Agro-Jal Farming Enterprises, Inc. is a
farming corporation in Santa Maria, California that grows
strawberries and vegetables. When it harvests them, it uses
field-packing materials—plastic clamshell containers for the
strawberries and cardboard trays and cartons for the other
produce. Agro-Jal has always used the cash method of
accounting for these materials—which means that it deducts
their full purchase price in the year it buys them instead of
deducting them bit-by-bit as they are used. The Commis-
  1 Inan order dated September 21, 2011, we consolidated docket Nos.
15102–10, 15103–10, 15114–10, 15115–10, 3924–11, 3925–11, 3926–11,
and 3927–11 for trial, briefing, and opinion. This opinion decides sum-
mary-judgment motions in only two of these cases, Nos. 15103–10 and
3924–11.

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146           145 UNITED STATES TAX COURT REPORTS                     (145)


sioner insists that Agro-Jal may deduct the cost of only those
field-packing materials that it actually uses each tax year,
and that it must defer deduction of the rest. Agro-Jal dis-
agrees. Who is right depends on our interpretation of section
464 of the Code and section 1.162–3 of the regulations. 2
   This is apparently an issue never before addressed by any
court.

                              Background
I. Agro-Jal’s Business
   Agro-Jal was incorporated in 1996, but it is still in many
ways the Maldonaldo family farm, whose patriarch founded
it many years ago. The business has grown greatly over the
years, and most of its income now comes from the efficient
production of a few crops—strawberries, broccoli, cauliflower,
iceberg and romaine lettuce, and celery. It is a year-round
business but somewhat unpredictable because of the farmer’s
oldest adversary, the weather, as well as fluctuations in
market demand.
   Strawberry plants can produce several crops before they
decline in productivity, so Agro-Jal plants new strawberry
plants each October and harvests their fresh fruit between
March and June, picks and freezes strawberries between
July and August, and passes through the fields for a last
crop of fresh fruit a year later between October and
December. Broccoli and cauliflower come in throughout the
year about 90 to 110 days after planting, and harvesting
takes about two weeks at the end of each cycle. Lettuce is
more regular: planted each January and harvested about 24
weeks later during a frantic seven days. Celery is also reg-
ular, sown in September and October and harvested during
May and June.
   California’s climate lets Agro-Jal stay busy planting and
harvesting throughout the year, and once each crop fully
matures, Agro-Jal has to be ready with the right combination
of trays, cartons, and clamshell containers to pack the
produce and get it to market.
  2 Unless we say otherwise, all section references are to the Internal Rev-

enue Code (Code) in effect for the years in issue.
(145)   AGRO-JAL FARMING ENTERS, INC. v. COMMISSIONER       147


   Agro-Jal does not just cut and pile produce when the time
comes—its workers go into the field to trim, inspect, grade,
and pack it. They pack fresh strawberries into prelabeled
plastic clamshells in various sizes (pint, one pound, two
pounds, etc.) and then place the clamshells in preassembled
cardboard trays. These clamshells aren’t exotic—they’re iden-
tical to what shoppers find when they buy strawberries at
the local grocery store. But they are very important to Agro-
Jal because packing in the fields drastically reduces proc-
essing times, lets cool air move through the packages and
chill the product before it is shipped, and allows ethylene gas
to escape. (Ethylene gas speeds ripening, which shortens
shelf life.) Harvesting strawberries destined to be frozen is
very similar, but with the additional step of loading the ber-
ries into large freezer bins for transport. Agro-Jal’s other
produce is bundled up, marked by size or weight, and packed
into cardboard cartons, cardboard trays, and plastic wrap-
pers. Workers then transport all the crops to a cooling
facility; and because everything Agro-Jal sells is perishable,
there is only so much time to get everything done. Packaging
produce quickly is an important part of the process, and
Agro-Jal’s ability to pack quickly would be significantly
weakened if it didn’t keep field-packing materials on hand.
   Regulations lengthen the lead time for getting field-
packing materials out to the field. The labels for all the
packing materials must identify the product, its brand name,
Agro-Jal’s name as the grower and shipper, the country of
origin, the weight, the UPC, and other relevant or required
information. Agro-Jal can’t just buy bare boxes. It must allow
enough time to contract for materials that meet all the var-
ious federal and state laws on labeling and packaging. This
means customization, and Agro-Jal has to wait between two
and four months for delivery once it places an order. Agro-
Jal buys in bulk and regularly prepays for large quantities
to ensure crops don’t spoil for want of packaging. This makes
it less likely that Agro-Jal will be delayed during the small
window in which it must harvest, pack, cool, and ship
produce.
II. Agro-Jal’s Accounting
  One of the complications of deciding these motions is that
Agro-Jal uses the cash method for its tax accounting but the
148           145 UNITED STATES TAX COURT REPORTS                            (145)


accrual method for its financial statements. The company is
a large operation that needs bank financing, and its banks
want statements that use generally accepted accounting prin-
ciples (GAAP). This meant that Agro-Jal took physical inven-
tories of its field-packing materials at the end of each year
before us.
  Agro-Jal’s year-end records enabled the parties to stipulate
the total amount paid for field-packing materials each year,
the portion of the costs of those materials bought and used
during the year, the portion paid for and received but not
used, and the portion that it had paid for but not yet
received. (The parties agree that Agro-Jal always received
and used any materials in this last category by the end of the
next year.) Here’s a table for the tax years at issue:
              Purchased     Purchased                      Total         Total
               and not       and not      Purchased       amount        amount
      Year    delivered       used        and used         used        purchased

      20051   $1,300,000     $554,296     $151,551       $151,551     $2,005,847
      2006     2,020,000      467,207     1,280,312      3,134,608     3,767,519
      2007     1,770,000      488,124     1,532,927      4,020,134     3,791,051
      2008       775,000      486,168     2,073,928      4,332,052     3,335,096
   1 Agro-Jal’s 2005 tax year isn’t at issue here. But we include it because Agro-
 Jal bought supplies in 2005 that it didn’t use until 2006.

   But even though Agro-Jal prepared financing statements
using GAAP, it kept its tax accounts—beginning with its first
tax year in 1996 and for every tax year afterward—according
to the cash method of accounting. Under the cash method, a
taxpayer includes all income for the tax year in which it’s
received, and deducts all expenses for the tax year in which
they are paid. See secs. 446(c)(1), 461(a); secs. 1.446–
1(c)(1)(i), 1.461–1(a)(1), Income Tax Regs. This means that
Agro-Jal deducts the full amount it spends on field-packing
materials for the year it buys them, even if it doesn’t use
them all or even receive them.
   The Commissioner concedes that Agro-Jal’s packing mate-
rials are deductible expenses, and that Agro-Jal is generally
entitled to use the cash method. But he challenges the timing
of Agro-Jal’s deductions.
   Both parties have moved for partial summary judgment on
this question. There are no factual disputes, and the parties
agree that this Court’s construction of section 464 and sec-
tion 1.162–3, Income Tax Regs., will lead to granting one of
(145)   AGRO-JAL FARMING ENTERS, INC. v. COMMISSIONER                 149


the two motions. The issue is one of considerable interest to
farmers generally.

                              Discussion
I. Principles of Farm Accounting
   Cash-method taxpayers generally can deduct their
expenses for the year in which they pay them. See sec.
461(a); sec. 1.461–1(a)(1), Income Tax Regs. And Agro-Jal is
surely right that farmers have been allowed to choose the
cash method of accounting for a long time. The Supreme
Court itself has blessed the practice as ‘‘an historical conces-
sion by the Secretary and the Commissioner to provide a uni-
tary and expedient bookkeeping system for farmers and
ranchers in need of a simplified accounting procedure.’’ See
United States v. Catto, 384 U.S. 102, 116 (1966). Farmers
have both business and tax reasons to prepay for supplies—
they may get to take advantage of earlier deductions, receive
more favorable prices, and speed up harvesting. See Commis-
sioner v. Van Raden, 650 F.2d 1046, 1049 (9th Cir. 1981),
aff ’g 71 T.C. 1083 (1979). There are a few limits—a prepay-
ment must actually be a payment and not a deposit, see, e.g.,
Lillie v. Commissioner, 45 T.C. 54, 63 (1965), aff ’d, 370 F.2d
562 (9th Cir. 1966); Rev. Rul. 79–229, 1979–2 C.B. 210, and
the materials or supplies must be used within the next year
to avoid an argument about whether the expense needs to be
capitalized, see, e.g., Zaninovich v. Commissioner, 616 F.2d
429, 432 (9th Cir. 1980), rev’g 69 T.C. 605 (1978).
   As is always the case with tax law, this general rule has
a number of exceptions. Two concern us here. The first is sec-
tion 464, which Congress enacted after noticing that rich
people were buying investment packages that featured highly
leveraged purchases of farm supplies. These deductions were
typically taken by limited partnerships or subchapter S cor-
porations 3 so that the expense could be distributed to the
investor. Donald H. Kelley, Burnell E. Steinmeyer, & George
G. Vinton, ‘‘Tax Accounting Rules for Farmers and
  3 Taxation  of S corporations is under subchapter S of the Code. S cor-
porations do not pay taxes themselves but rather pass through items of in-
come and deduction to their shareholders. Sec. 1366(a)(1). Even though
they don’t pay taxes, however, S corporations do file information returns
to report their income and deductions. See sec. 6037.
150           145 UNITED STATES TAX COURT REPORTS                        (145)


Ranchers,’’ 31 S.D. L. Rev. 255, 261–62 (1986). Section 464
allowed investors substantial deductions with no offsetting
income. Id. The Senate noted that ‘‘[f]arm tax benefits have
been effectively packaged and sold to high-bracket taxpayers
* * * for investments in cattle feeding and breeding, tree
crops, vegetable and other field crops, vineyards, dairy cows,
fish, chickens, and egg production.’’ See S. Rept. No. 94–
938(I), at 54 (1976), reprinted in 1976 U.S.C.C.A.N. 3438,
3490.
    Section 464 restricts ‘‘farming syndicates’’ from deducting
‘‘feed, seed, fertilizer, or other similar farm supplies’’ earlier
than for the year that those supplies are ‘‘actually used or
consumed.’’ Congress’s target was taxpayers primarily moti-
vated by a desire to shelter income—not those motivated by
profit. Id. at 58, reprinted in 1976 U.S.C.C.A.N. at 3494.
Indeed, the Senate hoped the changes would ‘‘improve the
competitive position of full time farmers.’’ Id.
    Both parties agree that this section does not directly apply
to Agro-Jal, 4 but both also argue that the section helps us
figure out the meaning of the regulation that does.
    The regulation that’s in play is section 1.162–3, Income
Tax Regs. (as it was written in the years at issue), 5 and
especially its first sentence, which reads:
  4 Section 464 limits the ability of only ‘‘farming syndicates’’ and those
who are not ‘‘qualified farm-related taxpayers’’ to use the cash method.
The section defines a ‘‘farming syndicate’’ to be: (A) ‘‘a partnership or any
other enterprise other than a corporation which is not an S corporation en-
gaged in the trade or business of farming, if at any time interests in such
partnership or enterprise have been offered for sale in any offering re-
quired to be registered with any Federal or State agency having authority
to regulate the offering of securities for sale’’ or (B) ‘‘a partnership or any
other enterprise other than a corporation which is not an S corporation en-
gaged in the trade or business of farming, if more than 35 percent of the
losses during any period are allocable to limited partners or limited entre-
preneurs.’’ See sec. 464(c)(1). Excess prepaid farm supplies will be treated
in the same manner as if the taxpayer were a farming syndicate if the tax-
payer ‘‘(A) does not use an accrual method of accounting, (B) has excess
prepaid farm supplies for the taxable year, and (C) is not a qualified farm-
related taxpayer.’’ See sec. 464(f)(1) and (2).
  The Commissioner and Agro-Jal agree that Agro-Jal does not fall under
section 464(c) and (f).
  5 Section 1.162–3 has since been superseded (first in 2012 by a tem-

porary regulation and then by a permanent regulation) and now contains
substantially different language. T.D. 9636, 2013–43 I.R.B. 331. We base
(145)   AGRO-JAL FARMING ENTERS, INC. v. COMMISSIONER                     151


  Taxpayers carrying materials and supplies on hand should include in
  expenses the charges for materials and supplies only in the amount that
  they are actually consumed and used in operation during the taxable
  year for which the return is made, provided that the costs of such mate-
  rials and supplies have not been deducted in determining the net income
  or loss or taxable income for any previous year. [Sec. 1.162–3, Income
  Tax Regs.; emphasis added. 6 ]

Both parties also analyze what caselaw there is on the sub-
ject. Nothing’s directly on point, but the Ninth Circuit, to
which this case is appealable, see sec. 7482, has spoken a
couple times about the timing of farmers’ deductions. Both
Zaninovich and Van Raden acknowledge that farmers can
use cash-method accounting—but that general proposition
isn’t disputed here. See sec. 1.471–6(a), Income Tax Regs.
(expressly authorizing cash-method accounting). And what
was disputed in Zaninovich and Van Raden was whether the
farmers in those cases could deduct or had to capitalize pre-
paid rent and feed expenses. The Ninth Circuit created the
‘‘one-year rule’’ to solve that problem: ‘‘Under the ‘one-year
our analysis on the regulation in effect for the 2006–08 tax years. That
version may be found on online databases, such as HeinOnline.
   6 Agro-Jal doesn’t meet the exception in the second sentence of section

1.162–3, which states: ‘‘If a taxpayer carries incidental materials or sup-
plies on hand for which no record of consumption is kept or of which phys-
ical inventories at the beginning and end of the year are not taken, it will
be permissible for the taxpayer to include in his expenses and to deduct
from gross income the total cost of such supplies and materials as were
purchased during the taxable year for which the return is made, provided
the taxable income is clearly reflected by this method.’’ (Emphasis added.)
Agro-Jal fails the second italicized requirement because there is no dispute
that it takes a year-end inventory of field-packing materials. It argues that
its December 31 inventories are only year-end inventories, not inventories
for the beginning of the following year. But there is nothing in the record
on this motion, and Agro-Jal cannot reasonably argue, that an inventory
taken at the very end of the year does not also reflect inventory at the very
beginning of next year. We are confident that no intervening event renders
the end-of-year inventory inapplicable as the beginning-of-year inventory
for the next year.
   Those year-end inventories also serve as a ‘‘record of consumption’’ of the
firm’s field-packing materials: Agro-Jal says that it doesn’t keep a record
of consumption of each field-packing item. But it’s possible to compute con-
sumption by taking inventory at the beginning of the year, adding new
purchases, and subtracting inventory at the end of the year. Agro-Jal did
keep records of each of those parts of the consumption equation, which
means that it kept a record of consumption, and so fails the first italicized
requirement.
152         145 UNITED STATES TAX COURT REPORTS             (145)


rule’ an expenditure is treated as a capital expenditure if it
creates an asset, or secures a like advantage to the taxpayer,
having a useful life in excess of one year,’’ but ‘‘the ‘one-year
rule’ is strictly applied to allow a full deduction in the year
of payment where an expenditure creates an asset having a
useful life beyond the taxable year of twelve months or less.’’
See Zaninovich, 616 F.2d at 432; Van Raden, 650 F.2d at
1050 n.7.
   The Commissioner does not argue that Agro-Jal has to cap-
italize the cost of its field-packing materials, which makes
these cases not quite on point. He also points to Hillsboro
Nat’l Bank v. Commissioner, 460 U.S. 370 (1983), in support
of his position that materials and supplies may be deducted
only as they are used or consumed. This case doesn’t quite
say that, either. Though Bliss Dairy had deducted the full
cost of its cattle feed in the same tax year it bought it, and
though the Court held in Hillsboro that the dairy’s share-
holders had to recognize income for receiving in liquidating
distributions the feed that the dairy had deducted but hadn’t
used, the analysis was all about the tax-benefit rule. Id. at
397–402. The tax-benefit rule ‘‘tells us to look at the subse-
quent event * * * and ask: If that event had occurred within
the same taxable year, would it ‘have foreclosed the deduc-
tion?’ ’’ Maines v. Commissioner, 144 T.C. 123, 129 (2015); see
also Rojas v. Commissioner, 901 F.2d 810 (9th Cir. 1990)
(argument about tax-benefit rule, not a farm’s entitlement to
initial deduction), aff ’g 90 T.C. 1090 (1988).
   The only ‘‘subsequent event’’ here is that Agro-Jal keeps
buying and using more field-packing materials every year.
And the parties stipulated that Agro-Jal always uses its pre-
paid packing materials by the end of the following tax year—
as it must, because they begin to deteriorate six to eight
months after they’re delivered. This case is just about the
timing of deductions and not about the tax-benefit rule or
capitalization-v.-expensing.
II. Summary of the Arguments
   The Commissioner argues that Agro-Jal must defer its
deductions for field-packing materials until each clamshell,
tray, carton, or wrapper is used or consumed. He would
italicize the first clause of the first sentence of section
(145)   AGRO-JAL FARMING ENTERS, INC. v. COMMISSIONER                 153


1.162–3, Income Tax Regs., which he argues sets up a gen-
eral rule that every taxpayer must defer deductions for mate-
rials and supplies until the year he uses or consumes them:
  Taxpayers carrying materials and supplies on hand should include in
  expenses the charges for materials and supplies only in the amount that
  they are actually consumed and used in operation during the taxable year
  for which the return is made, provided that the costs of such materials
  and supplies have not been deducted in determining the net income or
  loss or taxable income for any previous year. [Sec. 1.162–3, Income Tax
  Regs.; emphasis added.]

   The Commissioner recognizes that tax law usually
garnishes general rules with exceptions, but he argues that
section 464 is the only exception to this general rule, and
that section allows immediate deductions only for ‘‘feed, seed,
fertilizer, or other similar farm supplies,’’ when the amounts
prepaid for these expenses don’t account for more than 50%
of all farming expenses during any three-year period. See sec.
464(a), (f). Agro-Jal doesn’t spend that much on packing
materials, but packing materials aren’t ‘‘feed, seed, or fer-
tilizer,’’ and the Commissioner argues that we should nar-
rowly construe the phrase ‘‘other similar farm supplies.’’
   Agro-Jal has two counterarguments. The first assumes
that the Commissioner’s interpretations of section 464 and
section 1.162–3, Income Tax Regs., are correct—that is, sec-
tion 464 allows immediate deductions only for ‘‘feed, seed,
fertilizer, and other similar farm supplies’’—but Agro-Jal
argues that field-packing materials are ‘‘other similar farm
supplies’’ and thus deductible in the year of purchase. Its
second argument is also textualist, but more complicated. It
starts again with section 464 but to make a broader point—
that the section’s restriction on cash-method accounting for
farming syndicates shows that tax law has a background rule
that lets farmers who are not syndicates freely use the cash
method for everything, at least everything used, as field-
packing materials are, within a year. Agro-Jal reasons that
section 464 is the only limit that the Code places on farmers’
use of the cash method and, because section 464 concededly
doesn’t apply to it, the Code itself must be read to presump-
tively allow Agro-Jal to take its deduction for field-packing
materials as it normally does—in the year it buys them. Next
it tells us to look at the second clause of the first sentence
of section 1.162–3—the one we didn’t italicize above: ‘‘pro-
154         145 UNITED STATES TAX COURT REPORTS             (145)


vided that the costs of such materials and supplies have not
been deducted in * * * any previous year.’’ Agro-Jal says
that because it already legitimately deducted its materials
and supplies in an earlier year—the year it bought them—
it isn’t required to defer its deduction until the year the sup-
plies are used or consumed.
III. Field-Packing Materials and Section 464
   We’ll begin with a close look at section 464. Section 464
sets as a general rule for farming syndicates that ‘‘amounts
paid for feed, seed, fertilizer, or other similar farm supplies
shall only be allowed for the taxable year in which such feed,
seed, fertilizer, or other supplies are actually used or con-
sumed.’’ Sec. 464(a) (emphasis added). The negative implica-
tion of section 464 is that nonsyndicate farmers, like Agro-
Jal, that use the cash method can deduct feed, seed, fer-
tilizer, or other similar farm supplies in the year of purchase.
The Commissioner agrees that if Agro-Jal’s packing mate-
rials are ‘‘feed, seed, fertilizer, or other similar farm sup-
plies,’’ then section 1.162–3 doesn’t apply.
   But the Commissioner doesn’t think field-packing mate-
rials qualify because, he argues, the old canon of ejusdem
generis tells us to limit the reach of ‘‘other similar farming
supplies’’ to those like ‘‘feed, seed, and fertilizer.’’ He says
that means inputs of farm production, not useful materials.
Agro-Jal disagrees, and argues that ‘‘other similar farm sup-
plies’’ needs to be read broadly.
   When a general word or phrase follows a list of more spe-
cific words, ejusdem generis tells us we should narrowly con-
strue the general word or phrase to include only things that
are akin to the specific words. See United States v. Tobeler,
311 F.3d 1201, 1205 (9th Cir. 2002); see also Coleman v.
Commissioner, 76 T.C. 580, 589 (1981). That list of specific
words here—feed, seed, fertilizer—evokes a class. We have to
figure out how these terms are alike, and we have to agree
with the Commissioner on this one: Feed and seed and fer-
tilizer are alike in that each is an essential input to the
growing of crops or the raising of livestock. None of the speci-
fied items is useful in any other part of a farm’s operations—
and specifically not in harvesting, transporting, or mar-
keting. ‘‘Feed, seed, and fertilizer’’ is not an exhaustive list—
(145)   AGRO-JAL FARMING ENTERS, INC. v. COMMISSIONER                      155


things like saplings and lime could be considered farm sup-
plies that are similar to seeds and fertilizer, respectively. We
don’t doubt that Agro-Jal’s field-packing materials are of crit-
ical importance to its harvesting process and its overall busi-
ness operations. But the materials aren’t critical to the
growing of crops or the raising of livestock—which makes
them not similar enough to the class of items described by
the phrase ‘‘feed, seed, [or] fertilizer.’’
  But section 464 does bolster Agro-Jal’s argument
indirectly, because the history of section 464 shows that
before its enactment anyone in the farming business could
immediately deduct prepaid expenses. 7 Seen against this
backdrop, section 464 looks like it was aimed at both espe-
cially abusive taxpayers—‘‘farming syndicates’’—and to cer-
tain especially abused expenses—‘‘feed, seed, fertilizer, or
other similar farm supplies.’’ 8
IV. Timing Under Section 1.162–3
  Which brings us to what we think is the real kernel of
applicable law on these motions—the first sentence of section
   7 See, e.g., S. Rept. No. 94–938(I), at 54 (1976), reprinted in 1976

U.S.C.C.A.N. 3438, 3489 (‘‘Generally, in farming operations tax losses can
be shown in early years of an investment because of (1) the opportunity
to deduct, when paid, costs which in nonfarm businesses would be inven-
toried and deducted in a later year, (2) the ability to deduct, when paid,
costs which should properly be capitalized.’’); id. at 52 (‘‘The special inven-
tory exception for farmers was adopted by administrative regulation more
than fifty years ago. The primary justification for this exception was the
relative simplicity of the cash method of accounting.’’); id. at 54 (‘‘[U]nder
the cash method of accounting, farm expenses are still deductible as they
are paid.’’).
   8 The Blue Book seems to support this. See Staff of J. Comm. on Tax-

ation, General Explanation of the Tax Reform Act of 1986, at 192 n.7 (J.
Comm. Print 1987), available at file:///U:/wp/Coffey/jcs–10–87.pdf (‘‘Prepaid
expenses of taxpayers [not restricted by section 464] may be deducted to
the same extent as under prior law, without regard to the 50-percent limi-
tation’’). (The Blue Book is a collection of commentaries regarding recently
passed tax laws. United States v. Woods, 571 U.S. ll, ll 134 S. Ct.
557, 568 (2013). It is written by the staff of the Joint Committee on Tax-
ation, but because it is written after the passage of legislation, it has no
bearing on statutory interpretation. Id. Its weight is that of a law-review
article. Id. Or maybe not. See sec. 1.6662–4(d)(3)(iii), Income Tax Regs.
(recognizing Blue Book, and not law-review articles, as a form of ‘‘substan-
tial authority’’ for the purpose of defending against a substantial-under-
statement penalty).)
156         145 UNITED STATES TAX COURT REPORTS                     (145)


1.162–3. It’s so important that we’ll give it a third reading
here, albeit with different italicization:
 Taxpayers carrying materials and supplies on hand should include in
 expenses the charges for materials and supplies only in the amount that
 they are actually consumed and used in operation during the taxable
 year for which the return is made, provided that the costs of such mate-
 rials and supplies have not been deducted in determining the net income
 or loss or taxable income for any previous year. [Sec. 1.162–3, Income
 Tax Regs.; emphasis added.]

   Much depends on the phrase ‘‘provided that.’’ Agro-Jal con-
tends that ‘‘provided that’’ is just a lawyerly synonym for
‘‘only if.’’ Under this interpretation, Agro-Jal has to defer its
deductions until it uses or consumes the field-packing mate-
rials ‘‘only if ’’ it didn’t deduct them in any prior year. Agro-
Jal, as a cash-method taxpayer not constrained by section
464, will always have deducted the prepaid materials in the
prior year because that’s when it paid for them.
   Agro-Jal is quite right that historical concessions as sup-
ported by references in caselaw, and with clear shadows cast
by a section like 464, have created a general rule that
farmers can use the cash method for supplies they use within
a year of purchase. Agro-Jal even agrees with the Commis-
sioner that section 1.162–3, Income Tax Regs., creates a
significant exception to this general rule for materials and
supplies. But Agro-Jal also says that this exception doesn’t
apply to cash-method taxpayers who meet the condition set
forth in the ‘‘provided that’’ clause. If a taxpayer has already
deducted costs of supplies for a prior year, he’s not subject
to the first clause. Agro-Jal says the second clause is impor-
tant to ensure that a deduction is not taken twice by those
using the cash method. The first sentence of section 1.162–
3 in this reading merely emphasizes the need to bar a second
deduction for the same supplies when a taxpayer actually
uses them in a later year, but doesn’t require taxpayers to
defer deductions until consumption. Agro-Jal argues that its
interpretation must be correct, because the ‘‘provided that’’
clause would be meaningless if it wasn’t read as a conditional
limit on the reach of the first clause.
   The Commissioner agrees that section 1.162–3 is the
controlling regulation here. But he says that the words ‘‘pro-
vided that’’ should be read as a ‘‘limitation or qualification to
prevent a double deduction.’’ He says Agro-Jal’s reading of
(145)   AGRO-JAL FARMING ENTERS, INC. v. COMMISSIONER                       157


the second clause deprives the first clause of any effect in the
case of a cash-method taxpayer while his reading ‘‘gives
meaning to the whole regulation and produces a logical
result.’’
   The Commissioner has to argue in other words that this
‘‘provided that’’ clause doesn’t in fact create a condition for
the application of an exception, but is doing something else.
In an ancient case, Schlemmer v. Buffalo, Rochester & Pitts-
burg Ry. Co., 205 U.S. 1, 10 (1907), the Supreme Court con-
strued ‘‘provided’’ to create an exception, rather than a condi-
tion. We don’t think that would make any difference.
Whether ‘‘provided that’’ is an exception or a condition, the
result is the same here—Agro-Jal would have to defer its
packing-materials deduction, except when it already
deducted the materials for a prior year. The Commissioner’s
interpretation is essentially trying to say that ‘‘provided that’’
means ‘‘in lieu of.’’ This would require Agro-Jal to take its
deductions when the materials are used or consumed ‘‘in lieu
of ’’ taking them in any prior year.
   We think that the Commissioner’s reading of the proviso is
a stretch and that ‘‘provided that’’ means ‘‘on the condition
that’’ or ‘‘if ’’ and ‘‘with the understanding.’’ See, e.g., Web-
ster’s New Collegiate Dictionary 1001 (11th ed. 2008). And
we hold that the ‘‘provided that’’ clause of section 1.162–3
means that materials and supplies must be deducted as they
are used or consumed, on the condition that (or ‘‘only if ’’, or
‘‘as long as’’) they haven’t been deducted in any prior year.
A cash-method taxpayer who immediately deducts supplies
in the year of purchase will satisfy the first sentence of sec-
tion 1.162–3 by not taking a second deduction when the
materials or supplies are used in a later taxable year.
   Each side warns us that the other’s reading of the phrase
would create surplusage. The surplusage canon holds that ‘‘it
is no more the court’s function to revise by subtraction than
by addition’’ and most commonly prevents a statutory
interpretation that would make a provision irrelevant.
Antonin Scalia & Bryan A. Garner, Reading Law: The
Interpretation of Legal Texts 174, 176 (2012). 9 Agro-Jal
  9 ‘‘If a provision is susceptible of (1) a meaning that gives it an effect al-

ready achieved by another provision, or that deprives another provision of
all independent effect, and (2) another meaning that leaves both provisions
                                                  Continued
158          145 UNITED STATES TAX COURT REPORTS                      (145)


argues that the Commissioner’s interpretation deprives the
second clause of any effect because there is no scenario in
which a cash-method taxpayer could ever claim a deduction
before the year of use. The Commissioner similarly argues
that Agro-Jal’s interpretation deprives the first clause of any
effect because there is no scenario in which a cash-method
taxpayer would have to defer its deduction until the year of
use.
   We agree with Agro-Jal. Agro-Jal’s interpretation of section
1.162–3 could apply in three different scenarios. In the first
a packing producer advances a cash-method taxpayer mate-
rials and supplies without immediate payment. Let’s say that
in December of year 1, a cash-method farmer receives and
uses $100 of supplies payable 30 days later in January of
year 2. Generally, under the cash method, the farmer would
ordinarily deduct the supplies for year 2—the year he paid
for them. See sec. 1.461–1(a)(1), Income Tax Regs. But under
Agro-Jal’s reading of section 1.162–3 the farmer can deduct
the supplies in year 1—the year he used them. In this
example, Agro-Jal’s reading of section 1.162–3 permits deduc-
tions in the earliest possible year, without deferral or
duplication. 10 In the second scenario a cash-method farmer
both buys $100 of supplies and uses them in year 1. This
time the farmer takes a deduction as he uses the supplies
without taking the deduction twice because he didn’t deduct
them for a prior year. In the third scenario, the one we have
here, the farmer pays for $100 of supplies in year 1 but uses
them in year 2. He takes a deduction for year 1 under the
cash method, but when he uses the supplies in year 2 he
doesn’t double-dip because he’s already deducted the supplies
in year one. The ‘‘provided that’’ clause says he doesn’t
deduct them when he uses them because he deducted them
for a prior year. Agro-Jal’s interpretation would give both
clauses meaning, depending on the different years in which
a taxpayer buys and uses his supplies.

with some independent operation, the latter should be preferred.’’ Antonin
Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts
174, 176 (2012).
  10 Though it is possible that regularly doing so might cause the Commis-

sioner to argue that the taxpayer’s accounting system is distorting his in-
come. See Rev. Rul. 78–382, 1978–2 C.B. 111.
(145)   AGRO-JAL FARMING ENTERS, INC. v. COMMISSIONER                   159


   Whereas Agro-Jal’s interpretation gives effect to both
clauses, the Commissioner’s interpretation renders the
second clause surplusage in every example. 11 Under the
Commissioner’s reading, a cash-method taxpayer who uses
supplies in year 1 but pays in year 2 gets a deduction only
for the year of use; if he buys and uses supplies in the same
year, he gets a deduction only for the year of use; and if he
buys supplies in year 1 but uses them only in year 2, he gets
a deduction only for the year of use. A cash-method taxpayer
could not, in other words, ever deduct supplies for a year
other than the one in which he uses them. The first clause
would always apply and render the ‘‘provided that’’ clause
surplus.
   But there’s another wrinkle—section 1.162–3 doesn’t say
‘‘any’’ or ‘‘all’’ materials and supplies. It instead governs only
materials and supplies that taxpayers carry ‘‘on hand.’’ Let’s
go back to the block quote for a fourth time, with yet another
bit italicized:
  Taxpayers carrying materials and supplies on hand should include in
  expenses the charges for materials and supplies only in the amount that
  they are actually consumed and used in operation during the taxable
  year for which the return is made, provided that the costs of such mate-
  rials and supplies have not been deducted in * * * any previous year.
  [Sec. 1.162–3, Income Tax Regs.; emphases added.]

   The first question is what ‘‘on hand’’ means. Agro-Jal says
it includes materials and supplies that are prepaid and have
been delivered but haven’t yet been consumed. Materials and
supplies that have been ordered, but haven’t yet been deliv-
ered, are not ‘‘on hand.’’ The Commissioner takes a much
more expansive view: He says ‘‘on hand’’ includes items
that’ve been purchased and are expected to arrive at a later
  11 Well, maybe not every example. Although the Commissioner didn’t
rely on it, the second sentence of section 1.162–3 allows a deduction for
the year purchased of ‘‘incidental materials or supplies on hand for which
no record of consumption is kept or of which physical inventories at the
beginning and end of the year are not taken.’’ See supra note 2. Such pur-
chases might be covered by the part of the regulation’s first sentence after
the ‘‘provided that,’’ but a taxpayer would get current deductibility under
the second sentence only if he didn’t keep a record of his consumption of
these supplies. The first sentence assumes that the materials and supplies
governed by it have records of the ‘‘amounts that they are actually con-
sumed.’’ The two sentences thus seem to address different situations en-
tirely.
160           145 UNITED STATES TAX COURT REPORTS                       (145)


date—even if those items haven’t even been manufactured
yet. 12 We agree with the Commissioner that ‘‘on hand’’ might
conceivably include more than just those supplies that are
actually, currently physically present and immediately acces-
sible. See, for example, Webster’s New Collegiate Dictionary
564, defining ‘‘on hand’’ as including ‘‘present possession’’ and
‘‘about to appear’’ (e.g., cartons en route to the farm, or car-
tons in a locked shed on a day when the only Maldonaldo
with a key is off the farm giving a speech). But we’ll deal
with those hypotheticals if and when they become real—any
principle that they stand for doesn’t extend so far as to
include supplies for which delivery is still months away or
yet to be made, just those already actually physically present
or those imminently about to arrive.
   More important is how the phrase ‘‘on hand’’ affects the
meaning and scope of section 1.162–3. Section 1.162–3 gov-
erns only materials and supplies ‘‘on hand.’’ Materials and
supplies not on hand do not seem to be governed by section
1.162–3 at all. And this means that the regulation cannot
under any plausible reading say exactly what the Commis-
sioner argues—namely, that Agro-Jal can’t deduct any of the
field-packing materials that it has paid for and not yet used.
V. Conclusion
   Agro-Jal can deduct its field-packing materials for the year
it bought them. The materials that it buys that are not ‘‘on
hand’’ are governed by the general rules of cash-method
accounting, which allow current deduction. The materials
that it buys that are ‘‘on hand’’ are governed by section
1.162–3, which we hold does not require a cash-method tax-
payer to defer its deductions until the materials are used or
consumed, if the taxpayer deducted their costs for a prior tax
year. The ‘‘one-year rule’’—the rule that a taxpayer has to
use those supplies within an approximately one-year period—
might limit deductibility in some other case.
 12 We   asked Commissioner’s counsel at oral argument:
 Q: [Y]ou’re saying that even when the oil is still in the ground out of
    which the plastic is made, it’s ‘‘on hand’’ for purposes of the first sen-
    tence of 162–3?
 A: Yes, I think you would have read it a little bit broader than just the
    physical term of ‘‘on hand.’’
(145)   AGRO-JAL FARMING ENTERS, INC. v. COMMISSIONER                     161


  But not here. 13
                      An appropriate order will be issued
                    granting petitioners’ motion and denying
                    respondent’s motion.

                              f




   13 See Zaninovich, 616 F.2d at 432 n.6 (‘‘While the ‘one-year rule’ is

strictly applied to allow a full deduction in the year of payment where an
expenditure creates an asset having a useful life beyond the taxable year
of twelve months or less, it is not applied in the same manner in the other
direction. Where an expenditure creates an asset having a useful life be-
yond the taxable year of more than twelve months, the ‘one-year rule’ has
been used as a guidepost only, and not as a rigid rule requiring automatic
capitalization of every expenditure which creates an asset having a useful
life in excess of one year. See, e.g., Jack’s Cookie Co. v. United States, 597
F.2d 395, 405 (4th Cir. 1979); United States v. Wehrli, 400 F.2d 686, 689
(10th Cir. 1968).’’).
