                           NOT FOR PUBLICATION                           FILED
                    UNITED STATES COURT OF APPEALS                        DEC 5 2018
                                                                      MOLLY C. DWYER, CLERK
                                                                       U.S. COURT OF APPEALS
                           FOR THE NINTH CIRCUIT

WASCO REAL PROPERTIES I, LLC; et                No.    17-71810
al.,
                                                Tax Ct. Nos.8111-12
                Petitioners-Appellants,                     8112-12
                                                            8113-12
 v.

COMMISSIONER OF INTERNAL                        MEMORANDUM*
REVENUE,

                Respondent-Appellee.

                           Appeal from a Decision of the
                             United States Tax Court

                          Submitted December 3, 2018**
                              Pasadena, California

Before: D.W. NELSON and WARDLAW, Circuit Judges, and PRATT,*** District
Judge.




      *
             This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
      **
             The panel unanimously concludes this case is suitable for decision
without oral argument. See Fed. R. App. P. 34(a)(2).
      ***
            The Honorable Robert W. Pratt, United States District Judge for the
Southern District of Iowa, sitting by designation.
      Petitioners-Appellants (1) Wasco Real Properties I, LLC, Gardiner Family

Trust, Tax Matters Partner (“Wasco”); (2) Rosedale Ranch, a general partnership,

Rosedale Farming Group, Tax Matters Partner (“Rosedale”); and (3) King and

Gardiner Farms, LLC, Keith Gardiner, Tax Matters Partner (“K&G”) appeal the

decision of the United States Tax Court generally upholding the Final Partnership

Administrative Adjustments issued by the Commissioner of Internal Revenue

(“IRS”). Because the Tax Court correctly held that Petitioners-Appellants were

required to capitalize, rather than deduct, the property taxes and interest payments

made on the property purchased for their commercial almond farming operations,

we affirm the decision of the Tax Court.

      A Tax Court’s determination that the facts of the case fall within a particular

legal definition is reviewed de novo. DHL Corp. & Subsidiaries v. Comm’r, 285

F.3d 1210, 1216–17 (9th Cir. 2002).

      The Tax Court correctly held that Wasco was required to capitalize the

property taxes corresponding to the portion of the Wasco Property on which

almond trees were grown. The property taxes paid on the land were incurred in the

course of using the land to grow the trees, and directly benefit the growing of the

almond trees because paying property taxes allows the land to continue to be used

for the growth of almond trees. See 26 C.F.R. § 1.263A-1(e)(3)(i)(A). As such, the

property taxes paid on the land are indirect costs allocable to the production of the


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almond trees and were required to be capitalized under I.R.C. § 263A(2)(B).

      The Tax Court correctly held that each Petitioner-Appellant was required to

capitalize the interest paid on the land acquisition debt corresponding to the portion

of its land on which almond trees were grown. The interest on the land acquisition

debt is allocable to the almond trees within the meaning of I.R.C. § 263A(f)(1)(B)

and as defined by the allocation rules in § 263A(f)(2)(A). The land acquisition debt

is directly attributable to the production expenditures of the almond trees, because

the cost of the land is a production expenditure of the trees. See I.R.C.

§ 263(f)(5)(C). The cost of the land is a production expenditure because it is

required to be capitalized as an indirect cost. See I.R.C. § 263A(a)(2)(B); 26 C.F.R.

§ 1.263A-11(a). The cost of the land is an indirect cost because it “directly

benefit[s]” or is “incurred by reason of the performance of production” of the

almond trees. 26 C.F.R. § 1.263A-1(e)(3)(i)(A). The land on which the almond

trees grow directly benefits the production of the almond trees by providing the

soil and nutrients that the trees require to grow. The cost of the land was also

incurred by reason of producing the trees; that is, the farmers had to buy the land as

the first step in the process of production of the almond trees.

      I.R.C. § 263A(a)(2) does not exclude the cost of the land from capitalization

because the cost of the land may be taken into account in computing income for a

future taxable year as part of the basis of the property, e.g., when the land is sold.


                                           3
See 26 C.F.R. § 1.263A-1(c)(3), (4). Therefore, the interest paid on the land

acquisition debt is allocable to the almond trees and each Petitioner-Appellant was

required to capitalize the interest corresponding to the portion of its land on which

almond trees were grown.

       The Tax Court correctly applied the anti-abuse rule to hold that K&G and

Rosedale were required to capitalize the interest they paid on the funds they

borrowed and contemporaneously lent to Wasco to purchase the Wasco property.

The text of the anti-abuse rule does not contain a “purposeful avoidance”

requirement. See 26 C.F.R. § 1.263A-15(c). Avoidance can be evidenced by

conduct. The situation here is exactly the type that the anti-abuse rule

contemplates. If Wasco had obtained the loans directly from the third parties

without going through Rosedale and K&G, Wasco would be required to capitalize

the interest.

       The duty of consistency does not preclude the § 481 adjustments made by

the IRS. The duty of consistency applies to changes made by the taxpayer, not

adjustments imposed by the Commissioner. I.R.C. § 481(a); see Rankin v. Comm’r,

138 F.3d 1286, 1288 (9th Cir. 1998).

       Petitioners-Appellants have not carried the burden of clearly showing their

right to the claimed deductions.

       The decision of the Tax Court is AFFIRMED.


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