(b)
Definitions.
(1) Section
25128,
subdivision (d)(2), of the Revenue and Taxation Code sets forth the statutory
definition of "agricultural business activity." In general, the term applies
only to taxpayers engaged in "the business of farming" as defined in Treasury
Regulation section 1.175-3 and includes only activities encompassed within "the
business of farming" as so defined.
(2) For purposes of Revenue and Taxation Code
section
25128,
subdivision (d)(2), and this regulation, the term "farm" is used in its
ordinary and accepted sense, and generally means land used for the production
of crops, fruits, or other agricultural products or for the sustenance of
livestock or poultry. The term "livestock" includes cattle, hogs, horses,
mules, donkeys, sheep, goats, and captive fur-bearing animals. The term
"poultry" includes chickens, turkeys, geese, ducks, emus, ostriches, and
pigeons. Thus, a farm includes livestock, dairy, poultry, fish, fruit,
fur-bearing animal, and truck farms, plantations, ranches, nurseries, ranges,
orchards, feed yards for fattening cattle, and greenhouses and other similar
structures used primarily for the raising of agricultural or horticultural
commodities. Greenhouses and other similar structures that are used primarily
for purposes other than the raising of agricultural or horticultural
commodities do not constitute farms, as, for example, structures that are used
primarily for the display, storage, fabrication, or sale of wreaths, corsages,
and bouquets. A fish farm is an area where fish are grown or raised, as opposed
to merely caught or harvested.
(3)
Wherever the definition of agricultural business activity in this regulation
refers to the production of a product, the term "production" means planting,
growing, breeding, raising or fattening one's own agricultural commodity.
Production includes processing activities which are normally incident to the
growing, raising, planting, breeding, or fattening of agricultural products.
For example, assume an apportioning trade or business is in the business of
growing and selling fruits and vegetables. When the fruits and vegetables are
ready to be harvested, the business picks, washes, inspects, and packages the
fruits and vegetables for sale. Such activities are normally incident to the
raising of these crops by farmers. The receipts from the sale of these fruits
and vegetables are gross business receipts from a qualified agricultural
business activity. The term production does not include the processing of
agricultural products beyond those activities which are normally incident to
the production of such products according to industry practice.
Example 1: The processing of grain that a company has
grown and harvested in order to produce flour, breads, cereals, and other
similar food products, and the sale of the processed products do not constitute
agricultural business activity.
Example 2: The processing of grapes into wine, regardless
of the source of the grapes, and the sale of such wine do not constitute
agricultural business activity.
Example 3: The processing of nuts by shelling and the
sale of such processed nuts do not constitute agricultural business activity.
Example 4: A farmer raises cattle, slaughters the cattle, and sells the
carcasses. Slaughtering cattle and the sale of their carcasses do not
constitute agricultural business activity.
(c) Unless otherwise provided in this
regulation, the following activities constitute agricultural business activity:
(1) The production of crops, plants, vines
and trees (excluding forestry operations or the growing of timber). This
category also includes the operation of sod farms and cranberry bogs; the
production of mushrooms, bulbs, flower seeds, and vegetable seeds; and the
production of hydroponic crops. Specific activities in this category include
the following:
(A) The production of wheat;
rice; field corn for grain or seed; sweet corn; popcorn; soybeans; and other
cash grains, including production of dry field and seed peas and beans,
safflowers, sunflowers, barley, buckwheat, cowpea, flaxseed, lentil, milo,
mustard seed, oat, rye, and sorghum.
(B) The production of field crops, including
cotton, cottonseed, tobacco, sugarcane, sugarbeets, potato, alfalfa, broomcorn,
clover, grass seed, hay, hop, mint, peanut, sweet potato, timothy, yam, other
roots, and tubers.
(C) The
production of vegetables and melons, including asparagus, bean, beet, bok choy,
broccoli, cabbage, cantaloupe, cauliflower, celery, cucumber, English pea,
green lima bean, green pea, lettuce, market gardens, onion, pepper, romaine,
snap bean, squash, tomato, and watermelon. This category also includes truck
farms.
(D) The production of fruits
and tree nuts, including berry crops, such as blackberry, blueberry, cranberry,
currant, dewberry, loganberry, raspberry, and strawberry; grapes; tree nuts,
including almond, filbert, macadamia, pecan, pistachio, and walnut; citrus
fruits, including grapefruit, lemon, lime, orange, and tangerine; deciduous
tree fruits, including apple, apricot, cherry, nectarine, peach, pear,
persimmon, plum, pomegranate, prune, and quince; avocado; banana; coffee; date;
fig; kiwi; olive; pineapple; plantain; and tropical fruits.
(E) The production of ornamental plants and
other nursery products, such as bulbs, florist's greens, flowers, shrubbery,
flower and vegetable seeds, and plants and sod. These products may be grown
under cover or outdoors.
(F) The
production of food crops grown under cover, such as mushrooms, bean sprouts,
fruits, greenhouse crops, hydroponic crops, mushroom spawn, rhubarb, seaweed,
tomatoes, truffles, and vegetables grown under cover.
(2) The keeping, grazing, or feeding of
livestock for the sale of livestock or livestock products. Businesses engaged
in these activities include farms, ranches, dairies, certain feedlots as
specified in subparagraph (A) of this paragraph, egg production facilities,
poultry hatcheries, and apiaries. Livestock includes cattle, hogs, sheep,
goats, poultry (including emus and ostriches), horses, rabbits, bees, pets,
fish in captivity, and fur-bearing animals in captivity. "Livestock products"
means products which come directly from the livestock without processing, such
as serums. Activities included in this general category include the following:
(A) The fattening of beef cattle in a
confined area for a period of at least 30 days. Business activities which
consist of feeding beef cattle for periods of less than 30 days, in connection
with their transport, are not included.
(B) The production or feeding of beef cattle,
such as beef cattle farms, cattle raising farms, and cattle ranches.
(C) The production or feeding of
hogs.
(D) The production of sheep,
lambs, goats, goats' milk, wool, and mohair. This includes the fattening of
lambs in a confined area (in feedlots) for a period of at least 30 days. The
feeding of lambs for periods of less than 30 days, in connection with their
transport, is not included.
(3) The production of cows' milk and other
dairy products and in raising dairy heifer replacements.
(4) The production of poultry and eggs. This
category includes the following:
(A) The
production of chickens for slaughter, including Cornish hens.
(B) The production of turkeys and turkey
eggs.
(C) Operating poultry
hatcheries.
(D) The production of
poultry and eggs, not elsewhere included, on duck farms, emu farms, ostrich
farms, egg (from other than chicken or turkey) farms, geese farms, pheasant
farms, pigeon farms, quail farms, and squab farms.
(5) The production of animal specialities.
This includes the production of the following:
(A) Fur and fur-bearing animals and rabbits,
including chinchilla, fox, game, and mink;
(B) Horses and other equines, including
burros, donkeys, mules, and ponies;
(C) Finfish and shellfish, such as
crustaceans and mollusks, within a confined space and under controlled feeding,
sanitation, and harvesting procedures, such as on catfish farms, fish farms,
goldfish farms, minnow farms, tropical aquarium fish farms, and trout farms;
and
(D) Other animal specialties,
(including the products thereof), such as pets, bees, worms, and laboratory
animals.
(6) Under
section
25128,
subdivision (d)(2), of the Revenue and Taxation Code, the following are also
included in the definition of agricultural business activity:
(A) Cultivating the soil, or raising or
harvesting any agricultural or horticultural commodity;
(B) Raising, shearing, feeding, caring for,
training, or management of animals on a farm; and
(C) Handling, drying, packing, grading, or
storing on a farm any agricultural or horticultural commodity in its
unmanufactured state, but only if the owner, tenant, or operator of the farm
regularly produces more than one-half of the commodity handled, dried, packed,
graded, or stored.
The more-than-one-half test set forth in this subsection
(C) and in section
25128,
subdivision (d)(2), of the Revenue and Taxation Code applies only to service
receipts from outside the apportioning trade or business and does not apply to
the apportioning trade or business's self-produced agricultural products. For
example, if a farming corporation stores both its own and other corporations'
agricultural products on its farm premises, and it self-produces over 50
percent of the agricultural products stored there, then the entire proceeds
received from the third parties (outside of the apportioning trade or business)
for providing storage services would be included as gross business receipts
from an agricultural business activity. However, if the farmer self-produces
less than 50 percent of the products stored, the receipts from services to
third parties will not qualify as gross business receipts from an agricultural
business activity. The amounts received from the sales of the self-produced
agricultural products which had been stored by the farmer on its farm would
still qualify as gross business receipts from an agricultural business
activity.
(e) Gross business receipts from agricultural
business activity.
(1) Only gross receipts
derived by an apportioning trade or business from agricultural business
activity as defined in this regulation shall be considered to be gross business
receipts from a qualified agricultural business activity for purposes of
section
25128 of the Revenue and Taxation
Code. Except as provided in paragraph (3) of this subsection, gross receipts
from sales of produce which were not produced by the apportioning trade or
business are not gross business receipts from agricultural business activity.
Example: If X, a farming corporation, purchases peaches
from an unrelated farming business which has produced the peaches, the resale
of those peaches by X will not give rise to gross business receipts from an
agricultural business activity. X did not produce the peaches; therefore, the
sales were not derived from a qualified agricultural business activity, as
defined in section
25128 of the Revenue and Taxation
Code and this regulation, conducted by X.
(2) If an apportioning trade or business
sells products produced from its qualifying agricultural business activity and
also sells products purchased from another party, tracing will generally be
required to determine which portion of the total receipts is from its qualified
agricultural business activity and which portion is not. In some cases, tracing
may be difficult because records are not available and cannot reasonably be
obtained. In such cases, reasonable estimates will be acceptable.
(3) Exchanges. Exchanges are an exception to
the requirement that the product sold must be derived from the apportioning
trade or business's own qualified agricultural business activity as set forth
in subsection (e)(1) of this regulation. If products produced by an
apportioning trade or business's qualified agricultural business activity are
exchanged for similar products owned by parties outside of the apportioning
trade or business, the subsequent sale of the products received in the exchange
shall be treated as arising from the apportioning trade or business's qualified
agricultural business activity to the extent the exchange itself has not
previously been reflected in the calculation of the business's qualified
agricultural business activity.
