BIR Ruling

January 22, 1973 Messrs. Sycip, Gorres, Velayo & Co. P. O. Box 589, Manila Gentlemen : This refers to your letter dated December 6, 1972 requesting a ruling to the effect that your client, Dole Philippines, Inc. be allowed to claim as abandonment loss the unamortized cost of its original planting materials based on its schedule of its replacement and to capitalize and amortize its new plant materials over the remaining term of its Grower Agreement. It is represented that your client is engaged in the business of growing a certain type of agricultural product which it processes and cans for commercial purposes; that it entered into a Grower Agreement with a certain owner of agricultural land for a certain period of years, say 25 years; that it incurred certain development expenses in connection with the venture for which it requested an opinion that it be allowed to capitalize and amortize the said development expenses over a period commencing with the start of commercial canning operations up to the end of the period covered by the Grower Agreement; that among the development cost or expenses which your client requested to be capitalized and amortized is the cost of the original planting materials which were brought to the Philippines from abroad; that this Office ruled that your client may capitalize and amortize the said development costs over a period commencing with the start of its actual commercial operations up to the end of the period covered by the Grower Agreement with the owner of the agricultural land; that in accordance with this ruling, your client capitalized and amortized the cost of the original planting materials; that a new and better variety of agricultural plant being grown by your client has been developed abroad; that your client decided to uproot all its existing agricultural plants and to replace these with the new variety; that it will take your client four years to uproot and replace its existing agricultural plants with the new variety; that your client proposes to undertake this task starting in 1973 up to 1976; that your client intends to capitalize and amortize the propagation cost of the new and better variety of plant over the balance of the term of the Grower Agreement; that your client intends to claim an abandonment loss on the basis of farm replacement with respect to the unamortized cost of the original planting materials; that the unamortized cost of the original planting materials will be spread over the total area presently planted with this particular plant and abandonment loss will be claimed by your client based on the area replaced by the new variety. In reply thereto, I have the honor to inform you that under Section 98 of Revenue Regulations No. 2, when through some change in business conditions, the usefulness in the business of some or all of the capital assets is suddenly terminated, so that the taxpayer discontinues the business or discards such assets permanently from the use in such business, he may claim as deduction the actual loss sustained. In determining the amount of loss, adjustment must be made, however, for improvements, depreciations and the salvage value of the property. Accordingly, the unamortized cost the planting materials on the basis of farm replacement being the actual loss sustained, can be claimed as abandonment loss of your client. Likewise, your client can capitalize and amortize the cost of the new and better variety of plant materials over the remaining term of the Grower Agreement. It is understood, however, that any amount your client shall claim as abandonment loss must be properly justified. Consequently, it is upon your client to establish the fact of uprooting. Hence, before uprooting any area of the plantation your client must notify the Director of the revenue region, thru the District Officer where your client's plantation is located of such intention so that verification of the uprooting can be made by them. After an area have been uprooted and verified, a report thereof stating the number of plants uprooted and the area of the field affected should be submitted by your client to the Regional Director, thru the Revenue District Officer who shall attest to the correctness thereof by the actual verification, for purposes of records and future reference. cd Very truly yours, (SGD.) MISAEL P. VERA Commissioner of Internal Revenue