Capitalization and Depreciation of Purchased and Raised Livestock

May 10, 1990 BIR RULING NO. 076-90 30 000-00 076-90 Gentlemen : This refers to your letter dated March 26, 1990 stating that your client, Del Monte Phils. (Del Monte) is primarily engaged in pineapple production for canning; that incidental to this operation, it is also engaged in cattle raising; that this came about as a result of the problem it encountered in disposing its waste pineapple pulp from the cannery; that Del Monte discovered that pressing the pineapple peelings, cores and other pineapple wastes into bran and adding locally-grown maize and coconut by products resulted in a nutritious and tasty cattle feed; that the discovery triggered off the cattle raising operation; that Del Monte's present herd may be classified into three, namely: (a) feeding herd, (b) breeding herd which consists of the growing herd and the purely breeding herd, and (c) dairy; that the feeding herd is non-grazing, trained to live in an enclosed area called feeder stock and fattened on a special diet consisting of pineapple pulp and concentrates; that when the cattle average 370 kilos each, they are sold to farms and meat dealers; that the breeding herd is used for breeding purposes; that the growing herd component is composed of calves which are nurtured until 1- or 2 years old after which time they become bulls or cows/ heifers; that actually, the optimum age of a bull is 5 years, with a growing period of 1- years and a productive period of 3- years; that on the other hand, a cow or heifer has an optimum age of 8 years with a growing period of 2 years and productive period of 6 years; that the dairy herd is used for the production of milk; that there are also young calves under this category; that aside from raising the cattle in the above classes of herds, Del Monte also buys cattle from ranches already in the productive stage; that for the purchased cattle, Del Monte's cost is the selling price and other fixed or variable expenses incidental to the purchase; that for cattle that are bred and grown the cost consists of feeds, pine pulp, labor, depreciation, and other administrative expenses such as salaries, gasoline, light and power, insurance and other expenses; that all the costs incurred by Del Monte for its purchased and raised cattle are booked in inventory account and remain there until such time that the cattle are sold or otherwise disposed of; and that Del Monte is requesting that for its breeding and dairy herd (excluding feeding herd), it be allowed, beginning January 1, 1990, to capitalize for tax purposes, the cost of its livestock and depreciate them over their productive lives. The calves, however, shall remain in the inventory account until they reach their productive period (i.e., for bulls, 1- years and for cows/heifers, 2 years) upon which time, the accumulated cost shall be capitalized. In connection therewith, you now request confirmation of your opinion to the effect that the cost incurred by Del Monte on its purchased and raised livestock for breeding and dairy purposes may be capitalized and depreciated over their productive lives. In reply thereto, I have the honor to inform you that pursuant to Section 114 of the Income Tax Regulations, a reasonable allowance for depreciation may also be claimed on livestock acquired for work, breeding or dairy purposes, unless they are included in an inventory used to determine profits in accordance with the regulations. Such depreciation should be based on the cost or other basis and the estimated life of the livestock. If such livestock be included in an inventory no depreciation thereof will be allowed, as the corresponding reduction in their value will be reflected in the inventory. Thus, the cost incurred by Del Monte on its purchased and raised livestock for breeding and dairy purposes may be capitalized and depreciated over their productive lives provided as represented that Del Monte will take out the cost of the productive cattle from the inventory account except for the cost of the calves which shall remain in the inventory account until their productive stage. Moreover, the removal from the inventory account of livestock already in its productive stage and capitalizing the same will not need the prior consent of the Commissioner of Internal Revenue considering that it does not involve a change in accounting method. Very truly yours, (SGD.) JOSE U. ONG Commissioner