Conmac Investments, Inc. v. Commissioner of Internal Revenue

United States Court of Appeals
For the Eighth Circuit
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No. 24-1605
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Conmac Investments, Inc.
Petitioner
v.
Commissioner of Internal Revenue
Respondent
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United States Tax Court
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Submitted: January 14, 2025
Filed: June 6, 2025
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Before SMITH, BENTON, and ERICKSON, Circuit Judges.
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BENTON, Circuit Judge.
The Commissioner of Internal Revenue determined that Conmac Investments,
Inc. changed its method of accounting without the Commissioner’s approval.
Conmac petitioned the Tax Court1, which ruled for the Commissioner. Conmac
appeals. Having jurisdiction under 26 U.S.C. § 7482(a)(1), this court affirms.
1 The Honorable Elizabeth Crewson Paris, United States Tax Court.

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I.
Conmac, an Arkansas company, owns, leases, and manages farms. It bought
farmland in 2004, 2006 through 2008, and 2010 through 2013. As part of buying
the farmland, Conmac negotiated with the sellers to receive rights to “base acres”—
the right to receive subsidy payments from the United States Department of
Agriculture based on the number of acres assigned to farmland growing specific
crops. See 7 U.S.C. § 8702(2). A farm with base acres can generate more income
than a farm with no (or fewer) base acres.
Conmac did not claim deductions for amortization of its base acres on its
federal income tax returns for the years 2004 through 2008. Learning that other
farmland buyers were allocating part of the purchase price to the value of base-acre
payments, Conmac first began amortization of its base acres in 2009. It did not file
an “Application for Change of Accounting Method” at any time. Conmac claimed
$141,614 in amortization for the years 2009 through 2012. It claimed $48,374 in
2013, and $44,980 in 2014.
The Commissioner disallowed Conmac’s amortization. Conmac petitioned
the Tax Court. The court ruled that Conmac’s decision to amortize base acres was
a change in method of accounting that required IRS approval. Conmac Investments,
Inc. v. Comm’r, T.C. Memo. 2023-40.
This court reviews de novo the Tax Court’s grant of summary judgment.
Nestle Purina Petcare Co. v. Comm’r, 594 F.3d 968, 970 (8th Cir. 2010). Summary
judgment is proper “if the pleadings, the discovery and disclosure materials on file,
and any affidavits show that there is no genuine issue as to any material fact and that
the movant is entitled to judgment as a matter of law.” Torgerson v. City of
Rochester, 643 F.3d 1031, 1042 (8th Cir. 2011) (en banc), citing Fed. R. Civ. P.
56(c)(2).

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II.
Conmac challenges the Tax Court’s ruling that its amortization of base acres
in 2009 was a change in method of accounting. Generally, once an accounting
method is adopted, it may not be changed without the Commissioner’s permission.
26 U.S.C. § 446(e). A taxpayer changes its method of accounting if it changes “the
overall plan of accounting for gross income or deductions or . . . the treatment of any
material item used in such overall plan.” Treas. Reg. § 1.446-1(e)(2)(ii)(a). A
“material item” is “any item that involves the proper time for the inclusion of the
item in income or the taking of a deduction.” Id.
The key issue is whether Conmac changed its method of accounting by
beginning to amortize its base acres. The Tax Court relied mostly on the explicit
regulation: “a change in the treatment of an asset from nondepreciable or
nonamortizable to depreciable or amortizable, or vice versa, is a change in method
of accounting.” Treas. Reg. § 1.446-1(e)(2)(ii)(d)(2). This passage says in full:
Changes in depreciation or amortization that are a change in method
of accounting. Except as provided in paragraph (e)(2)(ii)(d)(3) of this
section, a change in the treatment of an asset from nondepreciable or
nonamortizable to depreciable or amortizable, or vice versa, is a change
in method of accounting.
Id.
Conmac argues that the Tax Court ignored the exception: “Except as provided
in paragraph (e)(2)(ii)(d)(3) . . . .” This paragraph—and the section it references,
(e)(2)(ii)(b)—list changes that are not a “change in method of accounting.”
Conmac focuses on two changes that are not changes in method of accounting:
. . . . Also, a change in method of accounting does not include
adjustment of any . . . deduction that does not involve the proper time
for . . . the taking of a deduction . . . . A change in method of accounting

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also does not include a change in treatment resulting from a change in
underlying facts.
Treas. Reg. § 1.446-1(e)(2)(ii)(b).
Conmac believes that its changes were not an adjustment involving the time
for taking the deduction, but only a change in the characterization of whether the
deduction was allowable.
This argument is wrong. If Conmac had continued not deducting amortization
of the base acres, it would have recovered the original cost at the time of the eventual
disposition. By beginning to deduct amortization of the base acres, Conmac changed
the time it recovered the original cost by spreading the cost over the years before
eventual disposition.
By changing the timing of its cost recovery, Conmac’s 2009 change to
amortize its base acres changed the timing of the deduction. The cases Conmac cites
(which do not consider depreciation or amortization) are inapposite. See generally
Underhill v. Comm’r, 45 T.C. 489, 489 (1966) (a case decided before the 1970
revisions to Treas. Reg. § 1.446-1(e), which redefined “material item” to include
language about proper time); Tate & Lyle, Inc. v. Comm’r, 103 T.C. 656, 668 (1994)
(addressing a “total exclusion” from gross income), rev’d on other grounds, 87 F.3d
99 (3d Cir. 1996); Shuster’s Express Inc. v. Comm’r, 66 T.C. 588, 597 (1976)
(addressing a deduction that distorted the taxpayer’s total lifetime income), aff’d,
562 F.2d 39 (2d Cir. 1977).
Conmac argues that the 2009 change resulted from a change in underlying
facts and was therefore not a change in its method of accounting. See Treas. Reg.
§ 1.446-1(e)(2)(ii)(b). But Conmac never identifies underlying facts that changed.
Instead, Conmac, based on the advice of its certified public accountants, realized
that base acres might be intangible assets. The Internal Revenue Code has for
decades allowed amortization of intangibles—but Conmac first began claiming
amortization in 2009. See Treas. Reg § 1.106-3(a)(1) (authorizing amortization for

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taxable periods since February 28, 1913). Conmac’s “subjective misunderstanding
of fact or law does not equate” to “a change in underlying facts” within the meaning
of the regulation. See Pinkston v. Comm’r, T.C. Memo. 2020-44, at *22–23.
This case is not like those Conmac cites, where the change in facts were
changes of underlying objective facts. See Underhill, 45 T.C. at 496–97 (taxpayer
did not change its method of accounting when it complied with the holding of a new
case); Chesapeake & Ohio Ry. Co. v. Comm’r, 64 T.C. 352, 383 (1975) (based on
new analytical studies and data—and after Congress legalized amortization for later
assets—a railroad did not change its method of accounting by depreciating assets
previously considered to last indefinitely); Southern Pac. Transp. Co. v. Comm’r,
75 T.C. 497, 807 (1980) (same); Kansas City Southern Ry. Co. v. Comm’r, 76 T.C.
1067, 1155-56 (1981) (same). See generally Burlington N. Inc. v. United States,
676 F.2d 566, 580 (Ct. Cl. 1982) (“Each time [the Tax Court] has examined the
question of the depreciability of railroad grading and tunnel bores, it has been careful
expressly to limit the ramifications of its decision.”); Sec. State Bank v. Comm’r,
111 T.C. 210, 213 (1998) (“The doctrine of stare decisis generally requires that [the
Tax Court] follow the holding of a previously decided case, absent special
justification.”), aff’d on other grounds, 214 F.3d 1254 (10th Cir. 2000).
In sum, Conmac does not meet any exception from the explicit rule: “A
change in the treatment of an asset from nondepreciable or nonamortizable to
depreciable or amortizable, or vice versa, is a change in method of accounting.”
Treas. Reg. § 1.446-1(e)(2)(ii)(d)(2). Conmac failed to secure the Commissioner’s
approval to change its method of accounting. See 26 U.S.C. § 446(e); Treas. Reg.
§ 1.446-1(e)(2)(i).
III.
A “change in the treatment of an asset from nondepreciable or nonamortizable
to depreciable or amortizable (or vice versa) . . . results in a section 481 adjustment.”
Treas. Reg. § 1.446-1(e)(2)(ii)(d)(5)(iii). In relevant part, Section 481 provides:

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(a) General rule
In computing the taxpayer’s taxable income for any taxable year
(referred to in this section as the “year of the change”)—
(1) if such computation is under a method of accounting different
from the method under which the taxpayer’s taxable income for
the preceding taxable year was computed, then
(2) there shall be taken into account those adjustments which are
determined to be necessary solely by reason of the change in
order to prevent amounts from being duplicated or omitted . . .
This plain language instructs that Section 481 applies only when a taxpayer’s
income for “the year of the change” is computed using a method different from the
one used in the “preceding” year. This occurrence triggers IRS adjustments to
prevent duplicated deductions or omitted income.
Conmac argues that the “year of the change” was 2009, when it changed the
method of accounting from the preceding year. Conmac concludes that the
Commissioner should not have included in 2013 income the amortization deductions
Conmac took for 2009 through 2012.
Conmac is wrong. The “year of the change” is 2013, when the Commissioner
changed Conmac’s method of accounting for its base acres—triggering a Section
481 adjustment. “[B]ecause this statute would be virtually useless if it did not affect
closed years, courts have uniformly interpreted it to allow adjustments, in the year
of change, to reflect adjustments to tax liabilities for years closed by the period of
limitations.” Pinkston v. Comm’r, T.C. Memo. 2020-55, at *9–10 (cleaned up).
See generally Rev. Proc. 2002-18 (stating the IRS practice to make a § 481(a)
adjustment for taxable years that are beyond the statute of limitation).
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The judgment is affirmed.
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