[Code of Federal Regulations]
[Title 26, Volume 2]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.165-6]

[Page 898-899]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.165-6  Farming losses.

    (a) Allowance of losses. (1) Except as otherwise provided in this 
section, any loss incurred in the operation of a farm as a trade or 
business shall be allowed as a deduction under section 165(a) or as a 
net operating loss deduction in accordance with the provisions of 
section 172. See Sec. 1.172-1.
    (2) If the taxpayer owns and operates a farm for profit in addition 
to being engaged in another trade or business, but sustains a loss from 
the operation of the farming business, then the amount of loss sustained 
in the operation of the farm may be deducted from gross income, if any, 
from all other sources.
    (3) Loss incurred in the operation of a farm for recreation or 
pleasure shall not be allowed as a deduction from gross income. See 
Sec. 1.162-12.
    (b) Loss from shrinkage. If, in the course of the business of 
farming, farm products are held for a favorable market, no deduction 
shall be allowed under section 165(a) in respect of such products merely 
because of shrinkage in weight, decline in value, or deterioration in 
storage.
    (c) Loss of prospective crop. The total loss by frost, storm, flood, 
or fire of a prospective crop being grown in the business of farming 
shall not be allowed as a deduction under section 165(a).
    (d) Loss of livestock--(1) Raised stock. A taxpayer engaged in the 
business of raising and selling livestock, such as cattle, sheep, or 
horses, may not deduct as a loss under section 165(a) the value of 
animals that perish from among those which were raised on the farm.
    (2) Purchased stock. The loss sustained upon the death by disease, 
exposure, or injury of any livestock purchased and used in the trade or 
business of farming shall be allowed as a deduction under section 
165(a). See, also, paragraph (e) of this section.
    (e) Loss due to compliance with orders of governmental authority. 
The loss sustained upon the destruction by order of the United States, a 
State, or any other governmental authority, of any livestock, or other 
property, purchased and used in the trade or business of farming shall 
be allowed as a deduction under section 165(a).
    (f) Amount deductible--(1) Expenses of operation. The cost of any 
feed, pasture, or care which is allowed under section 162 as an expense 
of operating a farm for profit shall not be included as a part of the 
cost of livestock for purposes of determining the amount of loss 
deductible under section 165(a) and this section. For the deduction of 
farming expenses, see Sec. 1.162-12.

[[Page 899]]

    (2) Losses reflected in inventories. If inventories are taken into 
account in determining the income from the trade or business of farming, 
no deduction shall be allowed under this section for losses sustained 
during the taxable year upon livestock or other products, whether 
purchased for resale or produced on the farm, to the extent such losses 
are reflected in the inventory on hand at the close of the taxable year. 
Nothing in this section shall be construed to disallow the deduction of 
any loss reflected in the inventories of the taxpayer. For provisions 
relating to inventories of farmers, see section 471 and the regulations 
thereunder.
    (3) Other limitations. For other provisions relating to the amount 
deductible under this section, see paragraph (c) of Sec. 1.165-1, 
relating to the amount deductible under section 165(a); Sec. 1.165-7, 
relating to casualty losses; and Sec. 1.1231-1, relating to gains and 
losses from the sale or exchange of certain property used in the trade 
or business.
    (g) Other provisions applicable to farmers. For other provisions 
relating to farmers, see Sec. 1.61-4, relating to gross income of 
farmers; paragraph (b) of Sec. 1.167(a)-6, relating to depreciation in 
the case of farmers; and Sec. 1.175-1, relating to soil and water 
conservation expenditures.