UNITED STATES COURT OF APPEALS FOR THE D.C. CIRCUIT


KORAMBA FARMERS NO 1

v.

CMSNR IRS


98-1454a

D.C. Cir. 1999


*	*	*


Karen LeCraft Henderson, Circuit Judge: The appellants,  Australian
partnerships subject to U.S. income reporting and  their tax partner,
seek review of a Tax Court opinion holding  that they were not
entitled to deduct expenditures for water  and soil conservation
expenditures made for property located  in Australia. See Koramba
Farmers & Graziers No. 1 v.  Commissioner, 110 T.C. 445 (1998). The
Tax Court conclud- ed that section 175(c)(3)(A)(ii) of the Internal
Revenue Code,  26 U.S.C. s 175(c)(3)(A)(ii) (IRC s 175), does not
allow the  deduction of such expenditures on foreign land because the 
expenditures must be consistent with the soil conservation  plan of a
state agency with jurisdiction over the taxpayer's  land. On appeal
the appellants argue that IRC  s 175(c)(3)(A)(ii) requires that
expenditures simply be consis- tent with any state soil conservation
plan regardless whether  the taxpayer's property is located within the
jurisdiction of  the agency with whose plan its water and soil
conservation  expenditures are consistent. We disagree and hold that
IRC  s 175(c)(3)(A)(ii) requires that the plan apply to " 'the area in
 which the land is located.' " Koramba, 110 T.C. at 452  (quoting IRC
s 175(c)(3)(A)(i)). Accordingly, we affirm.


I.


Koramba Farmers & Graziers No.1 (Koramba No.1) and  Koramba Farmers &
Graziers No.2 (Koramba No.2) (collec- tively Koramba) are general
partnerships organized under  Australian law with their principal
place of business in New  South Wales, Australia. Dean Phillips, a
Koramba partner, is  a U.S. citizen. In 1985 Philips & Heetco, Inc.
(Heetco), a  United States corporation, acquired from William and
Pene- lope Owen a fifty per cent interest in their New South Wales, 


Australia farmland. Phillips, Heetco and the Owens then  formed Koramba
No. 1 to develop the farmland. In 1986  Koramba No. 1 began
construction of an irrigation project in  order to grow cotton on the
farm. In 1987 and 1988 the  partners purchased two additional parcels,
formed Koramba  No. 2 and expanded their cotton farming. In
constructing  the irrigation system, Koramba provided for soil and
water  conservation. As required by Part VII of the New South  Wales
Water Act, see Water (Amendment) Act, 1983, No. 142,  s 167 (N.S.W.
Inc. Act) (Joint Appendix (JA) at 34), Koramba  sought and received
general approval from the New South  Wales Department of Water
Resources for its expenditures.  It elected to deduct from its federal
income taxes its conser- vation expenditures for the tax years 1986-89
pursuant to  IRC s 175. The Internal Revenue Service (IRS) accepted 
Koramba No. 1's 1986 deduction but disallowed all of Koram- ba's
post-1986 deductions.1 The IRS concluded that the Tax  Reform Act of
1986, Pub. L. 99-514, sec. 401(a), 100 Stat.  2221, in including IRC s
175(c)(3), disallowed any deduction  for "conservation expenditures
incurred with respect to land  outside the United States." Koramba,


Koramba then petitioned the Tax Court for review, claim- ing that under
IRC s 175(c)(3) (A)(ii) "conservation expendi- tures need only be
consistent with the plan of some State  agency," regardless whether
the plan covered the taxpayer's  land, "to be deductible."2 110 T.C.
at 452 (emphasis original).  The Tax Court disagreed, holding that
"the statute requires  that the improved land must lie within the
state whose agency  is comparable to" the Department of Agriculture's
Soil and  Conservation Service (SCS). Id. Koramba appealed.




__________

n 1 The IRS denied Koramba No. 1 a $806,633 deduction for 1987  and a
$519,004 deduction for 1988. Koramba No. 2 was denied a  $1,011,360
deduction for 1988 and a $2,683,415 deduction for 1989.  Koramba No. 1
had no 1989 deductions.


2 Before the Tax Court Koramba also argued that the term  "state"
included a foreign state. Koramba does not appeal the Tax  Court's
rejection of this argument.


II.


Before December 31, 1986, the Internal Revenue Code  allowed a farmer
to deduct soil and water conservation expen- ditures not exceeding
twenty-five per cent of the farmer's  gross farm income. See IRC s 175
(1982) (amended 1986).  In 1986, responding to a concern that section
175 and similar  provisions "may be affecting prudent farming
decisions ad- versely.... [and] that such provisions may have
contributed  to an increase in acreage under production, which in turn
may  have encouraged the present-day overproduction of agricul- tural
commodities," S. Rep. No. 99-313, at 265 (1986), the  Congress amended
IRC s 175 to limit the deductibility of  conservation expenditures. It
did so by adding section  175(c)(3)(A) which provides:


Expenditures must be consistent with soil conservation 
plan.--Notwithstanding any other provision of this sec- tion,
subsection (a) shall not apply to any expenditures  unless such
expenditures are consistent with--


(i) the plan (if any) approved by the Soil Conservation  Service of the
Department of Agriculture for the area  in which the land is located,
or


(ii) if there is no plan described in clause (i), any soil 
conservation plan of a comparable state agency.


The appellants argue that the language of (ii) is unambigu- ous, that
is, a farmer qualifies for the deduction under (ii) if  his
conservation expenditures are consistent with the soil  conservation
plan of "any" state regardless whether the ex- penditures are made for
property located in that state.3 We 




__________

n 3 The appellants also argue that the express geographic limitation 
in clause (i) manifests that the absence of the limitation in clause
(ii)  is intentional. As discussed infra, however, we believe the
phrase  "comparable state agency" encompasses a geographic limitation.
 Accordingly, we find several of the appellants' other arguments 
unpersuasive. We reject their reliance on other IRC provisions  that
contain specific geographic limitations, e.g., IRC s 616(d) (lim-
iting deductibility of mining expenditures made"outside the United 
States") as well as an unenacted soil conservation tax credit for soil
 conservation expenditures made "within the United States," see 


disagree. To be deductible the conservation plan must be  consistent
with that of a state agency "comparable" to the  SCS.


First, the most natural way to read "comparable state  agency" is that
the state agency, like the SCS, must have  jurisdiction over "the area
in which the [taxpayer's] land is  located." Second, it is highly
unlikely "that Congress intend- ed to approve the deductions of
conservation expenditures in  Nevada, for example, which are
consistent with a conserva- tion plan of an agency of some other
state" but inconsistent  with the conservation plan of Nevada's
agency. Koramba,  110 T.C. at 452. The appellants argue that this
result will not  occur because the underlying assumption ignores "the
scienti- fic underpinnings of soil and water conservation plans,"
Reply  Br. at 3, and erroneously assumes that "state plans vary 
widely and, hence, that conservation expenditures consistent  with the
plan of one state will not be consistent with the plans  of others,"


While the record is inadequate for us to determine whether  all state
plans are essentially the same, we would note that  small differences
in state plans may reflect important policy  differences--e.g., arid
states are likely to have greater con- servation concerns. Moreover,
if, as the appellants contend,  state plans are essentially identical
and based on best man- agement practices, the Congress's reference to
a "comparable  state agency" would appear to be superfluous--it could
sim- ply have allowed deductions conforming with "best manage- ment
practices." Cf. Swanson Mining Corp. v. FERC, 790 




__________

n H.R. H4170, 88th Cong. s 892(h)(3) (1984) (as amended by the 
Senate), reprinted in Cong. Rec. H4547. Similarly, their citation to 
cases holding that a geographic limitation in one provision demon-
strates that the absence of a limitation in a second provision is 
deliberate, see, e.g., Water Quality Ass'n Employees' Benefit Corp. 
v. United States, 795 F.2d 1303 (7th Cir. 1986) (invalidating IRS-
imposed geographic limitation on membership in "voluntary em- ployees'
beneficiary associations" where other tax-exempt organiza- tions had
statutory geographic membership limitations provided by  statute), is
unavailing because of our conclusion that clause (ii)'s  geographic
limitation is necessarily implied.


F.2d 96, 102 (D.C. Cir. 1986) (provisions are read to give each  part
meaning).


Examining the legislative history, we find no indication that  the
Congress intended the deduction to apply outside the  United States.
To the contrary, it supports the nondeducti- bility of foreign
expenditures. The joint conference report  states that "the conferees
wish to clarify that while prior  approval of the taxpayer's
particular project by the [SCS] or  comparable state agency is not
necessary to qualify the  expenditure under the provision, there must
be an overall  plan for the taxpayer's area that has been approved by
such  an agency." H.R. Rep. No. 99-841, at 110 (1986) (emphasis 
added). As "[t]he phrase 'such an agency' unmistakably  refers to the
SCS or a State agency comparable to the SCS  whose plan is in effect
for the taxpayer's area,"4 110 T.C. at  453, to the extent the
legislative history is relevant, it sup- ports the view that those
involved in drafting the report were  aware that the congressional


Because the natural interpretation, and the one supported  by what
legislative history exists, of the term "comparable  state agency"
means that the state agency, like the SCS,  must have jurisdiction
over the taxpayer's land and because  the alternative reading could,
as noted earlier, lead to an  absurd result, we conclude that IRC s
175(c)(3)(A) does not  allow the deduction of soil conservation
expenditures made  for property located outside the United States.
Accordingly  the opinion of the Tax Court is


Affirmed.




__________

n 4 Koramba argues that imposition of a geographic nexus require- ment
interferes with the congressional purposes of creating tax  neutrality
and promoting "prudent farming practices." See S. Rep.  No. 99-313, at
265. As the IRS notes, however, the Congress also  wanted to reduce
overproduction. Id.