is not within the authority or jurisdiction of the Service. We request that the proposed regulations 1.278-2 be withdrawn immediately.

The Jojoba Association formally requests a public hearing in regard to this matter unless the proposed regulations are withdrawn as a result of the Service's evaluation of our written comments. It is intended that Dr. Carole A. Whittaker and David R. Bosse, President and tax counsel for the Association, respectively, will appear at such hearing. In addition, the Association may present oral testimony from other scientific and/or technical experts.

Respectfully submitted on behalf of the Jojoba Growers Association.
CAROLE A. WHITTAKER, PH.D.,

President.

HEARING ON PROPOSED REGULATIONS ON FARMING SYNDICATE EXPENDITURES According to the Internal Revenue Service, the proposed regulations on farm syndicate expenditures are being proposed in order to implement changes in the tax law made by the Tax Reform Act of 1976. In the wording of the proposed regulations regarding Sec. 278, the words "fruit", "orchard" and "grove" are given broad definitions and jojoba seed is included as a specific example of a crop for which preproductive costs must be capitalized by farming syndicates. The definitions given in the proposed regulations would include virtually all agricultural crops. Asparagus and artichoke plantations, which also require several years to reach commercial production, would now come under the purview of Sec. 278.

Mr. Bruce E. Thompson, Jr., Asst. Secretary of the Department of Treasury, has stated that:

"Section 278(b) is consistent with general tax accounting rules requiring the cost of constructing a long-lived asset to be capitalized and cost recovery deductions to be claimed only after the asset begins producing income. Although certain active farmers are allowed current deductions for capital outlays in some circumstances, section 278 is designed to deny the benefit of current deductions to passive investors in tax shelter farming syndicates.

"Because jojobas were not produced in substantial quantities in 1976, the drafters of section 278(b) did not specifically consider whether the provision should apply to syndicates that cultivate jojobas. However, the task of the regulations is to interpret the statute so as to implement consistently its underlying rationale. Our understanding is that jojobas, like apple or other fruit trees, require several years of development before producing a commercial crop, and thereafter live and produce for many years. Thus, the proposed regulations treat the production of jojobas the same for tax purposes."

The issue to be dealt with relative to the proposed wording of Sec. 278, and the specific inclusion of jojoba as an example, is not whether Congress should have or would have included jojoba along with fruit and nut tree crops but rather whether Congress, in effect, did include jojoba.

The resolution of the issue relies on the answer to two questions:

1. Did Congress intend to include all agricultural crops or did they limit the coverage of Sec. 278 to fruit and nut tree crops, as those words are commonly understood? 2. Is jojoba seed a fruit or nut tree crop?

The Jojoba Growers Association believes that the legislative history for the Tax Reform Act of 1976 shows that Congress distinguished fruit and nut tree crops from other agricultural crops and chose by intent to include only the former in Sec. 278. In his comment letter and public testimony today Mr. Heinhold of Shea & Gould, among others, has shown most clearly that in formulating the Tax Law of 1976 Congress considered all kinds of agricutural crops: fruits, nuts, vegetables and nursery stock; tree crops and field crops. However, they included only fruit and nut tree crops in Sec. 278 and relegated vegetable and field crops and nursery stock to inclusion in the at-risk provisions of Sec. 465.

The questions of the classification of jojoba as a fruit or nut tree crop will be dealt with extensively by Prof. Jules Janick, a professor of horticulture for 30 years and the editor for the past 15 years of four journals of the American Society of Horticulturists.

In the next few minutes I would like to give the members of the panel a brief summary of the development of jojoba as an agricultural crop and conclude with a videotape to give you a visual image of the jojoba plant and its flowers, fruit and

seed.

In 1975 and 1977 the National Academy of Sciences published studies dealing with the feasibility of developing jojoba as a new agricultural crop. They estimated that 150,000 acres of jojoba plantations would be required to meet the potential de

mands of the lubricant, pharmaceutical, and cosmetic industries, among others. The Academy recognized that the commercial production of jojoba would require the domestication of a native plant indigenous to the Sonoran Desert. As of 1977, there were no commercial plantations established in the U.S.

Dr. Noel Vietmeyer of the Board on Science and Technology for International Development of the National Academy of Sciences is chairman of a committee charged with making a current technology assessment of jojoba. The committee's findings will be published in July of this year. However, Dr. Vietmeyer has just informed me that his committee has concluded that the process of domesticating jojoba is progressing remarkably well and that the emergence of jojoba as a technically sound agricultural industry is imminent.

During the period 1978 to 1983, some 38,000 acres of jojoba plantations have been established in the southwestern U.S. The first plantations established are now beginning to come into production. For the first time, in 1984, we will obtain jojoba liquid wax from seed harvested from plantations rather than from native stands. In this short period of time, jojoba growers have made remarkable progress in learning how to grow jojoba under cultivation. Growers have learned to select their growing sites carefully where temperatures do not go below 26° F, where soils are sandy or sandy loam, and where irrigation water is available. We have learned how to propagate jojoba successfully by planting seed directly in the soil and, more recently, by rooted cuttings. We have learned that jojoba requries careful cultivation to remove and prevent weed growth and that it responds well to irrigation and fertilization. Specialized equipment has been adapted or designed for cultivating, pruning and harvesting.

Eventually, growers will achieve higher levels of productivity and greater cost efficiency as we refine cultural practices, learn more about the pollination requirements for jojoba, and begin to make genetic selections for identifying superior plants.

The financing for this mammoth effort has come primarily from private investment capital-perhaps one-third of which is in the form of farming syndicates. These funds have been invested at high risk in developing a new agricultural crop and with the hope and intent of earning a signficant return. Tax deferral or the reduction in investment cost of 30 to 50% from tax savings are not adequate incentives in and of themselves to warrant such investment. These funds have not disappeared down some remote desert wash but have resulted in developing a jojoba industry to the level where it can provide a valuable renewable resource which help to conserve the world's non-renewable resources.

It has been the widespread opinion of jojoba growers, investors and their tax counsels that expenditures for growing costs during the preproductive period could be appropriately taken as current expense since jojoba seed is not a fruit or nut crop. The Jojoba Growers Association concurs with other opinion expressed here and in the numerous comment letters received by the Service that the definitions of fruit, nut, orchard and grove as given in the proposed regulations are too broad and contradict the expressed intent of Congress. We, likewise, recommend that the definition of fruit and nut be deleted from the proposed regulations with an administrative direction that those terms are to have their common and ordinary meaning. Furthermore, should the Service not see fit to act on this recommendation promptly, the Jojoba Growers Association requests that the Service hold a field hearing so that we can demonstrate the soundness of the emerging jojoba industry. A 21⁄2-minute videotape showing the following:

1. Native jojoba plants: A young seedling emerging and a mature plant.

2. Jojoba plantations: A field at 1-2 years and then at 5 years showing hedgerows of jojoba under furrow irrigation.

3. 1983 harvest showing a new harvesting machine being used on jojoba.

4. Male flowers losing their pollen to the wind. Female plants with flowers and developing seed on the same branch.

5. Green seed, drying seed and mature seed shown on the plant and fallen to the ground.

6. Seed being extracted for oil.

7. Example of a plant which might be used for selecting superior cultivars.

We thank you for your attention and consideration.

Chairman STARK. Mr. Shooter.

39-988 O 85

STATEMENT OF A. KELLEY SHOOTER, PRESIDENT,

AGRICULTURAL INVESTMENTS, INC.

Mr. SHOOTER. I would just like to take it one step further from where Carole left it in respect to the development of the industry. I think there is a myth in the fact that jojoba is nothing but a tax shelter with a couple beans in the ground and the money is basically lost down the desert wash.

The industry, itself, really started in 1975 and 1977 when the National Academy of Sciences published studies dealing with the feasibility of developing jojoba as a new agricultural crop. They estimated that 150,000 acres would be needed for the potential demands of the lubricant, pharmaceutical, and cosmetic industries. As of 1977, there were no commercial jojoba crops in the United States, and the Academy realized that it would require the domestication of a wild shrub.

Dr. Noel Vietmeyer of the National Academy of Science has recently concluded his assessment of the jojoba industry. Dr. Vietmeyer believes that the progress of the industry to this point is remarkable and that emergence of this as a sound economical agricultural industry is imminent.

I would like to also establish that since 1977, some 36,000 plus acres have been established in the United States. This year, for the first time, commercial production will begin, the oil will be extracted from the bean from plantations rather than from wild stands of jojoba.

We have learned a tremendous amount in the short time we have had jojoba under commercial cultivation. We have learned to be very careful in our site selections, temperatures cannot go below 26 degrees, soils have to be light, well-drained, and there has to be available irrigation.

Also, I would like to dispel the myth that it takes 3 years to determine the sex of a jojoba plant. We have also been able to accomplish, and right now we are planting plants with known sex in the field. We are cloning by rooting cuttings from parent plant material in which the sex has already been identified.

Very much yet remains to be done with the cultivation of jojoba, the refinement of cultural practices and genetic selections. All of this has been, as Carole pointed out, a tremendous mammouth effort funded by private investment and the tax deductions in and of themselves during of the preproductive period are hardly enough to warrant risks that are involved.

I would just like to say that we have at this point in time, put those dollars to use to create a renewable resource to give our country an advantage over our foreign competitors. In conclusion, I would just like to point out that if H.R. 5199 is passed, it will have the exact opposite effect of what it is setting out to accomplish. It will, in effect, reduce taxable revenues rather than increase them. If we make certain basic assumptions that we have yields beginning with 400 pounds to the acre and going up to 5,000 pounds to the acre, in the 15th year, and that we have a large historical price of $2.50 a pound and growing costs of roughly $1,400 an acre per year, and we take the basic acreage we have, 36,000 acres, and we say that roughly two-thirds of this industry is affected by H.R.

5199, we come to the conclusion that this year if we leave the existing tax laws in place, we will have revenues of taxable income of about $2 million. By 1999, we will have taxable income of over $1 billion per year, totaling $5 billion during that period of time.

If H.R. 5199 is passed, this year, the U.S. Treasury will get back $144 million in tax revenues, but by 1999, Treasury will only be receiving $84 million per year for a total of approximately $666 million.

The point I am making is that at this point in time, Treasury will get back, if we compare the two and we say that they leave the existing tax laws in place versus passing H.R. 5199, that this year Treasury will get back $142 million in taxable income. But by 1999, Treasury will have lost back all of that taxable income and by 1999, Treasury will be losing at a rate of almost $1 billion a year or a net taxable income loss of over $4 billion.

The point I am trying to make is that this is penny wise and pound foolish, and let's not kill the goose that lays the taxable egg. Chairman STARK. OK.

[The prepared statement follows:]

STATEMENT OF A. KELLEY SHOOTER, PRESIdent, AgricuLTURAL INVESTMENTS, INC.

DEVELOPMENT OF THE JOJOBA INDUSTRY

In 1975 and 1977 the National Academy of Sciences published studies dealing with the feasibility of developing jojoba as a new agricultural crop. They estimated that 150,000 acres of jojoba plantations would be required to meet the potential demands of the lubricant, pharmaceutical, and cosmetic industries, among others. The Academy recognized that the commercial production of jojoba would require the domestication of a native plant indigenous to the Sonoran Desert. As of 1977, there were no commercial plantations established in the U.S.

Dr. Noel Vietmeyer of the Board of Science and Technology for International Development of the National Academy of Sciences is chairman of a committee charged with making a current technology assessment of jojoba. Dr. Vietmeyer has just informed The Jojoba Growers Association that his committee has concluded that the process of domesticating jojoba is progressing remarkably well and that the emergence of jojoba as a technically sound agricultural industry is imminent.

During the period 1978 to 1983, some 36,000 plus acres of jojoba plantations have been established in the southwestern U.S. The first plantations established are now beginning to come into production. For the first time, in 1984, we will obtain jojoba liquid wax from seed harvested from plantations rather than from native stands. In this short period of time, jojoba growers have made remarkable progress in learning how to grow jojoba under cultivation. Growers have learned to select their growing sites carefully where temperatures do not go below 26°F, where soils are sandy or sandy loam, and where irrigation water is available. We have learned how to propagate jojoba successfully by planting seed directly in the soil, and more recently, by presexed rooted cuttings. We have learned that jojoba requires careful cultivation to remove and prevent weed growth and that it responds well to irrigation and fertilization. Specialized equipment has been adapted or designed for cultivating, pruning and harvesting.

Eventually, growers will achieve higher levels of productivity and greater cost efficiency as we refine cultural practices, learn more about the pollination requirements for jojoba, and begin to make genetic selections for identifying superior plants.

The financing for this mammoth effort has come primarily from private investment capital-unlike the development of every other crop which has been subsidized by the public sector. These funds have been invested at high risk in developing a new agricultural crop and with the hope and intent of earning a significant return. Tax deferral or the reduction in investment cost of 30 to 50% from tax savings are not adequate incentives in and of themselves to warrant such investment. These funds have not disappeared down some remote desert wash but have resulted in developing a jojoba industry to the level where it can provide a valuable renewable resource which can help to conserve the world's non-renewable resources.

It has been the widespread opinion of jojoba growers, investors and their tax counsels that expenditures for growing costs during the preproductive period could be appropriately taken as current expense since jojoba seed is not a fruit or nut crop, as determined by the head of the fruit crop laboratory at the U.S.D.A..

In conclusion, the following table: Taxable Income Comparison, demonstrates that passage of H.R. 5199 would result in the opposite effect intended by Congress, reduced taxable income. Column A depicts the taxable income from the jojoba industry if the existing tax laws were left in place and the development of the industry continued at its present pace. By comparison, Column B, shows the taxable income from the jojoba industry assuming H.R. 5199 were passed, thereby stifling any further private investment capital. Column C compares the taxable income from passage of H.R. 5199 by deducting Column B from Column A. Thus, passage of H.R. 5199 would result in additional taxable income this year of $141,727,819. However, by 1989 the taxable income gained this year would be lost if the existing tax laws were simply left in place. Moreover, the taxable income lost, as a result of passing H.R. 5199, would total $4,373,298,990 by 1999.