Interest and property taxes must sometimes be capitalized rather than deducted.

Three partnerships that are in the business of farming almonds were told by the Internal Revenue Service on audit that they had to capitalize not only the interest the partnerships pay on loans taken out to buy the almond groves, but also the annual property taxes they pay.

Each partnership deducted the taxes and interest as it paid them. The IRS said the payments had to be added to the tax basis each partnership had in its almond trees.

Section 263A of the US tax code requires amounts that are indirect costs of producing “real property” to be added to the tax basis of the real property.

A US appeals court agreed with the IRS in early December.

The court said that almond trees are “real property” for this purpose and the taxes and interest payments are part of the cost of growing the almond trees.

The case is Wasco Real Properties I, LLC v. Commissioner. The US Tax Court had come to the same conclusion earlier.