Watson v. Commissioner of Internal Revenue/Dissent Minton

Mr. Justice MINTON, with whom Mr. Justice REED and Mr. Justice DOUGLAS join, dissenting from the Court's opinion and judgment.

The question is: Should the sale and conveyance of this land for a lump sum be treated wholly as a sale of real estate taxable as a long-term capital gain, or should the crop of immature oranges be segregated and its value taxed as ordinary income?

The pertinent provisios of the statute are set forth in the margin. Mrs. Watson does not contend that the growing oranges were capital assets as defined in § 117(a), but instead she claims that they were 'property used in the trade or business' as defined in § 117(j) and that she is entitled to capital gains treatment under that section. Her claim rests on her contention that the growing oranges were: (1) real property; (2) used in her trade or business; and (3) held for more than 6 months; and that they were neither (4) properly includible in inventory; nor (5) held primarily for sale to customers in the ordinary course of her business.

First. The immature oranges were real property when the orange grove was sold. Mrs. Watson and her brothers sold the green oranges as part of the land, without severance, constructive or otherwise. How this transaction should be treated under California law does not necessarily control its treatment taxwise under the federal statute. Burnet v. Harmel, 287 U.S. 103, 110, 53 S.Ct. 74, 77, 77 L.Ed. 199. However, real property is not defined in the Revenue Act, and in the absence of such definition we must look to the law of California to determine what is real property. Under that law, this crop of oranges passed as real estate. Wilson v. White, 161 Cal. 453, 460, 119 P. 895, 898; Young v. Bank of California, 88 Cal.App.2d 184, 187-188, 198 P.2d 543, 545-546. The immature fruit, from the falling of the blossoms until the harvesting, is a part of the realty, as its very existence and growth are wholly dependent upon the ground from which it takes its life and gains its sustenance. Actually severed from the ground before maturity, the fruit is worthless. Its life, and hence its value, lies in the soil of which it is a part.

Second. The Commissioner urges that, unlike the trees, the oranges are the ultimate product of the enterprise, and as such are not 'used' in the business. We do not interpret the word 'used' so narrowly. We believe that the phrase 'used in the trade or business' is simply designed to differentiate business assets from the taxpayer's personal assets and his nonbusiness, income-producing property. It is not disputed that Mrs. Watson's business was raising and selling oranges nor that the land and orange trees were used in her business. At the time the orange grove was sold, the oranges were as much a part of the trees as the leaves and the bark. Therefore, the oranges were 'property used in (Mrs. Watson's) trade or business'.

Third. Were the oranges 'held for more than 6 months' before the sale? It is clear that the land and trees had been held since January 1, 1942, over two and one-half years prior to the sale. As we have just said, the oranges were real property, an integral part of the trees on which they grew. Therefore, the holding period for the oranges is the same as for the trees, and the oranges were 'held for more than 6 months' within the meaning of § 117(j).

Fourth. The Bureau itself has said that the growing oranges were not 'properly * *  * includible in (Mrs. Watson's) inventory.' The Bureau's ruling provides in pertinent part:

'While farmers may report their gross income upon the accrual     basis (in which an inventory to determine profits is used),      they are not permitted to inventory growing crops for the      reason that the amount and value of such crops on hand at the      beginning and end of the taxable year can not be accurately      determined. * *  * '

Fifth. We believe that the growing oranges were not 'held * *  * primarily for sale to customers in the ordinary course of (Mrs. Watson's) trade or business.' What was the business of the taxpayer? She was in the business of raising and selling matured fruit. She was not in the business of selling land and trees and green fruit growing upon the trees. She was going out of the business in which she had long been engaged. She sold everything for one lump sum, without any allocation to land, trees or green fruit. It was not an ordinary business transaction. It was an extraordinary transaction. It was not a sale in the ordinary course of business. It was a sale out of the course of business for the purpose of going out of business. It was not a sale to an ordinary customer, who bought ripe fruit in quantities less than the whole crop, as Mrs. Watson had been accustomed to sell them. It was a sale of land and green fruit to one not a customer. Mrs. Watson did not split the sale up into land, trees, and green fruit. She sold all as one, and at the same time. It is the Commissioner who breaks up her sale into parts and makes something out of it different from what it was, and then proceeds to tax the transaction as he remade it. I have always understood that tax laws deal with realities. It is unrealistic to treat an extraordinary sale for one consideration of real property, part of which is immature green fruit, which sale will put the seller completely out of business, as an ordinary sale in the course of trade or business, when the business being closed out had been one that dealt only in the sale of matured fruit. The Commissioner is not free to remake the transaction as he sees fit.

The Tenth Circuit and the Fifth Circuit have reached a different conclusion from that of the Tax Court and the Ninth Circuit in the instant case. In McCoy v. Commissioner, 10 Cir., 192 F.2d 486, the court was dealing with the sale of land with a growing crop of wheat upon it. In Owen v. Commissioner, 5 Cir., 192 F.2d 1006, as in the instant case, the court was dealing with the sale of an orange grove. Moreover, two District Courts have held that the seller of an orange grove is entitled to capital gains treatment of the value of the immature oranges. Cole v. Smyth, 96 F.Supp. 745; Irrgang v. Fahs, D.C., 94 F.Supp. 206. I agree with these courts that the oranges in the instant case were 'property used in (Mrs. Watson's) trade or business' as defined by the Revenue Act. The sale of the orange grove was not to be broken up to enable the Commissioner to tax as personalty that which was real property. The immature crop of green oranges was not property held primarily for sale to customers in the ordinary course of trade or business.

In amending the Revenue Act of 1951, Congress took cognizance of the construction placed on § 117(j)(1) by the Commissioner and the Tax Court, and amended the section to make it abundantly clear that unharvested crops were a part of the realty upon which they were growing and were to be given capital gains treatment. 65 Stat. 500, 26 U.S.C. (Supp. V) § 117(j)(3), 26 U.S.C.A. § 117(j)(3).

After discussing the conflict that had arisen over the Commissioner's interpretation of the statute as to growing immature crops, the Senate Committee Report on this Amendment states:

'Your committee believes that sales of land together with     growing crops or fruit are not such transactions as occur in      the ordinary course of business and should thus result in      capital gains rather than in ordinary income. * *  * '

Congress was correcting a misinterpretation of the Revenue Act by the Commissioner and the Tax Court. It was making clear what the Commissioner and the Tax Court had obfuscated. I see no reason why we should strain to uphold a tax which Congress has by recent legislation determined to be incorrect.

I would reverse the judgment.