Document: 345 U.S. 544 73 S.Ct. 848 97 L.Ed. 1232 WATSON et al.v.COMMISSIONER OF INTERNAL REVENUE. No. 290. Argued Feb. 2, 1953. Decided May 18, Rehearing Denied June 15, See 1003, 1128. Mr. Arthur McGregor, Los Angeles, Cal., for petitioners. Ellis N. Slack, Washington, D.C., respondent. Justice BURTON delivered the opinion of Court. 1 This case relates to a taxpayer who, several years, held an undivided interest in orange grove and engaged business growing selling oranges it produced. In midst 1944 season, she sold her grove, including unmatured crop then on trees. The question before us is whether, federal income tax purposes, must treat that part profit from sale which attributable as ordinary or capital gain. For reasons hereafter stated, income. 2 1944, Mrs. M. Gladys Watson, one petitioners here, two brothers, each owned one-third 110-acre navel near Exeter, Tulare County, California. Its management had been supervised by brothers since 1912 and, 1942, operated partnership. It was oldest best groves locality. production per acre about twice average such county. last five years value its increased over year before. 1943 produced 79,851 loose boxes oranges, yielding gross $136,808.71. After deducting all expenses cultivation, operation, picking hauling, net $92,153.05 left.1 Anticipating heavy frost after November, advocated then. Accordingly, June, offered $197,100, complete, land, trees, crop, improvements, equipment five-acre peach orchard. At time bloom. 3 By July smaller fruit dropped trees 'set,' but not assured. A purchaser became interested delayed his decision so determine more accurately probable cause sellers bear expense care. He examined past records early August, received estimates might be 70,000 80,000 boxes, which, at current prices, would bring him $120,000 above expenses. One Watson's also estimated if matured. August 10, sales price $197,100 agreed upon, payable $10,000 cash balance September 1. No allocation between rest property specified seller bore caring up 1, amounting $16,020.54. carried through there no serious frost. filled 74,268 boxes. them for.$146,000, return $126,000. 4 Watson filed joint with husband, taking full deductions share incurred cultivation treating gain long-term On basis, shown $48,819.82, but, gain, only 50% it, $24,409.91, included taxable income.2 5 Commissioner Internal Revenue assessed deficiency against petitioners, largely based claim whatever should treated allocated $122,500, out crop. premise, he $24,101.35 their return. review, Tax Court, judges dissenting, sustained principle reduced $40,000 portion proceeds 15 T.C. 800. With other adjustments, material Court $6,920.35. Appeals affirmed. 197 F.2d 56. meantime, made comparable decisions McCoy v. Commissioner, 828, Owen P-H Memo, 50,300, reversed appeal, 10 Cir., 192 486, 1006. Shortly latter decisions, Act 1951 amended statute relation beginning December 31, 1950, permit certain unharvested crops gains.3 We granted certiorari instant resolve above-indicated conflict statutory construction still affecting many 1951. 344 895, 274. 6 issue turns upon Acts Congress. 1951, Congress, first time, dealt expressly specifically this subject.4 While action prospective only, terms throw light problems prior years.5 adoption amendment emphasized point law. recognized that, order affirmative statement Congress needed. Finally, permitted gains under circumstances, provided those could deduct Those thereafter investments added basis they relate. emphasizes impropriety interpretation case. She seeks 100% date sale. same claims right report relate.6 7 case, we are dependent § 117(j) Code, effect 1944.7 controlling language subsection required gains, 'used trade business' taxpayer, 'held than months,' primarily customers course business'. contends while land met these tests subsection, unmatured, none three. 8 Each day brought annual closer availability business. uncertainty condition maturity discounted value, nevertheless, presence contributed substantially grove. $122,500 $197,100. $40,000. accept amount now confirmed Appeals. obvious parties did fact attribute substantial If, any moment, stripped destroyed frost, have resulted once reduction 9 Assuming fairly September, remains demonstrate has authorized addition improvements equipment, Courts Fifth Tenth Circuits placed emphasis law state where situated, real property. regard immaterial. Whether property, resulting is, nature, subject 11 urges grounds support position does authorize taxpayer's treatment derived agree contention. Although severable sale, nothing requiring severable. While, previous like were occurred maturity, came There distinguishes character present discounting hazards future, later when past. transfer title retained continued owner owner's 12 Commissioner's absence requirement contrary consistent policy evidenced Williams McGowan, 152 570, 572, 162 A.L.R. 1036, established Second Circuit, 1945, doctrine 'upon going (the price) comminuted into fragments, separately matched definition 117(a)(1) * *.' Bureau dating, least, 1946, circumstances us, 'regardless stage development, realized income.'8 13 do here situation arises coal mineral wealth separated natural growth leading seasonal separation. Butler Consolidated Coal Co. 183. distinguishable timber itself short-term product. Carroll 70 806; Camp Manufacturing 467. 14 Having reached conclusion, find unnecessary pass second contention because come existence 'set' July, least bloom six months judgment 16 Affirmed. 17 MINTON, whom REED DOUGLAS join, dissenting Court's judgment. 18 is: Should conveyance lump sum wholly estate immature segregated taxed income? 19 pertinent provisios set forth margin.1 contend assets defined 117(a), instead 'property used entitled section. Her rests were: (1) property; (2) business; (3) months; neither (4) properly includible inventory; nor (5) 20 First. sold. green without severance, constructive otherwise. How transaction California necessarily control taxwise statute. Burnet Harmel, 287 103, 110, 53 74, 77, 77 199. However, Act, look what Under law, passed estate. Wilson White, 161 Cal. 453, 460, 119 P. 898; Young Bank California, 88 Cal.App.2d 184, 187—188, 198 P.2d 543, 545—546. fruit, falling blossoms until harvesting, realty, very ground takes life sustenance. Actually severed worthless. life, hence lies soil part. 21 Second. unlike ultimate product enterprise, 'used' interpret word narrowly. believe phrase simply designed differentiate personal nonbusiness, income-producing disputed raising sold, much leaves bark. Therefore, (Mrs. Watson's) 22 Third. Were months' sale? clear January one-half As just said, integral grew. holding period within meaning 117(j). 23 Fourth. said 'properly inventory.' Bureau's ruling provides part: 24 'While farmers may accrual (in inventory profits used), reason hand end can determined. *'2 25 Fifth. business.' What taxpayer? matured fruit. long engaged. everything sum, transaction. extraordinary purpose customer, who bought ripe quantities less whole accustomed sell them. customer. split one, time. breaks parts makes something different was, remade it. I always understood laws deal realities. unrealistic consideration will put completely business, being closed free remake sees fit. 26 Circuit conclusion Ninth court dealing wheat 1006, Moreover, District oranges. Cole Smyth, 96 F.Supp. 745; Irrgang Fahs, 94 206. courts Act. broken enable personalty 27 amending took cognizance 117(j)(1) section make abundantly realty given treatment. 65 Stat. 500, U.S.C. (Supp. V) 117(j)(3), U.S.C.A. 117(j)(3). 28 discussing arisen crops, Senate Committee Report Amendment states: 29 'Your committee believes together transactions occur thus result rather *'3 30 correcting misinterpretation making obfuscated. see why strain uphold recent legislation determined incorrect. 31 reverse 1942 yielded 54,939 $82,521.17 $49,790.10. yield 1934 55,097 $46,512.68 $22,141.42. 117(b) (c)(2), I.R.C., 150(c) c. 619, 56 843—844, (1940 ed., Supp. (c) (2), 117(b), (c)(2). 500—501, §§ 117(j), 24(f), 113(b)(1), 113(b)(1). Code: '(3) Sale months, exchanged (or compulsorily involuntarily converted described paragraph (2)) person, shall considered business". And, equally important, '(f) Where provisions 117(j)(3) business', computing deduction (whether whether expenses, depreciation, otherwise) allowed.' Id., 501, 24(f). prospective, retroactive, next 117 note. That retroactive another redefined include livestock, stock draft, breeding dairy purposes. Stock connection, Finance, reporting proposed said: Section 323 bill provides. recognizes, however, keeps accounts returns receipts disbursements unripe deducted income, entire such, viewed Actually, course, true cases difference production. your committee's allowed disallowed 'The applicable dispositions occurring 1950. revenue loss provision expected $3 million annually.' S.Rep.No. 781, 82d Cong., 1st Sess. 47 48. amended, 846: 117. Capital losses '(j) Gains exchange '(1) Definition 'For purposes term means allowance depreciation 23(l), (A) kind close year, (B) *. '(2) General rule. during exchanges exceed sales, exchanges, conversions, months. If losses, assets. *' (Italics supplied.) orchards constitutes supra, orchard primary regardless 'In view foregoing, Federal citrus Gain constitute coming purview thereunder.' 1946—2 Com.Bull. 31. '§ '(a) Definitions. chapter— 'capital assets' connected business), 23(l) 50, 117(a) (1), 117(a)(1). involuntary conversion Rule. 'If, 846, I—1 Cum.Bull. 72. 47.

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