Watson v. Commissioner
345 U.S. 544 (1953)

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U.S. Supreme Court

Watson v. Commissioner, 345 U.S. 544 (1953)

Watson v. Commissioner

No. 290

Argued February 2, 1953

Decided May 18, 1953

345 U.S. 544

CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Syllabus

For several years, a taxpayer held an undivided interest in an orange grove and engaged in the business of growing and selling the oranges it produced. In the midst of the 1944 growing season, she sold her interest in the grove, including an unmatured crop then on the trees.

Held: for federal income tax purposes, under § 117(j) of the Internal Revenue Code, as in effect in 1944, she must treat that part of her profit from the sale which is attributable to the unmatured crop as ordinary income -- not as a capital gain. Pp. 345 U. S. 545-553.

(a) It is immaterial that, under the law of the state where the land is situated, an unmatured, unharvested crop is treated as real property for many purposes. P. 345 U. S. 551.

(b) In the circumstances of this case, the proceeds of the sale fairly attributable to the crop were derived from property "held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business" within the meaning of § 117(j) as it existed in 1944. Pp. 345 U. S. 551-552.

197 F.2d 56 affirmed.

The Tax Court sustained a deficiency assessed by the Commissioner of Internal Revenue against petitioners, but reduced the amount. 15 T.C. 800. The Court of Appeals affirmed. 197 F.2d 56. This Court granted certiorari. 344 U.S. 895. Affirmed, p. 345 U. S. 553.

Page 345 U. S. 545

MR. JUSTICE BURTON delivered the opinion of the Court.

This case relates to a taxpayer who, for several years, held an undivided interest in an orange grove and engaged in the business of growing and selling the oranges it produced. In the midst of the 1944 growing season, she sold her interest in the grove, including an unmatured crop then on the trees. The question before us is whether, for federal income tax purposes, she must treat that part of her profit from the sale which is attributable to the unmatured crop as ordinary income or as a capital gain. For the reasons hereafter stated, she must treat it as ordinary income.

In 1944, Mrs. M. Gladys Watson, one of the petitioners here, and her two brothers, each owned an undivided one-third interest in a 110-acre navel orange grove near Exeter, Tulare County, California. Its management had been supervised by her brothers since 1912, and, since 1942, she and her brothers had operated it as a partnership. It was the oldest and one of the best groves in the locality. Its production per acre was about twice the average of such production in the county. In each of the last five years, the value of its crop had increased over that of the year before. In 1943, it produced 79,851 loose boxes of oranges, yielding a gross income of $136,808.71. After deducting all expenses of cultivation, operation, picking and hauling, a net income of $92,153.05 was left. [Footnote 1] Anticipating a heavy frost after November,

Page 345 U. S. 546

1944, one of the brothers advocated selling the grove before then. Accordingly, in May or June, it was offered for $197,100, complete, including land, trees, unmatured crop, improvements, equipment and a five-acre peach orchard. At about that time, the 1944 orange crop was in bloom.

By July, the smaller fruit had dropped from the trees and the crop was "set," but not assured. A purchaser became interested but delayed his decision so as to determine more accurately the probable crop and to cause the sellers to bear more of the expense of its care. He examined past production records and, by early August, received estimates that the 1944 crop might be from 70,000 to 80,000 boxes, which at current prices, would bring him $120,000 for the crop above expenses. One of Mrs. Watson's brothers also estimated the 1944 crop at 70,000 boxes if it matured. August 10, the sales price of $197,100 was agreed upon, payable $10,000 in cash and the balance September 1. No allocation of the price between the crop and the rest of the property was specified, but the seller bore the expense of caring for the crop up to September 1, amounting to $16,020.54. The sale was carried through and there was no serious frost. The crop filled 74,268 boxes. The purchaser sold them for.$146,000, yielding him a net return of $126,000.

Mrs. Watson filed a joint return with her husband, taking full deductions for her one-third share of all of the business expenses incurred in the cultivation of the crop, but treating her gain from the sale of the grove, including the unmatured crop, as a long-term capital gain. On that basis, her net gain from the sale of the grove was shown as $48,819.82, but, treating it as a long-term capital gain, only 50% of it, or $24,409.91, was included in her taxable income. [Footnote 2]

Page 345 U. S. 547

The Commissioner of Internal Revenue assessed a deficiency against petitioners, largely based on his claim that whatever part of Mrs. Watson's income was attributable to the unmatured crop should be treated as ordinary income. He allocated $122,500, out of the $197,100 received for the grove as attributable to the unmatured crop. On that premise, he assessed a deficiency of $24,101.35 against petitioners on their joint return. On review, the Tax Court, with two judges dissenting, sustained the Commissioner in principle, but reduced to $40,000 the portion of the proceeds attributable to the crop. 15 T.C. 800. With other adjustments not material here, the Tax Court reduced the deficiency to $6,920.35. The Court of Appeals affirmed. 197 F.2d 56. In the meantime, the Tax Court made comparable decisions in McCoy v. Commissioner, 15 T.C. 828, and Owen v. Commissioner, P-H T.C. Memo

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