Owen v. Commissioner of Internal Revenue

• Decision Date: 07 December 1951
• Docket Number: No. 13609.,13609.
• Citation: 192 F.2d 1006
• Parties: OWEN v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Fifth Circuit

192 F.2d 1006 (1951)

OWEN v. COMMISSIONER OF INTERNAL REVENUE.

No. 13609.

United States Court of Appeals Fifth Circuit.

December 7, 1951.

James P. Hill, Jacksonville, Fla., for petitioner.

Hilbert P. Zarky, Special Asst. to Atty. Gen., Theron Lamar Caudle, Asst. Atty. Gen., Ellis N. Slack, Special Asst. to Atty. Gen., Charles Oliphant, Chief Counsel Bur. Int. Rev., Charles E. Lowery, Special Atty. Bur. Int. Rev., Helen Goodner, Special Asst. to Atty. Gen., Washington, D. C., for respondent.

Before HUTCHESON, Chief Judge, and HOLMES, and STRUM, Circuit Judges.

STRUM, Circuit Judge.

This is a petition to review a decision of the Tax Court which sustained a deficiency assessment in income taxes for 1944, entered by the Commissioner of Internal Revenue against petitioner Louise Owen.

Petitioner and her husband were engaged in the business of growing and selling citrus fruits in Florida. They owned several groves. They followed the customary practice in Florida of agreeing to sell fruit while it was still on the trees and to some extent immature, the buyer paying a fixed price per box as the fruit is picked, the seller allowing the fruit to remain on the trees until maturity, as such fruit will not ripen, and has no commercial value, if picked before maturity. Moreover, the marketing of immature fruit is prohibited by law, both state and federal. Citrus fruit trees of the type here involved bloom in the Spring. The fruit matures between the following October and March, depending upon the variety of the fruit and type of tree.

On November 2, 1944, petitioner and her husband sold one grove, together with the crop on the trees and grove equipment, for $12,000. At the time of the sale, approximately 27% of the fruit on the trees was fully matured and ready for picking, having a market value of $710. The remaining fruit was immature, about one-half of it having reached 92.6% of maturity, the remainder 77.4% of maturity. The immature fruit had no commercial value at the time of sale, as it would not ripen if physically severed from the tree, but at maturity its commercial value would be approximately $2290.

On December 14, 1944, petitioner and her husband sold another grove, together with all fruit on the trees and grove equipment, for $24,000. Approximately 63% of the fruit on the trees in this grove had reached full maturity, and was ready for picking, having a market value of $3465. The remaining fruit had reached 83.6% of maturity, having no commercial value at the time of sale, but at maturity its market value would be approximately $2035.

Each grove was sold for a lump sum consideration, there being no allocation of the purchase price as between land, trees, fruit, or grove equipment. The groves were conveyed by ordinary warranty deeds which described the land, the fruit passing as appurtenant to the freehold. None of the fruit had been separately sold prior to the sale of the groves, and there had been no severance, actual or constructive.

Petitioner and her husband had owned these groves as husband and wife by the entireties for more than six months. They realized a substantial taxable gain on each sale. Petitioner returned her one-half of the profits on the sales as long term capital gains. The Commissioner disagreed. He regarded the raising of citrus fruit as a trade or business, and the unpicked fruit on the trees as property primarily held for sale in the ordinary course of that business. Pursuant to his interpretation of section 117(j) of the Internal Revenue Code (Income Tax Bulletin 3815), he held that profit on the sale of the land itself was a long term capital gain, but he allocated a separate value to the fruit, apart from the land and trees, on which he separately computed profits and taxed the same as ordinary business income, entering a deficiency assessment accordingly.

The sole question on this appeal is whether the gains derived from sale of the unsevered fruit should be separately taxed as ordinary business income, as the Commissioner and the Tax Court have held, or whether such fruit should be regarded as appurtenant to the freehold, and gains from the sale thereof taxed along with the land as a long term capital gain, as petitioner contends.

As in other problems of taxation, the approach here should be factual, not hypothetical. What was actually done, not what might have been done, is the guide. The Commissioner contends that if the taxpayer had sold the fruit on the trees to one customer, and the land to another, there could be no doubt that profits on the sale of the fruit would be separately taxable as ordinary business income, and that the tax result is not changed simply because one party purchased both the fruit and the land in one transaction. Were the facts as hypothesized by the Commissioner, an entirely different case would be presented. Different methods of handling the same transaction will often produce different tax results.

Here the land itself was sold, together with the trees and fruit, as they stood in their natural state. There was no severance of the fruit, either actual or constructive, and none contemplated. The whole was sold, in solido. The fact that the fruit was potentially property held for sale in the ordinary course of business, and for that purpose could have been severed and separately sold by the taxpayer, does not justify imposing a tax upon it in that status, when in fact no such...