Tatum v. CIR

• Decision Date: 06 September 1968
• Docket Number: No. 24361.,24361.
• Citation: 400 F.2d 242
• Parties: Clyde G. TATUM and Veta Rae Tatum, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Fifth Circuit

400 F.2d 242 (1968)

Clyde G. TATUM and Veta Rae Tatum, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 24361.

United States Court of Appeals Fifth Circuit.

September 6, 1968.

William H. Evans, Lubbock, Tex., for petitioners.

Mitchell Rogovin, Asst. Atty. Gen., Lee A. Jackson, Harry Baum, Louis M. Kauder, Attys., Dept. of Justice, Lester R. Uretz, Chief Counsel, I.R.S., Richard P. Milloy, Atty., I.R.S., Washington, D. C., for respondent.

Before BELL, COLEMAN, and GODBOLD, Circuit Judges.

GODBOLD, Circuit Judge:

Petitioners are owners of farm land. They entered into verbal agreements with share-crop tenants under which the tenants agreed to pay as land rent fractional parts of the crops produced. In 1961 and 1962 petitioners made donations to charities of grain and cotton crops¹ grown on the rented land by share-crop tenants and paid in kind as land rent. On their federal income tax returns petitioners did not include in gross income any part of the value of the crops when donated or their sale price when sold by the charities, but claimed as a charitable deduction² the amounts received by the donees upon sale of the crops. For each tax year involved the crop rents were received by petitioners, donated by them to the charities and sold by the donees, all within that tax year.³

Petitioners used a cash receipts and expenditures method of accounting and were on a calendar year basis. The Commissioner asserted a deficiency based on failure to include the value of the donated crop shares in gross income and failure to reduce farm expenses deductions for the years of the donations by the portion of expenses allocable to the donated crops. Petitioners concede that if they did not realize taxable income they overstated farm expenses by the amounts properly allocable to the donated crop shares. The deductibility of the charitable contributions is not challenged by the Commissioner.

Under petitioners' rental agreement the tenant paid the expenses of producing crops on the rented land, except that petitioners furnished fertilizer and insecticide for one-third of the grain crop and one-fourth of the cotton crop. Landlord and tenant mutually planned the amount and location of crops and the application of fertilizer, insecticides and water. The tenant performed all work and paid all other expenses. When the crops were harvested the tenant paid to petitioners as rent one-third of the grain and one-fourth of the cotton produced.

Petitioners sued in the Tax Court which upheld the Commissioner's deficiency determination. The Tax Court treated the issue under traditional concepts of power to dispose of income, Helvering v. Horst, 311 U.S. 112, 61 S.Ct. 144, 85 L.Ed. 75 (1940), i. e., exercise of power to procure payment of income to another is the enjoyment, and hence the realization, of income by the one who exercises the power.

Section 61(a) of the Internal Revenue Code, 26 U.S.C.A. § 61(a), defines gross income as "all income from whatever source derived." The Treasury Regulations relating to gross income of farmers, Treas.Reg. § 1.61-4(a), (b), provide that "crop shares (whether or not considered rent under State law) shall be included in gross income as of the year in which the crop shares are reduced to money or the equivalent of money." This provision is applicable to farmers employing the cash or accrual method of accounting alike.

The tax consequences of § 61 and Treasury Regulation § 1.61-4 are sought to be avoided by petitioners' assertion of the distinction between an assignment of income, which remains taxable to the donor, and an assignment of appreciated property, which shifts the tax to the donee. Application of this distinction to farm products has long been a matter of dispute.

The Internal Revenue Service first sought to apply the assignment of income principle of Helvering v. Horst to farmers' gifts of crops. I.T. 3910, 1948-1 Cum.Bull. 15, took the position that the fair market value of wheat donated by a farmer to charity was includable in the farmer's gross income. The Commissioner understood farm products as being "in the nature of income," and the gift to charity was an event of sufficient enjoyment of the income to amount to a realization.⁴ A similar result was reached in I.T. 3932, 1948-2 Cum.Bull. 7, which involved a gift of livestock from a cattleman to his son. Both rulings rested on the proposition that appreciation in an income item, the growing crop or livestock, was realized when the farmer assigned his interest to another. This concept, as well as the Commissioner's characterization of the products as income items, was uniformly rejected by the courts. Campbell v. Prothro, 209 F.2d 331 (5th Cir. 1954); White v. Brodrick, 104 F.Supp. 213 (D. Kan.1952); Estate of W. G. Farrier, 15 T.C. 277 (1950); Elsie SoRelle, 22 T.C. 459 (1954). The courts were of the view that such gifts of farm products were transfers of income producing property, not of income,⁵ and that a gift of income producing property was not considered to be an event whereby appreciation in value was realized.⁶ Following these decisions farmers were entitled to multiple tax benefits when crops were assigned to another.⁷

The Commissioner acquiesced in the views of the courts. I.T. 3910 was revoked by Rev.Rul. 55-138, 1955-1 Cum. Bull. 223, which held farm products given to charity need not be included in gross income, and the farmer was nevertheless entitled to a charitable deduction measured by the fair market value of the crops at the time of the gift.⁸ See also Rev.Rul. 55-531, 1955-2 Cum.Bull. 520, applying the same principle to a gift of farm products to the farmer's son.

Though forced to draw back from his attempts to apply Helvering v. Horst to gifts by farmers, the Commissioner has continued to rule that gifts of share-crop rents by landlords are distinguishable from gifts of crops by farmers, and that a gift by a landlord is an assignment of rental income, not a gift of appreciated property. Rev.Rul. 63-66, 1963-1 Cum.Bull. 13. The case before us is the first to test the validity of this distinction.⁹

The question has both factual and legal aspects. If petitioners in fact are farmers they are entitled to be treated as any other farmer and need not include the value of the crop shares in gross income. A factual conclusion that petitioners are farmers would end the matter and would pretermit the legal question whether crop shares are income assets or appreciated property. But if it is determined as a matter of fact that petitioners are not farmers but landlords, there remains the question whether the Commissioner correctly distinguished between crops in the hands of a farmer and crop shares in the hands of a landlord.

In our opinion the stipulation of the parties and the conclusion of the Tax Court dispose of the factual question.¹⁰ Petitioners are landlords, not operating farmers.¹¹ The portion of the stipulation on which the Tax Court relied is set out in the margin.¹² The Tax Court did not state in specific terms a conclusion that petitioners are not farmers, but reading its decision as a whole we are of the opinion such a factual determination necessarily underlay its disposition of the case. The factual conclusions of the Tax Court based on this stipulation are not clearly erroneous, and this is the standard we must apply. See Estate of Broadhead v. Commissioner of Internal Revenue, 391 F.2d 841 (5th Cir. 1968).

Turning to the question of law we conclude that crop shares in the hands of the landlord essentially are income assets, taxable when reduced to money or the equivalent of money, rather than, like crops in the hands of a farmer, appreciated property items not taxable if assigned to a third party prior to the realization of any income.

An operating farmer who donates crops to a third party prior to a taxable event, and prior to the point at which he must recognize income,¹³ is not required to include the value of the crops in gross income. Rev.Rule 55-138, supra; Rev.Rul. 55-531, supra. The farmer has done nothing more than assign to another a property asset which has appreciated in value. There has been no taxable event. Neither the harvesting of the crop¹⁴ nor the donative transfer is a taxable event. E. g., Campbell v. Prothro, supra. Thus far Congress has not seen fit to tax unrealized appreciation in property value.¹⁵

The share-crop landlord, on the other hand, enters an agreement with his tenant whereby the tenant is given the use of the land in return for a share of the crops produced. When the crops are harvested and delivered¹⁶ the landlord has been paid in kind for the use of his land. Crop shares representing payment by the tenant for the use of the land are rental income assets no less than money paid for the same purpose.

Although there is no distinction in the essential income nature of crop rents as against rent in any other form, Treas. Reg. § 1.61-4(a), (b) accords to share-crop landlords the privilege of waiting until the crop shares are reduced to money before recognizing the income. This accounting procedure is a rule of administrative convenience, made necessary by the absence of cash with which to pay the tax prior to a sale and by difficulties in abstract valuation of farm products, but this rule of deferred reporting of income has no bearing on the underlying question whether potentially taxable income exists. Because recognition is deferred the unsold (or uncontributed) crop shares occupy a special position in tax nomenclature — they are best described as "potential income assets."¹⁷ See Estate of Davison v. United States, 292 F.2d 937, 155 Ct.Cl. 290 (1961).¹⁸ The shares are income items, but because recognition is postponed until they are reduced to money or its equivalent they are not immediately taxable.¹⁹

The precise point at which "realization," in the technical sense, occurs is academic for purposes of this case. Receipt of the shares, the...