Watson v. Comm'r of Internal Revenue
| Decision Date | 07 December 1950 |
| Docket Number | Docket No. 18856. |
| Citation | 15 T.C. 800 |
| Parties | ERNEST A. WATSON AND M. GLADYS WATSON, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. The petitioner and her brothers were the operating owners of an orange grove property comprising land, trees, a growing crop of oranges on the trees and other property employed in the operation, which they sold for a lump sum. Held, that the growing crop of oranges was not real property used in the petitioner's trade or business within the meaning of that term as used in section 117(j) of the Internal Revenue Code, and further that the crop constituted property held by petitioner primarily for sale to customers in the ordinary course of her trade or business and the gain realized upon the sale thereof is not under that section to be considered as capital gain.
2. Portion of total selling price allocable to the crop of oranges determined.
3. Held, that a proportional part of the expenses incurred in selling the total properties is to be allocated to the crop. Arthur McGregor, Esq., and Charles J. Higson, Esq., for the petitioners.
A. J. Hurley, Esq., for the respondent.
The respondent determined a deficiency of $24,101.35 in the income tax of the petitioners for 1944. The issues are: (1) Whether a portion of the proceeds received by petitioner M. Gladys Watson from the sale of her one-third interest in a citrus grove with the growing fruit thereon is to be allocated to the fruit and regarded as ordinary income, (2) if so, what portion is to be so allocated, and (3) whether the expenses of the sale should also be allocated between the fruit and the other property sold.
A portion of the facts were stipulated and are found accordingly.
At all times material hereto petitioners, Ernest A. Watson and M. Gladys Watson, were married and living together. For 1944 they made a joint income tax return which was filed with the collector for the sixth district of California.
In 1944 Mrs. Watson, sometimes referred to as the petitioner, and her brothers, W. Todd Dofflemyer and Louis L. Dofflemyer, each owned an undivided one-third interest in a 115-acre tract of land consisting of a 100-acre navel orange grove and a 5-acre peach orchard situated near Exeter, Tulare County, California, together with the improvements and equipment thereon. The foregoing land, sometimes hereafter referred to as the Dofflemyer ranch, was acquired about 1912 by the petitioner's father. After the father's death in 1928 the ranch was held by a family holding corporation which was liquidated about the end of 1941 and the property distributed to petitioner and her brothers. As of January 1, 1942, the date of acquisition, they set up the land and improvements on their books at an estimated fair market value of $55,649.44. From and after January 1, 1942, petitioner and her brothers operated the ranch after a partnership agreement. The brothers had supervised or managed the ranch since 1912 or 1913.
About May or June 1944, the petitioner and her brothers listed with H. C. Balaam, a local real estate agent, the Dofflemyer ranch and an 80-acre vineyard with a packing house on it for sale at a lump sum price of $329,100 for the properties. After attempting to the sell the properties Balaam obtained an offer of $132,000 for the vineyard property. Thereupon petitioner and her brothers withdrew the vineyard from sale and agreed that the asking price for the ranch should be $197,100, or the difference between the asking price for all the properties and the amount of the offer for the vineyard property. In his efforts to sell the ranch, Balaam, in June 1944, contacted J. W. C. Pogue of Exeter. Pogue had lived in the Exeter vicinity all of his life. He had been the owner of citrus fruit property, and had been in the citrus fruit business since 1907. Since the middle 1920's he had owned property adjacent to the ranch. Before reaching a decision on the matter Pogue desired to wait in order to determine as accurately as possible about what the orange crop would be and also wanted to have petitioner and her brothers bear as much of the production costs of the crop as possible.
Pogue examined the production records of the Dofflemyer ranch for the preceding year broken down into the various sizes of oranges and the quantity of culls. He went over the property at different times with men from his organization for the purpose of estimating what the orange crop would be. During the first part of August and after having estimated a crop of possibly 80,000 loose boxes of oranges and discounting that amount to 70,000 boxes to be on what he considered the safe side, and after considering orange market conditions current in 1944 and estimating that the proceeds from the orange crop would net about $120,000 after providing for further cultivation costs, picking, etc., Pogue decided to buy the ranch at the asking price of $197,100. On August 10, 1944, Louis L. Dofflemyer, who personally had been supervising the ranch since 1913 and was thoroughly familiar with it, estimated that the crop of oranges on the trees would produce 70,000 loose boxes. On the same day, August 10, 1944, an agreement was entered into between petitioner, her brother, and Pogue whereby Pogue agreed to buy the ranch for $197,100 cash being paid at that time and $187,100 being payable on or before September 1, 1944. The sellers were to pay all operating costs to September 1, 1944, and taxes and insurance were to be prorated to that date. The proceeds from the peach crop on part of the ranch which was then being harvested went to Pogue who was to bear all expense of harvesting. The growing crop of oranges on the trees also went to Pogue with the land. On or about September 1, 1944, Pogue completed payment for the ranch. In addition he paid $711 for other property on the premises which had not been included in the sales contract. The principal reason that Pogue purchased the ranch for $197,100 and paid all cash therefor was that he estimated he would realize the net amount of $120,000 from the sale of the orange crop and then would be able to sell the ranch for more than the difference between the purchase price and the proceeds from the sale of the crop. He considered that the selling price of $197,100 for the ranch with the equipment and the growing crop of oranges was below the market value of the properties.
The following is a statement of the assets included in the sale, the date of acquisition, fair market value at the time of acquisition of assets acquired on January 1, 1942, and the cost of those acquired thereafter, depreciation sustained to date of sale, and depreciated basis at the date of sale:
+-----------------------------------------------------------------------------+
¦Assets sold ¦Date of ¦Basis ¦Depreciation¦Depreciated¦
+--------------------------+--------------+----------+------------+-----------¦
¦ ¦acquisition ¦ ¦sustained ¦basis ¦
+--------------------------+--------------+----------+------------+-----------¦
¦Orange grove: ¦ ¦ ¦ ¦ ¦ ¦
+--------------------------+-----+--------+----------+------------+-----------¦
¦110 acres of land * ¦Jan. ¦1, 1942 ¦$21,030.02¦0 ¦$21,030.02 ¦
+--------------------------+-----+--------+----------+------------+-----------¦
¦Trees ¦Jan. ¦1, 1942 ¦22,261.03 ¦$8,648.71 ¦13,612.32 ¦
+--------------------------+-----+--------+----------+------------+-----------¦
¦Peach orchard: ¦ ¦ ¦ ¦ ¦ ¦
+--------------------------+-----+--------+----------+------------+-----------¦
¦5 acres of land * ¦Jan. ¦1, 1942 ¦1,000.00 ¦0 ¦1,000.00 ¦
+--------------------------+-----+--------+----------+------------+-----------¦
¦Trees ¦Jan. ¦1, 1942 ¦254.12 ¦225.87 ¦28.25 ¦
+--------------------------+-----+--------+----------+------------+-----------¦
¦Farm buildings ¦Jan. ¦1, 1942 ¦950.00 ¦322.66 ¦627.34 ¦
+--------------------------+-----+--------+----------+------------+-----------¦
¦Pipelines (oranges) ¦Jan. ¦1, 1942 ¦760.10 ¦405.39 ¦354.71 ¦
+--------------------------+-----+--------+----------+------------+-----------¦
¦Disc harrow ¦Jan. ¦1, 1942 ¦98.46 ¦65.65 ¦32.81 ¦
+--------------------------+-----+--------+----------+------------+-----------¦
¦2 Pumping plants ¦Jan. ¦1, 1942 ¦461.02 ¦344.58 ¦116.44 ¦
+--------------------------+-----+--------+----------+------------+-----------¦
¦6 Wind machines ¦Jan. ¦1, 1942 ¦4,835.12 ¦1,841.20 ¦2,993.92 ¦
+--------------------------+-----+--------+----------+------------+-----------¦
¦2 Trucks ¦Jan. ¦1, 1942 ¦669.28 ¦446.18 ¦223.10 ¦
+--------------------------+-----+--------+----------+------------+-----------¦
¦2 Tractors ¦Jan. ¦1, 1942 ¦1,039.44 ¦598.56 ¦440.88 ¦
+--------------------------+-----+--------+----------+------------+-----------¦
¦Tractor and equipment ¦Jan. ¦1, 1942 ¦1,215.48 ¦810.32 ¦405.16 ¦
+--------------------------+-----+--------+----------+------------+-----------¦
¦Ditcher ¦Jan. ¦1, 1942 ¦22.68 ¦12.11 ¦10.57 ¦
+--------------------------+-----+--------+----------+------------+-----------¦
¦2 Spray rigs ¦Jan. ¦1, 1942 ¦792.16 ¦528.13 ¦264.03 ¦
+--------------------------+-----+--------+----------+------------+-----------¦
¦Orchard heaters ¦Jan. ¦1, 1942 ¦139.65 ¦41.39 ¦98.26 ¦
+--------------------------+-----+--------+----------+------------+-----------¦
¦Pump ¦Apr. ¦17, 1943¦1,230.66 ¦153.87 ¦1,076.79 ¦...To continue reading
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