Lacroix v. Commissioner

LACROIX v. COMMISSIONER
61 T.C. 471 (1974).

Key Topics

DEPRECIATION DEDUCTION
· Additional first-year depreciation
·· Applicable only to tangible personal property
· Trees of orchards and groves

FRUIT TREES
· Bonus depreciation not allowed

Facts

Taxpayers were members of various partnerships which owned citrus trees and claimed deductions for additional first-year depreciation, under section 179, for the year 1967. The Commissioner disallowed the deductions on the ground that citrus trees did not qualify as section 179 property because they were not tangible personal property.

Held: For the Commissioner. The court, following the decision in Powars v. United States, 285 F. Supp. 72 (1968) [5 T.T.J. 207], held that section 179 was not as broad as section 48 in its definition of qualifying property since the latter section, in defining section 38 property (in which citrus trees are included), refers to both tangible personal property and other tangible property, while section 179 mentions only tangible personal property. The court found taxpayers' reliance on section 1.179-3(b) of the Income Tax Regulations misplaced since that section refers to certain real property which Congress desired to include within the reach of the investment tax credit. Analogizing to landscaping cases involving trees and shrubs, the court held that citrus trees should be considered part of real property or improvements for tax purposes and that Congress did not intend to include them within the meaning of tangible personal property for section 179 purposes.

Case Text
[Timber Issue Only]

STERRETT, Judge: The Commissioner determined deficiencies in petitioners' Federal income tax as follows:

Petitioners	Docket No.	Deficiency
Kenneth D. LaCroix and Rhetta S. LaCroix	5128-71	$ 3,002.00
Kenneth L. Lorenz and Florence H. Lorenz	5129-71	2,415.00
Orville W. Bottorff and Martha L. Bottorff	5130-71	2,541.00
Robert L, Duey and Nancy T. Duey.	5133-71	8,263.00
Robert E. Washbon and Margaret C. Washbon	5134-71	1,830.11
John H. Ryan and Lois L. Ryan	5135-71	2,461,00
Charles H. Ransom and Billie N. Ransom	5138-71	2,155.00
Charles W. Plows and Nancy H. Plows	5139-71	3,689.00
Peter W. Melitz and Virginia W. Melitz	5140-71	1,876.00
Lyle G. Shelton	5141-71	2,589.00
Joseph B. LaMonica and Arva L. LaMonica	5142-71	2,397.00
Byron D, Williams and Frances T. Williams	5143-71	1,387,00
John C. Davenport and Ina C. Davenport	5144-71	3,317.00
Richard W. Daby and Gladys M. Daby	5145-71	4,9.46.00
Site-Pak Development Corp	5154-71	2,353.00
Milton A. Miner and Kathleen N. Miner	5218-71	21,382.00
DeWayne H. Wohlleb and Marilyn A. Wohlleb	7886-71	23,383.73

These deficiencies were determined :by the respondent for the calendar year 1967, except for Site-Pak Development Corp., for which the deficiency determined was for the fiscal year ending March 31, 1968.

Certain issues have either been conceded or were not raised by the petitioners. The issues presented for determination are:

(1) Whether a $250,000 payment made in 1967 pursuant to a land sale contract was prepaid interest for which the Analand partnership, in which the petitioners are partners, is entitled to an interest deduction under section 163(a) ⁴ for the taxable year in which paid.

(2) Whether citrus trees are tangible personal property within the meaning of section 179 and therefore eligible for an additional first-year depreciation allowance.

* * *

Citrus Trees

The following petitioners were partners in the partnership or partnerships listed below during the taxable year 1967:

Petitioners	Partnership(s)
Byron D. Williams	Highland View Citrus Orchard; University Acres.
DeWayne H. Wohlleb	Highland View Citrus Orchard
Kenneth D. LaCroix	Highland View Citrus Orchard; University Acres
Orville W. Cole	Highland View Citrus Orchard
Milton A. Miner	Highland View Citrus Orchard
Site-Pak Development Corp. (in 1967 Whitesides, Williams & Coult, Inc.)	Highland View Citrus Orchard

The partnerships mentioned above owned citrus trees in 1967 and deducted certain amounts as additional first-year depreciation under section 179 on these citrus trees. As a result, the income or loss from these partnerships reported by the above-mentioned petitioners for the taxable year 1967 (March 31, 1968, for Whitesides, Inc.) was affected.

The respondent disallowed the additional first-year depreciation deductions and thus increased each petitioner's respective distributive share or shares by his proportionate share of the disallowed amounts. The respondent determined that citrus trees do not qualify as "section 179 property" because they are not tangible personal property within the meaning of that section.

Opinion

* * *

The second issue for decision is whether citrus trees qualify for the additional first-year depreciation allowance provided by section 179. The dispute here basically revolves around the issue of whether citrus trees fall within the classification of "tangible property" as that term is used in the definition of section 179 property." If citrus trees are "tangible personal property," since the respondent does not claim herein that the other prerequisites to classification as "section 179 property" are not met, the partnerships, of which certain of the petitioners are partners, will be entitled to an additional first-year depreciation allowance on said citrus trees.

To support their additional first-year depreciation claims, the petitioners argue that section 179 in its definition of "section 179 property" is as broad as or broader than section 48 in its definition of "section 38 property," under which the Internal Revenue Service has ruled that citrus trees are "section 38 property. ⁸ "Thus, petitioners conclude that citrus trees qualify for section 179 treatment. Petitioners also argue that, even if we find that section 179 is not as broad as section 48 in its definition of eligible property, citrus trees are still "tangible personal property" within the meaning of section 179, The respondent takes the opposite position on both points. We note that these questions have been presented for judicial determination only once previously. See Powars v United States, 285 F. Supp. 72 (C.D. Cal. 1968). We agree with the conclusions reached in Powars that section 179 is not as broad as section 48 in the respective definitions of qualifying property and that citrus trees are not "tangible personal property" within the meaning of section 179.

Section 179(d)(1) ⁹ provides, along with other requirements, that "section 179 property" must be "tangible personal property." The Code does not define this term but section 1.179-3(b), Income Tax Regs., elaborates on its definition as follows:

Tangible personal property. Local law definitions will not be controlling for purposes of determining the meaning of the term "tangible personal property" as it is used in section 179 and the regulations thereunder. For purposes of section 179, the term "tangible personal property" includes any tangible property except lane', and improvements thereto, such as buildings or other inherently permanent structures thereon (including items which are structural components of such buildings or structures). Assets accessory to the operation of a business, such as machinery, printing presses, transportation or office equipment, refrigerators, individual air conditioning units, grocery counters, etc. generally constitute tangible personal property for purposes of section 179, even though such assets may be termed fixtures under local law. The term does not include, for example, the wiring in a building, plumbing systems, nor central heating or central air conditioning machinery, pipes, or ducts or other items, which are structural components of a building or other permanent structure, nor does the term include trademarks, goodwill, or other intangibles.

We note that in addition to authority under section 7805 to prescribe all needful rules and regulations these regulations were promulgated under section 179(e) wherein the respondent is instructed to prescribe regulations necessary to carry out the purpose of section 179. These regulations, unless unreasonable or plainly inconsistent with the revenue statute, must be sustained and have the force and effect of law. Commissioner v. South Texas Co., 333 U.S. 496, 501 (1948); Maryland Casualty Co. v. United States, 251 U.S. 342, 349 (1920); cf. Edward A. Moradian, 53 T.C. 207,210 (1969). We do not find the regulations to be unreasonable or inconsistent with the statute.

Although the legislative history of section 179 is meager, we are convinced that in using the term "tangible personal property," Congress intended to exclude all real property, except for some fixtures or equipment which under local law may be classified as real property but for Federal tax purposes would be classified as personal property. 'In a summary of the proposed provision, later to become section 179, during debate in the Senate, the provision was stated to be applicable to "depreciable equipment" only. 104 Cong. Rec. 17090 (1958). One of the critics of the proposed provision objected to limiting its scope to only personal property and offered an amendment, subsequently rejected, which would have applied to both real and personal property as well as to inventory. 104 Cong. Rec. 17095-17098 (1958).

The term "tangible personal property" is used elsewhere in the Code. In section 48(a)(1) ¹⁰ the provisions relating to the investment credit employ it in the definition of "section 38 property." The term "personal property" is also used to define "section 1245 property" in section 1245(a)(3), ¹¹ and, according to the regulations, includes both tangible and intangible property. Sec. 1.1245.3(b), Income Tax Regs. However, since section 1.1245-3(b)(1), Income Tax Regs., defines "tangible personal property" for section 1245 purposes as that defined in section 1.48-1(c), Income Tax Regs., we need only consider the use of that term in section 48 in order to gain further insight into the application of the term to the facts of the instant case.

Several decisions of this Court have concluded that the definitions of "tangible personal property" in sections 1.484(c) ¹² and 1.179-3(b), Income Tax Regs., are substantially identical. Joseph Henry Moore, 58 T.C. 1045, 1055 (1972), affirmed per curiam 489 F. 2d 285 (C.A. 5, 1973); Estate of Shirley Morgan, 52 T.C. 478, 482 (1969), affirmed per curiam 448 F. 2d 1397 (C.A. 9, 1971). Thus, we conclude that the two terms should be applied in a similar manner.

The petitioners here argue that section 179 is interpreted to be just as broad or broader than section 48 in its definition of eligible property. Petitioners base their argument on section 1.179-3(b), Income Tax Regs,, which provides that for section 179 purposes the term "tangible personal property" includes "any tangible property" and that "any tangible property" would include both "tangible personal property" as used in section 48(a)(l)(A) and "other tangible property'' as used in section 48(a)(1)(B). Petitioners conclude that since citrus trees are clearly tangible property and singe they qualify as "section 38 property," it follows that they qualify as "section 179 property."

However, the legislative history of section 48 and the regulations under sections 48 and 179 do not support petitioners' argument. It is clear that the term "other tangible property" as used in section 48(a)(1)(B) was added so that certain real property, which would not be included under the broadly defined term "tangible personal property," could qualify for the investment credit if used as an integral part of certain enumerated activities. The Senate Finance Committee stated as follows:

4. "Section 38" property --Section 38 property (defined in sec. 48(a)), is the only property (either new or used) which is treated as "qualified investment." Except for the exclusions noted below, all tangible personal property qualifies as section 38 property. Except for buildings and their structural components, real property which is used as an integral part of manufacturing, production or extraction * * * also qualifies as section 38 property. * * * Tangible personal property is not intended to be defined narrowly here, nor to necessarily follow the rules of State law. is. Rept. No. 1881, 87th Cong., 2d Sess. (1962), 1962-3 C.B. 722.]

Tangible personal property may qualify as section 38 property irrespective of whether it is used as an integral part of manufacturing, production, or extraction. * * * Local law definitions will not be controlling for purposes of determining the meaning of the term "tangible personal property." For purposes of section 48, the term "tangible personal property," includes any tangible property except land, and improvements thereto, such as buildings or other inherently permanent structures thereon (including items which are structural components of such buildings or structures). [Id. at 858.]

In addition to tangible personal property, other tangible property (not including a building and its structural components) used as an integral part of the manufacturing, production, or extraction process * * * may qualify for the credit.

* * *

The terms "manufacturing," "production," "extraction," * * * are to be given their commonly accepted meaning. Thus, for example, manufacturing or production includes * * * the cultivation of the soil and the raising of livestock and other farm produce. Section 38 property would include, for example, property used as an integral part of * * * the growing, raising, processing, and packing or packaging of foodstuffs; * * * [id. at 859.]

We note here again, as we found above, that the legislative history of Section 179 shows that real property, as the term is used for tax, rather than local law, purposes, was not intended to be included as "tangible personal property" for section 179 purposes.

Congress, in its use of the term "other tangible property in section 48, did intend to allow the investment credit for certain real property, in addition to the broadly defined category of personal property, if used as an integral part, as applicable herein, to the cultivation of soil. It is important to note here that the Senate report also defined "tangible personal property" for section 48 purposes as "any tangible property" except land or improvements, thereon, as doe's Section 1.179-3(c), Income Tax Regs., upon which, petitioners rely, and as does section 1.48-1(C),. Income Tax Regs. On the basis of these facts and our determination that the term "tangible personal property" is to be applied similarly in both sections 48 and 179, we conclude that in its definition of "section 38 property" section 48 is broader in scope than is section 179 in its definition of "Section 179 property" with regard to the real or personal nature of the eligible property.

Petitioners next argue that citrus trees fall within the classification "tangible personal property." Section 1.179-3(c), Income Tax Regs:, defines this term as "any tangible property except land, and improvements thereon, such as buildings or other inherently permanent structures thereon." The respondent has determined that citrus trees do not fall within the classification of tangible personal property" and we agree.

We have not been directed to, nor have we been able to find any dispositive discussion of citrus trees with respect to their classification as real or personal property for Federal tax purposes. We note that several cases have allowed depreciation deductions for trees or orchards, but classification as real or personal property was not involved. ¹³ Thus, we must resort to analogy. In several landscaping cases, depreciation was denied for the cost of shrubbery because the shrubbery was believed to be "inextricably associated" with land. Herbert Shainberg, 33 T.C. 241 (1959).; Algernon Blair, .Inc., .291 T.C. 1205 (1958). However, in Alabama- Georgia Syrup Co., 36 T.C. 747 (1961), reversed without discussion of this point sub nom. Whitfield v. Commissioner, 311 F.2d 640 (C.A.. 5, 1962), depreciation was allowed on shrubbery and evergreens, presumably although it was not stated, because shrubbery and evergreens were no longer considered as land. Respondent himself in Rev. Proc. 62-21, 1962-2 C.B. 418, classified shrubbery and landscaping as land improvements subject to depreciation. ¹⁴ We believe that the trees here involved are closely akin to shrubbery and should fall into the same category for tax purposes. Nowhere have we found any indication that shrubbery or trees such as those in the instant case are considered to be personal property for tax purposes, but rather that they are associated with land or thought to be improvements thereon. ¹⁵

"Inherently permanent structures" on land are also excluded from the definition of the term "tangible personal property." In this regard, the following language from Beverly R. Roberts, 60 T.C. 861, 866 (1973), which involves "section 38 property," is instructive:

Tangible assets are thus to be classified as either "personal property" or "other tangible property" depending upon the fashion in which they are affixed to the land and how permanently they are designed to remain in place.

See also C. C. Everhart, 61 T.C. 328 (1973); Joseph Henry Moore, supra; Estate of Shirley Morgan, supra; cf. Minor Federal Savings & Loan Assn. v, United States, 435 F. 2d 1368, 1369-1371 (C.A. 8, 1970). We realize that these cases do not involve trees or other living things, but we believe that the principle for which they stand applies equally in the instant case. The trees in the instant case could, no doubt, be separated from the earth or transplanted, but it is doubtful that such was likely or even imagined at the time of planting or acquisition by the petitioners. Since the use of the term "tangible personal property" in sections 48 and 179 is substantially identical, we employ the distinction stated in Roberts in the instant case. While annexation to land does not necessarily preclude classification as "tangible personal property" for section 48 purposes, see Estate of Shirley Morgan, supra at 483, we believe that the permanence of the citrus trees in the instant case is of controlling importance.

Because we believe that commonsense dictates that citrus trees or trees in general are more commonly associated with land and because of their inherently permanent nature it is our judgment that citrus trees cannot reasonably be regarded as items of personal property for the purposes of Section 179.

Since citrus trees do not qualify as "section 179 property" the partnerships herein are not entitled to an additional first year depreciation allowance thereon and accordingly those petitioners herein who are partners of these partnerships must increase their respective distributive shares as the respondent has determined.

Decisions. will be entered for the respondent.

4 All Code references herein are to the Internal Revenue Code of 1954 as amended and as applicable to the taxable year involved, unless otherwise indicated.

8 In Rev. Rul. 65-104, 1965-1 C.B. 28, the Service ruled that citrus trees qualified as "section 38 property" without stating whether they were "tangible personal property'' within the meaning of sec. 48(a)( l)(A) or "other tangible property" within sec. 48(a)(1)(B). However, in Rev. Rul. 67-51, 1967-1 C.B. 68, the Service stated that trees of first orchards or groves were not "tangible personal property" within the meaning of sec. 179 but that they could qualify as "other tangible property" under sec. 48(a)(l)(B).

9 Sec. 179(d)(1) provides as follows:

1. SECTION 179 PROPERTY.--For purposes of this section, the term "section 179 property" means tangible personal property-

10 Sec. 48(a)(1)provides, in pertinent part, as follows:

(a) SECTION 38 PROPERTY.--

(1) IN GENERAL--Except as provided in this subsection, the .term "section 38 property" means--

11 Sec. 1245(a)(3) provides, in pertinent part, as follows:

(3) SECTION. 1245 PROPERTY. For purposes of this section, the term "Section 1245 property" means any property which is or has been property of-a character subject to .the allowance for depreciation .provided in section 167 (or subject to the allowance of amortization provided in-section 185) and is either-

(A) personal property,

(B) other property-(not including a building or its structural components) but only if such other property is tangible and has an adjusted basis in which there are reflected adjustments described in paragraph (2) for a period in which such property (or other property)-

(i) was used as an integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electrical energy, gas, water, or sewage disposal services, or

12 Sec. 1.48---1(c), income Tax Regs., defines "tangible personal property" as follows:

(C) Definition of tangible personal property. If property is tangible personal property it may qualify as section 38 property irrespective of whether it is used as an integral part of an activity (or constitutes a research or storage facility used in connection with such activity)specified in paragraph (a) of this section. Local law shall not be controlling for purposes of determining whether property is or is not "tangible" or "personal." Thus, the fact that under local law property is held to be personal property or tangible property shall not be controlling. Conversely, property may be personal property for purposes of the investment credit even though under local law the property is considered to be a fixture and therefore real properly. For purposes of this section, the term "tangible personal property" means any tangible property except land and improvements thereto, such as buildings or other inherently permanent structures (including items which are structural components of such buildings or structures). Thus, buildings, swimming pools, paved parking areas, wharves and docks, bridges, and fences are not tangible personal property. Tangible personal property includes all property (other than structural components) which is contained in or attached to a building. Thus, such property as production machinery, printing presses, transportation and office equipment, refrigerators, grocery counters, testing equipment, display racks and shelves, and neon and other signs, which is contained in or attached to a building constitutes tangible personal property for purposes of the credit allowed by section 38. Further, all property which is in the nature of machinery (other than structural components of a building or other inherently permanent structure) shall be considered tangible personal property even though located outside a building. Thus, for example; a gasoline pump, hydraulic car, lift, or automatic vending machine, although annexed to the ground, shall be considered tangible personal property.

13 See W. Thomas Davis, T.C. Memo. 1965-30, affirmed per curiam without discussion of this point 375 F. 2d 517 (C.A. 9 1967); Certiorari denied 389 U.S. 914 (1967); Ribbon Cliff Fruit Co., 12 B.T.A. 13 ( 1928), Kaweah Lemon Co, 5 B.T.A. 992 (1927); Redlands Security Co., 5 B.T.A. 956 (1926).

14 We realize that respondent also classified citrus trees in Rev. Proc. 62-21 as depreciable assets involved in agriculture; but again such classification gave no indication as to respondent's view of their nature as real or personal property.

15 While we realize that local law definitions are not necessarily controlling for the purposes of determining whether citrus trees are "tangible personal property" within the meaning of sec; 179, we nevertheless believe that a consistent interpretation is indicative. Congress is not in a position to define completely every term it uses, but in many circumstances must rely upon generally accepted interpretations and definitions. In a survey of cases we found a distinction between fructus industriales, or crops which are the product of human labor and which require periodic planting and cultivation, and fructus naturales, or crops which are the natural products of the soil such as trees in general or trees with growing fruit. The former may be either real or personal property depending upon the jurisdiction, but the latter are consistently held to be real property. See generally 25 C.J.S., Crops, Secs. 2 and 3. As citrus trees come within the classification of fructus naturales, they must be considered real property.