The opinion
Filed 2/11/25
CERTIFIED FOR PUBLICATION
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
THIRD APPELLATE DISTRICT
(Sacramento)
----
AHMAD SKOUTI et al., C100135
Plaintiffs and Appellants, (Super. Ct. No. 34-2020-
00278768-CU-MC-GDS)
v.
FRANCHISE TAX BOARD,
Defendant and Respondent.
APPEAL from a judgment of the Superior Court of Sacramento County,
Christopher E. Krueger, Judge. Affirmed.
Fennemore Dowling Aaron, J. Jackson Waste and Joseph J. Doerr for Plaintiffs
and Appellants.
Rob Bonta, Attorney General, Tamar Pachter, Assistant Attorney General, Craig D.
Rust, Jennifer T. Henderson and Lauren E. Freeman, Deputy Attorneys General, for
Defendant and Respondent.
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Plaintiffs Ahmad Skouti and Faten M. Kour purchased a citrus orchard with
proceeds from a jury award for the destruction of their grapevines. Internal Revenue
Code section 1033 (26 U.S.C. § 1033 (section 1033)) permits nonrecognition of gain
from involuntary conversions of property, like the one here, if the taxpayer “purchases
other property similar or related in service or use to the property so converted.” (§ 1033,
subd. (a)(2)(A).) The Franchise Tax Board (Board) determined plaintiffs cannot benefit
from section 1033 because the citrus orchard was not similar or related in service to the
converted grapevines. After exhausting administrative remedies, plaintiffs filed a
complaint in the trial court for refund of taxes against the Board. The parties filed
competing motions for summary judgment and the trial court granted the Board’s motion
and denied plaintiffs’ motion. On appeal, plaintiffs contend the trial court erred because
their purchase of citrus orchards was sufficiently similar under section 1033 to permit
nonrecognition of the gain from the involuntarily converted grapevines. We affirm,
concluding the properties are not similar under section 1033 because plaintiffs replaced
agricultural fixtures with property including both agricultural fixtures and land.
FACTUAL AND PROCEDURAL BACKGROUND
The parties’ stipulation of undisputed material facts for the summary judgment
motions stated plaintiffs are grape farmers with about 1,000 acres of grapevines. In 2002,
they sprayed their vineyards with a mixture of chemicals their crop advisor
recommended. These chemicals killed many of the grapes and injured or killed nearly
half of plaintiffs’ vines. Plaintiffs sued the crop advisor and a jury awarded them over
$7.5 million in damages. This award consisted of $3,260,166 for “[d]amage to [r]aisin
[c]rop” between 2002 and 2004; $160,933 for “[c]ost to [r]epair [v]ines” between 2002
and 2004; $467,629 for “[l]ost [p]rofit from [g]reen [g]rape [p]urchases” between 2002
and 2004; and $3,666,605 for “future lost profits.” The lost profits from 2002 through
2004 was based on the estimated drop in vine production from the damage, and the future
lost profits were based on the time it would take new vines to grow to grape producing
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maturity. Specifically, the parties’ stipulated facts stated plaintiffs’ expert at trial
calculated future losses based on the “planting of seedlings (aka rootstock) that would
take several years to produce a crop,” so the expert valued plaintiffs’ “future losses based
on the cost to sequentially replant 47[ percent] of the vineyards” until “the replacement
vines would have matured.”
After the crop advisor lost its appeal, it paid plaintiffs the judgment in 2007.
Plaintiffs elected in their 2007 tax return for $3,260,166 of the judgment to be treated
under section 1033. The Board rejected this treatment for plaintiffs’ state income tax
return. Plaintiffs exhausted their administrative remedies and the Board did not change
its position. Plaintiffs paid the disputed tax assessment on December 31, 2018.
On May 15, 2020, plaintiffs filed a complaint against the Board for refund of
taxes. Plaintiffs and the Board filed competing motions for summary judgment with the
aforementioned stipulation of undisputed material facts.
In plaintiffs’ complaint, they explained they used the $3,260,166 “to purchase
citrus orchards to replace the [d]estroyed [v]ines.” In plaintiffs’ opposition to the Board’s
motion for summary judgment, plaintiffs asserted they “used $3,260,166 from their
awarded damages to purchase approximately 40 acres of mature producing citrus trees in
2007.” Plaintiff Skouti stated in a declaration: “The citrus orchards that I purchased
were similar to my damaged vineyards in that they contained mature perennial crops that
were farmed for commercial agricultural production and harvested once each year for
sale to consumers.”
On October 3, 2023, the trial court granted the Board’s motion and denied
plaintiffs’ motion. The court determined the replacement property, consisting of land and
fully matured trees, was “not sufficiently similar to constitute a replacement of the
damaged grape vines [sic] for the purposes of . . . section 1033.”
Plaintiffs appeal.
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DISCUSSION
Plaintiffs contend the trial court erred because the citrus orchard was
“ ‘replacement property’ ” within section 1033. Plaintiffs assert, “They lost one type of
agricultural real property. They were compensated for that loss. They used that
compensation to buy another type of agricultural real property.” The Board argues that
plaintiffs did not satisfy section 1033 because “grapevines are not ‘similar or related in
service or use to’ the additional 40 acres of land containing citrus trees.” We agree with
the Board.
Summary judgment should be granted “if all the papers submitted show that there
is no triable issue as to any material fact and that the moving party is entitled to a
judgment as a matter of law.” (Code Civ. Proc., § 437c, subd. (c).) “ ‘Because this case
comes before us after the trial court granted a motion for summary judgment, we take the
facts from the record that was before the trial court when it ruled on that motion.
[Citation.] “ ‘We review the trial court’s decision de novo, considering all the evidence
set forth in the moving and opposing papers except that to which objections were made
and sustained.’ ” [Citation.] We liberally construe the evidence in support of the party
opposing summary judgment and resolve doubts concerning the evidence in favor of that
party.’ ” (LaBarbera v. Security National Ins. Co. (2022) 86 Cal.App.5th 1329, 1338-
1339.) We owe no deference to the trial court’s reasoning; our task is to review the trial
court’s decision, not its rationale. (Murchison v. County of Tehama (2021)
69 Cal.App.5th 867, 882.)
Section 1033, adopted for California tax law through Revenue and Taxation Code
section 18031, permits nonrecognition of gain from involuntary conversions of property
in certain circumstances. If the conversion is into money, the taxpayer need not
recognize the gain if the taxpayer “purchases other property similar or related in service
or use to the property so converted” within an allotted time. (§ 1033, subd. (a)(2)(A).)
To determine whether replacement property is “ ‘ “similar or related in service or use” ’ ”
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to the converted property, courts “look to the taxpayer’s relationship to his [or her] old
and new investments.” (Davis v. U.S. (9th Cir. 1979) 589 F.2d 446, 449.) The Ninth
Circuit has explained: “ ‘The test is a practical one. The trier of fact must determine
from all the circumstances whether the taxpayer has achieved a sufficient continuity of
investment to justify non-recognition of the gain, or whether the differences in the
relationship of the taxpayer to the two investments are such as to compel the conclusion
that he[, she, or they] has [or have] taken advantage of the [conversion] to alter the nature
of his[, her, or their] investment for his[, her, or their] own purposes.’ ” (Ibid.) “[T]he
essential inquiry is whether the taxpayer has committed the [conversion] award to a
substantially equivalent investment, the relevant facts include all of those [that] would
influence an investor in determining the attractiveness of the respective uses for his[, her,
or their] capital.” (Filippini v. U.S. (9th Cir. 1963) 318 F.2d 841, 845.) “[T]he purpose
of section 1033 ‘is to relieve the taxpayer of unanticipated tax liability arising from
involuntary conversion of his[, her, or their] property . . . . The statute is to be liberally
construed to accomplish this purpose.’ ” (Davis, at p. 450.)
In Davis, the Ninth Circuit applied this rule where a taxpayer owned “industrial
property being developed for lease, and improved agricultural land leased for sugar cane
cultivation and livestock grazing. [The t]axpayer also owned a sea fishery adjacent to its
agricultural property.” (Davis v. U.S., supra, 589 F.2d at p. 447.) Hawaii condemned the
sea fishery and portions of the agricultural land and the “[t]axpayer used the
condemnation proceeds to build a storm drainage and water system, grade land, and
excavate a roadway in . . . [the] land [the] taxpayer was developing for lease to industrial
concerns.” (Ibid.) The Ninth Circuit found the improvements represented a
“ ‘substantial continuation’ ” of the taxpayer’s existing investment because: “[T]he risk
attendant to [the] taxpayer’s investment in the industrial park was not greater than the risk
concomitant with an investment in agricultural land. [The t]axpayer’s management also
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remained substantially the same, without great variance in cost or service.” (Id. at
pp. 449-450.)
With this understanding, plaintiffs here do not qualify for the benefit of section
1033. The undisputed facts are that the property involuntarily converted was plaintiffs’
grapevines. These agricultural fixtures are improvements to land. (See Civ. Code, § 660;
Rev. & Tax. Code, § 105, subd. (a)(2).) Plaintiffs maintain the replacement property
purchased with the judgment proceeds was 40 acres of a citrus orchard. This is not
sufficiently similar or related in service under section 1033, subdivision (a) because the
citrus orchard is both agricultural fixtures and land. Even assuming the replacement
property’s agricultural fixtures—citrus trees—are a sufficiently equivalent investment as
the converted agricultural fixtures—grapevines—the replacement property includes the
underlying land. Both land and fixtures are elements of real property. (Civ. Code,
§ 658.) But they are distinct—“[l]and is the material of the earth,” (Civ. Code, § 659),
whereas fixtures are “affixed to land,” such as through “attach[ment] to it by roots” (Civ.
Code, § 660). And this distinction means agricultural fixtures by themselves represent a
different investment than land with agricultural fixtures.
This case exemplifies this point. Plaintiffs’ investment in the vines carried
different risks compared to the underlying land because plaintiffs’ judgment was for
damages to the grapes and vines but not for damage to the land. The parties’ stipulated
facts further explained plaintiffs’ expert at trial calculated future losses that were based
on the “planting of seedlings (aka rootstock) that would take several years to produce a
crop,” so the expert valued plaintiffs’ “future losses based on the cost to sequentially
replant 47[ percent] of the vineyards” until “the replacement vines would have matured.”
Damages were not associated with the land itself and instead the land could still be
planted with grapevines. This is also inherent with a citrus orchard—if in the future the
citrus trees were damaged in a similar manner as the grapevines, plaintiffs could still
have two parcels of productive land even if all agricultural fixtures were damaged. This
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establishes plaintiffs’ land and grapevines were not equivalent investments, and therefore
neither would grapevines be equivalent to land containing citrus trees.
For these reasons, this case is dissimilar from Davis, contrary to plaintiffs’
assertions. The involuntarily converted property in Davis was the entirety of the
property, improvements and land, not just the improvements to the land. (Davis v. U.S.,
supra, 589 F.2d at p. 447 [“The state of Hawaii condemned [the] taxpayer’s sea fishery
and various portions of [the] taxpayer’s agricultural property”].)1 The proceeds from the
converted improved land were then invested into improving industrial land, thus this was
a continuation of the taxpayer’s original investment with similar risk, management, and
costs as the converted property. (Davis, at pp. 449-450.) Not so here. Plaintiffs used
proceeds from improvements to invest into improved land, with different investment
considerations, constituting a discontinuation of plaintiffs’ original investment. Had the
entirety of plaintiffs’ property been converted and had plaintiffs used the funds to invest
into similar improved land, like in Davis, the outcome may be different. But that is not
the case presented here, where the only thing converted was grapevines.
We find a Fifth Circuit case cited by the Board more on point than Davis:
Woodall v. C.I.R. (5th Cir. 1992) 964 F.2d 361. There, insurance proceeds from a fire to
a nightclub were spent in part on buying other “land, building and improvements.” (Id. at
p. 362.) The Fifth Circuit found the replacement improved land was not “ ‘similar or
related in service or use’ ” to the nightclub because “[t]he loss was only to [the
taxpayers’] improvements. . . . The fire in the [nightclub] did not force the taxpayers to
buy the nightclub buildings; their lease interest had remained intact. . . . The purchase of
the building replaced no damaged property and the funds used for its purchase do not fall
1 The underlying district court case further explained Hawaii condemned the land to
construct highways. (Davis v. U.S. (D.Hawaii 1976) 411 F.Supp. 964, 965.)
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within [section] 1033.” (Woodall, at p. 364.) Similarly here, the damage was only to
plaintiffs’ improvements, and their interest in the underlying land remained intact.
Plaintiffs also often cite to the requirement section 1033 must be “liberally
construed” in their favor. They suggest: “Courts should eschew picayune hairsplitting in
favor of a liberal construction of the statute that gives taxpayers who have suffered a
major loss a much-needed break.” But liberal does not mean limitless. Taxpayers cannot
use section 1033 to “take[] advantage of the condemnation to alter the nature of [their]
investment for [their] own purposes.” (Filippini v. U.S., supra, 318 F.2d at pp. 844-845.)
We do not conclude plaintiffs necessarily had to replant grapevines to satisfy section
1033. (Loco Realty Company v. C.I.R. (8th Cir. 1962) 306 F.2d 207, 211 [“It is not
necessary that the replacement property be an exact duplicate of the original”].) We
instead conclude simply that plaintiffs’ purchase of land containing agricultural fixtures
does not constitute a continuation of their investment in agricultural fixtures alone. The
Board therefore correctly disallowed nonrecognition of gain under section 1033, and we
consequently affirm the trial court’s order finding so and the resulting judgment of
dismissal.
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DISPOSITION
The judgment is affirmed. The parties shall bear their own costs on appeal. (Cal.
Rules of Court, rule 8.278(a)(5).)
/s/
ROBIE, J.
We concur:
/s/
EARL, P. J.
/s/
DUARTE, J.
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