A state appeals panel has agreed that people who bought a citrus farm with money a jury awarded them for the destruction of their vineyard can’t use the purchase to limit their tax liability by buying a different kind of agricultural property.
The issue for plaintiffs Ahmad Skouti and Faten Kour dates back to 2002 when a crop adviser recommended a pesticide application they say killed many grapes and injured or killed nearly half the vines on a 1,000-acre farm. A jury awarded them more than $7.5 million in damages in their lawsuit against the adviser, ultimately paying in 2007 after losing on appeal.
According to court records, Skouti and Kour’s 2007 tax filing placed more than $3.2 million of that award under Internal Revenue Code 1033 — the amount awarded for damage to their raisin crop from 2002 through 2004 — but the Franchise Tax Board rejected that approach. After failing to convince the board to reconsider, Skouti and Kour paid the disputed assessment on Dec. 31, 2018.
But in May 2020, they sued the board to have the payment refunded. Both parties asked Sacramento County Superior Court Judge Christopher Krueger to grant summary judgment. He did so on behalf of the tax board in October 2023, finding the 40 acres of mature citrus trees weren’t sufficiently similar to the damaged property in order to align with section 1033’s provisions for replacement purchases.
Skouti and Kour challenged that ruling before the California Third District Appellate Court. Justice Ronald Robie wrote the panel’s opinion, filed Feb. 11; Justices Laurie Earl and Elena Duarte concurred.
The panel said California Revenue and Taxation Code section 18031 adopts the federal section 1033. It permits filers to claim they did not realize a gain if their property was "converted" involuntarily. In cases where that conversion becomes money, filers have an allotted time to make a purchase of similar property. Then courts must analyze whether the new investment substantially continues the old or if the filer may have taken advantage of the circumstances to improve their holdings.
“The undisputed facts are that the property involuntarily converted was plaintiffs’ grapevines,” Robie wrote. “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.”
Importantly, when the jury awarded damages against the crop adviser, it did so only for damages to grapes and vines. Calculations of future losses, based on the expert Skouti and Kour presented, factored how long it would take to regrow useful vines on land the plaintiffs already owned.
“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,” Robie wrote. “This establishes plaintiffs’ land and grapevines were not equivalent investments, and therefore neither would grapevines be equivalent to land containing citrus trees.”
The panel said its conclusion didn’t mean Skouti and Kour could only qualify for 1033 filing by using their money to plant grapevines, but “instead conclude simply that plaintiffs’ purchase of land containing agricultural fixtures does not constitute a continuation of their investment in agricultural fixtures alone.”
Skouti and Kour were represented by attorneys from the firm of Fennemore Law, of Fresno. The firm did not respond to a request for comment.
Representing the Franchise Tax Board were lawyers from the office of California Attorney General Rob Bonta.