Plaintiffs owned a 1000-acre farm in the Central Valley and back in 2002 sprayed some fertilizer on their grape crops that totally ruined them. So they sued and won a judgment of over $7.5 million, which the defendants paid.
Yay for Plaintiffs.
Plaintiffs then bought a 40-acre citrus farm to add to their holdings, and deducted over $3.2 million on their state tax return, claiming that the 40-acre citrus farm "replaced" their damaged grape crops and thus was tax deductible. The Franchise Tax Board disagreed, tax proceedings began, and it ultimately went up to the Court of Appeal. Which decides that the FTB was correct.
Which is clearly the right call.
You only get a deduction if the thing the taxpayer buys "replaces" damaged property. The damaged property here were some grape vines. But the plaintiffs here didn't replace their damaged grape vines; indeed, the trial and other evidence demonstrated quite concretely that they could have replaced the damaged grape vines with replacement grape vines, but didn't. Instead, they bought a 40-acre citrus farm.
That's not a replacement of like by like. Plaintiff's crops were damaged. They replaced those crops with essentially $3.2 million in land (that contained some trees). Crops and land aren't the same.
Here's my analogy (not Justice Robie's): If your house burns down, you can use the insurance money to replace it (without taxation) with another house. You cannot, however, avoid taxation if you use that insurance money to buy a different vacant lot.
Maybe you could use that money to buy a replacement house on a different lot. But you'd only receive a tax break, I imagine, if you spend the insurance money on the house, whereas the value of the lot (and the price you paid for it) would be totally nondeductible. But it didn't seem like there was any of that type of differential allocation here.
In short: Totally right result. Glad to see it.
