No Orchard, No Capital Gain

71 Tax Lawyer 501 (2019)

U of Texas Law, Public Law Number 702

19 Pages Posted: 29 Jun 2019 Last revised: 26 Sep 2019

See all articles by Calvin H. Johnson

Calvin H. Johnson

University of Texas at Austin - School of Law

Date Written: June 27, 2019


As a matter of principle, capital gain is the gain from invested capital or basis. If the taxpayer has no basis in something of value it sells, there is no capital gain.

The principle that capital gain is gain from capital is embedded in the ordinary English language meaning of “capital gain,” which reflects the long history of the English property system going back into feudal tenures. Property purchased by expenses charged to the income interest remains part of the income interest and does not become capital gain reserved for the next heir.

Moreover, the combination of deduction of inputs into a transaction and preferential capital gain rates for the output is a mismatch that creates an inappropriate negative tax or subsidy. The subsidy does not “clearly reflect income.”

Finally, preferential rates for capital gain provide relief from what Irving Fisher called a double tax on capital, but if there is no capital, there is no double tax and thus no capital gain. This means that, like compensation, the sale of a contract to perform future services, of body parts, of self-developed goodwill, or of an income interest are ordinary assets, not capital.

While capital gain has a principled meaning, there are cases that do not conform to the principles. The recent Tax Court Memorandum Decision, Greenteam Materials Recovery Facility PN v. Commissioner, treated the sale of a contract in which the taxpayer had no basis as if it were a capital asset. Compensation for services and self-developed goodwill are also sometimes treated as capital assets, which is a violation of the principled meaning of capital gain.

Keywords: Capital gain taxation

JEL Classification: H24, H25

Suggested Citation

Johnson, Calvin Harsha, No Orchard, No Capital Gain (June 27, 2019). 71 Tax Lawyer 501 (2019) ; U of Texas Law, Public Law Number 702. Available at SSRN:

Calvin Harsha Johnson (Contact Author)

University of Texas at Austin - School of Law ( email )

727 East Dean Keeton Street
Austin, TX 78705
United States
512-232-1306 (Phone)
512-232-2399 (Fax)

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