Ah Pah Redwood Co. v. Commissioner of Internal Rev.

• Decision Date: 13 December 1957
• Docket Number: No. 15434.,15434.
• Citation: 251 F.2d 163
• Parties: AH PAH REDWOOD COMPANY, a corporation, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Ninth Circuit

251 F.2d 163 (1957)

AH PAH REDWOOD COMPANY, a corporation, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 15434.

United States Court of Appeals Ninth Circuit.

December 13, 1957.

James C. Dezendorf, Koerner, Young, McColloch & Dezendorf, Marshall C. Cheney, Jr., Portland, Or., for petitioner.

Charles K. Rice, Asst. Atty. Gen., Helen A. Buckley, Robert N. Anderson, Walter R. Gelles, Attys., Dept. of Justice, Washington, D. C., for respondent.

Before BONE and HAMLEY, Circuit Judges, and GOODMAN, District Judge.

HAMLEY, Circuit Judge.

This matter is before us on a taxpayer's petition to review a decision of the Tax Court of the United States. In that decision, reported at 26 T.C. 1197, the tax court upheld a $38,304.21 income tax deficiency determination by the Commissioner of Internal Revenue, covering the calendar years 1948 and 1949.¹

In reaching this decision, the tax court held that the petitioner, Ah Pah Redwood Company, was not entitled to treat as long-term capital gains the receipts from the sale of timber cut and removed from its property by Coast Redwood Company between April 1948 and the end of 1949. The correctness of this ruling presents one of the two questions submitted for our consideration.

The facts to be considered in determining this question are undisputed. On December 13, 1946, Sage Land & Lumber Company, Inc., (seller) and Union Bond & Trust Company (buyer) entered into a contract for the sale and purchase of certain timberland situated in Humboldt county, California. In October, 1947, immediately after its organization as a corporation, petitioner purchased all of the right, title, and interest of Union Bond & Trust Company in this contract. Petitioner, according to the stipulated facts, then

"* * * allowed Coast Redwood Co. (an affiliate) to start cutting timber on this tract shortly after purchase and pay $5.00 per thousand feet as removed. This was an oral or implied contract."²

Pursuant to this arrangement, Coast began cutting timber on this tract, and, as it did so, paid the stipulated price. This activity continued through the balance of 1947, and throughout 1948 and 1949. On January 9, 1950, petitioner entered into a formal written agreement with Coast, under which the latter company purchased the land and all of the remaining timber covered by the contract of December 13, 1946.

Petitioner considered that its receipts from the sale of timber cut by Coast from April, 1948 (six months after petitioner acquired its interest in the tract and timber) to the end of 1949, were reportable as long-term capital gains. The company so reported these receipts in its income tax reports for 1948 and 1949, and claimed the preferential tax treatment accorded such gains, as prescribed by 26 U.S.C.A. (I.R.C.1939) § 117. All statutory references in this opinion are to the Internal Revenue Code of 1939.

The commissioner held, in his deficiency determination, that these receipts were taxable as ordinary income, instead of capital gains. As before indicated, the tax court concurred in this view.³

It seems to have been the position of both parties in the tax court, and initially in this court, that, if petitioner was entitled to capital-gains treatment on these receipts, it must be by reason of that part of § 117(j)⁴ which gives application to transactions of the kind described in subsection (k) (2) of the same section. Both respondent and petitioner, therefore, originally turned their attention primarily to subsection (k) (2), the pertinent part of which reads as follows:

"(2) In the case of the disposal of timber or coal (including lignite), held for more than 6 months prior to such disposal, by the owner thereof under any form or type of contract by virtue of which the owner retains an economic interest in such timber or coal, the difference between the amount received for such timber or coal and the adjusted depletion basis thereof shall be considered as though it were a gain or loss, as the case may be, upon the sale of such timber or coal. * * *"

Petitioner contended that contracts of "disposal," within the meaning of subsection (k) (2), were entered into as and when the timber was cut and paid for. All receipts from timber cut and paid for more than six months after petitioner obtained its interest in the tract could therefore, according to petitioner, be treated as capital gains. Respondent, on the other hand, argued that the cutting and payment transactions could not be regarded as contracts of "disposal," within the meaning of subsection (k) (2), because all such timber had already been disposed of by the act of the parties in entering into the October 1947 arrangement described in the above-quoted stipulation.

Both parties recognized that the October 1947 arrangement could not itself qualify as a transaction of the kind described in subsection (k) (2), since it was entered into within six months of the time petitioner acquired its interest in the timber.

The tax court, apparently accepting the issues as tendered by the parties, adopted respondent's view that the October 1947 arrangement between petitioner and Coast represented a "disposal" of the timber thereafter cut, so that the later acts of cutting and paying for such timber could not be considered transactions of the kind described in subsection (k) (2). But the tax court, still directing attention to subsection (k) (2), also advanced another reason for holding against petitioner—a reason which was not urged upon it by respondent. This was that subsection (k) (2) is not applicable in the case of property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, citing § 117(j) (1).⁵

On appeal, respondent completely disavowed this second reason advanced by the tax court, and pointed to an official ruling to the effect that the tax court decision, in this respect, does not represent the position of the Internal Revenue Service.⁶ The result was that, in their initial arguments in this court, both respondent and petitioner took the position, as they had in the tax court, that the controlling issue was whether the "disposal" of timber took place as and when the timber was cut and paid for, in which event subsection (k) (2) would apply, or at the time of the October 1947 arrangement, in which case subsection (k) (2) would not apply, and petitioner would not be entitled to capital-gains treatment.

Petitioner argued that the October 1947 arrangement, being only a license to cut, coupled with an offer to sell cut timber, and unsupported by consideration, is noncontractual, and therefore not a disposal "under any form or type of contract," which is a requirement of subsection (k) (2). It also contended that, even if it be assumed that the October 1947 arrangement is contractual, since it is not in writing it is not binding upon petitioner but is revocable at any time. This being the case, petitioner urged, the arrangement under discussion cannot be considered a "disposal" of timber, within the meaning of subsection (k) (2). Hence, petitioner reasoned, since the October 1947 arrangement was not a "disposal" under subsection (k) (2), the later cutting and payment transactions stand undefeated as subsection (k) (2) "disposals."

Respondent, on the other hand, contended that the arrangement of October 1947 was contractual in nature, because the stipulation of facts, quoted above, said it was. Although the October 1947 arrangement was oral, and therefore perhaps revocable under the statute of frauds, respondent pointed out that it was not revoked. Respondent further argued that, while the arrangement in question may have been only a cutting license and not a sale, it was nevertheless a "disposal," within the meaning of subsection (k) (2), citing Springfield Plywood Corporation v. Commissioner, 15 T. C. 697. Thus, respondent concluded, there was a "disposal" of all of the timber in October 1947, and hence there could be no later "disposal" of the same timber.

A new contention, however, was injected into the case when respondent filed its first supplemental brief, responding to appellant's reply brief. Respondent then contended, for the first time, that if, as petitioner argued, the sales or disposals occurred as the timber was cut and paid for, the transactions involved no retention by the owner of an economic interest in the timber, this being an indispensable requirement under subsection (k) (2).

In our view, the stipulated facts concerning the arrangement between petitioner and Coast, quoted above, indicate that no contract was entered into in October 1947. Under that arrangement, petitioner "allowed" Coast to "start cutting timber" and "pay $5.00 per thousand feet as removed." Coast was under no obligation to remove any timber, and accepted no risk with respect to timber not removed. Petitioner received no consideration in any form at the time of the October 1947 arrangement.

In reaching this conclusion, we have not overlooked the concluding words of the quoted stipulation, i. e., "This was an oral or implied contract." In view of the immediately-preceding words of the stipulation, which plainly indicate that Coast incurred no contractual obligation at that time, it must be assumed that these last-quoted words refer to the entire transaction. This would include not only the license extended and price quoted in October 1947, but also Coast's use of the license and acceptance of the offer by cutting and paying for the timber.

Assuming, as said in Springfield Plywood Corp. v. Commissioner, supra, that a cutting license can be a "disposal" under subsection (k) (2), it still must be a contractual disposal to meet the requirements of subsection (k) (2). In the Springfield case, the transaction, whether considered a sale or a license, was concededly evidenced by a contract between the owner and the cutter. That is not true here. It follows, therefore, that the October...