Kirby Lumber Corporation v. Phinney

• Citation: 412 F.2d 598
• Decision Date: 27 May 1969
• Docket Number: No. 26718.,26718.
• Parties: KIRBY LUMBER CORPORATION, Plaintiff-Appellee, v. R. L. PHINNEY, District Director of Internal Revenue, Defendant-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

412 F.2d 598 (1969)

KIRBY LUMBER CORPORATION, Plaintiff-Appellee, v. R. L. PHINNEY, District Director of Internal Revenue, Defendant-Appellant.

No. 26718.

United States Court of Appeals Fifth Circuit.

May 27, 1969.

Mitchell Rogovin, Asst. Atty. Gen., Lee A. Jackson, Atty., Richard M. Roberts, Acting Asst. Atty. Gen., Harry Marselli, David E. Carmack, Gilbert E. Andrews, Attys., Dept. of Justice, Washington, D. C., John O. Jones, Leonard B. Tatar, Attys., Dept. of Justice, Fort Worth, Tex., Ted Butler, Asst. U. S. Atty., Ernest Morgan, U. S. Atty., San Antonio, Tex., for defendant-appellant.

Joe G. Roady, Houston, Tex., Fountain, Cox & Gaines, Houston, Tex., for plaintiff-appellee.

Before JOHN R. BROWN, Chief Judge, COLEMAN, Circuit Judge, and SCOTT, District Judge.

COLEMAN, Circuit Judge:

The District Director of Internal Revenue collected $29,139.55 from the Kirby Lumber Corporation as additional income taxes allegedly due on the sale of standing tie grade hardwood timber hereinafter, tie timber in the year 1959. Before the District Court, sitting without a jury, Kirby recovered judgment for the refund of the amount paid, plus interest. The District Director vigorously appeals. We affirm.

The District Director says that the issue is "whether the District Court erred in holding that the income realized by the Kirby Lumber Corporation in 1959 from the sale of standing tie or local log grade hardwood timber was taxable as long-term capital gain rather than as ordinary income".

The taxpayer says that the issue might more precisely be stated as "whether in the year 1959 standing tie grade hardwood timber, as real property used in the trade or business of Kirby Lumber Corporation, was property held primarily for sale to customers in the ordinary course of its trade or business".

At the close of the evidence and after argument of counsel, the District Court found as a fact and held as a matter of law that in the year 1959 the tie timber in question was not property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of its trade or business, but was real property used in the taxpayer's trade or business, entitling the taxpayer to recover under the provisions of § 1231 of the Internal Revenue Code (1954).

Against this judicial result the District Director fires a thunderous salvo:

"It is the position of the District Director on this appeal that certain findings of fact made by the District Court do not constitute an accurate reflection of the record, that some of them are clearly erroneous and that others of them are incomplete or misleading".

A critical, painstaking scrutiny of the record fails, in our opinion, to justify the barrage.

Some of the crucial facts were stipulated. As to the remainder of the record, the Director tried the generally fruitless expedient of attempting to support his contentions with his adversary's proof. The Director offered no witnesses.

At any rate, considering the stipulations and the absence of material contradictions from witnesses appearing exclusively for the same side, there were no materially significant credibility issues for the trial court to settle. Thus, on this appeal, we are left only to consider the logical inferences to be drawn from undisputed facts and documents, according to the rule alluded to by Judge WISDOM in his dissenting opinion in United States v. Temple, 5 Cir., 1966, 355 F.2d 67 citing Galena Oaks Corporation v. Scofield, 5 Cir., 1954, 218 F.2d 217, 219. We feel, nevertheless, that there was no error, clear or otherwise.

This Court has several times addressed itself to the law applicable to the issue here presented. It may be briefly summarized as follows: Whether property has been held primarily for sale to customers in the ordinary course of his trade or business so that the proceeds are taxable as ordinary income rather than as capital gains is essentially a question of fact, with each case to be decided on its own peculiar facts. Specific factors or combinations of them are not controlling. We may consider the nature and character of the taxpayer's title, reason, purpose, and intent of acquisition and ownership, its duration, taxpayer's vocation, extent of its activities, extent and nature of efforts to sell, and such like. See United States v. Burket, 5 Cir., 1968, 402 F.2d 426; United States v. Temple, supra; Thompson v. Commissioner of Internal Revenue, 5 Cir., 1963, 322 F.2d 122; Wood v. Commissioner of Internal Revenue, 5 Cir., 1960, 276 F.2d 586; Smith v. Dunn, 5 Cir., 1955, 224 F.2d 353; Baum v. United States, 5 Cir. decided April 18, 1969 409 F.2d 829.

With these well established guidelines firmly before us we now consider the Findings of Fact incorporated in the memorandum of the District Court dated June 28, 1968. We cannot get the composite picture if we abridge or condense the findings. We have, therefore, decided to incorporate them at this point in toto. To avoid needless repetition in the concluding discussion we shall italicize those items which we consider to be of controlling significance.

FINDINGS OF FACT

"4. Plaintiff operates on the basis of the calendar year and timely filed its corporate return for the year 1959. In such return income from sales by plaintiff of hardwood stumpage under the contracts in question was reported and treated as capital gain and not as ordinary income. Thereafter the Commissioner of Internal Revenue issued a deficiency notice proposing an assessment in the sum of $29,139.55. Plaintiff thereafter duly filed a protest against such deficiency. The Commissioner thereafter issued a 90 day deficiency notice determining that $107,924.27 received by plaintiff during 1959 from such sales of hardwood stumpage should be taxed as ordinary income. Plaintiff thereafter paid to defendant, under protest, the sum of $29,139.55 and interest due thereon in the sum of $7,399.85, for a total of $36,539.40, and filed, on November 18, 1964, its claim for refund which was, on March 5, 1965, rejected by defendant.

"5. Plaintiff is the successor, after bankruptcy proceedings concluded in 1936, to the property and business of Kirby Lumber Company, a Texas corporation chartered in 1901. Kirby Lumber Company was formed in such year for the purpose of cutting and manufacturing into lumber and other products pine timber from 800,000 to 1,000,000 acres of land owned by Houston Oil Company. Thereafter it began to acquire fee title to lands and timber of its own. Prior to the period 1922-1923 Kirby Lumber Company cut and manufactured only pine timber. During such time 1922-1923 it built and acquired several hardwood mills and began to cut and manufacture lumber grade hardwood timber. Kirby Lumber Company through 1936 and plaintiff thereafter were engaged in the trade or business of manufacturing and selling at wholesale both pine and hardwood lumber and other timber products.¹

"6. By the year 1950, plaintiff owned over 550,000 acres of timberlands in East Texas and western Louisiana, on which grew both pine and hardwood timber. The land, with the timber growing thereon, was acquired for the purpose of owning, as a part of the lands, the timber to be utilized as a natural resource for production into lumber and other timber products. It was purchased for use in the plaintiff's trade or business. No timberland had ever been purchased by plaintiff for the purpose of resale. The hardwood timber on plaintiff's land was and is divided generally into three grades, being lumber grade, tie and local log grade and pulpwood. While all grades of hardwood are usually found throughout the forest, there were and are 82,000 acres owned by plaintiff scattered along rivers, and known as `bottom lands' where pine would not and does not grow, and which prior to 1950 were almost exclusively lumber grade hardwood timberlands. There are an additional 87,000 acres scattered throughout the forest which are called `predominantly hardwood' (where, generally, former pine lands have grown up in hardwood), where the tie grade hardwood is principally found, intermingled with pine, standing on land capable of being restored to pine growth. The remainder of the acreage is termed `predominantly pine'. To and through 1950 plaintiff owned and operated five sawmills, cutting and manufacturing both pine and lumber grade hardwood. It had not theretofore utilized in its sawmills any tie or pulpwood, nor had it sold such grades of hardwood as stumpage.

"7. In or about 1950, plaintiff's management determined to cease the production of hardwood lumber, to close down its scattered sawmills, to construct one giant sawmill designed for the production of pine products alone, and to begin a program of forest management called `perpetual cut forestry', whereunder all pine productive acreage would be devoted to pine, the pine nurtured and maintained to achieve an optimum growth, and thereafter only an amount equal to annual growth would be cut, leaving the forest as a perpetual natural resource. As a constituent part of this decision to devote the productive and manufacturing effort to pine, it was determined that the 87,000 acres which were predominantly hardwood must be returned to pine. It was determined, therefore, to eradicate, consistent with market demands, all of the tie grade hardwood timber located thereon. This process was begun in 1951. It was determined, at the same time, to dispose of lumber grade hardwood, such determination being based, as well, upon the necessity of devoting all productive acreage to pine. The last sale of manufactured hardwood lumber occurred in 1953 and none has been produced by plaintiff since that time, including 1959. Lumber grade was disposed of by a contract with Hillyer-Deutsch-Edwards, a substantial hardwood lumber manufacturer, pursuant to which Kirby employed...