AF LOWES LUMBER CO. v. Commissioner
| Decision Date | 30 June 1960 |
| Docket Number | Docket No. 71689,71690. |
| Parties | A. F. Lowes Lumber Co. v. Commissioner. Estate of A. F. Lowes, Deceased, the First National Bank of Portland (Oregon), Executor, and Ruth L. Lowes, surviving wife, v. Commissioner. |
| Court | U.S. Tax Court |
Frank E. Nash, Esq., American Bank Building, Portland, Ore. Maurice O. Georges, Esq., and Donald R. Holman, Esq., for the petitioners. John D. Picco, Esq., for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies in the income tax liabilities of petitioners and an addition to tax as follows:
Addition to
Fiscal year tax Sec
Docket ending 294(d)(2)
No. August 31 Deficiency I.R.C. 1939
71689 1951 $ 31,601.71
1952 85,156.54
1953 1,896.02
Calendar year
71690 1951 113,211.60
1952 128,020.33 $8,084.59
1953 59,004.25
1954 2,804.82
Petitioner in Docket No. 71689 claims it is entitled to refunds for its fiscal years 1951 and 1952 based upon increased depletion deductions under section 117(k)(1) of the Code.1 Petitioners in Docket No. 71690 claim they are entitled to a refund for the year 1952 attributable to a net operating loss carryback from the year 1954. By amended answer respondent claimed increased deficiencies for the taxable years in Docket No. 71690 based on an alternative theory therein advanced by respondent.
The principal issue, which is common to both docket numbers, is whether certain timber and timberlands acquired after August 31, 1946, in the names of A. F. Lowes and Ruth L. Lowes and paid for with funds of A. F. Lowes Lumber Co., a corporation, and which were later logged by the corporation under timber cutting contracts with a partnership comprised of the two individuals, were actually acquired and owned by the partnership, as urged by petitioners, or were acquired and owned by the corporation, as determined by respondent.
Other issues are:
By supplemental stipulation filed subsequent to the trial, petitioners in Docket No. 71690 conceded that they were not entitled to a deduction in the taxable years on account of the worthlessness of stock of Lowes Madrones Coal Mining Company. On reply brief respondent conceded that the individual petitioners were each entitled to deduct $75,000 as exploration expenditures made by the partnership under section 23(ff). Petitioners' claim that the increase in deficiencies asserted against the individual petitioners by respondent on an alternative theory first advanced in the pleadings was barred by the statute of limitations was not argued by petitioner and we assume that it has been waived.
Certain other subsidiary issues will be determined by a resolution of the above issues.
These cases were consolidated for trial.
Findings of Fact
The stipulated facts are so found.
Petitioner A. F. Lowes Lumber Co., hereafter referred to as the corporation, is an Oregon corporation with its principal office in Molalla, Oregon. It is engaged in the logging and sawmill business, including the manufacturing and sale of lumber. The corporation filed its corporate income tax returns on an accrual basis for the fiscal years ending August 31, 1951, 1952 and 1953 with the district director of internal revenue at Portland, Oregon.
A. F. Lowes, who died on May 28, 1954, hereafter referred to as decedent, and Ruth L. Lowes, hereafter referred to as Ruth, were at all times material to these cases and prior to his death husband and wife residing at Molalla, Oregon. They filed joint income tax returns on a cash basis for the calendar years 1951 to 1954, inclusive. The estate of A. F. Lowes, deceased, is an estate under the jurisdiction of the Circuit Court of the State of Oregon in and for the County of Clackamas, Oregon, and filed its return on a cash basis for the fiscal year ending April 30, 1955. The partnership of decedent and Ruth filed its information returns on an accrual basis for the fiscal years ending August 31, 1951, 1952 and 1953. The partnership also filed returns for the period September 1, 1953 to May 31, 1954 and for the period June 1, 1954 to August 31, 1954. All of the above returns were filed with the district director of internal revenue at Portland, Oregon.
Prior to August 31, 1946, decedent and Ruth were engaged in a number of business and investment activities, including the operation of a tavern in Molalla, the operation of a sawmill under the name A. F. Lowes Lumber Co., and the ownership of timber and timberlands. The sawmill, which employed approximately 10 men, was destroyed by fire in July 1945. Decedent and Ruth replaced it with a new and larger sawmill capable of employing 100 men. As of August 31, 1946, decedent and Ruth owned 27 separate tracts of timber with title held either in the individual name of A. F. Lowes or in their joint names.
In the summer of 1946, decedent's accountant, Ray Moran, was of the opinion that the Lowes were in need of tax advice and tax planning with respect to their various business and investment activities. He introduced decedent to Howard N. Dietrich, an attorney and certified public accountant from Portland who specialized in tax practice and who was experienced in the lumber business in the Northwest. Dietrich was retained by decedent in July or August 1946.
Dietrich investigated the assets and business affairs of decedent and Ruth, and at sometime prior to August 31, 1946, submitted a plan for the ownership of their assets and the conduct of their business activities. Dietrich recommended the formation of a partnership and the creation of a corporation. According to Dietrich's plan, the corporation was to operate the logging and sawmill business while the partnership was to operate the tavern, to hold the timber and other personal assets of decedent and Ruth, except the stock of the corporation which was to be held by them individually, and to acquire and hold any additional timber or timberlands that would be used in the corporation's business or otherwise.
On August 31, 1946, decedent and Ruth executed formal partnership articles which had been drawn up by Dietrich. The partnership was known as "A. F. and Ruth L. Lowes." Articles I through III of this agreement were declarations that timber, timberlands, and the tavern, whether legally held in the names of either or both of the parties, were the property of the partnership "A. F. and Ruth L. Lowes." The 27 tracts of timber owned by decedent and Ruth were described in articles I, II and III. Article IV constituted a declaration that properties then being used in the sawmill business should be transferred to and owned by the corporation. None of the properties thus described which had been held in the individual names of A. F. Lowes or Ruth L. Lowes or in their joint names was transferred to the partnership by a formal instrument of conveyance. It was Dietrich's opinion that under the Uniform Partnership Act, which was in effect in Oregon, no such separate conveyance was necessary. Article V contained the terms of the partnership agreement under which the properties owned by them were to be operated as follows:
The corporation was organized on August 29, 1946 with an authorized capital of 500 shares of no-par-value stock issued equally to decedent and Ruth pursuant to the following resolution of the stockholders:
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