Ah Pah Redwood Co. v. Commissioner of Internal Revenue, 022759 FEDTAX, 50695

Docket Nº:50695
Opinion Judge:VAN FOSSAN, Judge.
Party Name:AH PAH REDWOOD CO., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
Attorney:James C. Dezendorf, Esq., and Marshall C. Cheney, Jr., Esq., for the petitioner. John D. Picco, Esq., for the respondent.
Case Date:February 27, 1959
Court:United States Tax Court
 
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18 T.C.M. (CCH) 202 (1959)

T.C. Memo. 1959-44

AH PAH REDWOOD CO., Petitioner,

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 50695

United States Tax Court

February 27, 1959

Held, on the facts presently before us petitioner did not hold certain timber primarily for sale to customers in the ordinary course of business. Held, further, amounts received by petitioner in 1948 and 1949 from Coast Redwood Co. for timber cut by the latter in those years from the property of petitioner are properly taxable as capital gains on sale of property held for more than six months.

James C. Dezendorf, Esq., and Marshall C. Cheney, Jr., Esq., for the petitioner.

John D. Picco, Esq., for the respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

This proceeding involves Federal income taxes for the years 1948 and 1949 in the aggregate amount of $38,304.21.

In an opinion promulgated September 28, 1956, this Court, on the facts then before us, held that petitioner was not entitled to capital gains treatment under section 117(k)(2) of the Internal Revenue Code of 1939[1] on amounts received by petitioner in 1948 and 1949 from Coast Redwood Co. for timber cut by it from the property of petitioner. Ah Pah Redwood Co., 26 T.C. 1197 (1956).

Petitioner appealed, and on December 13, 1957, the Court of Appeals for the Ninth Circuit issued its opinion, affirming our holding as to allowable depletion and that petitioner was not entitled to capital gains treatment under section 117(k)(2). Ah Pah Redwood Co. v. Commissioner, 251 F.2d 163. The appellate court noted, however, that in second supplemental briefs, filed at the request of the court, both parties had called attention to the fact that capital gains treatment is available for absolute sales of timber under either section 117(a)(1) or 117(j)(1), provided, that the six-month-holding-period requirement is met, and that the timber was not held primarily for sale to customers in the ordinary course of trade or business. The court concluded that the only factor preventing the application of these last-mentioned Code sections to the case at bar was that petitioner may have held the timber primarily for sale to customers in the ordinary course of its trade or business. The court then remanded the case for further proceedings and a determination as to whether petitioner was entitled to capital gains treatment under section 117(a)(1) or (j)(1).

The only question presently before us is whether petitioner held the timber primarily for sale to customers in the ordinary course of its trade or business.

A new stipulation of facts with accompanying exhibits, filed by the parties pursuant to a motion granted by this Court on July 11, 1958, has clarified the facts in issue. In this situation a new or revised findings of fact is required.

FINDINGS OF FACT.

The petitioner, a California corporation, was organized on June 23, 1947. The returns for the periods here involved were filed with the collector of internal revenue for the district of Oregon. Petitioner used the calendar year for reporting its income.

The articles of incorporation reveal that petitioner was formed, inter alia, to engage in the business of buying, selling, and owning timber and of carrying on a general logging and lumber business. This purpose included the manufacturing, selling, processing, and shipping of lumber and related products; the construction, ownership, and operation of sawmills, tanbark mills, and pulp mills, as well as tramroads, railroads, and steamships; and the acquisition, holding, improving, encumbering, developing, and exchanging of real and personal property of every kind.

The capital stock of petitioner was originally owned by A. K. Wilson, who was its president from its inception and during the taxable years.

On September 29, 1947, all of petitioner's outstanding capital stock was acquired by International Pacific Pulp & Paper Company, hereinafter referred to as International, an Oregon corporation which, during the years involved, was actively engaged in a substantial sawmill and lumber business. Its plant was located in Portland, Oregon.

Wilson owned one share of the common and five share of the preferred stock of International. He was its president during the taxable years in question. The majority of International's stock was owned by Union Bond & Trust Company.

Coast Redwood Co., hereinafter called Coast, was incorporated under the laws of California in 1945 for the purpose of engaging in the business of logging and manufacturing lumber. During the years in question its sawmill was located in Arcata, Humboldt County, California. The capital stock of Coast was owned by Wilson and members of his family. Wilson has been its president since its inception.

Union Bond & Trust Company, hereinafter referred to as Union, is an Oregon corporation. Its stock is owned by Union Mortgage Company. Wilson has been its president since Union Mortgage Company acquired the capital stock of Union, a period which includes the tax years in question. Wilson owns 29 per cent of the capital stock of Union Mortgage Company.

On December 13, 1946, Sage Land & Lumber Company, Inc., as seller, and Union, as buyer, entered into a purchase agreement (hereinafter referred to as the Sage Agreement or Sage B Agreement) covering certain redwood timberlands in northern California. Subsequently, Union transferred its right, title, and interest under the Sage Agreement to International. On September 29, 1947, International reassigned its interest in the Sage Agreement to Union which in turn assigned and transferred it to petitioner.

The minutes of a special meeting of the board of directors of International called on September 29, 1947, include the following paragraph:

The President and Chairman of the Board, Mr. A. K. Wilson, announced that the Ah Pah Redwood Co. was ready, willing and able to purchase the Sage ‘ B’ agreement dated December 13, 1946, between the Sage Land & Lumber Company, Inc., and Union Bond & Trust Company, which covers 6757.90 acres of land in Northern Humboldt County, California, for...

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