Barclay v. United States

• Decision Date: 16 October 1964
• Docket Number: No. 165-61,164-61.,165-61
• Parties: Harold BARCLAY and Dorothy Barclay v. The UNITED STATES. Philip DAHL and Dorothy Dahl v. The UNITED STATES.
• Court: U.S. Claims Court

166 Ct. Cl. 421, 333 F.2d 847 (1964)

Harold BARCLAY and Dorothy Barclay v. The UNITED STATES.

Philip DAHL and Dorothy Dahl v. The UNITED STATES.

Nos. 165-61, 164-61.

United States Court of Claims.

June 12, 1964.

Rehearing Denied October 16, 1964.

COPYRIGHT MATERIAL OMITTED

Charles P. Duffy, Portland, Or., for plaintiffs. William T. Schantz, Portland, Or. and Fred S. Gilbert, Jr., Washington, D. C., were on the briefs.

J. Mitchell Reese, Jr., Washington, D. C., with whom was Asst. Atty. Gen. Louis F. Oberdorfer, for defendant. Edward S. Smith, Lyle M. Turner and Philip R. Miller, Washington, D. C., were on the brief.

Before JONES, Chief Judge, and WHITAKER, LARAMORE, DURFEE and DAVIS, Judges.

WHITAKER, Judge.

Stated in its simplest terms and omitting some important details, plaintiffs' claim is that they acquired ownership of the timber on a certain tract of land by virtue of a contract with the Indian Service of the Department of the Interior, and that they disposed of it to a corporation organized by them and of which they were the sole stockholders, except for two qualifying shares, after having held it for more than six months, and that they are thus entitled to treat the gains derived from the disposition of it as capital gains.

The Commissioner of Internal Revenue did not question that the taxpayers and the corporation were separate entities and that gain was realized when the taxpayers transferred to the corporation their rights under the contract, but he says this gain was ordinary income, instead of capital gain, and he assessed the tax accordingly.

That is the sole issue presented to us, and it is the sole issue we decide.

Plaintiffs Barclay reported the income derived from the sale of timber on the Warm Springs Indian Reservation in Oregon in their tax returns for the calendar years 1951, 1952, and 1953 as long-term capital gains; plaintiffs Dahl did the same thing in their returns for the years 1950, 1951, 1952, and 1953. In each case, the Commissioner of Internal Revenue assessed deficiencies against these taxpayers upon the ground that the income for those years was ordinary income. The taxpayers paid the deficiencies and filed timely refund claims. The claims were disallowed, and these suits followed.

The income was earned by plaintiffs Harold Barclay and Philip Dahl; their wives are parties to this litigation only because, for the taxable years with which we are concerned, they filed joint returns with their husbands. Dahl and Barclay will hereafter be referred to as the plaintiffs.

On November 26, 1948, the United States Department of the Interior issued an advertisement for bids for the purchase of merchantable timber on 51,883 acres of the Warm Springs Indian Reservation known as the "Simnasho Logging Unit." The advertisement specified that the unit contained approximately 107,500,000 board feet of timber, of which approximately 33,300,000 board feet stood on lands that had been allotted to individual Indians. Bids, accompanied by a cash deposit of $35,000, were required to be submitted by January 17, 1949.

Harold Barclay and Philip Dahl, who for several years had carried on a partnership called the Barclay Logging Company, jointly visited the local office of the Forestry Division of the Bureau of Indian Affairs to obtain more information about the timber. Barclay then hired a timber evaluation expert, Hans Milius, and went with him and Dahl and two representatives of the Indian Services on a field trip to survey the timber. After Milius reported that he deemed the prospective purchase a sound investment, plaintiffs decided to make a bid. On January 17, 1949, the last day on which bids could be submitted, they went to the office of the Indian Bureau, where Dahl, in his own name, submitted a bid at the minimum price of $10.50 per thousand board feet for Ponderosa Pine and $6 per thousand board feet for all other species. Dahl also deposited his certified check for $35,000. This was the only bid submitted.

In response to this bid, the Assistant Secretary of the Interior on January 31, 1949, sent a telegram to the Superintendent of the Warm Springs Indian Agency, accepting Dahl's bid and instructing him to submit "a bond and supporting papers for approval." The Tribal Council of the Confederated Tribes of the Reservation, which had previously approved the terms of the invitation, agreed on February 8, 1949, to the acceptance of Dahl's bid.

Dahl signed the formal "Timber Sale Contract" and submitted a $40,000 performance bond on March 7, 1949. These documents were forwarded to Washington but were not formally approved on behalf of the Secretary of the Interior until May 2, 1949. That contract gave plaintiffs the right to the timber on the unallotted lands (i. e., the land which the Department of the Interior held in trust for all Indians on the Reservation) in the Simnasho Unit, but approximately one-third of the timber on the Simnasho Unit was on acreage that had been allotted to individual Indians, and, by the terms of the agreement with the Government, separate contracts had to be entered into with the allottees before timber on their allotments could be removed. After the Superintendent of the Indian Agency contacted the various allottees and obtained powers of attorney from them, he entered into separate contracts with plaintiffs on their behalf. These contracts were signed between October 10, 1949, and April 8, 1953.

During April of 1949, with the permission of local officials of the Bureau of Indian Affairs, plaintiffs began the construction of sawmill on the Simnasho Tract. The mill was constructed with the funds, equipment, and personnel of the Barclay Logging Company, a partnership in which Barclay and Dahl were equal partners, and its cost was charged to the accounts of the plaintiffs on the partnership books in equal amounts. Construction of the sawmill was completed in November of that year.

On October 21, 1949, plaintiffs formed a corporation, called Dahl Pine, Inc., under the laws of Oregon. Four days later, at the first meeting of the stockholders, plaintiffs transferred the uncompleted sawmill to the corporation in exchange for all the stock and the corporation's promise to pay Barclay Logging Company the difference between the cost of the mill and the par value of the stock. On the same date, Dahl lent $100,000 in cash to the corporation, and he also executed a formal assignment to Barclay of a one-half interest in his contract with the Indian Service, in consideration of the payment of one-half of the sums Dahl had paid the Indian Service. The purpose of this assignment was to put into written form the prior oral understanding between Dahl and Barclay that they would share equally in the profits resulting from the contract.

After Dahl Pine, Inc., had been formed, it carried out the terms of the parties' previous oral understanding relating to the cutting and selling of the timber, which was that Barclay Logging Company would cut the timber after it had been scaled (i. e., measured to determine how many board feet of lumber it contained) by crews from the Indian Service, and deliver it to the corporation's mill. The corporation would then cut it into rough lumber and sell it. Out of the revenue it received, the corporation would pay plaintiffs the fair market value of the timber from which the logs had been cut.

The taxpayers say they are entitled to treat this income (the difference between what they paid for the timber and what Dahl Pine, Inc., paid them for it) as long-term capital gains under the provisions of either section 117(a) or section 117(k) (2) of the Internal Revenue Code of 1939. Section 117(a) deals with capital gains generally, while section 117(k) speaks specifically of transactions in timber. Defendant does not deny that gain was derived by plaintiffs from their sale to Dahl Pine, Inc., but it says it was ordinary income and not capital gain. It denies the applicability of either section 117(a) or of section 117(k) (2).

We hold that these taxpayers are entitled to treat the income derived from the disposition of timber from the lands held in trust for all Indians on the Warm Springs Reservation as long-term capital gains under section 117(k) (2) of the 1939 Code, but, as to the income derived from timber on allotted lands, we hold that plaintiffs are not entitled to do so, because they had not held the timber more than six months before they disposed of it, which is a necessary requirement of both section 117(a) and section 117(k) (2). Since we think the transaction comes within the terms of section 117(k) (2), we need not discuss the applicability of section 117(a).

Section 117(k) (2) of the Internal Revenue Code of 1939 reads:

"In the case of the disposal of timber * * * 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 * * * the difference between the amount received for such timber * * * 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 * * *."

In order to qualify under this section for capital gains treatment of income arising from a disposition of timber: 1. the taxpayer must be an "owner" of the timber; 2. he must make a "disposal" of it under a contractual arrangement by which he retains an economic interest in it; and 3. the taxayer must have held the timber for more than six months prior to the disposal. Plaintiffs say the transactions in this case meet all three requirements; defendant says they meet none of them. We shall discuss them in order.

1. Were plaintiffs the owners of the timber? The advertisement of the Indian Service, acting on behalf of certain Indian Tribes, solicited bids "for the purchase of merchantable timber" on the Simnasho Logging Unit. Dahl bid for the purchase of the timber. The...