Carpenter v. Comm'r of Internal Revenue
| Decision Date | 31 July 1961 |
| Docket Number | Docket Nos. 79509,79510. |
| Parties | JAMES A. CARPENTER AND CLORIS A. CARPENTER, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.RICHARD E. NEALY AND VERDA NEALY, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Charles P. Duffy, Esq., for the petitioners.
John D. Picco, Esq., for the respondent.
Petitioners, partners in a logging business, entered into an agreement on January 21, 1953, with persons who held option to purchase timber from a company which claimed to be owner thereof even though the title was involved in litigation. Agreement provided that if consent of the claimed owner could be obtained logging would be commenced without the partnership being required to exercise the option. Such consent was obtained on January 30, 1953, and logging began. The other claimant to title to the timber obtained a temporary injunction against logging by the partnership and the partnership entered into an agreement in March of 1953 with the other claimant to title whereby the partnership was granted a license to cut timber for the balance of the year 1953, which agreement was extended in March of 1954 for another year. The timber cut by petitioners' partnership was sold on the open market. Petitioners elected to have the provisions of sec. 631(a), I.R.C. 1954, apply in determining their taxes for the years 1954, 1955, and 1956. Held, petitioners had a contract right to cut timber for sale which they had held for more than 6 months prior to the beginning of each of the taxable years 1954, 1955, and 1956, and having so elected are entitled to have the provisions of sec. 631(a) apply in determining gain or loss from the timber sold.
Respondent determined deficiencies in income tax against petitioners James A. Carpenter and Cloris A. Carpenter in the amounts of $9,297.02, $17,001.46, and $12,935.42 for the years 1954, 1955, and 1956, respectively, and against petitioners Richard E. Nealy and Verda Nealy in the amounts of $22,601.16, $39,827.06, and $27,628.26 for the years 1954, 1955, and 1956, respectively.
The sole issue for decision is whether a partnership composed of James A. Carpenter and Richard E. Nealy had a contract right to cut certain timber which it had held for a period of more than 6 months before the beginning of each of the taxable years, thus entitling petitioners to treat the proceeds from the cutting of the timber during each of the years 1954, 1955, and 1956 in accordance with the provisions of section 631(a) of the Internal Revenue Code of 1954. Respondent determined in the case of each petitioner for each of the taxable years involved that the cutting of the timber did not qualify for capital gains treatment within the provisions of section 631(a) or any other section of the Internal Revenue Code of 1954.
Petitioners James A. Carpenter and Cloris A. Carpenter are husband and wife residing at Corvallis, Oregon. They filed joint income tax returns for the years 1954 and 1955 with the district director of internal revenue at San Francisco, California, and a joint income tax return for 1956 with the district director of internal revenue at Los Angeles, California.
Petitioners Richard E. Nealy and Verda Nealy are husband and wife residing at Grants Pass, Oregon. They filed joint income tax returns for the years 1954, 1955, and 1956 with the district director of internal revenue for the district of Oregon.
Commencing April 1, 1952, and continuing through the taxable years here involved, petitioners Richard A. Nealy (hereinafter referred to as Nealy) and James A. Carpenter (hereinafter referred to as Carpenter) were the sole members of Nealy Logging Company, a partnership, Nealy having a two-thirds interest therein, and Carpenter, a one-third interest.
The partnership filed a partnership return of income for the year 1954 with the district director of internal revenue at Portland, Oregon, and partnership returns of income for the years 1955 and 1956 with the district director of internal revenue at San Francisco, California.
Nealy Logging Company (hereinafter referred to as the partnership) kept its books and records on an accrual method of accounting. Its business was logging of timber and selling the logs produced therefrom on the open market and its principal place of business was Gasquet, California.
In 1952 Nealy Logging Company became interested in the merchantable timber located upon certain real property in Del Norte County, California, which will hereinafter be referred to as the John Paul tract. The John Paul tract had belonged to the John Paul Lumber Company, a Wisconsin corporation, for many years. The corporation was inactive from 1930 to about 1947. In 1944 certain individuals became aware that the John Paul tract had increased in value and unless redeemed might be sold for taxes. One Samuel Agnew furnished the funds with which the taxes were paid and secured deeds to the timberlands from certain individuals who purported to act on behalf of the John Paul Lumber Company. In 1947 the John Paul Lumber Company brought a quiet title action against Agnew in the California Superior Court. The John Paul Lumber Company prevailed in the Superior Court pursuant to decision entered June 27, 1952. Agnew appealed to the District Court of Appeals, Third District, California. On May 28, 1954, the appellate court affirmed the decision of the lower court, the appellate court decision being reported as John Paul Lumber Co. v. Agnew, 270 P.2d 1044 (1954). Agnew was unsuccessful in seeking review of this decision by the California Supreme Court and the litigation ended.
At about the time the partnership was formed Carpenter and Nealy had had talked to one Everett Skeeter about a supposed contract that the John Paul Lumber Company had with O. O. Barker, involving certain interests in the John Paul tract. The partnership made an agreement with Skeeter and James C. Rodger acting under a power of attorney for O. O. Barker, for the cutting of timber on the John Paul tract sometime in August 1952 and shortly thereafter commenced logging operations on the tract.
After the partnership had been logging the tract for a few days an action was brought against them by Ted R. Webb, Fred Linkhart, and the John Paul Lumber Company to enjoin their cutting timber on the John Paul tract and the court granted the injunction in September 1952.
Under date of May 22, 1951, the John Paul Lumber Company entered into a written agreement entitled ‘Timber Sales Contract and Option Agreement’ with Ted R. Webb. This agreement provided for the sale to Webb, immediately upon the execution of the contract, of the merchantable timber located on certain lands in Del Norte County, California, other than the John Paul tract here involved and in addition thereto granted Webb an option to purchase the timber located on the John Paul tract. The agreement of May 22, 1951, between John Paul Lumber Company and Ted R. Webb provided, in part, as follows:
1. Buyer agrees to buy and Seller agrees to sell to Buyer all merchantable timber located upon the following described real property in Del Norte County, California:
The Southeast quarter of the Southeast quarter of Section 24 and the South half of the Northwest quarter and the North half of the Southwest quarter and the Southwest quarter of the Southeast quarter of Section 25, Township 17 North, Range 3 East.
2. The total purchase price for said timber shall be $6.00 per thousand board feet, of which sum the amount of $12,500.00 shall be paid to Seller upon the execution of this agreement. The balance of said purchase price shall be paid by the Buyer to the Seller in monthly installments as said timber is cut and removed, payable on the 15th day of each month for all timber cut and removed during the preceding month. Payment shall be made by cashier's check mailed to Seller at 701 Citizens Building, West Palm Beach, Florida.
4. Buyer agrees to either cut and remove or have cruised and pay for all of said merchantable timber within a period of two (2) years from the date hereof, except that in the event Buyer exercises his option hereinafter granted, then this time limit shall not apply. Standing timber paid for may remain on the premises no later than May 21, 1961. Any taxes levied against the timber separate from the land shall be paid by Buyer.
5. The Seller agrees to furnish to Buyer a title insurance policy in the usual form in the amount of $10,000.00, showing title to said real estate to be vested in Seller and in good marketable condition. Said policy of title insurance shall be at Buyer's expense.
6. The Buyer shall not create nor permit to be created any lien upon the property of Seller and the Seller reserves the right to post notices of nonresponsibility upon said premises. Buyer shall carry adequate compensation and liability insurance at his own expense for the protection of the Seller and agrees to hold Seller free and harmless from any liability arising because of Buyer's operations on the premises.
8. In further consideration of the mutual covenants herein contained and the purchase of said timber by Buyer, Seller does hereby grant unto Buyer an option to purchase from Seller all of the remaining timber upon all lands owned by Seller in Del Norte County, California. The parties hereto recognize that title to said real property is presently in litigation and that this option must be exercised by Buyer at any time prior to a day which shall be sixty (60) days after Buyer is notified by Seller in writing that Seller is able to furnish good merchantable title to the said timber, said merchantable title to be evidenced by a...
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