Commissioner of Internal Revenue v. Boeing

• Decision Date: 11 December 1939
• Docket Number: No. 9071.,9071.
• Citation: 106 F.2d 305
• Parties: COMMISSIONER OF INTERNAL REVENUE v. BOEING.
• Court: U.S. Court of Appeals — Ninth Circuit

106 F.2d 305 (1939)

COMMISSIONER OF INTERNAL REVENUE v. BOEING.

No. 9071.

Circuit Court of Appeals, Ninth Circuit.

August 29, 1939.

Rehearing Denied October 5, 1939.

Writ of Certiorari Denied December 11, 1939.

James W. Morris, Asst. Atty. Gen., and Sewall Key, F. E. Youngman, and Carlton Fox, Sp. Assts. to Atty. Gen., for petitioner.

Hollister T. Sprague, Elmer E. Todd, Lowell P. Mickelwait, and Todd, Holman & Sprague, all of Seattle, Wash., for respondent.

Before GARRECHT, HANEY, and STEPHENS, Circuit Judges.

Writ of Certiorari Denied December 11, 1939. See 60 S.Ct. 295, 84 L.Ed. ___.

STEPHENS, Circuit Judge.

This proceeding involves two appeals which were consolidated for purposes of hearing and decision. They involve federal income tax for the calendar years 1933 and 1934 for which years the Commissioner determined deficiencies. The Board of Tax Appeals, upon petitions filed by the respondent herein, determined that there were no deficiencies and the Commissioner brings the cases here for review. The same question is involved in both appeals, namely, whether the respondent tax-payer was entitled to the benefit of the capital gain provisions of the Revenue Acts of 1932 and 1934.¹ The applicable provisions are Sec. 101 of the Revenue Act of 1932, C. 209, 47 Stat. at L. 169, 26 U.S.C.A. § 101 note, and Sec. 117 of the Revenue Act of 1934, C. 277, 48 Stat. at L. 680, 26 U.S.C. § 101, 26 U.S.C.A. § 101, which provide, roughly, that capital gain means gain from the sale or exchange of capital assets consummated after December 31, 1921. The term "capital assets" is defined as follows: "* * property held by the taxpayer for more than two years (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other 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 in the course of his trade or business." Section 101 of the Revenue Act of 1932, subsection (c) (8), 26 U.S.C.A. § 101 note.

It appears that the taxpayer inherited certain timberlands in 1890 from his father, and from his mother in 1910. He acquired additional timberlands by purchase at various times from 1903 through 1912. All of these properties were held by him for investment purposes. On July 31, 1922, the taxpayer, along with the co-owners of some of these timberlands, entered into a contract with the Greenwood Logging Company for the logging of a portion thereof. This contract contained the following provision,

"The Owners hereby employ the Logging Company to log said land and to perform the services herein set forth for the compensation herein stated.

"The Logging Company hereby accepts employment from the Owners for the logging of said land and for the other services herein agreed upon."

Upon the terms of the contract the logging company agreed to construct a logging railroad, logging camps and other necessary structures, at its own expense. It further agreed to cut and remove at least 600,000,000 feet of logs each year during the term of the contract. It was further provided that the logging company should pay all taxes and assessments of every kind that should be levied against the land and timber during the period of the contract. It was further provided that all logs cut and removed from the land should be transported by the logging company at tidewater on Grays Harbor and sold by it to purchasers at the current market price. The moneys received by the logging company were to be divided as follows: One-third of the gross proceeds of all logs sold to the owners in payment for their interest in the logs, including stumpage and stumpage rights; and the remaining two-thirds of the gross proceeds to the logging company in payment for its services.

On July 1, 1933, the taxpayer, along with his co-owners, entered into a similar contract with the Crescent Logging Company. This contract likewise provided that the logging company should construct the necessary logging roads, etc., at its own expense. The contract further provided that title to all the logs and other timber products to be cut or removed from the lands should remain in the owners at all times until sold. Under this contract the purchasers of the timber were to be billed separately for the amount due to the owners and remittance made directly to the owners. It was further provided that the work of cutting and removing the timber should be completed on or before January 1, 1935, and if not completed by that date the logging company should purchase the timber remaining on the lands at the current market price, to be paid for within 60 days, and removed within ten years thereafter.

The taxpayer gave practically no time or attention to the operations under these contracts during the taxable years involved. Routine reports of sales of logs came into the office maintained by the taxpayer where they were filed by an employee. This took only a negligible amount of time by the employee. From time to time the books of the logging company were inspected by an employee of the taxpayer.

During the taxable year 1933 the taxpayer realized profits from sales of timber pursuant to the Greenwood Company contract of $2,375.25, and from sales pursuant to the Crescent Company contract of $8,099.65, or a total of $10,474.90. During the taxable year 1934 the taxpayer realized profits from sales of timber made pursuant to the Crescent Company contract of $5,906.25, and sustained a loss of $1,004.41 from sales under the Greenwood Company, or a net profit in 1934 of $4,901.84.

From the above facts the Board concluded that these gains and losses resulted from the sale of "capital assets" within the statutory definition; that the timber sold did not constitute "stock in trade of the taxpayer" nor "other 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," nor "property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business."²

The petitioner assigns as error numerous findings of the Board as not supported by the evidence and also assigns as error the failure of the Board to make certain findings. The only evidence taken before the Board was in the form of documentary exhibits and oral testimony by the respondent taxpayer and his financial secretary. The petitioner offered no evidence at the hearing before the Board. There is, therefore, no conflict in the testimony.

At the outset we are confronted with the contention of the respondent that the Commissioner is appealing from findings of the Board on factual issues which are binding on this Court if supported by any substantial evidence. It is the respondent's theory that whether or not the timber sold by the respondent under the cutting contracts resulted in a gain derived from the sale of capital assets is an ultimate fact and can be disturbed by this Court only if such finding is unsupported by any substantial evidence.

The power of this Court to review decisions of the Board of Tax Appeals is statutory. Sec. 1003 (b) of the Revenue Act of 1926, 26 U.S.C. § 641 (c), 26 U. S.C.A. § 641 (c), provides: "Upon such review, such courts shall have power to affirm or, if the decision of the Board is not in accordance with law, to modify or to reverse the decision of the Board, with or without remanding the case for a rehearing, as justice may require."

In Helvering v. Rankin, 295 U.S. 123, 131, 55 S.Ct. 732, 736, 79 L.Ed. 1343, 1934, the Supreme Court said: "The Court of Appeals is without power, on review of proceedings of the Board of Tax Appeals, to make any findings of fact. `The Board of Tax Appeals is not a court. It is an executive or administrative board, upon the decision of which the parties are given an opportunity to base a petition for review of the courts after the administrative inquiry of the Board has been had and decided.' Old Colony Trust Co. v. Commissioner, 279 U.S. 716, 725, 49 S.Ct. 499, 502, 73 L.Ed. 918. The function of the court is to decide whether the correct rule of law was applied to the facts found; and whether there was substantial evidence before the Board to support the findings made. See Phillips v. Commissioner, 283 U. S. 589, 599, 600, 51 S.Ct. 608, 75 L.Ed. 1289; Burnet v. Leininger, 285 U.S. 136, 138, 52 S.Ct. 345, 76 L.Ed. 665; Old Mission Portland Cement Co. v. Helvering, 293 U.S. 289, 294, 55 S.Ct. 158, 79 L.Ed. 367. Unless the finding of the Board involves a mixed question of law and fact, the court may not properly substitute its own judgment for that of the Board."

In Helvering v. Tex-Penn Co., 300 U. S. 481, 57 S.Ct. 569, 81 L.Ed. 755, 1937, the question presented for determination was whether or not a certain reorganization scheme came within the non-recognition of gains provisions of the Revenue Act of 1918, § 202 (b), 40 Stat. at L. 1060. This question in turn depended on whether there had been an exchange of stock only or whether cash had also formed part of the consideration for the exchange. The Board had found that the taxpayer was liable for deficiencies. The Circuit Court of Appeals had reversed and certiorari was granted, 3 Cir., 83 F.2d 518. The Supreme Court said, 300 U.S. at page 483, 57 S.Ct. at page 570, 81 L.Ed. 755: "The first ultimate finding is (28 B.T.A. 917, at page 950): `The consideration received by Tex-Penn on or about August 1, 1919, in exchange for its assets consisted of $350,000 in cash and 1,007,834 shares of Transcontinental stock of no par value.'"

The Court then set out what it terms the "circumstantial facts" and then said, 300 U.S. at pages 490, 491, 57 S.Ct. at page 573, 81 L.Ed. 755: "The foregoing includes the substance of all the findings of circumstantial facts material to the question under consideration. They must be taken as established if supported by substantial...