Giustina v. United States

• Decision Date: 21 December 1960
• Docket Number: Civ. No. 9641-9644.
• Parties: Erminio GIUSTINA and Irene O. Giustina, Plaintiffs, v. UNITED STATES of America, Defendant. Anselmo GIUSTINA and Josephine Giustina, Plaintiffs, v. UNITED STATES of America, Defendant. Natale B. GIUSTINA and Jacqueline Giustina, Plaintiffs, v. UNITED STATES of America, Defendant. Ehrman V. GIUSTINA and Marion Lee Giustina, Plaintiffs, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — District of Oregon

190 F. Supp. 303

Erminio GIUSTINA and Irene O. Giustina, Plaintiffs, v. UNITED STATES of America, Defendant.

Anselmo GIUSTINA and Josephine Giustina, Plaintiffs, v. UNITED STATES of America, Defendant.

Natale B. GIUSTINA and Jacqueline Giustina, Plaintiffs, v. UNITED STATES of America, Defendant.

Ehrman V. GIUSTINA and Marion Lee Giustina, Plaintiffs, v. UNITED STATES of America, Defendant.

Civ. Nos. 9641-9644.

United States District Court D. Oregon.

December 21, 1960.

COPYRIGHT MATERIAL OMITTED

William E. Dougherty; Dougherty & Cairns, Portland, Or., for plaintiff.

C. E. Luckey, U. S. Atty., Edward J. Georgeff, Asst. U. S. Atty., Portland, Or., Charles H. Magnuson and Dale E. Anderson, Atty., Dept. of Justice, Washington, D. C., for defendant.

KILKENNY, District Judge.

Plaintiffs prosecute these actions, consolidated for trial, for the recovery of individual income taxes, plus interest, assessed against and collected from them for their taxable years ending December 31, 1949 and 1950.

Plaintiffs Erminio Giustina, Anselmo Giustina, Natale B. Giustina and Ehrman V. Giustina conducted a partnership business in the state of Oregon. After July 1, 1948, the partnership was conducted under the name of Giustina Bros. The wives were not members of the partnership.

On March 4, 1948, the Forest Service, United States Department of Agriculture, held a public auction "for the sale" of certain timber "to be cut" from approximately 190 acres of timber land within the Willamette National Forest in Oregon. The amount of timber "to be cut" from the area was estimated at approximately 15,407,000 board feet. On March 4, 1948, the partnership, then known as Giustina Bros. Lumber Co., submitted the highest bid at the said "timber sale auction." On March 11, 1948, the Forest Service sent a letter to the partnership advising that the bid had been accepted.¹ Enclosed with the letter were four copies of the "timber sale agreement" prepared by the Forest Service, a form for obtaining a $6,000 bond and directions for executing the agreement and the bond. The partnership executed said agreement and returned it to the Forest Service on March 12, 1948. The Department of Agriculture executed the agreement on April 2, 1948.² On July 1, 1948, Luckey Boy Lumber Co., an Oregon corporation, changed its name to Giustina Bros. Lumber Co., an Oregon corporation. On the same date the partnership entered into a written contract³ for the sale of all partnership operating assets used in the cutting, hauling and milling of timber and on said date entered into a contract giving the corporation the right to cut timber on certain lands owned by the partners. The timber which was the subject of the contract with the Forest Service was not included in such contract. Subsequent to said date Giustina Bros. Partnership arranged for the cutting and removal of the Forest Service timber by said corporation. A letter dated October 4, 1948⁴ was directed by the partnership to the corporation concerning the right of the corporation to cut such timber pursuant to the terms of the timber contract. The corporation cut and removed some timber from the property covered by the Forest Service contract prior to October 2, 1948, but the timber so cut was a minimal percentage of the total.

Timely income tax returns were filed by each plaintiff and his wife for the years 1949 and 1950 and the taxes as shown by the returns were paid. These returns reflected each partners' distributive share of partnership profits for its fiscal year ending January 31, 1949 and 1950. The partnership returns reported as capital gain such amounts as were received by the partnership from the sale of the timber under its arrangement with the corporation, Giustina Bros. Lumber Co. After an audit of the returns the Commissioner of Internal Revenue determined that the income received by the partnership from the corporation on account of timber covered by the Forest Service contract was not allowable as a long-term capital gain.

The question presented is whether the amount received by plaintiffs from the partnership resulting from the arrangement between the partnership and the corporation as to the cutting and removing of timber pursuant to the agreement with the United States Department of Agriculture should be treated as income from the sale of a capital asset within the meaning of § 117(a) or § 117(k) (2) of the Internal Revenue Code of 1939 (26 U.S.C. § 117(a), (k) (2)), or should be treated as ordinary income.

The contentions of the respective parties require a construction of certain sections of the Internal Revenue Code of 1939 and the nature of the ownership of the timber acquired by the partnership under such contract. Section 117, Internal Revenue Code of 1939, provides, among other things:

"117. Capital gains and losses

"(a) Definitions. As used in this chapter—

"(1) Capital assets. — The term `capital assets' means property held by the taxpayer (whether or not connected with his trade or business), but does not include—

"(A) 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 to customers in the ordinary course of his trade or business;

* * * * * *

"(4) Long-term capital gain. — The term `long-term capital gain' means gain from the sale or exchange of a capital asset held for more than 6 months, if and to the extent such gain is taken into account in computing gross income."

Section 117(j) (as added by § 151(b) of the Revenue Act of 1942, and amended by § 127(b) of the Revenue Act of 1943, c. 63, 58 Stat. 21) provides in material part:

"Gains and losses from involuntary conversion and from the sale or exchange of certain property used in the trade or business.—

"(1) Definition of property used in the trade or business.—For the purposes of this subsection, the term `property used in the trade or business' * * * also includes timber or coal with respect to which subsection (k) (1) or (2) is applicable * * *.

"(2) General rule. — If, during the taxable year, the recognized gains upon sales or exchanges of property used in the trade or business, plus the recognized gains from the compulsory or involuntary conversion (as a result of destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation or the threat or imminence thereof) of property used in the trade or business and capital assets held for more than 6 months into other property or money, exceed the recognized losses from such sales, exchanges, and conversions, such gains or exchanges of capital assets held for more than 6 months * * *.

* * * * * *

"(k) Gain or loss in the case of timber or coal.—

"(1) If the taxpayer so elects * * * the cutting of timber (for sale or for use in the taxpayer's trade or business) * * * by the taxpayer who owns, or has a contract right to cut, such timber (providing he has owned such timber or has held such contract for a period of more than six months * * *) shall be considered a sale or exchange of such timber cut * * *.

"(2) 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 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 * *."

The Senate Report⁵ on § 127(b) of the Revenue Act of 1943 is of importance in the construction of this legislation. Before proceeding to an examination of the contract between the Forest Service and the partnership, which must be interpreted in light of the foregoing provisions of the Internal Revenue Code, we should state a few principles of law which seem to be applicable.

The parties recognize the rule that ordinarily the validity and the construction of a contract with respect to the rights and obligations created thereby are governed by the law of the state where the contract is made. Award Incentives, Inc. v. Van Rooyen, 2 Cir., 1959, 263 F.2d 173, 70 A.L.R.2d 1285; Boseman v. Connecticut General Life Insurance Co., 301 U.S. 196, 57 S.Ct. 686, 81 L.Ed. 1036; Schram v. Smith, 9 Cir., 1938, 97 F.2d 662. However, we are not construing a contract between private persons. The United States is a party to this contract. The validity and construction of contracts through which the United States is exercising its constitutional functions, their consequences on the rights and obligations of the parties and the titles or liens which they create or permit, present questions of federal law not controlled by the laws of any state. United States v. Allegheny County, 322 U.S. 174, 183, 64 S.Ct. 908, 88 L.Ed. 1209; S. R. A., Inc. v. State of Minnesota, 327 U.S. 558, 564, 66 S.Ct. 749, 90 L.Ed. 851; United States v. Jones, 9 Cir., 1949, 176 F.2d 278.

Business contracts must be construed with such business sense as they would naturally be understood by intelligent men of affairs. Erie Railway Co. v. Ohio Public Service Co., 6 Cir., 1932, 62 F.2d 83; In re International Match Co., D.C.S.D.N.Y.1937, 20 F.Supp. 420. A contract must receive the construction which is most probable and natural under the circumstances, so as to obtain the object which the parties to it had in mind at the time it was made. Decatur Bank v. St. Louis Bank, 21 Wall. 294, 88 U.S. 294, 22 L.Ed. 560; United States v. Granite Company, 105 U.S. 37, 26 L.Ed. 1005. The Court should not attempt to remake the contract between the parties. Dermott v. Jones, 2 Wall. 1, 69 U.S. 1, 17 L.Ed. 762; Lowber v. Bangs, 2 Wall. 728, 69 U.S. 728, 17 L.Ed. 768. A contract will be construed most strongly against the party drafting it. Grace v. American Central Insurance Co., 109 U.S. 278, 3 S.Ct. 207, 27 L.Ed. 932; Kingman Water Co. v. United...