Jantzer v. CIR

• Decision Date: 03 November 1960
• Docket Number: No. 16612.,16612.
• Citation: 284 F.2d 348
• Parties: George L. JANTZER et al., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Ninth Circuit

284 F.2d 348 (1960)

George L. JANTZER et al., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 16612.

United States Court of Appeals Ninth Circuit.

November 3, 1960.

Frederick H. Torp, Portland, Or., Carl M. Brophy, Medford, Or., Cleveland C. Cory, Portland, Or., for petitioners.

Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson, Grant W. Wiprud, Sharon L. King, Attys., Dept. of Justice, Washington, D. C., for respondent.

Before BARNES, HAMLEY and HAMLIN, Circuit Judges.

BARNES, Circuit Judge.

This is a timely petition for review of decisions of the Tax Court (32 T.C. 161) holding that certain additional taxes were payable for the years 1952 and 1953 by petitioning taxpayers, partners in the Trail Creek Lumber Co., a partnership, by reason of moneys received under the terms of a certain contract. The Commissioner of Internal Revenue had reduced the amounts of capital gains reported by that partnership, and to a similar extent, had increased its ordinary income. Such increase, of course, was payable by the individual partners.

The principal question before the Tax Court was the applicability of section 117(k) (2) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 117(k) (2), which if applicable would authorize the taking of the income as capital gains. If that question were to be decided adversely to petitioners, there was an alternative assertion that the transaction amounted to a sale of capital assets under section 117 (a) (4) of the same Code.

The cases below were consolidated for trial, and tried on a stipulation of facts plus the testimony of Edmund W. Pease. While the returns here considered involve only the years 1952 and 1953, chronologically petitioners' story commences in 1946.

Early in 1946, George L. Jantzer, Emma E. Jantzer (his wife), Edmund W. Pease and Ethel E. Pease (his wife), were partners in the George L. Jantzer Lumber Co., a partnership (herein designated as partnership No. 1). On February 14, 1946, that partnership entered into a timber contract with Stanley W. Dwinnell. This is hereafter called the Dwinnell contract, and is Exhibit 14N in evidence.

Sometime prior to April 15, 1946, the four partners in the George L. Jantzer Lumber Co., together with Theodore G. and Lorraine Jantzer, formed the Trail Creek Lumber Co., a partnership (herein designated as partnership No. 2). On that date (April 15, 1946), the Dwinnell contract was assigned in writing by partnership No. 1 to partnership No. 2.¹ Dwinnell consented in writing. From April 15, 1946, until late 1949, this partnership No. 2 engaged in the business of logging, sawing and manufacturing of lumber. On July 11, 1946, partnership No. 2 had leased certain timber land known as the Onn tract, and on March 22, 1951, acquired fee simple title to that tract. On December 19, 1949, the three male partners in partnership No. 2 (Trail Creek Lumber Co.) and Lewis L. Jantzer, organized a corporation, Trail Creek Lumber Co., Inc. (hereinafter referred to as the corporation).

From and after January 1, 1950, the corporation, pursuant to an oral arrangement between it and partnership No. 2, cut, removed and paid for the Dwinnell timber. On January 3, 1950, partnership No. 2 sold its manufacturing, logging, office equipment and sawmill site to the corporation.

On June 6, 1951, partnership No. 2 conveyed title to the Onn property to the corporation, reserving orally "the few remaining standing trees."

In the taxable years 1952 and 1953, the Trail Creek corporation cut, removed and paid partnership No. 2 for timber on the Onn tract pursuant to an oral arrangement similar to the oral arrangement with respect to the Dwinnell contract.

The payments received by the partnership from the corporation on the amount of timber cut and removed from the Dwinnell and Onn tracts were as follows:

                Year Payments Rec'd Costs Net Gain
                  1952         $108,095.91        $40,273.13     $ 67,822.78
                  1953          172,290.21         60,161.17      112,129.04
                

Of these aggregate payments received by the partnership in 1952 and 1953, the amounts of $787.52 and $555.36 represented payments with respect to the disposal of timber on the Onn tract.

The oral agreement under which the corporation took over the obligation of partnership No. 2 with Dwinnell is characterized by the government as a "loose oral arrangement which was terminable at the will of either party." It was, says the government, in the nature of a continuing offer for the sale of so much of the Dwinnell timber as was cut and manufactured and "accepted by the corporation's act of cutting and manufacturing with respect to each tree."² To support this theory, the government points out that Dwinnell paid the state taxes on the Dwinnell tract; the corporation paid them on the Onn tract. No fire insurance was carried by partnership No. 2 on any timber. The Dwinnell contract did not require the partnership to carry insurance, but provided merely that if lumber were destroyed by fire, "any insurance that the Purchaser may carry thereon shall be paid to the parties herein pro rata as their interest may appear."

The Tax Court found (a) that the Dwinnell contract conveyed no title to timber, and hence the partnership could not have held the timber it sold, as it was cut and manufactured, for more than six months before the sale; (b) that partnership No. 2 and the corporation entered into a loose, oral arrangement terminable at the will of either party, which did not constitute a binding contract;³ (c) that after the partnership sold its equipment on January 3, 1950, it had no trade or business other than selling timber. The Dwinnell arrangement appears in the margin.⁴

Petitioners urge they were entitled to treat the sums mentioned as capital gains, for several reasons: first, the Tax Court had approved of such treatment of moneys received under similar circumstances (even to an oral contract) in the L. D. Wilson case, 26 T.C. 474; second, that Oregon law prevails, and that under it the partnership, as a conditional vendee, was the equitable owner of the timber, even though the legal title was held by the original owner, Dwinnell; third, and in the alternative, that even if § 117 (k) (2) of the Internal Revenue Code of 1939, especially applicable to sale of timber, is held inapplicable because there was no "disposal" of that which was "owned," there was a sale of a capital asset held for more than six months, under § 117(a) (4) of the Internal Revenue Code of 1939.

The Internal Revenue Code of 1939, in § 117 — "Capital gains and losses" — provides in material part:

"* * * (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 right 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 * *." 26 U.S.C.1952 ed. § 117.⁵

Section 117(a), "Definitions," provides:

"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 Sec. 151(b) of the Revenue Act of 1942, and amended by Sec. 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 and losses shall be considered as gains and losses from sales or exchanges of capital assets held for more than 6 months * *."

In the light of the law applicable, we examine the Dwinnell contract. Among its more important features are these:

1. Purchaser agreed to buy timber located on certain property.

2. Title to timber passed only when timber was cut, manufactured into lumber, and paid for, "anything herein contained to the contrary notwithstanding."

3. If timber was cut and manufactured into lumber but was not paid for, title still remained in Dwinnell.

4. Under the provisions of the...