JR SIMPLOT COMPANY v. Commissioner

• Decision Date: 10 May 1967
• Docket Number: Docket No. 5603-64.
• Citation: 26 TCM (CCH) 488,1967 TC Memo 104
• Parties: J. R. Simplot Company v. Commissioner.
• Court: U.S. Tax Court

26 T.C.M. (CCH) 488 (1967)

T.C. Memo. 1967-104.

J. R. Simplot Company v. Commissioner.

Docket No. 5603-64.

United States Tax Court.

Filed May 10, 1967.

L. E. Haight, J. R. Simplot Co., Boise, Idaho, for the petitioner. John C. Picco, for the respondent.

Memorandum Opinion

FAY, Judge:

Respondent determined deficiencies in petitioner's Federal income taxes for the fiscal years ending on February 28, 1958 and 1959, and February 29, 1960, in the amounts of $27,725.94, $4,294.14, and $5,460.00, respectively.

Petitioner has not raised an objection to respondent's determinations for the fiscal years ended February 28, 1959, and February 29, 1960, and has conceded part of the deficiency determined for the fiscal year ended February 28, 1958. The sole issue remaining for determination is whether the loss sustained in the fiscal year ended February 28, 1958, by petitioner in the amount of $19,841.61 from the disposition of certain timber-cutting contracts is properly a capital loss as determined by respondent or an ordinary loss as claimed by petitioner.

All of the facts have been stipulated, and the stipulation of facts, together with the exhibits attached thereto, is incorporated herein by this reference.

Petitioner, J. R. Simplot Company, an accrual basis taxpayer, is a Nevada corporation having a place of business at 200 Simplot Building, Boise, Idaho, and is qualified to conduct business in the State of Idaho. It filed a timely Federal income tax return for the fiscal year ended February 28, 1958, with the district director of internal revenue for the district of Idaho.

Among other things, petitioner is engaged in the sawmill business in Idaho and California, manufacturing lumber. It operates a sawmill located near Horseshoe Bend, Idaho.

On October 3, 1955, petitioner, doing business as the Caldwell Lumber Company, entered into a timber-cutting contract with the United States Forest Service (hereinafter referred to as the Clear Creek contract). Two additional contracts were entered into with the Bureau of Land Management and the United States Forest Service on April 16, 1956, and November 26, 1956 (hereinafter referred to as the Cascade Public Domain and the Smith Creek contracts, respectively). The three timber-cutting contracts, entered into in the normal course of petitioner's lumber manufacturing business, provided for the cutting and purchase of a certain quantity of timber prior to a certain date set forth therein and at specified stumpage rates.¹

The Clear Creek contract provided in pertinent part as follows:

General Terms

1. For and in consideration of the promises and agreements hereinafter contained, the Forest Service agrees to permit the purchaser to cut and the purchaser agrees to cut the timber included in this contract, and the Forest Service agrees to sell and the purchaser agrees to purchase and remove such cut timber, subject to the provisions hereof.

2. It is hereby understood and agreed that, except as otherwise provided herein:

a. All right, title, and interest in or to any timber included in this contract shall remain in the United States until it has been paid for, cut and scaled; and all right, title and interest in or to any timber which has been paid for, cut and scaled but not removed from the sale area by the purchaser within the period of this contract or any extension thereof shall revest in the United States.

b. In the event any timber included in this contract is destroyed or damaged to the extent it is unmerchantable by fire, wind, flood, insects, disease, or similar cause the party holding title to the destroyed or damaged timber shall bear the loss in stumpage and required deposits resulting from such destruction or damage, and there shall be no obligation on the part of the Forest Service to supply, or on the part of the purchaser to accept and pay for, other timber in lieu of that destroyed or damaged; Provided, that damage to or loss of timber removed from the sale area before scaling shall be borne by the purchaser, and: Provided further, that this paragraph shall not be construed to relieve either party of liability for negligence.

* * *

Section 5a. Period of Contract.

1. The purchaser agrees to cut and remove from the sale area all timber included in this contract prior to 12/31/57 unless the termination date is adjusted pursuant to Section 5a-2, or the contract period is extended by the Forest Service. All other obligations of the purchaser likewise shall be discharged prior to the above date, or any adjustment or extension thereof: * * *

* * *

Section 12g. Performance by Other than Purchaser.

1. The acquisition or assumption by another party under an agreement with the purchaser of any right or obligation of the purchaser under this contract shall be ineffective as to the Forest Service unless and until the Forest Service shall have been notified of such agreement and shall have recognized and approved it in writing signed by the forest officer who approved this contract or by his successor, or superior officer; and in no case shall such recognition or approval:

a. Operate to relieve the purchaser of the responsibilities or liabilities he has assumed hereunder; or

b. Be given unless such other party

(1) Is acceptable to the Forest Service as a purchaser of timber, and assumes in writing all of the obligations to the Forest Service under the terms of this contract as to the incompleted portion thereof, or

(2) Acquires the rights in trust as security and subject to such conditions as may be necessary for the protection of the public interests.

* * *

Section 13b. Settlement.

1. The purchaser agrees that any money advanced or deposited under this contract may, upon failure on his part to fulfill all and singular the requirements set forth in this contract or made a part hereof, be retained by the Forest Service to be applied toward the satisfaction of his obligations assumed under this contract without prejudice to any other rights and remedies of the Forest Service.

The termination dates of all three contracts were duly extended, by the respective Federal agencies involved, for cutting in 1957 and subsequent years. Petitioner began cutting operations pursuant to the contracts, but in 1957, due to a lack of timber in the vicinity of the Horseshoe Bend sawmill and because of the adverse conditions of the lumber market, it commenced the liquidation of its logging equipment and cut down its production at the sawmill.

In the fiscal year ended February 28, 1958, petitioner's Horseshoe Bend sawmill was sold and no further lumber manufacturing was done by petitioner in Idaho. Since timber remained to be cut pursuant to the three contracts, petitioner sought to negotiate a cancellation of the contracts with the United States Forest Service and the Bureau of Land Management.

The Federal agencies involved would not consider a cancellation of the contracts nor would they consider an "across the board" transfer of the contracts to a third party, stating that section 12g of the contracts prevented the petitioner from relieving itself of its responsibilities or liabilities by a sale or transfer of the contracts. Upon the failure of these negotiations petitioner decided to find a responsible person who would assume the uncompleted contracts.

On April 13, 1958, petitioner entered into an agreement with one Lawrence Hettinger, doing business as Producers Lumber Company, of Boise. The agreement was in the form of a letter dated April 3, 1958, written by petitioner and later agreed to and signed by Hettinger (d/b/a Producers Lumber Company). The agreement provided that:

We have agreed to assign these contracts to you, and you are accepting the assignments in accordance with the following terms and conditions:

(a) You will accept the assignment of each of the timber sale contracts, exactly as the sale now stands. Any deposits which this company has made under these contracts will be retained by the government agency involved, and you will not be required to make any reimbursement therefor to us. However, you will hereafter be responsible for full performance under the terms and conditions of each of the contracts, including compliance with all state and federal regulations, and you agree to save this company harmless from any liability which might be incurred by reason of these contracts.

(b) At the time the assignments are made you will procure a bond for each of the contracts, in accordance with the requirements thereof. At the same time we will cancel the current bonds which name this company as principal.

* * *

(d) In consideration for your assuming our liability under the contracts, we will pay you the total sum of $7,000.00 * * *. We will have the right, through our authorized agent or agents, at all times to inspect the road work and the rate of completion. All work must, of course, be done in accordance with the specifications contained in the contract and be approved by the Forest Service, and we have the right to designate the Forest Service Ranger in the area as our agent for the purpose of inspection and approval prior to the making of any payment.

* * *

Pursuant to this last quoted provision, petitioner did in fact conduct regular inspections of the work to assure itself that the basic contracts were being performed.

On April 9, 1958, an "Application for Recognition and Approval of Third Party Agreement" was made to the Federal agencies. Proper approval of the application was given upon the condition that said approval would not operate to release petitioner from any of its obligations under the timber-cutting contracts.

On its Federal income tax return for the fiscal year ended February 28, 1958, petitioner claimed as an ordinary business deduction the sum of $19,841.61, described therein as losses from "Other abandonments."²

Respondent in his statutory notice of deficiency determined that the losses described as "Other abandonments" were sustained in...