Mills v. Comm'r of Internal Revenue

• Decision Date: 13 December 1972
• Docket Number: Docket No. 4426-70.
• Citation: 59 T.C. 401
• Parties: CABAX MILLS, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

59 T.C. 401

CABAX MILLS, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 4426-70.

United States Tax Court

Filed December 13, 1972.

Milo E. Ormseth and Thomas B. Stoel, for the petitioner.

Lee A. Kamp, for the respondent.

Petitioner acquired 98 percent of the stock of Snellstrom in April 1964. Snellstrom was liquidated in April 1965 and petitioner received in liquidation certain timer-cutting contracts that had been held by Snellstrom prior to April 1964. Petitioner cut timer under those contracts during the period May 1, 1965, through Dec. 31, 1965, and reported the profits therefrom as long-term capital gain under sec. 631(a). Held: Petitioner acquired the Snellstrom stock and timber-cutting contracts under circumstances provided in sec. 334(b)(2), I.R.C. 1954, and is entitled to use as its basis in the assets received on liquidation of Snellstrom its adjusted basis in the stock of Snellstrom. Under sec. 1223(1) petitioner is also entitled to tack its holding period of the Snellstrom stock onto its holding period of the timber-cutting contracts and hence may make the election provided in sec. 631(a) and is entitled to the benefits thereof.

DRENNEN, Judge:

Respondent determined a deficiency in petitioner's income tax in the amount of $49,648.84 for its calendar year ended December 31, 1965. The issue presented for our decision is whether for purposes of section 631(a) of the Internal Revenue Code,¹ petitioner held certain timber-cutting contracts, which it received in a liquidation distribution, for more than 6 months prior to January 1, 1965.

FINDINGS OF FACT

The majority of the facts have been stipulated and are so found. The parties have agreed on the following statements in the stipulation.

Cabax Mills (hereinafter Cabax or petitioner) is an Oregon corporation with its principal place of business located in Eugene, Oreg. Petitioner filed its Federal corporate income tax return for its taxable year ending December 31, 1965, with the district director of internal revenue, Portland, Oreg.

During the year in question, petitioner was engaged in logging and manufacturing lumber in the State of Oregon. In the early months of 1964, petitioner became interested in acquiring Snellstrom Lumber Co. (hereinafter Snellstrom), a small closely held corporation engaged in logging and manufacturing plywood and lumber. Petitioner's interest in Snellstrom was engendered primarily in a plywood plant and certain timber-cutting rights it owned. Petitioner had attempted to purchase these assets from Snellstrom but the owners did not want to strip their corporation of its principal assets. Consequently, on March 31, 1964, Cabax and representatives of the holders of 530 of the 538 outstanding shares of capital stock of Snellstrom executed a contract of sale for the stock.

Under the provisions of the sales contract, Cabax agreed to purchase, and the shareholders agreed to sell, 530 shares (or 98 percent) of the outstanding stock of Snellstrom. The sales price for the stock was $5,000 per share for a total purchase price of $2,650,000. The $5,000 price was payable on an installment basis: $1,000 at the closing; $450 at closing or within 60 days thereafter; and the balance of $3,550 in six equal installments, with each installment due on each succeeding anniversary of the closing, together with annual interest of 5 percent on the declining principal balances, beginning at the date of closing, interest to be paid with and in addition to the principal payments.

The closing of the transaction was scheduled for April 1, 1964, or a later time fixed by representatives of the sellers, but in no event later than April 9, 1964. The closing actually occurred April 3, 1964. Under the contract, the sellers were required to deliver title to and possession of the Snellstrom shares to Cabax, and Cabax was then to assume all of the benefits and burdens of the ownership of such shares. Additionally, the officers and directors of Snellstrom were required to resign and nominees of Cabax were immediately elected to assume complete management and control of the new subsidiary corporation. In return, Cabax was required to cause new certificates for the purchased shares to be issued in its name and delivered to a bank as trustee, under a pledge to provide security for the unpaid balance of the purchase price, promptly after the closing. The security arrangement included a prohibition against liquidation of Snellstrom by Cabax until 40 percent of the purchase price for the Snellstrom shares had been paid.

Following the acquisition of Snellstrom, Cabax operated it as a subsidiary for slightly more than a year. By April 1965, petitioner had satisfied the conditions precedent to Snellstrom's liquidation imposed by the March 31, 1964, sales agreement. Accordingly, Snellstrom was liquidated pursuant to a plan of liquidation dated April 13, 1965.

In the course of the liquidation, Cabax surrendered all of its stock in Snellstrom and received in exchange therefor all of the assets and assumed all of the liabilities of Snellstrom immediately prior to its liquidation. However, cash in an amount equal to the aggregate book value of 8 shares of Snellstrom stock which Cabax had not purchased was reserved by Snellstrom for such shareholders and Cabax did not assume the obligation of Snellstrom to the holders of the 8 shares. Among the assets which Cabax received from Snellstrom were the contract rights to cut six tracts of timber. Snellstrom had held these contract rights to cut timber for more than 6 months prior to January 1, 1965.

During the year prior to its liquidation, Snellstrom cut timber from certain tracts in which it had contractual cutting rights. Attendantly, it elected to characterize its gain or loss realized from the appropriation of said timber under the provisions of section 631(a).

Subsequent to the liquidation, during the period commencing May 1, 1965, and ending December 31, 1965, Cabax cut timber for its operations under the contract rights received in the Snellstrom liquidation. Cabax also elected to characterize its gain or loss realized from the appropriation of said timber under the provisions of section 631(a).

The purchase by Cabax of the Snellstrom stock constituted a ‘purchase’ within the meaning of section 334(b)(3) of the Code. Following the purchase of the Snellstrom stock, Cabax continued to hold it as a capital asset until the shares were surrendered pursuant to the liquidation plan.

The liquidation of Snellstrom was a liquidation of the type described in section 334(b)(2). The basis of the property distributed to Cabax from Snellstrom, including the timber rights, was determined pursuant to the provisions of section 334(b)(2) to be $2,814,559.15.

On its return filed March 11, 1966, petitioner reported total long-term capital gains of $358,158.72. Of that figure, $302,928.39 was reported as long-term capital gain realized on the timber cut under the timber rights originally owned by Snellstrom. In the notice of deficiency respondent determined that the $302,928.39 gain did not qualify for long-term capital gains treatment under the provisions of section 631(a), because petitioner had not held the timber rights for more than 6 months prior to the beginning of its 1965 tax year as required by that section.

Prior to trial, the parties stipulated that petitioner's 1965 timber-cutting operations under the auspices of the Snellstrom timber contracts will be considered as a sale or exchange of such timber as provided in section 631(a) if petitioner establishes that its holding period of the contract rights to cut such timber is deemed to have commenced before June 30, 1964.

We find from the evidence that petitioner's purpose in buying the stock of Snellstrom was to acquire the assets of Snellstrom.

OPINION

The basic facts are not in dispute. The single issue for our determination is whether petitioner can be considered under the applicable sections of the Code to have held the contract rights to cut timber, which it received on the liquidation of Snellstrom, for a period of more than 6 months before January 1, 1965. In other words, for purposes of section 631(a), will petitioner be considered to have acquired the cutting rights held by Snellstrom at the time it acquired the Snellstrom stock in April of 1964 or at the time Snellstrom was liquidated in April of 1965.

Petitioner alleges that it purchased 98 percent of the stock of Snellstrom on April 3, 1964, and that this constituted a purchase within the meaning of section 334(b)(3); that it liquidated Snellstrom on April 30, 1965, pursuant to a plan of liquidation adopted on April 13, 1965; that it received from Snellstrom contract rights to cut certain tracts of timber; and that it cut the timber during the period May 1, 1965, through December 31, 1965. Petitioner further alleges that its purchase and liquidation of Snellstrom were section 334(b)(2) transactions, that Snellstrom held the contract rights to cut timber for more than 6 months prior to January 1, 1965, and that petitioner held the stock of Snellstrom for more than 6 months prior to January 1, 1965.

On these facts, petitioner contends that under section 1223(1) its holding period for the timber is deemed to have commenced when it acquired the stock of Snellstrom, or more than 6 months prior to January 1, 1965, and that, therefore, under section 631(a)² its cutting of the timber should be viewed as a sale or exchange, thus entitling it to capital gains treatment on its profits derived therefrom.³

Respondent contends that petitioner's holding period for the timber rights commenced when Snellstrom was liquidated. Respondent argues that a parent corporation and its subsidiary are two separate entities, and thus, Cabax cannot be deemed the owner of Snellstrom's assets, for purposes of section 631(a), prior to the liquidation of Snellstrom. Respondent further urges that if we adopt his view...