Oregon-Washington Plywood Co. v. Comm'r of Internal Revenue
| Decision Date | 10 July 1953 |
| Docket Number | Docket No. 39553. |
| Citation | 20 T.C. 816 |
| Parties | OREGON-WASHINGTON PLYWOOD COMPANY, AN OREGON CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
EXCESS PROFITS CREDIT— BORROWED INVESTED CAPITAL.— Held, that a land purchase contract and so-called note executed pursuant thereto were conditional and that the obligation under such instruments was not an outstanding indebtedness evidenced by either a note or a mortgage, within the meaning of section 719(a)(1), Internal Revenue Code. George J. Perkins, Esq., for the petitioner.
John H. Welch, Esq., for the respondent.
The respondent has determined an excess profits tax deficiency of $19,925.35 against the petitioner for the calendar year 1944.
The issue presented is whether, in determining the excess profits credit based upon the invested capital method, the petitioner's obligation for the balance due under a contract for purchase and sale of timberlands and an alleged promissory note executed pursuant to that contract, constitutes an outstanding indebtedness evidenced by a note or mortgage which may be included in borrowed capital for the years 1944 and 1945, within the meaning of section 719(a)(1), Internal Revenue Code.
It is stipulated that, if the Court finds for the petitioner on the issue involved, the amount claimed as representing 50 per cent of the average daily borrowed capital as set forth in each of the petitioner's excess profits tax returns for 1944 and 1945, respectively, is correct and there is no deficiency in excess profits tax for 1944. It is further stipulated that if the deficiency involved herein is sustained, it will result in an overassessment of $9,321.80 in income tax for the year 1944.
This proceeding has been submitted upon the pleadings and a stipulation of facts including numerous exhibits made a part thereof.
The stipulated facts are so found and included herein by reference.
The petitioner is an Oregon corporation which, during the years material herein, was qualified to transact business in the State of Washington, as a foreign corporation. The petitioner's income and excess profits tax returns for the taxable years 1944 and 1945 were filed with the collector of internal revenue for the district of Washington.
At all times material to this proceeding the petitioner owned and operated a plywood manufacturing plant at Tacoma, Washington, and in that vicinity there was a scarcity of raw material, namely, peeler logs.
On July 30, 1941, T. A. Peterman acquired title by deed to approximately 3,500 acres of timberland in Tillamook County, Oregon, and he had not conveyed or encumbered the same prior to the execution of a contract of purchase and sale dated August 30, 1943, hereinafter mentioned. That tract of timberland was cruised in December 1940 and January 1941 and the timber cruiser's report showed an estimated total of 109,528,000 feet of merchantable timber. The tract contained a large amount of dead timber which had been killed by a forest fire and the time for using the deal timber as peeler logs was limited. During 1943 and until November 16, 1944, T. A. Peterman, Katherine Peterman and Gladys Peterman were partners doing business under the firm name of Peterman Manufacturing Company which owned a large amount of logging equipment and maintained a logging organization in the area of the above-mentioned tract of timberland. The petitioner had no logging equipment or facilities for logging timber.
On August 30, 1943, T. A. Peterman and his wife as owners and the petitioner as purchaser executed a contract of purchase and sale of the above-mentioned 3,500-acre tract of timberland in Tillamook County, Oregon. The agreed purchase price was $500,000 payable $25,000 on date of the contract, $75,000 on or before September 30, 1943, and the balance of $400,000 ‘evidenced by a note made payable‘ to Peterman Manufacturing Company and delivered thereto on or before September 30, 1943. Payments on the note, plus accrued interest at the rate of 3 per cent per annum on deferred balances, were due on the 15th day of each month beginning November 15, 1943, on the basis of $5 per thousand feet, commercial log scale, cut and removed by the purchaser during the previous month. If the purchaser defaulted in the monthly payments logging operations were to cease until the default was made good. The purchaser agreed, inter alia, that it would conduct its operations on the lands in a good and workmanlike manner in accordance with the best methods and usages practiced in the Douglas fir area and the Oregon laws and regulations; that it would pay all taxes and assessments levied upon the lands, that it would scale the logs cut and removed and keep accurate records; and that no loss or destruction of, nor injury or damage to any part or all of the property from fire, wind, or other element of casualty whatsoever would give ground for the termination or rescission of the contract or relieve the purchaser of its obligations thereunder. The contract further provided that ‘time is of the essence in this contract and each and every portion thereof‘ and that in case of purchaser's default in payments or performance of other terms of the contract and after certain notice, the owners may elect to declare the contract at an end with all payments and improvements on the property forfeited as liquidated damages, or, the owners may elect to declare all unpaid sums plus accrued interest immediately due and payable and bring suit therefor. Further, the owners reserved title to the lands and timber thereon until complete performance of the contract by the purchaser but title to the logs passed to the purchaser as they were cut and removed from the land. Upon completion of the purchaser's obligations under the contract the owner's agreed to execute and deliver a deed to the timberlands in fee simple with covenants of warranty and good commercial abstract or title insurance in a sum equal to the price paid for the land subject to certain existing record reservations and easements.
The petitioner made the cash payments totaling $100,000 required by the contract of August 30, 1943, and on September 30, 1943, delivered the following note as provided in that contract:
Tacoma, Washington, September 30, 1943 . . . . . $400,000.00
As provided in an agreement dated August 30, 1943, the undersigned for value received promises to pay to the order of the Peterman Manufacturing Company the sum of Four Hundred Thousand Dollars (400,000.00) in lawful money of the United States of America. Payments on this note plus accrued interest at the rate of 3% per annum on deferred balances shall be made on the 15th day of each month beginning November 15, 1943.
The basis of such principal payments to be $5.00 per thousand feet commercial log scale for all logs except wood logs cut and removed by purchaser or its agents during the previous calendar month as provided in the agreement between T. A. Peterman and Ida C. Peterman, owners, and Oregon-Washington Plywood Company, purchaser, dated August 30, 1943, covering certain timber lands in Tillamook County, Oregon.
BY (S) PHILIP GARLAND Vice President
On September 18, 1943, the Peterman Manufacturing Company executed a written agreement with the petitioner whereby for certain agreed prices to be paid by the petitioner, the former agreed, inter alia, to furnish all equipment and labor and pay all costs for logging all merchantable timber on the above mentioned 3,500-acre tract for the petitioner. The Peterman Manufacturing Company further agreed to log an annual average of from 20 to 25 million feet a year until all of the timber be logged from the tract, to commence shipping logs in October, and to be in full production by February 1944.
On September 30, 1943, the Peterman Manufacturing Company executed an additional agreement with the petitioner to purchase at certain prices all logs cut other than the fir peeler logs and certain fir sawmill logs needed by the petitioner.
T. A. Peterman died on November 16, 1944. Thereafter the surviving partners, the decedent's wife and executors of the decedent's estate, desired to be relieved of the agreements mentioned in the next two preceding paragraphs as to logging operations and the purchase of logs, and they were terminated by a cancellation agreement dated January 4, 1946, between the interested parties an...
To continue reading
Request your trial