Ray v. Comm'r of Internal Revenue

• Decision Date: 23 September 1959
• Docket Number: Docket No. 69322.
• Citation: 32 T.C. 1244
• Parties: JOE S. RAY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

32 T.C. 1244

JOE S. RAY, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 69322.

Tax Court of the United States.

Filed September 23, 1959.

W. T. Rogers, Esq., for the petitioner.

Robert O. Rogers, Esq., for the respondent.

Petitioner, owner of certain timberlands, entered into a contract with the Mengel Company in the taxable year 1952, which provided, inter alia, that he was to produce 40,000 cords of pulpwood from his tracts of land over an 8-year period. Petitioner was to cut the timber involved or have it cut. Only in the event of his default in cutting, removing and shipping the pulpwood was Mengel to have the right to enter petitioner's land and perform the cutting operations. Petitioner arranged for his two sons, who were partners doing business under the name of Ray Naval Stores, to cut the trees involved. The contract with Mengel also provided that petitioner was to bear the risk of loss of any of the timber and trees and pay all taxes thereon. After Mengel received the pulpwood called for by the contract, the timber on the described tracts of land was to revert to petitioner. Petitioner was privileged to furnish pulpwood cut from lands other than those specified in the contract. His consideration for said pulpwood was wholly dependent on the severance and sale thereof, for which he was to receive the market price of pulpwood at the time of its delivery to Mengel. Upon execution of the contract, petitioner received $40,000 as a downpayment on the pulpwood to be produced. Held, that since petitioner did not surrender his cutting rights to the timber in question, he did not make a ‘disposal’ thereof which would entitle him to treat said transaction as though it were a gain or loss upon the sale of timber within the meaning of section 117(k)(2) of the Code of 1939, as amended. Held, further, that petitioner did not sell real estate used in his trade or business under the provisions of section 117(j). Held, further, that the downpayment of $40,000 is to be treated as ordinary income for the year in question.

FISHER, Judge:

This proceeding involves a deficiency in income tax determined against petitioner for the taxable year 1952 in the amount of $15,564.46.

The principal issue presented is whether petitioner is entitled to treat, as long-term capital gain pursuant to sections 117(k)(2) or 117(j) of the Code of 1939,¹ the amount of $40,000 which he received as an advance payment during the taxable year 1952 for timber to be cut from his or other land and delivered to the purchaser.

FINDINGS OF FACT.

Some of the facts are stipulated and, as stipulated, are incorporated herein by this reference.

Joe S. Ray, hereinafter called petitioner, is an individual with his place of residence at West Green, Georgia. He filed his individual Federal income tax return for the taxable year 1952 with the director of internal revenue, Atlanta, Georgia.

Petitioner kept his books and records and filed his return for the year 1952 on the cash basis.

For many years prior to and including the taxable year 1952, petitioner was engaged in the business of farming on his lands in the town of West Green, Georgia, including turpentining the pine trees growing thereon. Turpentining continues for about 8 or 10 years, which is about the average life of a pine tree. When all the turpentine was extracted or ‘worked out,‘ petitioner would cut the tree for pulpwood or sawmill timber and let another one grow. During the years petitioner was engaged in turpentining, he sold many trees which had been worked out of turpentine.

During the year 1951, petitioner had a fire on his tree farm, and in order to salvage the trees as much as he could, he sold pulpwood to dealers. Petitioner sold said pulpwood until about January 1952.

On March 15, 1952, petitioner entered into a contract (designated as indenture) with the Mengel Company, hereinafter referred to as Mengel. Later on this same date, petitioner and Mengel entered into a supplemental agreement to add to the terms of the original contract. The original contract, as supplemented, is sometimes hereinafter referred to as the contract.

Said contract wherein petitioner is referred to as ‘grantor’ and Mengel as ‘grantee,‘ commences with the recital:

That for and in consideration of the sum of Forty Thousand ($40,000) Dollars, * * * Grantor has granted, bargained, sold and conveyed, and by these presents does grant, bargain sell and convey unto Grantee * * * :

All of the pine trees * * * upon the following described lands * * *

There then follows the legal description of the various lands located in Coffee County, Georgia, containing approximately 4,800 acres.

The contract provides, inter alia, as follows:

1. The basic premises of this indenture is that forty thousand (40,000) standard cords * * * of pulpwood will be produced from the said timber and trees * * *

2. Grantee, its successors and assigns, shall have the right to enter upon said lands and to cut and remove the trees and timber hereby conveyed * * * .The cutting shall be in accordance with the cutting schedule stated hereinafter and the other terms and conditions of this indenture.

3. The payment of $40,000 made by Grantee to Grantor at the ensealing and delivery of this indenture is an advance payment at the rate of one ($1.00) Dollar per standard cord on the stumpage price to be paid by Grantee to Grantor for the pulpwood to be cut from the timber and trees on said lands. As the cutting and removal progresses, the balance of the stumpage price to be determined as hereinafter stated, shall be paid by Grantee to Grantor.

4. Grantor and Grantee acknowledge that the purchase price of pine pulpwood in Coffee County, Georgia, varies from time to time, and that it is the accepted custom in the trade for the stumpage price paid to the owner of the timber to vary in proportion. It is agreed between the parties hereto that the stumpage price which shall be paid by Grantee to Grantor shall so vary, * * * bearing in mind at all times that Grantee shall receive credit on the stumpage price in the sum of $1.00 per standard cord already paid thereon by the advance payment made at the ensealing and delivery of this indenture. * * *

5. As a cutting schedule for cutting and removing said timber and trees, 5,000 standard cords per year, at the rate of not less than 1,000 and not more than 2,000 standard cords in any quarter part of a year, shall be cut and removed from said land after cutting and removal operations shall have commenced normally.

6. Grantee shall keep accurate records of all timber and trees cut and removed from said land, shall furnish said information to Grantor at regular weekly intervals, and shall account to and pay Grantor at regular weekly intervals the balance due him for stumpage for all timber and trees cut and removed from said land.

7. Grantor shall make proper returns for all taxes due and to become due on said lands, timber and trees, and shall pay all taxes thereon as the same shall become due.

8. Part of the consideration for this indenture is the covenant of Grantor that he will, with initiative and all reasonable diligence and care, safeguard and protect the timber and trees on said land against loss by theft, fire and all forms of waste. * * *

9. If for any reason the timber and trees on said land and covered by this indenture shall fail to produce the 40,000 standard cords of pulpwood provided for herein, then Grantee, its successors and assigns, shall have the right and privilege of retaining a sufficient sum, out of the balance due for stumpage, to retire any unearned part of the $40,000 advanced at the ensealing and delivery of this indenture for the contemplated production of 40,000 standard cords.

10. Grantor is presently engaged in turpentining and other woodland operations on said lands, and it is the agreement of the parties that said operation may continue, consistent with the terms of this indenture. Also, it is the present agreement of the parties hereto that Grantor, within the cutting schedule hereinabove mentioned will cut and remove said timber and trees for pulpwood purposes, and that from him as a producer of pine pulpwood Grantee will purchase same and pay the then prevailing producer's price, thereby enabling Grantor possibly to realize a greater return than he would receive from the stumpage alone. If Grantor should so cut and remove said pulpwood he shall have the right to do so * * * . As such producer of pine pulpwood, Grantor shall be paid by Grantee the generally prevailing price then being paid to producers in Coffee County, Georgia, for each standard cord of acceptable pine pulpwood, less, however, at all times a deduction of $1.00 per standard cord by reason of the advance payment already made by Grantee to Grantor at the ensealing and delivery of this indenture. * * * 11. Grantor owns, has access to or may acquire other lands than those particularly described hereinbefore having thereon pine timber suitable for pulpwood purposes, and he may wish to cut pulpwood therefrom and as a producer ship same to Grantee instead of cutting off and over the lands particularly described in this indenture. * * * Grantee herein agrees to such substitution. Each standard cord of acceptable pulpwood so shipped shall reduce pro tanto the 40,000 standard cords to be cut off the lands particularly described hereinbefore in this indenture.

12. If, and not before, Grantor shall default in cutting, removing and shipping pulpwood to or at the director of Grantee in accordance with the cutting rate and schedule as provided or as permitted by this indenture, then and in that event Grantee may commence operations hereunder so as to assure continuance of said production schedule. * * *

13. Upon Grantee's receiving and accepting 40,000 standard cords of pulpwood under the terms of this indenture, or on March 14, 1962, whichever shall occur first, this indenture shall terminate,...