Springfield Plywood Corp. v. Comm'r of Internal Revenue
| Decision Date | 24 November 1950 |
| Docket Number | Docket No. 21710. |
| Citation | 15 T.C. 697 |
| Parties | SPRINGFIELD PLYWOOD CORPORATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioner acquired timberlands and within 6 months thereafter entered into a contract contemplating the disposal of all timber, within certain categories, to be paid for as cut. The contract referred to petitioner as vendor and the other parties as vendees and provided for the cutting of all such timber within 2 years, to be paid for at the end of that time whether cut or not. Held, that by and at the time of the contract there was ‘disposal‘ of the timber within 6 months from acquisition thereof within the language of section 117(j)(1) and (k)(2), Internal Revenue Code, and that petitioner's gain, from the payment for the timber, was not capital gain. Wayne C. Gilbert, Esq., and John L. Taylor, C.P.A., for the petitioner.
Douglas L. Barnes, Esq., for the respondent.
This case is submitted to us under Rule 30. As filed, it involved the following deficiencies:
The parties have, however, by stipulation settled and eliminated all issues as to 1942, leaving the only issue before us as follows: Whether petitioner, which had acquired timberlands and within 6 months contracted for the removal of timber therefrom on a royalty basis, received ordinary income or, on the other hand, capital gain, in royalties paid for timber cut more than 6 months from the date of petitioner's acquisition of the timber property, and this, in turn, depends upon whether within the language of section 117(k)(2) of the Internal Revenue Code and of Regulations 111, section 29.117-8, the timber was disposed of by the petitioner at the time it contracted, within 6 months of acquisition, for the cutting thereof, or, on the other hand, whether there was no disposal until timber was removed.
All facts have been stipulated and by reference we find them to be as stipulated. Only such portions thereof as considered necessary of statement in examination and discussion of the issue, will be set forth herein. Such facts may be briefly stated as follows:
In January 1943 petitioner acquired certain timber property. On May 14, 1943, it entered into an agreement with D. & W. Lumber Co., a partnership, which agreement it is stipulated ‘contemplated the disposal‘ of certain classes of timber on petitioner's lands. Payments were to be made at certain prices and at certain rates as the timber was cut. The agreement which is extensive repeatedly referred to the petitioner as vendor and the copartnership as vendees, and in pertinent part provided as follows: that the vendor ‘does hereby agree to sell unto the vendees and the vendees do hereby agree to purchase of and from the vendor at the price and upon the terms and conditions hereinafter stated all of the merchantable timber standing and down old growth and second growth fir timber and all merchantable standing and down hemlock and cedar timber‘ upon petitioner's lands; that the purchase price should be according to a scale dependent upon the kind of timber included in the above description; that the vendor granted the vendees right and license to enter upon the land and cut and log the timber under certain conditions; that before the 10th day of each calendar month the vendees should make a report of logs cut and pay therefor; that upon default in payment by the vendees ‘the right and license hereby granted to enter upon said lands and cut said timber ‘ shall be suspended until default shall be removed; that cutting and removal of timber should commence by June 1, 1943, and proceed continuously, except for causes beyond vendees' control, at the rate of 45,000 feet per day, ‘the cutting license hereby granted‘ to terminate 2 years from the date of contract; that the vendor expressly reserves the fight to have delivered to it all fir logs suitable for plywood, same to be delivered by the vendees to the vendor and paid for by the vendor at O.P.A. prices, less cost of loading; that ‘this agreement shall not become effective until and unless‘ within 20 days from the date thereof the vendees should execute to the vendor a performance bond or deposit $5,000 or execute to the vendor a chattel mortgage for $5,000 upon property worth $10,000, to insure performance of the agreement; that injury to or destruction of any of the timber, whether cut or uncut, by fire or the elements or otherwise should be at the vendees' risk, they to make full payment for the timber notwithstanding such loss or damage; that upon abandonment of the contract by the vendees or their failure to proceed to log the timber expeditiously as agreed or in case of any wilful default, the vendor may terminate the contract and recover damages in which event all logs cut and being upon the premises should be the property of the vendor; that ‘it is the intent of this contract that the vendee shall purchase and pay for all the standing and down timber on said lands on or before two years hereof‘ and that if at the expiration of that period ‘any timber agreed to be purchased‘ shall not have been cut, removed and paid for, the amount of such timber shall be determined and the vendees shall pay therefor at the prices specified, but without any right of removal thereof; that the specified rights and remedies for defaults shall not be exclusive of vendor's rights or remedies at law or equity; that the contract is unassignable and cannot be sublet except with the written consent of the vendor; that the vendees agree that it is a condition of the contract and the cutting license granted that they will pay all taxes upon the real property until they have cut, removed and paid for the timber agreed to be purchased; that the vendees must give notice before entering upon any 40-acre tract to cut and log and notify the vendor of their progress, and that the order of cutting shall be such as not to reduce the average value of timber left standing, and that logging is to be done in an orderly, workmanlike manner in accordance with best logging practice and in compliance with the laws and regulations of the State of Oregon and the United States.
Petitioner disposed of the timber involved herein by and at the date of the contract of May 14, 1943, within the meaning of section 117(k)(2) of the Internal Revenue Code.
The petitioner, under the above facts, agrees that its income from timber within 6 months of its acquisition of the timber is ordinary income, but contends that its gain from timber cut after 6 months from acquisition is capital gain; while the respondent's argument is that, under section 117(j)(1) the term ‘property used in the trade or business‘ (so constituting capital assets and giving right upon sale or exchange to capital gain) includes timber ‘with respect to which subsection * * * (k)(2) is applicable,‘1 but that subsection (k)(2) is not applicable for under its language only gain or loss from timber held more than 6 months prior to disposal by the owner ‘under any form or type of contract‘ shall be considered ‘as though it were a gain or loss * * * upon the sale of such timber‘ and this timber, respondent says, was not held more than 6 months at time of disposal— which was, he argues, by the contract of May 14, 1943. He points to Regulations 111, section 29.117-82 which provides in brief that disposition under the contract is considered to be the sale of the timber. The petitioner on brief says ‘The regulation * * * cannot mean anything else than that he consider the timber to have been disposed of as of the date of the execution of the contract,‘ so that the parties appear in full agreement as to...
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