Stuchell v. Department of Revenue, State of Or.
| Decision Date | 18 May 1982 |
| Docket Number | No. 1370,1370 |
| Citation | 293 Or. 111,644 P.2d 1387 |
| Parties | Edwin W. and Blanche STUCHELL; Edwin W. Stuchell, Trustee of the Neva D. Stuchell Trust; David E. Wyman, Jr., Personal Representative of the Estate of David E. Wyman, deceased; David E. and Helen R. Wyman; and Helen R. Wyman, Appellants, v. DEPARTMENT OF REVENUE, STATE OF OREGON, Respondents. ; SC 27846. |
| Court | Oregon Supreme Court |
Bryant R. Dunn and O. Kent Whiteley, Graham & Dunn, Seattle, Wash., argued the cause for appellants. With them on the briefs were Ridgway K. Foley, Jr., and Schwabe, Williamson, Wyatt, Moore & Roberts, Portland.
Walter J. Apley, Asst. Atty. Gen., Salem, argued the cause for respondents. With him on the brief were Dave Frohnmayer, Atty. Gen., Salem.
Before DENECKE, C. J., and LENT, LINDE, PETERSON, TANZER and ROBERTS, JJ.
The issue is whether certain money received by the plaintiffs resulting from the cutting of timber under the terms of a certain contract constituted income in respect of a decedent (hereinafter "IRD"). We hold that it did not. 1
The money in question is sums received by plaintiffs for timber cut and paid for after the deaths of plaintiffs' decedents, who were owners of certain fractional shares of the timber at the time of making the contract. Plaintiffs contend that those sums are not IRD under the personal income tax laws of this state because the sums are derived from the cutting of timber that was acquired by plaintiffs as the result of deaths of their respective decedents. Defendant contends that the money is IRD because the contract created a perpetual right in the buyer to cut and remove timber resulting in an equitable conversion that left in the owners/sellers of the timber bare legal title to the timber as security to ensure that they would collect the annual proceeds of timber cut under the contract.
The parties are agreed that for the purposes of this case state income tax law incorporates those provisions of the federal Internal Revenue Code of 1954, to which we refer in this opinion. The section of primary concern is § 691, which provides in part:
The pertinent Treasury Regulation, § 1.691(a)-1(b) provides:
"In general, the term 'income in respect of a decedent' refers to those amounts to which a decedent was entitled as gross income but which were not properly includible in computing his taxable income for the taxable year ending with the date of his death or for a previous taxable year under the method of accounting employed by the decedent. * * * "
Treasury Regulation § 1.691(a)-3(a) also casts some light on the matter:
"The right to receive an amount of income in respect of a decedent shall be treated in the hands of the estate, or by the person entitled to receive such amount by bequest, devise, or inheritance from the decedent or by reason of his death, as if it had been acquired in the transaction by which the decedent * * * acquired such right, and shall be considered as having the same character it would have had if the decedent * * * had lived and received such amount. * * * "
The stipulated facts and the terms of the contract reveal the following:
In April 1955, plaintiffs or their predecessors in interest and others (herein referred to as "owners") entered into the contract, a long-term timber cutting agreement, with Kinzua Corporation, which was engaged in a logging, lumber manufacturing and wood processing business advantageously near the standing timber. The contract covered the timber standing, growing and to be grown upon more than 100,000 acres of timber lands covering an indefinite amount of timber. Kinzua acquired the right to cut during each cutting year a specified maximum amount of merchantable timber and the duty to cut a prescribed minimum amount. The agreement was perpetual in the sense that if Kinzua kept its cutting rights in good standing it could continue to cut timber so long as there remained merchantable timber. The purchase price was to be paid as timber was cut and was based on the current fair market price for the quality, type and volume of timber cut, as determined by a named independent timber engineer pursuant to his appraisal as of May 1 of each logging season.
Kinzua was obligated to present to the owners yearly cutting plans, and the owners had the right to disapprove such plans if "such logging plan would materially affect the value of the remaining timber." Kinzua's cutting obligation was subject to excuse in the event of fire or other casualty which would make logging practically impossible or render its mill facility incapable of utilizing the timber to be logged.
One owner died in August 1964, and another owner died in August 1973. The plaintiffs acquired their respective interests in the timber covered by the contract as a result of those deaths, either by inheritance from a decedent or as a retained interest as a surviving spouse's share of community property. 2 For the tax years involved herein, the plaintiffs reported the gain realized under the timber cutting agreement, using depletion rates which reflected the basis of the timber stepped up to the date-of-death values of the timber pursuant to IRC § 1014(a). 3 The Department of Revenue denied the stepped-up basis for the reason that the amounts constitute IRD pursuant to IRC § 691. Plaintiffs appealed the proposed adjustment amounts and the Tax Court affirmed the Department of Revenue's order.
Lacking a statutory definition of "income in respect of decedent," the law has developed case by case, resulting in few generalizations but many examples of what is and what is not included in the term. 4 The application of IRC § 691 to certain kinds of income is well established. Income attributable to the decedent's personal services, such as wages, deferred compensation contracts and bonuses, is IRD, even though the decedent may not have a right to receive the payment before death. Helvering v. Enright, 312 U.S. 636, 61 S.Ct. 777, 85 L.Ed. 1093 (1941) (partnership profits); Latendresse v. Commissioner of Internal Revenue, 243 F.2d 577 (7th Cir. 1957) (commissions); Reg. § 1.691(a)-2(b) Ex 1 (deferred salary payments); O'Daniel's Estate v. Commissioner of Internal Revenue, 173 F.2d 966 (2d Cir. 1949) (bonus). Where income is attributable to rents, royalties or interest, only that portion of the income attributable to the period of time prior to the decedent's date of death, his holding period, constitutes IRD. Levin v. United States, 373 F.2d 434 (1st Cir. 1967); National Bank of Commerce et al. v. Mathis, 61-2 USTC (CCH), Par. 9744 (E.D.Ark.1961) (rent); Grill v. United States, 303 F.2d 922 (Ct.Cl.1962) (royalties); Herbert Payson, 18 T.C.M. 686 (1959) (interest). Where the decedent disposes of property but dies before realizing the proceeds, the proceeds are IRD. Claiborne v. United States, 648 F.2d 448 (6th Cir. 1981). The application of IRC § 691 to proceeds from a sale which is negotiated but not completed before death is less certain. The most recent case on incomplete sales transactions examined the case law and distilled a four-part test for determining whether the proceeds from the sale are IRD:
"(1) Whether the decedent entered into a legally significant arrangement regarding the subject matter of the sale, (2) whether the decedent performed the substantive (nonministerial) acts required as preconditions to the sale, (3) whether there existed at the time of the decedent's death any economically material contingencies which might have disrupted the sale, and (4) whether the decedent would have eventually received the sale proceeds if he or she had lived." (Footnotes omitted)
Estate of Peterson v. Commissioner, 667 F.2d 675 (8th Cir. 1982), citing 74 T.C. 630 at 639-641.
The focal point of all of the cases determining whether an item of income is IRD is the activity or event which produced the income, in this case, the timber cutting agreement. Defendant contends that the contract, while not effectuating a completed sale at the time it was entered into, gives rise to the doctrine of equitable conversion, leaving the decedents with an interest in personal property, the proceeds from the timber sales. Whether the timber cutting agreement sufficiently converted the decedents' interest in the timber into a right to income before death must be resolved under federal law. Commissioner of Internal Revenue v. Linde, 213 F.2d 1 (9th Cir. 1954); Burnet v. Harmel, 287 U.S. 103, 53 S.Ct. 74, 77 L.Ed. 199 (1932). Equitable conversion and contract or property labels are not necessarily dispositive of a federal...
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