SUWANNEE LUMBER MANUFACTURING COMPANY v. Commissioner
| Decision Date | 29 November 1979 |
| Docket Number | Docket No. 2912-76 |
| Citation | 39 TCM (CCH) 572,1979 TC Memo 477 |
| Parties | Suwannee Lumber Manufacturing Company, Incorporated v. Commissioner. |
| Court | U.S. Tax Court |
Kenneth G. Anderson and Ronald D. Fairchild, 655 Florida Nat'l Bank Bldg., Jacksonville, Fla., for the petitioner. Gerald W. Hartley, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies and accumulated earnings tax pursuant to section 5311 as follows:
Taxable Year
Ended Deficiency Sec. 531 Tax
6-30-72 ............ $11,040 $ 36,342
6-30-73 ............ 16,560 174,205
6-30-74 ............ 16,560 86,871
Due to concessions, the issues remaining for our decision are:
(1) Whether petitioner is liable for accumulated earnings tax;2
(2) Whether all or part of the compensation paid by petitioner to M.J. Foley and J.B. Faircloth constituted unreasonable compensation; and (3) Whether, if petitioner is the prevailing party herein, a reasonable allowance for attorneys' fees should be granted.
Some of the facts have been stipulated. The stipulation of facts together with the exhibits attached thereto are incorporated herein by this reference.
Petitioner, Suwannee Lumber Manufacturing Company, Inc., (hereafter Suwannee), was incorporated on December 23, 1954, under the laws of the State of Florida. At all times relevant hereto, including the date on which its petition herein was filed, petitioner's principal place of business was Cross City, Florida. Petitioner timely filed its Federal income tax returns, using the accrual method of accounting for the fiscal years in issue, with the Internal Revenue Service at Chamblee, Georgia.
Since incorporation, Suwannee has been primarily engaged in the manufacture and sale of pine and cypress lumber and the sale of chips, bark, and other related byproducts from its lumber manufacturing. Suwannee's primary product is finished lumber, most often used in Florida home building and apartment construction.
Suwannee's sawmill and administrative offices were located at Shamrock, Florida, an unincorporated area adjacent to Cross City in Dixie County. The mill consisted of two sawmilling operations, a wood preserving plant, one finishing or planing plant, a drying yard and a chipmill, and other improvements to the leased land. Suwannee also had a large woodyard used to store inventory of logs and to air-dry and store manufactured lumber. On December 5, 1967, a major fire destroyed the chipmill and caused substantial damages to other facilities, forcing the mill to close for about three months. Suwannee's insurance covered 80 percent of the damages but Suwannee maintained no business interruption insurance. Suwannee rebuilt the damaged properties and contained its operations at Shamrock.
Suwannee's plant was no longer competitive with the modern mills constructed by the large paper companies due to its age and outdated equipment, which required higher labor costs. Newer mills of comparable size required an investment of $1,500,000-$2,000,000. In June 1973, Suwannee paid the expenses of 12 of its key employees to attend the Southern Forest Products Association convention in Atlanta so that they could inspect the efficient labor saving machinery on display there. Corporate minutes of June 2, 1973, state that plans should be made to replace Suwannee's machinery with newer and more efficient equipment.
The mill was constructed in about 1927 and was located on land leased by Foley Lumber Industries, Inc. (hereafter Foley Lumber) in 1953 for a term of fifteen years from Shamrock Properties, Inc. (hereafter Shamrock). Foley Lumber's operation of the sawmill proved unsuccessful and it sold its interests in the lumber mill, its business and equipment, and cutting rights on timberlands in Dixie and Taylor Counties to Suwannee in December 1954, and on January 3, 1955, assigned the lease on the mill site to Suwannee. In 1962, Suwannee and Shamrock amended the lease, confirming the 1955 assignment of the lease to Suwannee by Foley Lumber and setting the expiration date for the lease at June 15, 1978.
During 1972, Suwannee became concerned about securing continued use of the mill site after the expiration of its lease with Shamrock. Suwannee talked with Shamrock about the possibility of buying the 85-acre site and an adjoining 900-acre tract of land, but Shamrock was not interested, preferring instead to merely extend the term of the lease. Suwannee then requested that it at least be given a right of first refusal should Shamrock ever decide to sell the site and adjoining tract.
On March 1, 1975, Shamrock and Suwannee executed a new lease on the property which extended the expiration date to December 31, 1989, with the option to renew for an additional ten year period. A right of first refusal in favor of Suwannee was contained in the 1975 lease. This gave Suwannee the right to purchase, within thirty days of notice from Shamrock, the leased premises and 900 acres of adjacent timberland owned by Shamrock on the same terms and conditions as that provided under any other purchase agreement Shamrock might obtain.
Approximately 85 percent of Suwannee's lumber production was air-dried finished pine lumber. The production cycle for mills typical of Suwannee's size commenced when logs were delivered to the "woodyard." The logs remained there until the mill was capable of handling them, but no longer than four weeks (due to the possibility of deterioration) at which time they were debarked. The logs would then be cut into rough lumber, go through a dipping process and then be stacked to be air-dried. Depending on weather conditions, this process required between 30 to 90 days. After the rough lumber was dried, it was placed through the planer mill where it was finished and made ready for shipment. The remaining 15 percent of Suwannee's lumber production was kiln-dried instead of air-dried, a process which required only 10 days once the necessary lumber had been inventoried, but at greatly increased costs.
At the time Suwannee incorporated, its stock was held as follows:
George T. Dickert ........ 47.6%
Judson B. Faircloth ...... 47.6%
O'Neal Boatright ......... 4.8%
The original stock was issued at $250 per share, with no par value.
In February 1960, M.J. Foley purchased approximately 22 percent of Suwannee's outstanding stock and in 1962, Foley purchased all the shares held by O'Neal Boatright.
George T. Dickert, Jr., the son of George T. Dickert (Dickert) became employed by Suwannee in 1970, at which time he was 27. On or about April 28, 1972, he purchased 150 shares of stock in Suwannee for $27,309, payable in monthly installments of $273.09 for which he issued a promissory note.
During each of the years ended June 30, 1972, 1973 and 1974, petitioner's outstanding common stock was owned as follows:
Percentage No. of
Stockholder Owned Shares
George T. Dickert .......... 34.63% 1320
J.B. Faircloth ............. 34.63% 1320
M.J. Foley ................. 26.81% 1022
George T. Dickert, Jr. ..... 3.93% 150
During the same period, its officers were as follows:
George T. Dickert President J.B. Faircloth Vice President and Secretary M.J. Foley Vice President and Treasurer George T. Dickert, Jr. Vice President and Comptroller
All of the officers were also members of Suwannee's board of directors for each of these years. In August 1974, after the merger between Suwannee and F.F. & M., Inc., detailed later, Michael T. Foley and R.M. McCain became directors of Suwannee. At the same time, Michael T. Foley became Suwannee's secretary, and R.M. McCain became vice-president. Both George Dickert and his son also remained as officers and directors of Suwannee. Jerry D. Dickert, George T. Dickert's brother, served on Suwannee's board of directors from December 1969 until December 1971.
Suwannee's major raw material was pine saw timber. Saw timber requires a minimum of between 30 and 35 years growth before it is usable in lumber manufacturing, but reaches marketable pulpwood size in an average of 18 to 25 years. Because of hauling costs, the lumber supply should ideally be within 10 miles of the mill, although 50 miles is feasible; at 75 miles, the cost becomes prohibitive.
At the time Suwannee was formed in 1954, it relied heavily upon timber cutting rights on approximately 37,230 acres on the "Consolidated tract" and approximately 15,000 acres on the Crapp tract, held by Foley Lumber, to assure it of a supply, although some of the 37,230 acres had already been cut. Foley Lumber also had a right of first refusal (until 1968) on any timber offered for sale by Buckeye Cellulose Corporation (hereafter Buckeye) on an additional 500,000 acres of land. By 1961, however, the available timber on both the Consolidated tract and Crapp tract was completely cut. Moreover, in 1960, due to a lawsuit between Foley Lumber and Buckeye, Suwannee lost the benefit of Foley Lumber's right of first refusal to any timber offered for sale by Buckeye on its 500,000 acres.
Payments to private land owners for the purchase of timber were generally made in a lump sum in advance for all the timber sold under the contract, which usually was awarded for one to three years. Long-term contracts made by the large companies, however, usually required payment in cash only annually, one year in advance. Sales made by the State of Florida were generally effected under one to two year contracts, and payment was required in a lump sum prior to cutting. Sales made by the United States Government from national forests did not require a lump sum payment, but rather required a downpayment only.
Prior to the years in issue, large paper companies such as...
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