United States v. Giustina

• Decision Date: 29 January 1963
• Docket Number: No. 17454-17457.,17454-17457.
• Citation: 313 F.2d 710
• Parties: UNITED STATES of America, Appellant, v. Erminio GIUSTINA and Irene O. Giustina, Appellees. UNITED STATES of America, Appellant, v. Anselmo GIUSTINA and Josephine Giustina, Appellees. UNITED STATES of America, Appellant, v. Natale B. GIUSTINA and Jacqueline Giustina, Appellees. UNITED STATES of America, Appellant, v. Ehrman V. GIUSTINA and Marion Lee Giustina, Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

313 F.2d 710 (1962)

UNITED STATES of America, Appellant, v. Erminio GIUSTINA and Irene O. Giustina, Appellees.

UNITED STATES of America, Appellant, v. Anselmo GIUSTINA and Josephine Giustina, Appellees.

UNITED STATES of America, Appellant, v. Natale B. GIUSTINA and Jacqueline Giustina, Appellees.

UNITED STATES of America, Appellant, v. Ehrman V. GIUSTINA and Marion Lee Giustina, Appellees.

Nos. 17454-17457.

United States Court of Appeals Ninth Circuit.

December 17, 1962.

Rehearing Denied January 29, 1963.

Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, Robert N. Anderson and Dale E. Anderson, Attorneys, Department of Justice, Washington, D. C., and Sidney I. Lezak, U. S. Atty., and Edward J. Georgeff, Asst. U. S. Atty., Portland, Or., for appellant.

Dougherty & Cairns, and William E. Dougherty, Portland, Or., for appellee.

Before HAMLIN, JERTBERG and BROWNING, Circuit Judges.

BROWNING, Circuit Judge.

Appellees' partnership entered into a "Timber Sale Agreement" with the United States Forest Service with respect to the timber on one hundred ninety acres of government land. The timber was ultimately cut and removed by a corporation pursuant to a contract with the partnership. In their income tax returns the partners reported payments received from the corporation as capital gains. The Commissioner of Internal Revenue determined that these receipts were taxable as ordinary income; appellees paid the additional tax and sued to recover. The District Court entered judgment for the taxpayers and the government appealed.

The taxpayers are entitled to prevail if the receipts arose from a "disposal of timber * * * held for more than 6 months prior to such disposal, by the owner thereof under any form or type of contract by virtue of which the owner retains an economic interest in such timber * * *." Internal Revenue Code of 1939, Section 117(k) (2).¹

The government contends that: (1) the partnership did not become the "owner" of the timber under the Timber Sale Agreement with the Forest Service; (2) the arrangement between the partnership and the corporation did not constitute a "disposal" of the timber under a binding "contract," and (3) the partnership did not hold the timber for the required six months.

1. The term "owner" of timber was not defined in Subsection 117(k) (2) at the time relevant here.² However, in view of the purposes of the subsection, the term must be read to include at least those persons having a beneficial interest and investment risk in the standing timber. We turn to the contract between the government and the partnership to determine whether the latter acquired such an interest.

The Timber Sale Agreement provided³ for the "purchase"⁴ by the partnership of all timber merchantable for saw logs within a designated area. The purchase price was stated in terms of dollars per thousand board feet of timber, payable in advance of cutting as called for by the Forest Officer in charge. The partnership was required to cut and remove the timber by a fixed date; timber subject to the contract which was uncut by that date, or cut but not removed, was nonetheless to be paid for.⁵

Thus the agreement related to specific timber, readily identified; the price was fixed, subject only to measurement and a simple calculation; the purchasers had both the right and the obligation to pay for, cut, and remove all of the designated timber from the seller's land, and to do so within a relatively short period; they were free to dispose of it as they chose. The fact that the amount due was to be computed by measuring the logs as felled and multiplying by the fixed unit figure, and that the total price was to be paid in installments as called for, did not diminish the risk assumed by the partners. The price ultimately to be paid did not depend upon whether the timber was cut, whether the logs were sold, or how much they brought.

Thus the purpose and effect of the Timber Sale Agreement was to commit the capital and credit of the partners to the acquisition of the timber and to transfer to the partners the beneficial interest and investment risk in it.⁶ We are therefore satisfied that these partners fell within the class of persons to whom it must be supposed Congress intended to grant the preferential treatment provided by Subsection 117(k) (2); the District Court properly held that they were "owners" of the timber within the meaning of the subsection.

In arguing that the partners were not "owners" of the timber, the government relies upon certain decisions said to establish the rule that when an owner of oil and gas lands contracts with another for the exploitation of the oil and gas deposit in return for a percentage of the oil and gas produced, or its value, the owner has retained an "economic interest" in the oil and gas in place and the contract is a "lease" and not a "sale" of the owner's capital interest in the underlying deposit.⁷ The government argues that under the rationale of these decisions the Timber Sale Agreement by which the partners acquired the timber is to be treated as a "lease" and not a "sale" and the partners as "lessees" and not as "owners" under Subsection 117 (k) (2).⁸

But the Timber Sale Agreement was not a "lease" under which the government retained an "economic interest" in the timber within the meaning of the cases relied upon; hence they would not support the government in the present case even if we were to assume that a "lessee" as defined by these cases was necessarily excluded from the definition of "owner" in Subsection 117 (k) (2).⁹ As these decisions point out, the typical contract for the exploitation of an oil and gas deposit does not have the characteristics of a sale of the owner's capital interest in the underlying oil and gas; its dominant purpose is to fix the terms under which the land will be explored and under which any deposit of oil and gas that may be found will be produced. The exploration, drilling, and production contemplated by such a contract resembles a manufacturing operation to which the passage of title to the oil and gas produced is only an incident, rather than a sale of an interest in the oil and gas in place. No oil and gas may be present at all. In any event, the quantity available or which may be produced is uncertain. Payments under such a contract depend upon the fact and the amount of production of the oil and gas. They represent the allocation to the owner of his share of the resource. Oil and gas not removed during the term of the contract normally remains the property of the lessor.

By contrast, the dominant purpose of the Timber Sale Agreement in the present case was not the lease of lands for exploration, discovery, and exploitation of a concealed resource over an extended term, but rather the immediate conveyance of a visible, measurable, readily accessible timber crop, to be paid for, cut, and removed within a short period of time. The money received by the government was not rental income for use of the lands or the distribution of a share of the value of the timber actually cut, but deferred payments of a fixed purchase price for a definite (though unmeasured) stand of timber. The government did not retain an economic interest in the timber transferred; the only "interest" in the timber which it retained was the right to access after the timber was felled to make the measurements required to determine the amount due. The contract was not converted into a "lease" merely because the purchase price was to be paid in installments computed by multiplying the number of units actually produced by a dollar figure fixed in the contract.¹⁰

2. We turn to the government's contention that the arrangement between the partnership and the corporation for the cutting and removal of the timber was not a "disposal" of the timber under a "contract" within the meaning of Subsection 117(k) (2).¹¹

On July 1, 1948, the partnership entered into a contract to sell to the corporation one hundred and fifty million board feet of merchantable timber to be cut and removed from described parcels of land.¹² Initially the timber involved in the present suit was not included. By letter dated October 4, 1948, the partnership advised the corporation that the timber purchased by the partnership under the Forest Service Timber Sale Agreement would be made available to the corporation under the July 1, 1948 contract.¹³

The government first suggests that an agency relationship was created, relying upon a statement in the letter of October 4, 1948, from the partnership to the corporation that "by cutting and removing the timber, you will act in effect as our agent, and you will be responsible to us for strict compliance with the terms of the Forest Service timber sale agreement." But the contract of July 1, 1948 provided that "the only relationship between Sellers and the Buyer shall be that of vendors and purchaser of said timber to be cut and removed from the lands of the Sellers as aforesaid, and the Buyer shall not in any respect be deemed to be or represent itself to be an agent of * * * the Sellers or any of them." In context it is evident that the purpose of the letter of October 4th was to subject the timber purchased from the Forest Service to all of the terms and conditions of the July 1, 1948 contract; the statement in the letter of October 4th, emphasized by the government, was no more than an admonition that the terms of the Timber Sale Agreement must be faithfully complied with to avoid suspension of operations by the Forest Officer or termination of the Timber Sale Agreement by the government.

The government next suggests that the corporation assumed no binding obligation to the partnership under the arrangement. The District Court concluded that under the terms of the contract and letter "the corporation was required to cut and remove the timber." This seems a fair interpretation of the language used in the contractual documents and the...