Willamette Valley Lumber Co. v. United States

• Decision Date: 23 February 1966
• Docket Number: Civ. 64-380.
• Citation: 252 F. Supp. 199
• Parties: WILLAMETTE VALLEY LUMBER CO., Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — District of Oregon

252 F. Supp. 199

WILLAMETTE VALLEY LUMBER CO., Plaintiff, v. UNITED STATES of America, Defendant.

Civ. 64-380.

United States District Court D. Oregon.

February 23, 1966.

COPYRIGHT MATERIAL OMITTED

Norman J. Wiener, of King, Miller, Anderson, Nash & Yerke, Portland, Or., for plaintiff.

Gary P. Smith, Trial Atty., Tax Division No. 3, Refund Trial Section, Washington, D. C., and Michael L. Morehouse, Asst. U. S. Atty., Portland, Or., for defendant.

KILKENNY, District Judge.

Plaintiff seeks recovery of income taxes and interest in the sum of $44,912.20, paid by the taxpayer for the years 1959 and 1960. The question presented is whether the taxpayer may properly deduct ad valorem taxes on land and timber, which timber the plaintiff's predecessor (Willamette National) had purchased under contract, under the terms of which, it agreed to pay such taxes.

Taxpayer is an Oregon corporation, owning and operating facilities for the manufacture of wood products.

Its predecessor was organized in 1946 for the purpose of engaging in the logging of timber and the manufacturing of logs into lumber and other wood products, and specifically, for the purpose of entering into the agreement in question. In 1946 and 1947, it constructed a large sawmill at Foster, Oregon.

The Hills, owners of the property, and Willamette National, in 1946, entered into the Hill agreement, under which the Hills agreed to sell the timber on a specified portion of their lands and Willamette National agreed to purchase. The basic agreement has been supplemented and amended several times since 1946. In 1957, Willamette National was merged into plaintiff and plaintiff thereby became the purchaser under the Hill agreement. The basic agreement in effect in 1959 and 1960 is the one which we will consider, although it is not essentially different from the original agreement.

The language of the Hill agreement specifically applying to the payment of the ad valorem taxes on the property is set forth in the footnote.¹

Annually, since the date of the agreement, Willamette National and the plaintiff have logged substantial amounts of timber from the land and have manufactured the logs into lumber and other wood products. Incidentally, during such period of time, the plaintiff, and its predecessor, also purchased timber from the United States Forest Service on lands which were intermingled with lands subject to the agreement. Such timber was logged, manufactured and sold in essentially the same manner as the Hill timber. Other logs were purchased from third parties by plaintiff and processed in the same manner.

In the year 1946, and in all intervening years, Willamette National and plaintiff have paid the taxes on the timber and the land pursuant to the agreement. During all of those years, Willamette National and the plaintiff, on their respective federal income tax returns, claimed a deduction of such taxes from ordinary income. Until the years here in question, the right to make such deductions was not challenged. Consistent with the practice of the Willamette National and the plaintiff, the Hills, during such period, did not claim a deduction from their ordinary income on account of the payment of such taxes, nor did the Hills claim that the tax payments were additional payments for stumpage.

The Government contends that the amounts disbursed by plaintiff in payment of the taxes represent an additional cost of the timber to the plaintiff and is not a proper deduction under § 164 of the Internal Revenue Code of 1954. The taxpayer claims a right of a deduction for the amount of these taxes from ordinary income under the provisions of such section and, as an alternative, under § 162. The pertinent sections of the Internal Revenue Code are set forth in the footnote.² Likewise, a pertinent Treasury Regulation, Section 1.164-1 provides that real property taxes "are deductible only by the person upon whom they are imposed."

Three witnesses were produced at the time of the trial and these witnesses gave the Court an excellent portrait of the background in connection with the execution of the original contract, its amendments, and the actions of the persons pursuant to the contract.

First, we shall consider Section 164.

The Tax Court has properly held that there is no personal liability for ad valorem taxes in Oregon. Asthmanefrin Co., Inc., 25 T.C. 1139 (1956). Oregon has special statutes with reference to the taxation of standing timber which are set forth in the footnotes.³ The plaintiff is entitled to deduct, on its income tax returns, "taxes" to the extent that it was the owner of the property against which the taxes were levied. Asthmanefrin Co., Inc., supra.

Of significance is the fact that the purchaser was compelled to build an elaborate manufacturing plant which cost in the neighborhood of $2,500,000.00. It was required to pay "as stumpage" 50% of its profits on logs cut under the contract and sawed into timber or sold as logs, plus 10% of its profits from timber acquired from other sources. Provision is also made for minimum stumpage rates. Additionally, the contract required plaintiff to operate its mill to a specified annual capacity until all of the timber described in the contract had been logged and removed at the specified rate.

The provisions of the contract here in question, while not identical with those construed in Giustina v. United States, 190 F.Supp. 303 (D.Or.1960), 313 F.2d 710 (9th Cir. 1962), bear sufficient resemblance to make Giustina of value in here arriving at a proper decision. Giustina covers most, if not all, of the major points raised by the Government. However, the Government properly points to the fact that Giustina construed the provisions of 26 U.S.C. § 117(k) (2) (I.R.C. 1939); and 26 U.S.C. § 631(b) (I.R.C. 1954), rather than 26 U.S.C. § 164 (I.R.C. 1954). I find no room for a meaningful distinction between the two. In Giustina, we were concerned with the definition of "owner" within the meaning of § 117(k) (2). Here, we are concerned with the definition of "owner" within the meaning of the Revenue rulings as construed in Asthmanefrin Co., Inc., supra, and the Oregon statutes.

Much is said in the briefs about Barclay v. United States, Ct.Cl. 1964, 333 F.2d 847; Jantzer v. Commissioner, 284 F.2d 348 (9th Cir. 1960), and L. D. Wilson, 26 T.C. 474 (1956). While the logic employed in each of those cases is instructive, it is in no way decisive of the issues before me. The sum total of the results in those cases, however, point to victory for the plaintiff on the facts before me.

The Congress, in providing no guidelines on the subject, left it open for state law to play a major part in determining whether a vendor or purchaser, under a timber purchase contract, should be viewed as the proper person for deduction of the ad valorem tax. The Treasury Department, in 1959, recognized such to be the fact by enacting its Regulation § 1.164-1, which provides that real property taxes "are deductible only by the person upon whom they are imposed." Unfortunately, the Treasury Department did not define "imposed", but I am of the belief that such taxes, in fact, are imposed on those who are required to pay them. Here, the obligation is on the plaintiff.

For a starting point, let us take the practical interpretation as placed on the tax provision of this contract by the parties themselves. Throughout the period from 1946 to this date, the Hills have construed the contract and all of its amendments, to require, not only the payment of the ad valorem taxes by plaintiff and its predecessor, but also to permit them to deduct the taxes so paid from their income.

One of the principal requirements of the original contract was the construction of the saw mills and the logging roads by the purchaser. The contract recites that the purchaser held an option to purchase a suitable site for the sawmill and log pond and had adequate funds to erect a modern sawmill and planing mill with an annual capacity of thirty-three to forty million board feet of lumber and the funds to construct the necessary logging roads required to log the Hills timber and that the merchantable timber on the lands owned by the vendors was believed, by the purchaser, to be sufficient to supply timber for the proposed mill for a 15 year period and that the vendors were willing to sell such timber to the purchaser and the purchaser was willing to buy the same from the vendors.⁴ Following through on the recitals, the agreement required the purchaser to immediately commence the construction of the saw and planing mill on the site. Furthermore, the purchaser was required to log and remove all of the merchantable timber and to operate the sawmill until the merchantable timber was cut. A complete discussion and analysis of all of the terms and provisions of the respective contracts would be of benefit to neither the parties, their attorneys, nor the profession. It is enough to say that any reasonable interpretation of those provisions and of the testimony in the case, requires a finding that plaintiff was the "owner" of the timber at the time of assessment in each year, to-wit: July 1st.

While it is true that an agent of the Hills, Timber Service Company, paid the taxes and then billed the plaintiff for the amount of the payment, the fact remains that the plaintiff was required, by the terms of the contract, to pay these taxes. Nor, in my view, is the fact that at least some of the risk of loss, in the event of fire, was placed on the Hills, in any way controlling. That provision must be construed with the other provisions of the contract, but when so construed there remains no question but that plaintiff was the "owner" of a beneficial interest or equitable title in the timber to be cut as of July 1st of each year during the term of the contract. That the sale of the timber, under an executory contract, amounts to a conveyance of an interest in the timber is settled...