Wilson v. Comm'r of Internal Revenue

• Decision Date: 07 June 1956
• Docket Number: Docket No. 53094.
• Citation: 26 T.C. 474
• Parties: L. D. WILSON AND JANE WILSON, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

26 T.C. 474

L. D. WILSON AND JANE WILSON, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 53094.

Tax Court of the United States.

Filed June 7, 1956.

Willian H. Kinsey, Esq., for the petitioners.

John H. Welch, Esq., for the respondent.

Held, that under the contract pursuant to which the Valley Lumber Company a partnership, acquired a tract of timber known as the Vaughan timber, such partnership would, under Oregon law, be deemed the equitable owner thereof; that its subsequent cutting arrangement with its controlled corporation constituted a ‘disposal’ of the timber within the scope and intendment of section 117(k)(2), I.R.C. 1939; and that petitioners' distributable shares of the partnership's profits therefrom are properly taxable as long-term capital gains.

The respondent determined deficiencies in income tax of petitioners', for the taxable years 1948 and 1949, in the amounts of $9,482.04 and $8,925.13, respectively.

The issues framed by the pleadings are: (1) Whether petitioners' distributable share of the profits realized by a partnership, of which they were members, from a transaction involving the cutting of certain timber, which transaction was with a corporation, 50 per cent of the stock of which was held by petitioners' is properly taxable as long-term capital gain; and if not, (2) whether petitioners' action in so reporting such gain, thereby eliminating from gross income 50 per cent thereof, the amount thus eliminated being in excess of 25 per cent of the gross income reported, constitutes the omission from gross income of such amount within the intendment of section 275(c), Internal Revenue Code of 1939. A collateral issue of procedure is whether respondent's assertion in his amended answer that certain transactions resulted in ordinary income rather than short-term capital gain, as stated in his notice of deficiency, such assertion having no effect on the amount of the deficiencies determined, serves to shift the burden of proof to respondent.

FINDINGS OF FACT.

The partial stipulation of facts filed by the parties, with exhibits attached, is adopted and, by this reference, made a part hereof.

Petitioners. L. D. Wilson (hereinafter referred to as Wilson) and Jane Wilson, are husband and wife, and at the times herein pertinent, their residence and place of business was John Day, Oregon. They filed joint income tax returns for the taxable years 1948 and 1949 with the then collector of internal revenue for the district of Oregon. Petitioners were members of a partnership known as Valley Lumber Company (hereinafter referred to as the partnership), consisting of petitioners and Lee and Goldie Evans, husband and wife, as partners, each of such persons having a 25 per cent interest therein. Partnership returns of income, Form 1065, were filed on behalf of the partnership for the fiscal years ended October 31, 1948, and October 31, 1949, with the then collector of internal revenue for the district of Oregon.

On or about May 20, 1946, Jack and Minnie Vaughan, as parties of the first part, entered into an agreement (hereinafter called the Vaughan contract) with the partnership, as party of the second part, which agreement provides in material part as follows:

THAT the parties of the first part do hereby agree to sell and the party of the second part does hereby agree to buy all of the live, merchantable, standing Ponderosa Pine timber growing upon any of the following described premises now owned by the parties of the first part * * *, and the party of the second part does hereby agree to pay therefore (sic) the sum of $4.50 per M upon the log scale for logs delivered at the mill, said logs to be scaled as they are delivered at the mill, and the party of the second part agrees to pay for all such logs as scaled on or before the 10th day of each month for all logs delivered at the mill during the previous month. The parties of the first part do hereby acknowledge receipt of the sum of $2,500.00 which shall apply upon the purchase price for the last timber cut upon the above described property, and second party is to pay an additional sum of $2,500.00 before starting to cut the timber, to be likewise applied on the purchase price for last timber cut.

AND IT IS FURTHER UNDERSTOOD AND AGREED That the parties of the first part are the true and lawful owners of the timber and have a good right to sell the same together with the right to remove the same.

AND IT IS FURTHER UNDERSTOOD AND AGREED That in cutting said timber the party of the second part will cut the same with reasonable regularity, taking all the merchantable timber clean as it goes, and will not cut the timber promiscuously and that as said timber is cut the same will be promptly delivered to the mill in order that the same may be paid for within a reasonable time and not left in the woods to deteriorate.

AND IT IS FURTHER UNDERSTOOD AND AGREED That the party of the second part may enter upon said land and cut and remove said timber at any time they (sic) may desire, except that it is expressly understood and agreed that the party of the second part shall completely remove and pay for said timber on or before the six years from the date hereof. And it being further understood that once the party of the second part has logged the premises its rights herein shall cease and nothing herein contained shall give it the right to relog any of said premises.

AND IT IS FURTHER UNDERSTOOD AND AGREED That the party of the second part will take due caution to prevent injury to any livestock that the parties of the first part may graze upon any of the above described property; and that should injury be occasioned by any thereof due to the logging operations of the party of the second part, that it will promptly reimburse the parties of the first part therefore (sic).

AND IT IS FURTHER UNDERSTOOD AND AGREED That the party of the second part covenants and agrees that it is to assume all liability and responsibility of every kind or nature with respect to the laws, rules and regulations with regard to the piling of brush and the burning of slash in accordance with the laws, rules and regulations of the State Fire Marshall, the United States Forester and the United States Forest Service, and the party of the second part covenants and agrees that it will be especially careful with fire, and that should any fires be occasioned upon the property after logging operations are commenced and until fully relieved of such responsibility by any of the above named agencies, the party of the second part is to assume all liability for any fires occasioned through its operations and save the parties of the first part harmless from any claims for damages therefore (sic), and to further reimburse the parties of the first part for any damage to their own timber so occasioned.

AND IT IS FURTHER UNDERSTOOD AND AGREED That the party of the second part will promptly pay for all materials and labor used in connection with its logging operations so as to save the parties of the first part harmless from any liens that might attach to said timber or lands by reason of any unpaid bills or accounts.

AND IT IS FURTHER UNDERSTOOD AND AGREED That the title to the timber or logs shall not pass to the party of the second part until such timber and logs are fully paid for as herein provided.

AND IT IS FURTHER UNDERSTOOD AND AGREED That the parties of the first part will pay all taxes upon such timber until the 1st day of July, 1946, but that thereafter any and all taxes due upon such timber shall be paid by the party of the second part promptly when due and before the same shall become delinquent.

AND IT IS FURTHER UNDERSTOOD AND AGREED That time and specific performance is hereby made the essence of this agreement and should the party of the second part well and truly complete and perform each and every one of the terms of this agreement then this agreement shall continue in full force and effect and the party of the second part shall be entitled (sic) to all the benefits, rights and privileges hereunder, but should the party of the second part fail to keep and perform each and every one of the terms of this agreement or fail to make the payments herein provided at the time and in the manner herein provided, then all rights of the party of the second part in and to this agreement and the timber herein described shall absolutely cease and terminate and the parties of the first part may enter into and take possession of said premises forcibly or otherwise, and may keep and retain any advance payments made by the party of the second part as liquidated damages but not as a penalty for the breach hereof.

AND IT IS FURTHER UNDERSTOOD AND AGREED That this agreement shall be binding upon the heirs, executors, administrators and assigns of the parties hereto.

Under the foregoing contract, the partnership was entitled and obligated on or before 6 years from the date of the Vaughan contract to cut, remove, and pay for all the merchantable timber located on the premises described therein.

During the years in question, the timber was cut and removed by a corporation called Valley Pine Co., Inc. (hereinafter called the corporation). The corporation paid the partnership a specified price per thousand board feet for the timber cut and removed by the corporation. The logging was done by Alton McBride, who was an independent logger hired and paid by the corporation to log the timber. McBride furnished the equipment, built the roads, and furnished the necessary employees to perform the logging operations. Such operations were supervised by Wilson. The corporation paid the partnership for the logs it cut at prices fixed by Wilson and Lee Evans in an amount to insure its making a profit. The prices charged depended upon the log price received by the corporation from the mills. After the Vaughan tract was logged by McBride, the logs were delivered by the corporation to...