*1249 In 1917 petitioner entered into a contract for the cutting of timber owned by her. Petitioner was to receive specified amounts per thousand feet as the timber was cut and also some corporate stock after certain obligations had been paid. Petitioner received the stock in 1921. Held, the transaction was not an exchange of property resulting neither in gain nor loss but that the stock formed part of the consideration and constituted taxable income in 1921. Held, further, petitioner is not entitled to recover the full investment value of the entire tract of timber before becoming liable to income tax upon the profits received from the timber as it was cut and sold.
*781 This proceeding is for the redetermination of a deficiency in income tax asserted by the respondent for the year 1921 in the amount of $274,793.20. The following errors are alleged:
1 (a). In determining that petitioner at any time during 1921 received 500 shares of stock of the Wier Long Leaf Lumber Company, and including in petitioner's taxable*1250 income for said year $295,065 or any other sum as profits from the alleged receipt of said 500 shares of stock.
1 (b). In including in petitioner's taxable income $295,065 as representing the June 30, 1921, value of 500 shares of stock of the Wier Long Leaf Lumber Company received in that year by petitioner.
2. In disallowing a deduction on account of loss sustained upon final adjudication of certain litigations during said year.
3. In disallowing a deduction of $379.80 for taxes paid in 1921 to a drainage district.
4. In including as taxable income to petitioner $37,500 as profits from the conveyance of certain oil and mineral interests.
5. In including as income to petitioner nontaxable dividends received by her during 1921 in the amount of $10,009.96.
FINDINGS OF FACT.
Petitioner is a widow residing at Orange, Texas. On March 1, 1913, and February 12, 1917, petitioner owned in fee simple as her separate property an undivided one-sixth interest in approximately 83,739 acres of timber land and all timber thereon in Jasper, Newton and Sabine Counties, Texas. She also owned in fee simple in community *782 with her husband, E. W. Brown, an undivided*1251 one-sixth interest in the land and timber. The remaining interests in the land and timber were owned by petitioner's sister and her husband and petitioner's mother. On June 16, 1917, petitioner's husband died and petitioner became the owner in her separate right of one-half interest in the community property.
On March 1, 1913, the land contained 12,941 feet of pine timber per acre, of a value of $5.80 per thousand feet. The land itself, aside from the timber, was worth $5 per acre.
On February 12, 1917, petitioner and the other owners of the land and timber, as the first party, and R. W. Wier, as the second party, entered into a contract the pertinent provisions of which are as follows:
1. Parties of the first part for the consideration and upon the terms and conditions hereinafter mentioned, by these presents do hereby give and grant unto the party of the second part the exclusive right to enter upon with teams, trams, and all other proper ways to turpentine and cut and remove all the merchantable pine timber measuring ten (10) inches in diameter, and upwards, at the stump at the time of removal on and from all lands, situated in the Counties of Newton, Jasper and Sabine, *1252 in the State of Texas, owned by parties of the first part and itemized on lists hereto attached for better description. The mention of any one or more tracts on said lists shall not be the exclusion of any other tract or tracts and it is intended to include all merchantable pine timber of said size owned by either of the parties of the first part in said Counties of Newton, Jasper and Sabine, being approximately 86,000 acres of land.
* * *
3. Party of the second part hereby obligates and binds himself to pay to the parties of the first part for said timber the sum of $6.00 per thousand feet, log scale; and the further sum of Twenty-five per cent (25%) of the average selling price f.o.b. the mill, during each full semi-annual period; over and above the sum of $13.50 per thousand feet. Said payments of $6.00 per thousand feet to be made monthly, on or before the 15th day of each month, for the timber cut the preceding month, and the twenty-five per cent herein provided for shall be determined and estimated at the end of each six months period of operations, and shall be paid on or before the 15th day of the succeeding month thereafter. It is further stipulated and agreed that*1253 the party of the first part shall have free access to the books of the party of the second part at all times and may have them audited whenever desired by paying the expenses incurred therefor, but the party of the second part shall furnish to the party of the first part free of cost a monthly and semi-annual statement of its affairs.
* * *
10. It is agreed that the party of the second part shall within a reasonable time from this date commence the construction of the railroad and mill plant and continue such construction until the mill plant in all its necessary departments shall be complete and ready for operation, not to exceed one year from this date, unavoidable delays and strikes excepted.
* * *
14. *783 Party of the second part obligates himself to cut an average of forth million (40,000,000) feet annually, log measure, but shall have the right to cut as much more than forty million feet annually as conditions may justify, not to exceed seventy-five million (75,000,000) feet log measure annually * * *.
16. In the event the Lutcher & Moore Lumber Company with its present mills in operation and under construction should before the expiration of this contract*1254 cut over its holdings and the holdings of parties of the first part in Louisiana capable of being profitably manufactured into lumber at the time; then at such time and not before twelve years from the date hereof, parties of the first part shall have the right to enter upon any lands and timber covered by this contract and not at the time cut, and cut and remove the same for manufacturing at said plant or plants running at full time and capacity and all such timber as it may cut and remove under the provisions hereof shall be released from this contract and held and construed as though this contract in no sense or way applied thereto; * * *
24. It is expressly provided that * * * a failure without due cause * * * on the part of the second party to operate his mill for a period of six months shall be ground for a judicial cancellation of this contract and all rights acquired and held by virtue hereof shall upon such judicial cancellation immediately cease and become void.
25. It is further agreed, and it is a part of the consideration moving to first parties for the execution of this contract, that said party of the second part will immediately commence and organize and charter, *1255 in a legal form and manner under the laws of such state as he may select for the purpose, a corporation with an authorized capital stock of $400,000.00 to be fully subscribed for at par and paid in as needed by second party and by such other persons, if any, as he may procure to become stockholders in said corporation, for the purpose of constructing a sawmill plant complete including all other things connected therewith herein mentioned for manufacturing the timber above described into lumber; and second party shall thereupon transfer and assign to such corporation the rights, titles and interests of second party under this contract, subject to the terms hereof and to the obligations resting upon him hereunder.
Said stock shall be so issued and its ownership so protected and guarded by charter provisions, by-laws, stipulations in the stock certificates and contracts between the corporation and its stockholders or otherwise, that the net profits if any, accruing to said corporation as assignee of this contract, from the operations under same by said corporation, shall be paid to the owners as cash dividends from time to time as earned and available until the net earnings available*1256 for that purpose shall equal the total cost of the fixed investment made by the party of the second part and such corporation as his assignee.
Immediately thereupon all of said stock, by whomsoever held shall be called in and surrendered by the respective holders thereof and one-half of such stock shall be transferred to, and without further consideration reissued fully paid and non-assessable to, the following persons in the following proportions, that is to say: One-third (1/3) thereof to Mrs. Frances A. Lutcher; one-sixth (1/6) thereof to W. H. Stark; one-sixth (1/6) thereof to Miriam M. Stark; onesixth (1/6) thereof to E. W. Brown; and one-sixth (1/6) to Carrie L. Brown; or to such persons as they, respectively, or their respective heirs and legal representatives may direct, and the other half of said stock shall be reissued proportionately to the parties so surrendering the same as above required; and from thenceforth such stock so transferred and re-issued shall be owned, held and disposed of by such persons without limitation of any *784 kind save and except only the one share of such stock so issued to parties of the first part (not to exceed in its face or par value*1257 $100.00) shall be by said parties or by some one of them (all of such parties hereby binding themselves, their heirs and legal representatives, jointly, for the carrying out of this stipulation) properly transferred and assigned upon the books of said corporation to second party herein, his heirs, assigns or legal representatives, in trust; the object being to give to party of the second part, or to him and those other than first parties hereto whom he may have associated with him in the ownership of the stock of said corporation, a majority of the voting strength in the transaction of all business pertaining to said corporation. All dividends and other rights with respect to said one share of stock shall remain in the party transferring the same. * * *
Pursuant to said contract, on July 10, 1917, the Wier Long Leaf Lumber Company was incorporated and all the rights granted to R. W. Wier by the contract were by him transferred and assigned to the corporation. Lumbering and turpentine operations upon the timber tract were at once begun by the corporation and have continued ever since.
The earnings of the corporation available for dividends from July 10, 1917, to January 1, 1922, and*1258 the dividends paid up to June 1, 1921, amounted to:
| Year | Available for | Dividends |
| dividends | paid | |
| 1917 | $3,929.41 | None. |
| 1918 | 8,697.06 | None. |
| 1919 | 256,931.72 | $60,000 |
| 1920 | 570,918.32 | 160,000 |
| 1921 | 130,311.58 | 180,000 |
Petitioner's interest in the timber cut, its value, and the cash received for it to the close of 1921 is as follows:
| Quantity | March 1, 1913, | Received by | Net |
| value | petitioner | profit | |
| 34,798,315 ft | $201,830.23 | $297,438.26 | $95,608.03 |
In her income-tax returns for the years 1917 to 1921, inclusive, petitioner reported the amount received each year for timber cut and she was taxed upon the excess of receipts over the March 1, 1913, value. Her accounts were kept and her returns filed on the cash receipts and disbursements basis.
In June, 1921, the Wier Long Leaf Lumber Company called in all outstanding certificates of stock and issued new ones, pursuant to the original contract with R. W. Wier. Petitioner received 500 shares of the new issue of a stock under said contract, but did not include the value thereof as income in her income-tax return for 1921. Respondent added to petitioner's reported*1259 income the amount *785 of $295,065 as being the value of the stock she received. The parties have stipulated, and we so find, that the stock had a fair market value of $233.60 per share, totaling $116,800 at the time petitioner received it. The stock received was additional to the cash consideration paid to petitioner as above set forth.
Prior to 1921 petitioner owned an undivided one-fourth interest in 2,217 acres of timber land located in the Canfield League Survey in Sabine County, Texas. The title of the land became involved in litigation and in 1921, by judgment of court, petitioner was divested of her interest. She claimed a deduction on account of such loss, which was disallowed. Respondent now concedes error and the parties have stipulated that petitioner suffered a deductible loss in the amount of $31,705.98.
Respondent disallowed a deduction of $379.80 claimed on account of drainage taxes paid in Louisiana. Petitioner has stipulated that such disallowance was correct.
In 1921 petitioner owned an undivided interest in certain oil lands. The lands were sold during that year, part of the consideration being paid in cash. Petitioner has stipulated that*1260 respondent correctly included the amount of $37,500 as profits from the sale in petitioner's net income.
Petitioner received from the Vinton Petroleum Company dividends in 1921 in the amount of $36,492.75. Respondent included all of said dividends as taxable income, but now stipulates that that amount was excessive and that petitioner's taxable income should be reduced by the amount of $10,009.96.
OPINION.
MARQUETTE: All issues in controversy have been settled by stipulation of the parties except one, namely, whether the receipt of corporate stock in 1921 pursuant to a contract made in 1917 resulted in taxable gain to petitioner in 1921.
On March 1, 1913, and on February 12, 1917, petitioner owned a one-sixth interest in extensive timber lands in Texas, and she and her husband owned another one-sixth interest in the lands in community. On February 12, 1917, the owners of the land entered into contract respecting the timber as set out in our findings of fact. In June, 1917, petitioner individually owned a one-fourth interest, the value of which as of March 1, 1913, amounted to $104,673.75 for the land itself and to $1,571,171.28 for the timber. From the date of the contract*1261 until December 31, 1921, petitioner received $297,438.26 in cash for her share of the timber sold. She also received, in 1921, 500 shares of stock of the Weir Long Leaf Lumber Company, pursuant to the contract. The shares had a fair market value of $116,800. It is her contention that until she has received the full *786 amount of her capital investment in the timber, $1,571,171.28, no taxable income, profit or gain accrues to her.
The petitioner relies upon the decision of the Supreme Court in . In that case a corporation owning timber lands operated its own mills and manufactured lumber from its own stumpage. The court held that for the purpose of computing net income for Federal tax purposes the company was entitled to deduct from its gross receipts from lumber sold the fixed market value of the standing timber cut during the taxable year, saying: "* * * the deduction did but restore to the capital in money that which had been withdrawn in stumpage cut, leaving the aggregate of capital neither increased nor decreased, and leaving the residue of the gross receipts to represent the gain realized by the conversion. *1262 "
But the court distinctly negatived the idea that no taxable gain should be computed until the sales of lumber had fully covered the investment value of the entire stumpage tract. Speaking of the conversion of capital assets from standing timber into money, the court said:
The suggestion that the entire proceeds of the conversion should be still treated as the same capital, changed only in form and containing no element of income although including an increment of value, we reject at once as inconsistent with the general purpose of the act. Selling for profit is too familiar a business transaction to permit us to suppose that it was intended to be omitted from consideration in an act for taxing the doing of business in corporate form upon the basis of the income received "from all sources."
The principles thus laid down by the Supreme Court have been followed here. Petitioner was taxed each year only upon the net profit over investment value of the timber cut and sold, and capital representing the timber sold has been restored to her through deductions from gross income.
Petitioner also relies upon the decision in *1263 . In that case the taxpayer sold and delivered certain shares of corporate stock for a consideration to be paid in part in annual installments from ore as received under a mining lease by the purchaser of the stock. The lease did not require the lessee to produce any maximum or minimum tonnage or to make any definite payments of ore. The court held that under those conditions the taxpayer was entitled to a full return of capital investment before paying income tax based upon a conjectural market value of annual payments of ore.
Petitioner's argument is based upon the assumption that the principle followed in the Logan case, supra, should be universally applied where capital assets are sold, regardless of the conditions or manner of such sale. We do not concur in that viewpoint, nor do *787 we consider the Logan case controlling in this proceeding. In that case the taxpayer made a definite sale of her stock in one company and delivered it to the purchaser. Her dominion over the stock was ended, although she received at the time only part of the agreed purchase price. Payment of the balance was dependent upon*1264 conditions which were uncertain and it was quite possible that such balance might never be paid in full. In the present proceeding there was no outright, completed sale of the entire stand of timber. Rather, the parties entered into a contract to sell such amounts of timber as the second party should cut and remove from the land. ; ; ; . Actual sale took place only when and to the extent the timber was cut and paid for. The consideration to petitioner was to be: (1) A cash payment for timber as and when cut, slightly greater than the investment value of the stumpage; (2) participation in the price received in excess of $13.50 per thousand feet for lumber sold; (3) a pro rata amount of stock in the Wier Long Leaf Lumber Company after its original outlay had been reimbursed from profits on lumber sold. The second and third items of the consideration were not certain, it is true. But as petitioner received more than her capital investment in the*1265 timber footage cut each month she was not confronted with the hazard which existed in the Logan case, supra.
Petitioner also contends that the corporate stock she received in 1921 was part of an exchange in which neither gain nor loss is recognized. If the stock was received in exchange for property held for investment or for productive use in trade or business and the exchange was of property of a like kind or use, then no taxable gain resulted. Section 202(c)(1), Revenue Act of 1921.
In our opinion the contention is not sound. Petitioner does not indicate what property she exchanged for the stock. Was it all of her interest in the standing timber, worth more than ten times the value of the stock? If so she would not then be entitled to any cash consideration for the timber as it was cut and presumably would have received none. Further, such an exchange would have divested her completely of any ownership of the timber, altogether contrary to the terms of the contract above referred to, and which contract, the record shows, was carried out according to its terms. If petitioner exchanged only a part of her timber interest for the stock, what degree of interest was*1266 so traded? The record is silent. The standing timber and the land on which it grew are the only species of property mentioned in the record which petitioner might have exchanged for the corporate stock. Nothing in the record indicates that she parted with her interest in the land. The situation here *788 presented is very similar to that in , where the taxpayer contracted to sell oil lands and interests for a consideration partly of cash and partly of corporation stock, and contended that an exchange of properties had taken place. We there said:
We do not agree to this contention. The organization of the Hobbs Oil Company and the transfer to it of the lands and leases was merely a part of one main transaction, which was to sell certain oil lands and interests in oil lands * * * for a consideration of $2,100,000 cash and $600,000 capital stock of the Delaware Company. The fact that to perform the contract the organization of a common-law trust or association was resorted to as a means to carry through the deal does not alter the character of the transaction. There was no intention on the part of Hobbs or his associates to*1267 effect an exchange of their oil lands for stock in the Hobbs Oil Company, but their intention was to make a sale of their lands to Haskell and the Delaware Company by which they were to receive a large part of the agreed purchase price in cash and the balance in stock of the Delaware Company.
See also (certiorari denied); .
We fully agree with the above decisions and hold that in the present proceeding there was no exchange of property within the meaning of the revenue act. The value of the stock received by petitioner in 1921, namely, $116,800, was properly taxable to her in that year.
Readjustment of petitioner's income tax for 1921 should allow her a deductible loss of $31,705.98 with respect to litigation over timber land in the Canfield League Servey in Sabine County, Texas; should include only $10,009.96 of the dividends from the Vinton Petroleum Company as taxable income; and should include only $116,800 as the value of stock in the Wier Long Leaf Lumber Company.
Decision will be entered under Rule 50.