*1 Decision will be entered under Rule 50.
1. Taxable Year -- Beginning of Year for Fiscal Year Taxpayer. -- A fiscal year beginning December 1, 1943, and ending November 30, 1944, held not a taxable year beginning after December 31, 1943, within meaning of section 510 of Revenue Act of 1943, which excluded capital gains from income for purposes of declared value excess-profits tax for taxable years beginning after December 31, 1943.
2. Declared Value Excess-Profits Tax -- Proration Formula for Fiscal Year Taxpayers in Respect of Other Taxes. -- The formula contained in Code
3. Realization of Income -- Effect of Execution and Delivery of Timber Grant and Deed. -- Execution and delivery of a timber grant as to part of petitioner's standing timber and a deed as to remainder of its timber lands, with possession taken by grantees, and the timber grant used by the grantee thereof as security for a loan from the Reconstruction Finance Corporation, all of which events occurred within one taxable year, *2 held to result in closed transactions and the realization of income within that year.
*588 The respondent determined deficiencies in income, declared value excess-profits, and excess profits taxes for the years and in the amounts as follows:
| Fiscal year ended | Tax | Deficiency |
| Nov. 30, 1942 | Income | $ 8,443.29 |
| Nov. 30, 1943 | Income | 7,575.57 |
| Nov. 30, 1944 | Income | 19,842.84 |
| Nov. 30, 1944 | Declared value excess-profits | 45,435.75 |
| Nov. 30, 1943 | Excess profits | 939.02 |
*4 The petitioner contests the determination of only the declared value excess-profits tax for the fiscal year ended November 30, 1944.
The questions presented are: (1) whether capital gain on the sale of assets is to be excluded from income either (a) by reason of section 510 of the Revenue Act of 1943 which excludes capital gains from declared value excess-profits income for taxable years beginning after December 31, 1943, or (b) by reason of the allocation formula contained in
FINDINGS OF FACT.
The petitioner, North Carolina Lumber Company, was a North Carolina corporation. Its returns were prepared on the accrual method of accounting, for fiscal years ended November 30. Its income and profits tax returns for the fiscal year ended November 30, 1944, were filed with the collector of internal revenue for the district of North Carolina.
*589 The petitioner was engaged in logging operations in North Carolina, and in the manufacture of veneer, with its principal plant located*5 at Hallsboro, North Carolina. At the beginning of 1944, all of the petitioner's stock was owned by J. W. Wells Lumber Company, a partnership, in which the partners were J. W. Wells and Ruth A. Wells. 1 J. W. Wells was president of the petitioner. The petitioner owned lands aggregating in excess of 47,000 acres which contained about 50,000,000 feet of timber, largely veneer grade gum.
In the spring of 1944, J. W. Wells commenced negotiations with Bernard B. Shaw and W. A. Gooch for the sale to them of all the petitioner's assets. Shaw was president of Plywoods-Plastics Corporation, which had its principal place of business at Hampton, South Carolina, and was engaged in the manufacture of plywood products. Gooch was manager of the petitioner's plant at Hallsboro, North Carolina.
By resolution of the stockholders of the petitioner adopted on June 7, 1944, Wells was authorized to negotiate for the sale, and*6 to sell all of the petitioner's assets. It was further resolved at that meeting that if the proposed sale was consummated the petitioner was to be liquidated, the liquidation to be completed as far as possible on or before June 30, 1945.
Wells, acting for the petitioner, came to an oral agreement with Shaw and Gooch whereby the petitioner was to sell to them all of its assets for $ 725,000, of which $ 200,000 was to be paid in cash and the balance, evidenced by notes, over a period of years. It was understood that Shaw and Gooch would form a partnership to operate the plant at Hallsboro, and that the balance of the purchase price would be paid out of operations on the basis of minimum monthly payments or at the rate of $ 12.50 per thousand feet of timber as it was cut.
In July 1944 about the time that the sale was to be effected, Shaw found it necessary to borrow funds to meet the agreed down payment of $ 200,000. He requested of Wells that 27,000,000 feet of standing timber on 5,410 acres of the petitioner's lands be carved out and transferred to Plywoods-Plastics Corporation to be used by that corporation as security for a loan from the Reconstruction Finance Corporation to enable*7 Shaw and Gooch to make the down payment on the purchase price.
On July 17, 1944, the following documents were executed:
(a) An instrument described therein as a "Timber Grant or Lease" wherein the petitioner is called the Seller and Plywoods-Plastics Corporation is called the Buyer. It recites in part that "the Seller has sold to the Buyer, and the Buyer has bought from the Seller" on terms *590 and conditions subsequently specified, all gum timber or trees of a designated diameter, of veneer grade, standing on a tract of 5,410 acres, more or less, in Columbus County, North Carolina. The instrument recited that the agreed price to be paid was $ 400,000, of which $ 200,000 had been paid, and the remainder, evidenced by a note, was payable in 72 monthly installments of $ 2,777.77 each, with interest of 3 1/2 per cent payable every 90 days. The instrument provided that "title to the timber and trees * * * shall remain in the Seller and/or Trustee" until the full purchase price had been paid, subject to certain cutting rights granted to the buyer. The buyer was not to cut any of the timber while in default as to payments of installments of purchase price or interest. If not *8 in default, the buyer could cut and remove timber, for which it was to account to the petitioner, and to pay therefor at the rate of $ 12.50 per thousand feet, which payments were to be credited on the buyer's note. The provision for such stumpage payments was not to relieve the buyer of paying the monthly installments, and interest, on its note. The buyer was to have 15 years after July 1, 1944, in which to cut and remove the timber. Upon the happening of specified events, including the buyer's default in meeting installment payments, failure to pay taxes, or bankruptcy of the buyer, the trustee named in the instrument was authorized to advertise and sell the property and convey title to the purchaser. The instrument provided that for the purpose of such sale "the Seller conveys title to said timber, timber rights, ways, easements and privileges to said Trustee." It was also provided:
If the buyer shall within the terms above, and strictly in compliance therewith, pay in full said purchase price and all interest thereon accrued, the seller will make, execute and deliver to buyer, or its assigns, a timber grant or lease as stipulated above.
(b) A promissory note, as referred to*9 in the "Timber Grant or Lease" executed by Plywoods-Plastics Corporation, payable to the order of the petitioner in the principal sum of $ 200,000 with interest at the rate of 3 1/2 per cent a year. The note was endorsed by Shaw and Gooch, and in such endorsement each agreed for himself, and severally, to pay the note and interest thereon.
(c) A deed, whereby the petitioner conveyed to Shaw and Gooch, in fee simple all of its real estate, subject to the timber grant or lease held by Plywoods-Plastics Corporation.
(d) A bill of sale, whereby the petitioner conveyed to Shaw and Gooch all of its personal property used in connection with its business, which property is listed therein in detail.
(e) A promissory note, signed by Shaw and Gooch, payable to the order of the petitioner in the principal sum of $ 325,000 with interest at the annual rate of 3 1/2 per cent. The principal was payable in *591 monthly installments of $ 4,513.88. The principal of the note represented the purchase price of the land and personal property conveyed by the petitioner to Shaw and Gooch.
(f) A deed of trust, executed by Shaw and Gooch and their wives, to H. A. Pharr, as trustee and to the petitioner, *10 covering all of the assets conveyed to them by the petitioner. This deed was given as security for the payment of the Shaw and Gooch note in the amount of $ 325,000 and also of the Plywoods-Plastics Corporation note in the amount of $ 200,000.
(g) A deed of trust, whereby Plywoods-Plastics Corporation conveyed to a bank as trustee all of its rights under the timber grant or lease from the petitioner. This deed was made for the purpose of securing the payment of the debt of Plywoods-Plastics Corporation to the Reconstruction Finance Corporation. By its provisions, it was subordinate to the petitioner's lien on the property for the $ 200,000 unpaid portion of the purchase price of the property.
On July 1, 1944, Shaw and Gooch formed a partnership under the name of North Carolina Lumber and Veneer Company for the purpose of operating the business then being conducted by the petitioner.
Wells, president of the petitioner, was of the opinion that in order for the petitioner to be assured of receiving payment of the deferred portion of the sales price of its properties, it was essential that the land sold be treated as a unit rather than to have it broken into parcels. Wells and Shaw*11 orally agreed that whatever rights were acquired by Plywoods-Plastics Corporation under the grant to it from the petitioner would be transferred to the partnership formed by Shaw and Gooch, and that pending such transfer no timber would be cut on the 5,410-acre tract.
The petitioner was placed in liquidation in July 1944. In March 1945 the notes in the amounts of $ 200,000 and $ 325,000 were distributed as liquidating dividends to J. W. Wells Lumber Company. At that time, some payments had been made on the $ 325,000 note; no payments had been made on the $ 200,000 note. In 1944, the petitioner also distributed cash as liquidating dividends.
The partnership formed by Shaw and Gooch operated the plant and business at Hallsboro until August 1945. On August 14, 1945, Gooch, joined by his wife, in a combination deed and bill of sale, conveyed to Wells and Mrs. Ruth A. Wells a one-half undivided interest in the lands that he and Shaw had acquired from the petitioner in 1944, and also in the personal property used in and about the business. It was the recited intent and purpose of the instrument to convey to Wells and Mrs. Wells all of the real property that Gooch had acquired from *12 the petitioner on July 17, 1944, and his interest in all assets of every kind and nature belonging to or connected with *592 the partnership in which he and Shaw had been partners. The conveyance was made subject to the deed of trust executed by Shaw and Gooch on July 17, 1944, to secure their indebtedness to the petitioner.
On the same date, August 14, 1945, Shaw, Wells, and Mrs. Ruth A. Wells formed a partnership under the name of North Carolina Lumber and Veneer Company, for the operation of the veneer business that had been conducted by the petitioner prior to the several transactions that had occurred on July 17, 1944. The partnership agreement was lengthy and detailed. As far as presently material, it recited that Wells and Mrs. Wells had purchased the interest of Gooch in the partnership in which Shaw and Gooch had been partners; that Shaw had agreed to release Gooch from his indorsement of the $ 200,000 note executed by Plywoods-Plastics Corporation to the petitioner; that Shaw would assume and agree to pay the amounts due to the petitioner; and that Wells and Mrs. Wells assumed the payment of a note of Gooch in the amount of $ 150,000 that he had made to the prior *13 partnership as a part of his capital contribution. It was agreed that Shaw had contributed to the capital assets of the new partnership the sum of $ 225,000, that Wells and Mrs. Wells together had contributed an equal amount, and that their shares and interests were to be in those proportions, that is, 50 per cent in Shaw and 25 per cent each in Wells and Mrs. Wells.
On the same date, August 14, 1945, Plywoods-Plastics Corporation executed a timber deed whereby it sold and conveyed to the new partnership, North Carolina Lumber and Veneer Company, the timber on the 5,410-acre tract that had been conveyed to it by the petitioner on July 17, 1944. The deed included the timber and all of the rights, privileges and easements that had been acquired from the petitioner. No timber was cut on the 5,410-acre tract during the period it was owned by Plywoods-Plastics Corporation.
In its income and declared value excess-profits tax returns for the fiscal year ended November 30, 1944, the petitioner reported long term capital gains in the amount of $ 383,026.81, which amount included the following items:
| Plywoods-Plastics Corp. -- Timber | $ 341,191.88 |
| Shaw & Gooch -- Hallsboro, N. C., Assets | 11,525.57 |
| Total | $ 352,717.45 |
*14 In the computation on the declared value excess-profits tax schedule, the petitioner deducted from its net income (which included the above capital gain) eleven-twelfths thereof. The remaining one-twelfth of its reported net income was less than 10 per cent of the declared value of the petitioner's stock for the year ended June 30, 1944, and the petitioner did not report or pay any declared value excess-profits tax.
*593 OPINION.
Taxable Years to Which Applicable. -- The amendment made by subsection (a) shall be applicable to taxable years beginning after December 31, 1943.
The petitioner contends that under a proper construction of the above provisions all capital gain realized by it in its fiscal year ended November 30, 1944, should be excluded from net income for purposes of the declared value excess-profits tax. Its contention brings into play other statutory provisions. One is section (c) of the Revenue Act of 1943 which provides that, unless otherwise provided, the terms used in that act shall have the same meaning as when used in the Internal Revenue Code. *16 Section 48 (a) of the Code provided then, as now, that:
"Taxable year" means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed * * *.
The argument runs that by reason of section 510 (b) of the 1943 Act, capital gains were excluded from net income for the calendar year 1944; the petitioner's taxable year was a year ending within the calendar year 1944; under section 48 (a) its fiscal year, ended in the calendar year 1944, was a taxable year beginning after December 31, 1943.
We cannot subscribe to the petitioner's views. As we read the statutory provisions, their words and their meanings are quite clear and we cannot substitute the words of either for those of the other. Section 48 (a) simply recites what a taxable year is. It may be a calendar year or a fiscal year ending within the calendar year. We read further *594 in section 48, subsection (b), that a fiscal year is a period of 12 months ending on the last day of any month other than December. In contrast with Code section 48, section 510 (b) of the 1943 Act speaks of taxable years beginning after December 31, 1943. The petitioner's taxable*17 year was a fiscal year ending on November 30. Its first fiscal year beginning after December 31, 1943, was its fiscal year beginning December 1, 1944. The fiscal year before us had its beginning before December 31, 1943, to wit, on December 1, 1943. To hold otherwise would require a distortion of plain, easily understandable words, and we are not willing to sponsor an attempt to give them other meanings.
The first alternative contention of the petitioner is that its declared value excess-profits tax for the fiscal year ended November 30, 1944, should be determined by application of the proration formula contained in Code
Sections 11 and 12 deal with taxes on individuals and are not material here. Sections 13 and 15 impose, respectively, normal taxes and surtaxes on corporate income. *18 Section 14, which was repealed by the Revenue Act of 1951, specified the rates of income tax on the income of special classes of corporations. Section 450, which was repealed by the Individual Income Tax Act of 1944, imposed the victory tax on income of individuals.
The tax with which we are concerned was imposed by Code
The respondent's position is that the proration formula provided in
Other Laws Applicable. All provisions of law (including penalties) applicable in respect of the taxes imposed by chapter 1, shall, insofar as not inconsistent with this subchapter, be applicable in respect of the tax imposed by
*19 We hold for the respondent on this point. The proration formula in
This section [which became section 140] relates to the normal tax imposed by sections 11, 13, and 14 of the Code and to the surtax imposed by sections 12 and 15 of the Code, while section 203 relates to the excess profits tax imposed by subchapter E of Chapter 2 of the Code. [S. Rept. No. 1631, 77th
The section as originally drafted by the Ways and Means Committee was amended by the Senate Finance Committee, *20 the amendment being numbered 110. In the Conference Committee Report, the amendment was spoken of as follows:
This amendment relates only to normal tax and surtax, while amendment No. 260 relates to excess profits tax. [H. Rept. No. 2586, 77th Cong., 2d Sess., p. 43,
Nowhere, as far as we can find, is any reference made to the declared value excess-profits tax in
The petitioner relies on our holding in the case of
The Novak case is not authority for the position of the petitioner in these proceedings. We have pointed out above that
The petitioner's argument as to section 603 is that it requires the application to the declared value excess-profits tax of all provisions of law applicable to Chapter 1 (income) taxes. While the language of section *22 603, quoted above, is broad, we find that precedent will not support the broad construction for which the petitioner contends. In the case of
The arguments run parallel but with different ultimate consequences. In the Arrow-Hart case the respondent contended that the broad provisions of section 729 (a) required that a section in the income tax chapter (section 24 (a) (5)), relating to nondeductible expenses, be applied so as to result in an increase in the tax*23 imposed by sections not within the income tax chapter. Here the petitioner insists that the broad provisions of section 603 require that a section in the income tax chapter (
In the Arrow-Hart case we considered the legislative history of section 729 (a) and also similar provisions contained in other tax statutes. We concluded that it was the intention of Congress in the enactment of that section to import into the excess profits tax sections only the administrative provisions of the income tax chapter and not substantive provisions which determine the amount of tax. We reach the same conclusion here as to the purpose of section 603 and hold that it does not permit the use of the proration formula of
Finally, the petitioner contends that the respondent erred in determining that gain realized by it on the sale of assets, or at least that portion attributable to the contract with Plywoods-Plastics Corporation, was taxable in the fiscal year ended November*24 30, 1944.
The transactions upon which the petitioner reported a long term capital gain, and on which the respondent determined a deficiency, are described in several documents dated July 17, 1944. One of these *597 is a deed wherein the petitioner recites that it has "given, granted, bargained, sold and does hereby convey" to Shaw and Gooch 45,544 acres of land, more or less, the boundaries of which are described in detail. This deed also conveys to Shaw and Gooch several other tracts of land which, from their descriptions, appear to be relatively small in area. The deed contains the following provision:
The land aforesaid and the timbers thereon were sold, and this deed made subject to the following reservations and restriction:
(a) A timber lease and timber cutting contract from Grantor to Plywoods-Plastics Corporation, * * * giving and granting the right under conditions therein provided, to cut and remove for a period of fifteen (15) years certain timber on 5410 acres, more or less * * *.
Another instrument, also executed on July 17, 1944, was a bill of sale whereby the petitioner for a recited valuable consideration "grants, bargains, sells, conveys and delivers" to Shaw*25 and Gooch, "their heirs and assigns" personal property described in detail and, according to the bill of sale, "most of which is located upon the plant site of" the petitioner. At or about the same time, Shaw and Gooch, joined by their wives, conveyed to H. A. Pharr, as trustee, the lands and personal property previously conveyed to them by the petitioner. The purpose of this conveyance in trust was to secure the payment of the $ 325,000 note given by Shaw and Gooch to the petitioner and also the $ 200,000 note given by Plywoods-Plastics Corporation to the petitioner.
The document which both parties regard as the most important of the group executed on July 17, 1944, is the one described therein as a "Timber Grant or Lease." That document, after the usual preliminary recitals of identification of the parties, provides:
(a) That the seller [the petitioner] has sold to the buyer [Plywoods-Plastics Corporation], and the buyer has bought from the seller, * * * all gum timber or trees [of specified diameter and grade] * * * being upon the following described tract of land: [here follows a description of the boundaries of the 5,410 acre tract].
(b) The title to the timber and trees above*26 described shall remain in the seller and/or trustee as hereinafter stipulated, until all of the purchase price hereinafter stipulated shall have been fully paid, together with any interest that may accrue thereon, and until all of the covenants of this agreement have been fully performed; subject, however, to the buyer's right to cut and remove timber from said land as hereinafter provided.
One of the points advanced by the petitioner is that under North Carolina law the agreement between it and Plywoods-Plastics Corporation was an agreement to transfer title in the future rather than a conveyance which operated as a present transfer. State laws and decisions are not uniform as to the effect of conveyances of standing timber. However, the courts of North Carolina have made it clear *598 that in that state such a conveyance, as a general rule, operates as a conveyance of realty in fee simple, defeasible as to the timber that is not cut and removed within the period specified. The general rule, supported by decisions of many cases, is stated in
We have held in*27 numerous cases that these deeds for standing timber, as ordinarily drawn, convey a fee-simple interest in such timber as realty, determinable as to all such timber as is not cut and removed within the time specified in the deed and that, while such estate exists, it is clothed with the same attributes and subject to the same laws of devolution and transfer as other interests in realty.
The petitioner recognizes that the general rule is as above stated, but seems to doubt its application in a situation as that before us where the agreement recites a reservation of title by the vendor. It cites the case of
The petitioner's argument on this point is founded on provision (b) of the grant wherein it is provided that title to the timber and trees should remain in the petitioner and/or trustee until all of the purchase price had been paid. In view of the unequivocal words of present conveyance in the first part of the grant, we think that the provision as to reservation of title is properly to be regarded only as being in the nature of a vendor's lien or mortgage to provide security for the balance of the purchase price. See
But the question of the technical nature of the title acquired by Plywoods-Plastics Corporation is not necessarily decisive of the question presented here for decision. Clearly some interest in property *599 passed to Plywoods-Plastics Corporation and if that transaction resulted in gain to the petitioner it is subject to tax as provided by the Federal taxing statutes.
The ultimate question for our decision is whether the events that occurred on July 17, 1944, and the instruments that were executed and delivered by the petitioner at that time marked completed and closed transactions. We think they did. It is clear from resolutions adopted by the petitioner's directors in June 1944, that it was intended that the petitioner should dispose of all of its properties, and then liquidate. It shaped events towards those ends. Wells negotiated for the sale of all of the corporate assets. It proceeded to execute the formal documents that were necessary to divest itself, *30 by sales, of all of its properties. The instruments that were executed and delivered by the petitioner were not options, or contracts to sell, but were present grants of title. The purchasers went into possession, and one of them used its title as the basis for a loan from the Reconstruction Finance Corporation.
In
A closed transaction for tax purposes results from a contract of sale which is absolute and unconditional on the part of the seller to deliver to*31 the buyer a deed upon payment of the consideration and by which the purchaser secures immediate possession and exercises all the rights of ownership. The delivery of a deed may be postponed and payment of part of the purchase price may be deferred by installment payments; but for taxing purposes it is enough if the vendor obtains under the contract the unqualified right to recover the consideration.
In the instant case there was a contractual obligation to pay even though no notes or other evidence of debt were given. It was not an executory contract, as where the transfer of title and full payment are made conditions to the completion of the transaction.
The petitioner did more in these proceedings to mark a closed transaction in 1944 than did the taxpayer in the Union Pacific case in *600 the year in which it was held that the transaction was closed and completed. Here, the petitioner in 1944 executed and delivered a deed and bill of sale to Shaw and Gooch, and a timber grant to Plywoods-Plastics Corporation. Under the provisions of those instruments, the petitioner had an unqualified right to receive the sales price agreed upon for the properties. Under the accrual method of accounting, it is the right to receive and not the actual receipt that determines the inclusion of an amount in gross income. "When the right to receive an amount becomes fixed, the right accrues."
The petitioner places emphasis on the fact of its oral agreement with Shaw that *33 Plywoods-Plastics Corporation was not to cut the timber on the 5,410-acre tract, and that the rights to that timber were to be transferred to the Shaw-Gooch partnership. This we regard as merely an additional form of security demanded by the petitioner for the payment of the purchase price of the properties. This agreement did not affect the titles conveyed by the instruments of July 17, 1944, nor the petitioner's right to receive the price agreed upon for the properties.
The respondent did not err in treating the gain on the sale of the petitioner's properties as income for the fiscal year ended November 30, 1944, and subject to declared value excess-profits tax.
Decision will be entered under Rule 50.