*12 Decision will be entered for the petitioner.
Petitioner acquired 98 percent of the stock of Snellstrom in April 1964. Snellstrom was liquidated in April 1965 and petitioner received in liquidation certain timber-cutting contracts that had been held by Snellstrom prior to April 1964. Petitioner cut timber under those contracts during the period May 1, 1965, through Dec. 31, 1965, and reported the profits therefrom as long-term capital gain under
*401 Respondent determined a deficiency in petitioner's corporate income tax in the amount of $ 49,648.84 for its calendar year ended December 31, 1965. The issue presented for our decision is whether for purposes of
*16 FINDINGS OF FACT
The majority of the facts have been stipulated and are so found. The parties have agreed on the following statements in the stipulation.
Cabax Mills (hereinafter Cabax or petitioner) is an Oregon corporation with its principal place of business located in Eugene, Oreg. Petitioner filed its Federal corporate income tax return for its taxable year ending December 31, 1965, with the district director of internal revenue, Portland, Oreg.
During the year in question, petitioner was engaged in logging and manufacturing lumber in the State of Oregon. In the early months of 1964, petitioner became interested in acquiring Snellstrom Lumber Co. (hereinafter Snellstrom), a small closely held corporation engaged in logging and manufacturing plywood and lumber. Petitioner's interest *402 in Snellstrom was engendered primarily in a plywood plant and certain timber-cutting rights it owned. Petitioner had attempted to purchase these assets from Snellstrom but the owners did not want to strip their corporation of its principal assets. Consequently, on March 31, 1964, Cabax and representatives of the holders of 530 of the 538 outstanding shares of capital stock of Snellstrom*17 executed a contract of sale for the stock.
Under the provisions of the sales contract, Cabax agreed to purchase, and the shareholders agreed to sell, 530 shares (or 98 percent) of the outstanding stock of Snellstrom. The sales price for the stock was $ 5,000 per share for a total purchase price of $ 2,650,000. The $ 5,000 price was payable on an installment basis: $ 1,000 at the closing; $ 450 at closing or within 60 days thereafter; and the balance of $ 3,550 in six equal installments, with each installment due on each succeeding anniversary of the closing, together with annual interest of 5 percent on the declining principal balances, beginning at the date of closing, interest to be paid with and in addition to the principal payments.
The closing of the transaction was scheduled for April 1, 1964, or a later time fixed by representatives of the sellers, but in no event later than April 9, 1964. The closing actually occurred April 3, 1964. Under the contract, the sellers were required to deliver title to and possession of the Snellstrom shares to Cabax, and Cabax was then to assume all of the benefits and burdens of the ownership of such shares. Additionally, the officers and*18 directors of Snellstrom were required to resign and nominees of Cabax were immediately elected to assume complete management and control of the new subsidiary corporation. In return, Cabax was required to cause new certificates for the purchased shares to be issued in its name and delivered to a bank as trustee, under a pledge to provide security for the unpaid balance of the purchase price, promptly after the closing. The security arrangement included a prohibition against liquidation of Snellstrom by Cabax until 40 percent of the purchase price for the Snellstrom shares had been paid.
Following the acquisition of Snellstrom, Cabax operated it as a subsidiary for slightly more than a year. By April 1965, petitioner had satisfied the conditions precedent to Snellstrom's liquidation imposed by the March 31, 1964, sales agreement. Accordingly, Snellstrom was liquidated pursuant to a plan of liquidation dated April 13, 1965.
In the course of the liquidation, Cabax surrendered all of its stock in Snellstrom and received in exchange therefor all of the assets and assumed all of the liabilities of Snellstrom immediately prior to its liquidation. However, cash in an amount equal to *19 the aggregate book value of the 8 shares of Snellstrom stock which Cabax had not purchased was reserved by Snellstrom for such shareholders and Cabax *403 did not assume the obligation of Snellstrom to the holders of the 8 shares. Among the assets which Cabax received from Snellstrom were the contract rights to cut six tracts of timber. Snellstrom had held these contract rights to cut timber for more than 6 months prior to January 1, 1965.
During the year prior to its liquidation, Snellstrom cut timber from certain tracts in which it had contractual cutting rights. Attendantly, it elected to characterize its gain or loss realized from the appropriation of said timber under the provisions of
Subsequent to the liquidation, during the period commencing May 1, 1965, and ending December 31, 1965, Cabax cut timber for its operations under the contract rights received in the Snellstrom liquidation. Cabax also elected to characterize its gain or loss realized from the appropriation of said timber under the provisions of
The purchase by Cabax of the Snellstrom stock constituted a "purchase" within the meaning of
The liquidation of Snellstrom was a liquidation of the type described in
On its return filed March 11, 1966, petitioner reported total long-term capital gains of $ 358,158.72. Of that figure, $ 302,928.39 was reported as long-term capital gain realized on the timber cut under the timber rights originally owned by Snellstrom. In the notice of deficiency respondent determined that the $ 302,928.39 gain did not qualify for long-term capital gains treatment under the provisions of
Prior to trial, the parties stipulated that petitioner's 1965 timber-cutting operations under the auspices of the Snellstrom timber contracts will be considered as a sale or exchange of such timber as provided*21 in
We find from the evidence that petitioner's purpose in buying the stock of Snellstrom was to acquire the assets of Snellstrom.
*404 OPINION
The basic facts are not in dispute. The single issue for our determination is whether petitioner can be considered under the applicable sections of the Code to have held the contract rights to cut timber, which it received on the liquidation of Snellstrom, for a period of more than 6 months before January 1, 1965. In other words, for purposes of
Petitioner alleges that it purchased 98 percent of the stock of Snellstrom on April 3, 1964, and that this constituted a purchase within the meaning of
On these facts, petitioner contends that under
*405 Respondent contends that petitioner's holding period for the timber rights commenced when Snellstrom was liquidated. Respondent argues that a parent corporation and its subsidiary are two separate entities, and thus, Cabax cannot be deemed the owner of Snellstrom's assets, for purposes of
Pursuant to the above provisions petitioner would be entitled to report its gains on the timber cut under the cutting*25 contracts it acquired from Snellstrom as long-term capital gain if it can be considered to have owned those contracts for more than 6 months prior to January 1, 1965.
*26
*29 Now tracking back through the provisions of the various sections described above, it would appear, patently at least, that petitioner was entitled to report its gain from cutting timber under the cutting contracts received from Snellstrom as long-term capital gain under
Despite the rather clear language of the statutes involved, which points to a decision in petitioner's favor, respondent argues that an exchange within the meaning of
Prior to 1954, the provisions of the 1939 Code technically forced the acquiring corporation to take a carryover basis in the distributed assets, regardless of how much or how little it paid for the subsidiary's stock. However, the substituted basis result was attainable in the courts under the Kimbell-Diamond doctrine which employed fictions and a subjective intent standard to determine if a substituted basis was warranted. See
The purpose for enacting
We find nothing inconsistent with the purpose of
Respondent's objection to this line of reasoning is that the doctrine of Kimbell-Diamond, on which
As we see it, there are several infirmities in respondent's position. First, as we have established, the
By linking
Finally, not only do we believe that our decision obtains the proper legal result in holding that petitioner may avail itself of
*39 Respondent also argues that inasmuch as petitioner did not have the right to cut and sell timber under the Snellstrom contracts on its own account until Snellstrom was liquidated on April 30, 1965, petitioner was not entitled to make the
The statute speaks of the cutting of timber for sale by a taxpayer who has a right to cut such timber. To us this means that the*40 taxpayer who would claim the benefit of the statute must be the one who has not only the right to cut but also the right to sell on his own account. * * *
Petitioner points out, correctly we think, that the regulation and the Carlen case are concerned with the difference between a logging contractor, who has no beneficial interest in the timber and is not entitled to make the election, and an owner-logger who has the right to cut and sell timber for his own account. We do not believe the rationale of the regulation or the Carlen case precludes petitioner from claiming the benefits of
Since the parties have stipulated that petitioner qualifies for an election under
Decision will be entered for the petitioner.
Footnotes
1. All section references are to the Internal Revenue Code of 1954.↩
2.
SEC. 631 . GAIN OR LOSS IN THE CASE OF TIMBER, COAL, OR DOMESTIC IRON ORE.(a) Election to Consider Cutting as Sale or Exchange. -- If the taxpayer so elects on his return for a taxable year, the cutting of timber (for sale or for use in the taxpayer's trade or business) during such year by the taxpayer who owns, or has a contract right to cut, such timber (providing he has owned such timber or has held such contract right for a period of more than 6 months before the beginning of such year) shall be considered as a sale or exchange of such timber cut during such year. If such election has been made, gain or loss to the taxpayer shall be recognized in an amount equal to the difference between the fair market value of such timber, and the adjusted basis for depletion of such timber in the hands of the taxpayer. Such fair market value shall be the fair market value as of the first day of the taxable year in which such timber is cut, and shall thereafter be considered as the cost of such cut timber to the taxpayer for all purposes for which such cost is a necessary factor. If a taxpayer makes an election under this subsection, such election shall apply with respect to all timber which is owned by the taxpayer or which the taxpayer has a contract right to cut and shall be binding on the taxpayer for the taxable year for which the election is made and for all subsequent years, unless the Secretary or his delegate, on showing of undue hardship, permits the taxpayer to revoke his election; such revocation, however, shall preclude any further elections under this subsection except with the consent of the Secretary or his delegate. For purposes of this subsection and subsection (b), the term "timber" includes evergreen trees which are more than 6 years old at the time severed from the roots and are sold for ornamental purposes.↩
3. Because of our conclusion on petitioner's principal argument we need not consider petitioner's alternative argument that it became the constructive owner of Snellstrom's assets on Apr. 13, 1964, when it became fully responsible for the subsidiary's operations and liabilities.↩
4.
SEC. 1223 . HOLDING PERIOD OF PROPERTY.(1) In determining the period for which the taxpayer has held property received in an exchange, there shall be included the period for which he held the property exchanged if, under this chapter, the property has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as the property exchanged, and, in the case of such exchanges after March 1, 1954, the property exchanged at the time of such exchange was a capital asset as defined in section 1221 or property described in
section 1231 . For purposes of this paragraph --(A) an involuntary conversion described in section 1033 shall be considered an exchange of the property converted for the property acquired, and
(B) a distribution to which section 355 (or so much of section 356 as relates to section 355) applies shall be treated as an exchange.↩
5.
SEC. 334 . BASIS OF PROPERTY RECEIVED IN LIQUIDATIONS.(b) Liquidation of Subsidiary. --
* * * *
(2) Exception. -- If property is received by a corporation in a distribution in complete liquidation of another corporation (within the meaning of
section 332(b) ), and if --(A) the distribution is pursuant to a plan of liquidation adopted --
(i) on or after June 22, 1954, and
(ii) not more than 2 years after the date of the transaction described in subparagraph (B) (or, in the case of a series of transactions, the date of the last such transaction); and
(B) stock of the distributing corporation possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote, and at least 80 percent of the total number of shares of all other classes of stock (except nonvoting stock which is limited and preferred as to dividends), was acquired by the distributee by purchase (as defined in paragraph (3)) during a period of not more than 12 months,
then the basis of the property in the hands of the distributee shall be the adjusted basis of the stock with respect to which the distribution was made. For purposes of the preceding sentence, under regulations prescribed by the Secretary or his delegate, proper adjustment in the adjusted basis of any stock shall be made for any distribution made to the distributee with respect to such stock before the adoption of the plan of liquidation, for any money received, for any liabilities assumed or subject to which the property was received, and for other items.↩
6. It is noteworthy that respondent's regulations,
sec. 1.334-1(c)(4), Income Tax Regs.↩ , require adjustments to the parent corporation's basis in the subsidiary's stock to reflect the operations of the subsidiary during the interim period prior to liquidation. Such adjustments demonstrate that the date of the stock purchase is the effective date of the asset acquisition.7. This case deals solely with the question of the proper holding period of certain assets Snellstrom owned at the time its stock was purchased. We do not herein decide the question of the holding period of assets a subsidiary acquires after↩ the purchase of any part of its stock.