*42 For 1942 deficiency in income tax $ 41.07 and deficiency in excess profits tax $ 18,520.61.
For 1943 deficiency in excess profits tax of $ 7,842.70.
Petitioner acquired timberlands and within 6 months thereafter entered into a contract contemplating the disposal of all timber, within certain categories, to be paid for as cut. The contract referred to petitioner as vendor and the other parties as vendees and provided for the cutting of all such timber within 2 years, to be paid for at the end of that time whether cut or not. Held, that by and at the time of the contract there was "disposal" of the timber within 6 months from acquisition thereof within the language of
*698 OPINION.
This case is submitted to us under Rule 30. As filed, it involved the following deficiencies:
| Excess profits | ||
| Year | Income tax | tax |
| 1942 | $ 41.07 | $ 19,840.50 |
| 1943 | 10,908.06 |
The parties have, however, by stipulation settled and eliminated all issues as to 1942, leaving the only issue before us as follows: Whether petitioner, which had acquired timberlands and within 6 months contracted for the removal of timber therefrom on a royalty basis, received ordinary income or, on the other hand, capital gain, in royalties paid for timber cut more than 6 months from the date of petitioner's acquisition of the timber property, and this, in turn, depends upon whether within the language of
All facts have been stipulated and by reference we find them to be as stipulated. Only such portions thereof as considered necessary of statement in examination and discussion of the issue, will be set forth herein. Such facts may be briefly stated as follows:
In January 1943 petitioner acquired certain timber property. On May 14, 1943, it entered into an agreement with D. & W. Lumber Co., a partnership, which agreement it is stipulated "contemplated the disposal" of certain classes of timber on petitioner's lands. Payments were to be made at certain prices and at certain rates as the timber was cut. The agreement which is extensive repeatedly referred to the petitioner as vendor and the copartnership as vendees, and in pertinent part provided as follows: that the vendor "does hereby agree to sell unto the vendees and the vendees do hereby agree to purchase of and from the vendor at the price and upon the terms and conditions *699 hereinafter stated all of the merchantable timber standing and down old growth and*45 second growth fir timber and all merchantable standing and down hemlock and cedar timber" upon petitioner's lands; that the purchase price should be according to a scale dependent upon the kind of timber included in the above description; that the vendor granted the vendees right and license to enter upon the land and cut and log the timber under certain conditions; that before the 10th day of each calendar month the vendees should make a report of logs cut and pay therefor; that upon default in payment by the vendees "the right and license hereby granted to enter upon said lands and cut said timber" shall be suspended until default shall be removed; that cutting and removal of timber should commence by June 1, 1943, and proceed continuously, except for causes beyond vendees' control, at the rate of 45,000 feet per day, "the cutting license hereby granted" to terminate 2 years from the date of contract; that the vendor expressly reserves the right to have delivered to it all fir logs suitable for plywood, same to be delivered by the vendees to the vendor and paid for by the vendor at O. P. A. prices, less cost of loading; that "this agreement shall not become effective until and unless" *46 within 20 days from the date thereof the vendees should execute to the vendor a performance bond or deposit $ 5,000 or execute to the vendor a chattel mortgage for $ 5,000 upon property worth $ 10,000, to insure performance of the agreement; that injury to or destruction of any of the timber, whether cut or uncut, by fire or the elements or otherwise should be at the vendees' risk, they to make full payment for the timber notwithstanding such loss or damage; that upon abandonment of the contract by the vendees or their failure to proceed to log the timber expeditiously as agreed or in case of any wilful default, the vendor may terminate the contract and recover damages in which event all logs cut and being upon the premises should be the property of the vendor; that "it is the intent of this contract that the vendee shall purchase and pay for all the standing and down timber on said lands on or before two years hereof" and that if at the expiration of that period "any timber agreed to be purchased" shall not have been cut, removed and paid for, the amount of such timber shall be determined and the vendees shall pay therefor at the prices specified, but without any right of removal*47 thereof; that the specified rights and remedies for defaults shall not be exclusive of vendor's rights or remedies at law or equity; that the contract is unassignable and cannot be sublet except with the written consent of the vendor; that the vendees agree that it is a condition of the contract and the cutting license granted that they will pay all taxes upon the real property until they have cut, removed and paid for the timber agreed to be purchased; that the vendees must give *700 notice before entering upon any 40-acre tract to cut and log and notify the vendor of their progress, and that the order of cutting shall be such as not to reduce the average value of timber left standing, and that logging is to be done in an orderly, workmanlike manner in accordance with best logging practice and in compliance with the laws and regulations of the State of Oregon and the United States.
Petitioner disposed of the timber involved herein by and at the date of the contract of May 14, 1943, within the meaning of
The petitioner, under the above facts, agrees that its income from timber within 6 months of its acquisition of the timber is*48 ordinary income, but contends that its gain from timber cut after 6 months from acquisition is capital gain; while the respondent's argument is that, under
*51 The parties, in short, agree that the question controlling here is: Did the contract dispose of the timber, or was it disposed of only when cut and removed? The petitioner says, on brief, "The question can be narrowed down to this: What is the meaning of the phrase 'disposal of timber' as used in
The error we see in this view is that the statute requires, not sale, but "disposal" of the timber, and that the terms "disposal" or "dispose of" are, on high authority, broader than "sell."
In
*702 In
It thus appears that, on the text of
As provided particularly in the stipulation of the parties, in case of the above conclusion by us, decision of deficiencies will be entered as follows:
For 1942 deficiency in income tax $ 41.07 and deficiency in excess profits tax $ 18,520.61.
For 1943 deficiency in excess profits tax of $ 7,842.70.
Footnotes
1.
SEC. 117 . CAPITAL GAINS AND LOSSES.* * * *
(j) Gains and Losses From Involuntary Conversion and From the Sale or Exchange of Certain Property Used in the Trade or Business. --
(1) Definition of property used in the trade or business. -- For the purposes of this subsection, the term "property used in the trade or business" means property used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 23 (l), held for more than 6 months, and real property used in the trade or business, held for more than 6 months, which is not (A) property of a kind which would properly be includible in the inventory of the taxpayer if on hand at the close of the taxable year, or (B) property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business. Such term also includes timber with respect to which subsection (k) (1) or (2) is applicable.
* * * *
(k) Gain or Loss upon the Cutting of Timber. --
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(2) In the case of the disposal of timber (held for more than six months prior to such disposal) by the owner thereof under any form or type of contract by virtue of which the owner retains an economic interest in such timber, the difference between the amount received for such timber and the adjusted depletion basis thereof shall be considered as though it were a gain or loss, as the case may be, upon the sale of such timber.↩
2. SEC. 29.117-8. Gain or Loss upon the Cutting and Disposal of Timber.
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(b) Gain or Loss upon the disposal of timber under cutting contract. -- If a taxpayer disposes of timber under any form or type of contract whereby he retains an economic interest in such timber, the disposal under the contract shall be considered to be a sale of such timber. The difference between the amounts received for the timber in any taxable year and the adjusted basis for depletion of the timber with respect to which the amounts were so received shall be considered to be a gain or loss upon the sale of such timber for such year. If the taxpayer owned the timber for a period of more than six months prior to the date of such contract, for the purposes of
section 117 (j) such timber shall be considered to be property used in the trade or business for the taxable year for which it is considered to have been sold along with other property of the taxpayer used in the trade or business as defined insection 117 (j) (1) . Whether gain or loss resulting from the disposition of the timber which is considered to have been sold will be deemed to be gain or loss resulting from the sale of a capital asset held for more than six months will depend upon the application ofsection 117 (j)↩ in the case of the taxpayer.