551 F.2d 821 | Ct. Cl. | 1977
delivered the opinion of the court:
This tax refund action involving the characterization of gain realized by plaintiffs from their sale of a timber
Plaintiff,
In consideration of the premises and the promises hereinafter contained, Forest Service agrees to sell and permit Purchaser to cut and Purchaser agrees to purchase and cut included Timber.
All right, title and interest in and to any included timber in the Turn Point contract remained in the Forest Service until it had been cut, scaled and paid for; at that time, title vested in the plaintiff who then had to remove the processed timber from the contract sales area within the period of the contract. All losses, except for negligence, were to be borne by the party holding title.
Throughout the remainder of 1968 and until March 19, 1969, plaintiff was engaged in the logging business. This entailed both the cutting of the standing timber located in the South Tongass National Forest subject to the Turn Point contract and the selling of the logs to Ketchikan Pulp Company (hereinafter referred to as Ketchikan), an unrelated Washington corporation. The plaintiff did not operate a sawmill nor was he engaged in manufacturing lumber, veneer or other wood products. His sole activity was the cutting of the standing timber and its sale to Ketchikan.
On March 19, 1969, 13% months after the plaintiff entered into the Turn Point contract, he sold all of the timber cutting rights under the contract to Ketchikan for the sum of $127,500,
Prior to the March 19, 1969, sale to Ketchikan, the plaintiff had neither sold nor held for sale a Government timber contract. After that sale, the plaintiff ceased independent logging operations entirely and sold all logging equipment, machinery and supplies to Ketchikan.
In filing their joint federal income tax return for the year 1969, the plaintiffs elected to report the gain realized from the sale of the timber cutting rights to Ketchikan on the installment basis pursuant to § 453.
Upon audit of plaintiffs’ tax returns, the Commissioner of the Internal Revenue Service (Commissioner) determined that the gain recognized by plaintiffs in 1969, 1970 and 1971, attributable to the sale of the Turn Point contract to Ketchikan, should have been reported as ordinary income rather than as long-term capital gain. A statutory notice of deficiency for 1969 through 1971 was issued by the Commissioner on March 20,1973. Thereafter, plaintiffs received billings for the deficiency, which they were unable to pay within 10 days because of lack of funds.
On November 21, 1973, the plaintiffs paid $8,000 to the District Director, Anchorage, Alaska. On January 21, 1974, the Division of Veterans Affairs of the Department of Commerce of the State of Alaska paid, on the plaintiffs’ behalf, the remaining sum of $10,999.48 from the proceeds of a loan.
Plaintiffs filed with the Internal Revenue Service (IRS) Center at Ogden, Utah, their timely refund claims for the years 1969 through 1971. The IRS not having acted upon their refund claims for more than 6 months after the date of filing, the plaintiffs filed a petition in this court based upon the same grounds as set forth in the refund claims.
Plaintiffs argue that the timber cutting contract involved herein was a capital asset, or in the alternative, plaintiffs interest in the contract and underlying timber was "real property used in the trade or business” of plaintiff within the meaning of § 1231(b)(1). Under either alternative, plaintiffs contend that the gain realized on the sale of the contract qualifies as long-term capital gain since the contract was held by plaintiff for more than six months. Nevertheless, plaintiffs concede that a portion of the payments received by them on the sale of the Turn Point contract should be imputed interest, taxable as ordinary
On the other hand, defendant contends that the gain realized by plaintiffs from the sale of the Turn Point contract does not qualify for capital gain treatment. Initially, the defendant submits that plaintiffs interest in the Turn Point contract and the underlying timber was real property used in plaintiffs trade or business; it must be treated as a noncapital asset by virtue of § 1221(2), but is precluded from § 1231(a) treatment by the Corn Products
We are faced with the preliminary issue of whether plaintiffs interest in the Turn Point contract would qualify either as a § 1221 asset or as a § 1231(b)(1) asset, but for the Corn Products doctrine. Of necessity, we then must examine the Corn Products doctrine to determine its applicability to the instant case.
Defendant contends and the plaintiffs submit as an alternative argument that plaintiffs interest in the Turn Point contract and underlying timber was real property used in the plaintiffs trade or business. We find these contentions lack merit. To constitute realty plaintiff must have acquired a present interest in the standing timber on the execution of the contract. The facts before us do not
To disqualify the Turn Point contract from § 1231(b)(1), we must also determine that it was not "property used in the trade or business of a character which is subject to the allowance for depreciation provided in section 167.” Given the nature of the contract, this task is not difficult. The Turn Point contract was merely a sales contract obligating the plaintiff to purchase a specific amount of timber— whether cut or not — within a period of approximately three years.
The plaintiffs argue that they sold the Turn Point contract, itself, rather than the timber which was the subject of that contract. They assert that the contract was "property” which did not fall into any of the specified exclusions of § 1221 and, therefore, the contract is a capital asset, the sale of which gave rise to capital gain. The plaintiffs also rely upon Commissioner v. Ferrer,
With respect to the treatment of amounts received on the sale of contract rights, courts have approached in numerous ways the question of whether the property disposed of was the type of property that Congress intended to
The Supreme Court has stated that the sale of property, though not literally within the exceptions of § 1221, may nevertheless give rise to ordinary income or loss when the asset is an integral part of the taxpayer’s business. Corn Products Refining Co. v. Commissioner, supra note 9. The application of the Corn Products doctrine to the instant case seems clear to us. The plaintiff was engaged in the logging business: cutting standing timber and selling- the cut timber to Ketchikan. The Turn Point contract gave the plaintiff the right to cut timber; it insured the plaintiff a ready source of supply of the logging business raw material, timber. The contract, therefore, was essential to and an integral part of plaintiffs logging business. The contract gave plaintiff rights in the timber which were so integrally related to his ordinary business objectives of logging the timber that a "business use” intention rather than an "investment” intent prevailed.
Since we hold that the gain realized by the plaintiffs from the sale of the Turn Point contract was ordinary income within the rationale of the Corn Products doctrine, we need not consider the applicability of § 483 to the instant case.
Reasonable cause for failure to pay tax exists to the extent the taxpayer can satisfactorily show that he exercised ordinary business care and prudence in providing for the payment of his liability, but was, nevertheless, either unable to pay the tax or would have suffered "undue hardship”
In the instant case, plaintiffs have failed to introduce any evidence to show that their failure to pay the tax was
CONCLUSION
For the reasons hereinbefore stated, plaintiffs’ motion for summary judgment is denied, defendant’s cross motion for summary judgment is granted and plaintiffs’ petition is dismissed.
Frances G. Norton is a party to this action only because she filed joint returns with her husband, Emmett E. Norton, for the years in question. Where reference is made to Mr. Norton acting individually, he will be referred to as the "plaintiff’; where reference is made to both Mr. and Mrs. Norton, they will be referred to as the "plaintiffs.”
United States Department of Agriculture Forest Service Timber Sale Contract No. 05-92. The contract relates to certain designated timber in the South Tongass National Forest, State of Alaska.
Even though the bill of sale specified that both the Turn Point contract and various pieces of logging equipment were sold for $127,500, the Norton affidavit makes it clear that the $127,500 was the purchase price of the timber cutting rights alone.
Since the total purchase price was not dependent upon the amount of timber cut, plaintiff concedes that he did not retain an economic interest in the timber transferred to Ketchikan within the meaning of I.R.C. § 631(b). Therefore, I.R.C. § 1231(b)(2) is not applicable to the instant case.
Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954.
Plaintiffs’ tax basis is the sum of a $5,000 cash bond and a $2,400 advance stumpage deposit with the Forest Service.
Payments totaling $18,999.48 were received by the Internal Revenue Service; $5,468.81 was allocated to plaintiffs’ 1969 tax year; $6,290.58 was allocated to plaintiffs’ 1970 tax year; and $7,240.09 was allocated to plaintiffs’ 1971 tax year.
I.R.C. § 483; Treas. Reg. § 1.483-1(c)(2), T.D. 6873.1966-1 C.B. 101. In the case of an installment contract which does not contain any provision for interest, the amount of interest to be imputed is computed at the rate of 5 percent per annum compounded semiannually. Although not applicable to the instant case, it should be noted that T.D. 6873 was amended by T.D. 7394, 1976-1 C.B. 135.
Corn Products Refining Co. v. Comm’r, 350 U. S. 46 (1955).
166 Ct. Cl. 421, 333 F. 2d 847 (1964). See also Union Bag-Camp Paper Corp., 163 Ct. Cl. 525, 325 F. 2d 730 (1963).
313 F. 2d 710 (9th Cir. 1962).
See also Treas. Reg. § 1.631-2(e)(2) (1960) and Rev. Rul. 58-295, 1958-1 C.B. 249.
166 Ct. Cl. at 427, 333 F. 2d at 851.
26 T.C.M. (CCH) 488 (1967).
The contract was awarded on' January 30, 1968, and was to terminate on December 31, 1970.
304 F. 2d 125 (2d Cir. 1962).
Eustice, Contract Rights, Capital Gain, and Assignment of Income—the Ferrer Case, 20 Tax L. Rev. 1 (1964). The approaches may be grouped into certain broad categories: (1) Is the asset “property” which is a “capital asset” under § 1221? See Comm’r v. Gillette Motor Transport Co., 364 U. S. 130 (1960); Comm'r v. Ferrer, supra note 16. (2) Do the amounts received by the taxpayer upon the sale of the contract rights represent a substitute for future ordinary income that would otherwise have been received by the taxpayer? See Comm’r v. P. G. Lake Inc., 356 U. S. 260 (1958); Comm’r v. Ferrer, supra. (3) Does the transaction constitute a “sale or exchange”? See Fairbanks v. United States, 306 U. S. 436 (1939). (4) Was the property acquired with an intention that it would serve an integral function in the taxpayer's regular business activities? See Corn Products Refining Co. v. Comm'r, supra note 9.
However, it should be noted that our approach here does not serve to read out of the statute the obvious and important class of “business connected” assets covered by § 1231.
See J. R. Simplot Co. v. Comm’r, 26 T.C.M. (CCH) at 492. Cf. Hollywood Baseball Ass’n v. Comm’r, 423 F. 2d 494, 499-500 (9th Cir.), cert. denied, 400 U. S. 848 (1970) (Corn Products doctrine applied to § 337).
I.R.C. § 483(f)(3).
Undue hardship has the same meaning for § 6651(a)(3) purposes as it does under § 6161, extensions of time to pay tax, Treas. Reg. § 1.6161-1(b) (1960).
Treas. Reg. § 301.6651-1(c)(1), T.D. 7133, 1971-2 C.B. 415.
Deffendall v. United States, 386 F. Supp. 509, 512 (D. Or. 1974); Fischer v. Comm’r, 50 T.C. 164, 177 (1968). Cf. Olshausen v. Comm’r, 273 F. 2d 23 (9th Cir. 1959), cert. denied, 363 U. S. 820 (1960) (I.R.C. § 294 of the 1939 Code, burden to prove reasonable cause on the taxpayer).