HITCHCOCK v. FRANK
63-1 USTC ¶ 9497; 11 AFTR 2d 1703 (W.D. Wash. 1963).

Key Topics
DISPOSAL WITH A RETAINED ECONOMIC INTEREST
· Ownership of timber
· · Date of acquiring ownership
· Date of disposal
· Disposal to related business entity

The taxpayer was the successful bidder under a timber offering by the U.S. Department of the Interior. He was notified on July 26, 1950, that his bid had been accepted; on July 31, 1950, a proposed contract was signed by the taxpayer; and on September 20, 1950, the Assistant Secretary of the Interior signed the contract. The taxpayer agreed to purchase the timber, to pay a specified price per thousand board feet, to cut all timber by a designated date, and to pay the full purchase price whether the timber was actually cut or not. Title was retained by the seller until payment was received. In October 1950, the taxpayer organized a partnership which began cutting the timber in March 1951. The partnership's cutting was pursuant to an implicit unwritten understanding between the taxpayer and the partnership that the taxpayer would retain the contract and that the partnership would have the right to cut and sell the logs for its own account. In October 1952, the taxpayer achieved a more definite and certain arrangement with the partnership, which was reflected in the accounts of the partnership. The taxpayer reported the payments received from the partnership in 1953, 1954 and 1955 as long-term capital gain from a disposal with a retained economic interest under sections 117(k)(2) and 631(b). The Commissioner contended that the payments were ordinary income, apparently contending that: (1) the contract with the Government did not confer ownership of the timber on the taxpayer; (2) if the contract conferred ownership on the taxpayer, he held the timber for less than six months before he permitted the partnership to begin cutting; (3) if the taxpayer was the owner and had held the timber for six months, he did not retain an economic interest in it; and (4) section 707(b)(2) deprives gain from a sale between a partnership and his partnership of capital gain status.

Held: For the taxpayer. The contract with the Government became effective when the taxpayer was notified that his bid had been accepted and constituted a sale of timber to the taxpayer. Retention of legal title was only for security purposes. The taxpayer became the owner of the timber under the contract and was thus qualified to make a disposal, which he did through his arrangement with the partnership. No disposal occurred prior to the definite arrangement of October 1952 because the earlier cutting occurred pursuant to an implicit understanding which was loose, informal, vague and indefinite and did not constitute any form or type of contract. The disposal thus occurred more than six months after the taxpayer had become the owner of the timber. Since the taxpayer had to look to the severance of the timber for payment, he retained an economic interest. ,Section 631(b) is a specific, remedial section which overrides the more general provisions of section 707(b)(2). Consequently, the proceeds derived by the taxpayer from the partnership qualify under sections 117 (k)(2) and 631(b) for capital gain treatment.

MEMORANDUM DECISION

BOLDT, District Judge: At the request of counsel, determination of this case has been withheld awaiting decision in United States v. Giustina by the Court of Appeals for this circuit. It appeared likely such decision would be controlling of the present case. Letters of counsel following entry of the Giustina opinion, 313 F.2d 710, indicate that decision in favor of the taxpayers has now become final.

In the letter of government counsel it is contended that factual differences distinguish the cited decision from the present case because (1) under the terms of his purchase contract with the Indian Service M. G. Hitchcock was not the "owner" of the timber in question and (2) he made no "disposal" thereof because his cutting contract with the partnership was oral rather than written. Upon a careful consideration of the Giustina decision and the facts as found in the present case the specified contentions are found without merit.

The facts and conclusions as found and held are correctly stated in the proposed Findings of Fact and Conclusions of Law lodged by plaintiff following the trial. Such Findings and Conclusions (excluding alternative Finding XIV and alternative Conclusion XVI) in a form suitable for signature and entry, together with an appropriate form of judgment may be presented to the court at the convenience of counsel.

The above-entitled action duly and regularly came on for trial before the undersigned Judge of the above-entitled Court, sitting without a jury, on September 12, 1961. Plaintiffs appeared by their attorneys. Bryant R. Dunn, Ben J. Gantt, Jr., and William R. Smith of Graham, Green, Dunn, Johnston & Rosenquist, of Seattle, Washington. The Defendant appeared by Brockman Adams, United States Attorney, Chares W. Billinghurst, Assistant United States Attorney and Charles H. Magnuson and Joyle C. Dahl, Attorneys, Department of Justice. Plaintiffs presented testimony in support of their action and Plaintiffs' Exhibits (Numbers 1 to 64) and Defendant's Exhibits (A to Z and AA to TT) were introduced and admitted in Evidence. Upon the completion of the presentation of Plaintiff's testimony, both Plaintiffs and Defendant rested. The Court, having considered all of the evidence, the briefs and memoranda filed by the parties and the arguments of counsel, rendered its written memorandum decision finding that Plaintiffs are entitled to a judgment against the Defendant; and the Court, having been and now being fully advised in the premises, does hereby find the facts and state its conclusions of law as follows:

I. This is a civil action arising under and by virtue of the Internal Revenue Laws of the United States for the recovery of individual income taxes, interest and penalties assessed against and collected from Plaintiffs, for their taxable years ending December 31,1953, 1954 and 1955, respectively. The Court has jurisdiction of the subject matter thereof under the provisions of Title 28, U. S. C., Section 1340.

At all times herein mentioned, the Plaintiffs, M. G. Hitchcock and Kathleen Hitchcock, were and now are husband and wife; and, during the taxable ),ears in question they were and now are residents of White Swan, Washington.

During the period October 31, 1952, until September 30, 1960, the Defendant, William E. Frank, was the duly appointed and acting District Director of Internal Revenue for the Collection District of Washington. At the time of the commencement of this action, the Defendant Frank was a resident within, the Western Judicial District of Washington.

II. The written memorandum decision of the Court rendered in this cause is by this reference incorporated into and made a Part of these Findings of Fact to the same effect as ff such decision were fully set forth herein.

III. (1) On January 19, 1950, the United States Department of the Interior, by written notice (Ex. 1) advertised for sealed bids for the purchase of timber on a tract within the Yakima Indian Reservation described as the "Dry-Logy Creek Logging Unit" to be submitted to the Superintendent, Yakima Indian Agency, at Toppenish, Washington, on June 27, 1950 (Pre. Tr. Or., Ad. Fact 4). On June 27, 1950, M. G. Hitchcock submitted the high bid for the purchase of the timber. At the same time and in compliance with. the notice for bids (Ex. 1), Hitchcock deposited with the Superintendent of the Yakima Indian Agency a certified check in the sum of $120,000.00, payable to the Treasurer of the United States, as an advance payment upon the purchase price of the timber (Tr. 25 ;: Pre. Tr. Or,, Ad. Fact 4; Ex. 30).

(2) On July 26, 1950, the Bureau of Indian Affairs of the United States Department of the Interior (acting through Mr. Darrell Fleming, Acting Superintendent of the Yakima Indian Agency) notified Hitch-cock by telegram (Ex. 2) that his high bid for the timber had been accepted (Tr. 25, 26; Pre. Tr. Or,, Ad, Fact 5). Said telegram stated as follows:

YOUR BID ON DRY-LOGY UNIT ACCEPTED. CONTRACT AND BOND MUST BE SUBMITTED FOR APPROVAL WITHIN SIXTY DAYS.

(3) On July 31, 1950, the Superintendent of the Yakima Indian Agency, as seller, and Hitchcock, as purchaser, signed :Timber Contract No. ll8-ind-1410, dated July 26, 1950 (Ex. 3), covering the timber the timber on the Dry-Logy Creek Logging Unit and evidencing the terms and conditions of the sale thereof. Said Timber Contract (Exhibit 3), together with Exhibits 46 and 59, constituting a part thereof (hereinafter collectively referred to as the "Indian Service Contract"), are by this reference incorporated into and made a part of these Findings of Fact to the same effect as if such Contract were fully set forth herein. Also incorporated herein by reference are Exhibits 60, 61 and 62, setting forth the location and volume of the timber cut on the Dry-Logy Creek Logging Unit during the years 1953, 1954 and 1955, respectively.

(4) On September 20, 1950, the Indian Service Contract and Hitchcock's bond in the penal sum of $70,000.00 (Ex. 3)were approved by Assistant Secretary of the Interior, Dale E. Doty, and Hitchcock was advised of said approval by letter (Ex. 4) from the Superintendent of the Yakima Indian Agency, Perry E. Skarra, on September 27, 1950 (Pre. Tr. Or., Ad. Fact 6). The delay in obtaining such approval was occasioned by a minor technical error in the contract as prepared by the Indian Service (Tr. 26, 27) and a technical error in connection with execution of the bond by the surety (Ex. 27).

(5) Under the terms of the Indian Service Contract, the Indian Service agreed to sell to Hitchcock certain merchantable timber; and Hitchcock agreed to purchase said timber and to pay therefore a purchase price measured at specified fixed rates per thousand feet, board measure, subject to quarterly adjustment beginning April 1, 1951. Hitchcock agreed to cut all of the timber covered by the Indian Service Contract prior to April I, 1972, and to "pay to the Superintendent, for the use and benefit of the Indians entitled thereto, the full value of said timber . . ." (Ex. 3, para. 6). Hitchcock was required to make payments upon the purchase price of the timber, in advance of cutting (Ex. 3, para. 13, 14, 17) and was obligated to pay the full purchase price of the timber whether cut and removed or not (Ex. 3, General Timber Sale Reg., para. 15).

(6) Under the terms of the Indian Service Contract, Hitchcock became and was the conditional vendee of the timber concerned; and, on July 26, 1950, the date that he was notified that his bid to purchase the timber had been accepted, Hitchcock became the "owner" of such timber, within the meaning of Section 117 (k)(2) of the Internal Code of 1939 and Section 631(b) of the Internal Revenue Code of 1954. L. D. Wilson, (1956) 26 T. C. 474; Giustina v. United States, (D. C; Or., 1960) 190 F. Supp. 303; Wagar Lumber Company v. United States, (W. D. Wash., 1960) 181 F. Supp. 388.

(7) All of the negotiations, transactions and dealings between the Indian Service and Hitchcock with reference to the Indian Service Contract were conducted by Hitchcock, individually, for his own account, and not as agent for any person, firm or corporation. Hitch-cock did not intend to act and did not act on behalf or for the benefit of his father, C. G. Hitchcock, his father-in4aw, E. J. O'Larey, or the M. G. Hitchcock Mill partnership at Sisters, Oregon. The Indian Service Contract was Hitchcock's individual property and it was not an asset of the M. G. Hitchcock Mill partnership (Pre. Tr. Or., Ad. Fact 8; Tr. 35, 38, 40, 45, 68).

IV. (1) At all times since 1928 and during all of his adult life, the Plaintiff, M. G. Hitchcock, has been a lumber manufacturer, engaged in such business either as an employee, sole proprietor, partner or officer and manager of a corporation (Tr. 19 to 22). On January 1, 1945, a partnership known as the "M. G. Hitchcock Mill" was organized to continue and carry on, and until some time in 1951 did carry on, a lumber manufacturing business at Sisters, Oregon. The members of this partnership were Hitchcock, his father, C. G. Hitch-cock and his father-in-law, E. J. O'Larey, as equal one-third partners (Ex. 25). Both Hitchcock's father and father-in4aw were in their seventies, and Hitchcock's father was in bad health and not expected to live for long (Tr. 35).

(2) For some two or three years before bidding on the Dry-Logy timber, Hitchcock had been looking for other sawmill interests (Tr. 23). At the time that Hitchcock submitted his bid for the Dry-Logy timber and continuing until on or about October 10, 1950, it was Hitchcock's intention to log and mill the timber individually, as a sole proprietor, separate and apart from the M. G. Hitchcock Mill partnership at Sisters, Oregon. Hitchcock did not intend to associate either his father, C. G. Hitchcock, or his father-in-law, E. J. O'Larey, in the venture because of their advanced age and his father's ill health (Tr. 35 to 37, 107).

(3) From the time (June 27, 1950) that he submitted the high bid for the Dry-Logy timber, Hitchcock began designing and Prepared to build and equip a logging outfit and sawmill to' cut and mill the timber (Tr. 31; Pre. Tr. Or., Ad, Fact 4). He chose a mill site at White Swan, Washington, took an option on it (Ex, M)and later purchased the same on September 29, 1950 (Ex. BB; Tr. 32), He also made preparations for the purchase of machinery and equipment for the sawmill (Tr. 33, 34; Ex. G to L, inc.; Ex, CC) and, on September 28, 1950, Hitchcock opened an individual checking account in Seattle-First National Bank at Toppenish, Washington; with an initial deposit of $50,000.00, representing the proceeds from the sale of his home in Oregon (Tr. 43, 44, 97; Ex. 31 ).

(4) In the course of setting up the logging and mill operation at White Swan, it developed to be of such magnitude and interest that Hitchcock was required to devote practically all of his time and attention thereto. Because of this, and since available timber was very scarce at Sisters, Oregon, Hitchcock, in early October, 1950, changed his mind about continuing the Sisters operation and his residence at Sisters, Oregon, and decided to move to White Swan, Washington, to liquidate the Sisters, Oregon, operation, and to utilize the resulting proceeds in the construction and operation of the saw mill at White Swan, Washington. In conjunction with his determination, and about October 10, 1950, it was also then first determined that a partnership to be known as White Swan Lumber Company and consisting, of Hitchcock, his father, C. G. Hitchcock, and his father-in-law, E. J. O'Larey, would be organized to log and mill the Dry-Logy timber covered by the Indian Service Contract, which contract was to remain Hitchcock's individual property (Tr. 36 to 45, 60).

(5) From and after October 10, 1950, or thereabouts, construction of the mill and logging road, which formerly had been carried on in the name of and by, Hitchcock, individually, was thereafter carried on in the name of White Swan Lumber Company. On October 11, 1950, Hitchcock's individual checking account in Seattle-First National Bank was closed out and a partnership checking account in the name of White Swan Lumber Company was opened with an initial deposit of $320,000.00 (Tr. 44; Ex. 32), On October 13, 1950, a Certificate of Assumed Name was filed with the Yakima County Clerk (Ex. 5), stating that M. G. Hitchcock, C. G. Hitchcock and E. J. O'Larey were conducting or would conduct a business at White Swan, Washington, as White Swan Lumber Company.

(6) The interests of Hitchcock's father and father-in-law in the proposed partnership were to be small (Tr. 38) and, by October 17, 1950, it was at least tentatively agreed that Hitchcock's interest was to be 85%, his father's interest, 10%, and his father-in-law's interest, 5% (Tr. 42, Ex. 6). No written partnership agreement was then entered into the capital contributions were not definitely determined. Each was to contribute what he had available (Tr. 43). The arrangement was then, and for some time following the death of Hitchcock's father on March 7, 1951, remained, loose, indefinite and tentative (Tr. 37 to 46; Tr. 50 to 60).

(7) The specific purpose for which the proposed partnership was intended was to construct a sawmill, planing mill and dry kilns upon the mill site at White Swan, Washington, and to cut the timber covered by the Indian Service Contract. This was the only timber in the area available for cutting (Pre. Tr. Or., Ad. Facts 10, 12; Tr. 38, 40, 45, 69, 107). It was implicitly understood between Hitchcock, his father and his father-in-law that the proposed partnership would have the right to cut and log the Dry-Logy timber and to sell the resulting sawlogs or wood products for its own account (Tr. 45), but it was also expressly and implicitly understood that the Indian Service Contract was to remain Hitchcock's individual property (Tr. 45, 60). Hitchcock did not at any time, then, prior thereto or thereafter, assign, transfer or contribute the Indian Service Contract to either the M. G. Hitchcock Mill partnership, the proposed partnership heretofore referred to, or the White Swan Lumber Company partnership formed on November 20, 1951, hereinafter referred to in Finding of Fact V (Tr. 38, 40, 68, 69; Ex. 9, Art. III).

(8) At all times material herein, the Indian Service Contract was and remained the individual property of M. G. Hitchcock (Pre. Tr. Or., Ad. Fact 8; Tr. 35, 38, 40, 45, 60, 68, 69; Ex. 9, Art. III).

V. (1) On March 7, 1951, prior to the time that construction of the mill and logging road to the Dry-Logy timber was completed, Hitchcock's father, C. G. Hitchcock, died and his estate was probated in Deschutes County, Oregon (Ex. 24). Under his Last Will and Testament, C. G. Hitchcock bequeathed all of his property and estate to his surviving wife, Ethel I. Hitchcock who, on April 12, 1951, was appointed executrix of his estate. Prior to November, 1951, M. G. Hitchcock purchased from his father's estate, the decedent's partnership interest in the M. G. Hitchcock Mill at Sisters, Oregon, for $114,149.22, the inventoried and appraised value thereof, paying therefore the sum of $4,149.22 in cash and giving to his mother, Ethel I. Hitchcock, his promissory note in the sum of $110,000.00 for the balance (Tr. 50 to 52; Ex. 24). The partnership interest of the decedent in M. G. Hitchcock Mill included his interest in the funds advanced by the M. G. Hitchcock Mill partnership to White Swan Lumber Company (Tr. 50, 51 ).

(2) Construction of the White Swan Mill was completed in September, 1951 (Tr. 46, 47). The logging road from the mill to the Dry-Logy timber was completed in April, 1951 (Tr. 47). The first cutting of the Dry-Logy timber took place in March of 1951 (Tr. 47, 49, 50; Ex. A). During the 1951, 11,983,100 feet B. M. of pine timber and 380 feet B. M. Of fir and other timber were cut from the Dry-Logy Creek Logging Unit.

(3) A total of :approximately $945,000.00 was expended in the construction of the White ' Swan mill facilities and approximately $39,000.00 was expended upon the logging road (Pre. Tr. Or., Ad. Fact 11). These funds were derived (a) $50,000.00 from the sale of M. G. Hitchcock's home in Oregon; (b) $300,000,00 from the sale of Mrs. M, G. (Kathleen) Hitchcock’s hardware Store at Bend, Oregon; and (c) the balance primarily from ·funds derived: from the M. G. Hitchcock Mill partnership and liquidation of its operations and assets in Oregon (Tr. 51).

(4) Prior to November 20, 1951, only one capital account, that of M. G. Hitchcock, was reflected on the books of White Swan Lumber Company. This account Showed Hitchcock's capital as an mount in excess of $1,400,000.00 (Tr. 134, 135'; Ex. 35, Acct; 20-A, Capital --M. G, Hitchcock).

(5) In November, 1950, M. G. Hitchcock retained the accounting firm of Boyd, Olofson & Company, in Yakima, Washington, to set up a general set of records for White Swan :Lumber Company. (Tr. 115). Mr. Winfield G. Boyal, a Certified Public Accountant and the senior partner in that firm, did not personally set up: the original books. He sent Mr. Jim Warnock, one of the men in his office, to White Swan for that purpose (Tr. 115, 116). On November 20, 1951, Mr. Boyd visited M. G. Hitchcock at White Swan because of Mr. Warnock's concern over whether or not there was, in fact, a partnership operation at White Swan and: the terms of the partnership arrangement, if any (Tr. 116 to 118). At that time, Hitchcock explained to Mr. Boyd the source of the funds credited to his capital account on the books of White Swan Lumber Company and stated that he wanted to operate White Swan Lumber Company as a partnership with his father-in-law, E. J. O'Larey, his mother, Ethel I. Hitchcock, .and his brother, Phil Hitchcock,. as his copartners (Tr. 120, 121).

(6) It was not until November 20, 1951, as a result of this conversation between Hitchcock and Boyd, that a definite partnership arrangement was decided upon by Hitchcock and later agreed upon and accepted by and between M. G. Hitchcock, his mother, Ethel I. Hitchcock, his father-in-law, E. J. O'Larey, and his brother Phil Hitchcock. The father-in-law, E. J. O'Larey, moved to White Swan about that time (Tr. 47).
Under this arrangement, Hitchcock, his mother, his father-in-law and his brother, as copartners, agreed to operate the logging and lumber manufacturing business at White Swan, Washington; as White Swan Lumber Company, with respective partnership interests of 85 %, 5%, 5% and 5% (Tr. 53, 121,122). Capital accounts of the respective partners were to be arrived at by canceling the note indebtedness of M. G. Hitchcock to his mother and treating this amount as her capital contribution (Tr. 54); by utilizing E. J. O'Larey's credits on the books of the M. G. Hitchcock Mill partnership at Sisters, Oregon (representing his share of M. G. Hitchcock Mill funds advanced to M. G. Hitchcock's capital account at White Swan) as his capital contribution (Tr. 54, 55); and by crediting Hitchcock with the amount of his personal investment in the White Swan operation (including the funds derived from the sale of his wife's hardware store in Oregon) plus such amount as represented his share of the capital derived from the M. G. Hitchcock Mill partnership at Sisters, Oregon, after taking into consideration the respective interests therein of his mother (arising from cancellation of the note indebtedness) and his father-in-law, E. J. O'Larey (Tr. 55, 122, 131). The remaining partner, Phil Hitchcock was to have no capital account initially, but was to contribute to the partnership by way of services (Tr. 54, 122).

(7) Shortly after this partnership arrangement was arrived at, it was reflected on the books of White Swan Lumber Company, as of December 31, 1951, by the partnership accountants, Boyd, Olofson & Company (Tr. 123, 124; Tr. 129 to 135). In order to reflect the respective capital contributions to the partnership, White Swan Lumber Company, the books of the M. G. Hitchcock Mill partnership at Sisters, Oregon, were closed (Tr. 121) and, that portion of Hitch-cock's existing capital account in White Swan Lumber Company, derived from the M. G. Hitchcock Mill, being $518,215.49, was charged on the books of White Swan Lumber Company to M. G. Hitchcock Mill and was credited to the partners' White Swan capital accounts as follows (Tr. 130 to 135; Ex. 6, J-14): Hitchcock, $314,897.95; his mother, Ethel I. Hitchcock, $119,497.57; and his father-in-law, E. J. O'Larey, $83,819.97. These adjustments left Hitchcock with a total capital account of $1,277,989.24 (Tr. 134; Ex. 35, Acct. 20-A), his mother with a capital account of $119,497.57 (Tr. 133; Ex. 35, Acct. 20-E), and Iris father-in-law with a capital account of $83,819.97 (Tr. 132, 133; Ex. 35, Acct. 20-F). In accordance with this arrangement, the promissory note in the sum of $110,000.00 given by Hitchcock to his mother was canceled and returned to Hitchcock (Tr. 54).

(8) After the death of Hitchcock's father, C. G. Hitchcock, on March 7, 1951, and continuing until November 20, 1951, or shortly thereafter, there was no definite understanding or agreement as to who was to carry on the White Swan logging and mill operation originally intended to be carried on by a partnership composed of Hitchcock, his father and his father-in4aw. However, on November 20, 1951, or shortly thereafter, the members of such a partnership, their respective percentages of interest and their respective capital contributions were arrived at and agreed upon as hereinabove set forth in this Finding of Fact V (Tr. 37 to 46; Tr. 50 to 60; Tr. 87 to 93; Tr. 117 to 123; Tr. 130 to 135; Ex. 36, 1-14; Ex. 35, Acct. 20-A, Capital M.G. Hitchcock; Acct. 20-E, Capital Mrs. C. G. Hitch-cock; Acct. 20-F, Capital--E. J. O'Larey).

VI. (1) On October 27 or 28, 1952, the Certified Public Accountant, Mr. Winfield G. Boyd, had a further conversation with Hitchcock and then advised him that there should be a more definite and certain arrangement between Hitchcock and the partnership, White Swan Lumber Company, covering the cutting of the Dry-Logy timber by the partnership, and fixing a method of determining the price to be paid for the timber, and that such arrangement should be reflected more Clearly on the hooks of the partnership (Tr. 64, 65, 135,136).

(2) As a result of this conversation, Hitchcock determined and advised Boyd of the prices to be paid to him by the partnership, White Swan Lumber Company, for Dry-Logy timber cut by the partnership in 1952, and arrived at a method of determining the prices to be paid for Dry-Logy timber cut by the partnership in 1953 and later years. The Dry-Logy timber cut by the partnership in 1952 was to be paid for at the price payable for timber cut Under the terms of another Indian Service contract covering the sale of timber on an adjacent logging unit known as the "Brush-Tepee Unit," which Brush-Tepee timber was deemed by Hitchcock to be of comparable value; and the Dry-Logy timber cut by the partnership in 1953 and later years was to be paid for at prices representing the value thereof as determined by Mason, Bruce & Girard, a firm of timber engineers, if available, and, if not; by some other competent timber engineer (Tr. 65 to 67; Tr. 136 to 139).

(3) In the course of this discussion, the right and obligation of the partnership, White Swan Lumber Company, to cut all of the Dry-Logy timber covered by the Indian Service Contract, in accordance with the cutting requirements thereof, was discussed and recognized (Tr. 67, 139). However, Hitchcock didn't want his mother and father-in-law obligated on a long-term contract that, in view of their advanced age, might tie up their estates or prove disastrous or work to their disadvantage in future years, without an "escape clause." At Boyd's suggestion, Hitchcock determined that while the partnership would have the right to cut all of the Dry-Logy timber and an obligation to comply with the cutting requirements of the Indian Service Contract, the partnership could terminate its obligation to cut with respect to any future logging year by giving Hitchcock adequate prior notice (Tr. 67, 139).

(4) At the conclusion of this discussion, Boyd advised Hitchcock that the other partners of White Swan Lumber Company should all be informed of, understand and agree to the terms and conditions of the definite cutting arrangement between Hitchcock and the partnership, as determined by Hitchcock and expressed to Boyd. Shortly thereafter, said terms and conditions were explained to Hitchcock's mother and brother by Hitchcock, and to Hitchcock's father-in-law by Boyd, and each of them was satisfied therewith and agreed to the same (Tr. 67, 139, 140).

(5) The books of the partnership, White Swan Lumber Company, did not, at any time prior to November 1, 1952, reflect the existence of any cutting arrangement with Hitchcock coveting the Dry-Logy timber. All payments required under the Indian Service Contract were carried on the books of the partnership in a "Timber Account" showing debits at the end of 1951 in the total sum of $448,434.53, and debits at the end of October, 1952, in the sum of $728,434.53, with no corresponding credits (Tr. 143, 144; Ex. 35, Acct. No. 6, Timber Account).

(6) As a result of Hitchcock's conversation with Boyd on October 27 or 28, 1952, and the later ratification by Hitchcock's mother, father-in-law and brother of Hitchcock's determinations as set forth in the foregoing paragraphs (2), (3) and (4) of this Finding of Fact VI concerning the right and obligation of the partnership to cut the Dry-Logy timber, Boyd, Olofson & Company, shortly thereafter, made certain entries and adjustments on the books of the partnership to reflect the resulting definite cutting arrangement between Hitchcock and the partnership:

(a) On November 1, 1952 (Tr. 148), a receivable account for Hitchcock was set up on the books of the partnership (Tr. 144). Hitchcock was then charged with the debits in the partnership Timber Account as of December 31, 1951, in the sum of $448,434,53, and was credited with the sum of $299,894.92 for the Dry-Logy timber cut by the partnership in 1951, which amount was computed at the prices specified in the Indian Service Contract. He was also given a credit in the further sum of $7,616.09 for a right-of-way, leaving a net difference of $140,923.52 between such charges and credits for the year 1951 (Tr. 143, 144; Ex. 38, 1-28). This amount ($140,923.52) was then entered as a debit in Hitchcock's partnership receivable account and as a credit in the partnership's Timber Account (Tr. 144; Ex. 35, Acct. No. 2-A, Accounts Receivable, M. O. Hitchcock; Ex. 35, Acct. No. 6, Timber Account). As a result of these debits and credits, the partnership paid Hitchcock for Dry-Logy timber cut by the partnership during 195.1 the same prices that Hitchcock paid the Indian Service for such timber (Tr. 144, 145).

(b) With respect to the Dry-Logy timber cut by the partnership in 1952, Hitchcock was charged with the additional debits in the partnership's Timber Account in the sum of $400,000.00, representing the payments under the Indian Service Contract made by the partnership to the Indian Service for and on behalf of Hitchcock in 1952, and Hitchcock was credited with the sum of $532,320.28 for such timber, which amount was computed by application or me prices, per thousand feet, b.m., specified in the Brush-Tepee Unit (J. Neils Lumber Company) Indian Service contract to the volume of Dry-Logy timber cut by the partnership in 1952 (Tr. 145, 146; Ex. 36, 1-32!. This latter amount ($532,320.28) was then entered as a credit to Hitchcock s partnership receivable account (Tr. 145 to 147; Ex. 35, Acct. No. 2-A, Accounts Receivable--M. G. Hitchcock) and offsetting entries were made in the partnership's Timber Account (Tr. 145 to 147; Ex. 35, Acct. No. 6, Timber Account). As a result of these debits and credits as reflected in Hitch-cock's partnership receivable account, there remained owing by Hitchcock to the partnership as of December 31, 1952, the sum of $8,603.24. As a further result of said debits and credits, the partnership paid Hitchcock, for Dry-Logy timber cut by the partnership in 1952, the sum of $532,320.28.

(7) With respect to Dry-Logy timber cut by the partnership in the following years 1953, 1954 and 1955, the same procedure of debits and credits to Hitchcock's partnership receivable account and the partnership Timber Account was followed, reflecting (a) the payments under the Indian Service Contract made by the partnership to the Indian Service for and on behalf of Hitchcock and (b) the amounts paid to Hitchcock for the Dry-Logy timber cut by the partnership during each of said years (Tr. 147; Tr. 150 to 157; Ex. 36, J-46; Ex. 36, J-62; J-81; Ex. 35, Acct. No. 2-A--M. G. Hitchcock Accounts Receivable; Ex. 35, Acct. No. 6, Timber Account). This procedure was based upon the determinations made by Hitchcock on October 27 or 28, 1952, and shortly thereafter ratified and agreed to by the other partners of White Swan Lumber Company, as set forth in the preceding paragraphs (2), (3) and (4) of this Finding of Fact VI (Tr. 156, 157).

(8) Under the cutting arrangement so followed by Hitchcock and the partnership, the amounts paid by the partnership to Hitchcock for Dry-Logy timber cut by the partnership during the respective years 1953, 1954 and 1955 were determined substantially in accordance with the method determined by Hitchcock at the time of his October 27 or 28, 1952, conversation with Boyd, thereafter ratified and agreed to by the other partners of White Swan Lumber Company (Tr. 146, 147; Tr. 149 to 157). Boyd, Olofson & Company, and with little or no consultation with Hitchcock, would determine the amount to be paid by the partnership to Hitchcock based upon the volume of Dry-Logy timber cut by the partnership in the year in question (EX. 43, 44, 45; Tr. 155, 156), and the value thereof as fixed by the timber engineers, Mason, Bruce & Girard, and then enter the resulting debits and credits on the books of the partnership (Tr. 149 to 157).

(9) During the years 1953, 1954 and 1955, the partnership, White Swan Lumber Company, complied with and performed in full all of the cutting requirements of the Indian Service Contract and complied with and performed in full each of its obligations to Hitchcock under the cutting arrangement as agreed upon by and between Hitchcock and the other partners of White Swan Lumber Company on or shortly after October 27 or 28, 1952,

(10) On April 1, 1958, the partnership, White Swan Lumber Company, was incorporated as White Swan Lumber Company, Inc., a Washington corporation (Tr. 74), to operate the partnership mill at White Swan, Washington and to cut the Dry-Logy timber (Tr. 75). Shortly after the formation of the corporation, the partnership, on April 15, 1958, executed an Assignment and Bill of Sale to the corporation (Exhibit 26) which, by this reference, is incorporated into and made a part of this Finding of Fact VI to the same effect as if such Assignment and Bill of Sale were fully set forth herein. Said Assignment and Bill of Sale was executed by each of the partners of White Swan Lumber Company and also by the Plaintiffs, M. G. Hitchcock and Kathleen Hitchcock, individually. Under item 10 of said Assignment and Bill of Sale, the terms, provisions and conditions of the cutting arrangement existing between Hitchcock and the partnership at all times from or shortly after October 27 or 28, 1952, are substantially set forth in writing (Tr. 77).

(11) As an implicit part of the partnership agreement between Hitchcock, his mother, his father-in-law and brother, as set forth in Finding of Fact V, it was understood that the partnership, White Swan Lumber Company, would have the right to cut and log the Dry-Logy timber for its own account (Tr. 89, 105, i07, 118).

(12) The Dry-Logy timber cut by the partnership, White Swan Lumber Company, duri0g the years 1953, 1954 and 1955 (Exs. 43, 44 and 45) was disposed of by Hitchcock under a contract, express and implied in fact, made and entered into on or shortly after October 27 or 28, 1952, which said contract was based upon the determinations arrived at by Hitchcock and expressed to Boyd on October 27 or 28, 1952, and the ratification and approval of said determinations by the other partners of White Swan Lumber Company shortly thereafter, as set forth in paragraphs (2), (3) and (4) of this Finding of Fact VI, in fact followed by Hitchcock and the partnership with respect to all Dry-Logy timber cut by the partnership in subsequent years and clearly reflected on the partnership's books of account (Tr. 135 to 157). L.D. Wilson, (1956) 26 T. C. 474; Giustina v, United States, (D. C. Or., 1960) 190 F. Supp. 303; A. F. Lowes Lumber Co. (1960) 19 T. C. M. 727.

(13) All Dry-Logy timber cut prior to the date of the contract referred to in the preceding paragraph (12) was not cut under or pursuant to any form or type of contract, but was cut pursuant to the "implicit understanding" with Hitchcock, referred to in paragraph (7) of Finding of Fact IV and paragraph ( 11 ) of this Finding of Fact VI. This "implicit understanding" was loose, informal, vague and indefinite, and lacked the basic terms and essential elements of a contract. Ah Pah Redwood Co. v. Commissioner o/Internal Revenue, (9 Cir., 1957) 251 F. (2d) 163; Jantzer v. Commissioner o[ Internal Revenue, (9 Cir., 1960) 284 F. (2d) 348.

(14) While (a) the expenditures to construct the White Swan mill and logging road (Finding of Fact V, para. (3)) and (b) the respective capital contributions of Hitchcock's mother and father-in-law to the partnership, White Swan Lumber Company (Finding of Fact V, paras. (6) and (7)) and (c) the payments and advances by the partnership, White Swan Lumber Company for and on behalf of Hitchcock in connection with the Indian Service Contract (Para. (5), (6) and (7) of this Finding of Fact VI), were made in reliance upon the "implicit understanding" referred to in the preceding paragraph (13) that the Dry-Logy timber would be cut by and for the account of the proposed partnership referred to in Finding of Fact IV and the partnership, White Swan Lumber Company, referred to in Finding of Fact V, thus creating certain equitable rights with respect to the Dry-Logy timber, such rights were vague, indefinite and noncontractual in nature. Spooner v. Reserve Life Insurance Co., (1955) 47 Wn. (2d) 454, 287 P. (2d) 735; Olmstead v. Abbot, (Vt., 1889) 18 Atl. 315; Lager v. Berggren, (1936) 187 Wash. 462, 60 P. (2d) 99; Hardgrove v. Bowman, (1941) 10Wn. (2d) 136, l16P. (2d) 336.

(15) At the time the contract between Hitchcock and the partnership, White Swan Lumber Company, was made and entered into as set forth in paragraph (12) of this Finding of Fact VI, Hitchcock had held the Dry-Logy timber under the Indian Service Contract as the owner thereof for more than six months. L. D. Wilson, (1956) 26 T. C. 474; Giustina v. United States, (D. C. Or., 1960) 190 F. Supp. 303; Ah Pah Redwood Co. v. Commissioner of Internal Revenue, (9 Cir., 1957) 251 F. 2d 163; Jantzer v. Commissioner o! Internal Revenue (9 Cir., 1960) 284 F. 2d 348.

Under the terms of said contract, Hitchcock's right to payment for the Dry-Logy timber was conditioned upon cutting of the timber by the partnership. By virtue of the contract, Hitchcock had to look to severance of the Dry-Logy timber for payment and, consequently, retained an economic interest in such timber. L.D. Wilson, (1956) 26 T. C. 474; A. F. Lowes Lumber Co., (1960) 19 T. C. M. 727; Giustina v. United States, (D. C. Or., 1960) 190 F. Supp. 303.

VII. At all times herein mentioned, Hitchcock was engaged in the business of manufacturing lumber, and the Dry-Logy timber was held by him as a source of supply for the lumber manufacturing business at White Swan, Washington, with respect to which he was a partner. With one exception, Hitchcock made no other sales of timber during his lifetime (Tr. 72), and that one sale of timber was made in the course of the liquidation, termination and winding up of the M. G, Hitchcock Mill partnership at Sisters, Oregon (Tr. 72, 73). Hitchcock has never advertised any timber for sale, employed anyone to sell timber, paid any commissions on the sale of timber or purchased any timber for the purpose of sale (Tr. 73, 74).

VIII. (1) During the year 1953, the partnership, White Swan Lumber Company, cut 20,237,440 feet, b.m., of pine timber and 86,890 feet, b.m., of fir and other timber on the Dry-Logy Creek Logging Unit, and Hitchcock paid the Indian Service for this timber the sum of $512,022.58 (Ex. 43; Pre. Tr. Or., Ad. Fact 17). In accordance with the terms and provisions of the Contract between Hitchcock and the partnership, White Swan Lumber Company, the partnership paid Hitchcock for such timber the sum of $745,160.64 (Pre. Tr. Or., Ad. Fact 17; Ex. 36, J-46; Ex. 35, Acct. No. 2-A-M. G. Hitchcock Accounts Receivable; Ex. 35, Acct. No. 6 Timber Account). In 1953 Hitchcock realized a gain in the sum of $233,-138.06 from the cutting and disposal of Dry-Logy timber.

(2) During the year 1954, the partnership, White Swan Lumber Company, cut 14,2(32,830 feet, b.m. of pine timber and 52,880 feet, b.m. of fir and other timber on the Dry-Logy Creek Logging Unit, and Hitchcock paid the Indian Service for this timber the sum of $338,061.09 (Ex. 44; Pre.Tr. Or., Ad. Fact 17). In accordance with the terms and provisions of the contract between Hitchcock and the partnership, White Swan Lumber Company, the partnership paid Hitchcock for such timber the sum of $496,590.94 (Pre. Tr. Or., Ad. Fact 17; Ex. 36, J-62; Ex. 35, Acct. No. 2-A-M. G. Hitchcock Accounts Receivable; Ex. 35, Acct. No. 6, Timber Account). In 1954 Hitchcock realized a gain in the sum of $158,529.85 from the cutting and disposal of Dry-Logy timber.
(3) During the year 1955, the partnership, White Swan Lumber Company, cut 12,828,580 feet, b.m. of pine timber and 340,850 feet, b.m., of fir and other timber on the Dry-Logy Creek Logging Unit, and Hitchcock paid the Indian Service for this timber the sum of $315,786.15 (Ex. 45; Pre. Tr. Or., Ad. Fact 17). In accordance with the terms and provisions of the contract between Hitchcock and the partnership, White Swan Lumber Company, the partnership paid Hitchcock for such timber the sum of $464,555.68 (Pre. Tr. Or., Ad. Fact 17; Ex. 36, J-81; Ex. 35, Acct. No. 2-A-M. G. Hitchcock Accounts Receivable; Ex. 35, Acct. No. 6, Timber Account). In 1955 Hitchcock realized a gain in the sum of $148,769.53 from the cutting and disposal of Dry-Logy timber.

IX. (1) On January 15, 1954, Plaintiffs filed with the Defendant as District Director of Internal Revenue for the Collection District of Washington, their joint individual income tax return for the calendar year 1953 (Ex. 10). In said joint return, Plaintiffs reported an income tax liability in the sum of $191,816.40 which was duly paid to the Defendant Frank in installments, the last payment of $177,566.40 being made on January 15, 1954 (Pre. Tr. Or., Ad. Fact 19).

(2) In said joint return for 1953, Plaintiffs applied Section 117 (k) (2) of the Internal Revenue Code of 1939, as amended, with respect to the gain in the sum of $233,138.06 realized by them in 1953 from the disposal and cutting of Dry-Logy timber and, in accordance with the provisions of said section 117 (k)(2) and section 117(j) of said Code, Plaintiffs considered and treated said gain as long-term capital gain from the sale of a capital asset (timber) held by them for more than six months and computed their income tax liability accordingly (Pre. Tr. Or., Ad. Fact 20).

(3) On or about October 28, 1957, as a result of a review and audit of Plaintiffs' joint income tax return for 1953, the Commissioner of Internal Revenue, acting by and through the Defendant Frank, executed and mailed to Plaintiffs, a Statutory Notice of Deficiency (Ex. 11) assessing a deficiency in the sum of $271,500.92 with respect to Plaintiffs' 1953 income tax liability; assessing a further deficiency by way of penalty in the amount of $237.50 under Section 294(d) (1)(B) of the Internal Revenue Code of 1939; and assessing a further deficiency by way of penalty in the amount of $26,659.04 under Section 294(d)(2) of said Code (Pre. Tr. Or., Ad. Fact 22). In said Statutory Notice of Deficiency, the Defendant Frank erroneously determined that the gain ($233,138.06) realized by Plaintiffs from the disposal and cutting of Dry-Logy timber was taxable as ordinary income and not as long-term capital gain. Thereafter, during the period December 12, 1957, through January 14, 1959, Plaintiffs paid to the Defendant Frank the sum of $271,500.92 as additional income tax assessed by the Defendant Frank for the year 1953, the sum of $26,896.54 in payment of the penalties assessed for said year, together with interest thereon in the sum of $62,314.71. A schedule of these payments setting forth the dates of payment and amounts paid is included in Admitted Fact 23 of the Pre-Trial Order herein. Said Admitted Fact 23 is by this reference incorporated into and made a part of this Finding of Fact IX to the same effect as if such Admitted Fact were fully set forth herein.

(4) On April 5, 1958, Plaintiffs filed with the Defendant Frank a timely Claim for Refund of income taxes, penalties and interest paid by Plaintiffs for the taxable year 1953, in the following amounts (Pre. Tr. Or., Ad. Fact 24; Ex. 12):

Income Tax	$272,532.40
Penalties	26,896.54
Interest paid to time of filing Claim for Refund	30,000.00

together with statutory interest thereon. On February 3, 1959, Plaintiffs filed with the Defendant Frank a timely Amended Claim for Refund of said income taxes, penalties and interest in the following amounts (Pre. Tr. Or., Ad. Fact 25; Ex. 13):

Income Tax	$272,532.40
Penalties	26,896.54
Interest paid to time of filing Amended Claim for Refund	62,314.71

together with statutory interest thereon.

(5) After said Claim for Refund, as amended, had been filed, Plaintiffs entered into settlement negotiations with the Internal Revenue Service and, as a result thereof, on or about July 19, 1960, certain items of income tax liability representing $118,713.83 of the total amount of income taxes covered by said Claim for Refund ($272,532.40) were settled. However, said settlement did not include or cover the items in said Claim for Refund relating to Plaintiffs' right to long-term capital gain on the disposal of the timber cut on the Dry-Logy Creek Logging Unit in 1953, representing $153,818.67 of the income taxes covered by said Claim for Refund, or the item therein relating to the Section 294(d)(2) penalty assessed and collected by the Defendant Frank (Pre. Tr. Or., Ad. Fact 26; Ex. 14). In accordance with the terms of said settlement, Plaintiffs, on or about July 19, 1960, received a refund of income taxes, penalties and interest for the year 1953 in the total amount of $139,041.25. After such refund, there remained unpaid and outstanding under Plaintiffs' 1953 Claim for Refund (not covered by said settlement) the following:

Income Taxes	$153,818.67
Section 294(d)(2) penalty	11,147.78
Interest paid	34,522.80

together with statutory interest thereon. The terms and provisions of the settlement above referred to, together with the specific items covered thereby and an itemization of the refunds received by Plaintiffs as above stated, are set forth with particularity in Admitted Facts 26, 27 and 28 of the Pre-Trial Order herein. Said Admitted Facts 26, 27 and 28 are by this reference incorporated into and made a part of this Finding of Fact IX to the same effect as if such Admitted Facts were fully set forth herein.

X. (1) On January 15, 1955, Plaintiffs filed with the Defendant as District Director of Internal Revenue for the Collection District of Washington, their joint individual income tax return for the calendar year 1954 (Ex. 16). In said joint return, Plaintiffs reported an income tax liability in the sum of $237,769.18, which was duly paid to the Defendant Frank in installments, the last payment of $222,769.18 being made on January 15, 1955( Pre. Tr. Or., Ad. Fact 32). In accordance with the provisions of the Internal Revenue Code of 1954, Plaintiffs did make, execute and timely file with the Defendant as District Director their joint individual income tax return for the calendar year 1955 (Ex. 20), reporting an income tax liability in the sum of $189,646.67. Plaintiffs duly paid said income tax liability for 1955 to the Defendant as District Director in installments, the last payment in the sum of $25,000.00 being made on January 13, 1956 (Pre. Tr. Or., Ad. Fact 43).

(2) In said joint returns for 1954 and 1955, Plaintiffs applied Section 631(b) of the Internal Revenue Code of 1954 to the gains in the sum of $158,529.85 and $148,769.53 realized by them in 1954 and 1955, respectively, from the disposal and cutting of Dry-Logy timber, and, in accordance with the provisions of said Section 631 (b) and Section 1231 of said Code, Plaintiffs considered and treated said gains as long-term capital gains from the sale of a capital asset (timber) held by them for more than six months, and computed their income tax liability accordingly (Pre. Tr. Or., Ad. Fact 33, 44).

(3) On or about October 28, 1957, as a result of a review and audit of Plaintiffs' joint income tax returns for 1954 and 1955, the Commissioner of Internal Revenue, acting by and through the Defendant Frank, executed and mailed to Plaintiffs a Statutory Notice of Deficiency (Ex. 11), assessing a deficiency in the sum of $163,074.33 with respect to Plaintiffs' 1954 income tax liability; assessing a deficiency in the sum of $201,131.18 with respect to Plaintiffs' 1955 income tax liability; assessing a further deficiency by way of penalty in the sum of $250.00 (for the taxable year 1954) under Section 294 (d)(1) (B) of the Internal Revenue Code of 1939; and assessing a further deficiency by way of penalty (for the taxable year 1954) in the amount of $22,850.61 under Section 294(d)(2) of said 1939 Code (Pre. Tr. Or., Ad. Facts 34, 45). In said Statutory Notice of Deficiency, the Defendant Frank erroneously determined that the gain realized by Plaintiffs in 1954 and 1955 from the disposal and cutting of Dry-Logy timber was taxable as ordinary income and not as long-term capital gain. On March 19, 1958, Plaintiffs paid to the Defendant Frank the sum of $163,074.33 as additional income tax assessed by the Defendant Frank for the year 1954 and the sum of $23,100.61 in payment of the penalties assessed for said year. On January 14, 1959, Plaintiffs paid to the Defendant Frank the further sum of $28,446.42 as interest on said deficiencies (Pre. Tr. Or., Ad. Fact 35). On December 26, 1957, Plaintiffs paid to the Defendant Frank the sum of $201,131.18 as additional income tax assessed by the Defendant Frank for the year 1955 and, on January 14, 1959, the further sum of $20,476.81 as interest thereon (Pre. Tr. Or., Ad. Fact 46).

(4) On April 5, 1958, Plaintiffs filed with the Defendant Frank timely Claims for Refund of income taxes and penalties paid by Plaintiffs for the taxable years 1954 and 1955, respectively, in the following mounts (Pre, Tr. Or., Ad. Fact 36, Ex. 17; Ad. Fact 47, Ex, 21):

	1954	1955
Income Tax	$199,661.94	$228,712,46
Penalties	23,100.61

together with statutory interest thereon. On February 3, 1959, Plaintiffs filed with the Defendant Frank timely amended Claims for Refund of income taxes, penalties and interest paid by Plaintiffs for the taxable years 1954 and 1955, respectively, in the following amounts (Pre. Tr. Or., Ad. Fact 37, Ex. 18; Ad. Fact 48, Ex. 22):

	1954	1955
Income Tax	$199,661.94	$228,712.46
Penalties	23,100.61
Interest paid to the time of filing Amended Claims for Refund	28,446.42	20,476.81

together with statutory interest thereon.

(5) After said Claims for Refund, as amended, had been filed, Plaintiffs entered into settlement negotiations with the Internal Revenue Service with respect thereto. As a result thereof, certain items of income tax liability, representing $62,045.48 of the income taxes ($199,661.94) covered by Plaintiffs' 1954 Claim for Refund were settled. In addition, Plaintiffs settled certain items of income tax liability covered by the 1955 Claim for Refund which items represented $97,300.24 of the income taxes ($228,712.46) covered by said 1955 Claim for Refund. However, said settlement did not include or cover the items in said Claims for Refund relating to Plaintiffs right to long-term capital gain on the disposal of the timber cut on the Dry-Logy Creek Logging Unit in 1954 and 1955, representing $137,616.46 of the income taxes covered by the 1954 Claim for Refund and $131,412.22 of the income taxes covered by the 1955 Claim for Refund. In addition, said settlement did not include or cover the item in said 1954 Claim for Refund relating to the Section 294(d) (2) penalty assessed and collected by the Defendant Frank (Pre. Tr. Or., Ad. Facts 38 and 49; Ex. 14). In accordance with the terms of said settlement, Plaintiffs, on or about July 19, 1960, received a refund of income taxes, penalties and interest for the year 1954 in the total amount of $52,350,90 and a refund of income taxes and interest for the year 1955 in the total amount of $55,055.28. After such refund there remained unpaid and outstanding under Plaintiff's 1954 and 1955 Claims for Refund (not covered by said settlement), the following:

	1954	1955
Income Taxes	$137,616.46	$131,412.22
Section 294(d)(2) penalty	8,132.25
Interest paid	24,005.59	13,378.91

together with statutory interest thereon. The terms and provisions of the settlement above referred to, together with the specific items covered thereby and an itemization of the refunds received by Plaintiffs in connection therewith, are set forth with particularity in Admitted Facts 38 through 40 and 49 through 51 of the Pre-Trial Order herein. Said Admitted Facts are by this reference incorporated into and made a part of this Finding of Fact X to the same effect as ff such Admitted Facts were fully set forth herein.

XI. On July 28, 1960, the Defendant Frank as District Director of Internal Revenue for the Collection District of Washington sent to Plaintiffs, by registered mail, a Notice of Disallowance of Plaintiffs' 1953 Claim for Refund except to the extent allowed by settlement; a Notice of Disallowance of Plaintiffs' 1954 Claim for Refund except to the extent allowed by settlement; and a Notice of Disallowance of Plaintiffs' 1955 Claim for Refund except to the extent allowed by settlement (Pre. Tr. Or., Ad. Fact 30, Ex. 15; Ad. Fact 42, Ex. 19; Ad, Fact 53, Ex. 23). This action was commenced within two years from the date of mailing said Notices of Disallowance.

XII. The parties, by and through their respective attorneys of record, have stipulated that the issue herein relating to the penalties assessed and collected by the Defendant Frank for the taxable years 1953 and 1954 under the provisions of section 294(d)(2) of the Internal Revenue Code of 1939 is a matter of computation, which computation will be necessary only in the event that Plaintiffs' tax liability for either the year 1953 or 1954 is decreased, in which event said computation will be submitted to the Court in accordance with the Stipulation Between the Parties as set forth in paragraph 4 of the Pre-Trial Order herein.

XIII. Probable cause existed for the Defendant, William E. Frank, with respect to his assessment and collection from Plaintiffs of the Federal income taxes, penalties and interest thereon as set forth in Findings of Fact IX and X and, in the course of said assessment and collection, the Defendant Frank acted under the direction of the Secretary of the Treasury or other proper Government officer.

From the foregoing Findings of Fact, the Court does hereby make the following:

I. This is a civil action arising under the Internal Revenue laws of the United States. This Court has jurisdiction of the subject matter of this action under the provisions of Title 28, U. S. C. A., § 1340.

II. The written memorandum decision of the Court rendered in this cause is by this reference incorporated into and made a part of these Conclusions of Law to the same effect as if such decision were fully set forth herein. All conclusions of law expressed by the Court in such memorandum decision are hereby expressly adopted and incorporated herein by this reference as if fully set forth in this paragraph.

III. The Indian Service Contract became effective on July 26, 1950, the date that Plaintiff Hitchcock was notified by the Bureau of Indian Affairs, United States Department of Interior, that his bid for the timber covered thereby had been accepted. All subsequent steps relating to execution of the written contract and approval of the contract and bond by the Secretary of the Interior were merely formal and ministerial. Wagar Lumber Company v. United States, (W. D. Wash., 1960) 18t F. Supp. 388, 390; Giustina v. United States, (D. C. Or., 1960) 190 F. Supp. 303, 313.

IV. The Indian Service Contract was a contract providing for the sale of standing timber by the Indian Service as seller to the Plaintiff Hitchcock as purchaser, with legal title reserved in the seller for purposes of security only. On July 26, 1950, Plaintiff Hitchcock acquired the timber covered by the Indian Service Contract and became the "owner" thereof within the meaning of that term (a) as used in Section 117(k)(2) of the Internal Revenue Code of 1939, applicable herein with respect to the taxable year 1953, and (b) as used and expressly defined in Section 631 (b) of the Internal Revenue Code of 1954, applicable herein with respect to the taxable years 1954 and 1955. L.D. Wilson, (1956) 26 T. C. 474, 480, 481; Giustina v. United States, (D. C., Or., 1960) 190 F. Supp. 303, 309-311; United States v. Robinson, (5 Cir., 1942) 129 F. (2d) 297, 300; Boeing v. United States, (Ct. Cl., 1951) 98 F. Supp. 581, 585; Wirkkala v. United States, (W. D. Wash., 1960) 181 F. Supp. 338, 339.

V. (1) The Indian Service Contract was not acquired by or for the benefit of Plaintiff Hitchcock's father, C. G. Hitchcock, his father-in-law, E. J. O'Larey, or the M. G. Hitchcock Mill partnership at Sisters, Oregon, and did not at any time constitute an asset of either the M. G. Hitchcock Mill partnership or the White Swan Lumber Company partnership at White Swan, Washington.

(2) Plaintiff Hitchcock did not at any time assign, transfer or contribute the Indian Service Contract to either the M. G. Hitchcock Mill partnership or the White Swan Lumber Company partnership.

(3) The Indian Service Contract was acquired and retained by Plaintiff Hitchcock as his individual property..4. F. Lowes Lumber Co., (1960) 19 T. C. M. 727; 40 Am. Jut. 196, 197, Partnership § 97, 98; Azevedo v. Sequeira, (Cal., 1933) 22 P. (2d) 745, 746; Bosworth v. Hopkins, (Wis., 1893) 55 N. W. 424, 427, 428; Jenkins v. Jenkins, (Ark., 1906) 98 S. W. 685; Lanteen Medical Laboratories, Inc., (1948) 10 T. C. 279, 288; Telfair Stockton, (1932) 26 B. T. A. 801, 803; Commissioner v. McCloskey, (5 Cir., 1935) 76 F. (2d) 373.

VI. On or shortly after November 20, 1951, Plaintiff Hitchcock, his mother, Ethel I. Hitchcock, his father-in-law, E. J. O'Larey, and his brother, Phil Hitchcock, entered into and formed a partnership by oral agreement, under and pursuant to which they associated themselves as co-partners to conduct, carry on and operate a logging and lumber manufacturing business at White Swan, Washington under the firm name of White Swan Lumber Company, with profits interests of 85%, 5%, 5% and 5%, respectively. At all times from or shortly after November 20, 1951, until on or about April 1, 1958, the partnership, White Swan Lumber Company, was engaged in the business of logging timber and manufacturing lumber in the partnership mill at White Swan, Washington.

VII. On or shortly after October 27 or 28, 1952, after holding the Dry-Logy timber covered by the Indian Service Contract (as owner thereof) for more than six months, Plaintiff Hitchcock entered into a timber cutting contract with the partnership, White Swan Lumber Company, under which (a) White Swan Lumber Company acquired from Hitchcock an enforceable contract right to cut and remove all of said timber and to mill the same for its own account, and (b) White Swan Lumber Company expressly and by implication agreed to cut all of said timber in compliance with the cutting requirements of the Indian Service Contract. This timber cutting contract constituted a "form or type of contract" under which Plaintiff Hitchcock made a contractual disposal of said timber to the partnership, White Swan Lumber Company, in such manner as to satisfy the disposal requirements of Section l17(k)(2) of the Internal Revenue Code of 1939, applicable herein with respect to the taxable year 1953, and Section 631 (b) of the Internal Revenue Code of 1954; applicable herein with respect to the taxable years 1954 and 1955. Boeing v. United States, (Ct, Cl., 1951) 98 F. Supp. 581,584; Springfield Plywood Corporation, (1950) 15 T. C. 697, 701,702; L. D. Wilson, (1956) 26 T. C. 474, 481; Giustina v, United States, (D.C. Or., 1960) 190 F. Supp. 303, 313, 314; A. F. Lowes Lumber Co., (1960) T. C. Memo. 1960-141, 19 TCM 727, 739.

Any "implicit understanding" or cutting arrangement existing between Plaintiff Hitchcock and the partnership prior to said timber cutting contract was loose, vague and indefinite, and lacked the basic terms and essential elements of a contract. Such "implicit understanding'' or cutting arrangement was noncontractual and unenforceable and did not constitute a (contractual) disposal of timber within the meaning of Section 117(k) (2) of the Internal Revenue Code of 1939 or Section 631 (b) of the Internal Revenue Code of 1954. No enforceable timber cutting contract existed between Plaintiff Hitchcock and White Swan Lumber Company prior to October 27 or 28, 1952, or shortly thereafter. Ah Pah Redwood Co. v. Commissioner, (9 Cir., 1957) 251 F. (2d) 163, 167; Jantzer v. Commissioner, (1960) 284 F. (2d) 348, 357; Giustina v. United States, (D. C. Or., 1960) 190 F. Supp. 303, 313.

VIII. The taxable nature of the gains realized by the Plaintiff Hitch-cock from the cutting and disposal of Dry-Logy timber during the years 1954 and 1955 is to be determined under the Internal Revenue Code of 1954. Boeing v. United States, (Ct. Cl., 1951) 98 F. Supp. 581, 584.

Under Section 631 (b) of the Internal Revenue Code of 1954, the date of disposal of timber is deemed to be the date such timber is cut. Consequently, for the purposes of said Section 631 (b), Plaintiff Hitchcock did not dispose of the Dry-Logy timber cut by the partnership, White Swan Lumber Company, during the years 1954 and 1955, until 1954 and 1955, respectively, when and as such timber was actually cut.

IX. Under and by virtue of the timber cutting contract between Plaintiff Hitchcock and the partnership, White Swan Lumber Company (entered into on or shortly after October 27 or 28, 1952), Plaintiff Hitchcock retained an "economic interest" in the Dry-Logy timber. Reg. § 1.611-1(b)(1);L. D. Wilson, (1956) 26 T. C. 474, 481; Giustina. United States, (D. C. Or., 1960) 190 F. Supp. 303, 314; A. F. Lowes Lumber Co., (1960) T. C. Memo. 1960-141, 19 TCM 727, 739, 740.

X. Plaintiff Hitchcock did not hold the Dry-Logy timber primarily for sale to customers in the ordinary course of his trade or business. The Dry-Logy timber, in the hands of Plaintiff Hitchcock, was a "capital asset" as defined in Section 117(a)( 1 ) of the Internal Revenue Code of 1939 and Section 1221 of the Revenue Code of 1954, or "property used in the trade or business" as defined in Section l17(j) of the Internal Revenue Code of 1939 and Section 1231 of the Revenue Code of 1954. John W. Blodgett, (1928) 13 B. T. A. 1388; United States v. Robinson, (5 Cir., 1942) 129 F. (2d) 297; Camp Manufacturing Co., (1944) 3 T. C. 467; Isaac S. Peebles, Jr., (1945) 5 T. C. 14; Warner Mountains Lumber Co., (1947) 9 T. C. 1171; Carroll v. Commissioner, (5 Cir., 1934) 70 F. (2d) 806; George W. Taylor, (1960) T. C. Memo. 1960-91, 19 TCM 468; Kirby Lumber Corp. v. Scofield, (D. C. Tex., 1950) 89 F. Supp. 102; Ah Pah Redwood Co. v. Commissioner, (9 Cir., 1957) 251 F. (2d) 163.

XI. The timber cutting contract between Plaintiff Hitchcock and the partnership, White Swan Lumber Company (entered into on or shortly after October 27 or 28, 1952), was not a contract of present or conditional sale and did not transfer or convey to White Swan Lumber Company any title to real estate or the Dry-Logy timber standing in place. Under the cutting contract, White Swan Lumber Company acquired a contract right to cut the Dry-Logy timber and to acquire title to such timber for its own account, as and when cut. Commissioner of Internal Revenue v. Boeing, (9 Cir., 1939) 106 F. (2d) 305, 309; Boeing v. United States, (Ct. Cl., 1951) 98 F. Supp. 581,584; Foster v. Commissioner, (5 Cir., 1932) 57 F. (2d) 516, 517; Brown v. Commissioner, (5 Cir., 1934) 69 F. (2d) 863, 865; Ah Pah Redwood Co. v. Commissioner, (9 Cir., 1957) 251 F. (2d) 163, 167; A. F. Lowes Lumber Co., (1960) T. C. Memo. 1960-141, 19 TCM 727, 739.

XII. (1) Section 631(b) of the Internal Revenue Code of 1954 is a statute of special application, remedial in nature, enacted for the specific purpose of extending the benefit of long term capital gain treatment to owners of timber (including holders of a contract to cut timber) who dispose of such timber under a cutting contract and retain an economic interest therein.

Sen. Rep. No. 627, (1944) C. B. 973, 978 Under Section 631(b), the gain realized on any such timber transaction is to be considered as though it were a gain on the sale of timber and, under Section 1231 of the Internal Revenue Code of 1954, it is specifically provided that such gain on the sale of timber shall be considered as gain on the sale of a capital asset held for more than six months (long term capital gain).

(2) Section 707(b) of the Internal Revenue Code of 1954 was enacted as part of a general and comprehensive plan of tax treatment for partners and partnerships, and was designed to prevent recognition of fictitious losses or a sale or exchange of property between a partner and his controlled partnership for the purpose of raising the basis of the property at capital gain rates for later depreciation. Under Section 707(b) (2) it is provided that any recognized gain from such sale or exchange shall be considered as gain from the sale or exchange of property other than a capital asset (ordinary income). House Rep. No. 1337, (1954) 83d Cong., 2d Sess.; 1954 U. S. Cong. & Adm. News, Vol. 3, pp. 4093, 4094, 4366; Sen. Rep. No. 1622, (1954) 83d Cong., 2d Sess.; 1954 U. S. Cong. & Adm. News, Vol. 3, pp. 4724, 5028.

(3) Under Section 771 (a) (1) of the Internal Revenue Code of 1954, Section 707(b)(2) of said Code is effective only with respect to taxable years beginning after December 31, 1954. Section 707 (b) (2) presents an issue in this cause only as to the nature of the tax treatment to be given Plaintiffs' gain on the contractual disposal of Dry-Logy timber realized during the taxable year 1955. Section 707 (b)(2) was not effective during the taxable years 1953 and 1954 and would not in any event apply to such gains realized by Plaintiffs during the years 1953 and 1954.

(4) Section 707(b)(2) of the Internal Revenue Code of 1954, by its terms, does not apply to the contractual disposal of Dry-Logy timber made by Plaintiff Hitchcock to his controlled partnership, White Swan Lumber Company, because such timber transaction did not constitute a "sale or exchange" of property within the meaning of Section 707(b) (2); and the property in the hands of the transferee partnership (White Swan Lumber Company), to-wit: a contract right to cut timber, constituted a "capital asset" as defined in Section 1221 of the Internal Revenue Code of 1954.

(5) Section 631 (b) of the Internal Revenue Code of 1954 is a remedial statute extending special tax treatment to certain timber transactions independently of, and without reference to, other provisions of said Code relating generally to tax treatment of sales and exchanges of property and the nature of the gain or loss there from. Boeing v. United States, (Ct. Cl., 1951) 98 F. Supp. 581; Ah Pah Redwood Co. v. Commissioner, (9 Cir., 1957) 251 F. (2d) 163.

(6) Any conflict between the general provisions of Section 707 (b) (2) and the specific provisions of Section 631 (b) with respect to the tax treatment of gain realized upon a contractual disposal of timber (with retained economic interest) by a partner to his controlled partnership, is to be resolved by application of the specific remedial provisions of Section 631 (b) as an exception to the general provisions of Section 707(b)(2). Kenneth S. Battelle, (1947) 9 T. C. 299, 304; Amelia H. Cohen Trust v. Commissioner, (3 Cir., 1941) 121 F. (2d) 689; Musselman Hub-Brake Co. v. Commissioner, (6 Cir. 1943) 139 F. (2d) 65, 67; Bonwit Teller & Co. v. United States, 283 U. S. 258, 263, 51 S. Ct. 395, 75 L. Ed. 1018 (1931); Maurer v. United States, (10 Cir., 1960) 284 F. (2d) 122, 123; Helvering v. Morgan's Inc., 293 U. S. 121, 55 S. Ct. 60, 79, L. Ed. 233 (1934); 6 Mertens, Law of Federal Income Taxation, pp. 71, 72, §35.24, Footnote 67.

XIII. (1) The gain realized by Plaintiffs in 1953 from the cutting and disposal of Dry-Logy timber during 1953 ($233,138.06) was taxable as long-term capital gain under Sections 117(k)(2) and .1170) of the Internal Revenue Code of 1939. Plaintiff's correct income tax liability for the taxable year ending December 31, 1953, was $223,794.I3 and not the sum of $337,612.80, as erroneously determined, assessed and collected by the Defendant Frank.

(2) The gain realized by Plaintiffs in 1954 from the cutting and disposal of Dry-Logy timber during 1954 ($158,529.85) was taxable as long-term capital gain under Sections 631(b) and 1231 of the Internal Revenue Code of 1954. Plaintiffs' correct income tax liability for the taxable year ending December 31, 1954, was $235,690.17 and not the sum of $373,306.63, as erroneously determined, assessed and collected by the Defendant Frank.

(3) The gain realized by Plaintiffs in 1955 from the cutting and disposal of Dry-Logy timber during 1955 ($148,769.53) was taxable as long-term capital gain under Sections 631 (b) and 1231 of the Internal Revenue Code of 1954. Plaintiffs' correct income tax liability for the taxable year ending December 31, 1955, was $214,-896.53 and not the sum of $346,308.75 as erroneously determined, assessed and collected by the Defendant Frank.

XIV. Plaintiffs are entitled to judgment against the Defendant, William E. Frank, as follows:

(1) On Plaintiffs' First Cause of Action for the sum of $199,489.25 (the amount erroneously assessed and illegally collected as additional income tax, penalties and interest for the year 1953)together with interest thereon at the rate of 6 per cent per annum (a) on $194,966.45 thereof from December 12, 1957, until paid; (b) on $2,000.00 thereof from April 18, 1958, until paid; (c) on $2,000.00 thereof from May 6, !958, until paid; and (d) on $522.80 thereof from June 6, 1958, until paid.

(2) On Plaintiffs' Second Cause of Action for the sum of $169,754,30 (the amount erroneously assessed and illegally collected as additional income tax, penalties and interest for the year 1954) together with interest thereon at the rate of 6 per cent per annum (a) on $145,748.71 thereof from March 19, 1958, until paid; and (b) on $24,005.59 thereof from January 14, 1959, until paid.

(3) On Plaintiffs' Third Cause of Action for the sum of $144,-791.13 (the amount erroneously assessed and illegally collected as additional income tax and interest for the year 1'955) together with interest thereon at the rate of 6 per cent per annum (a) on $131,412.22 thereof from December 26, 1957; and (b) on $13,378.91 thereof from January 14, 1959, until paid.

(4) For Plaintiffs’ costs and disbursements herein to be taxed.

XV. The Defendant William E. Frank, is entitled to the issuance by this Court of a Certificate of Probable Cause pursuant to 28 U.S. Code § 2006.