Patterson v. Belcher

BELCHER V. PATTERSON

302 F.2d 289; 62-1 USTC ¶ 9426; 9 AFTR 2d 1316 (5th Cir. 1962).
Rehearing denied 305 F.2d 557; 62-2 USTC ¶ 9585; 10 AFTR 2d 5067 (5th Cir. 1962).
Cert. denied 371 U.S. 921 (1962).
Reversing 60-2 USTC ¶ 9733; 6 AFTR 2d 5697 (N.D. Ala. 1960).
On remand sub nom. Abernathy v. Patterson, 63-2 USTC ¶ 9678; 12 AFTR 2d 5179 (N.D. Ala. 1963).

Editor's Summary

Key Topic

OUTRIGHT SALE--CAPITAL GAIN v. ORDINARY INCOME
- Substantial sales to single purchaser
- Effect of change in character of business or intent of seller
MORTGAGE FORECLOSURE
- Date of gain recognition
CAPITAL v. EXPENSE
- Reforestation expenditures
CASUALTY LOSS
- Basis limitation on deduction
DEPLETION ALLOWANCE
- Timber growth as factor in computing depletion

During the years 1950 through 1955 a partnership made sales of 80 million board feet of standing timber to a related corporation. These sales were pursuant to a loose oral agreement Or understanding, and the partnership received payment measured by the fair market value of the timber cut. Similar arrangements were made with other purchasers but in a much smaller amount. In its partnership income tax returns for each year, it asserted that its principal activity was real estate and timber. Neither the partners nor the partnership elected to treat the cutting of the timber as a sale or exchange under sections 117(k)(1) or 631(a), However, the partners treated their income from timber sales as capital gain under sections 117(a) and 1221. The Commissioner contended that this was ordinary income on the ground that no election had been made under sections 117(k) (1) and 631(a), no disposal under a contract occurred to satisfy sections 117(k)(2) and 631(b), and the partnership held the timber primarily for sale in its business, thus negating sections 117(a) and 1221. The partnership apparently challenged only the Commissioner's contention that it held timber primarily for sale.

Issue No. 2

In 1950 the partnership sold the Allendale tract for a cash down payment and the vendee's purchase money obligation. In 1953, the partnership foreclosed and reacquired title. The Commissioner contended that gain should have been recognized on the foreclosure in 1953, while the taxpayers contended that they were not required to recognize gain until 1954, when the original purchaser's right of redemption was relinquished. The year contended for by the Commissioner, 1953, was not before the Court, but was the subject of a pending Tax Court proceeding. The Commissioner here evidently sought only to preserve his right to set-off in 1954 in the event of an adverse Tax Court decision as to 1953.

Issue No. 3

Following the above foreclosure, the partnership sold lots from the Allendale tract to the public, fourteen sales being made in 1954-55. The partners reported their income from these sales as capital gain on the ground that the property was held for investment and therefore was a capital asset. The Commissioner contended that the tract was held for sale in the ordinary course of business.

Issue No. 4

The partnership deducted certain reforestation expenses which the Commissioner contended should have been capitalized.

Issue No. 5

The partnership deducted a casualty loss with respect to timber destroyed by fire. The Commissioner challenged the deduction on the ground that the partnership had no basis in the timber destroyed.

Issue No. 6

The partnership's depletion allowance was in controversy.

District Court
[opinion at p. 592]

Issue No. 1

Held: For the taxpayer. The Court holds without discussion that the partnership did not hold timber primarily for sale to customers in the ordinary course of its trade or business, and that the taxpayers may treat their income from such sales as capital gain.

Issue No. 2

The Court refuses to determine the year in which gain realized on the foreclosure sale must be recognized because the issue is not directly involved. Neither party is estopped from litigating the issue in another action.

Issue No. 3

Held: For the Commissioner. The Court held, on a jury verdict, that the Allendale tract was held by the partnership primarily for sale to customers in the ordinary course of business in 1954-55.

Issue No. 4

Held: For the Commissioner. The Commissioner is sustained in his determination that reforestation expenses must be capitalized.

Issue No. 5

Held: For the Commissioner: The partnership had no cost basis in the timber destroyed and the taxpayers are not entitled to deduct any amount as a casualty loss.

Issue No. 6

Held: In computing the proper allowance for timber depletion, a reasonably ascertainable growth factor should be taken into consideration.

Court of Appeals
[opinion below]

Issue No. I

Held: Reversed. The evidence of record establishes that the partnership was primarily in the business of selling timber. Its ledger reveals a long history of constant, continuous and substantial timber purchases and sales throughout the years 1950 through 1955. if the timber was not held primarily for sale in the ordinary course of business, it is difficult to conceive for what other purpose it was held. The fact that most of it was said to the corporation does not alter the result. There is nothing in the statute to provide that sales to a restricted number of customers are not to be considered as sales to customers. The taxpayers are not entitled to capital gain treatment under sections 117(k) or 631 as they neither elected the benefits of sections 117(k)(1) and 631(a) nor disposed of timber under a contract as required by sections 117(k)(2) and 631(b). The partnership's oral arrangement with the corporation and other purchasers was not a disposal under contract but was in the nature of a continuing offer, accepted by the corporation as each tree was severed from the land.

Issue No. 2

Held: Reversed. The District Court's refusal to determine the year in which the gain from the foreclosure sale must be recognized constituted error. Such a determination is indispensible to the final disposition of this litigation. Therefore, the case is remanded for this determination.

Issue No. 3

Held: Affirmed. The jury's verdict that the partnership held the Allendale tract for sale to customers in the ordinary course of its trade or business in 1954 and 1955 was firmly grounded in the facts of record. The taxpayers' contention that the property was originally purchased as an investment is not persuasive of its subsequent intent and use after reacquisition in the mortgage foreclosure. While property may at one time be held for investment purposes, if the character of the business changes or the intent of the partners changes, the property could subsequently be found by reasonable men to be held primarily for sale to customers in the ordinary course of business.

District Court (On remand)
[opinion at p. 597]

Held: The gain on the Allendale mortgage foreclosure must be recognized in 1954, when the mortgagor relinquished statutory right of redemption.

Case Text

CARSWELL, District Judge: Seven actions were instituted in the District Court wherein the plaintiffs sought income tax refunds for taxes allegedly overpaid. The Director of Internal Revenue appeals from adverse findings of fact and conclusions of law. In cross appeal filed by two of the plaintiffs, in one case, there is an attack on the verdict of the jury and upon the refusal of the court to grant directed verdict for the plaintiffs. The questions presented by the Director will be treated in I and II below. The question raised regarding the appeal of James R. Abernathy, Jr., and Mary Belcher Abernathy from the determination of the jury will be discussed in III below.

I. The questions raised by the Director require the Court first to determine whether the issue presented here was preserved by timely presentation to the District Court. If it is held here that the matter was adjudicated in the District Court, the Director further contends that the District Court erred in its holding that the gain realized by the taxpayers as a result of the sales of timber by the partnership to the corporation in the years 1950, 1951, 1952, 1954 and 1955 was capital gain and not ordinary income.

The Belcher Land and Timber Company, called here the Partnership, and the individual members comprising it, sought refunds for taxes which they claim were overpaid.

The partnership was formed on August 1, 1946. The W. A. Belcher Lumber Company, Inc., called here the corporation, also commenced operations as of August 1, 1:946. The ownership of the stock in the corporation is held by the same persons and in the same percentage as held by them in the partnership. W. A. Belcher has been the chief executive officer of both the partnership and the corporation since their inception.

In the years 1950 through 1955 the partnership bought and sold real estate and lumber. The following reflects the yearly purchases of timber by the partnership in the years 1950 through 1955:

The corporation purchased timber from the partnership and manufactured it into lumber.

The timber was cut by the corporation pursuant to a loose oral agreement or understanding between the partnership and the corporation. This arrangement was in the nature of a continuing offer by the partnership for the sale of its timber. The corporation accepted these continuing offers as a matter of course and cut the timber from the land owned or leased by the partnership. The partnership received payment from the corporation measured by the fair market value of the timber cut. The following reflects the partnership sales to the corporation for the years 1950 through 1955:

In addition to the sales made to the corporation, the partnership made sales to other customers as follows:

In its tax returns for the years 1950 through 1955 the partnership accorded the gain from the sales of timber capital gain treatment. The individual members of the partnership treated their respective distributive shares of the gain from sales of timber in their individual tax returns as capital gains. The timber sold by the partnership was partly timber which stood on lands owned by the partnership and was partly timber standing on land owned by others on which the partnership had a lease or contractual right to cut.

The partnership returns where audited by the Internal Revenue Service and a finding made of deficiencies in taxes for each of the partners for all of the years 1950 through 1955, inclusive. The year 1953 is the subject matter of pending litigation in the Tax Court and is not involved here. The partners paid the assessed deficiencies and filed claims for refund. Upon rejection of these claims, the instant actions were flied and consolidated for trial.

On September 22, 1960, prior to the trial, the Director filed a motion for set-off, urging that neither the partnership nor the individual partners were entitled to capital gain treatment on the partnership sale of timber because: (1) the partnership was engaged, among other things, in the business of selling logs and timber to customers in the ordinary course of its trade or business; (2) the agents of the Internal Revenue Service incorrectly assumed that the sales of timber held by the partnership constituted gain from the sale of a capital asset held for more than six months under the provisions of Section l17(k)(2) of the I939 Internal Revenue Code and Section 631(b) of the 1954 Code. The Director discovered that there was not a "disposal of timber" with retained economic interest as required in these sections, and, in addition, found that some of the logs and timber sold was not held, as required, for more than six months prior to disposal. (3) Neither the partners nor the partnership elected to come under the provisions of Section l17(k) (1) of the 1939 Code or Section 631 (a) of the 1954 Code. Therefore, the Director says, the timber held by the partnership was its stock in trade, so to speak, and was, accordingly, held primarily for sale to customers in the ordinary course of its trade or business. If this be so, it follows that the gain from these sales of timber should have been reported and taxed as ordinary income rather than capital gain.

The Partnership contends that the issue of whether the timber held by the partnership was held primarily for sale to customers in the ordinary course of its trade or business was not raised in the court below and, therefore, is not properly; before this Court for determination on appeal.

The partnership's position is that the instruction given by the court to the jury at the request of the Director is the law of the case¹; that the pre-trial order as well as the testimony of the witnesses show that this issue had not been previously raised and the attempt by the Director to raise the issue on this appeal is improper. It eon-tends that the Revenue Agent's report on which claim for refund is predicated failed to raise this issue and this report being presumptively correct, the Director is precluded from raising the issue.

In its findings of fact, however, the District Court specifically found that the sales of timber made for each of the years 1950: through 1955 by the partnership to the corporation were not made of property held primarily for sale to customers in the Ordinary course of the trade or business of the partnership. In its conclusions of law the court held that the gain from sales of timber made by the partnership to the corporation during each of the five years involved here were entitled to capital gain treatment under the Internal Revenue Code.

By agreement of the parties only a few of the many factual issues presented were submitted to the jury, all Others being left to the trial court for determination. Since the court found that the sales were not made of property held primarily for sale to customers in the ordinary course of trade or business, the, subsequent interrogatories submitted to the jury distinguishing long term gains from short term gains necessarily followed. We hold that the issue was properly raised and adjudicated below and is, therefore, properly before this Court.

The Director urges that the finding of fact made by ,the: District Court was erroneous. Since there is no basic disagreement as to the evidentiary facts, the Director's objections to the finding may be weighed here free from the restraint of the "Clearly erroneous rule" to determine whether the District Court erred in its ultimate finding of fact that the sales of timber made by the partnership were not made of property held primarily for sale to customers in the ordinary course of trade or business. Thomas v.. Commissioner, 1254 F. 2d 233 (5th Cir. 1958); Gamble v. Commissioner, 242 F. 2d 586 (5th Cir. 1957); Galena Oaks Corp. v. Scofield, 218 F. 2d 217 (5th Cir. 1954).

Gains from the sale of timber constitute-capital gain ,and are given favorable capital gain treatment if the timber is a "capital asset" as defined by Section l17(a)(1) and (4) of the 1939.Code²; or if the transactions whereby the gain is realized Comply with the specific terms of Section 117(k) (1)or (2).³

Section 117(a) (1) defines "capital assets" as "property held by the taxpayer (whether or not connected with his trade or business), but does not include . . . property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; . . ."

Section l17(k)(1) provides that the actual cutting of timber by ;a taxpayer who owns or has a contractual right to cut shall be considered, if the taxpayer so elects, as a sale or exchange of the timber and the gain resulting there from shall be given capital gain treatment. We find that Section l17(k)(2) is inapplicable here since there was rte "disposal" of timber under a "contract by virtue of which the owner retains an economic interest in such timber." See Yantzer v. Commissioner, 284 F. 2d 348 (9th Cir. 1960). The appellees assert no rights under Section l17(k)(1) or l17(k)(2), therefore no discussion is deemed necessary.

The evidence of record establishes that the partnership was primarily in the business of selling timber. W. A. Belcher, the chief ,executive officer of the partnership and the corporation, testified to this fact.⁴

In the partnership Form 1065 tax returns for each of the years in question, it is asserted that the principal activity of the partnership was "real estate and timber". The partnership's ledger (Plaintiff's Exhibit 11 ) reveals a long history of constant, continuous and substantial timber sales throughout the years 1950 through 1955.

Under the headings set forth in the ledgers one section is devoted to the sales of timber made to the corporation and the other to sales made to other customers.

The partnership sold over 80 million board feet of timber to the corporation in the six year period. The sales ranged from a minimum of something under 9 million board feet in the year 1953 to a maximum of 19 million board feet in the year 1954. The sales were numerous and the ledger shows that the partnership billed the corporation for timber sold as frequently as bi-monthly. In the six year period the partnership received a total of $2,152,485.77. Although not in so great a quantity, there were sales to other customers. During the six year period in question, the partnership received total income in sales to other customers in the amount of $32,051.51.

The partnership made continuous, numerous and frequent purchases of standing timber. These purchases consisted of both land purchases as well as lease or contract rights to cut timber standing on land belonging to others. A total of 237 separate standing timber purchases were made from 1950 through 1955, ranging from a minimum of 16 purchases in any one year to a maximum of 59 purchases. In addition to the timber which it already owned, the partnership acquired as a result of these purchases approximately 65 million board feet of standing timber over the six year period. Virtually all of the timber was cut within one year after it had been acquired. All of the timber was cut by the partnership's customers. Of the timber held in excess of six months the partnership netted $861,467.22.

On the basis of the foregoing facts, if the sales of timber made by the partnership did not consist of timber held primarily for sale to customers in the ordinary course of trade or business, it is difficult to conceive for what other purpose the timber was held. The fact that most of the timber was sold to the corporation does not alter the fact that the primary business of the partnership was selling timber. There is nothing in the statute to provide that sales to a restricted number of customers are not to be considered as sales to customers. Pennroad Corp v. Commissioner, 261 F. 2d 325 (3rd Cir. 1958), certiorari denied 359 U. S. 958. A single vendee may be a customer within the meaning of Section 117 (a) (1). Jantzer v. Commissioner, supra.

We, therefore, hold that the District Court erred in its ultimate determination that the sale of timber for the years in question were not of property held primarily for sale to customers in the ordinary course of trade or business. It therefore follows that we do not agree that the sales of timber constituted sales of "capital assets" under Section 117 (1).

The judgment is therefore vacated and the cause remanded to the District Court with directions for the entry of judgment in accordance herewith.

II. The second question raised in the Director's appeal is whether the District Court erred in refusing to make a determination of the specific year in which the Allendale tract of land became a taxable event to the partnership.

In 1950 the partnership sold the bulk of a property known as the Allendale tract to the Atlanta Highway Estates, Inc. The total price of the property sold by the partnership was $727,200. The vendee paid $53,236 in cash and gave a purchase money mortgage for the remaining balance of $673,964. In 1953 as a result of the default by Atlanta Highway Estates, Inc., the partnership foreclosed on the mortgaged property. At public auction on February 14, 1953, the partnership bid in the property at $500,000 and on that date reacquired the property, through deed of foreclosure.

Beginning in January, 1954, and continuing through 1955 the partnership resold the repossessed property in small parcels and lots. Although the gain upon the foreclosure was not reported by the partnership, the partnership increased the cost basis of the property by the amount of the price bid in at the foreclosure. It thereby subsequently computed its gain on the sales of the small parcels and lots using the increased basis of the property. As a result thereof it reported a smaller gain from the sale of these parcels and lots.

The Director determined in its notice of deficiency that the gain realized on the foreclosure sale should have been reported in the partnership income for the year 1953. Income tax adjustments for the year 1953 are now in the Tax Court upon petition for redetermination filed by the taxpayer.

The District Court during the course of the trial ruled that the gain realized from the foreclosure sale was a taxable event, but there was no ruling as to the taxable year. At the close of the trial the Director discovered that the taxpayers were urging in the Tax Court that the foreclosure sale was a taxable event in 1954 or 1955 on the ground that the two year statutory right of redemption was not relinquished until July 26, 1954. Upon discovery of the fact that the taxpayers denied that the foreclosure was a taxable event in 1953, the Director moved the District Court to determine the specific year that the gain on the foreclosure sale constituted a taxable event. The District Court declined to do so, stating as grounds for its refusal that "neither party is hereby estopped or in any wise precluded in any other litigation or proceeding from litigating the issue of the proper year in which any gain from the foreclosure is taxable."

We think that the District Court's refusal to make a determination of the specific year in which the gain constituted a taxable event was error, for in order for there to be a final disposition of this litigation such determination is indispensable. The taxable consequences of this determination should likewise be settled :in this litigation.

The taxpayer is not entitled to a refund for the years in which he claims such refunds are due if he still owes taxes for the years involved. The Director is entitled to set off any monies still owing to the Government against the amounts claimed for refund. See Lewis v. Reynolds, 48 F. 2d 515 (10th Cir. 1931), affirmed 284 U.S. 281.

Once the year of the taxable :event is established, the taxable consequences follow as a matter of course. If the gain from the foreclosure is a taxable event of the year 1953, then the Director would have no right of set-off in this litigation as distinguished from other claims for refund asserted by the taxpayer in the Tax Court. If the gain is a taxable event in the year 1954 or: 1955i the- partners or partnership would not be entitled to as much of a refund as they now lay claim to. A new suit should not be required merely for the purpose of making this determination.

A plenary proceeding involving the same testimony, the same exhibits, the same parties and the same subject matter is a useless procedure and can only increase the costs of litigation and prolong the matter unduly. We think that the District Court should make this determination from the record as it stands, or if either of the parties desire to submit additional relevant evidence the District Court should receive it and thereafter enter appropriate findings of fact and conclusions of law.

Reversed and remanded with directions for further proceedings in accordance herewith.

III. This portion of the opinion is devoted to the appeal of Mary Belcher Abernathy and James R. Abernathy, Jr. They contend that the District Court erred in refusing to grant a directed verdict on the question of whether the Allendale tract was held primarily for sale to customers in the ordinary course of-trade or business for the years 1954 and 1955.

The jury found that the Allendale tract was held primarily for sale to customers in the ordinary course of trade or business in 1954 and 1955. We must, therefore, determine the sufficiency of the evidence to support the verdict. The jury answered a special interrogatory as follows:

Was the 'Allendale' tract held primarily for sale to customers in the ordinary course of trade or business of the partnership:

In 1943 Mary Belcher Abernathy, here referred to as the taxpayer, was a partner along with other members of the Belcher family in the W. A. Belcher Lumber Company.

In 1943 the partnership purchased a 699.47 acre tract of land known as the Allendale tract. At the time the purchase was made, part of the property had been subdivided and streets and utilities were installed but not all of the lots had been sold. The W. A. Belcher Lumber Company sold lots from the Allendale tract through a real estate man at Fairfield.

On August 1, 1946, the W. A. Belcher Lumber Company was dissolved and the Belcher Land and Timber Company, a partnership, was formed. The Allendale tract along with other assets of the W. A. Belcher Lumber Company was transferred to the new partnership. At this time the Allendale property was reduced to 691.476 acres.

The partnership thereafter conducted the sales of the lots. The partnership returns show that the partnership made sales from the Allendale tract (excluding the installment sale to the Atlanta Highway Estates in 1950, referred to in II, supra) in the number of sales, acreage, gross sales price and total gain in the years 1946 through 1955 as listed below:

In its returns for these years the partnership treated the gain from the above sales as long term capital gain. The individual taxpayers treated their respective distributive shares from the sale of Allendale property as long term capital gains.

The partnership's returns show that on July 15, 1950, the partnership sold 581.76 acres of the Allendale tract to the Atlanta Highway Estates, Inc,, for $727,200 and for the three years prior to default the total collections, including the down payment, totaled $124,439.95. Of these collections $106,831.71 was reported as profit and the balance, $17,608.24, was treated as a return of capital.

In 1953 when the partnership foreclosed on 445.46 acres of the Allendale tract, the partnership bid in the property at $500,000 and acquired deed thereto. On July 26, 1954, the Atlanta Highway Estates, Inc., relinquished its statutory right of redemption by quit claim deed. All of the sales from the Allendale tract listed by the partnership in its returns for the years 1954 and 1955 were from the repossessed property.

Some of the sales from the Allendale tract were to Belcher Building Corporation. This

corporation was formed in 1946 to develop land, to build houses for sale, and to otherwise deal in real estate. At the outset W. A. Belcher and one W. E. Armstrong each owned one third of the stock and E. C. Creel and the Creel Investment Company, Inc., owned the remaining one-third.

In 1954 W, A. Belcher and Nell Vandergrift Belcher, his wife, acquired all of the stock formerly held by Armstrong, Creel and Creel Investment Company, and thereby acquired complete Owner. ship of the Belcher Building Corporation. A qualifying share thereafter issued to Mrs. N. O. Vandergrift, W. A. Belcher, Nell Vandergrift Belcher and Mrs. N. O. Vandergrift became the Board of Directors. The Belcher Budding Corporation never profited.⁵

The General Manager of the Belcher Building Corporation testified that he knew he was working solely for Mr. Belcher in the years 1954 and 1955. In these years he developed and subdivided raw acreage from the repossessed Allendale tract for resale through the Belcher Building Corporation. The acreage was actually purchased by the Building Corporation in 1955; but the planning and developing began in 1954. In the Years 1954 and 1955 lots from the Allendale tract were sold directly to the public on behalf of the partnership.

The Director in the deficiency notice determined that the lots in the Allendale tract were held primarily for sale to customers in the ordinary course of trade or business of the partnership, and that the profit realized on sales from the property on that tract was ordinary income rather than long term capital gain as reported on the partnership return. Assessments of the deficiencies for the years 1950, 1951, 1952, 1954 and 1955 were timely made.

This issue was tried before a jury and the jury determined that in i954 and 1955 the partnership held the lots in the Allendale tract primarily for sale to customers in its ordinary course of trade or business. The jury is verdict in the instant case not only has a rational basis in the evidence, but is firmly grounded in the facts of record.

In 1954 alone the partnership made nine separate sales of lots from the reacquired tract of land.

It has been uniformly held that the question of particular property held primarily for sale to customers in the ordinary course of business is essentially a question of fact to be determined by the trier of fact. Gamble v. Commissioner, supra; Jackson v. King, 223 F. 2d 714 (5th Cir. 1955); Galena Oaks Corp. v. Scofield, supra.

Where a jury has tried a matter upon correct instructions, the only inquiry is whether such conclusion could with reason be reached on the evidence. Commissioner v. Duberstein, 363U. S. 278; United States v. Kaiser 363 U. S. 299 (1960).

The taxpayers' contention that the property. Was originally purchased in 1943 as an investment is not persuasive of its subsequent intent and use after reacquisition in the mortgage foreclosure. While property may at one time be held for investment purposes, if the character of the business changes or the intent of the partners changes, the property could subsequently be found by reasonable men to be held primarily for sale to customers in the ordinary course of business.

We think that the verdict of the jury is clearly sustainable upon the evidence and we affirm the District Court's denial of the motion for directed verdict.

REVERSED in Part with Directions.

Petition for Rehearing

PER CURIAM: We have considered carefully all grounds asserted and find no cause for rehearing although the petition does call attention to certain sentences of the Courts' opinion Which require amendment for clarification and correction textually without impairment to its rationale or its holding.

On page 7 of the opinion the Court stated:

By agreement of the parties only a few of the many factual issues presented were submitted to the jury, all others being left to the trial court for determination. Since the court found that the sales were not made of property held primarily for sale to customers in the ordinary course of trade or business, the subsequent interrogatories submitted to the jury distinguishing long term gains from short term gains (sic) necessarily followed. We hold that the issue was properly raised and adjudicated below and is, therefore, properly before this court.

The language of this paragraph is amended to read as follows:

By agreement of the parties only a few of the factual issues presented were submitted to the jury, all others being left to the trial court for determination. Submitted to the jury were interrogatories requiring the jury to determine, for the various years in question, the fair market value of certain timber held for more than six months, and less than six months. The jury made no determination that the taxpayer held the timber primarily for sale to customers in the ordinary course of trade or business. The jury only made such findings relating to the Allendale and Crawford tracts and such findings are not relevant to the particular issue here. The jury was not asked to make such a finding with respect to the other timber. It was either assumed by the parties that the timber was not held primarily for sale to customers in the ordinary course of trade or business, or either or both of the parties completely failed to bring this issue to the Court's attention at the time that the interrogatories were submitted to the jury. In any event, we find that such a determination is indispensable to a final adjudication of this cause. Since the District Court later found that the timber was not held primarily for sale to customers in the ordinary course of trade or business, the findings of the jury with respect to fair market value have efficacy. Had the court found, even after the jury's verdict that the timber was held primarily for sale to customers in the ordinary course of trade or business irrespective of the jury verdicts the taxpayers would not be entitled to capital gain. What the District Court here did was, in effect, submit the question of damages to the jury prior to determining or having determined itself the question of liability.

We hold, therefore, that the issue was properly raised in the court below and that the District Court made a finding of fact on this very point at issue.

Secondly, the paragraph of the Courts' opinion on page 12 reading:

The second question raised in the Director's appeal is Whether the District Court erred in refusing to make a determination of the specific year in which
the Allendale tract of land became a taxable event to the partnership.

should read as follows:

The second question raised in the Director's appeal is whether the District Court erred in refusing to make a determination of the specific year in which the Allendale mortgage foreclosure became a taxable event to the partnership.

The language of the latter paragraph is substituted for the former language of the opinion.

Of the other matters Urged in the petition or rehearing we con-elude that these are repetitious of the grounds previously submitted, considered and determined. The petition for rehearing is, therefore, denied.

1 Defendant's Requested instruction No. 4

2 Sec. 117. CAPITAL GAINS AND LOSSES.

(a) Definitions.--As used in this chapter--

(1) Capital Assets.--The term ,'capital assets" means property held by the taxpayer ~(whether or not connected with his trade or business), but does not include---
(A) stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer If on hand at the close of the taxable year, or 10roperty held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; . . .
(4) Long-term capital gain.--The term "long term capital gain" means gain from the :sale or exchange of a capital asset held for more than 6 months, if and to the extent such :gain is taken into account in computing gross income; . . .

3 (k) (As added by Sec. 127(a), Revenue Act of 1943, supra, and as amended by Sec.

325(b) and (c), Revenue Act of 1951, supra) Gain or loss in the Case of Timber or Coal.--

(1) If the taxpayer so elects upon his return for a taxable year, the cutting of timber (for sale or for use in the taxpayer's trade or business) during such year by the taxpayer who owns, or has a contract right to cut, such timber (providing he has owned such timber or has held such contract right for a period of more than six months prior to the .beginning of such year) shah be considered as a sale or exchange of such timber cut ,during such year . . .
(2) In the case of the disposal of timber or coal (including lignite), held for more than 6 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 or .coal, the difference between the amount received for such timber or coal 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 or coal.

Sec. 631. Internal Revenue Code of 1954. GAIN OR LOSS IN THE CASE OF TIMBER OR COAL.

(a) Election to Consider Cutting as Sale or Exchange.--I[ the taxpayer so elects on his return for a taxable year, the cutting of timber (for sale or for use in the taxpayer's trade or business) during such year by the taxpayer who owns, or has a contract right to cut, such timber (providing he has owned such timber or has held such contract right for a period of more than 6 months before the beginning of such year) shall be considered as a sale or exchange of such timber cut during such year ....
(b) Disposal of Timber With a Retained Economic Interest.--In the case of the disposal of timber held for more than 6 months before such disposal, by the owner thereof under any form or type of contract by virtue of which such owner retains an economic interest in such timber, the difference between the amount realized from the disposal of such timber and the adjusted depletion basis thereof, shah be considered as though it were a gain or loss, as the case may be, on the sale of such timber . . . ]For purposes of this subsection, the term "owner" means any person who owns an interest in such timber, including a sublessor or a holder of a contract to cut timber.

4 CROSS EXAMINATION

Q (BY MR. FRAZIER:) Mr. Belcher, I believe you testified a moment ago that you are a lumber manufacturer. You have got several other businesses, too?
A Yes, I have got a few other things.
Q You are the President of the Land & Timber Company, aren't you?
A President
Q President?
A I am joint owner and manager
Q Of the Land and Timber Company
A Right
Q You are the chief executive officer?
A I am General Manager
Q About the corporation, the lumber company?
A I am president
Q That is the same office generally as Chief Executive. Now what is the Land and Timber Company? It, as I understand it buys the land and timber and turns around and sells it to the corporation?
A To the lumber company
Q And the lumber company cuts it up into goards and pays what you consider to be the fair market value.
A Right

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