Gaskins v. United States

GASKINS v. UNITED STATES
381 F.2d 729, 67-2 U.S. Tax Cas. ¶9663, 20 Am. Fed. Tax R.2d 5577 (5th Cir. 1967).
Affirming 67-2 U.S. Tax Cas. ¶9662, 20 Am. Fed. Tax R.2d 5144 (1966).

Key Topics
DISPOSAL WITH A RETAINED ECONOMIC INTEREST
· Effect of cutting arrangement being terminable at will

Facts

The taxpayer had an oral agreement with a second party under which the second party cut and purchased standing timber owned by the taxpayer. Both the taxpayer and the purchaser testified that the taxpayer could have terminated the purchaser's cutting of the timber at any time. The taxpayer treated his profits from the sales as capital gain under section 63l(b) of the Code. The government contended that the taxpayer's profits constituted ordinary income.

Held: For the Government. Capital gain treatment under section 631(b) is permitted only where the taxpayer has made a disposal of standing timber under a contract by virtue of which he retains an economic interest in the timber. For a taxpayer to obtain capital gain treatment under section 631 (b) the contract must provide (I) that the purchaser has both the right and the obligation to cut an amount of timber agreed upon between the parties; (2) that the purchaser is to own all of the timber cut when and as cut; and (3) that the purchaser is required to pay for the timber according to the amount cut. Here, both parties to the oral agreement testified that the taxpayer could have called off the arrangement at will. Thus, the purchaser did not have the right and obligation to cut an agreed upon amount of timber. The arrangement was an option to sell rather than a disposal, and consequently capital gain treatment under section 631(b) is not allowable.

Held: Affirmed Per Curiam.