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Summaries - S

Click on the case name for the complete text.

Schlicher v. Commissioner
T.C. Memo. 1997-37

Sale or exchange of residence: Deferral of gain: Allocations: Business v. residential use.-An individual who sold his principal residence and purchased a large tract of property of which a portion was used for his horse business could defer recognition of gain from the sale in an amount equal to the cost of the new property that was allocable to the remaining acreage. The taxpayer's use of that acreage was significant and constituted residential use. The taxpayer credibly testified that he moved to the property because he appreciated nature, admired unobstructed views of the countryside, enjoyed living in open spaces where he could hike and ride horseback, and desired to live the rest of his life there. Boarded horses were kept in the business portion of the property, and the taxpayer neither trained horses on the premises nor gave riding lessons there. Further, he did not hold the property for investment purposes.
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Schudel v. Commissioner
33 CCH Tax Ct. Mem. 1155, 1974 P-H Tax Ct. Mem. ¶74,262(1974).

Taxpayers, individually and as equal partners in a partner-ship, were engaged in planting, cultivating, harvesting, and selling Christmas trees during the taxable years 1967, 1968, and 1969. Each year the mature trees would be examined and classified according to size and density., with any trees not categorized as prime being allowed to grow for another year before harvesting. Each year negotiations with buyers were conducted in January in order to establish a price for the trees to be harvested and sold in November. During the years involved, taxpayers were under an election. pursuant to section 631 (a), to treat the cuffing of the trees as a sale or exchange. In reporting the partnership's gains, taxpayers used the price agreed to in January of a year as the fair market value of the trees cut in that year. The Commissioner found deficiencies based on his determination of the fair market value of a tree in its January condition, which frequently was not the same as its November condition.
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Schudel v. Commissioner
563 F.2d 1300, 77-2 USTC ¶ 9746,
40 AFTR2d 77-6139 (9th Cir. 1977) (rev'g and rem'g)

Timber: Election to treat cutting as sale or exchange: Fair market value.--For purposes of calculating gain or loss on trees cut in November, the fair market value as of January 1 is to be determined on the basis of the condition of the trees when they were cut rather than as of January 1. Reg. § 1.631-1(d)(2), which provides otherwise, is inconsistent with the statute. The case was remanded for further proceedings since disputes remained as to the proper manner of determining the fair market price as of January of trees based on the condition they were in when cut in November.
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Schnitzer v. United States
69-1 USTC ¶9160, 22 AFTR 2d 5972 (D. Ore. 1968).

Georgia Mills acquired all of the assets of Pilot Rock Lumber Co. To finance the acquisition, Georgia Mills gave the taxpayers a "Timber Production Indenture," under which the taxpayers acquired title to 102 million board feet of merchantable timber. In return for the timber, the taxpayers gave Georgia Mills two million dollars. The indenture provided for its own termination when the taxpayers received from the sale of the timber two million dollars plus 61/4% of any unliquidated portion of the principal sum. Title to alt remaining trees would then revert to Georgia Mills. As part of the same financing arrangement, but in a separate document, taxpayers and Georgia Mills entered into a timber cutting contract under which Georgia Mills acquired the right to harvest the timber previously conveyed to the taxpayers. The taxpayers claimed capital gain treatment of the profit they made from the cutting arrangement. They claimed that they were the owners Of the timber and that they had made a disposal of the timber to Georgia Mills within the meaning of Section 631(b). They admitted that they took title to the timber with the prior understanding that Georgia Mills would have the right to cut it. They contended, however, that despite this understanding they nevertheless qualified as "owners" of the standing timber under Section 631(b), citing Weyerhaeuser (page ) which held that a taxpayer may be an owner of standing timber under Section 631(a) even though he does not have a right to cut the timber for sale on his own account or for use in his trade or business.
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Scott v. United States
305 F.2d 460 (Ct. Cl. 1962)

The taxpayers, two non-managing members of a three person joint enterprise, purchased 25 tracts of timberland at a total cost of $146,362.45 from 1944 to 1949, From 1944 to I952, the taxpayers sold all 25 tracts in 14 transactions for a total of $830,255. The last two sales consisted of 11 tracts purchased in 1949 and sold in 1952 for a total price of $454,720 with a total gain of $407,851.97. The taxpayers reported the gain in 1952 as long-term capital gain. The Commissioner assessed deficiencies in 1952 based on a finding that the gains on 1952 sales were ordinary income from the sale of property held primarily for sale to customers in the ordinary course of business.

The taxpayers, one of whom was a practicing attorney and the other the president or a furniture factory, spent a minor part of their time On personal investments in stock, and a still smaller part of their time on timberland transactions. The third member of the joint enterprise was the manager of the enterprise with authority to buy, manage, and sell timberland for the enterprise. Except for one unsuccessful effort to advertise and sell three of the 25 tracts at public auction in 1947, the parties never engaged in any advertisement or promotion of sales; in addition, no timber was ever sold on a stumpage basis, no effort was made to develop and improve the property, no roads were built to or on the timberlands, and no logging operations were ever conducted thereon. The court found that the profits realized by the taxpayers were not due to any business activities by the taxpayer but resulted from the rapid rise in the price of timber.
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Shaffer v. Commissioner
19 T.C.M. 978; P-H T.C. Memo ¶60,186 (1960).

A partnership engaged in the business of cuffing timber and manufacturing lumber and lumber products acquired the right to cut timber from the McCann tract, owned by Eastern Timber Company. Eastern was a corporation controlled by the same persons who controlled Fairhurst Lumber Company, a corporation which acted as sales agent for the partnership's products. Under the cutting contract for the McCann tract, the partnership agreed to purchase all of the timber and to pay Eastern a percentage of gross sales or a minimum price per thousand board feet of timber cut. The contract designated Fairhurst as sales agent and gave it a right of first refusal on timber products but not on logs. Title to all logs and timber products was to remain in Eastern until paid for. Eastern was to pay taxes on the land and standing timber, but the partnership was to pay taxes on timber products and to bear any loss resulting from the destruction of products or cut logs by fire. The contract was by its terms not assignable. The partnership did in fact sell all of its lumber and lumber products to Fairhurst, but it sold logs to other purchasers. It determined the selling price of its lumber products without question by Eastern or Fairhurst. The partnership elected under section 117 (k) (1) to treat its cutting of the lumber from the McCann tract as a sale or exchange. The Commissioner contended that the partnership was not entitled to make the election because it was merely performing logging services and did not have any interest in the timber. The Commissioner argued that Fairhurst's right of first refusal, the nonassignability of the contract, and the reservation of title by Eastern all indicated that the partnership did not have the requisite interest in the timber.
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Shepherd v. Commissioner
2002-1 USTC ¶60,431

Gift tax: Transfers in general: Indirect gifts: Transfer to partnership: Valuation: Real property subject to lease: Methodology: Discounts. This appeal involves the value, for federal gift tax purposes, of the transfer of minority shares of leased land by Petitioner J.C. Shepherd ("Shepherd") to his two adult sons through a family partnership. After trial, the United States Tax Court held that the transfer was an indirect gift of undivided fractional shares of land and that the value of the gift to each son was $160,876. Upon review and oral argument, we affirm the Tax Court's decision for the reasons explained in its opinion published at 115 T.C. 376 (2000).

Sherrod v. Commissioner
82 T.C. 523, Tax Ct. Rep. (CCH) 41,084, (P-H) ¶ 82.40 (1984)

[Estate tax: Special use valuation: Farm property: Tax Court: Jurisdiction.]--At death decedent was beneficial owner of 1,478 acres of land. During the last 25 years of his life, 1,108 acres were in timber, 270 acres in row crops, and 100 acres in pasture. All of it was under exclusive management and control of decedent until 5 years before his death when he placed it in a revocable living trust. Thereafter, until his death, management and control were exercised by decedent's son, who was one of the trustees. Management included (1) the negotiation of annual rental agreements on the crop and pasture lands, (2) contact from time to time with tenants to check their performance and to see if they knew of any problem with respect to the timberland, (3) supervision of timberland by personal inspection and contact with tenants and adjoining landowners to protect against trespassers, insect infestation and disease, (4) negotiation of cutting contracts and (5) payment of local taxes. Held, the 1,478 acres qualify for special use valuation under section 2032A(b) and section 20.2032A-3(b)(1) , Estate Tax Regs. Held, further, this Court is without jurisdiction to review respondent's determination that the estate does not qualify to pay the tax in installments under sections 6166 and LK:S6166A(A) 6166A .
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Sherrod v. Commissioner
85-2 USTC ¶13,644; 774 F2d 1057
|Reversing the decision of the Tax Court, 85 T.C. 523, Dec. 41,084, ¶12,542

Estate tax: Special use valuation: Qualified use: Timberland.--An estate's assets, including timberland, crop land, and pasture land, were not entitled to special use valuation for federal estate tax purposes because the property did not meet the "qualified use" test. In reversing the decision of the Tax Court, the appellate court held that since sixty-eight of the decedent's one hundred acres of pasture land were not put to any use at all and 270 acres of the crop land were leased to unrelated parties for fixed rentals, the crop land and pasture land were not qualifying real property. Even though the timberland could be considered qualifying real property, the fair market value of that property, by itself, represented only 26 percent of the adjusted gross estate and the 50-percent threshold test was not met.
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J. R. Simplot Co. v. Commissioner
26 T.C.M. 488; P-H T.C. Memo ¶67,104 (1967).

The taxpayer was engaged in the business of manufacturing lumber as a sawmill operator. During the period 1955-1956 it entered into three timber contracts with agencies of the Federal Government for the purpose of obtaining timber for its sawmill. The contracts provided that the taxpayer was to cut the standing timber and purchase the cut timber. Title to the timber was to remain in the United States until it was cut, scaled and paid for, and the risk of loss was to be borne by the United States until title was transferred to the taxpayer. The taxpayer cut timber pursuant to the contracts until 1957 when because of a lack of timber in the vicinity of its sawmill and adverse market conditions it liquidated its sawmill operations, and sought cancellation of the timber contracts. When the Government refused to cancel, the taxpayer paid another company ,$7,000 to take over the contracts. The taxpayer treated the $7,000 payment and its unrecovered deposits on the contracts as constituting an abandonment loss and deducted the amounts from ordinary income. The Commissioner disallowed the deduction. He contended that the contracts were either capital assets as defined in section 1221 or assets used in a trade or business as defined in section 1231(b) and that their transfer constituted a sale or exchange resulting in a capital rather than an ordinary loss.
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Smith v. Commissioner
48 T.C. ____ No. 83 (1967)

The taxpayer was a stockholder in a corporation which on April 10, 1962, entered into an agreement to sell a tract of timberland. The terms of the agreement were $3,000 down, a $9,000 interest-bearing promissory note to be paid January 1, 1963, and ten annual installments totaling $39,960 at 6 percent interest. However, the purchaser had the right to pay the $39,960 at any time prior to January 1, 1963, at a discount of 18 percent. The corporation reported a capital gain on the sale in its tax return for its fiscal year ended October 31, 1962. Thereafter, the purchaser exercised his right to prepay the contract balance at a saving to him and a loss to the corporation of $7,192.80. The corporation deducted the loss from ordinary income, but the Commissioner contended that is was a capital loss and disallowed the deduction.
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Smith v. Commissioner
11 TTJ 129, 424 F.2d 219, 70-1 USTC ¶ 9327,
25 AFTR2d 70-936 (9th Cir. 1970) (aff'g in part and rev'g)

Adjustments to basis of stock: Net operating losses: Stockholder creditors: Tax option corporation. The, taxpayers were stockholder-creditors of an electing small business corporation. Their bases for the indebtedness had been reduced, but not to zero, by virtue of adjustments for corporate net operating losses. They received payments from the corporation in reduction of this indebtedness. The Court held that each payment was allocable in part to return of basis and in part to income.

Taxable year of inclusion: Partnership income: Accrual basis: Compromise rental payment: Year accruable: Proof.- The taxpayers met their burden of proving that a compromise rental payment to an accrual basis partnership in which they were partners did not properly accrue for the period ended June 30, 1963. The payment of the rental was contingent on the closing of the real property and a saw mill. Accordingly, the partnership's right to receive payment was contingent on the closing of the real property transaction and such closing did not take place; therefore, the transaction was not finalized until after June 30, 1963.
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Smithgall v. United States
81-1 U.S.T.C. ¶ 9121 47 AFTR 2d 81-695 (1980)

The taxpayers owned a 180-acre estate in Georgia, including a 35-acre tract surrounding their residence. This 35-acre tract was non-business residential property. Ornamental pine trees on this tract were killed in 1973 by the southern pine beetle. The mass attack of beetles was of epidemic proportions and unusual for the area. The trees were killed within a period of five days to two weeks. The Commissioner of Internal Revenue disallowed taxpayer's deduction Of expenses incurred for clean up of the trees killed by the beetles.
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Snider v. Commissioner
34 CCH Tax Ct. Memo. 530,
1975 P-H Tax Ct. Memo ¶75,111 (1975)

Four related taxpayers were members of a partnership formed in 1959 to purchase timber cutting contracts, and cut and milt timber. In 1966, a corporation bought the assets of the partnership, continued to operate on the same premises as the partnership, and employed each of the taxpayers in various positions on a salaried basis. From 1966 to 1970, taxpayers purchased timber cutting contracts from timber owners in the area which were later resold to the corporation. The corporation also purchased timber cutting contracts from other timber owners, timber brokers, and third parties. Taxpayers were not members of a timber brokers association, were not licensed or listed as timber brokers, and did not improve or have the capability to cut the timber. In 1970, the corporation went out of business and its assets were purchased at a public auction by a corporation owned by two of the taxpayers. Taxpayers treated the sale of timber cutting contracts to the corporation as sales of capital assets and the gains realized from these sales as capital gains. The Commissioner contended that the timber cutting contracts were purchased primarily for sale to customers in the ordinary course of a trade or business within the meaning of Section 1221 and therefore gains from the sales should be treated as ordinary income.
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Souther Pacific Transportation Co. v. Commissioner
75 T.C. No. 44 (1980)
(Timber issue only)

This suit is brought by the taxpayer as successor to the Southern Pacific Land Company (SPLC). The taxpayer contests the Commissioner's determination that certain allocated expenses incurred in connection with SPLC's timber management program should reduce the amount realized from its timber sales, and hence its capital gains under Section 631(b); instead, taxpayer maintains that these expenses were ordinary and necessary under Section 162, and should be deductible from ordinary income. During the years at issue SPLC owned and managed over 700,000 acres of timberland in northern California. It was stipulated that the SPLC timber sale contracts are predominantly cutting contracts to which Section 631 (b) applies.
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Sringfield Plywood Corp. v. Commissioner
15 T.C. 697 (1950).

Within six months after acquiring timberlands, the taxpayer granted in writing to a lumber company (described as the "vendee") the "right and license" to enter upon the land and cut and log the timber for a period of two years. Payment was to be made as the timber was cut, but the vendee was required to pay for all timber not cut at the end of the period. The risk of fire and the duty to pay taxes on the standing timber were on the vendee. The taxpayer treated its profit from the contract after the six-month holding period as capital gain under section 117(k) (2J on the theory that disposal occurred at the time of sale which in turn occurred at the time of cutting, not at the time it granted the right to enter and cut. The Commissioner denied capital gain treatment on the ground that the taxpayer had not held the timber for six months before the disposal, arguing that the taxpayer made a "disposal" when it entered into the cutting arrangement, i.e., prior to the expiration of the six-month holding period.
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The Squirt Company v. Commissioner
51 T.C. 543, Tax Ct. Rep. (CCH) 29,401, (P-H) ¶ 51.53 (1969)

[Casualty losses: Citrus land: Simultaneous depreciation of land values: Loss of anticipated profits.]--S. Co. suffered a casualty to certain citrus tree land. Held, the amount deductible as a casualty loss under section 165(a) , I. R. C. 1954, determined to be equal to the cost of restoring the land to its pre-casualty condition and not the net decrease in fair market value of the land.
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The Squirt Co. v. Commissioner of Internal Revenue
423 F.2d 710 (9th Cir. 1970); 70-1 USTC ¶9281 25 AFTR 2d 842
Affirming, 51 T.C. 543 (1969)

The taxpayer purchased a citrus ranch in 1958 located in the Rio Grande Valley in Texas. In 1962 a freeze destroyed 230 acres of taxpayer's citrus trees but did no actual damage to the soil. There was a substantial reduction in the fair market value of taxpayer's land attributable to a general reduction in the value of citrus land in the area triggered by the fear of future freezes. The taxpayer claimed that he was entitled to deduct as a casualty loss under Section 165 the decrease in fair market value of his land attributable to decreased buyer demand. The Commissioner allowed a deduction to the extent of taxpayer's basis in the destroyed citrus trees and the cost of clearing the land of dead or damaged trees but disallowed a deduction for the general decline in market value resulting from decreased buyer demand.
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Starker v. United States
35 AFTR 2d 75-1550, 75-1 U.S.T.C. ¶9443 (1975)

The taxpayer conveyed timberlands to two corporations in 1967 under agreements whereby the corporations in turn promised to convey at a future date other timberlands to the taxpayer. These lands were not owned by the corporations on the date of execution of the original agreement. The taxpayer received no cash payments. The taxpayers treated the transfers to the corporations as nontaxable under Section 1031 in his 1967 return.
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Starker v. United States
77-2 U.S.T.C. ¶ 9512 40 AFTR 2d 77-5460 (1977)

The taxpayer conveyed timberlands to a corporation in exchange for the corporation's promise that property acceptable to the taxpayer would be conveyed in the future. The value of the timberland was entered into an "Exchange Value" account of the corporation. As parcels were purchased by the corporation and transferred to the taxpayer, the balance was reduced by the purchase price and acquisition costs. At the end of each month the balance was increased by a six percent per annum "growth factor." Twelve parcels, the total value of which equaled the original value of the timberland, were conveyed to the taxpayer. Three additional parcels, the value of which equaled the "growth factor" accumulated over the period, were also conveyed. As such, no cash had to be transferred to close the account.

Taxpayer contended that the transactions qualified for nonrecognition of gain treatment under Section 1031. The Government responded that the taxpayer was not entitled to non-recognition treatment because the original transaction was not an "exchange of like-kind property."
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Starker v. United States
79-2 U.S.T.C. ¶ 9541 44 AFTR 2d 79-5525 (1979)
Affirming, reversing and remanding 77-2 U.S.T.C. ¶ 9512, 40 AFTR 2d 77-5460 (1977)

The taxpayer conveyed timberlands to a corporation in exchange for the corporation's promise that properties acceptable to the taxpayer would be conveyed in the future. The value of the timberland was entered into an "Exchange Value" account of the corporation. As parcels were purchased by the corporation and transferred to the taxpayer the balance was reduced by the purchase and acquisition costs. At the end of each month the balance was increased by a six percent per annum "growth factor." Twelve parcels, whose total value equaled the original value of the timberland, were conveyed to the taxpayer or his children. Three additional parcels, whose total value equaled the amount of the "growth factor" accumulated over the period, were also conveyed. As such, no cash was transferred to close the account.
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Stevensom Co-Ply, Inc. v. Commissioner
76 T.C. 637 Tax Ct. Rep. (CCH) 37,850, (P-H)¶76.54
acq. I.R.B. 1982-28, 5

The taxpayer, an employee's cooperative, was not taxable on any part of its net income that was distributed to stockholder-employees as patronage dividends. Section 1381, et seq. For the year at issue, taxpayer distributed patronage dividends that included Section 631(a) gains it had earned. In determining its alternative tax under Section 1201 (a), taxpayer excluded these distributed 631 (a) gains from the tax base used to calculate the tax. The Government contended that such gains, even though distributed, were subject to the alternative minimum tax. It based its position on the absence of statutory or regulatory authority to deduct distributed capital gains, and on the express requirement of Regulation §1.1382-1(b) to include all long-term gains in the alternative tax computation.
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Stone v. Grandquist
60-I USTC ¶9148; 5 AFTR 2d 304 (D. Ore. 1959).

Under oral agreements in 1949 and 1954, the taxpayer purchased from DYW Corporation all of the timber on a certain tract. The parties agreed that Oregon-Washington Plywood Co. ("Plywood"] had the right of first refusal on all logs cut from the timber, but their agreement also provided that the taxpayer was free to sell all logs to whomever would pay him the highest price. The right of first refusal in Plywood was created in 1946 through agreement between DYW's predecessor and Plywood's predecessor. Although the taxpayer was aware of this right of first refusal, he sold logs where he wanted to and to whomever would pay the most for them. The taxpayer carried unsold logs in his own inventory and he carried insurance on felled timber and logs, but ad valorem taxes were paid by DYW. Plywood was aware of the fact that the taxpayer was selling logs to whomever he desired. All parties concerned, including Plywood, considered that the taxpayer had the right to sell the logs on his own account. The taxpayer did not work as a logger for other persons. With respect to timber cut in 1952 and 1953 under the 1949 contract, and in 1955 under the 1954 contract, the taxpayer elected to treat the cutting as a sale or exchange under section 117(k)(1). The Commissioner disagreed, evidently on the theory that the taxpayer did not own or have a contract right to cut the timber because the right of firs! refusal in Plywood precluded the taxpayer from selling for his own account.
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Straughn v. Commissioner
55 T.C, 21; CCH Dec. 30,367

The taxpayer and her deceased husband acquired 170 acres of land adjacent to 130 acres already owned by them which were used to grow Emperor table grapes. The newly acquired land had been wet-farmed with irrigation applied through a sprinkler system. For the preceding 16 years wheat and cotton had been grown on the transferred land. The taxpayer wanted to use the newly acquired land to grow Emperor table grapes instead of wheat and cotton. In order to economically grow table grapes on the land it was necessary to incur subsoiling and leveling expenses of $25,709.00. The taxpayer claimed these expenses as a deduction on her 1964 and 1965 income tax returns contending that they were soil and water conservation expenses deductible under Section 175 of the Code. The government contended that the deductions should be disallowed because the expenses were not incurred in respect of "land used in farming" as required by Section 175.
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St. Germain v. Commissioner
18 T.C.M. 355; P-H T.C. Memo ¶59,073 (1959)

The taxpayer, a successful investment broker, owned a farm of 170 acres on which he raised cattle. He incurred continuous losses and in 1948 concluded that the best use for the farm was to grow trees. Prior to this decision he had planted 50,000 trees. By 1951 he had acquired a total of 700 acres and had planted a total of 70,000 trees. He cleared !and, constructed access roads, prepared fire lanes and employed part-time tree planters. His farm was designated as a "Tree Farm" by the American Forest Products Industries, Inc. The taxpayer expected to realize a net profit of $1.00 per mature tree after an expected growing period of 35-50 years. The Commissioner disallowed the deduction of the taxpayer's net losses from agricultural operations on the ground that the farm was used for personal enjoyment and was not operated as a trade or business.
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Stuchell v. Commissioner
37 T.C.M. 236(1978)

The taxpayers were shareholders in a corporation they formed to engage in logging, lumber-manufacturing and wood processing. In the same year the corporation was formed, the shareholders purchased, in proportion to their stockholdings, undivided interests in certain timberlands. Initially, the shareholders sold timber to the corporation through short-term timber cutting contracts taxable as disposals of timber under Section 631(b). Later, however, the shareholders decided that the economic future of the corporation would be best served by a long-term timber cutting contract since this would avoid the possibility that a single shareholder could veto sales by refusing to sign the short-term contracts. Because it was not feasible to set a single price for timber to be cut over a long period, the corporation and the shareholders agreed that timber prices would be set annually by an independent qualified appraiser. A specific appraiser was named in the agreement, and if he were unable to serve, an appraiser was to be chosen by the president of a named bank. The corporation and the shareholders had no control over the selection process. After several years, during which the shareholders reported their earnings from the: timber contract as capital gains under Section 631 (b), the Internal Revenue Service contested the appraisals as being too high in amount, and argued that the amounts paid to the shareholders in excess of what the Government determined to be the timber's fair market value were constructive dividends which were taxable as ordinary income. The Government did not contend that the agreement was not at arm's length or that the appraiser was under the control of the shareholders; only that the appraisals were in excess of fair market value.
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Superior Pine Products Co. v. United States
______F. 2d ________(Court of Claims, 1973)
73-1 U.S.T.C. ¶9348; 31 AFTR 2d 1134

Taxpayer owned more than 200,000 acres of forest land in Georgia. In 1947, taxpayer entered into an agreement with St. Regis Paper Company, pursuant to which St. Regis acquired the rights to timber growing or to be grown on taxpayer's land for a 60-year term commencing January 1, 1945. St. Regis acquired all of the surface rights necessary to the development of the land as well as the right to use, occupy and maintain all buildings and structures on the land and the right to build any additional buildings or structures necessary and convenient for its operations. Taxpayer reserved certain mineral rights upon and beneath the land for itself.

St. Regis agreed to pay an annual amount, adjusted in accordance with changes in the market, equal to the prescribed price for 150,000 cords of timber, even if the average annual growth were to fall below 150,000 cords. If the average annual growth exceeded 150,000 cords, St. Regis agreed to pay the prevailing contract price per cord for all of such annual growth, regardless of whether the timber was cut, removed or otherwise utilized. The agreement was drafted with the intention that timber would be utilized at the same rate it was being produced so that at the termination date of the contract there would be on hand approximately the same amount of timber that had existed at the beginning of the contract term.

St. Regis was required to pay all costs of operation and management of the timberlands and all severance and ad valorem taxes. Title to the timber passed from taxpayer to St. Regis only when such timber was severed from the land.

The Revenue Service allowed long-term capital gain treatment to the taxpayer for all of its proceeds prior to and including part of 1965 on the theory that, under sections 1221 and 1231 of the Code, there had been a sale of capital assets (the existing timber) at the beginning of the contract term at the then existing market value. These cumulative allowances brought the total amount of proceeds from St. Regis up to the full market value of the timber existing as of the commencement of the agreement. The Service, however, contended that taxpayer's proceeds in excess of the market value were ordinary income. Taxpayer, relying on Section 631(b), contended that it was entitled to capital gains treatment on all of the annual payments from St. Regis since it had retained an economic interest in the timber.
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Superior Pine Products Co. v. United States
Ct. CL Com. Rpt. 727 CCH 7907 (1973).
73-1 U.S.T.C. 9348; 31 AFTR 2d 1134.

The Court of Claims upheld the lower court's decision in favor of the Government, as reported in Volume 9 of the Timber Tax Journal, page 215. Certiorari was denied by the Supreme Court On October 9, 1973.
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