BELCHER v

BELCHER v. PATTERSON
60-2 USTC ¶ 9733; 6 AFTR 2d 5697 (N.D. Ala. 1960).
Rev'd 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).
On remand sub nom. Abernathy v. Patterson, 63-2 USTC ¶9678; 12 AFTR 2d 5179 (N.D. Ala. 1963).

FINDINGS OF FACT, CONCLUSIONS OF LAW AND. ORDER

LYNNE, District Judge: The above-styled consolidated actions came on to be heard on the 23rd day of September, 1960, Pursuant to the provision of the order on pretrial hearing entered therein on July 18, 1960, certain special interrogatories were submitted to the jury. Such special interrogatories, together with the responses of the jury thereto, appear serially below:

Interrogatory NO. I

Taxpayer's Value $369,432.27

Government's Value $340,727,29

What do you find to have been the fair market value of timber sold by Belcher land and Timber Company to W. A. Belcher Lumber Company, Inc. during the year 1950?

To which the jury responded: $369,432.27.

Interrogatory No. 2

Taxpayer's Value $522,895.53

Government's Value $416,029.41

What do you find to have been the fair market value of timber sold by Belcher Land and Timber Company to W. A, Belcher Lumber Company, Inc. during the year 1951?

To which the jury responded: $522,895.53.

Interrogatory No. 3

Taxpayer's Value $324,636.81

Government's Value $286,332.61

What do you find to have been the fair market value of such sales of timber held for more than six months during the year 1950?

To which the jury responded $314,000.00.

Interrogatory No. 4

Taxpayer's .Value $508,226,96

Government s Value $319,689,70

What do you find to have been the fair market value of such sales Of timber held for more than six months during the year 1951?

To which the jury responded: $461,000.00.

Interrogatory No. 5

Taxpayer's Value: $495,257.06

Government s Value $398,046.07

What do you find to have been the fair market value of timber sold by Belcher Land and Timber Company to W. A. Belcher Lumber Company, Inc., during the year 1952?

To which the jury responded: $495,257.06.

Interrogatory No. 6

Taxpayer's Value $512,222,7I

Government's Value $449,965.69

What do you find to have been the fair market value of timber sold by Belcher Land and Timber Company to W. A. Belcher Lumber Company, Inc., during the year 1955?

To which the jury responded: $512,222,71.

Interrogatory No. 7

Taxpayer's Value $475,648,29

Government's Value $318,547.42

What do you find to have been the fair market value of such sales of timber held for more than six months during the year 1952?

To which the jury responded: $435,000.00.

Interrogatory No. 8

Taxpayer's Value $161,960.59

Government's Value $251,018.94

What do you find to have been the fair market value of such sales of timber held for more than six months during the year 1955?

To which the jury responded: $183,000.00.

Interrogatory No. 9

Taxpayer's Value $495,065.67

Government's Value $409,998.62

What do yon find to have been the fair market value of the timber sold by the partnership to the corporation for the corporation's taxable year ended June 30, 1951?

To which the jury responded: $495,065.67.

Interrogatory No. I0

Taxpayer's Value $530,187.82

Government's Value $415,654.48

What do you find to have been the fair market value of the timber sold by the partnership to the corporation for the corporation's taxable year ended June 30, 1952?

To which the jury responded: $530,187.82.

Interrogatory No. 11

Was the "Allendale" tract held primarily for sale to customers in the ordinary course of trade or business of the partnership: During the year 1950? During the year 1951? During the year 1952? During the year 1954? During the year 1955?

To which the jury responded, for the year 1950, no; for the year 1951, no; for the year 1952, no; for the year 1954, yes; and for the year 1955, yes.

Interrogatory No. 12

Was the property referred to in the evidence as Payne sales from the Crawford tract held primarily for sale to customers in the ordinary course of trade or business of the partnership: During the year 1954? During the year 1955?

To which the jury responded, for the year 1954, no; and, for the year 1955, no.

Counsel, in open court, stipulated that the remaining issues might be heard and decided by the court without the intervention of a jury on the evidence heard in open court in the trial to the jury. The court therefore makes and enters the following findings of fact and conclusions of law upon those issues tried to the court without a jury.

FINDINGS OF FACT

1. Belcher Land and Timber company is a partnership created on August 1,1946, and at all times subsequent thereto has been a valid and subsisting partnership composed of the following partners with partnership interests as stated:

The Trustee has made annual distribution to each beneficiary of the trust of partnership income received.

2. W. A. Belcher Lumber Company, Inc., a corporation, commenced operations as of August 1, 1946, and at all times subsequent thereto has been a valid and subsisting corporation. The ownership of stock of the corporation is held by the same persons and in the same percentage as the partnership interests in the Belcher Land and Timber Company.

3. The amounts expended by the Belcher Land and Timber Company, a partnership, for each of the years 1950, 1951, 1952, 1954 and 1955, for reforestation are not deductible from income but constitute capital expenditures, such amounts for each of such years being as follows:

4. The cost basis of the land sold by the Belcher Land and Timber Company, a partnership, from the tract known as "Crawford" in 1952 is $4,245.00.

5. The cost basis of the land described as "Payne Sales from the Crawford Tract" sold in 1954 by the Belcher Land and Timber Company, a partnership, is $7,575.00.

6. The cost basis of the land described as "Payne Sales from the Crawford Tract" sold in 1955 by the Belcher Land and Timber Company, a partnership, is $6,060.00.

7. The cost basis of the land sold in I955 from the Allendale Tract by the members of the Belcher Land and Timber Company, a partnership, is as follows:

8. The Belcher Land and Timber Company, a partnership, timber depletion allocable to the timber cut in each of the years 1950, 1951, 1952, 1954 and 1955, inclusive, is that figure for each year computed by commencing with the timber balances shown in the Report of Revenue Agent Crim (Plaintiff's Exhibit 31) as of December 31, 1949, plus growth of timber at the rate of 68 feet per acre per year on fee lands, said depletion for each of the years involved being as follows:

Year	Total Depletion	Depletion Long Term Sales
1950	$152,469.31	$ 97,037.04
1951	329,609.03	267,713.50
1952	273,390.64	213,133.58
1954	211,919.35	105,958.67
1955	455,385.64	124,972.03

9. The sales of timber made for each of the years 1950 to 1955, inclusive, by the Belcher Land and Timber Company, a partnership, to W. A. Belcher Lumber Company, a corporation, were not made of property held primarily for sale to customers in the ordinary course of trade or business of Belcher Land and Timber Company, a partnership.

10. The proper depreciation allowance of W. A. Belcher Lumber Company, Inc., a corporation, is as follows for the fiscal years ended June 30, 1951 and June 30, 1952, with respect to each of the items described below:

The depreciation for all other depreciable property for said corporation is as shown in the federal income tax returns filed by the corporation for each of said years.

11. The Belcher Land and Timber Company, a partnership, had no cost basis for any timber claimed as a casualty loss by fire in 1952 and such claimed casualty loss is disallowed.

12. For purposes of this case in ascertaining the cost basis of sales of certain parcels from the Allendale Tract in 1955, the re-acquisition of this property (previously sold in 195'0 to Atlanta Highway Estates, Inc.) through foreclosure in 1953 and the extinguishment of the statutory right of redemption in 1954 by the quitclaim deed of the equity of redemption, has been considered a taxable event and the court has been apprized of the contention of plaintiffs that the tax consequences of the foreclosure were not effective until the statutory right of redemption was extinguished by the quitclaim deed from Atlanta Highway Estates, Inc., the mortgagor, to Belcher Land and Timber Company, a partnership, the mortgagee, and the court has been advised of the contrary contention of the defendant that the tax consequences of the foreclosure were fully effective in 1953, and no adjudication is made of this issue except for purposes of this case only in determining the cost basis of the sales from the Allendale Tract in 1955 and 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.

CONCLUSIONS OF LAW

1. The amounts expended by the partnership, Belcher Land and Timber Company, for reforestation constitute capital expenditures as provided by Section 24 of the Internal Revenue Code of 1939 or Section 263 of the Internal Revenue Code of 1954, as the case may be, and such expenditures are not deductible from income under the provisions of Section 23(a) of the Internal Revenue Code of 1936, or Section 162 of the Internal Revenue Code of 1954.

2. The cost basis of land as found in the findings of fact above is properly determinable under the Internal Revenue Code of 1939 or the Internal Revenue Code of 1954, as the case may be, for determining gain on sales of real estate.

3. In computing the proper allowance for timber depletion, a reasonably ascertainable growth factor should be taken into consideration to arrive at the estimated amount of timber each year subject to the depletion allowance.

4. The sales of timber made by the Belcher Land and Timber Company, a partnership, to W. A. Belcher Lumber Company, a corporation, during the years 1950, 1951, 1952, 1954 and 1955, of timber held for more than six months are entitled to capital provisions of the Internal Revenue Code of 1939 or 1954, as the case may be.

5. Casualty losses are not deductible in excess of the cost basis of the property lost.

ORDER

In conformity with the responses of the jury to the special interrogatories, as shown above, and with the findings of fact and conclusions of law made and entered by the court upon those issues submitted to the court without the intervention of a jury by stipulation of counsel:

It is ORDERED, ADJUDGED and DECREED by the court that the amount plaintiffs are entitled to recover and/or be refunded, if any, to be entered as the final judgment in these consolidated cases shall be computed by the parties in accordance with the foregoing findings of fact, and the verdict of the jury on the special interrogatories, subject to the approval of the court, and the court hereby retains jurisdiction of the cases for such other orders, judgments. and decrees as may be necessary and proper.

On Remand

FINDINGS OF FACT, CONCLUSIONS OF LAW AND ORDER

LYNNE, District Judge: Pursuant to the extended opinion of the United States Court of Appeals for the Fifth Circuit remanding the above styled case to this Court for a determination of the following issue:

this Court has taken a submission of that issue, upon the pertinent facts shown in the record on appeal and the stipulation of additional facts by counsel for the respective parties, and hereby make and enter the following findings of fact and conclusions of law upon such issue.

FINDINGS OF FACT

1. William Albert Belcher and wife, Nell Vandergrift Belcher, individually and Nell Vandergrift Belcher as trustee respectively for Mary Earnestine Belcher Abernathy, William Albert Belcher, Jr., Van Elam Belcher and Katherine Ann Belcher, partners under the name of Belcher Land and Timber Company, a partnership, sold to Atlanta Highway Estates, Inc., a corporation, on July 15, 1950 certain land constituting a capital asset of the partnership known as the Allen-dale tract for the total consideration of $727,200 of which $53,236 was paid in cash on the closing of the transaction and the balance of $673,964 was evidenced by a promissory note secured by a mortgage on certain real estate in the Allendale tract as described therein bearing interest at 4% to payment date of January 15, 1953, said mortgage being the Allendale mortgage referred to in the extended opinion of the Court of Appeals (Plaintiff's Exhibit 53).

2. The gain from the sale of the land in the Allendale tract secured by the Allendale mortgage was properly reported as an installment sale in the partnership income tax return for 1950, with the gain taxable as a capital gain. The gain as reported in the 1950 partnership return is as follows:

3. The gain on collections on the sale of the land in the Allendale tract was taxable at capital gain rates as an installment sale in 1950 and subsequent years in which collections were made.

4. Default was made by the mortgagor in the Allendale mortgage and the partnership caused foreclosure of the mortgage under the power of sale therein in the year 1953. The partnership bid in the property not theretofore released from the mortgage for $500,000 and the property covered by the mortgage not theretofore released from the lien of the mortgage was conveyed to the partnership by foreclosure deed (Plaintiff's Exhibit 52).

5. After the foreclosure sale, a suit for a deficiency judgment was instituted on June 2, 1953 on behalf of the partnership against the mortgagor in the Circuit Court of Jefferson County, Alabama, case No. 29301-X, for a deficiency in the amount of $180,558.75, plus interest, as the balance due on the promissory note of the mortgagor executed on July 15, 1950 in the face amount of $673,964.00.

6. The mortgagor threatened to redeem from the foreclosure sale.

7. Under date of July 26, I954 the mortgagor executed a deed conveying to the partnership the equity of redemption with the understanding and agreement that in consideration thereof the deficiency judgment suit would be settled and dismissed and that the entire liability under the installment obligation would be completely satisfied, extinguished and settled at less than face value and complete satisfaction of the installment obligation at less than face value was thereby accomplished. (Plaintiff's Exhibit 51 ).

8. The installment obligation thereby satisfied was a capital asset and the face value thereof was $673,964.00

9. The Allendale mortgage foreclosure did not become a taxable event to the partnership in the year 1953 because the mortgagor under Alabama law had a statutory right of redemption within two years from the date of foreclosure unless sooner extinguished by voluntary act of mortgagor.

10. The Allendale mortgage foreclosure became a taxable event to the partnership in the year 1954 because the right of redemption of the mortgagor was extinguished by the quit claim deed transferring the equity of redemption to the partnership in consideration of the settlement of the deficiency foreclosure suit without liability and the satisfaction, extinguishment and settlement of all liability of the mortgagor under the installment obligation secured by the mortgage by the satisfaction of the installment obligation at other than face value, that is, at less than face value. The taxable gain of the partnership on the Allendale mortgage foreclosure occurred in 1954 and is properly computed as follows:

11. The net gain 0f $404,634.09 is taxable in the year 1954 at capital gain rates and not at ordinary rates.

CONCLUSIONS OF LAW

1. The gain on the Allendale mortgage foreclosure is taxable in the year 1954 under the provisions of Section 453 (d) of Internal Revenue Code of 1954 relating to gain or loss on disposition of installment obligations at other than face value.

2. The face value of the installment obligation in 1954 which was satisfied at less than face value was $673,964.00.

3. The gain on the mortgage foreclosure of the Allendale tract was not taxable in the year 1953 for the reason that the mortgagor had a statutory right of redemption which did not expire for two years unless relinquished by the mortgagor prior to the expiration of the two year period.

4. The transfer of the right of redemption in the year 1954 by quit claim deed from the mortgagor to the partnership resulted in the satisfaction, extinguishment and settlement Of the installment obligation at other than face value.

5. Inasmuch as the original sale of the Allendale tract which was subject to the Allendale mortgage in 1950 was the sale of a capital asset, the gain realized in 1954 on the extinguishment of the installment obligation at other than face value is taxable at capital gain rates and not at ordinary income tax rates.

6. In conformity with the foregoing findings, of fact and conclusions of law submitted to the Court on the foregoing issue:

IT IS ORDERED, ADJUDGED AND DECREED by the Court that the amount, if any, which plaintiffs are otherwise entitled to recover or to be refunded in the year 1954 shall be offset by plaintiffs' share of the taxable gain of the partnership in the year 1954 resulting from the satisfaction of installment obligations of the Allendale transaction at other than face value computed at capital gain rates.

And the Court hereby retains jurisdiction of this case for such other orders, judgments and decrees as may be necessary and proper.

FINAL JUDGMENT

Pursuant to the opinion and mandate of the United States Court of Appeals for the Fifth Circuit in the above styled cause, the final judgment entered in the above styled cause on November 23, 1960 is hereby vacated and:

It is ORDERED, ADJUDGED and DECREED by the Court as follows

1. That the plaintiffs have and recover nothing from the defendant on the claim for refund sued upon for the year 1952.

2. That the plaintiffs have and recover nothing from the defendant on the claim for refund sued upon for the year 1954.

3. That the plaintiffs have and recover from the defendant the sum of $1,515.38 on the claim for refund sued upon for the year 1955, together with interest as provided by law, and costs.