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Summaries - C

Click on the case name for the complete text.

Cabax Mills v. Commissioner
59 T.C. 9 No. 38; P.H.T.C. ¶59.38 (1972)

Taxpayer was engaged in the business of logging and lumer manufacturing. In April, 1964, it acquired 98 percent of the stock of a small closely held corporation (Snellstrom) which was also engaged in logging and lumber manufacturing. Snellstrom was liquidated in April, 1965 and taxpayer received certain timber-cutting contracts that had been held by Snellstrom prior to April, 1964.

During the period May 1, 1965 through December 31, 1965, taxpayer cut timber under those contracts and elected to treat the cutting as a sale or exchange under section 631(a), which requires a six-month holding period before the beginning of the taxable year.

Taxpayer contended that it should be considered to have acquired rights held by Snellstrom at the time it acquired the stock in that corporation in April of 1964. The Commissioner, on the other hand, argued that the taxpayer had acquired the cutting rights only at the time of Snellstrom's liquidation one year later in April of 1965, and therefore, that taxpayer had not held the timber rights for more than six months prior to the beginning of its 1965 taxable year as required by section 631 (a).
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Camp Manufacturing Co. v. Commissioner
3 TC, 467 (1944); Ace. 1944 C.B. 4.

The taxpayer was engaged in the business of manufacturing and marketing lumber and lumber products. It owned over 100,000 acres of timberlands from which it ordinarily cut timber for its own requirements. However, on occasion it sold small amounts of standing timber pursuant to unsolicited requests, two of which accounted for over 90% of the amount sold. The trees were marked, cut, logged and removed by the purchasers at their own expense. The Commissioner contended that the timber was held for sale to customers in the ordinary course of the taxpayer's business and that gains realized from its sale were taxable as ordinary income.
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Camp, R. J. v. United States
74-2 U.S. Tax Cas. ¶9596, 34 Am. Fed. Tax R.2d 74-5575 (1974).

CAMP, JOHN C. v. UNITED STATES
74-2 U.s. Tax Cas. ¶9597, 34 Am. Fed. Tax R.2d 74-5573 (1974).

CAMP, SALLIE P. v. UNITED STATES
74-2 U.S. Tax Cas. ¶9598, 34 Am. Fed. Tax R.2d 74-5571 (1974).

Taxpayers entered into two 66-year timber contracts in 1959. For trial purposes they stipulated that they retained no economic interest in the timber sold. At the time the contracts were executed, the fair market value of the timber was not considered, since Revenue Ruling 62-81, governing tax treatment of such contract sales, had not yet been issued. Each year thereafter, taxpayers claimed the proceeds received under the contracts as long-term capital gains. They were assessed deficiencies for the taxable years 1967 through 1971, on the ground that the proceeds from the contracts received in those years had exceeded the fair market value of the timber at the time the contracts were entered into, this being the test, under Revenue Ruling 62-81, for whether capital gain or ordinary income treatment should be accorded to sale proceeds. Taxpayers timely filed for refunds, which were denied.
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Capoeman v. United States
110 F. Supp. 924, 53-1 USTC ¶ 9119,
43 AFTR 606 (W.D. Wash. 1952)

In the District Court of the United States for the Western District of Washington, Southern Division. No. 1101. September 3, 1952. -- (110 F. Supp. 924.)

[Judgment for plaintiffs affirmed per curiam by CA-9, 55-1 USTC ¶ 9295, and affirmed by the Supreme Court, 56-1 USTC ¶ 9474, 351 U. S. 1.]
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Capoeman v. United States
220 F.2d 349, 55-1 USTC ¶ 9295,
47 AFTR 329 (9th Cir. 1955) (aff'g per curiam)

In the United States Court of Appeals for the Ninth Circuit. No. 13,640. March 11, 1955. (220 F. (2d) 349.) Appeal from the United States District Court for the Western District of Washington, Southern Division,

Tax imposed on individuals: Indians: Tribal land held in trust by LT. S.--By the treaty with the Qninaielt Indian Tribe tribal lands were transferred to the United States and an area was reserved /or the exclusive use of the members of the tribe. In 1907, pursuant to the treaty, a trust patent was issued to taxpayer for 93 acres of tribal land within the Reservation. The fee title to this land is still held by the United States in trust for taxpayer. In 1943 standing timber thereon was sold, cut and paid for. A small portion of the proceeds was distributed to taxpayers and the balance was placed in trust by the United States in an account for them. Taxpayers claimed that their income from the sale of timber was not subject to tax because such taxation would be in violation of the treaty and the trust patent The District Court held for taxpayers and was affirmed. Affirming the decision of the District Court, 53-1 ustc ¶ 9119, 110 Fed. Supp. 924.
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Capoeman v. United States
351 U.S. 1, 76 S. Ct. 611, 100 L.Ed. 883,
56-1 USTC ¶ 9474, 49 AFTR 178 (1956), 1956-1 C.B. 605 (aff'g)

In the Supreme Court of the United States. No, 134. October Term, 1955 April 23, 1956.
On writ of certiorari to the United States Court of Appeals for the Ninth Circuit.

Taxability of Indians: Income from timber cut from allotted lands. Full-blood, noncompetent members of the Quinaielt Tribe of Indians are not taxable on income from the sale of timber cut from their allotted lands. Immunity from taxation is guaranteed by the General Allotment Act and the solemn undertaking in the trust patent allotting the acreage.
One dissent.

Affirming the decision, of the Court of Appeals for the Ninth Circuit, 220 Fed.(2d) 349, reported at 55-1 ustc ¶ 9295, which affirmed the-decision-of the District Court, 110 Fed. Supp. 924, reported at 534 USTC ¶ 9119.
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Carlen v. Commissioner
20 T.C. 573 (1953).
Aff'd 220 F.2d 338; 55-I USTC ¶9296; 47 AFTR 322 (9th Cir. 1955).
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Carlen v. Commissioner
220 F.2d 338; 55-1 USTC ¶ 9296; 47 AFTR 322 (9th Cir. 1955).
Affirming 20 T.C. 573 (1953).

A partnership of which the taxpayer was a member agreed with Neuskah Timber Company to cut certain timber which Neuskah had contracted to purchase. The partnership was to log the timber and deliver it to mills designated by Neuskah. Neuskah was to pay the partnership "for this service" the net cash returns from the sale of the logs after deduction of specified stumpage and service fees. Title and control of the logs were to remain with Neuskah until the logs were sold. The partnership elected to treat its income from the cutting of the timber as gain from the sale or exchange of timber under section 117(k)(1). The Commissioner took the position that the partnership was not entitled to make the election under section 117(k)(1) on the grounds that it neither owned nor held a contract right to cut the timber. The Commissioner argued that section 117(k)(1) was available only to persons owning timber or having a contract right to cut it for use in their own trade or business. He contended that the partnership was merely per. forming services for compensation.
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Carloate Industries Inc. v. United States
230 F. Supp. 282; 64-2 USTC ¶ 9564; 14 AFTR 2d 53.27 (S.D. Tex. 1964).
Rev'd 354 F.2d 814; 66-1 USTC ¶ 9159; 17 AFTR 2d 59 (5th Cir. 1966).
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Carloate Industries Inc. v. United States
354 F.2d 814; 66-1 USTC ¶ 9159; 17 AFTR 2{1 59 (5th Cir. 1966).
Reversing 230 F. Supp. 282; 64-2 USTC ¶ 9564; 14 AFTR 2d 5327 (S.D. Tex. 1964).

A severe freeze destroyed the taxpayer's citrus grove and left the land covered with dead and dying trees and stumps. The physical properties of the soil were not damaged. The taxpayer had previously allocated the purchase price of the grove between trees and land in order to establish a basis for depreciation of the trees. It deducted as a casualty loss the reduction in the fair market value of the grove, not limited to the adjusted basis of the trees. The Commissioner contended that the deduction must be so limited. The taxpayer argued that mature citrus trees cannot be separated from the land, and that the proper deduction was the decrease in fair market value of land and trees, limited by the aggregate adjusted basis of the land and trees. The taxpayer also argued that the Commissioner had, pursuant to the Supreme Court decision in Helvering v. Owens, prescribed unitary treatment in the case of casualty losses to non-business property. It contended that there was no statutory basis for distinguishing business and non-business casualty losses.
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Carpenter v. Commissioner
36 T.C. 797 (1961); Acq. 1962-1 C.B. 3.

The taxpayers were members of a partnership which desired to cut timber located on a tract of land owned by the John Paul Lumber Company. On May 22, 1951, John Paul granted Ted R. Webb an option to purchase the timber on this tract. John Paul's title was challenged by Samuel Agnew, against whom John Paul brought a quiet title suit. On June 27, 1952, the trial court ruled in favor of John Paul and Agnew appealed. !n August 1952, while the appeal was pending, the partnership began cutting the timber under a contract which it had executed with a party who apparently had no interest in the timber. Webb, as optionee of John Paul, obtained an injunction against further cutting by the partnership. On January 21, 1953, Webb and the partnership entered into an agreement whereby Webb sold his option to the partnership and the latter was, subject to John Paul's consent, granted the right to commence cutting. John Paul consented on January 31, 1953, and cutting began again. On February 13, 1953, Agnew, whose appeal from the quiet title decree was still pending, obtained an injunction against further cutting. On March 23, 1953, Agnew agreed to permit cutting provided stumpage was paid into escrow pending final outcome of the title litigation. Webb agreed to this arrangement and the partnership resumed cutting operations. On May 28, 1954, Agnew's appeal was resolved in favor of John Paul. On July 18, 1955, the partnership exercised its option to purchase the timber. The partnership reported its income from cutting in 1954, 1955 and 1956 as long-term capital gain pursuant to an election under section 631 (a). The Commissioner denied this treatment on the ground that the partnership did not obtain a contract right to cut timber on the tract until it exercised the option on July 18, 1955, and that it had not held a contract right to cut for the necessary six months prior to 1954, 1955 or 1956. He contended that the earlier arrangement with Webb did not confer on the partnership a contract right to cut, citing the AhPah and Jantzer cases.
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Cascade Lumber Co. v. Squire
57-2 USTC ¶ 9841; 52 AFTR 1290 (W.D. Wash. 1957).

The taxpayer properly elected the benefits of section 117(k)(1) with respect to timber cut by it in 1949 and 1950. However, on auditing the taxpayer's return for those years, the Internal Revenue Service determined that the timber cut had a substantially lower value than that claimed by the taxpayer on its return, resulting in a smaller capital gain element. The taxpayer, through claims for refund, contended for a value even higher than that claimed on the returns.
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Casey v. United States
459 F. 2d 495 (Court of Claims, 1972) 72-1 U.S.T.C. ¶9419; 29 AFTR 2d 1089

The taxpayer was a member of a joint venture which contracted with the Forest Service to cut merchantable timber on Government land. The joint venture agreed to pay for the timber cut and removed, based on a specified stumpage rate per thousand board feet cut and removed and further agreed to construct access roads to the stands of timber covered by the contracts. The joint venture constructed the access roads and during the years 1960 and 1961, disposed of part of the cut timber by transferring it to the joint venture's wholly owned operating corporation in return for the corporation's payment of specified royalties. The gain realized by the joint .venture on the cutting of the timber was reported as capital gain under the provisions of section 631(b) of the Code which allows capital gain treatment for gains from the disposal of timber in cases where the owner, including the holder of a cutting contract, retains an economic interest in the timber being cut.

The costs to the joint ventures of constructing the access roads were amortized on the basis of the quantity of timber sold. The taxpayer deducted his share of the amortized costs as ordinary and necessary business expenses. The Commissioner disallowed the deduction from ordinary income, contending that the cost of access roads should have been treated as capital in nature and therefore applied to reduce the capital gains from the sale of the timber.
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Chapman & Dewey Lumber Co. v. United States
238 F. Supp. 869; 65-1 USTC ¶ 9129; 15 AFTR 2d 70 (W.D. Tenn. 1965).
Rev'd 359 F.2d 495; 66-1 USTC ¶ 9385; 17 AFTR 2d 899 (6th Cir. 1966).
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Chapman & Dewey Lumber Co. v. United States
359 F.2d 495; 66-1 USTC ¶ 9385; 17 AFTR 2d 899 (6th Cir. 1966).
Reversing 238 P. Supp. 869; 65-1 USTC ¶ 9129; 15 AFTR 2d 70 (W.D. Tenn. 1965).

The taxpayer, a manufacturer and seller of hardwood lumber, carried out a reforestation program on a 75 acre tract. The reforestation program consisted of clearing and discing the land, procuring and planting seedlings, and keeping them clear of other growth for a period of two years. The taxpayer deducted the costs of the program, including labor, cost of seedlings, depreciation of machinery, and the cost of gasoline and other supplies. The Commissioner contended that these costs and depreciation should be capitalized. Upon request of the District Court or a court functionary, the taxpayers waived oral argument on a motion for summary judgment filed by the Government.
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Clark v. Commissioner
28 T.C.M, 1260; P-H T.C. Memo ¶69,241 (1969).

The taxpayer, an unemployed bricklayer, rented a house in Maryland with a yard, where he attempted to grow Oregon myrtle trees. He had gathered seeds and seedlings in California, the native region of the Oregon myrtle, and in 1965 brought them east, avowedly to market the leaves as spice, or the plants as ornaments. Despite his efforts at propagation, the 1965, 1966 and 1967 crops failed. Consequently, he made no real marketing efforts and earned no profits. The Commissioner disallowed the deduction of business expenses in 1965 and 1966, arguing that because the taxpayer lacked any profit motivation, his activities did not constitute a trade or business as defined in section 162.
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Clayton v. Commissioner
65 TCM 2371, Tax Ct. Mem. Dec. (CCH) 48,978(M), Apr. 1993

Losses: Nonprofit activities: Hobbies: Farming activity: Additions to tax: Penalties: Negligence- A taxpayer did not carry on his tree farming activity with the requisite profit objective and therefore was not entitled to claimed deductions for his farm losses. The lack of profit objective was evidenced by the taxpayer's failure to present a business plan or realistic profit projection, his inability to give his farming activity the highest priority in the year in question due to another full-time job and by his failure to replant the trees that he had lost due to bad weather. The negligence penalty, however, was not imposed because the taxpayer made a good faith effort in his interpretation of the facts and law. The taxpayer failed to understand the distinction between his personal expenses and the expenses of a going concern that are incurred with the requisite profit objective.
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Clemens v. United States
68-2 USTC ¶ 9620; 23 AFTR 2d 69-326 (D. Ore. 1968)

On June 18 and June 28, 1963, the taxpayers bid on government timber being offered for sale at auction by the Bureau of Land Management. The auctions were held in accordance with government regulations providing that a timber sales contract would be awarded to the highest bidder unless all bids were rejected or the bidder was not responsible or qualified. The taxpayers were the only bidders to qualify on these sales, and, upon the expiration of the time to receive additional bids, the taxpayers were declared to be the highest bidders on each tract. They were not formally notified that their bids had been accepted, however, until July 5 (with respect to two tracts) and July 16 (with respect to one other). The taxpayers cut the timber during 1964 and elected to treat their cutting as a sale or exchange under Section 631(a). The Government contended that they were not entitled to elect under Section 631(a) with respect to this particular timber for the reason that they had not, as required by Section 631(a), owned or had a contract right to cut the timber for more than six months before the beginning of the taxable year in which the timber was cut, i.e., 1964.

The Government's position was that the taxpayers did not acquire title or right to the timber until the bids were accepted on July 5 and July 16. The taxpayers, on the other hand, argued that they became "owners" of the timber when they were declared the high bidders on June 16 and June 28, and even if this were not so, the timber sales contracts should relate back to these dates.
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Clemens v. United States
439 F.2d 705 (9th Cir. 1971); 71-1 USTC ¶9258 27 AFTR 2d 834
Affirming, 295 F. Supp. 1339 (D. Ore. 1968)

On June 18 and June 28, 1963, the taxpayers submitted bids on timber being offered for sale at auction by the Bureau of Land Management. Government regulations provided that bids would be received, either sealed, in writing, or orally, with the contract awarded to the highest bidder unless all bids were rejected or the bidder was not responsible or qualified. The taxpayers were the only bidders to qualify on the sales, and upon the expiration 'of the time to receive additional bids, the taxpayers were declared to be the highest bidders. The taxpayers submitted a written bid deposit to the Bureau of Land Management. On July 5 and July 16, 1963, the taxpayers were notified that their bids on the timber in question had been accepted. They then executed the standard timber sales contract and performance bond. The taxpayers cut the timber during 1964 and elected to treat their cutting as a sale or exchange under Section 631(a) which requires a six month holding period before the beginning of the taxable year. The taxpayers contended that they became the owners of the timber, with a contract right to cut, when their bids were submitted and when they were declared the high bidders on June 16 and June 28. The Government argued that the taxpayers did not acquire title or a contract right to cut until the bids were accepted, admittedly after July 1st and less than six months before the beginning of the taxable year.
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Coleman v. Commissioner
76 T.C. 580

The taxpayers claimed a $2,640 casualty loss under Section 165(c)(3) for the death of a large American elm growing in the front yard of their home. Death was due to Dutch elm disease, a fungus often spread by elm bark beetles. To qualify the loss as an "other casualty" under Section 165(c)(3), the taxpayers argued that the tree was lost to a "sudden attack of insects." Certain judicial precedent holds that such an attack satisfied the requirement under Section 165(c)(3) that a loss relating to non-business property must result from a sudden and unexpected cause.
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Consolidated Naval Stores Co. v. Fahs
54-2 USTC ¶ 9456; 48 AFTR 1233 (S.D. Fla. 1954).
Rev'd 227 F.2d 923; 56-1 USTC ¶ 9132; 48 AFTR 717 (5th Cir. 1955).

BARKER, District Judge: These cases were consolidated for the purpose of trial and came on for trial in due course on November 9, 1953. The Court, having considered the evidence, the stipulation of facts entered into between the parties and filed with the Court, and the brief and arguments of counsel, finds the facts and states its conclusions of law, as follows:
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Consolidated Naval Stores Co. v. Fahs
227 F.2d 923; 56-1 USTC ¶ 9132; 48 AFTR 717 (5th Cir. 1955).
Reversing 54-2 USTC ¶ 9456; 48 AFTR 1233 (S.D. Fla. 1954).

The taxpayer was organized in 1902 and it engaged in the naval stores business directly and through subsidiaries. By 1931, the taxpayer held large tracts of cut-over timberland, having acquired a million and a half acres in the liquidation of its land-holding subsidiary. During the period 1932 through 1952, the character of the taxpayer's business changed substantially. It engaged in ranching and banking activities, produced citrus and operated packing houses. A decline in the naval stores industry resulted in termination of the taxpayer's naval stores operations in 1949. During this period; the tax:-payer maintained a Land Department for the purpose of Selling cut-over timberlands. Although the land Was neither advertised for sale nor improved by the taxpayer, the Land Department had no difficulty in disposing of the land through numerous individual sales. The taxpayer's method of reporting its income from land sales was not consistent. In some years it reported this income as capital gain and in other years as ordinary income. It did report all losses as ordinary. The Commissioner contended that the taxpayer held the land primarily for sale to customers in the ordinary course of its trade or business, and that the sales resulted in ordinary income.
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Converse v. Earle
51-2 USTC ¶9430; 43 AFTR 1308 (D. Ore. 1951).

Issue No. I
The taxpayer contracted to log timber owned by another party at an agreed rate per thousand feel plus a percentage of profit from the logging operation. The contract stated that these payments were to compensate the taxpayer for his services and for the use and rental of his equipment. The owner of the timber was given the option to purchase the taxpayer's equipment upon termination of the contract, at its original appraised value less such sums as should be paid to the taxpayer for "depreciation" on that value. No such "depreciation" was paid during the life of the contract. The option was exercised, and the taxpayer was paid the full appraised value of his equipment. The taxpayer reported his gain as long-term capital gain, but the Government contended that a part of the price was ordinary income rather than capital gain apparently on the ground that it represented additional compensation to the taxpayer.

Issue No. 2
The taxpayer paid part of the cost of a logging road being constructed adjacent to timberlands owned by him and furnished a tractor for use in the construction. He deducted as expenses his part of the cost of the road, expenses of repairing the tractor, and depreciation incurred on the tractor. The Commissioner disallowed these deductions on the ground that they constituted capital expenditures rather than ordinary and necessary business expenses.
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Cooper v. Commissioner
42 T.C.M, 418
Tax Ct. Mem. Dec. (CCH) 38,064(M), (P-H) ¶81,369
(Timber issue only)

A fire destroyed a stand of pine trees located On the taxpayer's farmland five years after the trees were planted. The fair market value of the trees immediately before the fire was $5,000 and the taxpayer claimed a casualty loss deduction in the amount of $4,000. The Government did not dispute that the taxpayer was entitled to a loss deduction but argued that the amount of the deduction was limited to the adjusted basis of the trees, $162, which represented the cost of seedlings and planting.
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Cornish v. United States
221 F. Supp. 658; 63-2 USTC ¶ 9662; 12 AFTR 2d 5526 (D. Ore. 1963).
Rev'd on other grounds 348 F.2d 175; 65-2 USTC ¶ 9508; 16 AFTR 2d 5022 (9th Cir. 1965).

The taxpayers acquired an interest in a partnership less than six months before the commencement of its taxable year. During the year, the partnership elected to treat its cutting of timber as a sale or exchange under section 631(a). The Commissioner contended that the taxpayers were not entitled to benefit from the election because they had not held their interests for more than six months before the beginning of the partnership's taxable year.
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Cornish v. United States
348 F.2d 175, 65-2 USTC ¶ 9508, 16 AFTR2d 5022 (9th Cir. 1965)
Reversing and Remanding District Court 63-2 USTC; ¶9662, 221 F. Supp. 658.

Basis: Partnership assets: Allocation between tangibles and intangibles. Where an election is made to adjust the basis of partnership assets, and there are several classes of depreciable partnership assets, the percentage of difference between the fair market value and the adjusted basis of each must be maintained in allocating the total amount of the increase in the adjusted basis attributable to depreciable assets. Back references: ¶ 3994.01 and 4516.736.
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Cristo v. Commissioner
44 TCM 1057, Tax Ct. Mem. Dec. (CCH) 39,326(M), (P-H) ¶ 82,514

[Depreciation: Deduction: Apartment house: 60-month depreciation period: Valid election: Accounting methods and periods: Change from straight line to 125-percent declining balance: Losses: Casualty: Beetle destruction of pine trees: Amount determined: Expenses--trade or business: Home office: Deductibility.]--(1) Petitioners bought an apartment house in 1973; they made rehabilitation expenditures in each of the years 1974 through 1977. Held: petitioners did not make a valid election of 60-month depreciation under section 167(k) , I. R. C. 1954, nor did they properly request permission to change from straight line depreciation to 125-percent declining balance depreciation otherwise available under section 167(j) , I. R. C. 1954.(2) Southern pine beetles destroyed pine trees in two attacks on petitioners' property, giving rise to what the parties agree is a "casualty" loss from each attack, under section 165(c)(3) , I. R. C. 1954. Held: amounts of losses determined.(3) Petitioners set aside a room in their home for use as an office. Held: petitioners have failed to show they satisfied the requirements of section 280A(c)(1) , I. R. C. 1954.
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Crosby v. United States
68-2 USTC ¶ 9571; 22 AFTR 2d 5554 (D. Miss. 1968).

The taxpayers sold timber to St. Regis Paper Company from three tracts of timberland. The taxpayer who owned Tract No. 1 had been in the timber business for many years and had sold timber as a primary part of his business. The taxpayers who owned Tract Nos. 2 and 3 were not as active in the timber business as the first taxpayer; however, they had purchased the tracts for the specific purpose of selling the timber to St. Regis, The contracts of sale provided that St. Regis would buy all specified timber at a fixed price in a stated quantity each year during the life of the contracts. However, the contracts did not obligate St. Regis to cut and remove any quantity of timber as a condition precedent to the right of the taxpayers to receive fixed Periodic payments. The taxpayers treated their gains on the sales to St; Regis as capital gains, but this was contested by the Internal Revenue Service on the ground that the sales failed to qualify for capital gain treatment under either Section 631(b), relating to disposals of standing timber under a cutting contract, or Section 1221, relating to outright sales of capital assets.
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Crosby v. United States
414 F.2d 822; 69-2 USTC ¶9514; 24 AFTR 2d 5098 (5th Cir. 1969).
Affirming 68-2 USTC ¶ 9571; 22 AFTR 2d 5554 (D. Miss. 1968),

The taxpayers entered into three identical sixty-year timber purchase agreements with St. Regis Paper Company. Under the agreements, the taxpayers are entitled to receive quarterly payments based either upon a minimum fee schedule or upon actual average growth, whichever is greater. Any timber so purchased and paid for, if not cut during the year of payment, becomes a "timber backlog" which St. Regis may cut without making further payments. Upon termination of the contract, all timber not cut and removed remains the property of the taxpayers. Of the taxpayers who entered into the contracts with St. Regis, one was an experienced timberman who had made several sales of timber to a family owned corporation. The other taxpayers, though related to the first taxpayer, had not made timber sales in the past nor were they actively engaged in the timber business. However, there was no evidence that the latter taxpayers had acquired the timber for any other purpose than sale to St. Regis. The taxpayers treated their gains from the contracts with St. Regis as capital gains. This was contested by the Internal Revenue Service on the ground that the sales failed to qualify for capital gain treatment under either Section 631(b), relating to disposals of standing timber under a cutting contract, or Section 1221, relating to outright sales of capital assets.
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