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Summaries - K

Click on the case name for the complete text.

KDI Navcor, Inc. v. Commissioner
35 TCM 341, 1976 P-H Tax Ct. Memo. 76,077 (1976)

The taxpayer is the surviving corporation following the merger of four corporations, including the Yamhill Lumber Company. In 1969, Yamhill had Section 631(a) gains of $484,489. During the same year, Yamhill's expenses exceeded ordinary income by $162,867.

In computing the alternative tax under Section 1201, Yamhill reduced the amount of gain resulting from the election under Section 631(a) by the excess of expenses over ordinary income. Taxpayer contended that the capital gains should be offset by the operating loss. Alternatively, the taxpayer sought to treat the excess of expenses over ordinary income as a net operating loss for taxable year 1969. The Commissioner disallowed the reduction of Section 631(a) gain by the excess of expenses over ordinary income in computing the alternative tax and sought to hold the taxpayer liable for the resulting deficiency as a transferee of assets without consideration within the meaning of Section 6901.
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Kelsay, Grover B. and Lois E. Kelsay et. al. v. Commissioner
31 T.C.M. 1232; P.H.T.C. Memo ¶72,249 (1972)

Taxpayers were partners in a logging partnership which had elected to treat the cutting of timber by it as a sale or exchange of a capital asset under section 631(a) of the Code. On August 27, 1957, the logging partnership entered into an agreement with Weyerhaeuser Timber Company {"Weyerhaeuser") for the exchange of certain cutover timber acreage for a plot of somewhat lesser acreage' upon which was believed to be 6,500,000 board feet of matured timber. On January 27, 1958, Weyerhaeuser also granted the logging partnership an option for a term ending December 31, 1965, that gave them the right to cut an additional 8,500,000 board feet of timber at a price of $60 per thousand board feet.

It later developed that the tract that the logging partnership had received from Weyerhaeuser would not yield the stated 8,500,000 board feet of timber, As a result, the partnership was given the right to cut elsewhere on Weyerhaeuser land. There was also some question whether the specified acreage covered by the option would yield the agreed upon 8,500,000 board feet of timber. Accordingly, the logging partnership, upon relinquishing its original option, was granted by Weyerhaeuser a new option dated November 23, 1964 to cut the earlier agreed to amount of board feet on a different tract.

The logging partnership exercised its rights under the option on July 28, 1965. In August, 1965, Weyerhaeuser prepared a cutting contract for 4,000,000 board feet and in January, 1966, prepared a contract for the remainder or 4,500,000 board feet. The logging partnership cut from the tract a total slightly in excess of the designated
8,500,000 board feet of timber during the years 1965 and 1966. The sole issue in the case was whether taxpayer owned or had a contract right to cut the timber on the Weyerhaeuser lands for a period of more than six months prior to the taxable year in which the timber was cut.
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Kieffer v. Commissioner,
TC Memo. 1998-202, 75 TCM 2403, Filed June 2, 1998

Married taxpayers who were members of the Spokane Indian Tribe were subject to tax on income earned from timber harvested on reservation land and cut into lumber. The taxpayers earned income from logging pursuant to a tribal permit on trust land and lumber sales. They were not allottees and did not derive the income from sales of lumber produced from timber on their own allotted lands. The taxpayers also did not derive the income from Indian fishing rights related activity; therefore, the lumber sales income was not exempt under Code Sec. 7873 or any treaty provision. Further, the taxpayers were liable for the negligence penalty because they did not offer any direct evidence regarding the penalty.
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Kinley v. Commissioner
51 T.C. 1000 (1969).

The taxpayer was engaged in the business of planting, cultivating and harvesting Scotch Pine Christmas trees. In order to qualify for the Christmas Tree market, a Scotch Pine must have a certain appearance which depends upon its density, shape, color, straightness and freshness. There are three basic cultural practices used in the growing of Scotch Pine Christmas trees during the cultivation period of approximately nine years. These are weed and brush control, insect control and shearing. Shearing is carried out to maintain the desired shape and density of the trees by cutting of excessive growth each year. Up to the third year after planting, shearing is not necessary since the Scotch Pine maintains a rate of growth which produces a normal conical shape which is the basic marketable form of the tree. After the third year the rate of growth of a tree becomes more rapid resulting in wild growth of branches which causes a loss of its prime and basic shape. Shearing consists of cutting back the terminal leader to a length of about 10 inches and cutting off the wild side branches to restore and maintain the conical shape of the tree. If shearing is not done each year, the shearing done in prior years is a complete loss and the tree becomes an unmarketable "cull." The taxpayer contended that the annual cost he incurred for the shearing of his Scotch Pine trees was an ordinary and necessary business expense. The Commissioner, on the other hand, contended that the amounts incurred for the shearing were capital expenditures. It was his position that the taxpayer did not plant Christmas trees, but rather planted Scotch Pine trees which were converted into marketable Christmas trees by the annual shearings. The shearings, the Commissioner contended, added value to the trees and thus were in the nature of improvements or betterments, the cost of which is required by the Code to be capitalized rather than deducted as business expenses.
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Kinley v. Commissioner
70-2 USTC ¶ 9462 (2d Cir. 1970); 26 AFTR 2d 5127
Affirming, 51 T.C. 1000 (1969)

The Court of Appeals affirmed without opinion the decision of the Tax Court holding that the cost of shearing scotch pine trees, undertaken to improve their shape and make them more desirable as Christmas trees, was deductible as an ordinary and necessary business expense since such shearing did not prolong the life of the trees and did not of itself create marketable trees.
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Kirby Lumber Corp. v. Scofield
89 F. Supp. 102; 50-1 USTC ¶ 9176; 39 AFTR 240 (W. D. Tex. 1950).

In connection with its business of manufacturing and selling lumber products, Kirby Lumber Corporation owned some 500,000 acres of timberland, several tenant houses, mules and trucks. It operated five sawmills and used its timber as a source of raw materials. Although Kirby periodically sold timber and timberland, its policy was to avoid such sales, It had no sales force and it neither advertised nor solicited sales of timber or timberlands. In 1942 and 1943 it sold some' timber and timberland, principally to competitors under pressures originating with the Government. These sales represented about two per cent of its total revenues in those years. Kirby reported its profits from these sales as well as profits from the sale of its tenant houses, mules and trucks, as capital gain under section 117(j].: The Government contended that the property had been held primarily for sale to customers and that the profits were ordinary income.
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Kirby Lumber Corporation v. Phinney
68-2 USTC ¶ 9446; 22 AFTR 2d 5069 (W.D, Tex. 1968).

The taxpayer was engaged in the business of manufacturing lumber and other forest products. It grew its own source of supply on timberlands owned by it. From 1901 until the period 1922-23 the taxpayer's predecessor used only pine timber in its business, However, from that latter period until 1950, the taxpayer or its predecessor used both pine and hardwood timber. In 1950, the taxpayer's management decided to cease the production of hardwood lumber, to close down its scattered sawmills, to construct one large sawmill designed for the production of pine products alone, and to begin a program of forest management called "perpetual cut forestry." It was decided that the 87,000 acres currently growing hardwood timber would be returned to pine, The method chosen for disposing of the hardwood timber differed according to the grade of hardwood in question. Lumber grade hardwood was cut by contractors employed by the taxpayer, and the logs were sold to a single purchaser. This accounted for 82,000 acres of hardwood, and was accorded capital gain treatment under Section 1231. Pulpwood grade hardwood was sold under cutting contracts on a per unit cut basis, and these sales were accorded capital gain treatment under Section 631(b), The problem arose with respect to tie grade hardwood. This was sold outright in small amounts to several different purchasers under contracts calling for advance payment rather than payment on a per unit cut basis. Purchasers of such timber were of extremely limited financial resources, and knowing this, the taxpayer's management decided against selling to them on a per unit cut basis, which is, in effect, a credit arrangement. Had there been a single purchaser desiring alt the tie grade hardwood, taxpayer would have sold it all at once rather than in small parcels. During the tax year in question, 1959, the taxpayer sold 10,650,282 board feet of standing tie grade hardwood timber by virtue of 206 separate contracts with fourteen separate individuals. The amount received by the taxpayer in 1959 from the sale of tie grade hardwood equaled 1.3% of its total sales of timber and lumber products. The taxpayer had no separate department for the handling of hardwood timber sales; no portion of the time of its sales department was devoted to sales of hardwood timber; there was no advertising promulgated or displayed or sales promotional activity engaged in by any employee of the taxpayer; there were no improvements made to the property; and the hardwood timber was not listed with an agent or broker for sale. The taxpayer treated its gain on sales of tie grade hardwood timber as capital gain under Section 1231. This was contested by the Revenue Service which contended that the amount of sales made of such timber by the taxpayer was not consistent with capital gain treatment under Section 1231, but instead indicated that such timber was either (1) property properly includable in the taxpayer's inventory, or (2) property held by the taxpayer primarily for sale to customers in the ordinary course of its trade or business.
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Kirby Lumber Corporation v. Phinney
412 F.2d 598; 69-1 USTC ¶ 9429; 23 AFTR 2d 1528 (5th Cir. 1969).
Affirming, 68-2 USTC 9446; 22 AFTR 2d 5069 (W.D. Tex. 1968).

The taxpayer is engaged in the business of manufacturing lumber and other forest products. From 1923 until 1950, the taxpayer or its predecessor used both pine and hardwood timber in its business. In 1950, the taxpayer owned over 550,000 acres of timberlands. Hardwood timber grew on 82,000 acres of "bottom lands" where pine would not grow and was also scattered throughout another 87,000 acres, which was predominantly hardwood. The hardwood timber was of three grades: lumber grade, pulpwood grade, and tie grade. Of these three grades, the taxpayer had used only the lumber grade in its sawmills. It had never utilized any tie or pulpwood, nor had it sold such grades as stumpage. In or about 1950, the taxpayer's management decided to cease the production of hardwood lumber, to close down its scattered sawmills, to construct one large sawmill designed for the production of pine products alone, and to begin a program of forest management called "perpetual cut forestry." As a constituent part of this decision, it was determined that the 87,000 acres which were predominantly hardwood would be returned to pine, and that the 82,000 acres of hardwood on "bottom lands" would also be sold and removed from the taxpayer's trade or business. The method chosen for disposing of the hardwood timber differed according to grade. Lumber grade hardwood was cut by contractors employed by the taxpayer, and the logs were sold to a single purchaser. The 82,000 acres of hardwood on the "bottom lands" were sold under this contract The taxpayer's gain under this contract was accorded capital gain treatment under Section 1231. Pulpwood grade hardwood was sold under cutting contracts on a Per unit cut basis, and these sales were accorded capital gain treatment under Section 631(b). The problem arose with respect to tie grade hardwood. This was sold outright in small amounts to several different purchasers under contracts calling for advance payment rather than payment on a per unit cut basis. Purchasers of such timber were of extremely limited financial resources, and knowing this, the taxpayer's management decided against selling to them on a Per unit cut basis, which is, in effect, a credit arrangement. During the tax year in question, 1959, the taxpayer sold 10,650,282 board feet of standing tie grade hardwood timber by virtue of 206 separate contracts with fourteen separate individuals. Of such sales, more than half were to only two persons. On an average the 206 sales involved 51,700 board feet of timber on 114.73 acres, for a sales price of $595.55, or just over 1 cent Per board foot. The amount received by the taxpayer in 1959 from the sale of tie grade hardwood was only 1.3% of its total sales of timber and lumber products. The taxpayer had no separate department for the handling of hardwood timber sales; no portion of the time of its sales department was devoted to sales of hardwood timber; there was no advertising or sales promotional activity engaged in by any employee of the taxpayer; there were no improvements made to the property; and the hardwood timber was not listed with an agent or broker for sale. The taxpayer treated its gain on sales of tie grade hardwood timber as capital gain. This was contested by the Revenue Service which contended that the number of sales made of such timber by the taxpayer was inconsistent with capital gain treatment under Sections 1221 or 1231, and the tie grade hardwood timber was either (1) property properly includable in the taxpayer's inventory, or (2) property held by the taxpayer primarily for sale to customers in the ordinary course of its trade or business.
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Kirschling v. United States
1982 P-H 148,089

The taxpayer, an Indian, received income from the sale of timber grown on reservation lands held in trust for her by the U.S. government under the General Allotment Act. Since, under this Act, the government was required to preserve the taxpayer is allotted interest in the land until it was distributed in fee simple to her, dispositions of this interest were tax-free while the trust relationship existed. Since the timber was part of her property interest, its sale was not taxable.

However, after receiving the sales proceeds, taxpayer gave a portion to a third party. The Government asserted that this transfer was subject to gift tax.
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Knapp v. Commissioner
23 T.C. 716 (1955).

The taxpayers owned ten groves of citrus trees. Four of the groves had been purchased and six had been grown from plantings. The costs of planting and developing the latter groves had been deducted by the taxpayers as business expenses. On January 29, 1949, a freeze partially destroyed all of the groves, leaving dead or damaged trees standing on the land. The taxpayers calculated the percentage decline in value of each grove (treating the land and trees as a unit} and claimed a like percentage of the original cost basis of each grove as a casualty loss deduction. The Commissioner contended that no loss was allowable in respect of the land; that the cost of removing dead and damaged trees could not be treated as damaged to the land; that any loss to the land would have to be computed separately; that the basis of the trees was required to be reduced by depreciation allowable in earlier years; and, that the basis of six groves did not include planting and development cost which had been deducted.
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Kolczynski v. Commissioner
TC Memo. 2005-217, September 20, 2005.

Estate tax: Valuation: Real estate: Highest and best use of parcel: Comparative sales approach. —The estate tax value of a tract of land was determined by using the comparative sales approach, after finding that its highest and best use was a mixed use of recreation and timberland. When the decedent died, she owned a main tract and five smaller tracts of land, totaling about 2,095 acres and featuring timberlands, open fields, access to a river, and what formerly operated as rice fields. Because the tract of land was located in a unique ecosystem and the tract's standing timber historically was cut only to aid in covering the expenses of maintaining the property, the highest and best use of the land was a mixed use of recreation supported by selective timber farming. The valuation approach used by the estate's expert relied primarily on the sale of a property that was part of a Code Sec. 1031 exchange, which was disregarded because the property was not located in the same unique area and only the value of the merchantable timber was provided by the estate's expert, and the sale of a property contiguous to the subject tract. Although the contiguous property was one-fourth the size of the subject tract, the sale was relevant because the parcels were adjacent and the sale occurred about two years before the decedent's death. Accordingly, the value of the subject tract of land was determined using the comparative sales approach, with adjustments considered for the following: (1) the difference in the value of improvements on the two properties; (2) the difference between the per-acre value of the timber on the two properties; (3) the date of sale of the contiguous property and the valuation date of the subject property; (4) the per-acre sale price of the contiguous property as it was one-fourth of the size of the subject tract; and (5) the location of the properties. As a result, the value of the subject tract of land on the valuation date, after appropriate adjustments were made, was $4,829,252.

Krome v. Commissioner
9 T.C.M. I78; P-H T.C. Memo ¶ 50,064 (1950).

In 1945, the taxpayers' avocado, mango and citrus groves suffered hurricane damage, none of which was compensated for by insurance. The taxpayers calculated the amount of their loss by accumulating those expenditures necessary to develop a producing tree (i.e., purchase, planting, and caretaking costs), by estimating the percentage of those costs which would have to be repeated as a consequence of the hurricane, and by applying the resulting percentage against the adjusted basis of each grove. The Commissioner rejected the formula and allowed casualty loss deductions only for trees which had been totally destroyed. He argued that no deduction was allowable for trees partially destroyed because substantially all the damage to such trees could be classified as incidental, minor or mere retardation of growth.
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Kurzet v. Commissioner
TC Memo. 1997-54, 73 TCM 1867

The primary issues for decision are: (1) Whether, during the years in issue, petitioners' ownership and management of a timber farm property near Coos Bay, Oregon, constituted a trade or business activity entered into for profit, as petitioners contend, or a personal, nonbusiness, not-for-profit activity, as respondent contends; (2) whether petitioners' investment in property in Tahiti constituted a for-profit investment under section 212; (3) the deductibility under section 162 or section 212 of expenses relating to petitioners' use of a Lear jet to travel, among other places, to their Oregon timber farm property and to their property in Tahiti; and (4) to what extent expenses of petitioners' residence in Orange, California, qualify as home office expenses under section 280A. Various additional and alternative issues are also for decision (e.g., if petitioners' timber farm constitutes a for-profit trade or business activity, whether petitioners should be required to capitalize additional costs relating to the timber farm as part of the costs of a water reservoir).
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Kurzet v. Commissioner
US-CT-APP-10, [2000-2 USTC ¶50,671]
Affirming in part, reversing and remanding in part the Tax Court, 73 TCM 1867, Dec. 51,857(M) , TC Memo. 1997-54.

The Commissioner of Internal Revenue (the "Commissioner") brought an action against the Kurzets, alleging that they were deficient in their tax payments for the years 1987, 1988, and 1989 and also sought accuracy-related penalties. In an order dated January 29, 1997, the tax court found that the Kurzets were deficient in their tax payments because they claimed impermissible tax deductions in connection with the Tahiti property, the Lear jet, and their California home, but did not require the Kurzets to pay any accuracy-related penalties. The tax court felt that penalties were not appropriate in light of the fact that the "errors on the tax returns were attributable to the amateurish books and records that the petitioners unfortunately established to keep track of their business, investment, and personal activities" and the fact that the Kurzets had hired professional tax preparers who failed to explain the accounting problems to the couple.

The tax court made additional findings in an opinion issued from the bench on February 24, 1997, resolving a number of issues that had been omitted from the written order of January 29. As relevant here, in the bench opinion, the tax court refused to allow the Kurzets to change the manner in which they calculated depreciation for the reservoir they had constructed on their timber farm.

On appeal, the Kurzets assert four claims of error. First, the Kurzets urge that the tax court erred in determining that the expenses attributable to the use of the Kurzets' Lear jet were not deductible pursuant to I.R.C. §162. Second, the Kurzets argue that the tax court erred in concluding that none of the expenses attributable to the Kurzets' California residence were deductible pursuant to I.R.C. §280A(c)(1). Third, the Kurzets argue that the tax court erred in determining that the Kurzet's Tahiti property was a recreational or personal use property rather than an investment under I.R.C. §212. Finally, the Kurzets complain that they were not entitled to change the cost recovery period on the reservoir constructed on the Kurzets' timber farm from 31.5 years to 15 years. We reverse as to the Kurzets' first claim of error but affirm as to the three remaining issues.
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