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Summaries - P

Click on the case name for the complete text.

Pankratz v. Commissioner
22 T.C. 1298 (1954).

A partnership assigned its contract right to cut timber before holding it for six months. Further assignment by the assignee without the partnership's consent was prohibited. Royalty payments received under the assignment contract were treated by the partners as ordinary income: Some five years later, the partnership, for additional consideration, joined with its assignee in a new assignment to a third party. The partners treated the royalty payments received under the new assignment as gain from the sale of a capital asset held for more than six months, arguing that the first assignment did not amount to a sale. The Commissioner contended that the payments under the new assignment, like those received under the earlier one, were ordinary income.
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Parker Tree Farms, Inc., et al. v. Commissioner
46 TCM 493, T.C. Memo. 1983-357

Income: Interest: Loan with usurious interest: Basis: Adjustments to: Capitalization of expenses: Dividends: Constructive receipt: Close corporation: Repayment of loans: Use of automobile for personal purposes: Income: Exclusions: Sick pay: Capital gains and losses: Basis of land in excess of purchase price: Basis: Farm property: Allocation of buildings and assets: Bad debts: Worthless securities: Personal holding companies: Determination of tax: Additions to tax: Failure to file: Negligence: Commissioner's determination sustained.

Parker Tree Farms, Inc.Held:1. Petitioner received unreported interest income in the amount of $7,500 in 1970.2. Petitioner overstated its basis in land sold to Weyerhaeuser Paper Company in 1967 by $46,368.74.3. Petitioner is liable for an addition to tax for failure to timely file corporate income tax returns for 1968 and 1970, under section 6651(a) .4. Petitioner is liable for an addition to tax for negligence for 1968 and 1970, under section 6653(a).

Josephus D. and Helen H. Parker Held:1. Petitioners received constructive dividends in the amounts of $37,500 and $27,808.15 from J. D. Parker & Sons, Inc., in 1968 and 1969, respectively.2. Petitioners received constructive dividends of $1,406.37 during each of the years 1968, 1969 and 1970 from the personal use of corporate automobiles.3. Petitioners are not entitled to exclude any amounts as sick pay under section 105(d) with respect to wages received from Parker Tree Farms, Inc. and J. D. Parker & Sons, Inc., in the years 1968, 1969, and 1970.4. Petitioners are liable for an addition to tax for negligence for 1968 and 1969, under section 6653(a).

J. D. Parker & Sons, Inc. Held: 1. Petitioner received unreported capital gain and interest income of $14,824.48 and $15,149.97, respectively, in 1969 in connection with the sale of land. 2. Respondent's determination of the amount of depreciation allowable in 1968, 1969 and 1970 sustained. 3. Fifty percent of deductions claimed relative to corporate automobiles in 1968, 1969 and 1970 held to constitute a constructive dividend are not deductible as an ordinary and necessary business expense. 4. Petitioner is not entitled to a worthless stock deduction of $10,230.75 in 1970, under section 165(g)(1). 5. Petitioner is subject to the personal holding company tax in 1968 and 1969.6. Petitioner is liable for an addition to tax for failure to timely file corporate income tax returns for 1968 and 1969, under section 6651(a)(1) .7. Petitioner is liable for an addition to tax for negligence for 1968 and 1969, under section 6653(a).
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Peebles v. Commissioner
5 T.C. 14 (1945); Acq. 1945 C.B. 6.

The taxpayer, a lawyer, accumulated timberland through periodic purchases. After unsuccessful attempts to sell the timber to a logging company, he entered into a contract with one Krepps. Krepps was granted the right to cut and remove timber from a portion of the land during a specified period. He was required to deliver the timber to one of four purchasers. The purchasing company paid one-third of the price it had negotiated with Krepps or a stipulated amount per thousand board feet whichever was higher, directly to the taxpayer. Title to the timber remained in taxpayer until he received payment, and the contract was not assignable. At the time of the trial, the taxpayer had made no other sales. The Commissioner contended that the profit realized by the taxpayer was ordinary income on the ground that the timber was held by taxpayer primarily for sale to customers in the ordinary course of his trade or business and thus did not qualify as a capital asset under section 117 (a).
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Arhtur W. Peterson
29 T.C.M. 802; P-H T.C. Memo ¶70,181 (1970)

The taxpayers purchased a tract of land in 1943 and began cutting timber on the tract in 1945 and continued to do so up to and including the years in controversy. In 1945, the taxpayer began construction on a sawmill which when completed was used to process the timber from taxpayers' property. Although timber was cut during the years in issue, none was processed because of a lack of power at the sawmill. The taxpayer continued to cut and store timber during the years in issue with the intention of resuming the processing operation as soon as the power was restored. The taxpayers also engaged in other activities on this tract of land such as clearing and grass planting. The taxpayers' intention was to farm the land when it was finally cleared. The taxpayers claimed various expenditures as business expenses from their activities on this tract of land. Only those contentions relative to the timber tax issue will be discussed here. The taxpayers contended that the expenses were deductible under Section 162(a) as expenses incurred in a trade or business or under Section 182 as expenditures incurred by a farmer in clearing his land. The Commissioner contended that the expenses related to the tract were nondeductible personal expenditures. The Commissioner argued alternatively that the expenses were nondeductible capital expenditures. The Commissioner also denied that any expenditures were deductible under Section 182.
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Peek v. Commissioner
45 T.C.M. 1382 Tax Ct. Mem. Dec. (CCH) 40,063(M), (P-H) ¶83,224

Taxpayers were partners in an integrated lumber manufacturing firm. Timber for use in their lumber business was cut from fee land, under U.S. Forest Service cutting contracts, and under private cutting contracts. During the tax year in question all timber was cut from the Eldorado National Forest. The Commissioner disagreed with taxpayers valuation of this timber for purposes of taxpayers' Section 631(a) election on two grounds.

First, the Commissioner contended that since the comparable sales used in the taxpayers' appraisal were for U.S. Forest Service timber, the statistical high bid price for such sales must be discounted to reflect the time value of money. According to this argument, winning bid prices, are based on the anticipated appreciation in timber prices over the several years during which the winning bidder had the right to cut the timber. Under U.S. Forest Service contracts the timber is paid for at the time of cutting, except for a 3 percent deposit made at the time the contract is awarded.

Second, the Commissioner contended that the taxpayers failed to consider the exchange between private parties of a large tract of timberland in the vicinity of the timber in question as a comparable sale for purposes of valuing their timber. The taxpayers contended that the tract was not comparable because of the nature of the transaction and physical differences between the tracts.
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Pinkerton v. Commissioner
28 T.C. 910 (1957); Acq. 1958-1 C.B. 5.

The taxpayers were partners engaged in the business of logging and selling timber from timberlands owned by Weyerhaeuser Timber Company. Their operations were conducted under a contract concluded in 1936 between Weyerhaeuser and a corporation controlled by the partners. The corporation was liquidated in January 1945, and the cutting contract was assigned to one of the partners, Craig L. Spencer. It remained in his name throughout the partnership's operations. In February 1945, Spencer and the partnership entered into a contract which recited that he desired to employ the partnership to log and market the timber and that he desired to realize his benefit from the contract with Weyerhaeuser by way of income distributable from the partnership. The partnership cut the timber; received scale bills which named it as owner; sold the logs in its own name; delivered invoices for the logs; received payment from the purchasers; retained such payments for its own use; made stumpage payments and reports direct to Weyerhaeuser; made payments due to Weyerhaeuser for limber not cut; carried the logs in its inventory; paid personal property and real estate taxes on the logs and timberlands; and paid fire patrol expenses. Spencer was paid nothing by the partnership other than his share of partnership profits. No one questioned the partnership's right to deal with the timber in the above manner. The partners elected under section 117(k) (1) to treat the cutting of the timber as a sale or exchange. Their right to make the election was challenged by the Commissioner on the ground that the partnership had no proprietary interest in the timber.
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Plant v. United States
81-2 U.S.T.C. ¶9661 48 AFTR2d 81-5936

The taxpayer entered into a contract to sell all the timber standing and growing during a twenty-year period on certain land he owned. This contract obligated the buyer to pay a fixed annual amount equal to the value of estimated average annual growth determined on a unit price basis and subject to adjustment by the Wholesale Commodity Price Index. Payment for trees cut in excess of the average annual growth was to be made after an annual accounting. If the buyer cut fewer trees than the estimated annual growth during any year, it could subsequently cut the amount of this shortfall without paying additional consideration. The taxpayer received the fixed annual payments for three years, even though no timber was cut, and reported these receipts as long-term capital gains. He asserted that Section 631(b) provided capital gain treatment because the contract represented a disposal of timber with a retained economic interest. The government denied treatment under Section 631(b). It contended that the taxpayer retained no economic interest in the timber within the meaning of that Section because the annual payments were fixed and not dependent on the cutting of timber.
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Plant v. United States
682 F.2d 914, 82-2 U.S.T.C. ¶9522 50 AFTR2d 82-5505
Affirming 81-2 USTC ¶9661 48 AFTR2d 81-5936

The taxpayer entered into a contract to sell all the timber standing and growing during a 21 year period on certain land he owned. This contract obligated the buyer to pay a fixed annual amount equal to the value of estimated average annual growth determined on a unit price basis and subject to adjustment by the Wholesale Commodity Price Index. Payment for trees cut in excess of the average annual growth was to be made after an annual accounting. If the buyer cut fewer trees than the estimated annual growth during any year, it could subsequently cut the amount of this shortfall without paying additional consideration. The taxpayer received the fixed annual payments for three years, even though no timber was cut, and reported these receipts as long-term capital gains. He asserted that Section 631(b) provided capital gains treatment because the contract represented a disposal of the timber with a retained economic interest. The government denied treatment under Section 631(b). It contended that the taxpayer retained no economic interest in the timber within the meaning of that Section because the annual payments were fixed and not dependent on the cutting of timber.
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Polson Logging Co. v. Commissioner
12 T.C.M. 664; P-H T.C. Memo ¶ 53,208 (1953).

The taxpayer cut timber and elected capital gain treatment under section 117(k)(1). The Commissioner disagreed with the value assigned to the cut timber by the taxpayer.
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Pope & Talbot, Inc. v. Commissioner
60 T.C. 74 (1973)

During the taxable years 1966 and 1967, the taxpayer was engaged principally in the manufacture and sale of timber products and was bound by a previous election to treat the cutting of its timber as a sale or exchange in accordance with section 631(a). In each year the taxpayer computed the gain realized under section 631(a)as the difference between the fair market value of the timber, as of the first of the taxable year, and the adjusted basis for depletion of the timber. In addition, the fair market value of the timber, as of the first of the taxable year, was included in inventory and reflected as part of the cost of goods sold, this procedure being in accordance with the portion of section 631(a) which assigns the fair market value of the timber as the cost of timber cut for all purposes requiring such a cost.

The Commissioner made a substantial upward adjustment in taxpayer's fair market value computation for 1966. Since this resulted in an equal change in both the cost of sales and capital gains figures, the adjustment did not produce any change in taxable income. In computing the alternative tax pursuant to section 1201(a), taxpayer reduced the amount of gain resulting from the election under section 631(a) by the corresponding loss which resulted from including the timber appreciation in the cost of sales. The Commissioner, however, refused to allow the taxpayer to offset the section 631(a) gains by including the appreciation in the cost of sales. Without allowance for such a deduction, taxpayer's liability was lower when computed in the regular manner than it was when computed under section 1201(a)0 and the Commissioner consequently computed taxpayer's liability without regard to the alternative tax provisions of section 1201 (a).

The taxpayer contended that the Commissioner erred in two respects. First, it argued that the Commissioner's upward revision of the fair market value for 1966 was incorrect, and second, that, in computing the alternative tax under section 1201(a) for both 1966 and 1967, the gain resulting from the election under section 631(a) should be reduced by an amount equal to the operating loss which resulted from inclusion of the timber's appreciation in the cost of sales.
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Pope & Talbot, Inc. v. Commissioner
515 F.2d 155, 75-1 U.S.T.C. ¶9424 (1975)

The taxpayer was engaged in the manufacture and sale of timber products. During 1966 and 1967 the taxpayer was bound by a previous election to treat the cutting of its timber in accordance with Section 631(a). The Commissioner made a substantial upward adjustment in taxpayer's fair market valuation for 1966. The result, an equal change in both cost of sales and capital gains, produced no change in taxable income.

In computing the alternative tax pursuant to Section 1201(a), the taxpayer reduced the amount of gain resulting from the election under Section 631(a) by the corresponding loss which resulted from including the timber appreciation in cost of sales. The Commissioner refused to allow the taxpayer to offset Section 631 (a) gains by including the appreciation in the cost of sales. Without allowance for such a deduction, taxpayer's liability was lower when computed in the regular manner than it was when computed under Section 1201(a). The Commissioner consequently computed taxpayer's liability without regard to alternative tax provisions.

The taxpayer contended that, in computing the alternative tax under Section 1201(a)for both 1966 and 1967, the gain resulting from the election under Section 631 (a) should be reduced by an amount equal to the operating loss which resulted from the inclusion of the timber's appreciation in the cost of sales.
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Powars v. United States
285 F. Supp. 72; 68-2 USTC ¶9562; 22 AFTR 2d 5666 (C.D. D.C. Calif. 1968).

Taxpayers, owners of citrus groves, claimed additional first year depreciation (20% of cost) on newly purchased citrus trees under Section 179 of the Code, which section applies only to "tangible personal property." The Government disallowed the additional depreciation, citing Rev. Rul. 67-51, 1967-1 C.B. 68, wherein the Commissioner of Internal Revenue ruled that although trees of fruit orchards or groves qualify as "other tangible property" for purposes of the 7% Investment Credit under Section 48, they do not qualify as "tangible personal property" under Section 179. The taxpayers contended that this ruling was incorrect insofar as it denied Section 179 depreciation on fruit trees.
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Powe v. Commissioner
44 T.C.M. 933 Tax Ct. Mem. Dec. (CCH) 39,293(M), (P-H) ¶82,488
(Timber issues only)

The taxpayer, a retired businessman, acquired as an investment extensive holdings of timberland over a period of more than 30 years. In 1958 the taxpayer transferred over 13,000 acres of this land to a trust created for the benefit of his family. Between 1958 and 1972 the Trust made timber sales in 12 of the years, providing $252.794 in revenue. Between 1960 and 1972 Mr. Powe made timber sales in 8 years, providing $30,518 in revenue. In 1973 Mr. Powe made three timber sales providing $163,167 in revenue. In addition, Mr. Powe and the Trust sold all of the existing timber and surface rights for a 60 year period on approximately 9,000 acres of timberland for $320,000.

Mr. Powe was an active investor. He maintained an office in his home to oversee his approximately one-half million dollar brokerage account, his timberland, and other investments. His living expenses were paid primarily from the dividends generated by his brokerage account. Neither Mr. Powe nor the Trust, of which he was a trustee, maintained business cards, invoices, or stationary connected in any way with their dealings in timberland.
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