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Summaries - U

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Union Bag-Camp Paper Corp. v. United States
325 F.2d 730; 64-1 USTC ¶9122, 12 AFTR 2d 6127 (Ct. Cl. 1963).

Issue No.1
The taxpayer, a manufacturer of paper, paper bags, and related products, entered into long-term agreements with owners of timberlands for the purpose of operating tree farms to insure supplies of pulpwood for use in its business. The agreements gave the taxpayer complete and exclusive use of the lands, including timber growth, logging, wood, turpentine, oil, mining, mineral, water, water power, grazing, farming, and hunting rights. The taxpayer also had the right to build and operate roads, railroads, mills, wells, mines, lakes, buildings, and other structures on the land. in return, it agreed to pay annually to the lessor as rental an amount equal to 5% of an agreed and specified value of the lands, to pay all taxes assessed against the property, and to pay a designated amount per acre into a forestry management fund. The taxpayer agreed not to cut any timber during the first seven years of the term and there after to cut only the estimated annual growth. The taxpayer deducted the annual rental payments, taxes and forestry fund payments as ordinary and necessary business expenses. The Government contended that the long-term agreements were not leases but contract rights to cut timber and hence that the annual payments were not rent but the purchase price for the right to cut. Alternatively, it argued that the taxpayer had the burden of showing what portion, if any, of the annual payments were for rights other than the right to cut timber.

Issue No. 2
In addition to using the timber in its business, the taxpayer sold some to outside purchasers under cutting contracts in exchange for stumpage payments. The taxpayer reported these payments as capital gain under section 117(k)(2). The Government contended that if the taxpayer was a lessee entitled to deduct rental payments, as argued by the taxpayer, it could not also qualify as an owner of the limber within the meaning of section 117(k)(2).

Issue No. 3
The taxpayer deducted land management expenses, including salaries, depreciation, supplies, repairs, travel, entertainment and insurance. No part of the expenses were allocated to the negotiation and supervision of its cutting contracts. The Government contended that an estimated 50 of the receipts from the cutting contracts was attributable to such negotiation and supervision and should be offset against gain as a direct selling expense.
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Union Bag-Camp Paper Corp. v. United States
366 F.2d 1011; 66-2 USTC ¶ 9694, 18 AFTR 2d 5758 (Ct. Cl. 1966).

The facts of this case are essentially parallel to those before the Court of Claims in its 1963 decision involving the same parties and issues [p. 719]. The taxpayer, having been successful in the earlier case, invoked the principle of collateral estoppel, and moved for a partial summary judgment on the basis of the earlier decision. The Government contended that an intervening decision of the Fifth Circuit, Dyal v. United States [p. 866], prevented the application of collateral estoppel. The Court in Dyal held that lessors under long-term leases could report the "rental" received as capital gain to the extent of timber in existence at the execution of the leases. The Court of Appeals did not agree with the Court of Claims holding in 1963 that the provision requiring the lessee to wait seven years before cutting any timber and limiting it then to the annual growth precluded apportionment of any part of the annual payments to timber. The Government contended that under the Court of Appeals rationale, the portion of the annual payments allocable to timber in existence when the lease was executed should be capitalized by the lessee as the cost of that timber rather than deducted as rental.
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