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Summaries - V

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Varn, Inc. v. United States
425 F.2d 1231 (Ct. Cl. 1970); 70-1 USTC ¶9406, 25 AFTR 2d 2101

The taxpayer, Varn, Inc., owned 37,000 acres of pine timber and used such timber principally for the production and sale of turpentine gum from standing trees. Varn Timber Company was a timber dealer engaged primarily in acquiring rights to cut standing timber and in selling the pulpwood derived from the timber. Varn Timber Company and Varn, Inc., had some common officers and directors, but the management and control of the two corporations were in separate hands. Although Varn Timber acquired rights to cut varying quantities of taxpayer's standing timber during the years 1954-1963, the Company's sales of timber from other sources were always much greater. The taxpayer wanted to acquire a tract of land known as the Refuge Tract but needed $140,000 to complete the transaction. An arrangement was worked out whereby the taxpayer secured a $140,000 interest-free loan from the Container Corporation by agreeing that Varn Timber would cut belted out timber from taxpayer's 37,000 acre tract and deliver pulpwood to Container Corporation on Varn Timber's account with Varn Timber paying taxpayer the going stumpage price and Container Corporation withholding sufficient sums to repay the $140,000 debt within a period of several years. Varn Timber agreed to cut and deliver sufficient pulpwood to Container so that Yarn, Inc.'s loan would be repaid. The separate agreement between Varn, Inc. and Container Corporation provided that Container was to receive the timber from the Refuge Tract, or any other lands, until taxpayer had repaid the loan. Varn Timber Company, as the independent contractor, in fact cut all of the timber at issue in this case from the 37,000 acre tract and cut none from the Refuge Tract, which had been conveyed by taxpayer to Container until the loan was fully repaid. Under taxpayer's agreement with Varn Timber Company, taxpayer was to receive the going stumpage price for all timber cut from the 37,000 acre tract except to the extent taxpayer received credits to its account with Container. The government contended that under the above arrangement, the taxpayer was cutting its own timber and that since the taxpayer did not properly elect under Section 631(a) capital gains treatment must be denied. Varn, Inc. argued that it was entitled to long-term capital gains treatment under Section 631(b) since it disposed of the timber under contractual arrangement with Varn Timber Company while retaining an economic interest in such timber.
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