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Opinion of the Court

149 C. Cls.

26 U.S.C. § 117 (1952 Ed.), and section 631 (a) of the Internal Revenue Code of 1954, 26 U.S.C. § 631 (1952 Ed.) Supp. II.

Section 117(k) (1) of the 1939 Code, which is almost identical to section 631 (a) of the 1954 Code, reads in pertinent part as follows:

If the taxpayer so elects upon his return for a taxable year, the cutting of timber (for sale or for use in the taxpayer's trade or business) during such year by the taxpayer who owns, or has a contract right to cut, such timber (providing he has owned such timber or has held such contract right for a period of more than six months prior to the beginning of such year) shall be considered as a sale or exchange of such timber cut during such year. In case such election has been made, gain or loss to the taxpayer shall be recognized in an amount equal to the difference between the adjusted basis for depletion of such timber in the hands of the taxpayer and the fair market value of such timber. Such fair market value shall be the fair market value as of the first day of the taxable year in which such timber is cut, and shall thereafter be considered as the cost of such cut timber to the taxpayer for all purposes for which such cost is a necessary factor.

The facts are these: During the years 1952, 1953, and 1954, plaintiffs George W. Gilmore and Roberta Gilmore, husband and wife, resided in the State of Oregon and filed joint Federal income tax returns for each of said years with the District Director of Internal Revenue for the District of Oregon.

Beginning in the year 1948 and continuing through the year 1954 and thereafter, plaintiffs were engaged as equal partners in the conduct of a general logging business and in the buying and selling of timber and logs in the vicinity of Molalla, Oregon, under the assumed business name of Gilmore Logging Company, a partnership (hereinafter referred to as Gilmore). The books of this partnership were and are maintained and its returns filed on a cash basis.

On May 20, 1942, and at all pertinent times involved in this case, certain timber lands were owned by Ostrander Railway and Timber Company (hereinafter referred to as Ostrander). On said date Ostrander entered into a written contract with Pope & Talbot, Inc., a California corporation.

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Opinion of the Court

By the terms of said contract, Ostrander agreed as "Seller" to sell, and Pope & Talbot as "Purchaser" agreed to purchase all of the merchantable timber on the pertinent timber lands owned by Ostrander Railway and Timber Company. By the terms of said contract, hereinafter referred to as the Ostrander contract, Pope & Talbot had the right to enter upon the lands and proceed with logging of the timber. Pope & Talbot had the further right to construct and maintain the necessary roadways, structures and camps and to do any and all other things necessary and proper in their judgment for the logging of the lands and the cutting and removal of timber thereon and therefrom. The timber was to be scaled and graded by the Columbia River Log Scaling & Grading Bureau.

Pope & Talbot agreed to pay Ostrander specified "base stumpage prices" according to various grades and species and in addition an "overage stumpage price" whenever the average market price exceeded the specified base prices.

The contract further provided generally that operations be carried on in a good and workmanlike manner. Pope & Talbot agreed to construct a truck road on a right-of-way to be furnished by Ostrander. Pope & Talbot otherwise reserved the right to construct additional roads and to use existing roads on the lands. In addition, Pope & Talbot agreed to pay for the use of a certain existing road at the rate of $1.10 per thousand feet log scale for all logs transported over the road.

Ostrander agreed to make its log dumps and booming and rafting facilities at Canby, Oregon, available to Pope & Talbot at a reasonable cost.

Prior to 1950, Pope & Talbot performed the logging operations on the timber lands, but at that time concluded that these operations were not economically profitable. Consequently, Pope & Talbot negotiated with several logging companies, including plaintiff, in connection with cutting said

timber.

On July 17, 1950, plaintiff George W. Gilmore, on behalf of Gilmore Logging Company (hereinafter referred to as Gilmore), entered into a written contract with Pope & Talbot, by the terms of which Gilmore agreed to enter upon the

Opinion of the Court

149 C. Cls.

timberlands covered by the Ostrander contract, and to provide all necessary men and logging and other equipment and to carry on the logging of the timberlands until all of the merchantable timber had been removed from the lands.

This contract, hereinafter referred to as the Gilmore contract, recited that Pope & Talbot had entered into the Ostrander contract with the Ostrander company, and that Pope & Talbot had thereby obtained the right to log and remove timber from the Ostrander timberlands, and then recited that Pope & Talbot was desirous of having Gilmore log and remove all of the remaining portions of the timber, and that Gilmore was desirous of performing all of such work. It was provided that Gilmore pay to Pope & Talbot the exact stumpage payments as agreed upon between Pope & Talbot and Ostrander in the Ostrander contact, and the same schedule of stumpage payments was set forth. In addition, Gilmore was required to pay to Pope & Talbot overage stumpage prices, defined and computed in the Gilmore contract identically as they were in the Ostrander contract.

By the terms of the Gilmore contract, Pope & Talbot agreed that the amount to be paid Gilmore "for all logs boomed and rafted and ready for towing, delivered at the Canby, Oregon, log dump shall be the market price at the time of delivery in the Columbia River District as agreed upon between the Contractor [Gilmore] and the Company [Pope & Talbot], based on water scale, and based on species and grades of logs by rafts." The market price was to be agreed upon by the parties by the same procedures as were provided between Pope & Talbot and Ostrander in the Ostrander contract.

The Gilmore contract contained the same provisions as the Ostrander contract regarding grading and scaling of the logs removed from the timberlands, except that in effect Gilmore assumed Pope & Talbot's obligation to pay one-half of the cost of such scaling and grading.

In effect, Gilmore agreed to pay to Pope & Talbot the same stumpage prices, overage stumpage prices, and scaling and grading costs as Pope & Talbot had agreed to pay to Ostrander.

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Opinion of the Court

By the Gilmore contract, Gilmore agreed to pay Pope & Talbot $2.30 per thousand feet for all logs transported over and across roads constructed by Pope & Talbot on the timberlands until the sum of $161,906.82 had been paid. That sum was stated to be the depreciated investment of Pope & Talbot in these roads as of December 31, 1949. Gilmore otherwise agreed to assume all of the obligations previously incurred by Pope & Talbot with respect to use and maintenance of roads located on the timberlands, or furnishing access thereto.

Shortly after the execution of the principal agreement between them, Gilmore also contracted to purchase from Pope & Talbot certain logging trucks, tractors and other equipment for the sum of $76,150, and also miscellaneous logging supplies for an additional $14,913.13. This equipment and these supplies were on the pertinent timberlands and had been used by Pope & Talbot on its logging operations under the Ostrander contract.

Commencing in the year 1950 and continuing through 1954 and thereafter, Gilmore conducted logging operations on the timberlands pursuant to the Gilmore contract.

By the Ostrander contract Pope & Talbot was required to make a down payment to Ostrander in the amount of $100,000, to be held by Ostrander and applied as payment for the last of the timber to be cut and removed from the timberlands by Pope & Talbot. Under the Gilmore contract, Gilmore was not required to make any down payment.

In the Ostrander contract, because of war conditions, it was stated that Pope & Talbot were not obligated to remove any specific quantity of timber in any one calendar year. Pope & Talbot were required in the event it was able to conduct the logging operations for as much as six months in a calendar year, to pay to Ostrander not less than $75,000 in year regardless of the amount of footage actually removed. If Pope & Talbot could not log for as much as six months, it was nevertheless required to pay Ostrander not less than $15,000 to apply upon the purchase price, even though no logging operations were conducted during that year. Under the Gilmore contract, Gilmore was required to

such

log, transport and deliver to the log dump not less than

Opinion of the Court

149 C. Cls.

10,000,000 feet of logs by December 31, 1950, and not less than 20,000,000 nor more than 30,000,000 feet during each calendar year thereafter, unless otherwise agreed. The minimum production was not requested by Pope & Talbot nor maintained by Gilmore.

Pursuant to the Gilmore contract, Pope & Talbot had the right to order Gilmore's logging operations on the pertinent timberlands to cease in the event unfavorable market conditions precluded Pope & Talbot from utilizing the logs produced by Gilmore. In this event Gilmore had the right to clean up felled and bucked timber, and Pope & Talbot had first option to purchase such timber. No such shutdowns were requested or ordered by Pope & Talbot.

Pursuant to the Ostrander contract, Pope & Talbot agreed to pay all costs and expenses involved in the logging operations, except taxes, which were to be paid by Ostrander. These same obligations of Pope & Talbot were assumed by Gilmore. Gilmore also assumed the responsibility of reporting and paying the Oregon State Forest Research Tax.

The Gilmore contract provided for supervision at all times by Pope & Talbot. However, Pope & Talbot did not, in fact, supervise said operations except to the extent that in 1950 and 1951 its forester designated the areas of timber to be cut by Gilmore. Both the Ostrander and Gilmore contracts required that timber be branded. The branding irons used by Gilmore were furnished by Ostrander to Pope & Talbot, and in turn by Pope & Talbot to Gilmore.

By the terms of the Gilmore contract, Gilmore agreed to indemnify and save Pope & Talbot harmless from any and all losses on account of any injuries, deaths, or damages to persons or property caused by the negligence of Gilmore or its employees. Gilmore was also to provide its own insurance.

In the event Gilmore failed to carry out the terms of the agreement, Pope & Talbot was given the right to take over and complete the logging operation and could use Gilmore's equipment for such purposes.

Gilmore could not assign or transfer any of the rights under the agreement without written consent of Pope & Talbot.

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