54 Opinion of the Court Gilmore could subcontract the work only to subcontractors meeting the approval of Pope & Talbot. The Ostrander contract provided that neither party could assign the contract without the written consent of the other. This was not obtained by Pope & Talbot, but Pope & Talbot did advise the executive officer of Ostrander that Gilmore was replacing the logging operations of Pope & Talbot. In each of the calendar years here involved, the Gilmore Logging Company filed a partnership return wherein the cutting of the timber during each year was reported under the provisions of section 117 (k) (1) of the Internal Revenue Code of 1939, and for the year 1954 under the provisions of section 631(a) of the Internal Revenue Code of 1954. By a report of an examination and audit dated November 21, 1955, the District Director of Internal Revenue for the District of Oregon proposed to disallow to plaintiffs the benefits of section 117(k) (1) for the years 1952 and 1953 and section 631 (a) for the year 1954. Accordingly, a deficiency was assessed and paid by plaintiff. Plaintiff then filed a claim for refund which was disallowed. This suit results. In determining whether under the terms of the contract, the taxpayers cut the timber in question "for sale or for use in the taxpayer's trade or business" within the meaning of section 117(k) (1), and section 631(a), we must look to see whether the contract gave Gilmore the right to sell the logs or use same in its trade or business. Absent that contractual right, the cases of Carlen v. Commissioner, 220 F. 2d 338 and Ellison v. Frank, 245 F. 2d 837 are directly in point. Based on the reasoning of those cases, we are of the opinion that the taxpayer must have acquired some property right in the logs as cut which would entitle it to capital gains treatment. On the other hand, if the taxpayer cut the timber in question "for sale" it had such a property right as would entitle it to the capital gains treatment contended In this situation the reasoning, with which we agree, of for. the court in the case of United States v. Johnson, 257 F. 2d 530 would apply. Taxpayer here argues that its contract basically is the same as the contract in the Johnson case, supra, and hence 625946-62- -6 Opinion of the Court 149 C. Cls. since it had sold the logs to Pope & Talbot, it was entitled to the capital gains treatment provided for. Defendant argues that the taxpayer never obtained an interest in the logs such as to afford it capital gains treatment. The defendant further says that all plaintiffs had was a contract right to cut timber for which they would receive compensation, and that plaintiffs were not owners of the timber cut and had no right either to sell it or to use it in their trade or business. The answer to this vital question is by no means an easy one, nor is it, in our opinion, an insurmountable one. From the contract it is apparent that only in the event of a stoppage of operations because of unfavorable market conditions could Gilmore sell to others. The contract in this respect provided that Gilmore had the right to clean up felled timber and Pope & Talbot had first option to purchase. Since Pope & Talbot had first option to purchase, we must assume that in the event they failed to exercise said option Gilmore could sell to whomever it pleased. However, this in our opinion is not enough to convince us that Gilmore was the owner with the right to sell all other timber. Therefore, to learn the true intent of the contracting parties, we must look to the contract and its terms. The contract in question here contains no direct provision permitting Gilmore to sell to persons of its own choice. Nor does the contract expressly forbid such a sale. Since the contract did not expressly forbid such a sale, we conclude that Gilmore, although it had a contractual obligation to deliver the logs to the Canby Log Dump, could have disposed of the logs to an outside purchaser. What effect this would have on the relations between Gilmore and Pope & Talbot is not here involved. It is true that Gilmore did not sell nor attempt to sell logs to anyone other than Pope & Talbot. However, there was no necessity for Gilmore to look for another purchaser. All Gilmore could get for the logs cut was the market price and Pope & Talbot were willing and anxious to, and, in fact, did take all logs cut and delivered by Gilmore. Looking further to the contract and evidence in this case, we find these pertinent facts: As found in finding 6, "By the 54 Opinion of the Court terms of the Gilmore contract, Pope & Talbot agreed that the amount to be paid Gilmore 'for all logs *** shall be the market price * * *?” (Emphasis supplied.) ***” Finding 8 also disclosed "Pope & Talbot was paying the same prices for logs from other sources as they were paying to Gilmore, ***" In the same finding, "Gilmore did not sell nor attempt to sell logs to anyone other than Pope & Talbot." (Emphasis supplied.) The Gilmore contract further provided that Gilmore pay to Pope & Talbot stumpage payments and overage stumpage prices. In this respect, clause 4 of the contract specifically provides "the stumpage prices to be paid by the contractor to the company for all timber cut * * * which shall be deducted from the payments due the contractor for all logs purchased by the company from the contractor ***.” (Emphasis supplied.) Moreover, clause 5 of the contract refers to plaintiffs as the "Purchaser." This it seems to us conclusively shows the intent of the parties that plaintiffs were the owners and sellers of the logs to Pope & Talbot. Thus, from a study of the contract in question and the facts in this case, it is obvious that Pope & Talbot, who used logs in its business, found that logging operations under its contract with Ostrander were not economically profitable. It therefore contracted with Gilmore to produce on almost the same terms as set forth in the Ostrander contract. In other words, Pope & Talbot wanted the logs, and also was desirous of saving a loss on the road construction. Therefore it (Pope & Talbot) contracted with plaintiffs to cut, pay for transportation over roads constructed by it, deliver and sell to them the logs cut. Under these circumstances Gilmore in effect stepped into the shoes of Pope & Talbot under its contract with Ostrander. 1 All the above leads us to the conclusion that Gilmore had a contract right to cut and Pope & Talbot agreed to pay Gilmore for the logs as cut. This it seems to us connotes Gil 1 This is especially true inasmuch as the defendant in its answer has admitted the allegation of paragraph 4 of the petition which alleges as follows: into a written agreement with Pope & Talbot, Inc., a California corporation, by "On July 17, 1950, George W. Gilmore, on behalf of said partnership, entered the terms of which it then became the holder of a contract right to cut certain timber in Clackamas County, Oregon. Dissenting Opinion by Judge Whitaker 149 C. Cls. more's ownership of the logs cut and all disposition of such logs to Pope & Talbot must have been sales. The contract contains many provisions similar to those present in the contract involved in the Johnson case, supra. We agree with the reasoning of the Court of Appeals in its disposition of this feature and adopt its reasoning in its application to the instant case. In conclusion, we hold that plaintiffs had a contract right to cut timber for sale, within the meaning of section 117(k) (1) and section 631 (a). Accordingly, plaintiffs are entitled to recover, and judgment will be entered to that effect. The amount of such recovery will be determined pursuant to Rule 38 (c) of the Rules of this court. It is so ordered. BARKSDALE, District Judge, sitting by designation, and MADDEN, Judge, concur. WHITAKER, Judge, dissenting: I think that under the contract Gilmore merely agreed to cut the timber on the Ostrander lands for Pope & Talbot for use in their mill. He did not have the right to cut it for resale to anyone to whom he wished to sell it. This is evidenced by the fact that Pope & Talbot could order him to suspend operations whenever they thought market conditions unfavorable. This is inconsistent with his claim of ownership of the timber. There is nothing in the contract giving Gilmore the right to sell the logs to whomever he pleased, except the provision as to timber already cut when Pope & Talbot directed a suspension of operations. This was but an insignificant part of the total amount cut, and, even as to this, Pope & Talbot had the first refusal. Gilmore did not acquire ownership of it until Pope & Talbot surrendered their rights in it. The fact that the contract gave them the right to sell this timber to people other than Pope & Talbot, and did not give them this right as to other timber, indicates that it was not intended to grant this right as to the vast majority of the timber Gilmore cut. Plaintiff Gilmore had to deliver the logs to Pope & 54 Findings of Fact Talbot; he could sell to no one else. Had he owned the logs, he could have sold to whom he pleased. Pope & Talbot acquired ownership of the timber under their contract with Ostrander. Had they desired to transfer ownership to Gilmore, this could have been done most readily by an assignment of their contract with Ostrander, but this could be done only with Ostrander's consent. That they did not assign it is some indication they did not mean to transfer ownership. The mere fact that the contract refers to the transfer of the logs from plaintiff to Pope & Talbot as a "sale" is not controlling. It has long been settled that words of a contract alone are not conclusive in determining tax consequences imposed by statute. Lucas v. Earl, 281 U.S. 111. JONES, Chief Judge, joins in the foregoing dissenting opinion. FINDINGS OF FACT The court, having considered the evidence, the report of Trial Commissioner Roald A. Hogenson, and the briefs and arguments of counsel, makes findings of fact as follows: 1. The timely petition herein was filed against the defendant pursuant to the provisions of section 1491, title 28, of the United States Code, for the recovery of income taxes assessed against and collected from plaintiffs for the calendar years 1952, 1953, and 1954. 2. During the years 1952, 1953, and 1954, plaintiffs George W. Gilmore and Roberta Gilmore were and now are citizens of the United States, husband and wife, residing in the city of Molalla, county of Clackamas, State of Oregon. Their joint federal income tax return for each of said years was duly filed with the District Director of Internal Revenue for the District of Oregon. 3. Beginning in the year 1948 and continuing through the year 1954 and thereafter, George W. Gilmore and Roberta Gilmore 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 Co., a co |