54 Findings of Fact 9. 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. 10. Pursuant to the Ostrander contract, Ostrander agreed to pay all taxes of every kind and nature assessed and levied against the lands and timber covered by the agreement. Pope & Talbot agreed to pay all costs and expenses of every kind and nature attendant upon its logging or other operations in the cutting, removing and transporting of the logs from the land. These same obligations of Pope & Talbot were assumed by Gilmore under the Gilmore contract. As provided in the Gilmore contract, Gilmore assumed the responsibility of reporting and paying the Oregon State Forest Research Tax for the duration of the agreement. This is and was a yield tax measured by production of timber from lands. It is not usual and customary in the trade for loggers to pay the yield tax. 11. The Gilmore contract provided that Gilmore's logging operations on the timberlands would be at all times directly supervised by Pope & Talbot. Pope & Talbot did not, in fact, supervise the logging operations, except to the extent that during only the years 1950 and 1951 its forester designated the areas of timber to be cut by Gilmore. 12. In the Ostrander contract, Pope & Talbot and Ostrander agreed that all logs removed from the timberlands would be branded with a distinctive brand, registered in accordance with Oregon law and to be used by Pope & Talbot only on timber products removed from the pertinent lands. The record in this case is silent as to the brand used by Pope & Talbot in its logging operations prior to 1950. Gilmore used the Ostrander brand in its operations on the pertinent timberlands. The Gilmore contract provided that Pope & Talbot was to provide Gilmore with the branding irons to brand the logs produced from the lands. The branding irons used by Gilmore were furnished by Os Findings of Fact 149 C. Cls. trander to Pope & Talbot, and in turn by it furnished to Gilmore. 13. By the terms of the Gilmore contract, Gilmore agreed to indemnify and save Pope & Talbot harmless from any and all loss, cost and expense on account of any injuries, deaths and damages to persons or property caused by the negligence of Gilmore or its employees. It was further provided that Gilmore would operate subject to and under the provisions of the Workmen's Compensation Act of the State of Oregon either through the State Industrial Commission or a private insurance company. It was stated that if Gilmore insured through a private company, such private insurance plan must have the approval of Pope & Talbot which must be named as one of the assured in the policy. In fact, Gilmore carried out a plan of self insurance. Under the Gilmore contract, Gilmore was required to furnish Pope & Talbot with policies of insurance covering all motor vehicles and trailers used in the logging operations, with Pope & Talbot to be named as an assured therein. In fact, Gilmore did carry such insurance, but Pope & Talbot was not named as an assured in the contract. 14. By the terms of the Gilmore contract, Gilmore was granted the right to have its employees use certain bunk houses and dwellings constructed by Pope & Talbot, and it was provided that Gilmore would collect and remit to Pope & Talbot rental charges approved by the latter company. Gilmore was granted free use of certain buildings, also constructed by Pope & Talbot, for storage and maintenance of equipment, on the condition that Gilmore keep the buildings in good and orderly condition and in proper repair at all times. 15. The Gilmore contract provided that if Gilmore failed to commence, proceed with, or complete the logging of the lands as required by the agreement, Pope & Talbot was given the right to take over and complete the logging of said lands or contract the same to others; and that in that event, Pope & Talbot could take over and use Gilmore's equipment without cost, and that any of Gilmore's funds retained by Pope 54 Findings of Fact & Talbot could be applied as liquidated damages suffered by Pope & Talbot as a result of the default of Gilmore. 16. The Gilmore contract provided that Gilmore could not assign nor transfer any of the rights under the agreement without written consent of Pope & Talbot. It was further provided that Gilmore's interests and rights could not be transferred by operation of law through any execution or judicial sale or insolvency or bankruptcy proceedings without the written consent of Pope & Talbot. On February 21, 1956, Pope & Talbot in writing consented to the assignment of the Gilmore contract by the Gilmore partnership to a new corporation formed by the plaintiffs. This consent was prepared by attorneys for Pope & Talbot, signed by its vice president, and described the Gilmore contract as one "whereby Pope & Talbot sold to Gilmore contract rights to cut certain timber" on the pertinent timberlands. The Gilmore contract also provided that Gilmore could subcontract the work thereunder only to subcontractors which Pope & Talbot had approved in writing after Gilmore had submitted the names of such subcontractors in writing to Pope & Talbot. In 1951 only, Gilmore did subcontract some of the cutting and delivery of logs without the approval of Pope & Talbot. 17. The Ostrander contract provided that neither Pope & Talbot nor Ostrander would have the right of assigning the contract or any interest therein without first securing the written consent of the other party to any such proposed assignment. Pope & Talbot did not obtain the written consent of Ostrander to the execution of the Gilmore contract nor to the arrangements between Gilmore and Pope & Talbot. However, Pope & Talbot did advise the executive officer of Ostrander in 1950 that Gilmore was replacing the logging operations of Pope & Talbot, and this officer of Ostrander informally consented to the replacement. 18. Throughout the performance of the Gilmore contract, monthly statements of the account were prepared by Pope & Talbot and submitted to Gilmore, accompanied by a check for the logs delivered during the preceding month. These statements were verified by Gilmore and checked against the Findings of Fact 149 C. Cls. scale sheets, copies of which were supplied to Gilmore, Pope & Talbot and Ostrander by the Columbia River Log Scaling and Grading Bureau. 19. Gilmore Logging Co. filed a timely partnership return of income for the calendar year 1952, reporting ordinary net income of $74,301.98 and net long term capital gains in the amount of $155,989.66. In this partnership return Gilmore Logging Co. reported the cutting of timber during the year 1952 under the provisions of section 117(k) (1) of the Internal Revenue Code of 1939. George W. Gilmore and Roberta Gilmore filed a timely joint individual income tax return for the year 1952, in which they reported their ordinary income and capital gains from Gilmore Logging Co., a partnership. The tax of $78,260.62 shown on the return was paid during the year 1952. 20. Pursuant to the terms of the Gilmore contract, Pope & Talbot retained from sums otherwise due Gilmore $17,307 (at the rate of $1.00 per thousand feet of logs cut and removed) during the year 1952 as a guaranty fund to be paid to Gilmore upon complete performance and termination of the contract. This amount of $17,307 was erroneously included in the partnership return of income for the year 1952 and in the taxable income of George W. Gilmore and Roberta Gilmore for this year. This amount was excluded from plaintiffs' income thereafter by the examining revenue agent in determining the deficiency for the year 1952 in order to reflect the cash basis of accounting used by the partnership. 21. Gilmore Logging Co. filed a timely partnership return of income for the calendar year 1953, reporting ordinary net income of $113,476.80 and net long term capital gains in the amount of $86,454.41. In this partnership return Gilmore Logging Co. reported the cutting of timber during the year 1953 under the provisions of section 117(k) (1) of the Internal Revenue Code of 1939. George W. Gilmore and Roberta Gilmore filed a timely joint individual income tax return for the year 1953, in which they reported their ordinary income and capital gains from Gilmore Logging Co., a partnership. The tax of $75,718.46 shown on the return was paid during the year 1953. 54 Findings of Fact 22. Pursuant to the terms of the Gilmore contract, Pope & Talbot retained from sums otherwise due Gilmore during the year 1953 the contract guaranty sum of $18,731.89. This amount of $18,731.89 was erroneously included in the partnership return of income for the year 1953 and in the taxable income of George W. Gilmore and Roberta Gilmore for this year. This amount was excluded from plaintiff's income thereafter by the examining revenue agent in determining the deficiency for the year 1953, in order to reflect the cash basis of accounting used by the partnership. 23. Gilmore Logging Co. filed a timely partnership return of income for the calendar year 1954, reporting ordinary net income of $32,193.27 and net long term capital gains in the amount of $63,473.21. In this partnership return Gilmore Logging Co. reported the cutting of timber during the year 1954 under the provisions of section 631 (a) of the Internal Revenue Code of 1954. George W. Gilmore and Roberta Gilmore filed a timely joint individual income tax return for the year 1954, in which they reported their ordinary income and capital gains from Gilmore Logging Co., a partnership. The tax of $25,541.14 shown on the return was paid during the year 1954. 24. Pursuant to the terms of the Gilmore contract, Pope & Talbot retained from sums otherwise due Gilmore during the year 1954 the contract guaranty sum of $21,113.18. This amount of $21,113.18 was erroneously included in the partnership return of income for the year 1954 and in the taxable income of George W. Gilmore and Roberta Gilmore for the year 1954. This amount was excluded from plaintiffs' income thereafter by the examining revenue agent in determining the deficiency for the year 1954 in order to reflect the cash basis of accounting used by the partnership. 25. During the latter part of the year 1955 a representative of the District Director of Internal Revenue for the District of Oregon examined the partnership returns of Gilmore Logging Co. for the years 1952, 1953, and 1954, and the plaintiffs' joint income tax returns for the same years. As a result of such an examination and under date of November 21, 1955, the plaintiffs received a statement of the revenue agent's proposed adjustments for these years. The principal |