
    GEORGE W. GILMORE AND ROBERTA GILMORE v. THE UNITED STATES
    [No. 454-57.
    Decided February 3, 1960]
    
      
      Mr. Charles P. Dujfy for tbe plaintiffs. Mr. Fred 8. Gilbert, Jr., and Mr. Carl E. Davidson were on tbe briefs.
    
      Mr. Harold 8. Larsen, with whom was Mr. Assistant Attorney General Charles K. Bice, for tbe defendant. Mr. James P. Garland and Mr. Lyle M. Turner were on the brief.
   Laramore, Judge,

delivered tbe opinion of tbe court:

Plaintiffs in this action seeks to recover income taxes in tbe amount of $142,740.75 for tbe years 1952,1953, and 1954 on the theory that amounts received by them in these years for logging certain timber were capital gains rather than ordinary income.

The sole question presented is whether the plaintiffs are entitled to the benefits of the capital gains provisions of section 117 (k) (1) of the Internal Eevenue Code of 1939, 26 U.S.C. § 117 (1952 Ed.), and section 631(a) of the Internal Eevenue 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 Eoberta 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 Eevenue 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 Eailway and Timber Company (hereinafter referred to as Ostrander). On said date Ostrander entered into a written contract with Pope & Talbot, Inc., a California corporation. 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 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.

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

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 for. In this situation the reasoning, with which we agree, of 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 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 n'ot 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 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 faying the same prices for logs from other sources as they were faying 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 comfany 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.

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 Gilmore’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.

Basksdale, District Judge, sitting by designation, and MaddeN, Judge, concur.

Whitakee, 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 & 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-partnership. The books of this partnership were and are maintained and its returns filed on the cash basis.

4. On and after May 20, 1942, and at all pertinent times involved in this case, certain lands in Clackamas County, Oregon, hereinafter referred to as the timberlands, were owned by Ostrander Railway and Timber Company, a Washington corporation, hereinafter referred to as Os-trander. On May 20,1942, Ostrander entered into a written contract with Pope & Talbot, Inc., a California corporation, which contract is hereinafter referred to as the Ostrander contract. By the terms of this contract, Ostrander agreed as “Seller” to sell, and Pope & Talbot as “Purchaser” agreed to purchase all of the merchantable timber on the pertinent timberlands.

The Ostrander contract provided in part as follows:

The Purchaser shall have the right to enter upon said lands and to proceed with the logging of the timber therefrom and m the conduct of such logging operations the Purchaser shall have the right to construct and maintain thereon all necessary roadways, structures and camps and to do any and all other things which in the judgment of the Purchaser are necessary and proper for the logging of said lands and the cutting and removal of the timber therefrom.
% Jfc $ ‡ ‡
All of the timber cut and removed from said lands by the Purchaser shall be scaled and graded by the Columbia River Log Scaling & Grading Bureau. The scale and grade of all such logs so made by the Bureau shall be the conclusive basis upon which payment shall be made and binding upon both parties. Each party shall pay one-half of the cost of such scaling and grading. A certificate showing the scale and grade of all logs scaled and graded by it shall be furnished to each of the parties hereto by the Bureau.

As stated in the Ostrander contract, Pope & Talbot agreed to pay Ostrander for the timber certain specified “base stumpage prices” according to various grades and species thereof, and in addition an “overage stumpage price” whenever the average market price of the various grades and species of logs at Portland, Oregon, for a calendar month exceeded certain specified base prices. The overage stump-age price was determined by percentages of differences between the “average market price” of the logs produced and the fixed base prices.

The Ostrander contract required generally that all logging operations by Pope & Talbot be carried on in a good and workmanlike manner in accordance with accepted logging practices obtaining in western Oregon, and otherwise specified in detail some practices required of Pope & Talbot.

Pope & Talbot agreed to construct a truck road at an estimated cost of $145,000 on a right-of-way to be furnished by Ostrander, to be used for the transportation of logs from the timberlands. Pope & Talbot was otherwise reserved the right to construct additional roads and to use existing roads on the lands. All roads, whether existing or to be constructed, were to be and remain the property of Ostrander. In addition to amounts paid for stumpage for the timber, 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 so that Pope & Talbot could dump the logs removed from the timberlands and have them rafted there.

5. Prior to 1950, Pope & Talbot performed logging operations on the timberlands pursuant to the Ostrander contract. Pope & Talbot concluded that these operations were not economically profitable in that it couldn’t produce the logs at the then market price. It was interested in obtaining at prevailing market prices fir logs, and other species of logs to be traded for fir logs, to be milled in its St. Helens sawmill. Pope & Talbot decided to have the logging operations contracted to an independent logging company, and had Gilmore Logging Co. and several other logging companies inspect the timberlands in connection with such negotiations.

6. On July 17, 1950, plaintiff George W. Gilmore, on behalf of Gilmore Logging Co., hereinafter referred to as Gilmore, entered into a written contract with Pope & Talbot, by the terms of which Gilmore agreed to enter upon the 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, is in evidence as plaintiff’s exhibit A and is included in this finding as if fully set forth. 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 contract, 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.

Regarding stumpage prices to be paid by Gilmore to Pope & Talbot, the Gilmore contract provided as follows:

4. The stumpage prices to be paid by the Contractor to the Company for all timber cut and removed by the Contractor from lands covered by this agreement, which shall be deducted from the payments due the Contractor for all logs purchased by the Company from the Contractor shall be the exact stumpage payments made by the Company to Ostrander Bailway and Timber Company * * *

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.

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 imtil 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.

7. 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.

8. In the Ostrander contract it was recognized that the country was at war and that everyone engaged in business was and would be faced with abnormal conditions and restrictions for an inestimable time in the future. Pope & Talbot, it was stated, was not obligated to remove any specific quantity of timber in any one calendar year. Pope & Talbot was required, in the event it was able to conduct logging operations for as much as six months in a calendar year, to pay to Ostrander not less than $75,000 in such year, regardless of the amount of footage actually removed. If Pope & Talbot could not conduct logging operations for as much as six months in a calendar year, 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 log, transport and deliver to the Canby, Oregon, log dump not less than 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 by Pope & Talbot and Gilmore. The minimum production of logs was not maintained by Gilmore nor requested by Pope & Talbot. Gilmore throughout the tax years here involved was endeavoring to induce the U.S. Forest Service to enter into contracts to sell timber on Government lands adjacent to the Ostrander lands, and Gilmore desired to extend its operations on the Ostrander lands so that there would be enough timber on both the Government lands and the Ostrander lands to permit continuance of the logging operations in that area. It was anticipated by Gilmore that the Government would not sell sufficient timber which would alone sustain the Gilmore operations. Pope & Talbot was paying the same prices for logs from other sources as they were paying to Gilmore, and obtained an adequate supply of logs without requiring Gilmore to produce the minimum quantities under the contract. Pope & Talbot under these circumstances was interested in extending the life of the forest on the pertinent timberlands as long as possible, consulted with and obtained informal consent of Ostrander officials and agreed with Gilmore to require and accept volumes which were less than the minimum production required under the Ostrander contract.

Gilmore’s equipment and facilities were sufficient to produce the minimum quantity of logs required by the contract. Gilmore did not sell nor attempt to sell logs to anyone other than Pope & Talbot.

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 Os-trander 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-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 & 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 timber-lands.

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 Pop6 & 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 scale sheets, copies of which were supplied to Gilmore, Pope & Talbot and Ostrander by the Columbia Eiver 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 $17,807 (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 H7(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.

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 proposed adjustments were the elimination from plaintiffs’ income of the amounts retained by Pope & Talbot in the guaranty fund, as provided by the Gilmore contract, and the disallowance to the plaintiffs of the benefits of section 117(k)(l) of the Internal Revenue Code of 1939 for the years 1952 and 1953 and the benefits of section 631(a) of the Internal Revenue Code of 1954 for the year 1954. The plaintiffs, on or about December 6, 1955, executed Treasury Department Forms 870, consenting to the immediate assessment of the following deficiencies in income tax for the pertinent years, as follows:

Year Deficiency
1952 -$70, 359. 56
1953 - 31,020. 98
1954 - 9,133. 52
Total_110, 514.08

26. Under date of December 9, 1955, the plaintiffs forwarded to the District Director of Internal Revenue at Portland, Oregon, their check in the amount of $125,514.06, in payment of the aforesaid total deficiency of $110,514.06, plus an additional payment of $15,000 toward interest thereon. On or about March 6, 1956, plaintiffs also paid the additional sum of $115.29 as interest on these deficiencies.

27. On or about February 16, 1956, plaintiffs duly filed with the District Director of Internal Revenue in Portland, Oregon, their claims for refund of income taxes in the following amounts:

Year Amount
1952-$82, 036.22
1953- 44, 066. 61
1954- 16, 637.92

Claims were also made for each of these years for the amount of the interest paid on the deficiencies shown in finding 25. These claims for refund were based upon the same grounds as those set forth in the petition filed herein.

28.Under date of July 17, 1956, plaintiffs received statutory notices of the disallowance of each of the refund claims, by registered mail, as required by section 3772(a)(2) of the Internal Revenue Code of 1939 and section 6532(a) (1) of the Internal Revenue Code of 1954.

29. The parties have agreed, with the approval of the commissioner, that the trial of this case be limited pursuant to Buie 38(c) to the issues of fact and law relating to the right of the plaintiffs to recover, reserving the determination of the amount of recovery, if any, for further proceedings.

CONCLUSION OF LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that plaintiffs are entitled to recover, and judgment will be entered to that effect.

The amount of recovery will be determined pursuant to Buie 38(c) of the Buies of this court.

In accordance with the opinion of the court and on a memorandum report of the commissioner as to the amount due thereunder, it was ordered on May 6, 1960, that judgment for the plaintiffs be entered for $157,856.04, with interest thereon as provided by law. 
      
       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:
      “On July IT, 1950, George W. Gilmore, on behalf of said partnership, entered into a written agreement with Pope & Talbot, Inc., a California corporation, by the terms of which it then became the holder of a contract right to cut certain timber in Clackamas County, Oregon. * * *”
      
     