
    UNION BAG-CAMP PAPER CORPORATION v. THE UNITED STATES
    [No. 386-58.
    Decided December 13, 1963]
    
      
      Paul D. Miller for plaintiff. John H. Alexander, William B. Landis, Joseph E. Bachelder III, and Mudge, Stern, Baldwin & Todd were on the brief.
    
      Theodore D. Peyser, with whom was Assistant Attorney General Louis D. Oberdorfer, for defendant. Edward S. Smith, Lyle M. Turner and Philip R. Miller were on the briefs.
    Before Jones, Chief Judge, Whitaker, Laramore, Durfee and Davis, Judges.
    
   Per Curiam :

This case was referred pursuant to Buie 45 to Lloyd Fletcher, a trial commissioner of this court, with directions to make findings of fact and recommendations for conclusions of law. The commissioner has done so in a report filed February 25, 1968. Briefs were filed by the parties, exceptions to the commissioner’s findings were taken by the defendant, and the case was submitted to the court on oral argument by counsel. Since the court is in agreement with the findings and recommendations of the trial commissioner, as hereinafter set forth, it hereby adopts the same as the basis for its judgment in this case. Plaintiff is, therefore, entitled to recover under each of the three causes of action set forth in the petition and defendant is not entitled to the setoff asserted in its first amended answer. The amount of recovery will be determined pursuant to Buie 38(c).

OPINION OP COMMISSIONER

Pursuant to section 1491, title 28, United States Code, plaintiff has brought this suit for a refund of Federal income taxes, and interest thereon, assessed and collected from the plaintiff by the Commissioner of Internal Bevenue for the calendar year 1949. The total of such taxes and interest claimed to be refundable for 1949 aggregates $79,863.95.

Since 1916 the plaintiff has been engaged in the manufacture of paper, paper bags, and related products. For many years plaintiff manufactured its products from kraft pulp and paper purchased from others. However, in 1936 it completed the construction of the first unit of a large integrated pulp mill in Savannah, Georgia, and thereupon for the first time began to manufacture its own kraft pulp. At the same time, plaintiff’s management decided that the company should inaugurate a long-range program for acquisition of timberlands through purchase or long-term lease primarily with a view to developing thereon a conservation and forest management program designed to provide plaintiff with successive and continuous crops of pulpwood for current use, and as a reserve for future use, in its manufacturing operations at the Savannah plant. The program was commenced in 1936, and by the end of the taxable year here involved, plaintiff had acquired more than 700,000 acres of land in Georgia, South Carolina, and Florida. Of this 700,000 acres, about 266,000 were held by plaintiff under fourteen long-term leases. The leased lands varied widely in physical characteristics and in the amount of timber growing thereon. Some of the land had been burnt over, some had been used for grazing, some included extensive swamp areas, and some had large open spaces devoid of timber or other forest cover. This relatively large amount of leasing activity by plaintiff, in lieu of outright purchase exclusively, was due both to plaintiff’s desire to hold its capital expenditures for land as low as possible while expanding its Savannah mill and, in some instances, to preferences of landowners for annual income from their lands over a long period of years.

The dispute in this case involves only the leased lands. The primary purpose of plaintiff in entering into these long-term leases was to obtain exclusive possession of timberlands which would be necessary for the growing of trees efficiently to provide continuous crops of pulpwood as a raw material supply for its Savannah mill. In addition to timber rights, plaintiff acquired by these leases, with minor reservations, the complete and exclusive use and control of the leased lands “including ** * * all timber, logging, wood, turpentine and naval stores, oil, mining, mineral, water, water power, grazing, farming, and hunting rights.” Plaintiff also had the right to build and operate roads, railroads, mills, wells, mines, lakes, buildings, and other structures and to remove such property from the lands at the end of the leases. Further, plaintiff had the complete right of assignment and sublease, and, in ten of the leases, had an option to purchase fee simple ownership at an agreed value. In short, it may be said that, for all practical purposes, the owner-lessors by these leases conveyed to plaintiff for the agreed term their entire possessory rights in the real estate, subject to certain restrictions on the cutting of timber described below.

In return, plaintiff agreed to pay all taxes assessed against the leased properties, to pay annually into a forestry management fund five cents per acre (under some of the leases ten cents per acre) to be expended for fire protection and forest management, and to pay annually to the lessor “as rental” an amount equal to five percent of an agreed and specified value of the leased lands. With respect to the cutting of timber, in most of the leases, plaintiff agreed (with immaterial exceptions) not to cut or remove any timber during the first seven years of the term and that thereafter the right to timber cutting or removal would be restricted to the estimated annual growth in any year, such right, however, to be cumulative. This annual growth rate was set at one-half cord of pulpwood per acre with provision for adjustment thereof at five-year intervals if actual growth materially differed from the assumed rate, and, under the cumulative provision, if plaintiff did not cut the full amount of annual growth in any given year, it was entitled to carry forward the balance for cutting to any later year. Thus, by these provisions the lessors were afforded (during the first seven years of nine leases) the security of standing timber on the lands, plus the assurance that, since only the annual growth could be cut thereafter, the lands would probably be returned to them with more standing timber thereon than existed at the inception of the leases.

Despite the foregoing, plaintiff was given in nine of the leases a right to cut additional timber but only upon the payment of a stipulated price therefor. In a lease known as “Kay-Bond,” plaintiff also acquired for no additional consideration the right to cut during each of the first seven years $65,000 worth, of saw timber, defined as trees measuring 12 inches in diameter one foot above the groünd.

The four remaining leases, known as the Samvrilka-Morgarl and Douglas-Dickerson. leases, are 'quite similar t'0 the tail leases described above, except that thés'ó foul l'éásés grant no purchase Option to piaiutiff aiid COntaiil different provisions’ relating to Cutting rights. Under tile Samwilka-Mor-gan leases, plaintiff obtained the right at any time during their 40-year term to cut trees having a diameter of 5.1 inches or more, breast high, with a covenant that at the end of the leases there would be a minimum of the same quantity of merchantable timber of such size on the lands as was there at the beginning of the leases. Under the Douglas-Dickerson leases, plaintiff purchased outright for a specified sum all trees then on the lands measuring six inches or more in diameter one foot above the ground, and thereafter, plaintiff had the right to cut all trees attaining such diameter during the lease term of 66 years. This purchase was made by a separate payment of an amount in addition to the regular payments called for under the lease, and this separate payment was not deducted from ordinary income but was treated as cost of timber in plaintiff’s income tax returns.

During 1949 plaintiff purchased approximately 85 percent of its pulpwood requirements from others and cut only 15 percent from the lands owned or leased by it. Primarily, the plaintiff has always operated both its own timberlands and those leased by it as so-called “tree farms”. The objective of such an operation was to produce by scientific methods successive and continuing crops of pulpwood and timber. This involved the expenditure of substantial sums for protection of timber growing, and to be grown, from fire and other hazards, selective cutting and thinning of wooded areas, encouragement of natural reseeding, and artificial reforestation by planting of pine seedlings.

In addition to its primary operation of the leased lands as pulpwood tree farms to serve as a source of raw material supply for its paper mill, plaintiff used the lands, as it had a right to do, for other income producing purposes. For example, it sold saw timber to lumber companies, granted turpentine leases, obtained oil and mineral rentals, and the like. Thus, in 1949, plaintiff realized from the leased lands $166,993.47 for which it made no payment to the lessors except the specified annual payments required by the leases. This sum was derived from the following sources:

(a) $59,697.11 was the fair market value of timber cut for use as pulpwood in plaintiff’s Savannah mill, and was reported in plaintiff’s 1949 return as giving rise to capital gain under section 117(k) (1) of the Internal Revenue Code of 1939 (hereinafter referred to as the “1939 Code”);

(b) $66,941.74 was derived from the sale of saw timber to lumber companies and dealers under cutting contracts, and was reported in plaintiff’s 1949 return as giving rise to capital gain under section 117 (k) (2) of the 1939 Code; and

(c) $40,354.62 was derived from miscellaneous uses of the leased lands, including oil and mineral rentals, turpentine leases, salvage, etc., which sum, representing over 24 percent of plaintiff’s 1949 gross income from the leased lands, was reported as ordinary income.

During 1949, pursuant to the above described 14 leases, plaintiff made annual payments to the lessors in the aggregate amount of $147,864.47; it expended for forest management and fire protection on the leased lands $12,923.67; and, in addition, it incurred or accrued and paid an aggregate of $38,626.90 in respect of ad valorem property taxes on the leased lands. In its 1949 income tax return, plaintiff deducted these amounts totalling $199,415.04 as ordinary and necessary business expenses under section 23(a)(1)(A) of the 1939 Code. However, upon audit, the Commissioner of Internal Revenue refused to allow the deductions so claimed and adjusted plaintiff’s return so as to capitalize these amounts as part of the cost of timber to be recovered through depletion allowances only. This action by the Commissioner resulted in an assessment of additional tax for 1949 of $56,695.12. The Commissioner further adjusted plaintiff’s 1949 tax return by disallowing five percent of its total general expenses for land management on the ground that such five percent of management expense was properly attributable to the cost of entering into and supervising certain cutting contracts (referred to under (b) above) and should be charged against the gain realized by plaintiff from such contracts. This latter adjustment resulted in assessment of further additional income tax for 1949 in the amount of $2,369.86 for a total of additional 1949 taxes amounting to $59,064.98. This amount, plus interest of $20,798.97, was paid by plaintiff, and thereafter a timely claim for refund thereof was filed. Upon the expiration of more than six months from the filing of the claim, and no formal action thereon having been taken by the Commissioner, this suit was filed seeking judgment for such additional taxes and interest.

(a) The first issue

From the foregoing, it is apparent that the major question which the court is here being asked to decide involves a determination as to the true character of the expenses incurred and paid by plaintiff under the above described long-term leases. In plaintiff’s view of the case, its annual payments of what the leases refer to as “rental”, the ad valorem taxes on the leased lands, and the forest management fund expenditures all fall within the provisions of section 23(a)(1)(A) of the 1939 Code which allow the deduction from income of:

* * * All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including * * * rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity. [Italics supplied.]

Defendant, on the other hand, contends that all of the aforesaid expenses should be capitalized as part of the cost of timber and offset against any income realized when the timber is cut. The importance to the parties of the issue thus posed is this. During the taxable year involved, plaintiff realized income from two sources upon the cutting of timber standing on the leased lands. (See finding 20, infra.) First, it cut pulpwood for its own use, and having so elected, it reported the fair market value of such timber as capital gain under section 117 (k) (1) of the 1939 Code. Secondly, plaintiff entered into certain timber cutting contracts with others, and it reported the amounts received by it from those contracts as capital gain under section 117 (k) (2) of the 1939 Code. If plaintiff’s payments under the leases must be capitalized and added to its timber depletion basis (as contended for by defendant), they serve merely to diminish plaintiff’s capital gain. On the other hand, if (as contended for by plaintiff) the payments are properly deductible as rent, then plaintiff has procured a deduction offsetting its ordinary income in exchange merely for an increase in lower-taxed capital gain.

Viewed from the standpoint of a lessee under the type of long-term lease here involved, this precise question does not appear to have been the subject of any reported decision. The other side of the coin, that is, the proper tax treatment of such payments in the hands of the lessor has been the subject of decision by the Tax Court of the United States. In Estate of James M. Lawton, 33 T.C. 47 (1959), the taxpayer was the owner of certain timberlands in Georgia which he leased for a term of 66 years to the plaintiff’s predecessor herein, Union Bag & Paper Corporation. Although not identical to the leases here involved, the Lawton lease was quite similar to them. It granted, leased and demised Law-ton’s timberlands to Union Bag, the latter to have “complete and exclusive use and control” of the land for 66 years, including the right to cut and remove trees of a specified size up to a stated cumulative maximum number of cords per year. In addition, as in the present leases, Union Bag was granted turpentine, water, farming, and other rights, including the right to construct roads, wells, mines, buildings, and other structures on the land. Union Bag was also given a one-half interest in oil, gas, and mineral rights. Similarly to its undertakings in the present leases, Union Bag agreed to pay for these rights by paying all taxes assessed against the land, to furnish adequate forest management and fire protection, and to pay the lessor a fixed annual sum “as rental.” The taxpayer-lessor contended that the annual payments thus received from Union Bag were entitled to capital gains treatment because the lease contemplated essentially the “purchase and sale of timber-cutting rights.” Pointing to the much broader terms of the lease, the Government responded that the lease contemplated Union Bag’s use of the lands for “timber farming” as opposed to a disposal of timber, and that, therefore, the annual payments were merely rent taxable to the lessor as ordinary income.

In sustaining the Government’s position, the Tax Court held at 33 T.C. 51 that capital gain treatment under section 117 (k) (2) was not applicable to the lessor’s receipts because :

* * * Bent was to be paid each year regardless whether or not any of the timber involved was cut or removed from petitioner’s acreage. As the agreement is explicit in this respect, we think it clear that petitioners have not, in _ any sense of the term, retained the necessary economic interest in the timber which would entitle them to capital gains treatment pursuant to section 117 (k) (2). * * *

The court further rejected the lessor’s contention that the contract of lease was essentially a “sale of timber-cutting rights” and stated at 33 T.C. 56:

Viewing the contract in its entirety, in our opinion the payment of $1.75 per acre by Union Bag was in the nature of rent for the right to use and occupy petitioner’s acreage for “pine-tree farming” and other independent forestry activities, including the right to cut and remove a cumulative maximum of 2,100 cords per annum of pulpwood during the term of the agreement.

To the same effect, in a case involving the Georgia state income tax law, see Superior Pine Products Company v. Williams, 214 Ga. 485, 106 S.E. 2d 6 (1958).

Having thus succeeded before the Tax Court in its contention that the type of payments involved herein are “rent” in the hands of the lessor, the Government with considerable agility here contends that, on the lessee’s side, these payments are not “rent” at all but are actually the purchase price of a right to cut timber and hence should be treated as capital expenditures. Essentially, the defendant finds justification for this 180-degree shift of position in section 1.631-2 (e) (1) of the Treasury Regulations promulgated under the Internal Revenue Code of 1954. That section of the regulations reads:

Amounts paid by the lessee for timber or the acquisition of timber cutting rights, whether designated as such or as rental, royalty, or bonus, shall be treated as the cost of timber and constitute part of the lessee’s de-pletable basis oi the timber, irrespective of the treatment accorded such payments in the hands of the lessor.

Defendant correctly points out that, insofar as the issues in this case are concerned, the 1954 Code provisions are the same as those contained in the 1939 Code. Cf. section 117 (k), 1939 Code and section 631,1954 Code. Therefore, defendant urges the applicability here of the above-quoted regulation despite its promulgation some years after the taxable year involved in this case. The question thus raised may properly be passed without decision, for even if the regulation had been promulgated in 1949, its provisions do not cover the facts established by the record herein.

Obviously, there may be numerous instances in the timber industry where the contract between the buyer of timber and the landowner is denominated by them a “lease” and where the buyer agrees to pay the landowner sums designated in the contract as “rentals.” Nonetheless, if it appears upon examination of the contract that all the “lessee” has acquired thereunder is the “lessor’s” timber or the right to cut it, then the regulation by its terms is applicable, and the “rentals” are properly treated as the cost of timber to the “lessee.”

However, in insisting upon the applicability of the regulation to this case, defendant appears to have overlooked the fact that, under the long-term leases here involved, the plaintiff acquired much more than timber or the right to cut it. While on this record there can be no doubt that plaintiff’s major objective in acquiring woodlands, both by purchase and lease, was to assure itself a continuous supply of pulpwood from both existing and after-born timber, it is unrealistic to infer therefrom that these leases must be viewed in the same light as simple timber-cutting contracts. For all practical purposes, plaintiff obtained for the long terms of these leases the exclusive use, control, and enjoyment of all the possessory rights attaching to the real estate. It can hardly be denied that the consideration paid by a person to acquire such rights in real estate for a term of years is traditionally and properly known as “rent.” This becomes all the more obvious when it is realized that all timber standing on the leased lands could be destroyed by catastrophic fire or disease infestation, and nonetheless plaintiff’s obligation to pay the stipulated annual payments would remain unimpaired. This exception to the contract doctrine of “commercial frustration” is apparently unique to the obligation of a tenant to pay rent under a lease of real property. See Wood v. Bartolino, 48 N.M. 175, 146 P. 2d. 883 (1944).

In the light of the foregoing, coupled with the consistent use by the parties of the language of lease throughout the documents in question, it is hardly surprising that in Law-ton the Tax Court held the same type of payments as are involved herein to be “rent.” No persuasive reason has been assigned why this court should disagree with the well-reasoned opinion of the Tax Court in the Lawton case, and we are told by the Supreme Court of the United States that, if payments made under a lease are “rent” in the hands of one of the parties, those same payments should be considered “rent” in the hands of the other party. Burton-Sutton Oil Co. v. Commissioner, 328 U.S. 25 (1946). There the Court considered the character of certain payments made under an oil lease, and, speaking through Mr. Justice Reed, stated at page 27:

A decision on the category of expenditures to which these 50% disbursements belong affects both the operators who make them and the owners, lessors, vendors, grantors, however they may be classed, who receive them. If they are capital investments to one, they are capital sales to the other. If they are rents or royalties paid out to one, they are rents or royalties received by the other.[]

The Government maintains, however, that if plaintiff’s annual payments are to be treated solely as rent for use of the leased lands, then there results the “unrealistic position” that the right most important to plaintiff, i.e., the right to cut timber, has been obtained by it “for nothing.” At the very least, so the argument goes, the plaintiff should be held to the burden of showing what portion, if any, of plaintiff’s annual payments were made for rights other than the right to cut timber so that allocation or apportionment of the payments between rental and capital expenditure can be made. This approach was developed in two recent revenue rulings setting forth Departmental refinements of the Lawton principle. Rev. Ruls. 62-81 and 62-82, 1962-23 Int. Rev. Bull, pp. 5, 8. There consideration was given to the proper treatment of annual payments received by lessors under long-term leases of timberlands bearing a partial resemblance to the present leases. On the problem of allocation, Revenue Ruling 62-82 states the following:

The question remains whether any portion of the lump-sum payment under the instant contract is consideration for a transfer of property in a transaction amounting to a present sale of timber. The transaction could properly be such only if some portion of the consideration was paid for timber having, at the time of the execution of the contract, a determinable fair market value (merchantable timber of cutting size and smaller young growth of appraisable value). Timber that is not in existence at the time of the contract cannot be the subject of a present sale. See Williston on Sales (Rev’d Ed.), sections 62 and 258.
The rights and privileges conferred upon the paper company comprehended both the possession of land and the disposition of timber. There is no provision of the contract which relates any portion of the payment specifically to timber. Despite the absence of such a reference, however, some portion of the payment received by the landowner may, in fact, be attributable to timber. This would be true if the timber existing on the tract at the execution of the contract possessed a determinable fair market value. If the taxpayer establishes the fair market value of such existing timber, the payment to the extent of such fair market value constitutes proceeds from the sale of timber. The portion of the payment in excess of the values so established is in the nature of consideration for the use of land over a period of time and, therefore, ordinary income.

However sensible the foregoing allocation principle might be when applied to some types of timber leases, it should not be applied under leases where, as here, the lessee has undertaken to return the leased lands to the lessor with as much, or more, timber standing thereon as existed at the beginning of the leases. In the long run, under these leases, no such thing as timber depletion has occurred, or will occur, on these timberlands, except with respect to some cutting of certain timber at a specified additional cost which transactions are not in dispute here. (See footnotes 7 and 13, supra.) It is true that, due to the aging requirements for suitable timber (see findings 15 and 19, infra), it is inevitable under these leases that during the earlier years of their terms (including the taxable year here involved), trees will be cut which were standing on the lands prior to the execution of the leases. Under such conditions, it has been suggested that the lessee is, in effect, “borrowing * * * timber under an agreement to replace it later.” LeFevre, Tax Aspects of Timber Transactions, 18 N.Y.U. Inst. on Federal Taxation 577, 597 (1960). Whatever words are used to describe the transactions in question, the inescapable fact remains that plaintiff’s annual payments are made to acquire the exclusive use, possession, and enjoyment of the leased lands, including as a part of those possessory rights, the right to cultivate and cut the annual timber growth. Apportionment of a lessee’s land use payments would seem entirely proper in case of a lease, for example, of 1,000 acres of timberland granting the lessee (1) the right to cut the timber from 500 acres with no obligation to replace it and (2) the right to conduct a turpentine operation on the remainder. But, under the present leases, it does not appear that timber depletion will occur, as such, and thus there is nothing logically to allocate or apportion thereto. Looking at the forest instead of the trees, the only ultimate change contemplated for these timberlands is one of improvement to the timber stand, not depletion thereof.

It follows that all three types of payments required, to be made by plaintiff should be deemed to constitute “rentals or other payments required to be made as a condition to the * * * use or possession * * * of property” and should therefore be deductible from gross income in their entirety under section 23(a) (1) (A) of the 1939 Code.

(5) The second issue

By way of an alternative defense, the Government asserts that if plaintiff is entitled to deduct the above described payments, then it must obviously be a mere lessee of timberlands; as such lessee, it is contended that plaintiff cannot qualify as an “owner” of timber so as to be entitled under section 117 (k) (2) to capital gain treatment of sums realized under timber cutting contracts. As previously stated, plaintiff’s 1949 income from the leased lands was derived from (1) miscellaneous uses yielding $40,354.62 and reported as ordinary income, (2) the cutting of pulpwood for plaintiff’s own use yielding $59,697.11 in fair market value reported as capital gain under section 117(k) (1), and (3) the sale of saw timber under cutting contracts with others yielding $66,941.74 also reported by plaintiff as capital gain but under section 117 (k) (2). Only the last mentioned income source is at issue in defendant’s alternative defense.

The pertinent provisions of section 117(k) (2) quoted in footnote 12, supra, disclose that to be entitled to its benefits, the taxpayer must show (1) a “disposal of timber,” (2) held for more than six months, (3) by himself as “owner thereof,” (4) under any form of contract by which he retains as owner an “economic interest in such timber.” Defendant’s argument that plaintiff, as lessee, cannot also be the “owner” of the timber on the leased lands results in the unacceptable conclusion that there existed no “owner” of that timber at the time of its “disposal” by plaintiff.

Once again, defendant has charted a course of argument diametrically opposed to that which it pursued so successfully in the Lawton case. Essential to one part of the Tax Court’s decision in Lawton was its agreement with the Government’s position that the lessor was not entitled to the benefits of section 117 (k) (2) “because no economic interest in the timber was retained” by him. 33 T.C. 57. If this be so, the question immediately arises — what happened to the economic interest in the timber? The answer seems clear enough. It had vested in the lessee.

The answer is the same in the present case with the added refinement that plaintiff’s rights to cut, use, and remove the timber were restricted (with exceptions not here involved) to the estimated annual growth, a restriction which admittedly was not exceeded by plaintiff. See finding 19, infra. Although, as previously held, the annual payments made by plaintiff were in the nature of rentals for the use of land rather than capital expenditures, they also entitled plaintiff, as lessee, to cut, remove, and dispose of the annual growth of timber. As to such arnwal growth, plaintiff acquired the entire proprietary interest and was the owner thereof both legally and equitably, and it is stipulated that plaintiff disposed of no more than that annual growth. Its ownership rights to the annual timber crop were as complete as those of any tenant to crops grown by him on leased lands.

Accordingly, for purposes of section 117 (k) (2), plaintiff was the “owner” of the saw timber disposed of to third parties under cutting contracts. See Boeing v. United States, 121 Ct. Cl. 9 (1951); Giustina v. United States, 190 F. Supp. 303 (D.C., Ore., 1960); L. D. Wilson, 26 T.C. 474 (1956); Springfield Plywood Corporation, 15 T.C. 697 (1950); and Estate of James M. Lawton, supra. Furthermore, it is clear that plaintiff retained the required “economic interest” since the payments under the cutting contracts were based upon actual units of timber cut and were payable only as timber was cut. See Boeing v. United States, supra, and L. D. Wilson, supra. Except for sales from the Bay-Bond tract aggregating $5,868.25, the timber so sold was held by plaintiff for more than six months prior to its disposal. Having thus met all the statutory requirements, plaintiff was entitled to treat the proceeds from these cutting contracts (except for $5,868.25 of the Bay-Bond receipts) as capital gains under section 117 (k) (2).

(o) The third issue

The final issue presented in this case also arises out of plaintiff’s business activities in the selling of timber under cutting contracts with others. From all its cutting contracts, both on its own lands and on the leased lands, plaintiff realized gross proceeds during 1949 of $364,592.84.

During 1949 plaintiff incurred and deducted from income under section 23(a), supra, its total expenses of managing all such lands in the aggregate amount of $385,387.23. These land management expenses were composed for the most part of salaries, depreciation, supplies, repairs, travel, entertainment and insurance as detailed in finding 27, infra. Plaintiff allocated no part of these management expenses to the negotiation and supervision of its cutting contracts. On the original audit of plaintiff’s 1949 return, the revenue agent concluded that no allocation of these expenses was required. On final audit, however, the Commissioner of Internal Beve-nue adopted a recommendation of his Engineering and Valuation Section to the effect that five percent of total receipts from the cutting contracts was a “suggestive estimate” of that part of management expense properly attributable to negotiation and supervision of the cutting contracts. The Commissioner thereupon disallowed $18,229.64 (5 percent of $364,592.84) from management expense and instead treated it as direct selling expense offsetting gain realized under the cutting contracts. This action resulted in the assessment of additional income tax for 1949 of $2,369.86 and interest thereon of $834.52.

The record shows that during 1949 plaintiff’s employees did spend a small part of their time negotiating sales prices for cutting contracts, designating areas to 'be cut, marking certain trees to be left standing, making casual checks as to quantities of timber cut, and occasionally inspecting the areas involved after cutting had been completed. (Finding 26, infra.) The record further shows, however, that the foregoing activities were only incidental to overall forest management activities, and that, even the complete elimination of the contract activities would have affected total management expenses merely in nominal amounts. Nonetheless, defendant contends that under Towanda Textiles, Inc. v. United States, 149 Ct. Cl. 123 (1960) and Rev. Rul. 58-266, 1958-1 C. B. 520, some portion of the management expense must have been selling expense directly attributable to the entering into and supervising of the cutting contracts and therefore should be offset from the gain realized under those contracts rather than deducted from ordinary income. In support of its estimate that such selling expense amounted to five percent of the total cutting contract receipts, defendant merely asserts that the Commissioner’s determination in this regard must be accepted absent proof to the contrary by the taxpayer. However, as stated above, the record before this court is persuasive that the contract activities of plaintiff’s employees were only incidental to their forest management duties and at best had but nominal effect on plaintiff’s payroll and other management expenses. In no sense do the expenses at issue here resemble the direct and substantial expenses involved in Towanda Textiles, Inc., where this court, in considering an entirely different Code provision, required attorney and adjuster fees directly incurred in the collection of fire insurance on a burned-out plant to be offset against the unrecognized gain accruing from the insurance proceeds. Neither do the expenses here resemble those involved in Rev. Rul. 58-266, supra, which were direct, substantial, and closely related to the coal disposal activities under consideration.

Defendant insists, however, that considering the relatively large amount of gross receipts ($864,592.84), the number of cutting contracts involved (eight on leased lands alone), and the fact that plaintiff’s witness (who testified to the insubstantial nature of the selling expenses) was primarily concerned during the particular taxable year with land acquisition for plaintiff rather than with its cutting contracts, there can be little question of the reasonableness of the Commissioner’s five percent estimate. Assuming, arguendo, the validity of these assertions, defendant has not come to grips with the essential question of whether, in any event, the proceeds from plaintiff’s cutting contracts must be offset by its selling expenses attributable to the negotiation and supervision of those contracts.

The history of the tax law in this area shows with reasonable clarity that selling expenses, such as those involved here, are properly deductible from gross income and are not required to be restricted to an offset against contract proceeds. There can be little doubt that, prior to 1944, a taxpayer engaged in the business of buying and selling of timber (such as plaintiff) was required to report the proceeds from timber sales as ordinary income and was entitled to deduct all ordinary and necessary expense attributable to such sales under section 23(a) of the 1939 Code. The tax treatment is the same today with respect to outright sales by owners holding their timber primarily for sale to customers in the ordinary course of trade or business. See Scott v. United States, 158 Ct. Cl. 434, 305 F. 2d 460 (1962), where, however, on the facts presented, the court decided that the taxpayers were not timber dealers but were investors whose timber sales constituted sales of capital assets as defined in section 117(a) of the 1939 Code. (Section 1221, 1954 Code.)

When sections 117(k) (1) and (2) were added to the 1939 Code by the Revenue Act of 1943 (58 Stat. 46), all timber owners, including dealers, became entitled to capital gains treatment where they either cut timber for use in their business (section 117 (k) (1)) or sold it to others but with a retained economic interest (section 117 (k) (2)). See Williams, Trends in Forest Taxation, 14 Nat’l Tax Jour. 113, 132-133 (June 1961). These statutory provisions, designed by Congress “to afford relief to timber owners,” (Boeing v. United States, supra, at p. 25 of 121 Ct. Cl.) contain nothing which on any normal reading would prohibit the deduction by a timber dealer from income of his ordinary and necessary expenses incurred in the growing or selling of his timber, or which would require him to offset such expenses against capital gains realized on timber sales or disposals.

This Congressional omission is highly significant for two reasons. In the first place, in other situations when Congress has desired to restrict a relief provision by disallowing deduction of related expenses, it has done so by express language. Thus, when section 117(j) (3) of the 1939 Code was added by the Revenue Act of 1951, in order to provide for the realization of capital gain on the sale of a growing crop together with the land on which it is situated, section 24(f) was simultaneously added to prohibit the deduction of the expenses of growing such crop. In the second place, during its consideration of legislation which ultimately became the 1954 Code, the House of Representatives passed a provision which would have specifically denied a deduction for the type of expenses here involved. Sec. 272, H.R. 8300, 83d Cong., 2d Sess.; see also H. Rept. No. 1337, 83d Cong., 2d Sess., pages A67-A68. However, the Senate Finance Committee eliminated this provision with respect to timber, and the Senate’s action was accepted by the Conference Committee. S. Rept. No. 1622, 83d Cong., 2d Sess., p. 229 (1954); H. Rept. No. 2543, 83d Cong., 2d Sess., p. 33 (1954).

The decisions in this area are equally indicative of the soundness of plaintiff’s claim for deduction of the expenses involved. This court considered a related issue in Hirshon v. United States, 126 Ct. Cl. 587 (1953) where the question was whether a trader in securities could deduct stamp taxes paid by him on each sale of stock, or whether, as required by an income tax ruling, he must merely offset such stamp tax cost against the selling price of the stock. Pointing to a checkered history of varying administrative actions (cf. Helvering v. Winmill, 305 U.S. 79), the court allowed deductions of the taxes as an ordinary and necessary business expense under section 23(a), despite their direct connection to capital gain transactions. Had there been a “Treasury Regulation of long standing which had survived several amendments and reenactments of the income tax law” such as was involved in Winmill, supra, the court indicated it would be required to support the regulation. But “no such situation” existed in Hirshon.

A fortiori, in the area of the present dispute, no longstanding regulation, or even a fluctuating one, has prohibited the deductions sought. Instead, with respect to the question here involved, the applicable regulations have been entirely silent and have merely repeated the language of the parent statute, section 117 (k) (2). See Treas. Reg. 111, sec. 29.117-8 (b) and Treas. Reg. 118, sec. 39.117(k) (1) (b). It was not until 1958, when Rev. Rul. 58-266, supra, was issued that administration action in this field was taken. Meanwhile, as pointed out above, in its deliberations on the 1954 Code, Congress had considered and rejected proposed legislation prohibiting the deduction of the type of expenditures here at issue. From the foregoing, it is clear that plaintiff should not be required to offset against cutting contract proceeds any part of its forest management expense even if it be assumed that-, as a practical matter, some portion thereof could be singled out as selling expense. See Drey v. United States (D.C. Mo., 1960) 61-1 USTC para. 9116.

Finally, it is important to observe that the conclusions reached herein would appear to strengthen and implement one of the underlying policies which, in the first place, occasioned the enactment of section 117 (k) (2) of the 1939 Code and thereafter its successor section 631 (b) of the 1954 Code. In general, the approach was one of favoring forest conservation by encouraging the modem trend towards production of timber as a crop under the concept of sustained-yield forest management and to get away from the older concept of “cut out and get out.” See Williams, Trends in Forest Taxation, supra, at page 131. Prior to the relief granted by section 117 (k), there was a real risk that timber managed as a crop might lose its capital asset status, and timber owners therefore tended to sell their timber properties outright without regard to desirable conservation practices. See Rowen, Taxation of Income From Timber Properties, supra, at page 339. Absent specific language in the statute or regulations so requiring, it should not be held that the taxing authority has with one hand granted a special tax benefit to a natural resource industry, but with, the other hand has taken back part of the benefit through the medium of disallowing a deduction to which the taxpayer had previously been entitled.

For all of the foregoing reasons, it is recommended that the court enter judgment for the plaintiff on each of its three causes of action, the exact amount of recovery to be determined pursuant to Kule 38 (c).

FINDINGS OF FACT

1. This action is brought by plaintiff pursuant to section 1491, title 28, United States Code to recover income taxes and interest thereon assessed and collected by the Commissioner of Internal Revenue from plaintiff for the calendar year 1949. The amount of income taxes so assessed and collected as to which recovery is sought is $59,064.98, and the amount of interest so assessed and collected as to which recovery is sought is $20,798.97. Said income taxes and interest were duly paid by plaintiff on March 15,1956, to the District Director of Internal Revenue, Lower Manhattan, New York.

2. The income taxes and interest, recovery of which is sought, arose from denial of certain deductions which were claimed by plaintiff on its income tax return for the year 1949 as stated in finding 24, infra. On January 22, 1958, plaintiff duly filed with the District Director of Internal Revenue, Lower Manhattan, New York, a duly executed claim for refund of said income taxes of $59,064.98 and interest of $20,798.97, with interest thereon as provided by law. This action was brought after the expiration of six months from the date of filing said claim.

3. Plaintiff has not received refund or credit of any part of said income taxes and interest so assessed and collected, nor has any action on the claim asserted in the petition been taken by Congress or by any Department of the United States Government, or in any judicial proceeding, including any in the Tax Court of the United States. Plaintiff is the owner of said claim for refund and has not made any assignment or transfer of all or any part thereof.

4. At all times herein mentioned plaintiff, Union Bag-Camp Paper Corporation, was and now is a corporation duly organized and existing under the laws of the Commonwealth of Virginia. On July 12,1956, Union Bag & Paper Corporation, which at all times herein mentioned prior to said date was a corporation duly organized under the laws of the State of New Jersey, was merged into plaintiff, and plaintiff’s name was thereupon changed from Camp Manufacturing Company, Incorporated, to Union Bag-Camp Paper Corporation. By reason of said merger, plaintiff has succeeded to and now has all rights of said Union Bag & Paper Corporation to the claims asserted herein. With respect to any acts or events occurring prior to July 12, 1956, the term “plaintiff” is herein used to refer to said Union Bag & Paper Corporation. Plaintiff kept its accounts, filed its income tax returns and computed its taxable income for 1949 on the basis of the calendar year and under the accrual method of accounting. For the year 1949 there was in effect a binding election by plaintiff to have section 117 (k) (1) of the Internal Revenue Code of 1939 apply.

5. Since 1916, plaintiff has engaged in the manufacture of paper, paper bags, and other products. Until the middle 1920’s paper bags were made chiefly from sulphite or white paper but thereafter they were supplanted by bags made from the lower cost and stronger kraft paper. The change to kraft paper and products was accomplished slowly and at a substantial cost. By 1929, plaintiff’s business had become primarily that of a converter, purchasing kraft pulp and some paper from others. The manufacture of its own kraft pulp and paper did not commence until 1936 when the first unit of plaintiff’s Savannah mill was completed. At the Savannah mill, plaintiff started manufacture of kraft pulp and paper, paper bags, and container board from kraft pulp. Through the years, the capacity of the Savannah mill has been greatly expanded. By 1949 the mill had a capacity of 1,165 tons of kraft pulp per day.

6. Upon the completion of the first unit of the Savannah pulp mill in 1936, plaintiff’s management embarked upon a long-range program of acquiring woodlands by fee purchases or 99-year leases and of inaugurating thereon a conservation and forest management program. The purpose of this program was to provide plaintiff with successive and continuous crops of pulpwood for current use, and as a reserve for future use, in its manufacturing operations at its Savannah plant. By the end of the taxable year here involved, plaintiff had acquired in fee simple ownership or under long-term lease, with option in many cases to purchase, more than 700,000 acres of woodlands in Georgia, South Carolina and Florida. Of this 700,000 acres of woodlands, about 266,000 acres were held under long-term leases, more particularly described hereinafter. The primary reason for the acquisition of this relatively large number of acres by way of long-term lease, instead of by purchase of the fee, was that plaintiff’s capital commitments to plant and equipment expansion were sufficiently large as to restrict the amount of its current funds available for an ambitious program of land acquisition by purchase. Also, in many instances, plaintiff found that the landowners themselves preferred a leasing arrangement to the end that their income therefrom would be spread over a long period of years rather than accrued into a single year as in the case of a conventional sale.

7. During 1949, plaintiff held possession of such of said lands as it had leased in said three States under 14 leases which granted, leased and demised such lands to plaintiff (or a predecessor) for terms of years. Ten such leases were for terms of 99 years, two for terms of 66 years, and two for terms of 40 years. Twelve of these leases were of lands in Georgia, and the other two were of lands in Florida and South Carolina. In addition to the right to use the leased lands for the growing of pulpwood for use in its manufacturing operations over a long period of years, plaintiff obtained the right to use the leased lands for many other useful and productive purposes, including the growing of saw timber for sale to third parties, production of oil, gas, and minerals, turpentine, grazing and other purposes. The names by which said leases are usually referred to herein, the dates of execution and terms thereof, are as follows:

8. The provisions of the first ten of said Id leases with respect to the rights granted to plaintiff by the owners of the leased lands are similar in substance and in form. One of the earliest of said leases, the Miller No. 1 Lease, is representative. The formal provisions of the granting and habendum clauses of the Miller No. 1 Lease Indenture are as follows:

This indenture, made and entered into as of the 1st day of July, 1936, by and between Sutherland Bluff Bealty Company, a corporation of McIntosh County, Georgia, hereinafter referred to as “Lessor”, and Union Bag & Paper Corporation of Georgia (a predecessor of plaintiff), a corporation of Chatham County, Georgia, hereinafter referred to as “Lessee,”
WITNESSETH
That the Lessor, for and in consideration of One Dollar ($1.00), cash in hand paid, the receipt of which is hereby acknowledged, and in further consideration of the other agreements hereinafter set forth, has granted, leased and demised, and by this instrument does grant, lease and demise unto the Lessee, Union Bag & Paper Corporation of Georgia, the following described lands and premises, to-wit:

(There follows a particular description of the lands which are demised.)

Together with all and singular the complete and exclusive use and control of said lands and the rights, members, hereditaments and appurtenances thereof, including (without in any way limiting the generality of the foregoing), all timber, logging, wood, turpentine and naval stores, oil, mining, mineral, water, water power, grazing, farming and hunting rights, and all rights of way, ways, privileges and easements in and over said lands which may be useful, convenient or necessary in the conduct of Lessee’s business thereon; together with the exclusive right to locate, build, construct, maintain and operate roads, tram roads, railroads, side tracks, skidders, mills, buildings, wells, mines, shafts, dams, ponds, lakes, factories, houses, buildings, and other structures, machinery, fixtures, appliances and methods, whether now in use or hereafter invented for the conduct of Lessee’s business; and access over and across said lands and contiguous lands owned by the Lessor, to transport timber or other products and persons and articles of every description and kind; and also the right to cut, use and remove any timber and trees, fuel, wood, under-growth, brush or earth, the cutting, using or removal of which may be useful, convenient or necessary in the cutting, handling, removing, processing, or manufacture of the timber, trees and other products of said land, or in exercising any of the rights granted hereunder, with the right at any time during the continuance of this lease, and for one year thereafter, to remove any and all machinery, structures and other property of said Lessee, placed upon said land and premises.
To have and to hoed the said described land and premises unto the Lessee, its successors and assigns, for and during the full term and period of ninety-nine (99) years from the date hereof, with the right to use, work and remove the trees, timber, and other products and deposits thereon, as herein provided.

A number of covenants follow the habendum clause, the first of which provides in the following terms for the consideration to be paid by the lessee:

1. The Lessee agrees to do and perform the following acts as the consideration hereof, to-wit:
(a) To pay to the proper governmental agency all taxes assessed against the above described lands and premises during the continuance of this lease, except inheritance or succession taxes.
(b) To pay annually into a Forestry Management Fund to be carried in the name of the Lessee, an amount equal to five cents (5;í) per acre, on the above described land. The Forestry Management Fund will be expended by the Lessee in forest management of the above described lands, as follows, namely: fire lanes will be cut, Fire Warden service will be maintained, and sound forestry methods will be applied and paid for ont of the fund. The Lessee will further endeavor to have the five cents (50) per acre expenditure provided for herein matched by the Federal Government as provided for under the Clark-MdSTary Act.
(c) The Lessee will pay to the Lessor as rental for the said described lands and premises, annually, in addition to the above expenditures, an amount equal to five per cent (5%) interest on a value agreed upon for the purpose of this contract, for the above described lands, of One Hundred Thousand Dollars ($100,000.00); that is to say, the rental for the term of this lease shall be Five Thousand ($5,000.00) Dollars per year, payable in quarterly installments of One Thousand Two Hundred and Fifty ($1,250.00) Dollars, each in advance, commencing upon the date hereof. Receipt is hereby acknowledge [sic] of the first payment of $1,250.00.[]

Under additional numbered clauses the lessor warrants his title to the land, and grants to the lessee an option to purchase the lands at the agreed value, but no part of the payments for rentals, taxes, or forest management can be applied to reduce the option price.

With respect to the cutting of timber, the lessee agrees—

(i) that it will not cut or remove any timber during the first seven years of the lease (except such as may be necessary for construction, fire protection, or “to enhance the growth of the main timber crop”) ,

(ii) that after the first seven years it will not cut or remove any timber “in excess of the computed and estimated growth of the entire tract since the end of said first seven-year period” (except such as is necessary for construction, fire protection, or “to enhance the growth of the main timber crop”), such right, however, being cumulative, so that if the full amount of the annual growth in any year (computed at the rate of one-half cord of pulpwood per year per acre, with provisions for adjustment of this figure at five-year intervals if it does not accurately reflect actual growth) is not cut by the lessee in such year the balance may be taken in any later year during the lease, and

(iii) the lessee is given the right to cut additional timber but only upon payment of a stipulated price.

The provision in the Miller No. 1 lease prohibiting the cutting of any timber during the first seven years (with certain specified exceptions), and the similar provision in each of the other nine leases (except Ray-Bond), was designed in conjunction with the provision limiting the cutting of timber after such seven-year period to the annual growth of timber, to afford some protection to the lessors (i.e., to permit the timber growth to develop so that it would more or less stand as its own security), and, in some cases, to afford prior occupants of the leased lands an opportunity to complete turpentine operations in process thereon. This provision also had the effect of increasing the quantity of timber which would be standing on the leased lands at the termination of the leases as compared with the quantity of timber standing on the lands at the inception of the leases. In four of the first ten leases, plaintiff was entitled to cut and remove timber during the first seven years upon payment of additional amounts, and the option-to-purchase price, if exercised, was reduced by the amount of such payments, and the annual payment to the lessor was likewise reduced by 5 percent of such additional payments.

9. The provisions of the Samwilka-Morgan leases and the Douglas-Dickerson leases, with respect to the rights granted to plaintiff by the owners of the leased lands, are similar to those contained in the Miller No. 1 lease, except that the provisions relating to cutting rights differ from those contained in the aforesaid ten leases as set forth below, and except that said four leases grant no option to the plaintiff to purchase the lands covered thereby as do the aforesaid ten leases.

Under the Samwilka-Morgan leases plaintiff had the right at any time during the terms of the leases to cut and remove any and all trees and timber having a diameter, breast high, of 5.1 inches or more at the time of execution of said leases or reaching such diameter during the terms of the leases, but plaintiff covenanted so to cut, use and harvest the trees and timber on the lands covered by said leases that at the end of the terms of the leases there should be a minimum of the same quantity of merchantable timber of such size on said lands as at the beginning of the leases.

Under the Douglas-Dickerson leases plaintiff purchased for a specified sum all trees and timber on the lands covered by said leases, which measured 6 inches or more in diameter at a point 12 inches above the ground at the time of execution of the leases; and thereafter during the terms of said leases, plaintiff had the right to cut and remove any trees and timber reaching 6 inches in diameter at a point 12 inches above the ground. Such purchase was made by separate payment of an amount in addition to the regular payments called for under the leases. Said separate payment was not deducted from ordinary income in tax returns filed by plaintiff. Such sum was treated by plaintiff for purposes of its tax returns as cost of timber.

10. In 1949, as well as at the respective dates of execution of the 14 leases, the lands covered by the several leases varied widely in regard to physical characteristics, the amount of timber growing thereon, and the ability to grow timber thereon. There were considerable variations as to the type of soil and as to moisture content resulting from nearness to or distance from rivers, lakes, and swamps, or otherwise. Consequently, the rate of growth of timber was not constant but varied from tract to tract depending upon many factors, including, among others, the character of the soil, the quantity of moisture, the age of the trees, climate conditions, insect infestation, fire damage, and other conditions. Some of the land had been burnt over, and some had been used for grazing. At the respective dates of execution, some of the tracts had large open spaces devoid of timber and forest cover. For example, the Bay-Bond tract in Florida had approximately 10,000 acres completely devoid of forest cover. Some of the leased lands include extensive swamp areas not particularly suitable for the growing of pulpwood.

11. In 1949 and years subsequent thereto, plaintiff’s Woodlands Division was, in essence, composed of its Land Department and its Wood Procurement Department. The Land Department was and is concerned with the management, control, conservation and protection of plaintiff’s timberlands, including those owned outright by it and those held under long-term leases. It seeks to accomplish these objectives through scientific methods for the conservation and enhancement of the growth of timber on such lands. The Wood Procurement Department was and is primarily concerned with the purchase of wood from third parties for use in plaintiff’s Savannah mill. As of the time of the trial herein, plaintiff’s Woodlands Division had approximately 425 permanent employees, including 90 graduate foresters. In 1949 the organization of plaintiff’s Woodlands Division was substantially the same as at the time of the trial herein, although it was smaller in number of employees.

12. During 1949, as well as in prior and subsequent years, plaintiff used the leased lands, in carrying on its trade or business, primarily for tree farming, i.e., for the growing and production of successive and continuing crops of pulpwood and timber, utilizing scientific methods for encouraging the growth of trees with the object of achieving a recurring profitable timber crop for current or future use in its manufacturing operations. In 1950, plaintiff’s timberlands in Georgia were designated as certified “tree farms” by the Georgia Forestry Commission and the Georgia Forestry Association. Also in 1950, plaintiff’s timberlands in South Carolina were similarly designated by the South Carolina State Commission of Forestry and Clemson College Extension Service. In 1953, plaintiff’s timberlands in Florida were so designated by the Florida Forest Service. Plaintiff’s management and utilization of the leased lands were the same as in the case of other timberlands owned outright by it.

13. In the development and regeneration of its timber-lands, including the leased lands, in 1949 and years prior thereto, plaintiff, in accordance with the then established and customary practice, relied largely on (a) natural reseeding, and (b) the so-called “seed tree method,” by which in any cutting or thinning of any particular tract of land, selected trees (chosen on the basis of quality, height and crown size) are left standing to provide natural reseeding in the surrounding area. Although it was not until 1953 or 1954, when, with the development of new machinery and techniques, the plaintiff began artificial reforestation on a large scale, plaintiff had its own nursery for the production of pine seedlings as early as 1937. During World War II and years preceding it, plaintiff’s activities in artificial planting were very small. Then, commencing in the planting seasons 1948-1949 and 1949-1950, plaintiff planted some 520,000 seedlings on 800 acres of its leased lands. The program of artificial reforestation increased in magnitude thereafter.

14. During 1949, in accordance with its regular practice in respect of all timberlands owned or leased by it, and pursuant to the provisions of the leases, plaintiff spent or incurred substantial sums in respect of the leased lands for protection of the timber growing, and to be grown thereon, from fire and other hazards, as well as for the encouragement of the growth of timber by means of the activities set forth in the preceding paragraphs. In protecting its lands, including the leased lands, against fire, plaintiff has utilized customary techniques, including the use of fire towers and the plowing of fire lanes. In more recent years, plaintiff has developed a comprehensive fire protection system involving the use of trucks, tractors, plows and communication by radio.

15. Useful timber on lands covered by the leases in question was and is principally pine. A pine tree may be cut for pulpwood when it is over 5 inches in diameter breast high (4y2 feet from the ground), but is not usually cut for pulpwood until it is substantially in excess of that size. Pine trees do not grow uniformly at every age or under every condition. There is normally a difference of about 2 inches in the diameter of a pine tree at stump height (12 inches from the ground) and at breast height (4y2 feet from the ground), so that 5 inches in diameter breast high is the equivalent of 7 inches in diameter at stump height. On lands covered by the leases, pine seedlings reach 5 inches in diameter breast high at various ages averaging about 15 years, and are more usually cut for pulpwood at ages between 20 and 30 years. The term “saw timber” denotes trees of larger diameters which may be utilized for the manufacture of lumber and boards. In normal parlance a tree is considered as of saw timber size when it is about 14 inches in diameter at stump height or 12 inches in diameter at breast height. On the leased lands, it normally requires about 30 years for a pine tree to reach a diameter of 12 inches at breast height. Ordinarily, the value of a tree utilized for saw timber purposes exceeds its value as pulpwood. Figures herein which show cords of timber on a tract at different dates, such as those set forth in finding 17, infra, show only merchantable cords, that is, cords of wood in trees over 5 inches in diameter breast high.

16. Plaintiff normally operates its forest lands on a 30-year cycle which involves successive cuttings in the 15th, 20th, 25th and 30th years, and accordingly most of plaintiff’s trees are substantially larger than 5 inches in diameter breast high (7 inches in diameter at stump height) when cut for pulpwood. The 15th, 20th and 25th year cuttings are generally regarded as “thinning cuts”, at which time plaintiff normally cuts from three to four cords of pulpwood an acre, although at the 25th year plaintiff may cut as much as five or six cords of pulpwood per acre. It is usually not economical to cut over a tract of timberland unless the quantity cut is at least three cords per acre. The 30th year cutting is regarded as a harvest cutting, which on the average will produce (on good timber sites and with proper forest management) between twenty-five and thirty cords of pulpwood per acre. All of the lands owned or leased by plaintiff for the growing of timber are divided into “forests”, “working circles”, and “compartments”. Each working circle, into which the forests are divided, contains 30 compartments. The compartments comprise approximately 1,000 acres each, and plaintiff endeavors to manage its forests so that each year cutting will take place in specified compartments. Although theories of tree farming have changed somewhat over the years, which have resulted in refinements and modifications of forest management techniques, generally the same type of forest management program which the plaintiff follows today, as outlined above, was followed by it in 1949.

17. The number of cords of pine timber over 5 inches in diameter breast high on the lands covered by each lease on the date the lease was executed, and at the beginning and end of 1949, and the number of cords removed between the date of execution and the beginning of 1949, are as follows:

In addition to the merchantable sized timber shown in the foregoing table, there were present on portions of each of the leased tracts at the time the lease was executed and thereafter varying quantities of trees of less than merchantable size. During 1949 plaintiff purchased approximately 85 percent of its requirements of pulpwood from others and cut only about 15 percent from property it owned or leased. In years prior and subsequent to 1949, plaintiff purchased a major proportion of its requirements of pulpwood from others. Such proportion has varied from about 70 to 90 percent of plaintiff’s annual pulpwood requirements.

18. During 1949, in accordance with its regular practice and course of business, plaintiff cut timber from said leased lands for use as pulpwood, primarily in its integrated paper mill located at Savannah, Georgia. Plaintiff held all such timber for more than six months prior to the beginning of 1949, except for the quantities shown in finding 20, infra, at values of $1,398.90 and $345.92 cut for pulpwood from the Bay-Bond and Douglas-Dickerson tracts, respectively. In addition, during 1949, in accordance with its regular practice and course of business during earlier and later years, plaintiff realized gains, as shown in findings 20 and 21, infra;, under cutting contracts for saw timber with lumber companies and dealers in respect of certain of the leased lands. In addition, during 1949, in accordance with its regular practice and course of business in earlier and later years, plaintiff received income, as set forth in finding 21, infra, from the sublease or grant of rights in said leased lands for miscellaneous purposes, including turpentining, grazing, and the discovery and production of oil, gas and minerals. Income from such miscellaneous uses of the lands leased by plaintiff has been and still is an important source of income from said lands. Such utilization of the leased lands during 1949, as well as in prior and subsequent years, not only for growing and producing pulpwood, but also for growing and producing saw timber, and for miscellaneous income producing purposes, was accomplished pursuant to plaintiff’s policy of using said lands so as to produce the maximum profit therefrom. Such other and miscellaneous uses did not interfere with, and were not permitted by plaintiff to interfere with, the use of the leased lands for the growing of pulpwood.

19. Under provisions of nine of the leases, plaintiff had the right each year, after the first seven years of each lease, to cut or dispose of a quantity of trees and timber equal to the estimated annual growth of trees and timber on the lands covered by the lease, which right was cumulative so that allowable quantities not cut in any such years might be cut in any later year during the term of the lease. Under provisions of the Ray-Bond lease, plaintiff had a cumulative right to cut or dispose of $65,000 in market value per year of trees and timber during the first seven years of the lease and a cumulative right to cut a quantity of trees and timber equal to the estimated annual growth thereafter. Following is a tabulation showing with respect to each of said leases (a) the year in which such a right to cut trees and timber first arose, (b) the quantities of trees and timber, expressed in cords, which plaintiff had such a right to cut or dispose of at the beginning of 1949, (c) the additions to such quantities for 1949, (d) the quantities cut or disposed of by plaintiff during 1949 in accordance with such right, and (e) the quantities to which plaintiff had such a right at the end of 1949 (the quantities are expressed in dollars of market value in the case of the Ray-Bond lease):

By reason of the age requirements for pine trees stated in finding 15, supra, it is a fair presumption that the trees which plaintiff removed, or had the legal right to remove, during 1949 were growing on the lands at the time they were leased by plaintiff.

20. Following is a tabulation showing, with respect to all leases, the gross amount of dollars realized during 1949 by plaintiff from the activities set forth in findings 7 and 18, supra, without payment of any amounts to the lessors of said lands except the specified annual payments listed in finding 23, infra:

The above sum of $66,941.74 was realized by the plaintiff from the leased lands in 1949 under cutting contracts for saw timber entered into between it and various lumber companies and dealers. As will be observed from Column (d) of the table contained in the immediately preceding finding, the timber which plaintiff (without payment to the lessors of any amounts other than those set forth in finding 23, infra) caused to be disposed of either for its own use or for sale to third parties under cutting contracts was a lesser amount for each tract than the quantity or value of timber which plaintiff had the right under the applicable lease to remove from such tract during 1949. The timber disposed of by plaintiff to third parties in 1949 under cutting contracts, as set forth above, was held by plaintiff for more than six months prior to such disposal except for $5,868.25 worth of timber in the case of the Bay-Bond lease. The agreement to enter into the latter lease was signed on September 20, 1948, and provided that the lease to be executed should be for a term of 99 years commencing October 1, 1948. The lease itself was not executed by the parties until December 1948, but as required by the agreement, it was made effective as of October 1, 1948. The cutting contract for the Bay-Bond tract covered a period of seven years and was executed by the parties in the fall of 1949, effective as of October 1, 1948. It allowed plaintiff to designate the trees to be cut and reserved title to the timber in plaintiff until such time as the timber had been cut and paid for by the purchaser. The gross amount received by plaintiff during 1949 from the Bay-Bond cutting contract was $26,688.12.

21. The sources of the amounts realized by plaintiff during 1949 from miscellaneous uses of said leased lands as shown in the table contained in the preceding finding 20 were as follows:

Oil and mineral rentals____________________________$24, 903. 88
Turpentine leases__________________________________ 12, 779. 61
Fire damage-------------------------------------- 1, 000. 00
Salvage, scrap and junk___________________________ 630.23
Tops---------------------------------------------- 325.40
Hunting, grazing and fishing_______________________ 200. 00
Posts, poles and piling_____________________________ 191. 30
Fuelwood_________________________________________ 114. 50
Bee leases________________________________________ 90. 00
Basements________________________________________ 79.45
Unidentified miscellaneous_________________________ 40.25
40,354.62

Said sum of $40,354.62 was reported as ordinary income on plaintiff’s income tax return for 1949. The sum of $59,697.11, being the value of pulpwood removals by plaintiff for its own use, was reported as giving rise to capital gain pursuant to the provisions of section 117 (k) (1) of the Internal Revenue Code of 1939, as amended. The sum of $66,941.74 (plus an additional sum of $24,263.61) was realized under cutting contracts disposing of saw timber from said leased lands and was reported by plaintiff as giving rise to capital gain of $71,044.49 pursuant to the provisions of section 117 (k) (2) of the Internal Revenue Code of 1939, as amended. Plaintiff computed said gain of $71,044.49 as follows:

22. Under the provisions of certain of the nine leases referred to in the first sentence of finding 19, supra, plaintiff had the right, upon payment of stipulated amounts per thousand board feet or per cord, to cut or dispose of trees and timber from the leased lands, in addition to the estimated annual growth after the first seven years of each lease. In 1949, and earlier years, plaintiff purchased trees and timber under such provisions and paid the following aggregate amounts therefor pursuant to such provisions:

Dyal No. 1______$41, 063
Dyal No. 2______ 12,101
Georgia-Florida__ 135,000

Under each of these three leases, the option price was reduced by the amounts shown, and the annual payment to the lessor was reduced by five percent thereof.

Under the Douglas-Dickerson leases, plaintiff purchased all of the merchantable timber on the lands covered by those leases, as stated in finding 9, supra, for a price of $243,254.24. None of the sums mentioned in this finding was deducted from ordinary income in tax returns filed by plaintiff. All such sums were treated by plaintiff for purposes of its tax returns as cost of timber.

23. Under the provisions of the aforesaid 14 leases, plaintiff was required to make certain fixed annual payments to the lessors, to pay ad valorem taxes on the leased properties, and to make certain expenditures for fire protection and forest management whether or not plaintiff cut or sold any timber from the lands. The payments and expenditures made by plaintiff in 1949 in accordance with these provisions of the leases were as follows:

During 1949, plaintiff paid or incurred expenses for fire protection and forest management of the leased lands in excess of said amount of $12,923.67, said amount being merely the amount which the plaintiff was required under the leases to pay or disburse during 1949 for these purposes. None of these amounts was applied, or was required by the terms of the aforesaid leases to be applied, against a purchase price of any of the leased lands. Subsequent to 1949, plaintiff purchased certain of the leased lands pursuant to options in the leases.

24. Plaintiff claimed deduction of the amounts stated in finding 23, supra, in the total amount of $199,415.04 on its income tax return for 1949. Upon audit of that return, plaintiff’s deduction of said amounts aggregating $199,415.04 was disallowed by the Commissioner of Internal Eevenue, resulting in assessment and payment of additional income taxes for 1949. The Commissioner determined that said amount of $199,415.04 should be capitalized as the cost of timber and recovered through depletion, and as a result plaintiff’s depletion allowance for 1949 was increased. The Commissioner also determined that plaintiff had correctly reported the gain from cutting contracts, referred to in finding 21, supra, made with respect to leased woodlands as long-term capital gain pursuant to section 117 (k) (2), and capital gain was accordingly allowed. However, the capital gain of $71,044.49 referred to in finding 21 was reduced to $31,763.64 as a result of (1) the increase in cost as described above and (2) the Commissioner’s determination that there were certain selling costs to be taken into account as described below in finding 27.

25. Of the ad valorem, taxes in the sum of $38,626.90 referred to in finding 23, supra, $28,790.71 was assessed in respect of real property in the State of Georgia, $682.56 was assessed in respect of real property in the State of South Carolina, and $9,153.63 was assessed in respect of real property in the State of Florida. Plaintiff made returns of all of said real property for said taxes for 1949 and paid the taxes directly except for certain real property in the State of Georgia which was returned for taxes by the lessors thereof and on which taxes for 1949 in the amount of $1,760.70 were paid by the lessors, who were reimbursed therefor by plaintiff. Upon audit of plaintiff’s income tax return for 1949, deduction of said amount of $38,626.90, which had been claimed by plaintiff as stated in finding 24, supra, was disallowed by the Commissioner of Internal Bevenue, resulting in assessment of additional income taxes for 1949.

26. As previously stated, during the year 1949, plaintiff disposed of timber both from the leased lands and its own lands under a number of cutting contracts. It realized therefrom a total amount of $864,592.84 of which amount $66,941.74 was derived from leased land cutting contracts. In connection with all these cutting contracts, plaintiff’s employees in 1949 spent a small part of their time performing the following duties: (1) negotiating sales prices to be inserted in standardized contracts, (2) designating the areas to be cut under the contracts, (3) marking the seed trees which were not to be cut, (4) making casual and sporadic checks of the quantity of timber cut, and (5) occasionally inspecting the areas involved after the cutting was completed.

27. Plaintiff deducted on its income tax return for 1949 its expenses incurred in managing said lands amounting to $372,463.56, plus the smn of $12,923.67, mentioned in finding 23, supra, for an aggregate of $385,387.23. The aggregate sum is composed of the following:

Salaries---------------------------------------------$178, 633.10
Depreciation________________________________________ 65,327. 30
Supplies -------------------------------------------- 45, 020. 36
Repairs --------------------------------------------- 36,124. 52
Travel and Entertainment____________________________ 29, 480. 57
General Insurance___________________________________ 11, 617. 79
Professional Services_________________________________ 3, 462.95
Timber Protective Organization Dues__________________ 2, 427.14
Electric Light and Power_____________________________ 1, 614.94
Contract Payments to Eire Wardens___________________ 1,383. 30
Legal Expenses______________________________________ 1,175.49
Telephone __________________________________________ 984.44
Rents — Office, Warehouse and Buildings_______________ 709.00
Miscellaneous Expenses_______________________________ 7,426.33
Total----------------------------------------- 385,387.23

Any expense involved in the negotiation and supervision of the cutting contracts described above was included in the foregoing forest management expenses. The record does not show the amount of expense attributable directly to the cutting contracts since the activities involved herein were incidental to plaintiff’s overall activities in managing its timberlands. Even if plaintiff had eliminated its cutting contract activities entirely, the foregoing expenses would have been affected merely in nominal amounts.

On the original audit of plaintiff’s 1949 return, the revenue agent concluded that no allocation of these expenses was required. On the final audit of the return, however, the Commissioner of Internal Bevenue adopted a recommendation of the Engineering and Valuation Section of the Internal Bevenue Service to the effect that five percent of total receipts from cutting contracts represented a fair estimate of that part of forest management expense attributable to negotiation and supervision of the cutting contracts. The Commissioner thereupon disallowed $18,229.64 out of the aforesaid management expenses and instead treated it as selling expense, or cost of sales, thus reducing the gain realized under the cutting contracts. The record indicates that this five percent figure was adopted, in the absence of more meaningful data, as a “suggestive estimate” of the reasonable cost of selling $364,592.84 worth of timber.

28. The sum of $66,941.74, which was realized by plaintiff in 1949 under its leased land cutting contracts, represented the gross proceeds received from disposals of saw timber made by plaintiff during 1949 pursuant to seven cutting contracts, as follows:

Name of Lease
Date of to which
Eaieeution Contract Relates
3/1/48______________________________Warsaw, Miller No. 1 and Miller No. 2
3/1/49 Warsaw, Miller No. 1 and Miller No. 2
6/1/49 (Renewing Agreement of
2/15/47)_________________________Georgia-Florida
12/1/49-----------------------------Dyal No. 1 (2 Leases)
10/1/48_____________________________Ray-Bond
8/16/48_____________________________Samwilka-Morgan (2 Leases)
8/16/49 _____________________________Samwilka-Morgan (2 Leases)

Disposals occurred in 1949 under cutting contracts in respect' of all said leases except Warsaw.

The provisions of said seven cutting contracts with respect to the interests retained by plaintiff and the interests granted to the other parties to said contracts are similar in substance and in form. The Dyal No. 1 cutting contract is representative of said contracts. Among the provisions of that cutting contract are the following:

(a) The vendee, referred to in the cutting contract as “lessee”, is entitled to cut and remove timber measuring 14 inches and up in diameter at 12 inches from ground level, subject to the right of plaintiff to designate the trees to be cut and the areas of cutting. Lessee agrees to secure permission from plaintiff before moving the logging operation from one designated area to another and to complete the removal of all timber specified on the area designated by plaintiff before moving the logging operations;
(b) Plaintiff warrants that the title to the trees and timber leased is good and merchantable;
(c) Payment for timber cut or removed is to be made on a serai-monthly basis at a fixed rate per unit of timber cut or removed;
(d) Passage of title from plaintiff to lessee is conditioned upon payment for timber cut or removed; and
(e) The plaintiff reserves the right to inspect all operations conducted under the cutting contract.

Reversing an earlier ruling, the Office of the Chief Counsel, Internal Revenue Service, ruled in 1955 that plaintiff’s treatment of gains from said disposals of timber from the leased lands in 1949 as capital gains under section 117 (k) (2) was proper.

CONCLUSIONS OE 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 plaintiff is entitled to recover under each of the three causes of action set forth in the petition herein. The court further concludes that defendant is not entitled to the setoff asserted in its first amended answer. The amount of recovery will be determined pursuant to Rule 38(c).

In accordance with the opinion of the court and a memorandum report of the commissioner as to the amount due thereunder, it was ordered on February 28,1964, that judgment be entered for the plaintiff for $78,832.44, plus interest thereon according to law. 
      
       Plaintiff has also filed suits for refund covering the four subsequent taxable years, 1950-1953, inclusive, which suits bear Court of Claims Numbers 193-61, 295-61, 296-61, and 398-61, respectively. The basic issues involved in those cases are the same as those involved herein, and by agreement of counsel with the Commissioner’s approval, further action in the later cases is being held in abeyance pending final disposition of the present case.
     
      
       In 1956, Union Bag & Paper Corporation was merged into plaintiff whose name was thereupon changed from Camp Manufacturing Company, Incorporated, to Union Bag-Camp Paper Corporation. Plaintiff has thus succeeded to all rights of Union Bag & Paper Corporation to the claims asserted herein. With respect to all events occurring prior to 1956, the term “plaintiff” is herein used to refer to Union Bag & Paper Corporation.
     
      
       Ten of these leases were for terms of 99 years, two were for terms of 66 years, and two were for terms of 40 years. Twelve of the leases were of lands in Georgia, and the other two were of lands located in Florida and South Carolina, respectively.
     
      
      
         The parties have stipulated that all of the leased lands were used by plaintiff in carrying on its trade or business.
     
      
       The quoted material is taken from one of the earliest of the leases, known as the Miller No. 1 lease. The parties have agreed that this lease is typical of ten of the fourteen leases, and it is the subject of detailed description in finding 8, infra.
     
      
       This value was also the amount for which, In some of the leases, plaintiff was given the option to purchase the fee simple ownership in the lands.
     
      
       Pursuant to this provision, plaintiff purchased and paid for an aggregate of $188,164 of timber prior to the end of 1949. In each such case, plaintiff treated the amount so paid as the cost of purchased timber on its books and in its income tax returns. In four of these leases, additional amounts so paid reduced the purchase-option price, which had the effect also of reducing the annual payments based on a percentage of that price.
     
      
       In one paragraph this lease also refers to the fixed payments for the first seven years as “anticipated and estimated depletion payments.”
     
      
       During the period 1950-1953, all these lands were designated as “certified tree farms” by various forestry commissions and organizations located in Georgia, South Carolina, and Florida.
     
      
       Although plaintiff first established its own tree nursery in 1937 and had done some amount of artificial planting in the taxable year involved, it did not commence artificial reforestation on a large scale until the planting season, 1953-1954.
     
      
       The pertinent provisions of this section read 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. * * *
     
      
       The pertinent provisions of this section read as follows:
      In the case of the disposal of timber * * * held for more than 6 months prior to such disposal, by the owner thereof under any form or type of contract by virtue of which the owner retains an economic interest in such timber * * * the difference between the amount received for such timber * * * and the adjusted depletion basis thereof shall be considered as though it were a gain or loss, as the case may be, upon the sale of such timber * * *.
     
      
       In further resemblance to some leases here involved, the Lawton lease also gave Union B,ag the right to cut additional amounts of timber for a specified price per acre. Like the present case also, the payments for such specific cutting rights were admittedly for purchase of timber and were not at issue in the case.
     
      
       One is reminded of Humpty Dumpty’s rather unique use of words:
      “When I use a word,” Humpty Dumpty said in a rather scornful tone, “it means just what I choose it to mean — neither more nor less.” Carroll, Through the Looking Glass, Dial Press Ed. p. 238.
     
      
       As defendant observes in its brief the 1939 Code and Regulations for 1949 are not very enlightening on the question of what is to be capitalized as cost of timber.
     
      
       It has, of course, become axiomatic that taxation is an “intensely practical matter.” See, for example, Farmers Loan & Trust Co. v. Minn., 280 US. 204, 212 ; and Burnet v. Sanford & Brooks Co., 282 U.S. 359.
     
      
       Obviously, the substance of a transaction should not depend entirely upon the use of “talismanic words.” Flournoy v. Wiener, 321 U.S. 253, 264 (dissenting opinion), or upon the “subtleties of draftmanship,” Commissioner v. P. G. Lake, Inc., 356 U.S. 260, 267. But where the indications of substance may be ambivalent, the terminology used can be an important indication of the true intent of the parties. Estate of James M. Lawton, supra, at pp. 55 — 56. To the same effect, see Gilmore v. United States, 149 Ct. Cl. 54, 63.
     
      
       As Mr. Randolph Paul has observed, in matters of taxation, there should always be “* * * an understanding of the principle that there are few rules of Federal tax law and few interpretations of the tax statutes that do not cut both ways * * Paul, Studies in Federal Taxation, Callaghan & Co., 1937, p. 64.
     
      
       Plaintiff lias accurately observed that the lease provisions for modern and scientific forest management of the leased properties and for the withholding of timber cutting during the first seven years of most of the leases are provisions which are calculated to improve, rather than deplete, the properties, not only for the present benefit of the lessee but also for the eventual benefit of the lessors, or their heirs-at-law and devisees.
     
      
       In a case not involving restriction of cutting rights to annual growth or requiring replacement, it might well be feasible to develop an allocation formula allowing for market fluctuation and based upon expert testimony as to the value of timber cutting rights for the taxable year (i.e. fair market value of the cords of wood allowed to be cut) and as to the market value of all other land use rights.
     
      
       “* * * depletion is based upon the concept of the exhaustion of a natural resource * * Mertens, Law of Federal Income Taxation, Vol. 4, Section 24.02.
     
      
       The purchasers who paid plaintiff nearly $67,000 for this saw timber would no doubt be startled by such a suggestion.
     
      
       The parties have stipulated that plaintiff paid the lessors $19,686.87 under provisions of the leases permitting the cutting of timber in excess of the estimated annual growth. This amount was treated by plaintiff as cost of timber sold and deducted from the gain realized. See finding 21, infra. Accordingly, it is not at issue here.
     
      
       In its brief, defendant argues that, in any event, tbe entire gain from the Ray-Bond cutting contract (see finding 20, infra) should be taxed as ordinary income because of failure to eomply with the six-month holding requirement of section 117(k)(2). This argument appears to be based upon the fact that both the lease and the cutting contract contain the same effective date, namely, October 1, 1948, so that, under the doctrine of Springfield Plywood Oorporation, supra, the timber “disposal” occurred on the same day as its acquisition by plaintiff. Not only does this argument run counter to paragraph 17 of the stipulation filed herein, but it ignores significant and distinguishing differences between the Ray-Bond cutting contract and the contract involved in Springfield Plywood, e.g., unlike the Springfield Plywood contract, plaintiff reserved in the Ray-Bond contract the right to designate the trees to be cut and the areas for logging operations. Except for the first three months of 1949 during which it received a total of $5,868.25, plaintiff had held the Ray-Bond timber for more than six months prior to disposal. Finding 20, infra.
      
     
      
       This figure includes the $66,941.74 derived from leased land cutting contracts discussed above.
     
      
       In this connection, the defendant also relies on this court’s recent decision in Allied Chemical Corporation v. United States, 158 Ct. Cl. 267 (1962) 305 F. 2d 433. There the court held that attorney’s fees paid by taxpayer were deductible as ordinary and necessary business expenses, although the legal services had been rendered in connection with a transaction which ultimately resulted in a capital gain to the taxpayer. Because, however, the legal expenses were incurred in the “taxpayer’s business of conserving Its holdings, and not for the primary purpose of realizing a capital gain” (Slip op. pp. 9-10), the court allowed the deduction. It is equally true here that plaintiff’s forest management expenses were incurred primarily in the ordinary conduct of its business, and the record discloses no recognizable part of such expenses to be directly related to timber sales under cutting contracts.
     
      
      
         See Williams, Trends in Forest Taxation, 14 Nat’l. Tax Jour. 113, 130-131 (June 1961) and Rowen, Taxation of Income from Timber Properties, 33 Taxes 336, 837.
     
      
       In passing, it is not inappropriate to comment on the accounting burden inherent in defendant’s contention that plaintiff’s selling expenses should be segregated from its forest management expenses and offset against cutting contract proceeds. In another connection, the Supreme Court has had occasion to observe the “practical considerations of accounting convenience which make it as difficult for such dealers, [in the business of buying and selling securities] in many instances, to set commissions off against the proceeds of individual sales as it would, be for the merchant of other wares to treat his selling expenses only as a series of subtractions from the selling price realized on particular items of his stock,” Spreckles v. Commissioner, 315 U.S. 626, 629 (1942). Although this plaintiff’s principal business is the manufacture of kraft paper, its timber business is of sufficient magnitude to require the employment of a large number of graduate foresters and other employees. (See finding 11, infra.) As stated, their various activities in administering cutting contracts appear to have been merely nominal and incidental to their general forest management duties. An accurate allocation of their time so spent would appear to involve similar accounting difficulties to those which would confront “the merchant of other wares” if he were required “to treat his selling expense only as a series of subtractions from the selling price realized on particular items of his stock.” Spreckles v. Commissioner, supra. As Judge Madden remarked in "Winn-Senter Construction Co. v. United States, 110 Ct. Cl. 34, 65: “The law, as between the Government and those who deal with it, should be law that it is possible to live by, not merely law that reads plausibly in the books.”
     
      
       In his usual felicitous manner, the late Judge Jerome Frank has referred to this principle as the “familiar easy-to-say-so-if-that-is-what--was-meant rule.” Commissioner v. Beck’s Estate, 129 F. 2d 243, 245 (2d Cir., 1942).
     
      
       In the Ray-Bond Lease, the fixed payments for the first seven years are referred to In one paragraph as “anticipated and estimated depletion payments.”
     
      
       The Ray-Bond lease provides that the lessee shall have a right to cut up to $65,000 In market value of timber per year during the first seven years of the lease, which right Is cumulative.
     
      
       This Is a reasonably accurate estimate of average growth though on the conservative side In the light of modern techniques of forest management.
     
      
       Under such provisions plaintiff purchased and paid for an aggregate of $188,164 of timber prior to the end of 1949. In each such case plaintiff treated the amount so paid as the cost of purchased timber on its books and in its income tax returns.
     
      
       The record indicates that $5,868.25 of this sum -was received by plaintiff prior to April 1, 1949, the expiration of six months from the effective date of the Ray-Bond lease.
     
      
       The Commissioner may have overlooked the fact that a portion of the gain realized by plaintiff In 1949 under the cutting contract with respect to the Ray-Bond lease was attributable to timber held by plalntlif for less than six months prior to the disposal thereof. See finding 20, and In particular footnote 5, supra.
      
     
      
       This figure constitutes five percent of $364,592.84 which was the gross amount received from the cutting contracts. See finding 26, supra.
      
     
      
      
         One of the “lessors” of the Ray-Bond lease is also “lessee” under the related cutting contract.
     
      
      In 1936, at the time of the entry into the Miller No. 1 lease, $28,000.00 was incurred by Union Bag for survey and cruising costs, which is being written of! as depletion on the basis of timber cut.
     
      
      The $19,686.87 represents the cost of timber sold. This amount was paid to the owners of the lands for timber which was separately cut and paid for under agreements apart from the leases or under provisions of the leases permitting the cutting of timber in excess of the estimated annual growth.
     