# Petition — Norton v. United States

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition
- **Published:** January 1, 1977
- **Citation:** 434 U.S. 831

## Text

SAR ee eH ee cee mmm

IN THE SUPREME COURT

OF THE UNITED STATES

October Term, 1977

No. 96-1756

EMMETT E. NORTON and FRANCES G. NORTON,
Petitioners,
Vv.
THE UNITED STATES,

Respondent.

PETITION FOR WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF CLAIMS

Charles P. Duffy
Counsel for Petitioners
1404 Standard Plaza
Portland, Oregon 97204
(503) 226-1371

cca

SUBJECT INDEX

Page
Opinion Delivered in Court Below 2
Jurisdiction 2
Questions Presented 2
Statutes Involved 4
Statement of Case 4
Reasons Relied on for Allowance

of Writ 7
Conclusion 15
Appendix A - Opinion of the Court

of Claims A-1 - A-10
Appendix B - Order Denying

Rehearing B-l1 - B-2

Appendix C - Sections 1221 and
1231, Title 26, U.S.C. C-1 - C=-3

ii

TABLE OF CASES CITED

Agway, Inc. v. United States,

(2978) »s se, SB, ;
524 F.2d 1194

Barclay v. Untted States,
(1964) 166 Ct. Cl. 421,
333 F.2d 847

Corn Products Refining Co. v.
Commissioner, (1975) 350
is -F 46

Deltide Fishing & Rental Tools,
Ince. v. United States,
(D.C. La. 1968) 279 F.Supp.
661

2,3,7,
9,10,11,
13,15,
16,17,
18

17

E. I. du Pont de Nemours Company v. 17

Untted States, (1961) 153
Ct. Cl. 274, 288 F.2d 904

Ferrer, Commissioner v.
(CCA 2, 1962) 304 F.2d 125

Grant Oil Tool Co. v. United
States, (1967) 180 Ct. Cl.
620, 381 F.2d 389

Hollywood Baseball Association v.

Commissioner, (CA 9, 1970)
423 F.2d 494

Philadelphia Quartz Company v.
United States, (1967) 179
Ct. Cl. 191, 374 F.2d 512

17

17

iii

TABLE OF STATUTES CITED

Section 453, Title 26, U.S.C.

Section 1221, Title 26, U.S.C.

Section 123l, Title 26, U.S.C.

Section 1255, Title 28, U.S.C.

Section 1491, Title 28, U.S.C.

MISCELLANEOUS

Eustice, "Contract Rights, Capital
Gain, and Assignment of
Income-the Ferrer Case (1964)
20 Tax L.Rev. 1, at 14

oa |"

iy

IN THE SUPREME COURT

OF THE UNITED STATES

October Term, 1977

No.

EMMETT E. NORTON and FRANCES G. NORTON,
Petitioners,
Vv.
THE UNITED STATES,

Respondent.

PETITION FOR WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF CLAIMS

Petitioners request that a writ of
certiorari be issued to review the deci-
sion of the United States Court of Claims
in the above-captioned case, which was

entered on March 23, 1977.

OPINION BELOW

The opinion of the Court of Claims
(App. A, tnfra, pp. A-1 to A-10) has not
yet been officially reported. It is
unofficially reported in 77-l U.S. Tax
Cases at 49296 and in 77 American Federal
Tax Reports 2d at 477-499.

JURISDICTION

The opinion of the Court of Claims
was entered on March 23, 1977. The order
denying the petition for rehearing (App.
B, tnfra, pp. B-1 to B-2) was entered
April 29, 1977.

The statutory provision believed to
confer on this Court jurisdiction to
review the decision in question is
Section 1255 of Title 28 of the United
States Code.

QUESTIONS PRESENTED

In the light of this Court's 1955

declaration in Corn Products Refining Co.

v. Commisstoner, 350 U.S. 46, that:

"Congress intended that profits
and losses arising from the every~-
day operation of a business be
considered as ordinary income or
loss rather than capital gain or
loss. The preferential treatment
provided by § 117 [the capital
gains provision, now Section 1221
of the Internal Revenue Code]
applies to transactions in pro-
perty which are not the normal
source of business income. It

was intended ‘to relieve the tax-
payer from * * * excessive tax
burdens on gains resulting from a
conversion of capital investments,
and to remove the deterrent effect
of those burdens on such conver-
sions.' Burnet v. Harmel, 287 U.S.
at page 106, 53 S.Ct. at page 75."

The questions presented here for
review are:

1. Whether the principles enunciated
by this Court in the Corn Products case
should have been applied by the Court of
Claims to a single sale in the final
liquidation of the taxpayer's business.

2. Whether the Corn Products princi-
ple should be applied to the sale of an
asset described in Section 1231 of the

Internal Revenue Code.

STATUTES AND INTERNAL REVENUE
REGULATIONS INVOLVED

The application of Sections 1221 and
1231 of the Internal Revenue Code are
involved. The pertinent provisions of
these statutes are set forth in Appendix
C, infra, pp. C-l1 to C-3.

STATEMENT OF THE CASE

l. Factual Background. This is a
tax refund action, the facts of which are
not in dispute. In January, 1968, peti-
tioner Emmett E. Norton entered into a
timber purchase contract with the Forest
Service of the United States Department of
Agriculture, by the terms of which he
acquired the right to cut and ownership of
certain designated timber in Alaska.
During the year 1968 and continuing until
March, 1969, Norton was engaged in the
business of logging the timber and sell-
ing the logs produced therefrom. In

March, 1969, Norton sold to Ketchikan Pulp

Company, an unrelated corporation, all of
the timber and timber cutting rights
acquired by him under the Forest Service
contract for the sum of $127,500, payable
as the timber was removed. During the
years 1969, 1970 and 1971, Norton received
the agreed purchase price from Ketchikan
Pulp Company in payment for the timber and
cutting rights.

In filing their joint federal income
tax return for the year 1969, petitioners
duly elected to report the sale on the
installment basis pursuant to Section 453
of the Internal Revenue Code.

In January, 1973, petitioners were
notified by the District Director of
Internal ° .enue in Anchorage, Alaska, of
proposed income .-.x deficiencies against
them for the years 1969, 1970 and 1971
aggregating $16,166, plus interest, based
upon treating the proceeds as ordinary

income rather than income from the sale of

a capital asset described in Section 1221
or from the sale of an asset described in
Secton 1231 of the Internal Revenue Code.
Thereafter, petitioners paid the income
tax deficiencies, plus interest, filed
timely refund claims and, when the refund
claims were disallowed, filed this timely
action in the Court of Claims in February,
1975. The basis for federal jurisdiction
in the Court of Claims was Section 1491 of
Title 28 of the United States Code.

2. Proceedings in the Court of
Claims. The facts not being in dispute,
in June, 1975, petitioners filed in the
Court of Claims their Motion for Summary
Judgment and in October, 1975, respondent
filed its Cross Motion for Summary Judg-
ment. The matter came on for oral argu-
ment before a three-judge panel of the
Court of Claims on January 14, 1977 and on
March 23, 1977 the Court rendered its

Opinion (Appendix A).

On April 4, 1977, petitioners filed a
timely Petition for Rehearing En Banc,
which was denied April 29, 1977 (Appendix
B).

REASONS FOR GRANTING THE WRIT

The decision of the Court of Claims,
in holding that the principle of Corn
Products applies to a single sale of
either a Section 1221 or Section 1231
asset, has decided a federal question in a
way in conflict with applicable decisions
of this Court. It also involves an impor-
tant question of federal law which has not
been, but should be, settled by this
Court.

I

The Timber Sale Contract itself was

a capital asset within the meaning of

Section 1221 of the Internal Revenue Code.

If the Court finds that the contract
itself (rather than the cutting rights or

timber which was the subject of the

contract) was sold by Emmett E. Norton to
Ketchikan Pulp Company, it should follow
that a capital asset was sold.

By the statutory definition in
Section 1221 of the Internal Revenue Code
(Appendix C), the term "capital asset"
includes all "property" held by a taxpayer,
exclusive of five listed exceptions, none
of which is apposite to this contract.

The contract itself was not depreciable
and was not real property, so the excep-
tion in Section 1221(2) would not be
applicable. If it were, then Section
1231(b) (1) would control; but the tax
result would be the same.

Since the decision in Commissioner v.
Ferrer, (CCA 2, 1962) 304 F.2d 125, the
courts have agreed that a contract is a
capital asset, and its sale at a profit
entitled to capital gains treatment, where

the contract rights created an equitable

interest in or an equitable encumbrance on

specific property which was itself a

capital asset. Eustice, "Contract Rights,

Capital Gain, and Assignment of Income--

the Ferrer Case" (1964) 20 Tax L. Rev. l,

at 14.

Did the Timber Sale Contract here
create in the vendee, Emmett E. Norton, an
equitable interest in the timber? In
interpreting a similar government timber
sale contract, the Court of Claims in
Barclay v. United States, (1964) 166 Ct.
Cl. 421, 333 F.2d 847, stated:

"Under this contract Dahl (one
of the plaintiffs) did not acquire
legal title to the timber on un-
allotted lands but he did acquire
beneficial ownership of all timber
on the tract..."

In addition to the five exceptions
listed in Section 1221 defining "capital
asset", there is, of course, the nonsta-

tutory exception enunciated in Corn

Products Refining Co. that profits and

losses arising from the everyday operation

10

of a business should be given ordinary
income tax treatment and that only trans-
actions in property which are not the
normal source of business income should
give rise to capital gains or losses. By
no stretch of the imagination can the
routine, day-to-day sale of corn futures
in the Corn Products case be equated with
Emmett E. Norton's one isolated sale of a
timber contract.

II

The timber which was the subject of

the Timber Sale Contract was “real pro-

perty used in the trade or business" of

petitioner Emmett E. Norton, within the

meaning of Section 1231(b)(1) of the

Internal Revenue Code.

If the Court finds that the cutting
rights or timber (as distinguished from
the contract itself) was sold, it should
follow that a Section 1231(b) (1) asset

(Appendix C) was sold, since it would come

11

within the definition of "~eal property
used in the trade or busines." found in
Section 1231(b)(1). In that event, the
sale of such property rights would still
be accorded capital asset treatment by
virtue of Section 1231.

In Corn Products this Court dealt
with a manufacturer of products made from
corn, which entered into contracts to sell
such products. In order to protect itself
from sharp increases in the cost of its
materials, it bought corn futures. In
other words, it was engaged in hedging
transactions. In one year it realized a
substantial profit from the sale of the
corn futures, and in other years suffered
losses. In computing its tax liability,
Corn Products originally reported these
amounts as ordinary profit and loss from
its manufacturing operations but subse-
quently took the position that the futures

were capital assets and that gains and

12

losses therefrom should have been treated
as arising from the sale of capital assets.
The Tax Court found as a fact that the
petitioner's futures transactions were an
integral part of its business designed to
protect its manufacturing operations
against price increases in its principal
raw material and to assure a ready supply
for future manufacturing requirements.

This Court held:

"Congress intended that profits
and losses arising from the
everyday operation of a business
be considered as ordinary income
or loss rather than capital gain
or loss. The preferential treat-
ment provided by (the capital
gains statute) applies to trans-
actions in property which are not
the normal source of business
income. It was intended 'to
relieve the taxpayer from...
excessive tax burdens on gains
resulting from a conversion of
capital investments and to remove
the deterrent effect of these
burdens on such conversions. '"

Until the opinion in this case was
issued, (Appendix A) neither the Court of

Claims nor any other court had ever

13

applied the Corn Products principle to a
single sale, whether or not in the final
liquidation of a taxpayer's business.

By definition, a Section 1231 asset
must be "used in the trade or business" of
the taxpayer. If the decision of the
Court of Claims is to be followed, the
statute could have no application to any
sale of a business asset and would, for
all practical purposes, be repealed.

Petitioner's one sale in liquidation
of the business can hardly be equated
with the number of sales of corn future
contracts (5,000 bushels each) by Corn
Products Refining Co. which totaled 755,
535 and 728, respectively, in the three
tax years involved there. Corn Products
Refining Co. v. Commisstoner, 16 T.C. 395,
at 397.

The sale of the Turn Point
contract was not a part of the everyday

business of petitioner Emmett Norton. It

14

was the only one he ever made and termin-
ated his business.
IIl

The opinion below did not respond to

the issues as presented by the parties.

Petitioners and defendant agreed in
their respective briefs filed in the lower
court that petitioners’ interest in the
Turn Point contract and the underlying
timber was real property used in the
petitioners’ trade or business within the
purview of Section 1231 of the Internal
Revenue Code. Despite this agreement of
the opposing parties the opinion holds to
the contrary. At the oral argument none
of the three judge panel indicated at any
time a disagreement with this basic
factual premise and the oral arguments
were, therefore, based upon an assumption
that this issue was not in dispute. We

submit that had the Court of Claims so

expressed itself, the parties would have

15

addressed themselves to this issue and
not assumed its acceptance.

Since the opposing parties agreed
that the timber sale contract was “real
property", the issues presented to the
Court of Claims in the briefs and on the
oral argument (in addition to petitioners’
alternate Section 1221 argument) narrowed
to the issue of whether or not the Corn
Products principle should be applied to
the sale of Section 1231 assets. By
declaring in its opinion that petitioners
did not acquire an interest in the timber,
the lower court avoided this issue. We
submit that the issue was fairly presented
to the Court of Claims panel and should
have been resolved by it.

CONCLUSION

We submit that this Court should
review this case because the Corn Products
principle has been applied in this and

countless other cases by the lower courts

16

during the past twenty years in various
and conflicting ways and has been extended
far beyond the originally intended scope
of this principle. As the Court of

Claims itself declared in its 1975 deci-
sion in Agway, Ine. v. United States, 524
F.2d 1194:

"Corn Products has been applied

in lower courts in a variety of

situations which possibly might

surprise the Corn Products court."

Before the decision of the Court of
Claims in the instant case, however, no
court had ever applied the Corn Products
principle to a single sale, whether or
not in the final liquidation of a tax-
payer's business.

It is also submitted that this Court
should hear this case to declare whether
or not the Corn Products principle should
be extended to the sale of depreciable
property ©r real property used in the

trade or business of the taxpayer, as

17

those terms are defined in Section 1231

of the Internal Revenue Code. Despite
agreement by petitioners (in the alterna-
tive) and respondent in the briefs filed
in the Court of Claims that the sale of

a Section 1231 asset was involved here,
the Court of Claims held to the contrary,
thus avoiding this issue. On three prior
occasions* the Court of Claims declined to
apply the Corn Products principle to the
sale of Section 1231 assets. There is an
extended discussion of the reasons why the
Corn Products principle should not be
applied to the sale of Seciion 1231 assets

in Deltide Fishing & Rental Tools, Ine. v.

*E. I. du Pont de Nemours Company v.
Untted States, (1961) 153 Ct. Cl. 274,
288 F.2d 904

Philadelphia Quartz Company v. United
States, (1967) 179 Ct. Cl. 191,
374 F.2d 512

Grant Otl Tool Co. v. United States,
(1967) 180 Ct. Cl. 620,
381 F.2d 389

18

United States, (D.C. La. 19608) 279 F.Supp.
661. On the other hand, the Court of
Appeals for the Ninth Circuit held on one
occasion that it could apply. dHollywood
Baseball Assoctatton v. Commisstoner,
(1970) 423 F.2d 494.

This apparent conflict should be
resolved by this Court.

It is submitted that a clarification
by this Court of the extent of the appli-
cation of the Corn Products principle
would be beneficial to these and other
taxpayers and even to the Internal Revenue
Service itself.

For these reasons, it is respectfully
submitted that this Petition for a Writ

of Certiorari should be granted.

Charles P. Duffy

1404 Standard Plaza
Portland, Oregon 97204
(503) 226-1371

Counsel for Petitioners

Gn the United States Court of Claims

No. 31-75

(Decided March 23, 1977)

EMMETT E. NORTON and FRANCES G. NORTON v.
THE UNITED STATES

Charles P. Duffy, attorney of record, for plaintiff. Duffy,
Stout, Georgeson & Dahl, of counsel.

C. Patrick Derdenger, with whom was Acting Assistant
Attorney General Myron C. Baum, for defendant. Theodore
D. Peyser, of counsel.

Before Davis, KasHiwa and Kunzic, Judges.

ON PLAINTIFFS’ MOTION FOR SUMMARY JUDGMENT AND
DEFENDANT'S CROSS MOTION FOR SUMMARY JUDGMENT

KasHiwa, Judge, delivered the opinion of the court:

This tax refund action involving the characterization of
gain realized by plaintiffs from their sale of a timber
cutting contract is before the court on cross motions for
summary judgment. The facts essential to the disposition of
the case are not in dispute. For the reasons set forth below,
we agree with the defendant that the gain realized by the
plaintiffs does not qualify as gain from the sale of a capital
asset. We, therefore, allow defendant’s cross motion for
summary judgment.

Appendix A - 1

2

Plaintiff,| Emmett E. Norton, an individual doing
business as the Norton Logging Company, on January 30,
1968, entered into a timber cutting contract? with the
United States Forest Service (hereinafter referred to as the
Turn Point contract). The Turn Point contract specified:

In consideration of the premises and the promises
hereinafter contained, Forest Service agrees to sell and
permit Purchaser to cut and Purchaser agrees to
purchase and cut included Timber.

All right, title and interest in and to any included timber
in the Turn Point contract remained in the Forest Service
until it had been cut, scaled and paid for; at that time, title
vested in the plaintiff who then had to remove the
processed timber from the contract sales area within the
period of the contract. All losses, except for negligence,
were to be borne by the party holding title.
Throughout the remainder of 1968 and until March 19,
1969, plaintiff was engaged in the logging business. This
entailed both the cutting of the standing timber located in
the South Tongass National Forest subject to the Turn
Point contract and the selling of the logs to Ketchikan Pulp
Company (hereinafter referred to as Ketchikan), an unre-
lated Washington corporation. The plaintiff did not operate
a sawmill nor was he engaged in manufacturing lumber,
veneer or other wood products. His sole activity was the
cutting of the standing timber and its sale to Ketchikan.
As the standing timber was cut and scaled, the plaintiff
was required to pay the Forest Service under the terms of
the contract $9.05 per thousand board feet for Sitka Spruce
and $2.32 per thousand board feet for Western Hemlock
and other species. To insure the performance of his
obligation under the Turn Point contract, the plaintiff
executed a performance bond in the amount of $5,000.

' Frances G. Norton is a party to this action only because she filed joint returns
with her husband, Emmett E. Norton, for the years in question. Where reference is
made to Mr. Norton acting individually, he will be referred to as the “plaintiff”;
where reference is made to both Mr. and Mrs. Norton, they will be referred to as the
“plaintiffs.”

* United States Department of Agriculture Forest Service Timber Sale Contract
No. 05-92. The contract relates to certain designated timber in the South Tongass
National Forest, State of Alaska.

Appendix A - 2

3

During the period January 30, 1968, through March 19,
1969, the plaintiff logged 9,919,040 board feet of the
estimated 30,000,000 board feet of timber subject to the
contract.

On March 19, 1969, 13% months after the plaintiff
entered into the Turn Point contract, he sold all of the
timber cutting rights under the contract to Ketchikan for
the sum of $127,500,° with no interest thereon, payable at
the rate of $8.50 per thousand board feet of logs produced.
In connection with the transaction, Ketchikan executed a
promissory note which recites that Ketchikan will pay the
plaintiff the $127,500, regardless of an over-run or under-
run of the volume of timber under the Turn Point
contract.*

Prior to the March 19, 1969, sale to Ketchikan, the
plaintiff had neither sold nor held for sale a Government
timber contract. After that sale, the plaintiff ceased
independent logging operations entirely and sold all
logging equipment, machinery and supplies to Ketchikan.

In filing their joint federal income tax return for the
year 1969, the plaintiffs elected to report the gain realized
from the sale of the timber cutting rights to Ketchikan on
the installment basis pursuant to § 453.° Their tax basis for
determining gain or loss was $7,400,° with a resulting 94.2
percent of gain. On their income tax returns for the years
1969, 1970 and 1971, the plaintiffs reported 94.2 percent of
the amount received from Ketchikan as long-term capital
gains.

Upon audit of plaintiffs’ tax returns, the Commissioner
of the Internal Revenue Service (Commissioner) deter-

? Even though the bill of sale specified that both the Turn Point contract and
various pieces of logging equipment were sold for $127,500, the Norton affidavit
makes it clear tisut the $127,500 was the purchase price of the timber cutting rights
alone.

* Since the total purchase price was not dependent upon the amount of timber cut,
plaintiff concedes that he did not retain an economic interest in the timber
transferred to Ketchikan within the meaning of LR.C. § 631(b). Therefore, L.R.C. §
1231(bx2) is not applicable to the instant case.

* Unless otherwise indicated, all section references are to the Internal Revenue
Code of 1954. :

* Plaint*fs’ tax basis is the sum of a $5,000 cash bond and a $2,400 advance
stumpage deposit with the Forest Service.

Appendix A - 3

4

mined that the gain recognized by plaintiffs in 1969, 1970
and 1971, attributable to the sale of the Turn Point
contract to Ketchikan, should have been reported as
ordinary income rather than as long-term capital gain. A
statutory notice of deficiency for 1969 through 1971 was
issued by the Commissioner on March 20, 1973. Thereafter,
plaintiffs received billings for the deficiency, which they
were unable to pay within 10 days because of lack of funds.

On November 21, 1973, the plaintiffs paid $8,000 to the
District Director, Anchorage, Alaska. On January 21, 1974,
the Division of Veterans Affairs of the Department of
Commerce of the State of Alaska paid, on the plaintiffs’
behalf, the remaining sum of $10,999.48 from the proceeds
of a loan.’

Plaintiffs filed with the Interna] Revenue Service (IRS)
Center at Ogden, Utah, their timely refund claims for the
years 1969 through 1971. The IRS not having acted upon
their refund claims for more than 6 months after the date
of filing, the plaintiffs filed a petition in this court based
upon the same grounds as set forth in the refund claims.

Plaintiffs argue that the timber cutting contract involved
herein was a capital asset, or in the alternative, plaintiff's
interest in the contract and underlying timber was “real
property used in the trade or business” of plaintiff within
the meaning of § 1231(bX1). Under either alternative,
plaintiffs contend that the gain realized on the sale of the
contract qualifies as long-term capital gain since the
contract was held by plaintiff for more than six months.
Nevertheless, plaintiffs concede that a portion of the
payments received by them on the sale of the Turn Point
contract should be imputed interest, taxable as ordinary
income.* Lastly, plaintiffs seek refund of the additions to
the tax, “late-payment penalties,” which they argue should

* Payments totaling $18,999.48 were received by the Internal Revenue Service:
$5,468.81 was allocated to plaintiffs’ 1969 tax year: $6,290.58 was allocated to
plaintiffs’ 1970 tax year; and $7,240.09 was allocated to plaintiffs’ 1971 tax year.

* LR. § 483; Treas. Reg. § 1.483-1(cX2), T.D. 6873, 1966-1 C.B. 101. In the case of
an installment contract which does not contain any provision for interest, the
amount of interest to be imputed is computed at the rate of 5 percent per annum
compounded semiannually. Although not applicable to the instant case, it should be
noted that T.D. 6873 was amended by T.D. 7394, 1976-1 CB. 135.

Appendix A - 4

5

not have been exacted from them since their failure to pay
the deficiencies within ten days of the date of the first
notice and demand therefor was due to reasonable cause—
inability to pay or undue hardship—and not due to willful
neglect within the purview of § 6651(aX3).

On the other hand, defendant contends that the gain
realized by plaintiffs from the sale of the Turn Point
contract does not qualify for capital gain treatment.
Initially, the defendant submits that plaintiffs interest in
the Turn Point contract and the underlying timber was
real property used in plaintiff's trade or business; it must
be treated as a noncapital asset by virtue of § 1221(2), but is
precluded from § 1231(a) treatment by the Corn Products®
doctrine since the contract was an integral part of the
plaintiff's business. Alternatively, defendant argues that
the Corn Products doctrine would exclude plaintiff's
contract from § 1221. Defendant has failed, however, to
address the plaintiffs’ last contention that their failure to
pay the deficiencies within ten days of the date of the first
notice and demand therefor was due to reasonable cause.

We are faced with the preliminary issue of whether
plaintiff's interest in the Turn “oint contract would qualify
either as a § 1221 asset or as a § 1231(bX1) asset, but for the
Corn Products doctrine. Of necessity, we then must
examine the Corn Products doctrine to determine its
applicability to the instant case.

Defendant contends and the plaintiffs submit as an
alternative argument that plaintiff's interest in the Turn
Point contract and underlying timber was real property
used in the plaintiff's trade or business. We find these
contentivns lack merit. To constitute realty plaintiff must
have acquired a present interest in the standing timber on
the execution of the contract. The facts before us do not
demonstrate that the parties to the contract intended to
transfer « present interest in the standing timber. As we
earlier recapitulated, the contract gave plaintiff the righi
to purchase and cut timber; however, until cut and paid
for, the title to that timber remained in the seller. This

* Corn Products Refining “> v. Comm'r, 350 U. S. 46 (1955).

Appendix A - 5

6

indicates an intent that no present interest in real
property, the standing timber, passed to the plaintiff. We
have considered our decision in Barclay v. United States,'°®
in addition to United States v. Giustina,'' which decisions,
while interpreting similar timber cutting sales contracts
with relation to the word “owner” in § 117(kX2) of the 1939
Code [now § 631(b) of the 1954 Code], held that such
contracts gave the holder beneficial ownership of all the
timber on the tract.'* To the defendant, the fact that
plaintiff had beneficial ownership in the timber is suffi-
cient to make the timber cutting contract real property.
Defendant reasons that standing timber is real property;
therefore, a timber cutting contract which gives beneficial
ownership in standing timber is real property. With this
reasoning we cannot agree. The above cases define owner
status for § 117(kX2) of the 1939 Code purposes; they do not
determine that the timber contract there in issue is real
property. In fact, this court in Barclay’* refused to consider
whether the timber contract there in issue qualified for §
117(a) of the 1939 Code [now §§ 1221 and 1222 of the 1954
Code] which thereby obviated the need to determine
whether the contract was real property used in the
taxpayer’s trade or business. Since we are convinced that
on the facts before us the parties did not intend to transfer
a present interest in the standing timber, we hold that
plaintiff's interest in the Turn Point contract was not real
property used in his trade or business. It should be noted
that our decision is compatible with the Tax Court’s
decision in J. R. Simplot Co. v. Commissioner,'* which held
that a similar contract was insufficient to transfer a
present interest in the standing timber.

To disqualify the Turn Point contract from § 1231(bX1),
we must also determine that it was not “property used in
the trade or business of a character which is subject to the

*° 166 Ct. Cl. 421, 333 F. 2d 847 (1964). See also Union Bag-Camp Paper Corp., 163
Ct. Cl. 525, 325 F. 2d 730 (1963).

** 313 F. 2d 710 (9th Cir. 1962).

** See also Treas. Reg. § 1.631-2ieX2) (1960) and Rev. Rul. 58-295, 1958-1 C.B. 249.

** 166 Ct. Cl. at 427, 333 F. 2d at 851.

‘* 26 T.C.M. (CCH) 488 (1967).

Appendix A - 6

7

allowance for depreciation provided in section 167.” Given
the nature of the contract, this task is not difficult. The
Turn Point contract was merely a sales contract obligating
the plaintiff to purchase a specific amount of timber—
whether cut or not—within a period of approximately
three years.'* Nonetheless, the contract was not the type
asset which diminished in value with use or passage of time
and it had neither a basis nor a useful life; consequently, it
was not of a character subject to the allowance for
depreciation. We, therefore, hold that the Turn Point
contract was not property used in the plaintiff's trade or
business within the definition of § 1231(bX1). However, we
do not agree with the plaintiffs who submit that the
contract is a § 1221 asset.

The plaintiffs argue that they sold the Turn Point
contract, itself, rather than the timber which was the
subject of that contract. They assert that the contract was
“property” which did not fall into any of the specified
exclusions of § 1221 and, therefore, the contract is a capital
asset, the sale of which gave rise to capital gain. The
plaintiffs also rely upon Commissioner v. Ferrer,‘* for the
proposition that a contract is a capital asset if the contract
rights created an equitable interest in specific property
which was itself a capital asset. By arguing that the
contract gave plaintiff an equitable interest in the timber
subject to the contract, citing Barclay v. United States,
supra, the plaintiffs reason that they sold a capital asset.
We disagree.

With respect to the treatment of amounts received on the
sale of contract rights, courts have approached in nu-
merous ways the question of whether the property disposed
of was the type of property that Congress intended to
classify as a capital asset.'’ Plaintiffs point to the approach

'* The contract was awarded on January 30, 1968, and was to terminae on
December 31, 1970.

** 304 F. 2d 125 (2d Cir. 1962).

‘7 Eustice, Contract Rights, Capital Gain, and Assignment of Income—the Ferrer
Case, 20 Tax L. Rev. 1 (1964). The approaches may be grouped into certain broad
categories: (1) Is the asset “property” which is a “capita) asset” under § 1221? See
Comm'r v. Gillette Motor Transport Co., 364 U.S. 130 (1960); Comm'r v. Ferrer, supra
note 16. (2) Do the amounts received by the taxpayer upon the sale of the contract

Appendix A - 7

8

utilized in Ferrer to support their argument. In Ferrer,
Judge Friendly summarized the immense body of deci-
sional law in the assignment of income area and wrestled
with the various complex issues that can arise from the
basic question of whether a taxpayer has transferred a
“property” right or an “income” right. Rather than utilize
this approach, we feel that the instant case can be decided
under the Corn Products doctrine exception to the statuto-
ry syllogism that all property is a capital asset unless
specifically excluded by the exceptions in § 1221.

The Supreme Court has stated that the sale of property,
though not literally within the exceptions of § 1221, may
nevertheless give rise to ordinary income or loss when the
asset is an integral part of the taxpayer’s business. Corn
Products Refining Co. v. Commissioner, supra note 9. The
application of the Corn Products doctrine to the instant
case seems clear to us. The plaintiff was engaged in the
logging buciness: cutting standing timber and selling the
cut timber to Ketchikan. The Turn Point contract gave the
plaintiff the right to cut timber; it insured the plaintiff a
ready source of supply of the logging business raw
material, timber. The contract, therefore, was essential to
and an integral part of plaintiffs logging business.
The contract gave plaintiff rights in the timber which were
so integrally related to his ordinary business objectives of
logging the timber that a “business use” intention rather
than an “investment” intent prevailed.'* In other words,
the contract was acquired by plaintiff with an intention
that it would serve an integral function in his regular
business activities and that motive had not changed at the
time of sale. Under the Corn Products doctrine, gain on the
sale of that contract is, therefore, part of plaintiffs

rights represent a substitute for future ordinary income that would otherwise have
been received by the taxpayer? See Comm'r v. P. G. Lake Inc., 356 U. 8. 260 (1958);
Comm'r v. Ferrer, supra. (3) Does the transaction constitute a “sale or exchange”? See
Fairbanks v. United States, 306 U. S. 436 (1939). (4) Was the property acquired with
an intention that it would serve an integral function in the taxpayer's regular
business activities? See Corn Products Refining Co. v. Comm'r, supra note 9.

** However, it should be noted that our approach here does not serve to read out of
the statute the obvious and important class of “business connected” assets covered
by § 1231

Appendix A - 8

—_—_—_— a

9

ordinary business income. We are not persuaded otherwise
by plaintiffs’ argument that since the sale of the Turn
Point contract represents the concluding phase of liquidat-
ing the logging business, the Corn Products doctrine should
not be applied.'®

Since we hold that the gain realized by the plaintiffs
from the sale of the Turn Point contract was ordinary
income within the rationale of the Corn Products doctrine,
we need not consider the applicability of § 483 to the
instant case.”° However, we must address plaintiffs’ argu-
ment that the additions to the tax, as provided under §
6651(aX3), should not have been exacted from them.
Plaintiffs argue that their failure to pay the deficiencies
within ten days of the date of the first notice and demand
therefor was due to their inability to pay which to them
was reasonable cause, not willful neglect.

Reasonable cause for failure to pay tax exists to the
extent the taxpayer can satisfactorily show that he
exercised ordinary business care and prudence in providing
for the payment of his liability, but was, nevertheless,
either unable to pay the tax or would have suffered “undue
hardship’’' if he paid on the due date.?* The burden of
proving that the failure to pay was due to reasonable cause
and not to willful neglect is on the taxpayer. If the
taxpayer offers no excuse, the penalty will be sustained by
the court.?*

In the instant case, plaintiffs have failed to introduce
any evidence to show that their failure to pay the tax was
due to reasonable cause. We must, therefore, sustain the §
6651(aX3) addition to the tax.

'* See J. R. Simplot Co. v. Comm'r, 26 T.C.M. (CCH) at 492. Cf. Hollywood Baseball
Ass'n v. Comm'r, 423 F. 2d 494, 499-500 (9th Cir.), cert. denied, 400 U. S. 848 (1970)
(Corn Products doctrine applied to § 337).

7° L RC. § 483fK3).

*' Undue hardship has the same meaning for § 6651(aX3) purposes as it does under
$ 6161, extensions of time to pay tax, Treas. Reg. § 1.6161-1(b) (1960).

** Treas. Reg. § 301.6651-lick1), T.D. 7133, 1971-2C.B. 415.

*? Deffendall v. United States, 386 F. Supp. 509, 512 (D. Or. 1974); Fischer v.
Comm'r, 50 T.C. 164, 177 (1968). Cf. Olshausen v. Comm'r, 273 F. 2d 23 (9th Cir.
1959), cert. denied, 363 U. S. 820 (1960) (I.R.C. § 294 of the 1939 Code, burden to prove
reasonable cause on the taxpayer).

Appendix A - 9

10

CONCLUSION

For the reasons hereinbefore stated, plaintiffs’ motion for
summary judgment is denied, defendant’s cross motion for
summary judgment is granted and plaintiffs’ petition is
dismissed.

Appendix A - 10

IN THE UNITED STATES COURT OF CLAIMS
No. 31-75

EMMETT E. NORTON and
FRANCES G. NORTON

Vv.

THE UNITED STATES

Before DAVIS, Judge, Presiding,
KASHIWA and KUNZIG, Judges.

ORDER

This case comes before the court on
plaintiffs' motion, filed April 4, 1977,
for rehearing en banc pursuant to Rules
7{d} and 151(b). Upon consideration
thereof, together with the response in
opposition thereto, without oral argument,
by the six active Judges of the court as
to the suggestion for rehearing en banc
under Rule 7(d), which suggestion is
denied, and further having been so con-
sidered by the panel listed above as to
the motion for rehearing under Rule

151(b),

Appendix B - l

IT IS ORDERED that plaintiffs’ said
motion for rehearing, filed April 4, 1977,
be and the same is denied.

BY THE COURT
/s/ Oscar H. Davis

Oscar H. Davis
Judge, Presiding

Appendix B - 2

APPENDIX C

APPLICABLE SECTIONS OF THE
INTERNAL REVENUE CODE OF 1954

"Sec. 1221. For purposes of this
subtitle, the term 'capital asset" means
property held by the taxpayer (whether
or not connected with his trade or busi-
ness), but does not include--

(1) stock in trade of the tax-
payer or other property of a kind
which would properly be included in
the inventory of the taxpayer if on
hand at the close of the taxable
year, or property held by the tax-
payer primarily for sale to custom-
ers in the ordinary course of his
trade or business;

(2) property, used in his trade
or business, of a character which is
subject to the allowance for depre-
ciation provided in section 167, or
real property used in his trade or
business;

(3) a copyright, a literary,
musical, or artistic composition, a
letter or memorandum, or similar
property, held by--

(A) a taxpayer whose per-
sonal efforts created such
property,

(B) in the case of a
letter, memorandum, or similar
property, a taxpayer for whom
such property was prepared or
produced, or

Appendix C - l

(C) a taxpayer in whose
hands the basis of such property
is determined, for purposes of
determining gain from a sale or
exchange, in whole or part by
reference to the basis of such
property in the hands of a tax-
payer described in subparagraph
(A) or (B);

(4) accounts or notes receivable
acquired in the ordinary course of
trade or business for services ren-
dered or from the sale of property
described in paragraph (1); or

(5) an obligation of the United
States or any of its possessions, or
of a State or Territory, or any poli-
tical subdivision thereof, or of the
District of Columbia, issued on or
after March 1, 1941, on a discount
basis and payable without interest at
a fixed maturity date not exceeding
one year from the date of issue."

"Sec. 1231. (a) GENERAL RULE.--If,
during the taxable year, the recognized
gains on sales or exchanges of property
used in the trade or business, plus the
recognized gains from the compulsory or
involuntary conversion (as a result of
destruction in whole or in part, theft or
seizure, or an exercise of the power of
requisition or condemnation or the threat
or imminence thereof) of property used in
the trade or business and capital assets
held for more than 6 months into other
property or money, exceed the recognized
losses from such sales, exchanges, and
conversions, such gains and losses shall
be considered as gains and losses from
sales or exchanges of capital assets held

Appendix C - 2

for more than 6 months. If such gains do
not exceed such losses, such gains and
losses shall not be considered as gains
and losses from sales or exchanges of
capital assets. ...

(b) DEFINITION OF PROPERTY USED IN
THE TRADE OR BUSINESS.--For purposes of
this section--

(1) GENERAL RULE.--The term
‘property used in the trade or busi-
ness' means property used in the
trade or business, of a character
which is subject to the allowance for
depreciation provided in section 167,
held for more than 6 months, and real
property used in the trade or busi-
ness, held for more than 6 months,
which is not--

(A) property of a kind
which would properly be includ-
ible in the inventory of the
taxpayer if on hand at the ciose
of the taxable year,

(B) property held by the
taxpayer primarily for sale to
customers in the ordinary course
of his trade or business, or

(C) a copyright, a liter-
ary, musical, or artistic com-
position, a letter or memoran-
dum, or similar property, held
by a taxpayer described in para-
graph (3) of sectio: 1221.

(2) TIMBER, COAL, OR DOMESTIC
IRON ORE.--Such term includes timber,
coal, and iron ore with respect to
which section 631 applies."

Appendix C - 3

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385004_1990%3A1. Public record. Not legal advice.