Deer Island Logging Co. v. Commissioner ( 1929 )

DEER ISLAND LOGGING CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Deer Island Logging Co. v. Commissioner

Docket Nos. 30307, 31613.

United States Board of Tax Appeals

14 B.T.A. 1027; 1929 BTA LEXIS 2992;

January 8, 1929, Promulgated

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">*2992 LONG-TERM CONTRACTS. - BASIS OF REPORTING INCOME. - Petitioner entered into a contract for purchase and sale of certain timber, and more than one year elapsing between date of commencement of work under the contract and completion, held that true income for each of the years would not be reflected by reporting income on the long-term-contract basis.

Ivan F. Phipps, Esq., and Charles E. McCulloch, Esq., for the petitioner.

Albert S. Lisenby, Esq., for the respondent.

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MILLIKEN

">*1027 These are proceedings for the redetermination of deficiencies asserted by the respondent for 1920, 1922, and 1923, in the amounts of $86,241.34, $2,846.68, and $39,907.23, respectively. Errors are alleged on the part of the respondent in determining that the petitioner received any taxable net income in any of the years under consideration, and in the selection of improper comparatives in computing the tax liability for 1920 under the provisions of sections ">*1028 327 and 328 of the Revenue Act of 1918. The proceedings were consolidated for hearing and decision. On motion of counsel for the respondent, the hearing was limited to the trial of the issue, ">*2993 which does not involve sections 327 and 328 of the Revenue Act of 1918, as provided for in Rule 62(a).

FINDINGS OF FACT.

The petitioner is a Washington corporation, with its principal office at Portland, Oreg.

On or about September 23, 1920, the petitioner entered into an agreement with the Lamb Timber Co., an Iowa corporation, which agreement, omitting the descriptions, is as follows:

THIS AGREEMENT, made this 23rd day of September, 1920, by and between LAMB TIMBER COMPANY, a corporation, organized and existing under the laws of the State of Iowa, and authorized and licensed to do business in the State of Oregon, and the COLUMBIA COUNTY LOGGING COMPANY, a corporation, organized and existing under the laws of the State of Oregon, their successors and assigns, parties of the first part, (hereinafter called the "Company"), and TIDE CREEK LUMBER COMPANY, party of the second part (hereinafter called "Tide Creek") and DEER ISLAND LOGGING COMPANY, a corporation, organized and existing under the laws of the State of Washington, licensed and authorized to do business in the State of Oregon, party of the third part (hereinafter called the "Logger").

WITNESSETH:

That WHEREAS, ">*2994 a certain contract has been in force for the logging of the timber of the Company, dated May 10, 1916, changed January 22, 1918, and whereas it is now desired to cancel same and substitute the following contract therefor, and

WHEREAS, Company desires to have its merchantable timber logged, rafted and sold, and Logger desires to do such work and furnish the logging railway and all equipment therefor, and to log for said Tide Creek.

THEREFORE, in consideration of the work and services to be done and logging railway and equipment to be constructed and furnished by the Logger, and the work, equipment, conveniences and opportunity to be furnished by the Company, and in consideration of the premises and the sum of one dollar ($1.00) paid by Logger to Company, the receipt whereof is hereby acknowledged, the parties hereto further agree as follows:

The Company furnishes for use of Logger the land for right of way as herein described to reach all the hereinafter described timber, the piling constructed in Deer Island Slough and the Slough, as dredged, and logging railway as constructed by Company prior to May 10, 1916, free of charge. Also such ballast as may be located on the property">*2995 of the company except as herein limited. Fuel oil shall be used exclusively for locomotives, except one locomotive. The Logger shall furnish all the balance of the logging railway and improvements, betterments and works in Deer Island Slough, all donkeys, trucks, cars, locomotives, camps, everything in fact, necessary for the operation, except as above stated. It being understood that Company can erect a sawmill or other structures on the westerly side of said Slough north of said logging railway to be used by Logger west of said Slough, and that Logger will switch cars to and ">*1029 from the Spokane, Portland & Seattle Railway Company's line to loading platform on said sidetracks so connected at a reasonable switching charge to Company. The Logger agrees to buy the railroad now constructed, extending from the main line in Section 11 to the mill of Tide Creek, for the sum of Thirty-five Thousand Dollars ($35,000.00) payable at $1.00 per thousand feet log scale for all logs hauled over the same but in no event more than said purchase price. Payment to be made on the fifth day of each month for all logs hauled over said line during the preceding month. Provided, however, ">*2996 in the event the Company shall not receive therefore said sum of Thirty-five Thousand Dollars ($35,000.00) at said $1.00 per thousand, it shall be optional with the Logger to pay the balance of said purchase price and take over said property, or treat the amount already paid as rental for the use of said track. The main line of railway east of shop to the trestle at the log dump and switch connecting with the Spokane, Portland & Seattle Railway is the property of the Company.

The land, premises, right of way and timber thereon, except as already logged by the Logger, owned by said Company which is to be used and employed by Logger hereunder is described as follows, viz:

* * *

Also the company owns the title in fee to the following described property, viz:

* * *

Also said Company hereby permits said Logger to use the gravel along any part of said railway constructed by said Logger on any property owned by said Logger on any property owned by the said Company in fee, and from northwest of a line two hundred fifty (250) feet south of the center line of the logging railway as now constructed under the Spokane, Portland & Seattle Railway, as above described, without any payment">*2997 therefor to said Company during the life of this contract.

Logger is to cut, remove, buck, haul, boom, raft, scale and deliver to tow boats or said Tide Creek all merchantable timber owned by said Company situated on land above described, including spars, poles and piling, and have right to construct Logger's railway on any land owned in fee by Company or on right of way now or hereafter owned, held or acquired by Company or logger.

The Logger shall pay the Company $4.00 per thousand feet log scale, less the payments heretofore already made on account of stumpage, for the logs produced in the year 1920, up to the time the cruise of the remaining timber belonging to the Company is made as herein provided. In estimating the amount due on logs heretofore logged in 1920, culls shall be figured at twenty-five cents per thousand feet. During the year 1920, up to the 23rd day of September, payment has been made for logs sold at the rate of $3.00 per thousand feet, and on sales made after the 23rd day of September, 1920, $1.00 shall be added to said $4.00 stumpage, until such time as the stumpage on which said $3.00 has been paid, is equal to the total of $4.00 per thousand feet. The">*2998 portion remaining due between said $3.00 and $4.00 shall bear interest at the rate of 6% until paid after December 31, 1920.

Except as above provided, the Logger shall pay the Company $4.00 per thousand feet stumpage for all timber included in the cruise thereof as finally agreed to hereunder. The cruise of the remaining timber of the Company shall be made immediately in the following manner: One cruiser each to be selected by the Company and Logger, who shall cruise said merchantable timber, including poles and piling, and continue the work of cruising until the same has been entirely completed and report thereof made. Then in the event that such cruisers disagree as to the quantity of timber remaining, the ">*1030 Logger and Company shall endeavor to agree upon the quantity of such timber from such cruise, and in the event of the failure of the Logger and Company to agree, the question of the quantity of such timber shall be determined by arbitration as hereinafter provided.

When the quantity of timber has been finally determined hereunder, it shall be approved by the presidents or vice-presidents of Company and Logger and be attached to and become a part of this contract.

">*2999 It is further agreed that said timber shall be paid for by Logger to Company, except as above provided at $4.00 per thousand feet as determined to be the quantity of timber so remaining to be logged. For convenience and for the purpose of fixing the time and manner of the last mentioned stumpage amount the logger shall on each sale of logs, spars, poles, piling, boom sticks, and other timber cut and sold from said premises, pay therefor $4.00 per thousand feet, log scale, and when acceptances or notes are taken, two such are to be taken, one for the amount of $5.00 or $4.00 as the case may be under this contract, which said acceptances and notes are to be endorsed by Logger.

On all sales for cash, payment by Logger to Company shall be made immediately upon receipt of payment by Logger.

No product hereunder shall be sold on more than thirty days time without interest. It being agreed that when Logger shall have completed the logging under this contract, it may be that said Company shall then be underpaid on said cruise, in which event the Logger shall pay the Company immediately the amount of any such underpayments.

The Logger shall pay promptly when due, all state and">*3000 county taxes on said timber which may be levied or assessed against the same. Where the land and timber are assessed together the Company shall pay upon the land on the basis of that which similar logged off land belonging to the company is this contract, which said acceptances and notes are to be endorsed by Logger.

One Hundred and Sixty (160) lineal feet of poles and piling shall be considered for the purposes of estimating stumpage payments as one thousand feet log scale.

Original scale of logs (to be returned within five days) and duplicate carbon copy of invoices or bills for logs, piling and poles shall be mailed to company by logger when the same are made.

The Logger shall, when requested by Company, furnish Company a statement showing its financial condition and company can, at its option audit the books of Logger at least once each year. Once each month Logger shall furnish Company with sales statement of products and an inventory of all logs not sold when same is made at least once each year.

Logger agrees that Columbia County Logging Company may be dissolved and convey its real estate included herein and personal property to the Lamb Timber Company, its successors">*3001 or assigns, subject to the terms hereof and said Lamb Timber Company may sell any of its land except said right of way and booming grounds, but possession of lands shall not be given until timber is removed on the land so sold.

Logger shall pay Company ten cents (10 cents) per thousand feet log scale for all timber transported on said Railway, including booming grounds and such of company land as herein provided to be used, excepting that timber owned by Lamb Timber Company, and shall furnish Company with accurate statements of same and Company shall have the right to check such statements from the books of Logger by audit at least once each year. Payments to be made on the fifth (5th) day of each month for logs transported the preceding month.

">*1031 Logger to cut, haul and raft a minimum of twenty (20) million feet and a maximum of not exceeding sixty (60) million feet log scale for each twelve (12) months hereinafter, until contract is completed, which shall be done within ten (10) years from date. And provided that commencing January 1, 1921, Logger shall pay Company at $4.00 per thousand for said minimum of twenty million feet, whether logged or not but in computing">*3002 said minimum, any production in any calendar year over twenty million shall apply in the calculations of said minimum on production of any subsequent year. Provided, further, that in the event of strikes, or unavoidable casualty or delays, the amount to be logged in any twelve (12) months shall be reduced proportionately.

The timber products, whether logged or not, shall be and remain the property of the Company until sold.

It is further understood and agreed that Tide Creek mill is to be operated at the option of the Company as long as said Logger shall log the present holdings of timber of the Company or any timber received in exchange for any part thereof and keep the mill supplied with logs to its capacity of one or two shifts of eight hours each at option of Company, and promptly switch and haul the cars for lumber and wood to and from mill for which the Logger is to be paid as follows:

Tide Creek shall pay Logger for switching cars at mill and hauling lumber and wood for each round trip of said lumber and wood for each car in and out to said mill at the rate of $4.00 for wood and $8.00 for lumber per car.

Tide Creek shall pay for logs purchased by it at $1.00 under">*3003 the sale price of the same grade of logs then prevailing at the boom of Logger.

All federal taxes for 1918 and 1919 heretofore paid and not included in settlement or hereafter collectible against Company, Logger, or Tide Creek shall be paid 2/9 by Logger and 7/9 by Company and Tide Creek.

This contract shall be in force and take effect as of January 1, 1920. Contracts dated May 10, 1916, and January 22, 1918, and all other contracts for logging, are hereby cancelled except as to settlement under the last named thereof.

Company at all times, or its duly authorized agents so designated by it, shall have free access at all times to any part of said property for any purpose not inconsistent with the terms hereof.

Logger shall meet requirements and regulations of State Board of Forestry of Oregon in burning slash and use every reasonable precaution through its agents and employees to prevent fires and make every reasonable effort to extinguish same.

Time is the essence of this agreement.

All consents, waivers, agreements, elections and determinations hereunder shall be in writing and be signed by the parties hereto, or their duly authorized agents, and shall not be otherwise">*3004 effective.

Company reposes in the integrity and personal character of the initial officers and agents with whom it deals in the closing of this contract, and Company shall not be bound to accept, except at its option, any successor or assigns of Logger, and if Logger assigns, sublets or sells, or otherwise alienates its rights, or any thereof, hereunder, except for construction work and for removal of poles and piling (and posts, if removed) such act or acts shall immediately terminate this agreement at the election of the company. Said Logger shall be considered and held as a licensee and independent contractor hereunder in any event during all the times herein mentioned.

Upon the termination of this contract the Logger shall have and it is hereby given full rights and authority to remove any and all buildings, machinery, steel rails, ties and other equipment and all improvements erected, constructed, ">*1032 built and owned by the Logger, that can be separated from the land, and any of such not so removed within six months thereafter shall become the property of the Company; except in the event of further logging operation on timber purchased or hauled by Logger as above">*3005 provided, then the time for such removal shall be extended to six months after the close of such logging operation.

The Company hereby covenants and warrants that it has free and unencumbered title to all of said lands described as being owned by it, together with the timber situated thereon, and that it likewise has the free and unencumbered right to the timber under the contracts herein specified for the respective times mentioned in said contracts, and it further covenants and warrants that it has the free and unencumbered right to the booming grounds, riparian rights and rights of way herein described subject to the rights of the public and United States Government.

In the event of any disagreement or misunderstanding between the Company and the Logger as to any construction or interpretation, or act to be done or performed, or not to be done or performed hereunder, and the said act or thing cannot be mutually agreed upon after conference and within a period of five (5) days from time such question or disagreement or misunderstanding arises, the same shall be arbitrated, each party to select an arbitrator within five (5) days after the expiration of said first five (5) days, ">*3006 and if such arbitrators cannot agree within three (3) days thereafter, they shall within three (3) days thereafter select a third arbitrator, and if they fail to make such mutual selection, the third arbitrator shall be selected within three (3) days by the County Judge of Columbia County, and if for any reason the office of County Judge is abolished or the office vacant, by the Circuit Judge of said County or the Judge of any Court having and assuming jurisdiction theretofore exercised by said Circuit Judge as to trials and within five (5) days thereafter said arbitrators shall meet and determine the matter in controversy and the findings of any arbitrators shall be in writing and be given to both parties hereto immediately and the party at fault shall hear and pay the expense of said arbitration, and if both parties are at fault, the Expense shall be equally borne by the parties hereto.

IN WITNESS WHEREOF, the parties hereto have caused this instrument to be executed by their respective officers thereunto duly authorized by their respective Board of Directors, the day and year first herein written.

The contract of September 23, 1920, was negotiated during the summer of 1920, ">*3007 and was made effective for the entire year.

During all of the years in controversy the petitioner was engaged in the operations permitted or required by the aforementioned contract and in the sale of the timber taken under the terms of that instrument. Substantially all of the timber cut by the petitioner during the years in controversy was sold during the year in which cut. The following is a statement of the sales of timber made by the petitioner in each of the years 1920 to 1924, inclusive, and of the inventories of timber at the close of each of those years:

Year	Sales	Inventory
1920	$1,295,486.87	$12,947.88
1921	527,240.50	20,127.39
1922	1,072,662.02	13,569.06
1923	1,505,563.49	8,152.87
1924	650,803.72	25,336.00

">*1033 The operations under the contract of September 23, 1920, involved the logging of some 14,000 acres of timber. Certain portions of the work were easy and certain portions difficult. In certain areas the timber was sound and of a heavy stand and in other places it was thin and defective in quality. Expenditures incident to the operation under the contract varied during the years 1920 to 1924.

During the years">*3008 1920 to 1924, inclusive, the petitioner did not declare or pay any dividends or make any other distributions whatever to its stockholders.

When the contract of September 23, 1920, was entered into, petitioner was advised by counsel that the operations under the contract could properly be treated as operations under a long-term contract within the meaning of article 36 of Regulations 45, and the profit or loss resulting from such contract could be reported for income-tax purposes in the year in which such contract was completed. The contract was at all times treated by petitioner on its books of account as a long-term contract. The petitioner did not close its books of account at the close of the years 1920, 1921, 1922, and 1923, with respect to its operations under the contract; and though it filed income-tax returns for these years, such returns showed no gain or loss, but contained the statement that petitioner was operating under a long-term contract and that the income, if any, derived from such operations would be reported upon the completion of the operations. The petitioner reported all of the income from the sale of timber taken under the contract in the year 1924, the">*3009 year in which the contract was completed, and claimed deductions for all expenses incurred incident to its operations under the contract.

The respondent determined that the petitioner was not entitled to report its income for 1920 to 1924, inclusive, upon the long-term-contract basis, and he determined deficiencies based upon the ascertainment of net income on a calendar year basis for each of such years.

The parties stipulated that if the petitioner is not entitled to report its income on the long-term-contract basis, as provided by article 36 of Regulations 45 and 62, the respondent has correctly determined the net income of each of the years in controversy.

OPINION.

MILLIKEN: The only question requiring a decision at this time, is the proper time for accounting for income, admittedly earned or received in 1920, 1922, and 1923, and for the expenses, losses, and statutory allowances, paid or incurred in the same years incident to the production of that income, considering the circumstance that such income was derived from the sale of products acquired under a contract which necessitated productive operations on the part ">*1034 of petitioner for a period extending">*3010 over more than one taxable year. The petitioner maintains that its books of account were kept upon the long-term-contract basis, that such basis clearly reflected its net income, and that, under the provisions of sections 212(b), 213, and 233 of the Revenue Acts of 1918 and 1921, it is entitled, and required, to compute its net income upon the same basis. The respondent answers that the nature of petitioner's business is not such as to entitle it to return its income upon the long-term-contract basis, as provided in article 36 of Regulations 45 and 62, and that the petitioner is required by statute to compute and return its net income upon an annual basis.

The provisions of the Revenue Acts of 1918 and 1921 pertinent to this question are the same in both Acts and are as follows:

SEC. 233. (a) That in the case of a corporation subject to the tax imposed by section 230 the term "gross income" means the gross income as defined in sections 213 * * *

SEC. 232. That in the case of a corporation subject to the tax imposed by section 230 the term "net income" means the gross income as defined in section 233 less the deductions allowed by section 234, and the net income shall be computed">*3011 on the same basis as is provided in subdivision (b) of section 212 or in section 226.

SEC. 213. That for the purposes of this title (except as otherwise provided in section 233) the term "gross income" -

(a) Includes gains, profits, and income derived from salaries, wages, or compensation for personal service (including in the case of the President of the United States, the judges of the Supreme and inferior courts of the United States, and all other officers and employees, whether elected or appointed, of the United States, Alaska, Hawaii, or any political subdivision thereof, or the District of Columbia, the compensation received as such), of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. The amount of all such items * * * shall be included in the gross income for the taxable year in which received by the taxpayer, ">*3012 unless, under methods of accounting permitted under subdivision (b) of section 212, any such amounts are to be properly accounted for as of a different period; * * *

SEC. 212. (a) That in the case of an individual the term "net income" means the gross income as defined in section 213, less the deductions allowed by section 214.

(b) The net income shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made upon such basis and in such manner as in the opinion of the Commissioner does clearly reflect the income. * * *

Under ">*1035 the general authority conferred upon him by the statutes to make all necessary regulations for their proper enforcement, the respondent, in article 36 of Regulations 45 and 62, has prescribed certain methods for computing the net income of taxpayers engaged in contracting operations extending over a period involving more than one">*3013 taxable year. Article 36 of Regulations 45 provides as follows:

Long-term contracts. - Persons engaged in contracting operations, who have uncompleted contracts, in some cases perhaps running for periods of several years, will be allowed to prepare their returns so that the gross income will be arrived at on the basis of completed work; that is, on jobs which have been finally completed any and all moneys received in payment will be returned as income for the year in which the work was completed. If the gross income is arrived at by this method, the deduction from such gross income should include and be limited to the expenditures made on account of such completed contracts. Or the percentage of profit from the contract may be estimated on the basis of percentage of expenditures, in which case the income to be returned each year during the performance of the contract will be computed upon the basis of the expenses incurred on such contract during the year; that is to say, if one-half of the estimated expenses necessary to the full performance of the contract are incurred during one year, one-half of the gross contract price should be returned as income for that year. Upon">*3014 the completion of a contract if it is found that as a result of such estimate or apportionment the income of any year or years has been overstated or understated, the taxpayer must file amended returns for such year or years. See section 212 of the statute and articles 22-24.

Article 36 of Regulations 62 provides as follows:

Long-term contracts. - Income from long-term contracts is taxable for the period in which the income is determined, such determination depending upon the nature and terms of the particular contract. As used herein the term "long-term contracts" means building, installation, or construction contracts covering a period in excess of one year. Persons whose income is derived in whole or in part from such contracts may, as to such income, prepare their returns upon the following bases:

(a) Gross income derived from such contracts may be reported upon the basis of percentage of completion. In such case there should accompany the return certificates of architects or engineers showing the percentage of completion during the taxable year of the entire work to be performed under the contract. There should be deducted from such gross income all expenditures">*3015 made during the taxable year on account of the contract, account being taken of the material and supplies on hand at the beginning and end of the taxable period for use in connection with the work under the contract but not yet so applied. If, upon completion of a contract, it is found that the taxable net income arising thereunder has not been clearly reflected for any year or years, the Commissioner may permit or require an amended return.

(b) Gross income may be reported in the taxable year in which the contract is finally completed and accepted if the taxpayer elects as a consistent practice to so treat such income, provided such method clearly reflects the net income. If this method is adopted there should be deducted from gross income all expenditures during the life of the contract which are properly allocated thereto, taking into consideration any material and supplies charged to the work under the contract but remaining on hand at the time of completion.

">*1036 Where a taxpayer has filed his return in accordance with the method of accounting regularly employed by him in keeping his books and such method clearly reflects the income, he will not be required">*3016 to change to either of the methods above set forth. If a taxpayer desires to change his method of accounting in accordance with paragraphs (a) and (b) above, a statement showing the composition of all items appearing upon his balance sheet and used in connection with the method of accounting formerly employed by him, should accompany his return.

Petitioner was advised by counsel that it was within the limited class of taxpayers to whom the above quoted regulations apply, and, acting upon that advice, it elected to postpone an accounting for the income derived from the sale of products acquired under the contract set out in the findings of fact until all the necessary operations under that contract had been completed. While it made formal record on its books of income, as earned or received, and of expenses, as paid or incurred, there was not a formal closing of the books at the end of 1920, 1921, 1922, and 1923, such as is customary with business enterprises at the close of an accounting period, and no profits, actual or estimated, were accounted for in those years. If filed income-tax returns for 1920, 1922, and 1923, in which it showed neither gain nor loss, but stated that">*3017 it was operating under a long-term contract and that the income, if any, derived from such operations would be reported upon the completion of the contract. It reported all of the income from sales of timber made in 1920, 1922, and 1923, as income for 1924, the year in which the contract was completed, and claimed deduction for all expenses incurred incident to the operations under the contract.

The structure of all revenue statutes is founded upon the principle that there shall be an annual accounting for income, unless in order to reflect true income a different basis is necessary. The respondent has determined that the use of an annual basis reflects income and petitioner desires a departure from same in order that its income may be clearly reflected. It, therefore, becomes necessary to determine, if, based upon the facts of record, this case is one where there should be such a departure.

We do not believe this is a case that falls within the permissive language of section 212 of the statute, or within the intendment of the regulations of the respondent promulgated in connection therewith. The application of the long-term-contract basis, as permitted by article 36 of Regulations">*3018 45 and 62, is applicable only to such situations where true income can not be reflected by resort to the usual annual basis.

The purpose of petitioner in entering into the contract in question was to secure and purchase timber. We think it manifest that petitioner can not bring itself within the four corners of the regulations ">*1037 by a mere showing that there is income to be derived from the disposition of property acquired under a long-term contract. The income in this case arises primarily from the sale of the property (timber) obtained pursuant to its provisions. Here the petitioner was not holding itself out as offering its services or binding itself to perform services for which it was to be paid by the contracting parties, but, to the contrary, it obligated itself to pay to the contracting parties certain amounts for the timber as removed. The profitableness of the contract, in so far as petitioner was concerned, inured in the profit it was to derive from the resale of the timber to others and its success in selling such timber at a profit was and did gauge the extent of the income it earned.

In ">*3019 C. H. Swift & Sons, Inc.,13 B.T.A. 138">13 B.T.A. 138, we had before us a somewhat analogous situation. In that case, the petitioner who was engaged in the purchase and resale of lumber at wholesale, had entered into long-term contracts for the purchase of lumber intended for resale, and it was contended that the proceeds of sales should be accounted for only after all the lumber contracted for had been received and disposed of when the profit or loss attributable to the entire venture would be reported for income-tax purposes. We there said in answer to that contention:

It hardly appears necessary to answer at length such a contention. Having acquired a quantity of lumber by purchase, contracted for more, and sold a part of that acquired, petitioner contends it should at present report no income since the ultimate outcome is doubtful of the venture in purchasing the lumber. There were no unfilled sales orders at the end of the year so far as we know. The situation was simply that a quantity of the lumber remained on hand unsold. By no stretch of the imagination can such a situation be included in the provisions of article 36, which obviously refers to sales or executory">*3020 contracts which are directly productive of gross income.

The provisions of the Revenue Act of 1918 pertinent to this issue are as follows:

* * *

Petitioner comes squarely within these provisions. It is on the accrual basis, employs inventories in the computation of income and derived gross income within the taxable year from sales of the lumber, which sales were completed transactions. We agree with respondent that there is no ground for a deferment to a subsequent year of the computation of the profit or loss.

The sole distinction in the two cases is in the manner in which they acquired the products which they resold. In the Swift case the taxpayer acquired outright, apparently for a cash payment or on the usual credit terms, lumber which it resold without any change by manufacturing or other productive processes. In the case at bar, petitioner was required to fell the timber at its own cost, an operation which required the construction and use of capital facilities, and, in addition, it was required to pay a stipulated price per ">*1038 thousand feet to the owner of the timber when the timber was sold. But this lone distinction is not of a character which would">*3021 necessitate a different rule in the case of this petitioner. The vital and controlling consideration is that in both cases the income was derived from the resale of products acquired under long-term contracts, and the contracts themselves are not directly the source of the income. Hence, we believe the same rule should apply in both cases.

This brings us to the question, much emphasized in brief of counsel for petitioner, that the income for the years should be computed on a long-term-contract basis in view of the fact that the petitioner so kept its books. We must always bear in mind when such a contention is made that bookkeeping entries are not in and of themselves controlling. Doyle v. Mitchell Brothers Co.,247 U.S. 179">247 U.S. 179. From a business standpoint, petitioner had the right to keep its books in such a manner that it could determine whether it had gained or lost upon the entire timber-cutting operation. It had the undoubted right to refrain from the declaration of dividends until all the timber had been cut and sold. It could choose the method it desired in keeping its books in balance for financial statements. ">*3022 But all of such methods may not, and, we believe in this case the method employed does not, conform to the reflection of true income for Federal taxation purposes. Congress may tax that which a business man may desire, for conservative purposes, to hold in a reserve. See Consolidated Asphalt Co.,1 B.T.A. 79">1 B.T.A. 79, and Harrison v. Heiner, 28 Fed.(2d) 985 (Dist. Ct., W. Dist. Pa., October 21, 1928). During each of the years in controversy, petitioner realized a substantial income from sales of timber. Those sales, so far as we know, were completed transactions, and the income thus realized could not be altered by any possible future contingency. The income, and all the expenses incident to the production thereof, were definitely ascertainable, and the net income of each year could be readily computed, as the respondent has done. No future adverse happening could have any effect upon the net income of these years. Counsel for petitioner also emphasizes that the income for each of the years was not evenly earned and that the stand of timber was heavy in some areas, while light in others, and that expenditures were uneven, incident to the cutting">*3023 of the timber. We can perceive no more distinction or hardship in the case of petitioner than any other taxpayer engaged in similar undertakings. An officer of petitioner testified that had petitioner owned the tract of timber in question it would have been subjected to the same business uncertainties and perplexities as they were operating under the contract. If any such happening as petitioner calls to our attention should be met with, it is, under the statutory rules, to be reckoned with and accounted for in the year in which it takes place. ">*1039 Having realized a net income in each of the years in controversy, the petitioner was in duty bound to make an accounting of it for income-tax purposes.

This petitioner is in no different situation, as concerns its long-term contracts, than a great many other taxpayers who are carrying on business under somewhat similar conditions. In all our major manufacturing industries, it is customary practice to purchase raw materials under contracts extending well into the future. Scores of taxpayers are engaged in the extraction and sale of coal, oil, gas, and other natural deposits, under royalty lease agreements which in a large">*3024 majority of cases extend over long periods of years. There are others who under like agreements, are taking the timber from our forests for conversion and resale. See Atkins Lumber Co.,1 B.T.A. 317">1 B.T.A. 317, wherein we said, "the taxing statutes have been designed to levy income and profits taxes upon the gains and profits of business for annual periods and each annual period must necessarily, under the provisions of the law, stand by itself." To hold that none of these realize income until the purchase or royalty agreements have expired, and all of the products taken under them have been converted and disposed of, would be a paradoxical ruling without statutory foundation. Yet, that is the logical end to which petitioner's reasoning leads.

Petitioner also relies on the fact that it entered into the contract of September, 1920, with the provisions of article 36 of Regulations 45 (1920 edition) in mind and that it should be held to come within its provisions. Of course, if petitioner is entitled to report its income on a long-term-contract basis, it is immaterial whether it entered into the contract with or without the Regulations in mind, but it may be observed that">*3025 the article of the Regulations in question was not promulgated until the issuance of Treasury Decision 3146, on January 28, 1921.

In brief filed in this cause, counsel for petitioner has dwelt at length on the decision of the District Court for the Western District of MissouriIn re Harrington, 1 Fed.(2d) 749. In that case the firm of engineers contracted to do specific engineering work for stated sums, which was dependent upon certain contingencies. There the taxpayer was engaged in the type of work (i.e., contractor) contemplated by the regulations of the respondent.

We hold that petitioner's net income is not clearly reflected by the method of accounting employed in keeping its books. Since the parties have stipulated that if the petitioner is not entitled to report its net income upon the long-term-contract basis, the respondent has correctly determined the net income of each of the years in controversy, the net income for each year as computed by the respondent is approved.

">*1040 These proceedings will be restored to the general calendar for hearing in due course, for the year 1920, pursuant to Rule 62(c) of the Board's rules of practice.

">*3026 Reviewed by the Board.

STERNHAGEN, GREEN, ARUNDELL, and SIEFKEN concur in result.