Williams v. Superior Pine Products Co.

Gardner, Presiding Judge.

The defendant relies on Code (Ann.) § 92-3119(d) which reads as follows: “There shall be included in 'gross income’ of a taxpayer, as defined in § 92-3107, gains from the sale or exchange of 'capital assets’, as hereinafter defined, and in the deductions, .of a taxpayer, as defined in § 92-3109 (d) ... (1) (A) The term 'capital assets’ means property held by the taxpayer (whether or not connected with his trade or business) but does not include—1. Stock in trade . . . or property held . . . primarily for sale to customers 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 depreciation provided in § 92-3109 (f), or real property used in his trade or business.”

The defendant also relies on Code (Ann.) § 92-3119 (d) (1) (K) (2) which reads as follows: “Percentage taken into account.—In the case of a taxpayer, if for any taxable year the net long-term capital gain exceeds the net short-term capital loss, 50 percent of the amount of such excess shall be a deduction from gross income.”

Code (Ann.) § 92-3122 reads: “The executive order of the Governor, dated May 20, 1952, as amended January 6, 1953, suspending the collection of income tax on corporations which is due by a failure to provide corporations the deduction from gross income of 50 percent of the excess of net long term capital gain over a net short term capital loss as is provided an individual, required to be paid under the Georgia Income Tax Act as amended by Georgia Laws approved February 15, 1952, is hereby ratified, approved and confirmed. All corporation income taxes which have accrued under said Act as amended since February 15, 1952, or may hereafter accrue by failure to provide the same deduction for a corporation as .is provided for an individual as provided in said order of the Governor and while said order is effective and/or during the regular session of the General Assembly in 1953, are hereby remitted, cancelled an'd annulled.” The defendant relies also on Code (Ann.) § 92-3119 (g) which reads as follows: “In the case of a sale or exchange of 'other assets’ used in a trade or business, the following rule shall apply . . . (2) In the case of a gain and the property used in the trade or business has been held longer than six months, only 50 percent of the gain shall be taken into account.”

The determination of whether the income here involved is regular income or capital gain depends not on the interpretation of the law but on the interpretation of the contract. Is the intention of the parties to sell and buy capital assets of the seller or is the intention to lease the land for sixty years for the purpose of pine-tree farming by the tenant? We think that' the answer is unquestionably the latter. The criterion in ascertaining intent here is whether as a result of the activities of the tenant the capital assets of the owner or Seller are depleted by the tenant in the course of its performance of the contract. The terms of the contract show without question that the assets, principally pine trees fit for pulpwood purposes, are not to be depleted but replaced and replacements nurtured through the years so that at the end of tíre term of the lease the status of the lands insofar as pulpwood trees are concerned would not be materially different from their status at the time of the contract. The Federal cases cited which involve the selling off of trees, without provisions for replacement over a period of years are so clearly distinguishable from this case that further discussion is unnecessary. The Federal cases most similar to this one hold the income to be regular income and these cases are not as strong on their facts in favor of regular income as the facts in this case because the element of continuous replacement and resupply of capital assets is not present in those cases. The cases referred to are: Burnet v. Harmel, 287 U.S. 103, 106 (53 Sup. Ct. 74, 77 L. ed. 199); Albritton v. Commissioner, 24 T. C. 903. The fact that the rental is based, over and beyond a minimum rental, on the number of cords of wood cut, is not controlling. The gravamen of the issue is whether capital assets are depleted. We think that the intention is that they should not be. The fact that Section 117 (k) of the Federal Internal Revenue Code of 1939 was not enacted as the law of Georgia is immaterial so far as this case is concerned. It reads in part as follows: “In the case of the disposal of timber or coal (including lignite), held for more than six 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 or coal, the difference between the amount received for such timber or coal 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 or coal . . .” This section was not intended to refer to a lease such as we have in this case, but was to remove inequities existing because of situations which arose in an owner’s selling off of timber, where there was no provision for farming timberlands or replacing depleted lands. Insofar as this case is concerned the law would be the same if Section 117 (k) of the Federal Internal Revenue Code was included in the Georgia law. We agree with the taxpayer’s argument on this point. There may be one or two more reasons why the income involved is regular income, but what we have said above is sufficient, it being in our opinion the most compelling reason for our conclusion.

The court erred in reversing the judgment of the Commissioner.

Judgment reversed.

Felton, C. J., Carlisle, Quillian and Nichols, JJ., concur. Townsend, J., dissents.