Opinion ID: 390279
Heading Depth: 1
Heading Rank: 3

Heading: Deferred Intercompany Transaction

Text: 9 Georgia-Pacific first argues that the ordinary income provision of Treas.Reg. § 1.1502-13(c)(4) does not apply because the timber contracts do not qualify as deferred intercompany transactions. We do not agree. 10 A transaction between affiliated corporations will be deemed a deferred intercompany transaction if it constitutes: 11 (i) The sale or exchange of property, 12 (ii) The performance of services in a case where the amount of the expenditure for such services is capitalized (for example, a builder's fee, architect's fee, or other similar cost which is included in the basis of property), or 13 (iii) Any other expenditure in a case where the amount of the expenditure is capitalized (for example, prepaid rent, or interest which is included in the basis of property)(.) 14 Treas.Reg. § 1.1502-13(a)(2). 15 We hold that the transactions in the present case were sales under the above-quoted regulation. 5 The timber contracts refer to the transaction as a sale and refer to the parties as the buyer and seller. We are not inclined to ignore the taxpayer's characterization of the contracts. We hold infra that each of the purchasers acquired an economic interest in standing timber through the contracts that entitled it to claim depletion as the timber was cut. It is therefore appropriate to deem the transfer of this economic interest a sale. 6 16 Georgia-Pacific contends that a disposition of rights in standing timber that qualifies for capital gains treatment under Int.Rev.Code § 631(b) can never be deemed a sale. It first notes that the Supreme Court held that receipts from a mineral lease do not constitute the sale of mineral rights and are not entitled to capital gains treatment. Burnet v. Harmel, 287 U.S. 103, 53 S.Ct. 74, 77 L.Ed. 199 (1932). Georgia-Pacific argues that, by analogy to Burnet, the disposition of rights in standing timber does not constitute a sale and that it is afforded capital gains treatment solely by virtue of Int.Rev.Code § 631(b). This argument is unpersuasive. 17 Assuming arguendo that the logic of Burnet also applies to the disposition of standing timber, we note that the Court held only that the lease did not constitute a sale of a capital asset, in that case the mineral rights in the land. The Court acknowledged that the lease did constitute a transfer of ownership of the minerals removed. Id. at 110-11, 53 S.Ct. at 77. Moreover, contracts for the sale of standing timber are more like a traditional sale than a mineral lease. 18 (T)he typical contract for the exploitation of an oil and gas deposit does not have the characteristics of a sale of the owner's capital interest in the underlying oil and gas; its dominant purpose is to fix the terms under which the land will be explored and under which any deposit of oil and gas that may be found will be produced. The exploration, drilling, and production contemplated by such a contract resembles a manufacturing operation to which the passage of title to the oil and gas produced is only an incident, rather than a sale of an interest in the oil and gas in place 19 By contrast, the dominant purpose of the Timber Sale Agreement in the present case was not the lease of lands for exploration, discovery, and exploitation of a concealed resource over an extended term, but rather the immediate conveyance of a visible, measurable, readily accessible timber crop, to be paid for, cut, and removed within a short period of time. 20 United States v. Giustina, 313 F.2d 710, 714 (9th Cir. 1962). 21 Georgia-Pacific also argues that a transfer qualifying under section 631(b) can never be a sale because the disposing party retains an economic interest in the timber. This argument is also unpersuasive. The intent of Congress in enacting section 631 was to prevent application of the Burnet rationale to the sale of standing timber and to allow the owner of timber land capital gains treatment whether he sold the timber and the land or just the standing timber. Dyalwood, Inc. v. United States, 588 F.2d 467 (5th Cir. 1979); United States v. Giustina, 313 F.2d at 713 n.7, 714 n.11. We believe the section 631(b) phrase under any form or type of contract by virtue of which such owner retains an economic interest was merely a shorthand form to refer to the type of contract to which Burnet might otherwise be applied. 7