The latter case was affirmed in Cameron v. Commissioner, 56 Fed. (2d) 1021. These decisions are controlling here, and, under clause 10(b) of the stipulation of facts, the value of the timber for depletion purposes is $4.937 per thousand for pine and $3 per thousand for hardwood.

The remaining question is the claim by petitioners of the right to elect to have the profits derived from the sale of certain quantities of standing timber cut during the taxable years computed on the basis of capital net gain on a sale of capital assets under section 206(b) of the Revenue Act of 1921, and section 208 (b) of the Revenue Acts of 1924 and 1926.

Petitioners contend that growing timber owned by the partnership of W. T. Carter & Bro. constituted capital assets, having been owned and held by the partnership for more than two years next prior to the years of sale, and come within the capital gain provisions of the applicable revenue act, while respondent claims that the timber sold was stock in trade, or was property held by W. T. Carter & Bro. primarily for sale in the course of its trade or business and was therefore excluded from the benefits of the capital gain provisions of the law.

The 13th clause of the stipulation of facts provides as follows: "W. T. Carter and Bro., a partnership, is and always has been engaged in the manufacture and sale of lumber at wholesale."

The deficiency for 1923 is governed by the Revenue Act of 1921 while those for 1924 and 1925 come within the provisions of the Revenue Acts of 1924 and 1926. The difference in the acts was stated by the Board in Clinton Gilbert, Executor, 20 B. T. A. 765, as follows:

"Capital assets" are defined by the Revenue Act of 1921 as follows:

SEC. 206. (a) That for the purpose of this title:

(6) The term "capital assets" as used in this section means property acquired and held by the taxpayer for profit or investment for more than two years (whether or not connected with his trade or business), but does not include property held for the personal use or consumption of the taxpayer or his family, or stock in trade of the taxpayer 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.

And by the Revenue Act of 1924 as follows:

SEC. 208. (a) For the purposes of this title

(8) The term "capital assets" means the property held by the taxpayer for more than two years (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer 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 taxpayer primarily for sale in the course of his trade or business.

Under the 1921 Act property had to be “acquired and held by the taxpayer for investment or profit for more than two years (whether or not connected with his trade or business)," but under the 1924 Act the property merely had to be held by the taxpayer for more than two years," without mention of whether it was held for investment or profit, before such property could be considered "capital assets." After having specifically provided that property held for two years would be considered capital assets, both acts expressly excluded property which would properly be included in a taxpayer's inventory if on hand at the close of the year. In addition, the 1921 Act excluded property held for the personal use or consumption of taxpayer or his family, while the 1924 Act excluded "property held primarily for sale in the course

of his trade or business."

*

Section 208(a) (8) of the Revenue Act of 1926 is substantially the same in its definition of capital assets as is section 208(a) (8) of the Revenue Act of 1924.

Property excluded by all three acts from capital assets includes "stock in trade of the taxpayer 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."

Under the laws of Texas, where the owner of standing timber enters into a contract to sell it and the vendee agrees to cut, remove and pay for it as removed within a specified time, the title to the timber remains in the vendor until the timber is cut, removed and paid for. Florence A. Foster, 18 B. T. A. 819, affirmed on this point in 57 Fed. (2d) 516. It results that until so cut and removed the timber is part of the realty, and we have decided in a number of cases that real estate is not stock in trade and not properly included in an inventory. Atlantic Coast Realty Co., 11 B. T. A. 416; Albert F. Keeney, 17 B. T. A. 560; John M. Welch, Sr., 19 B. T. A. 394.

We think it clear that the standing timber of W. T. Carter and Bro., the partnership, was not a part of its stock in trade and was not property which it should properly include in its inventory. We hold, therefore, that as to the taxable year 1923, taxable under the 1921 Act, petitioners are entitled to have the gains derived from the sale of standing timber computed under the capital gain provisions of the 1921 Revenue Act. But this holding does not dispose of the taxable years 1924 and 1925, governed by the Revenue Acts of 1924 and 1926.

Both of these acts carry a provision which excludes, in addition to the exclusion carried in the 1921 Act, from the benefits of the capital gain provisions of the acts, property held by the taxpayer primarily for sale in the course of his trade or business. This provision manifestly broadens the exclusions found in the 1921 Act, referred to above. In construing the meaning of this provision the Board said, in John M. Welch, Sr., 19 B. T. A. 394:

It may at once be admitted that real estate is not property to be included in the inventory. We so held in Atlantic Coast Realty Co., 11 B. T. A. 416, and

Albert F. Keeney, 17 B. T. A. 560. As we see the problem presented by these proceedings, it is whether the real estate owned by the petitioner and sold partly during the taxable years and partly in prior taxable years constituted property held by the petitioner primarily for sale in the course of his trade or business. What connotation is to be given to this language of the taxing acts as applied to the instant proceedings?

We think that it means that where a person is engaged in business and in the conduct of that business sells property which is held for sale in the business, such person may not claim the benefit of the capital gains provision of the statute. The question here is whether the petitioner was engaged in a real estate business during the years 1924, 1925 and 1926. We think that he was. He was a member of a partnership which was actively engaged in a real estate business and which was selling and endeavoring to sell the property held by the petitioner. Clearly, he was engaged in the real estate business in which the partnership was engaged. But the evidence shows further that the petitioner had over a series of years subdivided different tracts of land and held the lots in such subdivisions for sale. We think, indeed, that as an individual the petitioner was engaged within the meaning of the statute in a real estate business.

There can be no question that the real estate owned by the petitioner was property within the meaning of section 208(a) (8) of the Revenue Acts of 1924 and 1926 and that the property was held primarily for sale.

Undoubtedly any timber which the partnership of W. T. Carter and Bro. cut into lumber during the taxable years and sold as lumber, would be, under the above cited case and other cases of the Board, excluded from the capital gain provisions of the law. Petitioners do not contend otherwise. The business of the partnership was to cut timber and manufacture it into lumber and sell such lumber at wholesale. The lumber would be its "stock in trade," would be "property includable in its inventory," and would also be property "held primarily for sale." But we do not think we should hold, under the facts as they have been stipulated, that the standing timber of W. T. Carter and Bro, was property held by the partnership"primarily for sale in the course of its trade or business."

We have already pointed out that its trade or business was that of a wholesale lumber manufacturer and dealer and we believe it is reasonable to say that the ordinary course of manufacturers and sellers of lumber at wholesale is not to sell their standing timber, but to cut it themselves and manufacture it into lumber and sell the lumber. We hold that the standing timber owned by the partnership of W. T. Carter and Bro., and sold by it during the taxable years in the manner specified in the stipulation, was not property held by the partnership "primarily for sale in the course of its trade or business," and hence is not excluded from the capital gain provisions of the Revenue Acts of 1924 and 1926. On this issue we hold for petitioners.

Reviewed by the Board.

Decision will be entered under Rule 50 STERNHAGEN and MATTHEWs dissent on the second point.

ANNIE WATTS HILL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 53889. Promulgated November 16, 1932.

Cancellation or redemption of stock and the resultant distribution may be treated as a taxable dividend under provisions of section 201 (g) of the Revenue Act of 1926, although there is no proof of existing relation between the issuance of the stock and its redemption evidencing a continuing, unified plan for distribution of surplus.

Edmund B. Quiggle, Esq., and William W. Sledge, Esq., for the petitioner.

W. R. Lansford, Esq., and Newton Montgomery, Esq., for the respondent.

OPINION.

GOODRICH: This proceeding involves the redetermination of a deficiency of $4,741.98 for the year 1927, of which the amount of $2,726.65 is in controversy. Only one issue is raised, namely, whether the amount of $25,000 received by the petitioner in 1927 in redemption of 250 shares of Union Bleachery, issued to her as a stock dividend in 1922, should be treated as essentially equivalent to the distribution of an ordinary dividend under section 201 (g) of the Revenue Act of 1926, or as a distribution in partial liquidation under section 201 (e) of that act. The facts were stipulated, and that stipulation we incorporate herein by reference as our findings of fact, but for the purposes of this report a brief statement will suffice.

In September, 1922, petitioner inherited 250 shares of the common stock of Union Bleachery. In December, 1922, she received a like amount of preferred stock from the company as a stock dividend and, again, in October, 1925, received as a stock dividend 250 shares of common stock. In July, 1927, she received $25,000 in cash in redemption of her preferred stock previously received as a stock dividend. We infer that at the same time she received a further stock dividend of 250 shares of common stock. While that fact is not stipulated, it does appear that such stock dividend was declared and issued by the company, and our inference is only that she received her proportionate share thereof. There is no dispute concerning the amounts here involved. Should respondent's contention as to the applicability of section 201 (g) be upheld, it is conceded that his determination of deficiency is correct; should his contention be denied, it is conceded that petitioner's return for 1927 discloses correctly her capital gain from this transaction.

Union Bleachery was organized as a corporation on or about July 1, 1922, with an authorized capital of $400,000, being all common

stock of the par value of $100 a share. On December 29, 1922, its authorized capital was increased to $1,200,000, the increase of $800,000 being preferred stock, bearing dividends at 8 per cent, redeemable after two years, having a par value of $100 a share, and containing various protective provisions against encumbrance of property. The next day a dividend of 100 per cent upon the common stock, to be paid in the new preferred stock, was declared; consequently $400,000 of the preferred stock was issued immediately in payment of the dividend, the balance of like amount remaining unissued. On December 31, 1922, after the issuance of the stock dividend, the undivided profits of the company amounted to $432,284.68 without considering certain reserves established which may or may not have been proper appropriations of surplus.

On October 31, 1925, a dividend of 100 per cent upon the common stock, payable in common stock was declared and was thereafter paid. We assume that appropriate corporate action respecting the company's authorized capital was taken in order that this common stock might be issued, although the record before us is silent on the matter. On July 1, 1927, in conformity with action of the directors at a meeting held on April 26, 1927, and following notification to the stockholders, the company redeemed its preferred stock outstanding in the amount of $400,000 and at the same time paid in common stock a dividend of 50 per cent (being $400,000) upon the common stock outstanding of $800,000. The action of the directors at their meeting mentioned is reflected on the minutes as follows:

BE IT RESOLVED, That all the Preferred Stock of this corporation of the aggregate par value of $400,000.00 be redeemed and retired on July 1st, 1927, in accordance with the terms and provisions of the resolution authorizing the issue of such Preferred stock, and that the President be authorized and directed to give notice to this effect to all holders of record of such Preferred stock.

BE IT RESOLVED, That a stock dividend of 50% upon the Common stock of the corporation, payable in Common stock, to all Common stockholders of record as of July 1st, 1927, be and the same is hereby declared.

BE IT RESOLVED FURTHER, That the proper officers of this corporation be and they are hereby authorized to issue Common stock of this corporation of an aggregate par value of $400,000, in accordance with the foregoing resolution.

On December 31, 1926, the company's undivided profits amounted to $731,584.52 and to $462,641.85 on December 31, 1927 (after the issuance of the stock dividend), without considering certain reserves established which may or may not have been proper appropriations of surplus.

Each year from 1922 to 1927, both inclusive, the company paid cash dividends. In 1922 it paid $36,000; in 1923, 1924, $72,000; in 1925, $76,000; in 1926, $80,000; and in 1927, $76,000. The corporation has not been dissolved.