author: Lansdon:

text:
    Appeal of STANGE-ELLIOTT COAL CO.
    Docket No. 5745.
    Decided August 4, 1926.
    1. The Board is without jurisdiction to redetermine overassessment for a year in which no deficiency has been asserted.
    2. On the evidence, held, that the funds advanced for the construction of a railway track constitute a loan by the petitioner to the railroad company.

      Ottomar JStange for the petitioner.

      John D. Foley, Esq., for the Commissioner.
    Before Aeundell and Lansdon.
    The Commissioner has determined a deficiency in income and profits taxes for the calendar year 1920 in the amount of $3,248.64, and has advised the petitioner of an overassessment for the calendar year 1919 in the amount of $203.44. The petitioner avers that the taxes in controversy amount, approximately, to $5,648.27, and bases this assertion on its demand that the amount of the overassessment for 1919 should be increased or the deficiency for 1920 reduced.
    FINDINGS OF FACT.
    The petitioner is a West Virginia corporation with its principal office at Charleston. It was organized in 1918, and, since that date, has been engaged in the business of mining and marketing coal from a certain parcel of land, which it holds under a lease, the terms and conditions of which are not material to the issues involved in this proceeding.
    At the date of the incorporation of the petitioner there were no railway facilities for shipping coal mined from the land under lease. To secure the shipping service necessary to the profitable operation of its lease, the petitioner entered into the following contract with the Kanawha & West Virginia Railroad Co.:
    This agreement made and entered into this 15th day of December, 1917, WITNESSETH :
    That Whereas, The Kanawha and West Virginia Railroad Company owns the right of way and a partially completed fill and roadway for the construction of the main line of its railroad extending from the end of its present main track, near BÍakeley, West Virginia, 4050 feet up the Valley of Pond-Fork of Blue Creek, over lands of Boyd and Hill, and is desirous of completing the same so as to preserve its rights in the premises, and to increase its revenue from the operation thereof, and
    Whereas, The Stange-Elliott Coal Company is opening mines in tracts of land immediately adjacent to the line of the Railroad Company, as extended, and proposes to construct and maintain, at its own cost, the necessary sidings at its mines, and as an inducement to the Railroad Company to complete its main track aforesaid, as above described, has offered to furnish the Railroad Company all the necessary track materials for the construction of its main track as aforesaid,
    It Is, Therefore, Agreed a)s follows:
    1. The Stange-Elliott Coal Company shall advance to The Kanawha and West Virginia Railroad Company the entire cost, estimated at about Twelve Thousand Four Hundred and Eighty Five Dollars ($12,485.00), of making said extension of the Railroad Company’s main track as above described, and upon the completion of the work the actual cost of said construction shall be ascertained by the proper officer of said Goal Company and the Chief Engineer of the Railroad Company, and the' amount so agreed upon shall be certified to by them at the end of this agreement, and any balance due shall be paid by the Coal Company to the Railroad Company.
    2. The Stange-Elliott Coal Company agrees to proceed forthwith to open and develop, upon the lease obtained by that Company from L. S. Hill, et al., a coal mine, and to operate the same with such diligence as to produce the maximum tonnage possible from said lease.
    3. The Kanawha and West Virginia. Railroad Company will refund to the Stange-Elliott Coal Company, the sum of One Dollar ($1.00) for each and every .loaded car. (excepting passenger cars) passing over said extension to and from the mines of the Coal Company, party hereto, or to or from any other shipper or consignee located along or receiving freight upon said extention of the main line of The Kanawha and West Virginia Railroad Company, upon which the freight revenue of the Railroad Company is assessed upon the carload basis and is not less than Five Dollars ($5.00). Said payments shall be made monthly for a period of ten (10) years from the date of the certification upon this agreement of the actual cost of construction of said extension of the main line, unless said actual cost of construction shall theretofore have been fully repaid, but such payments shall cease and determine at the end of said ten year period, notwithstanding said actual cost phnii not be fully paid at that time, and The Kanawha and West Virginia Railroad Company shall be released from all further payments upon said indebtedness.
    It is agreed between the parties, however, that The Kanawha and West Virginia Railroad Company may, at any time, at its option, pay all of said indebtedness to said Coal Company.
    4. The acknowledgement of indebtedness, herein contained is absolutely non-negotiable and is non-assignable without the written consent of said The Kanawha and West Virginia Railroad Company first had and obtained and endorsed hereon, and if at any time The Stange-Elliott Coal Company, its successors or assigns, shall cease to mine and ship coal from said lease, then, and in that event, this agreement shall become null and void, and all further indebtedness of The Kanawha and West Virginia Railroad Company to said The Stange-Elliott Coal Company, its successors or assigns, shall at once determine and cease.
    Witness the signatures of the parties hereto by their officers thereunto properly authorized on the date and year first above written.
    Upon the completion of the railway track in conformity with the terms of the contract above, the parties involved agreed to and executed the following: '
    CERTIFICATE OF COST.
    As provided in the above agreement it is hereby certified that Fifteen Thousand seven hundred sixty-nine and 81/100 ($15769.81) Dollars is the actual cost of constructing the extension of the main line of railroad of the Kanawha and West Virginia Railroad Company provided for by the above contract, of which amount The Stange-Elliott Coal Company has paid Thirteen Thousand Six Hundred sixty-eight and 11/100 ($13668.11) Dollars, leaving due to be paid by the Coal Company to the Railroad Company the sum of Twenty-one hundred and one and 70/100 ($2101.70) Dollars.
   OPINION.

Lansdon:

Petitioner prays relief from the taxes asserted by the Commissioner in his deficiency letter on either of two bases: (1) That taxpayer be allowed to charge as a deduction in its return for 1920 the amount of $9,967.78, being that part of the total cost of the railroad which' taxpayer estimates it will not recoup from payments of the railroad company; or (2) if the above deduction be not allowed in the 1920 return, that it be permitted to deduct the entire cost of the railroad ($15,769.81) from its 1919 return as a business expenditure.

Considering the latter alternative first, it is sufficient to state that the Board is without jurisdiction to revise the overassessment' for the year 1919 or to inquire as to the correctness of the tax assessed in said year for the reason that no deficiency is- ásserted by the Commissioner in said year, and the finding of a deficiency is a prerequisite to jurisdiction. Appeal of R. P. Hazzard Co., 4 B. T. A. 150; Appeal of Cornelius Cotton Mills, 4 B. T. A. 255.

The deficiency for 1920 results from the Commissioner’s disallowance of the amount of $9,967.78, claimed as a deduction from income in the computation of tax liability for that year. It is not in dispute that this amount was paid or that the railway trackage thereby secured was necessary to the profitable operation of the taxpayer’s coal mine. The Commissioner’s theory is that the amount in question was a loan by the petitioner to the railroad company to be repaid over a period of ten years. The petitioner admits that it is not certain on what grounds the deduction should be allowed, but contends that, as the. money was paid, and in all probability will not be repaid by the railroad company, the amount should be considered in determining its tax liability.

We are satisfied from the plain language of the contract set forth in the findings of fact that the transaction, whereby the petitioner paid to the railroad company the total sum of $15,769.81, was a loan. It follows, therefore, that it is not allowable as a business expense.

Judgment for the Commissioner.


source: Caselaw Access Project

author: Maequette

license: Public Domain

text:
    Appeal of GEORGIA STATE SAVINGS ASSOCIATION.
    Docket No. 5352.
    Decided August 5, 1926.
    Interest involved herein, held to have been paid by the taxpayer on May 1, 1918, and May 1, 1922, and, the taxpayer being on the cash receipts and disbursements basis, such interest is not deductible from gross income for the fiscal years ended April 30,1918, and April 30, 1922.

      T. J. O'Brien, Jr., C. P. A., for the petitioner.

      Ellis W. Manning, Esq., for the Commissioner.
    Before Marquette, Morris, and GreeN.
    This appeal is from the determination of a deficiency in income and profits taxes for the fiscal years ended April 30, 1918, and April 30,1922, in the amount of $3,622.77.
    FINDINGS OE PACT.
    The taxpayer is a corporation organized under the banking laws of the State of Georgia, with its principal office and place of business at Savannah.
    The taxpayer receives deposits on savings accounts and on time certificates of deposit, and loans its funds on improved real estate on a monthly repayment plan, the repayments extending over a period of from six years to ten years.

      ■ The taxpayer has outstanding at all time a considerable amount of delinquent interest due it on loans, representing income earned but not received.
    By the terms-of the contracts entered into by the taxpayer and the holders of certificates of deposit, interest on such deposits is payable by the taxpayer at its “ Banking House, Savannah, Georgia,” semiannually on the first day of May and the first day of November, in each year.
    The taxpayer, shortly before the close of the fiscal years ended April 30, 1918, and April 30, 1922, in accordance with its custom of many years standing, prepared checks for the semi-annual interest on the deposits mentioned, dated April 30, of those years. The checks, which were drawn on the taxpayer and not on any other bank, were mailed to the depositors after the close of business on April 30,1918, and April 30, 1922, and were not and could not have been presented for payment until on or after the first day of May following the date they were mailed. When the checks were mailed out, the “ Interest Account ” was debited with the amount of interest due and “ Interest Checks Outstanding ” was credited with the amount of the checks. On and after May 1st, as the interest checks were presented for pajmient, “ Interest Checks Outstanding ” was debited and corresponding amounts credited to cash.
    In some instances the taxpayer was instructed by the holders of its certificates of deposit to credit their interest checks to their savings accounts, and in all of such cases the interest checks were drawn as usual on April 30th, and on the next day, May 1st, were credited to the savings accounts of the depositors.
    The taxpayer’s books of account were, during the years involved herein, kept on a cash receipts and disbursements basis.
    The Commissioner, upon audit of the taxpayer’s income and profits-tax return for the fiscal years ended April 30, 1918, and April 30, 1922, determined that the taxpayer is not entitled to include in its income for those years interest earned but not actually received, and that the interest on certificates of deposit represented by the checks mailed to depositors on April 30, 1918, and April 30, 1922, respectively, were a proper deduction from gross income for those years.
   OPINION.

Maequette

: Since the taxpayer’s books were kept on the cash receipts and disbursements basis, it is clear that interest due the taxpayer and uncollected at the close of any fiscal year, can not be considered as income for that year, but is income for the year in which collection is actually made. However, with reference to the interest on certificates of deposit, set forth in the findings of fact, we are of the opinion that payment thereof was not made on April 30, 1918, nor April 30, 1922, when the interest checks were drawn and mailed, but that such interest remained a liability to the taxpayer until the checks were actually presented at its banking house and there paid. The contracts under which the deposits were made provided that the interest thereon should be paid semi-annually on May 1st and November 1st of each year. The interest involved herein was due and payable May 1st, not April 30th. The taxpayer, although it drew the checks on April 30th, did not mail them until after the close of business on that date, so that they could not be presented for payment until on or after May 1st, and it made no entries on its books reducing cash, as it would have done if it had considered that payment was actually made. We consider that this transaction is entirely different from that in which the payor draws its checks on funds in another bank. The interest in question was payable on May 1st at the taxpayer’s banking house and, upon the presentation of the interest checks, they were paid and cash credited with the amount thereof.

For the reason stated we hold that the interest in question should not be deducted in computing the taxpayer’s net income for the fiscal years ended April 30, 1918, and April 30, 1922.

Order of redetermination will be entered on 10 days’ notice, under Rule 50.


author: Maeqttette

text:
    Appeal of S. W. BRIDGES & CO.
    Docket No. 8600.
    Decided August 5, 1926.
    In determining whether the net income for 1922 is in excess of . $25,000 and the credit of $2,000 provided for by section 236 (b) of the Revenue Act of 1921 is to be allowed, the net loss provided for by section 204 (b) may not be deducted.

      Samuel Freedman, Esq., for the petitioner.

      D. D. Shepard, Esq., for the Commissioner.
    Before Marquette, GeeeN, Love, and MoRRis.
    This appeal is from the determination of a deficiency in income tax for the year 1922 in the amount of $250.
    FINDINGS OF FACT.
    The petitioner is a Massachusetts corporation with its principal office at Boston.
    The petitioner’s net income for the year 1922 was $115,962.96. . For the year 1921 it sustained a net loss in the amount of $106,499.83, which, under the provisions of section 204 (b) of the Revenue Act of 1921, lias been allowed by the Commissioner as a reduction of its net taxable income for the year 1922. The net taxable income for the year 1922 computed in this manner was $9,463.13. ■
    In computing the deficiency herein the Commissioner denied to the taxpayer the specific credit of $2,000 provided for by section 236 (b) of the Revenue Act of 1921, upon the ground that the taxpayer’s net income was in excess of $25,000.
   OPINION.

Maeqttette

: The petitioner’s net income for the year 1922, after deducting the net loss sustained in the year 1921, is less than $25,000, and it contends that the net income so determined is the “ net income ” referred to in section 236 (b) of the Revenue Act of 1921, and that it is therefore entitled to the specific credit of $2,000 provided by the section. The same question here presented was before this Board in the Appeal of American Varnish Co., 2 B. T. A. 201. In that appeal the taxpayer’s net income for the fiscal year ended June 30, 1922, was in excess of $33,000. It had sustained a net loss for the fiscal year ended June 30, 1921, one-half of which was applied against its net income for the fiscal year ended June 30,1922, thereby reducing its net taxable income for that fiscal year to less than $25,000. The Board, holding that the taxpayer was not entitled to the specific credit of $2,000 provided by section 236 (b) of the Revenue Act of 1921, said:

Net income is defined in section 232 as “ the gross income as defined in section 233 less the deductions allowed by section 234.” Among the deductions listed in section 234, the net loss of the preceding year is not included. Provision is made specially for this further reduction of taxable net income in section 204. The provisions of that section material here are contained in section 204 (b), which reads in full as follows:
“(b) If for any taxable year beginning after December 31, 1920, it appears upon the production of evidence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount thereof shall be deducted from the net income of the taxpayer for the succeeding taxáble year; and if such net loss is in excess of the net income for such succeeding taxable year, the amount of such excess shall be allowed as, a deduction in computing the net income for the next succeeding taxable year; the deduction in all cases to be made under regulations prescribed by the Commissioner with the approval of the Secretary.”
The taxes on corporations are imposed under the Eevenue Act of 1921 by section 230, the material portion of which reads:
* * there shall be levied, collected, and paid for each taxable year upon the net income of every corporation a tax at the following rates: * * ' ”
This section imposes a tax upon the net income, and net income is defined as gross income less certain deductions which do not include the net loss allowed to be deducted under section 204. ■ In-like manner .section 236 grants a specific credit to corporations the net income of which does not exceed $25,000, and denies that benefit t.o corporations the net income of which does exceed that amount.

The petitioner herein urges that we erred in our decision in that appeal and that it should be modified. However, upon careful consideration, we perceive no sound reason for changing our views therein expressed.

The deficiency is- $250. Order of redeter-mination will be entered accordingly.


author: Marquette:

text:
    Appeal of DELAWARE COAL & SUPPLY CO.
    Docket No. 3908.
    Decided August 5, 1926.
    Profit from sale of land, and amount of exhaustion, wear and tear of assets, determined.

      J. J. O'1 Byrne, Esg., for the petitioner.

      Robert A. Littleton, Esg., for the Commissioner.
    Before Marquette, Morris, and Grf,en.
    This appeal is from the determination of a deficiency in income and profits taxes for the years 1920 and 1921, in the amount of $482.25. The questions involved are as to the amount the taxpayer is entitled to deduct in computing its net income for the years 1920 and 1921, on account of the exhaustion, wear and tear of its assets in those years, and as to the amount of profit it realized on the sale of certain real estate.
    FINDINGS OF FACT.
    The taxpayer is a New Jersey corporation, with its principal office at Paterson.
    On May 18, 1920, the taxpayer acquired the assets of a partnership, issuing therefor shares of its own capital stock. Among the assets so acquired were certain automobiles and trucks as follows:
    (1) Federal Truck No. 3 purchased March 4, 1918, at a cost of_$4, 978. 99
    (2) Federal Truck No. 4 purchased June 20, 1918, at a cost of_ 4, 978. 99
    (3) Broadway Truck purchased February 28, 1919, at a cost of_ 940. 00
    (4) Federal Truck No. 5 purchased September 30, 1919, at a cost of__-_ 5, 212; 17
    (5) Ford Truck No. 2 purchased January 30, 1920, at a cost of_ 150.00
    (6) Buick purchased June 30, 1920, at a cost of_ 1,019.60
    (7) White Truck purchased March 31, 1921, at a cost of_ 4, 841. 00
    The average life of these automobiles and trucks was four years. For the period May 18, 1920, to December 31, 1920, the amount of the exhaustion, wear and tear of said automobiles and trucks was $2,668.11, and for the year 1921, the exhaustion, wear and tear thereof was in the amount of $5,088.85.
    During the year 1920, the taxpayer acquired 15 lots or parcels of land and issued therefor shares of its capital stock of the par value of $7,000. The lots or parcels of land so acquired were entered on the taxpayer’s books at a value of $7,000. In 1921 the taxpayer sold 11 of these lots for a consideration of $9,790. The cost of the 11 lots to the taxpayer in 1920 was $466.66 per lot, making a total cost price of $5,133.26. The taxpayer realized on the sale of these lots in 1921 a profit of $4,656.64. In its income and profits-tax return for the year 1921 it reported its profit from the sale as $6,790.
   OPINION.

Marquette:

In computing the taxpayer’s net income for the year 1920, depreciation on the automobiles and trucks set forth in the findings of fact should be allowed in the amount of $2,668.11. For the year 1921, depreciation should be allowed on said automobiles and trucks in the amount of $5,038.85; and the profit from the sale of the 11 lots referred to in the findings of fact should be $4,656.64, instead of $6,790, as reported by the taxpayer in its return for that year.

Order of redetermination will be entered on 10 days’ notice, under Rule 50.


author: Love:

text:
    Appeal of FARMERS & TRADERS BANK.
    Docket No. 2248.
    Decided August 5, 1926.
    1. The taxpayer credited to another corporation, which was the record owner of real property, the sum of $1,500, to be drawn upon and used by the latter to pay taxes and interest charges due on land in which taxpayer owned a beneficial interest. Held, under the facts, the amount is not deductible by taxpayer either as a bad debt or as interest and taxes paid by it.
    2. An order of the State Banking Department, without further evidence of worthlessness, is not sufficient to authorize a taxpayer to deduct from gross income securities held by it and charged off in pursuance of such order.
    3. A sale of securities to another corporation resulting in a profit, although sold at an inflated value, results in taxable income to the seller, notwithstanding the fact that the two corporations were allied and had interlocking directorates.

      Alexander W. /Smith, Esq., for the petitioner.

      A. R. Murray, Esq., for the Commissioner.

      Before Sternhagen, LaNSdoN, and Love.
    This appeal is from the determination of a deficiency in income tax for the year 1919 in the amount of $2,163.25.
    The taxpayer assigns the following errors:
    (1) The disallowance of the sum of $1,500, charged by the taxpayer to profit and loss account by reason of a payment the taxpayer was compelled to make to protect its interests in real estate.
    (2) The disallowance of a deduction from gross income of $9,785, representing shares of stock of corporations ordered charged off the taxpayer’s books by the State Banking Department of Georgia.
    (3) The computation of a profit of $9,840 on the sale of 176 shares of Bankers Trust Co. stock sold by taxpayer to a friendly connection through interlocking directorates.
    FINDINGS OF FACT.
    As associate corporations and closely connected with the taxpayer by interlocking directorates were the Bankers Financing Co:, the Bankers Trust Co., and the Harper & Weathers Realty Co.
    Some time about 1911 or 1912 the Bankers Financing Co. ceased functioning in an active manner and was superseded by the Bankers Trust Co., and all of its stock was taken over by holders of the stock of the Bankers Trust Co., which subsequently performed the functions theretofore performed by said financing company.
    In 1914 a certain piece of real estate was purchased and title to same taken in the name of Harper & Weathers Realty Co., in which company the taxpayer was the holder of a majority of the stock. The initial cash payment consisted of $13,250, paid by Harper & Weathers Realty Co., and $9,250, paid by the taxpayer, under an agreement that each of the corporations should share the equity in said property in proportion to payments made. The property was purchased subject to a large encumbrance.
    In January, 1919, the taxpayer carried on its books an overdraft against the Harper & Weathers Realty Co. of $632.87.
    In 1919 interest on the said real estate debt, as well as taxes on same, matured and the Harper & Weathers Reatly Co. was unable to pay said obligations.
    The taxpayer deposited to the credit of said realty company $1,500, against which it checked in payment of said taxes and interest claims, and at the close of the year 1919 there was an overdraft charge of $759.40. Said real estate was closed out by sale at a loss in 1921 to 1923.
    In 1919 the taxpayer owned 45 shares of the stock of the Interstate Securities Co. and 17 shares of the stock of the Harper & Weathers Realty Co., which shares were carried on the books at a valuation of $9,785 and were ordered charged off the books by the State bank examiner.
    In order to comply with the order of the bank examiner and at the same time preserve its surplus fund unimpaired, it sold to the Bankers Financing Co. 176 shares of the Bankers Trust Co. at an inflated value, to the extent of $9,840 above the March 1,1913, value— that is, it sold said stock at $215 plus, per share. The market value of said stock in 1919 was $165 per share.
    The taxpayer received at date of said sale for said stock the sum of $38,000, payment being made as follows:
    Cash_$10,000.00
    Note due September 25, 1920_ 9,333. 33
    Note due September 25, 1921_ 9, 333.33
    Note due September 25, 1922_ 9, 333.34
    Deferred payments were to draw 7 per cent interest, payable semiannually. The record discloses the payment of notes one and two. Whether or not note three was paid is not disclosed.
   OPINION.

Love:

There are three distinct points contended for by the taxpayer:

(1) That the sum of $1,500 which was credited to the account of Harper & Weathers Realty Co. and with which the latter company paid its interest and taxes should be allowed as a deduction from gross income, either as a bad debt or as interest and taxes paid during the year 1919.

In the year 1914, as set forth in the findings of fact, the Harper & Weathers Realty Co. purchased and acquired title to a certain piece of real estate. During the year 1919 interest and taxes became due and payable with reference to the real estate so purchased. The Harper & Weathers Realty Co. found itself unable to meet such demands and the taxpayer, owning a beneficial interest in the property, agreed to advance to the record owner of the property the sum of $1,500 for the purpose of meeting the matured payments for interest and taxes. The credit extended was a loan and the same did not become a bad debt in the year 1919. The assets of the Harper & Weathers Realty Co. may not have exceeded its liabilities, but the company did own tangible assets which might have at any time enhanced in value and enabled it to meet fully its outstanding-obligations. It was not determined during the year that the credit extended was a bad debt such as to be deductible from gross income.

The taxpayer did not pay the $1,500 as interest on its indebtedness or as taxes on its property during the year — but loaned a sum for that purpose to another taxpayer. Hence the $1,500 is not deductible as interest or taxes which the taxpayer paid, or as a liability which accrued during the year.

(2) The taxpayer contends that, because it sold stock at an inflated value to a corporation with which it was closely associated, it should not be charged with receipt of income resulting from the transaction.

Taxpayer sold to the Bankers Financing Co. 176 shares of the Bankers Trust Co. at an inflated value, to the extent of $9,840 above the March 1, 1913, value. It was a bona fide sale between two corporations the consideration being cash and an enforceable obligation. The parties to the transaction made their own terms and the taxpayer must be bound by the same in so far as taxation may result-on the profit of $9,840.

It may be true that the transaction savors of an intercompany transaction, but there is no evidence before us of affiliation as prescribed by section 240 of the Revenue Act of 1918.

(3) The taxpayer contends that, by reason of the fact that the bank examiner ordered the taxpayer to charge off the 45 shares of the Interstate Securities Co. stock and the 17 shares of the Harper & Weathers Realty Co. stock, and .that said stock had theretofore been carried on its books at a valuation of $9,785, it should be permitted to deduct that amount from gross income, as a bad debt.

The order of a bank examiner to charge off an account is not, -per se, sufficient evidence to justify its deduction as a worthless debt. Appeal of The Murchison National Bank, 1 B. T. A. 617.

There was no evidence presented in regard to the value of the Interstate Securities Co. stock, but the evidence did disclose the fact that the Harper & Weathers Realty Co. stock did have a very substantial value. The company remained in existence and bought and sold real estate until as late as 1922 or 1923.

Judgment for the Commissioner.


author: Geeen

text:
    Appeals of GILBERT BUTLER and FRANCES A. F. SALTONSTALL.
    Docket Nos. 3118, 3117.
    Decided August 6, 1926.
    1. The petitioners acquired property by gift made prior to March 1, 1913, and now claim a loss as the result of its sale or other disposition. Held, that the loss, if any, can not be determined in the absence of proof of value at the date of acquisition.
    2. Held, that the March 1, 1913, value of the lessors’ (petitioners’) interest in a certain mine was its actual value on that date and that such value may not he based upon the value of the interest wMeli tile court in 1919 held to have been vested in them in 1913.
    3. The petitioners in 1913 had a claim against the Delaware & Hudson Co. upon which they realized in 1919. Held,, that in the absence of proof of the March 1, 1913, value of the elaim, the entire amount realized was income at the time it was collected.
    4. Where a mine is leased for a term equal to the life of the mine and the lessee makes certain improvements or does certain development work and, subsequently and prior to the exhaustion of the mine or the termination of the lease, the lease is forfeited, held, that the value of such improvements or development work is income on the date of the termination of the lease.
    5. March 1, 1913, value of lessors’ interest in mine determined; amount of income realized on settlement of litigation determined; value of assets exchanged for stock in 1919 determined; and from the foregoing the amount of the net additions to gross income determined.

      Warren Motley, Ésq., and Eckoard 0. Thayer, Esq., for the petitioners.

      Robert A. Littleton, Esq., and L. 0. Mitehell, Esq., for' the Commissioner.
    Before Marquette, GeeeN, Love, and MoRRis.
    Both of tiñese appeals involve income taxes for the year 1919. The Commissioner determined a deficiency in the Butler appeal of $6,225.54, and in the Saltonstall appeal of $76,925.76. The issues in the appeals are precisely the same, namely- — the amount of gain, if any, realized by the taxpayers upon the disposition of an interest in a certain coal mine, and the amount of income, if any, realized on the settlement of certain litigation growing out of the leasing of the mine. Each acquired his interest prior to March 1, 1913, by gift or inheritance, and each in 1919 exchanged his interest for stock or securities.
    FINDINGS OF FACT.
    In 1861, Henry B. Rockwell, being then the owner of a tract of coal land consisting of 336 acres located on the outskirts of the City of Scranton, Pa., and known as the Legitt’s Creek Coal Mine, entered into an agreement or lease with the Delaware & Pludson Co. whereby that company was granted the right to mine and remove coal therefrom, for which it agreed to pay the lessor or his representative a royalty of 12 cents per ton for all coal above the size of chestnut, and to pay all taxes assessed against the land, which taxes, for the four years preceding 1913, averaged approximately $6,000 per annum. The lease contained provisions as to the minimum amount of coal to be mined annually; measurement and weighing of coal; and time and method of making payment therefor-

      Rockwell thereafter transferred the property, subject to the lease, to one Gilbert, who died at a time not disclosed by the record, and this property passed to his' heirs of whom the taxpayers are two.
    The Gilbert heirs were not satisfied with the methods adopted by the Delaware & Hudson Go. and the interpretation placed upon the lease by that company, it being their contention that the provision of the lease regarding the mining of a minimum amount of coal had been disregarded and that they were entitled under the lease to substantial royalties which had not been paid. Sometime in 1909 the heirs formed a committee and appointed a representative with instructions to him to employ competent engineers and legal counsel and determine what procedure was advisable. The representative conducted the investigation and determined that the lease had been breached in several material particulars, and made demand upon the Delaware & Hudson Co. for compliance with, or cancellation of, the lease. Not having been able to adjust the matter satisfactorily, the representative, on behalf of the Gilbert heirs, commenced an action in equity in the Supreme Court of the State of New York on May 2, 1913. A referee was appointed and on September 21, 1918, he filed his report, which report was adopted by the court, and judgment in accordance therewith was entered on September 24, 1918. This judgment canceled and set aside the contract or lease and decreed that the title to the coal in the mines remain in the lessors; that the heirs were the owners of the coal unmined on January 1, 1913; that the company on or before May 2, 1913, had breached the covenants and conditions of said lease; that by reason of said breaches thereof the heirs had the right to elect to forfeit such lease; that the company had converted to its own use such coal of the size of chestnut or under as it had removed from the mine; and that it was liable to said heirs in the sum of $317,699.19, together with interest thereon from the 31st day of December, 1912, by reason of having so appropriated the coal of the size of chestnut or under. It was further provided in said decree that the plaintiffs therein were entitled to an accounting of the operation of said mine from and after May 2,1913. From this judgment both parties appealed.
    Both appeals were dismissed as the result of the settlement effected March 31, 1919, by the terms of which the company conveyed to the heirs all the removable equipment being used with the mine and quit-claimed to them all their right, title and interest in and to said mine, and the heirs caused a satisfaction of the money judgment to be entered and waived and abandoned their rights to an accounting.
    Thereafter, and until October 21, 1919, the Delaware & Hudson Co. operated the mine for and on behalf of the heirs, and on said last mentioned date the whole thereof, as of August 15, 1919,- was conveyed to a corporation known as the Legitt’s -Creek Anthracite Co., which had been organized by the heirs for the purpose of taking over all their right, title and interest in and to the coal mines.
    As the result of services rendered in connection with the investigation and litigation above referred to, the heirs became indebted to certain attorneys, engineers, and others, and in satisfaction of such obligations caused the corporation to issue to the persons rendering such services certain of its securities. We have fixed the total value of these securities at $1,103,318.79. At the time of the organization there was paid in to the corporation, by persons not theretofore interested in the property, the sum of $150,000 in cash, and securities of the corporation were issued therefor.
    At the time of the organization of the corporation the following securities were issued:
    7% notes secured by mortgage, face value- $650,000
    10,000 shares, 7% preferred stock, par value- 1, 000, 000
    15,000 shares of common stock, par value_ 1, 500, 000
    Of the above, there was issued for $150,000 in cash:
    Preferred stock, par value — _- 150, 000
    Common stock, par value_ 1, 075, 000
    To attorneys, engineers, and others, for services rendered Gilbert heirs:
    Notes, face value_ 373, 700
    Preferred stock, par value_ 561, 000
    Common stock, par value_ 280,500
    To the Gilbert heirs, in exchange for mine and equipment:
    Notes, face value_ 276, 300
    Preferred stock, par value_ 289,000
    Common stock, par value_i_ 144, 500
    Prior to the transfer of the mine and equipment to the Legitt’s Creek Anthracite Co., Butler and Saltonstall owned, respectively, a one-sixteenth and a one-eighth interest therein, and each received on the exchange of assets'for securities, respectively, a one-sixteenth and a one-eighth interest in the securities issued to the Gilbert heirs.
    In the deficiency letter addressed to Butler, the Commissioner set out his computation of taxable gain as follows:

      Rockwell heirs

    Value of assets, Aug. 15, 1919_$1, 721,440. 02
    Value of assets, Mar. 1, 1913, and cost_ 550, 539. 32
    Profit, 1919- 1,170, 900.70
    Back royalty income, 1919_ 144, 934.43
    Total taxable income, 1919_ 1, 315, 835.13
    The Legitt’s Creek Mine is located in the Wyoming Anthracite Basin. This basin is from two to six miles in width and extends from Shickshinny to Forest City, Pa., a distance of approximately 60 miles. All the coal in the basin is of the same general character and the mining operations throughout the basin are carried on in a similar way.
    The mine lies beneath a portion of the City of Scranton. It is approximately a mile and three-quarters in length and varies in width from 400 to 2,000 feet. Two streams, the Lackawanna River and Legitt’s Creek, pass over the property. Practically all of the surface has been subdivided into streets, blocks, and lots, and buildings and other improvements have been erected thereon. Some four acres of the surface are occupied by a cemetery.
    The lease, hereinbefore referred to, was made on the 12th day of November, 1861, between Henry B. Rockwell, as party of the first part, and the Delaware & Hudson Canal Co., as party of the second part. The Delaware & Hudson Canal Co. was succeeded as lessee by the Delaware & Hudson Co. The lease provided, among other things, that the lessee should mine,, in 1868 and subsequent years, 150,000 tons per year, or, in event of failure to mine such amount of coal, it should pay for that amount.at the royalty rates specified therein. It was further provided that the lessee should pay for the coal mined and taken out at the rate of 12 cents for every ton of 2,240 pounds of clean, merchantable coal, exclusive of chestnut coal, or any coal that would pass through a mesh of one inch square, and that if in any year the lessee should elect to take all coal as it came from the mine without it being screened or broken and prepared, they should have the right to take the same upon the payment to the lessor of 9 cents for every ton of 2,464 pounds. The .lease also contained a provision that, in the event the coal of the size of chestnut should exceed 25 per cent of the total amount of coal, including chestnut, the lessee should pay for such excess chestnut coal at the rate of 12 cents per ton.
    From all of the evidence we. conclude that there was in the mine on March 1, 1913, 9,400,000 tons (all sizes) of coal which were recoverable. The mine as then equipped and operated was capable of producing 300,000 tons (all sizes) per year, and based upon the recoverable tonnage and yearly production, above set out, would have a life of 30 years. The lease provided for a 12 cent royalty on all coal above the size of chestnut. For the purposes of this case only, we find that 60 per cent of the recoverable coal was above the size of chestnut and that the total recoverable coal above that size was 5,640,000 tons. This amount of recoverable coal at a royalty rate of 12 cents would return over the 30-year period gross royalties of $676?800. From this amount there should be deducted the guin of $180,000, representing the estimated taxes on the land, at the rate of $6,000 per year for 30 years, leaving estimated future net royalties of $496,800. The March 1, 1913, value of the right to receive the aforementioned net royalties was $212,770.99. The depletion allowance under the lease (which includes only coal above the size of chestnut), based upon the above valuation, is $.037725 per ton. The surface rights of the lessors had on March 1, 1913, a fair market value of $28,460.
    During the period from March 1, 1913, to August 15, 1919, there were mined out 1,427,937 tons of coal. (The record is silent as to the royalties paid therefor and we have assumed that the amount fixed by the compromise was arrived at without regard to them.) Sixty per cent of the coal so mined was above the size of chestnut and the lessors were entitled to receive-royalties on 856,762 tons at the rate provided in the lease. The depletion allowance on such tonnage is $32,321.35.
    On August 15, 1919, there remained- in the mine 7,972,063 tons of recoverable coal. The expected average annual production was 300,000 tons and the remaining life of the mine 27 years.
    The Commissioner, in determining the value of the coal on August 15, 1919, made his computation on the operating profits basis, using one dollar per ton as the average expected profit, and reduced the total expected profit over the life of the mine to its present value by the application of Hoskold’s formula, using a 6 per cent discount rate. The operating profit from this mine for several years prior to August 15, 1919, ranged from 70 cents to 80 cents per ton, with an average of 75 cents per ton, which we find to be the correct factor to be applied in making the computation. From the foregoing we find the present worth of the coal and improvements on August 15, 1919, to have been $2,725,877.54.
    The value of the plant and equipment on August 15, 1919, was $425,000. On the same date the development had a value of $160,-000. To continue production it will be necessary to make an annual capital expenditure over two-thirds of the remaining life of the mine. The Commissioner computed the present worth of this expenditure to be $352,632.72, and this amount to us seems reasonable. The total of these amounts, $937,632.72, we subtract from the present worth of the coal.
    To the value of the coal thus obtained we add the value of plant and equipment development, surface right of the value of $28,460, (which we find to be correct) and arrive at a total value of assets on August 15,1919, of $2,401,704.82.

      The net profit from the transaction we arrive at by the following computation:
    Lessors’ interest in coal, Mar. 1. 1913_ $212, 770. 99
    Value of surface, Mar. 1, 1913_ 28, 460. 00
    Mar. 1, 1913, value_ 241, 230. 99
    Additions:
    Improvements_ $425, 000. 00
    Development_ 160, 000. 00
    Paid engineers-1,103, 318. 79 1, 688, 318. 79
    Total Mar. 1, 1913, value and additions_ 1, 929, 549. 78
    Less depletion on tonnage removed since Mar. 1, 1913. 32, 321. 35
    Value plus additions_ 1, 897,228.43
    Aug. 15, 1919, value_ 2, 401, 704. 82
    Less Mar. 1, 1913, value and additions_ 1, 897, 228.43
    Taxable profit_ 504, 476. 39
    During the year 1919 and prior to August 15, the lessee paid to the lessors, as royalties for coal removed during the period, the sum of $5,940.07, which, after deducting depletion at the rate heretofore fixed, left as taxable income therefrom the sum of $4,072.66.
    The record contains no evidence of the value of the mine or of the interests of the taxpayers therein at the date on which they acquired their interests. It is equally silent as to the value, if any, on March 1, 1913, of the claim of the lessors against the Delaware & Hudson Co.
   OPINION.

Geeen

: Numerous questions are presented by these appeals. Many of these are questions of fact. It is necessary, in this opinion to discuss only those questions which are properly questions of law or which require our conclusion as to the correct legal principle to be applied in making our finding of ultimate fact. The taxpayers contend that they have sustained losses as the result of their acquisition and disposition of their interests in the mining property. We have heretofore held in the Appeal of Anniston City Land Co., 2 B. T. A. 526, that in order to ascertain the amount of loss realized on the disposition of assets acquired prior to March 1, 1913, the claimant must prove cost, March 1, 1913, value, and sale price. The same rule is applicable here. The taxpayers acquired their interests by inheritance, and without the proof of value at the date of acquisition we are without one of the necessary factors. It may be that the sale price (using that term to describe the value of the securities received in exchange) is less than the value at the date of acquisition though greater than the March 1, 1913, value. An application of the -Regulations to such a state of facts would result in a determination of no taxable gain. However, since the pleadings and proof disregard the value at the date of acquisition, we must limit our consideration and determination.

The taxpayers contend that they are entitled to have a March 1, 1913, valuation based upon the decree of court rendered in 1919, confirming the rights of the lessors asserted before and made the basis of an equitable action shortly after March 1, 1913. In the Appeal of Charles P. Hewes, 2 B. T. A. 1279, we had before us a similar question and determined the value as of March 1, 1913, upon the proof of the actual value at that time. We find no justification for the taxpayer’s position and have based our conclusion upon the evidence of the value of the lessors’ interest in its then condition.

All of the rights and interests which vested in the lessors as the result of the decree were by them exchanged for the improvements in and on the mine which, by the terms of the lease, remained the property of the lessee. The value of these rights and interests so acquired we have treated as. a part of the cost for the purpose of determining gain. It was in fact a capital expenditure subsequent to acquisition.

All of the rights and interests vested in the lessors by the decree grow out of a claim existing against the lessee prior to March 1, 1913. A careful examination of the evidence discloses no proof that this claim had any value on March 1, 1913, and we therefore must hold that all that the lessors received in satisfaction of such claim was income to them when received in 1919. The lessors received, exclusive of development work hereinafter referred to, assets of the value of $425,000. This conclusion is in accord with the principles of Doyle v. Mitchell Brothers Co., 247 U. S. 179.

Included among assets acquired on the settlement was the development work done in the mine. This, when received, had a value of $160,000. This development work is in the nature of an improvement. It was placed in the mine by the lessee. Such an improvement, consisting of shafts, tunnels, and the like, is irremovable and there was no occasion for limiting its removal by the terms of the lease. Commonly, permanent improvements placed upon leased property by the lessee result immediately in income to the lessor. See Miller v. Gearin (C. C. A.), 258 Fed. 225; Cryan v. Wardell, 263 Fed. 248. However, if the life of the improvement is less or only equal to the term of the lease, the Bureau of Internal Revenue has always conceded that no income resulted until the lessor acquired the possession and beneficial use thereof. This we believe to be the correct rule and, accordingly, hold that the value of the development work ($160,000) was income to the lessors when received by them in 1919,

The decree provided for the payment of interest which, if it had been paid, would constitute income. The right to receive such interest was a part of the consideration paid on the settlement for the transfer of all the improvements in the mine; and, since we hold that the entire value of the improvements is income in 1919, there is no occasion to give furthér consideration to the interest item. There was no change in the value of the assets acquired" in the settlement on March 31, 1919, between the date of their acquisition and the exchange thereof for stock and securities on October 21, 1919.

The payment made to the engineers and others by the corporation for and on behalf of the lessors was a capital expenditure and the value of the securities so paid out has been added to the March 1, 1913, value in the computation of gain or loss. Whether the payment be treated as a capital expenditure or a business expense is for our purposes a matter of no consequence, for the effect on taxable income is identical. There is little evidence of the values of the various classes of securities, but .since the October 21, 1919, value of the mine and improvements is considerably in excess of the total of the collateral notes and preferred stock issued, we, for the purpose of computing the value of the securities issued to the engineers and others, and for such purpose only, assign to the preferred stock a value of $100 and the common stock a value of $60.11365 per share. Upon these valuations the securities so paid had a total value of $1,103,318.79.

The values so placed upon the securities paid out can be, at fiest, only estimates w-hich we are compelled to use for want, of definite information. It is unnecessary and inadvisable to use such values in determining the taxable gain to the taxpayers, for the reason that each had a-specific interest in the entire assets and received a like proportion of the taxable gain.

The taxpayers insist that the October 21, 1919, value should be computed upon a royalty basis and the evidence of both the taxpayers and the Commissioner as to the average royalty at that time is more or less in harmony. The Kockwell heirs, however, were on that date in complete possession and control of the property and had, therefore, an interest greater than that of a lessor. Their interest was that of both lessor and lessee. In such case the operating profits basis may properly be used. The Commissioner chose such basis but used as one of his factors an operating profit of $1 per ton. This factor was based upon subsequent operating profits. We are of the opinion that only prior operating profits may be used and that subsequent operating profits may be used only as a check or as corroboration, On? of the Commissioner’s witnesses, a valuation engineer, testified that in his judgment the operating profits per ton, during the years from 1913 to 1919, ranged from 70 cents to 80 cents per ton. This we believe to be approximately correct and have chosen and applied 75 cents per ton as the proper factor. This factor reduced to its present worth and applied to the expected recoverable tonnage (with minor additions for expected expenditures, etc.) gives the value of the coal which we have found.

The Rockwell heirs, collectively, realized in 1919, as set out in the findings of fact, as the result of their acquisition and disposition of the mine, a taxable gain of $501,476.39. In addition they received income in the sum of $589,072.66, which is arrived at by adding together the following items: $425,000, value of plant and equipment; $160,000, value of development work (both items being received during the taxable year as the result of the settlement); and $4,072.66, net income from royalties. Together the two items total $1,093,549.05. Dividing this amount by one-eighth in the case of Saltonstall and one-sixteenth in the case of Butler, we find that they should add to their gross income the amounts of $136,693.63 and $68,346.82, respectively.

Order of redetermination will he entered on 15 days' notice, under Bule 50.

Smith and Trussell dissent.