author: ARundell :

text:
    Hecla Mining Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 69916, 74813.
    Promulgated February 11, 1937.

      J ohn P. Gray, Esq., and Arthur J. Pellette, Esq., for the petitioner.

      Mason B. Leming, Esq., F. T. Donahoe, Esq., and James D. Head, Esq., for the respondent.
   OPINION.

ARundell :

The main point in issue in these proceedings is whether or not the petitioner made a statutory discovery of a vein within the Hecla properties after February 28,1913. If it did, it is entitled to depletion deductions upon removal and sale of ore therefrom in the taxable years.

We have found upon consideration of the evidence that there are present in these cases the facts prescribed by statute as constituting a discovery, and we hold that there was a discovery of the Intermediate vein within the meaning of section 114 (b) (2) of the Revenue Act of 1928. There remains on this issue only the matter of setting out some of the reasons for our conclusion.

The petitioner acquired the group of mining claims here involved prior to 1913, and at March 1,1913, it was operating the Hecla mine. The parties have stipulated that the respondent allowed a March 1, 1913, value of $6,400,000 based on a recoverable tonnage of 3,300,-338. The tonnage and valuation so allowed appear to be based on a form D filed by the petitioner in May 1920, and on subsequent representations by the petitioner as to additional ore in the east ore body. Although there is some difference between the value claimed in the form D in evidence and the value allowed, the respondent alleges that the value determined was based solely on representations of the petitioner. According to the form D filed, and the schedules attached thereto, the value and tonnage claimed as bases for depletion allowances included only the developed and probable ore in the Hecla vein and the east ore body. Mining operations had been carried on in both of these ore bodies prior to March 1, 1913. Depletion deductions allowed from March 1,1913, to December 31,1926, amounted to $9,718,926.85, leaving $681,073.15 of the March 1, 1913, value unexhausted. This figure, $681,073.15, is stipulated to be the difference between actual depletion sustained on the basis of the value allowed and the depletion allowable under the Revenue Act of 1913. No claim is here made for this amount.

Prior to the filing of the petitions herein the petitioner unsuccessfully sought to have the respondent revalue its ore bodies as of March 1,1913, and also to obtain a discovery valuation for its Intermediate ore body as of March 1, 1916. The respondent’s refusal as to both of these claims was assigned as error in the petitions filed. At the hearing the petitioner abandoned the claim for a March 1, 1913, revaluation, and the petitions were amended to claim a statutory discovery of the Intermediate vein on September 30, 1915.

The statute upon which the allowance of depletion deductions depends in these cases,, section 114 (b) (2) of the Revenue Act of 1928, is set out below.

The several taxing statutes, at least those prior to that of 1932, show a progressive liberality on the part of Congress toward the allowance of deductions for the depletion of minerals. No deduction at all was allowed under the 1909 excise tax statute. The 1913 Act allowed a deduction of 5 percent “of the gross value at the mine of the output.” The 1916 Act gave a “reasonable allowance” for depletion “not to exceed the market value in the mine of the product * * * mined and sold during the year.” See Von Baumbach v. Sargent Land Co., 242 U. S. 503. The 1918 Act was the first to grant discovery depletion, limited to “mines * * * discovered by the taxpayer.” Sec. 234 (a) (9). The same wording appears in the next two succeeding statutes. Sec. 234 (a) (9), Revenue Act of 1921; sec. 204 (c), Revenue Act of 1924. Under these statutes a discovery consisted only of ore bodies wholly outside of and separate and distinct from existing mines. Cf. Clarence D. Robinson, 8 B. T. A. 778; Alamo Coal Co., 31 B. T. A. 869. The Revenue Bill (H. R. 1, 69th Cong., 1st sess.) which became the Revenue Act of 1926, as it was passed by the House and introduced in the Senate, allowed discovery as in the prior statute, i. e., “in the case of mines discovered by the taxpayer.” An amendment was proposed from the floor of the Senate, but not adopted, providing that:

Discoveries shall include minerals discovered or proven in an existing mine or mining tract by the taxpayer after February 28, 1913, not included in any prior valuation. (See pp. 2944 and 3430, Congressional Record.)

Subsequently the following amendment, offered from the' floor, was adopted by the Senate, (p. 3775, Congressional Record) :

Discoveries shall include minerals in commercial quantities contained within a vein or bed discovered in an existing mine or mining tract by the taxpayer after February 3, [sic] 1913, if the vein or bed thus discovered was not merely the extension of a continuing vein or bed already known to exist, and if the discovered minerals are of sufficient value and quantity that they could be separately mined and marketed at a profit.

This provision remained in the Revenue Bill when it went to conference, where it was changed to read as follows, in which form it was enacted into law:

Discoveries shall include minerals in commercial quantities contained within a vein or deposit discovered in an existing mine or mining tract by the taxpayer after February 28, 1913, if the vein or deposit thus discovered was not merely the uninterrupted extension of a continuing commercial vein or deposit already known to exist, and if the discovered minerals are sufficient value and quantity that they could be separately mined and marketed at a profit.

The last quoted provision was enacted as a part of section 204 (c) (1) of the Revenue Act of 1926, and was reenacted without change in section 114 (b) (2) of the Revenue Act of 1928.

The significance of the quoted provision is that under it discoveries need not be in mines separate and distinct from those previously-operated ; they may consist of veins or deposits “in an existing mine or mining tract.” It is under this provision that this petitioner claims a discovery. The facts here satisfy beyond question some of the requirements of this provision. The Intermediate vein — whether considered a separate vein or not — was a vein or deposit bearing minerals in commercial quantities. It was discovered in an existing mine after February 28,1913. There does not seem to be any dispute as to the mineral contents of the vein being of sufficient value and quantity that they could be separately mined and marketed at a profit. This leaves in controversy only the question of whether the Intermediate vein was or was not merely the uninterrupted extension of a continuing commercial vein or deposit (the Hecla vein) already known to exist.

We think it obvious under the above quoted provision that if a vein or deposit is found within a mine and has no connection whatever with a known vein, it constitutes a discovery. Various definitions of mineral veins have been given in the mining cases which have arisen under mining laws, particularly the Federal mining laws which grant extralateral rights to the locator of the apex of any “mineral vein, lode, or ledge.” Sec. 2322; Rev. Stat. Lindley says that these terms — vein, lode, or ledge — “Generally speaking, * * * are used interchangeably.” In the same section of the text it is pointed out that of the three terms, “the word ‘lode’ is the more comprehensive. A lode may, and often does, contain more than one vein.” In the majority of the cases cited to us it appears that the words “vein” and “lode” are treated as being synonymous. A leading case is Iron Silver Mining Co. v. Cheesman, 116 U. S. 529, where the Court quoted with approval the definition given by the trial judge in that case in his charge to the jury. We quote excerpts from the charge:

* * * To determine whether a lode or vein exists, it is necessary to define those terms; and, as to that, it is enough to say that a lode or vein is a body of mineral, or mineral-bearing rock, within defined boundaries in the general mass of the mountain. In this definition the elements are the body of mineral or mineral-bearing rock and the boundaries; with either of these things well established, very slight evidence may be accepted as to the existence of the other. A body of. mineral or mineral-bearing rock in the general mass of the mountain, so far as it may continue unbroken and without interruption, may be regarded as a lode, whatever the boundaries may be. In the existence of such a body, and to the extent of it, boundaries are implied. On the other hand, with well-defined boundaries, very slight evidence of ore within such boundaries wili prove the existence of a lode. Such boundaries constitute a fissure, and if in such fissure ore is found, although at considerable intervals in small quantities, it is called a lode or vein.
* * * * * * *
* * * A continuous body of mineral or mineral-bearing rock, extending through loose and disjointed rocks, is a lode as fully and certainly as that which is found in more regular formation; but if it is not continuous, or is not found in a crevice or opening which is itself continuous, it cannot be called by that name. In that case it lacks the individuality and extension which is an essential quality of a lode or vein.
* * * * * * *
It is a question to be decided by the weight of testimony rather than the number of witnesses; upon the effect which the testimony has on your minds, accepting that which seems to you to be worthy of belief and rejecting the other.

In discussing exceptions to the above charge the Supreme Court added:

* * * Certainly the lode or vein must be continuous in the sense that it can be traced through the surrounding rocks, though slight interruptions of the mineral-bearing rock would not be alone sufficient to destroy the identity of the vein. Nor would a short partial closure of the fissure have that effect if a little farther on it recurred again with mineral-bearing rock within it.

One much cited definition, quoted in Eureka Consolidated Mining Co. v. Richmond Mining Co., 8 Fed. Cas. 819, Case No. 4,548, is that a “lode” is “that formation by which the miner could be led or guided. * * * Some formation within which he could find ore and out of which he could not expect to find ore, was his lode.”

Referring to Iron Silver Mining Co. v. Cheesman, supra, it is to be noted that emphasis is placed on the elements of (a) “the body of the mineral or mineral-bearing rock” and (b) “the boundaries.” This is followed by the statement that “with either of these things well established, very slight evidence may be accepted as to the existence of the other.” In the present case both sides produced expert witnesses who have examined the Hecla mine and who testified as to their observations of the workings in the mine. There are differences of opinion between them as to some of the indications within the mine which go to a determination of whether the Intermediate vein is separate from or a part of the Hecla vein. For instance, on the matter of boundaries, one of petitioner’s witnesses, with over 30 years’ experience in the mines in the Coeur d’Alene district, testified that the distinction between the vein rock and the country rock in the Hecla mine was sharp and clear. On the other hand, respondent’s witnesses, who were men having considerable mining experience, asserted that the boundary was very vague and indefinite; that there was no definite sharp wall. The witnesses are equally at odds on the other element above mentioned, namely, the body of the mineral or mineral-bearing rock. Petitioner’s witnesses were of the opinion that there was a difference in the character of mineralization between the two veins which served to distinguish them, while those for the respondent found no such difference. The witnesses for both sides were men of many years of practical experience in mines of all kinds in all parts of the world. We find no reason to question the qualifications of any of them to answer the numerous queries put to them on matters of geology and practical mining. Petitioner’s witnesses, however, had the greater degree of familiarity with the Coeur d’Alene district as a whole and the Hecla mine in particular. They have had more or less intimate connections with and practical experience in the mines in that district for many years. They were in the better position to acquire detailed knowledge of the geology of the district and of practical mining operations. We were, on the whole more impressed with the testimony of the petitioner’s witnesses and have given it the greater weight where there is a conflict between the opinions expressed. Cf. Iron Silver Mining Co. v. Cheesman, supra. The testimony of petitioner’s witnesses compels the conclusion that the Hecla and Intermediate veins were separate ore bodies.

The view of some of the courts, following the Eureka case, supra, is that identification of veins or lodes is to be accomplished principally by determining whether there is any formation that a miner can follow and find ore. Counsel for the respondent places some emphasis on this definition. If we apply this definition we must again conclude that the Hecla and Intermediate veins were separate. The Intemediate vein was not located by following, a formation within which the miner could expect to find ore. The evidence on this point is" clear. In December 1913 the drift on the 900 level was being extended eastward on the Hecla vein. The vein at that point contained little or no ore, but the shear zone was strong, with gouges along the walls and occasionally quartz seams. This formation ran into a fault and at that point the drift was turned south — away from the shear zone in which ore might be expected to be found. Following the fault the drift cut through a small vein of ore and then, continuing south through country rock for about 15 feet, the Intermediate vein was found. This work was described by the shift boss in charge of the crew that cut the drift into the branch vein and the Intermediate vein. We are satisfied that when the drift was cut into the branch and Intermediate veins the miners had departed from the formation which embodied the Hecla vein and in which it migh be expected that ore would be found.

The controversy as to whether there were one or two main veins in the Hecla mine really involves a comparatively short area of a hundred feet or so on the 900, 1600, and 2000 levels where the veins approach each other. At other points on the various levels the veins are physically separated by greater thicknesses of barren quartzite. On the 600 level, as far as it has been explored to date, the two veins are separated by a minimum distance of about 45 feet. On the 900 level the veins are more than 30 feet apart at the point of nearest approach; they separate going westward and at the western limit of exploration on the Intermediate vein, some 1,500 feet from the point of discovery, they are about 250 feet apart. On the 1200 level a noncommercial branch vein some 300 feet in length runs from the Hecla to the Intermediate vein. Measuring across the Hecla and Intermediate on this level they are separated by a minimum of 40 feet of country rock. They are 250 feet apart at the western terminus of the drift on the Intermediate vein, and in a crosscut near the east end of that vein the two are separated by a distance of 75 feet. On the 1400 level the separation at all points is at least 50 feet. On the 1600 level the veins are separated at their nearest approach to each other by about 7 feet of unmineralized quartzite. They further separate both east and west from the point of nearest approach and at the eastern and western ends of the parallel drifts they are respectively 50 feet and 200 feet apart. At the point of nearest approach on the 2000 level, the veins are separated by from 3 to 6 feet of quartzite; at the most westerly and easterly points of exposure of both veins they are about 75 feet apart. On the lower levels the Hecla vein is exposed only in crosscuts and where so exposed it is separated from the Intermediate vein by a minimum of 10 feet of quartzite.

Considerable stress is placed by counsel for the respondent on the removal of ore through continuous stopes. As we see it, this is not decisive of the question of the number of veins in a mine. ' This has to do with a method of mining rather than with geology. We can see of course that extensive, continuous stoping could well be considered as following a continuous vein, for it is not likely that a miner would work extensively above the level if there was no commercial ore. But in this case it is at least doubtful whether there was continuous stoping through the length of the two veins. The stope maps in evidence, being vertical longitudinal sections of the mine workings, do not make it clear. At points where the veins approach each other these maps bear markings indicating an overlapping of stopes rather than a continuity. It is undisputed that there was a continuous opening from one vein to the other, and in some places the veins were sufficiently close that they were worked from one wide opening which in a sense may be said to be a continuous stope in that it laterally embraced both veins. Maps of the mine workings made by respondent’s witnesses on their examination of the mine do not show continuous stoping; on some of the levels these maps definitely show breaks in the stoping.

So far our discussion has proceeded on the matter of determining only whether the petitioner has made a case within that part of the discovery provision which includes as discoveries “minerals in commercial quantities contained within a vein or deposit discovered in an existing mine or mining tract.” If the provision just quoted stood alone it might require that there be a complete absence of identity of structural geology between the known and the newly found vein in order to constitute a discovery.' A close similarity would be reason to suspect the new as being but a continuation of the. old. But the statute removes this possibility by including in discoveries a newly found vein if it “was not merely the uninterrupted extension of a continuing commercial vein or deposit.” The qualifying words in this statutory provision are significant. They are “uninterrupted”, “commercial”, and “continuing.” It is not to, be presumed that these were inserted without a purpose, especially in view of the legislative history of the provision to which reference has been made above. They broaden considerably the scope of the provision beyond what it otherwise would be. Whether or not a vein is an extension of another is a matter of geology, often difficult to decide. Geology, it must be recognized, is not an exact science. The highest authorities in this field differ in their opinions on s’uch matters as classification of veins as to their source, age, and method of formation. The reports in the many cases involving apex questions readily demonstrate the diversity of opinion among geologists and the difficulty of establishing the identity of mineral veins. The question of whether two ore bodies are part of one vein or are separate veins is, as held in the Iron Silver Mining case, supra, to be decided by the weight of the evidence. It may be that recognition of the difficulty of deciding this question was the motive that prompted Congress to broaden the discovery provisions to include a vein or deposit that is not merely the uninterrupted extension of a continuing commercial. As we construe this provision, it means that there need not be a complete absence of similarity between a known deposit and one newly found in order for the finding of the latter to be a statutory discovery. There might be sufficient similarity between the two deposits that they might fairly be considered as parts of one vein, but there could nevertheless be a statutory discovery if the two were separated by a substantial interruption. A slight interruption, a small fault, or the pinching out to noncommercial proportions for a short distance probably would not meet the intent of the statute. It is well known that mineral veins are not of uniform thickness or richness of mineral matter throughout their course; they are subject to displacement by faults; they pinch and swell; fissure veins are subject to partial closure. In apex litigation it has been held that a “slight interruption of the mineral-bearing rock would not alone be sufficient to destroy the identity of the vein.” Iron Silver Mining Co. v. Cheesman, supra. The statute here involved does not stop with allowing discovery in respect to a vein or deposit found within a mine, but adds to what might generally be considered a separate vein or deposit, a commercial deposit that is not merely the uninterrupted extension of a continuing commercial vein. On the matter of the interruption between the deposits in the Hecla mine, the weight of the evidence is on the petitioner’s side. The two ore bodies were separated by a substantial interruption, consisting of unsheared, unmineralized quartzite. At no point did the shearing extend laterally from one ore body to another. As petitioner’s witnesses say, going down on either vein and staying within its walls, the other would not have been found. It is our opinion that the barren quartzite between the veins was in interruption of sufficient magnitude to require a holding that the Intermediate vein was not merely an uninterrupted extension of the Hecla vein.

The interruption between the commercial parts of the ore bodies was greater than that between the shear zones on most of the levels. As set out above, the initial mining was on the Hecla vein, progressing eastward from the shaft. The eastern terminus of the commercial ore in that vein was more than 400 feet from the western limit of commercial ore in the Intermediate vein on the 900 level on which the discovery was made. There is a 300 foot separation on the 600 level, over 200 feet on the 1200 level, and over 100 feet on the 1400 and 1600 levels. On the 2000 level the commercial ore appears to run parallel for some distance, but with a longitudinal separation of several feet of unmineralized quartzite. In view of these facts it can not be said that the Intermediate vein was an “uninterrupted extension of a continuing commercial vein.”

Although the Intermediate vein was first located in December 1913, its ore contents were not sufficiently blocked out until September 30, 1915, to support a determination that the ore was of a quantity and value that it could be separately mined and marketed at a profit. On that date the 600 level had entered the ore body and had penetrated it a distance of 10 or 15 feet. The 900 level had been drifted about 450 feet with one-floor stopes over 200 feet in length and two-floor stopes about 150 feet. A raise had been put up from the 900 level for a distance of 210 feet. The 1200 and 1600 levels were connected by a completed raise. The 1200 level had been drifted about 325 feet and the 1600 level 920 feet. The average width of the vein between the 600 and 900 levels was 9.6 feet; between the 900 and 1200 levels 12.9 feet; and between the 1200 and 1600 levels 14.6 feet. It was reasonable to assume at September 30, 1915, that the commercial ore in the Intermediate vein would extend a substantial distance above the 600 level and below the 1600 level.

A reasonable rate of mining the ore in the Intermediate vein at September 30, 1915, was 175,000 tons per year, and the reasonably expected life of the vein was in excess of 10 years. Plant and equipment to mine and beneficíate 175,000 tons annually would have cost $300,000. Ore from the Intermediate vein assayed 6.7702 ounces of silver per ton and 9.875 percent of lead. The average price of lead in 1913 was 4.673 cents per pound and the average price of silver in that year was 49.684 cents per ounce. The average price of lead over the period from 1896 to 1915 was 4.326 cents per pound and that of silver was 57.831 cents per ounce. Over the period 1916 to 1933 the average price of lead was 6.476 cents per pound and over the period 1916 to 1935 the average price of silver was 68.538 cents per ounce. Prices reasonably to be expected in 1915 for a number of years thereafter were 4.5 cents per pound for lead and 65 cents per ounce for silver. Mining costs varied with the selling price of the metals, due partly to a system of bonuses to employees. At the expected prices of 4.5 cents for lead and 65 cents for silver, mining costs averaged $3.05 per ton and the reasonably expected profit amounted to $5.4051 per ton of ore in the Intermediate vein. The facts known and reasonably to be expected at September 30, 1915, establish that at that date the Intermediate ore was of a quantity and value that it could be separately mined and marketed at a profit. That date then becomes the effective date of discovery. Art. 240 (e) Regulations 74.

Counsel for the respondent place considerable stress on the petitioner’s failure to advise its stockholders in published annual reports of the discovery of the Intermediate vein, and on its failure to mention the discovery in various refund claims filed with the Commissioner. The annual reports to stockholders set forth in most general terms only the result of each prior year’s operations. They do not purport to be geological reports, and, as counsel for the petitioner points out, the stockholders were not interested in the number of veins disclosed. Moveover, we do not see in the annual reports as clear an indication as does the respondent that petitioner’s officers had any conviction that there was but one vein. For instance, in the annual report covering operations for 1913 there appears this statement:

We started to drift on the 900 foot level to undercut this east ore, and in doing so, we unexpectedly encountered ore within three hundred and fifty feet of the old shoot.

We see no expressiop in this to affirm a belief that this new ore body was an extension of the old. The “unexpectedly” finding of an ore body 350 feet from the “old shoot” rather sustains the view of a statutory discovery. In the 1915 annual report it is stated:

The development on the 1200 foot level was practically all in ore, which appears to be an extension of our old orebody. The work on the 600 foot level also discloses this same extension.

We are unable to construe this as an unequivocal declaration of a conviction of the existence of only one vein. The expression “appears to be an extension” may as well be taken as one of doubt. The refund claims referred to by the respondent were filed in connection with petitioner’s claim for a revaluation of its ore deposits as of March 1, 1913, and in some of the later ones claim was made for discovery value on the Hecla vein below the 2400 level. These matters are not in issue here. If there was error in the annual reports and the refund claim, the most serious charge to be made is that it was an error of omission; at least we find nothing in them which misled the respondent and which would operate to estop the petitioner from claiming discovery of the Intermediate vein. In considering respondent’s claim of estoppel it must be borne in mind that not until the enactment of the Revenue Act of 1926, enlarging the scope of the discovery provisions, was the petitioner in any position to claim discovery of the Intermediate vein.

Holding that the petitioner made a statutory discovery, we come to the matter of valuation. The statute, quoted above, provides for depletion allowances on the basis of “the fair market value of the property at the date of discovery or within thirty days thereafter.” This statutory provision requires the determination of the fair market value of the Intermediate vein at September 30, 1915, or within 30 days thereafter. On this phase of the case the petitioner offered a considerable volume of evidence; the respondent offered none. Witnesses for the petitioner, in arriving at their opinions of value, took into account the facts in evidence including, among others, the amount of developed and probable ore in the vein, the per ton mineral content of the mine, costs of developing and mining, and prices current and expected for the minerals. The evidence amply supports the items taken into consideration by the witnesses as factors in reaching their conclusions. Subsequent operations demonstrate the soundness of the principal factors. For instance, the ore contents were estimated at 2,548,000 tons. From 1913 to 1934, inclusive, 2,504,037 tons were mined and the vein is not yet exhausted. Actual metal prices have exceeded those used as estimates. Recoveries of lead per ton of ore have exceed the estimated 183.554 pounds. Considering all the evidence, including particularly the tonnage of ore developed and probable, the recoverable metal content of the ore, the prices of metals, known and estimated costs of development, mining, and smelting, and the rate of production, we have concluded that a reasonable estimate of the fair market value of the Intermediate vein at September 30, 1915, was $6,500,000. Based on a reasonably estimated ore tonnage of 2,548,000 and a recoverable lead content of 467,695,592 pounds figured at 183.554 pounds per ton, a reasonable allowance for depletion is 1.39 cents per pound of lead produced and sold.

This brings us to the question of the amount of depletion allowable. Depletion deductions heretofore allowed were computed at the rate of 1.33 cents per pound of lead in the shipping product. There is no question on either side as to the correctness of this rate based on the value and tonnage claimed and allowed as of March 1, 1913. The value of $6,400,000 and recoverable ore tonnage of 3,300,338 apply, as we interpret the evidence, only to the Hecla vein and the east ore body. Counsel for the respondent says the record shows that “the so-called Intermediate orebody was included or could have been included” in the March 1, 1913, valuation. The valuation and tonnage arrived at by the parties was ostensibly confined at that time to the Hecla vein and east ore body as known at March 1, 1913.- They were based, according to the respondent, on the petitioner’s form D and representations in connection therewith. The form D placed in evidence includes maps outlining the ore reserves in the Hecla vein and east ore body upon which the petitioner based its claim for a March 1, 1913, value. Upon an examination of those maps we do not find in them any indication that they included any of the Intermediate ore body, and neither of the parties points to anything which would lead us to believe that it was included. In this situation we feel that the facts previously agreed on by the parties should not be disturbed and that the March 1, 1913, value and tonnage should be treated as confined to the Hecla and east ore bodies.

We are further of the opinion that the depletion deductions heretofore! allowed and those allowable on the facts found herein should not be affected by reason of the fact that part of the ore for which deductions were allowed in and prior to 1926 came from the Intermediate vein. It appears that from 1913 on through the taxable years ore was mined from both the Hecla and Intermediate veins, mixed in the mine and the shipping product sold without distinction as to the source. Depletion was claimed and allowed for the metal produced from both veins at the unit rate of 1.33 cents which had been established for the Hecla vein. Had the petitioner reported the finding of an additional ore body within its mine, the effect would have been to lower the rate of depletion under the so-called principle of dilution. This would not have changed the March 1, 1913, value. That value would remain constant whether the amount of ore in the mine proved to be more or less than the estimated tonnage on which it was based. By dilution and the consequent lowering of the unit rate, the period for exhaustion of the Hecla vein would simply have been extended beyond the year 1926. As matters now stand the value attributable to the Hecla vein and East ore body was exhausted in 1926 and the deductions allowed in and prior to that year can not be adjusted. Neither can the petitioner extend that value into later years and procure deductions therefor even though the ore is not exhausted. Under the statutes prior to the 1926 Act the petitioner would be entitled to no further deductions in respect of its Hecla mine after exhaustion of its March 1, 1913, value regardless of the amount of ore remaining in the old vein or the discovery of new ore bodies within the mine. But upon the change of the statute the petitioner became entitled to additional depletion deductions by reason of discovering the Intermediate vein, based on the value of the discovered vein. In other words, the statute gave the petitioner a new amount to exhaust over succeeding years. Had the petitioner removed sufficient ore from the discovery vein prior to the taxable years to exhaust the discovery value, some question of estoppel might arise. That situation does not exist here. From 1913 to January 1, 1925 (the effective date of the Act of 1926), the petitioner mined only 987,856 tons of ore from the Intermediate vein, leaving at the latter date 1,560,144 tons of the estimated 2,548,000 tons. At the beginning of 1928, the first taxable year before us, there remained 1,119,234 tons of the estimated contents. The statute, as we interpret it and apply it to the facts in this case, gives the petitioner the right to depletion deductions on a discovery value of $6,500,000. That basis persisted through the taxable years, and is not changed by the fact that an erroneous rate was applied to so much of the ore as was reported as coming from the Hecla vein. Summarizing on this point, we hold that for the years 1928 to 1931, inclusive, the petitioner is entitled to depletion deductions in respect to the Intermediate vein at the rate of 1.39 cents per pound of lead produced and sold from that vein.

The final questions are those of allowances for taxes. In the original petition filed in Docket No. 69916 petitioner claimed a deduction of $4,110.47 for 1928 as property taxes paid to Shoshone County. At the hearing evidence was put in showing payment of taxes in the amount claimed, but no claim therefor is made in the amended petition and that item is not discussed in the' brief. It would appear that this claim has been abandoned; if not, we are of the opinion that the deduction is not allowable on the evidence produced at the hearing. The petitioner’s books were kept on the accrual basis, and there is no showing of when these taxes became due so as to become an accruable and deductible item. A taxpayer on the accrual basis is entitled to deduct taxes in the year they accrue rather than in the year of payment. United States v. Anderson, 269 U. S. 422. Crown Willamette Paper Co., 14 B. T. A. 133.

The amounts set out in our findings as income taxes paid to the Dominion of Canada are the amounts stipulated by the parties. It appears from the discussion of this matter at the hearing that at the time of accrual of these taxes for the years 1930 and 1931 the petitioner was resisting payment and they were not actually paid until 1934. It being stipulated that the taxes were income taxes applicable to income for 1930 and 1931, they were accruable for those years, and credits are allowable therefor under section 131 of the Bevenue Act of 1928. That section provides in subsection (a) (1) for credits to domestic corporations for income taxes paid to foreign countries, with certain limitations set out in subsection (b). The amounts paid are given in Canadian money. The parties have stipulated that in determining the amounts paid in American money the rates of exchange set forth in I. T. 2556, Internal Bevenue Bulletin X-l, p. 128, and I. T. 2613, Internal Bevenue Bulletin XI-1, p. 47, may be used.

Beviewed by the Board.

Decision will be entered under Bule 50.

       (2) Discover! value in case of mines. — In the case of mines discovered by the taxpayer after February 28, 1913, the basis for depletion shall be the fair market value of the property at.the date of discovery or within thirty days thereafter, if such mines were not acquired as the result of purchase of a proven tract or lease, and if the fair market value of the property is materially disproportionate to the cost. The depletion allowance based on discovery value provided in this paragraph shall not exceed 50 per centum of the net income of the taxpayer (computed without allowance for depletion) from the property upon which the discovery was made, except that in no case shall the depletion allowance be less than it would be if computed without reference to discovery value. Discoveries shall include minerals in commercial quantities contained within a vein or deposit discovered in an existing mine or mining tract by the taxpayer after February 28, 1913, if the vein or deposit thus discovered was not merely the uninterrupted extension of a continuing commercial vein or deposit already known to exist, and if the discovered minerals are of sufficient value and quantity that they could be separately mined and marketed at a profit.

       Lindley on Mines, 3d Ed. § 290.

        Stope. — An excavation from which the ore has been extracted, either above or below a level, in a series of steps. A variation of step (Standard). Usually applied to highly inclined or vertical veins.” Fay’s Glossary of Mining and Mineral Industry.


source: Caselaw Access Project

author: Smith:

license: Public Domain

text:
    Jamima Platt, Petitioner, v. Commissioner of Internal Revenue, Respondent. Dora M. Meherin, Petitioner, v. Commissioner of Internal Revenue, Respondent. P. W. Meherin, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 78930, 80422, 81035.
    Promulgated February 11, 1937.

      Philip Selig, Jr., Esq., for petitioner in Docket No. 78930.

      William T. Sweigert, Esq., U. S. Webb, Esq., and Lucas E. Kil-kenny, Esq., for petitioners in Docket Nos. 80422 and 81035.

      W. E. Payne, Esq., and Owen W. Swecker, Esq., for the respondent.
   OPINION.

Smith:

The principal issue in these proceedings is whether the salaries received by the petitioner, P. W. Meherin, in 19B1 and 1932, and by the husband of petitioner Jamima Platt in 1932, are exempt from Federal income tax by reason of the constitutional limitations on the powers of the Federal Government to levy taxes on instru-mentalities of the states. Primarily, our question here is whether the Board of State Harbor Commissioners of the State of California falls within that class of state instrumentalities which has been judicially recognized as lying beyond the taxing powers of the Federal Government. If this immunity from taxation exists, it necessarily extends to the compensation paid to the employees of the instrumentality. Collector v. Day, 11 Wall. 113; Dobbins v. Commissioners of Erie County, 16 Pet. 435; Metcalf & Eddy v. Mitchell, 269 U. S. 514.

We have had occasion to consider this question in substantially the same form as it is presented here in several prior cases. The most closely related of these, as to facts, is Peter G. Ten Eyck, 29 B. T. A. 1113, in which we held that the Albany Port District Commission was engaged in performing a governmental function of the State of New York and- that the salaries which it paid to its employees were immune from Federal income tax. On appeal to the Circuit Court of Appeals for the Second Circuit the Board’s decision was affirmed in Commissioner v. Ten Eyck, 76 Fed. (2d) 515. In its opinion the court said:

* * * Subsection 16 of section 5, as amended by Laws 1929, c. 293, § 2 [Laws of New York], provided that “ ‘facilities,’ ‘port facilities,’ ‘terminals,’ and ‘terminal work’ ” should include “wharves, docks, piers, terminals, railroad tracks on terminals, cold storage and refrigerating plants, warehouses, elevators, and such property real or personal,” as would be used in connection therewith. The Commission did not operate the grain elevator erected thereon but leased it, as it did a molasses mill. It did operate the railroad, and charged rates authorized by the Interstate Commerce Commission. But we think that this terminal was intended as an instrument of government rather than of commerce only. In providing it and operating it, the state of New York was engaged in a usual governmental function as distinguished from a proprietary function.

Montgomery B. Case, 34 B. T. A. 1229, also involved facts similar to those in the instant proceedings. We there held, citing our earlier decisions in Leon S. Moisseiff, 21 B. T. A. 515, and Robert Carey, 31 B. T. A. 839, that the compensation of officers and employees of the Port of New York Authority was immune from Federal income tax. In our opinion we said:

We are bound, when the Circuit Court of Appeals has held, in affirmance of our own earlier decisions, that the Port Authority and other organizations similarly engaged are performing a traditionally sovereign function, to apply the doctrine and hold the pay of its employees to be exempt from Federal tax. Commissioner v. Ten Eyck, supra; Leon Moisseiff, supra; Robert Carey, supra; Commissioner v. Harlan, supra, [80 Fed. (2d) 660]. That the Ten Eyck case is regarded by the court as a holding that port development is a traditionally sovereign function is fortified by its more recent opinion Brush v. Commissioner, — Fed. (2d) — (C. C. A., 2nd Cir., July 13, 1936).

In George H. Harlan, 30 B. T. A. 804; affirmed by the Circuit Court of Appeals for the Ninth Circuit in Commissioner v. Harlan, 80 Fed. (2d) 660, we held that immunity- from Federal income tax extended to the compensation of an officer of the Golden Gate Bridge and Highway District of California. In its affirming opinion the court distinguished Helvering v. Powers, 293 U. S. 214, in which the Supreme Court held that in operating the Boston Elevated Railway Co. the State of Massachusetts was not exercising a “usual” governmental function and that the compensation paid to officers and employees so engaged was not immune from Federal income tax.

In Helvering v. Powers, supra, it was said that the “immunity from federal taxation is a question which compels consideration of the nature of the activity.” In United States v. California, 297 U. S. 175, the Court said:

* * * Hence we look to the activities in which, the states have traditionally engaged as marking the boundary of the restriction upon the federal taxing power. * * *

The courts have held that the development and maintenance by a state of port and harbor facilities within its boundaries is a traditional and essential governmental activity. Commissioner v. Ten Eyck, supra; Commissioner v. Harlan, supra; Bush Terminal Co. v. City of New York, 152 N. Y. Misc. 144; 273 N. Y. S. 331. The Supreme Court of California so ruled with respect to the Board of State Harbor Commissioners in Denning v. State, 123 Cal. 316; 55 Pac. 1000, where it said:

* * * The fact that the board is authorized or required to collect tolls and charges for dockage and wharfage to such extent “as will enable the commissioners to discharge the duties required of them by the act” does not affect its character as a governmental agency. * * *

It is argued that some of the functions of the various units of the Harbor Commission partook of a business or proprietary character. This angle of the question also was discussed in Montgomery B. Case, supra, where we said:

Relying upon Commissioner v. Powers, 68 Fed. (2d) 634, the argument is made that the Port Authority is engaged in proprietary functions for profit with the effect of withdrawing sources of revenue from the Federal taxing power. This is said in respect of the rents from the Inland Terminal Building, more particularly the upper stories privately occupied; of the tolls from the bridges and tunnels; and of the destruction of private ferry competition. If these were independent profit-making ends in themselves, the argument would be more engaging. But these several operations, even though 'the revenues produced are substantial, are but incidental to the great and comprehensive sovereign project of improving the port and terminal facilities of the port district. Bush Terminal Co. v. City of New York, 152 N. Y. Misc. 144. The Inland Terminal Building was not constructed to produce rent as a profit on investment, but to provide a more efficient terminal and thus expedite traffic and relieve highway congestion. The bridge and tunnel tolls and the reduction of traffic on the private ferries were incidental to the governmental project of providing highways to facilitate traffic and reduce port and' harbor congestion in the common public interest. * * *

Further discussion of the question as presented on the facts here could add nothing to what has been said in the cases referred to above. At least until the courts have established a ruling at variance with those cases, the question is foreclosed to the Board.

We hold that the Board of State Harbor Commissioners of the State of California is an instrumentality of the state engaged in a governmental function and that the compensation paid to its officers and employees is immune from Federal income tax.

As to the remaining issue the question raised is whether the cash dividend distribution in the amount of $7,659 which the petitioner, P. W. Meherin, received from the Barrymore Concrete Mixer Co. on May 6, 1931, was an ordinary dividend and therefore subject to credit against net income for the purpose of the normal tax, as contended by the petitioner, or was a liquidating dividend, as contended by the respondent.

The evidence clearly indicates, and we have found as a fact, that the dividend in question was not a liquidating dividend. In his brief the respondent states:

In view of the evidence adduced at the hearing the respondent does not desire to submit an argument in connection with the petitioners’ second assignment of error.

We regard the statement made by the respondent in his brief as conceding that this is the import of the evidence of record. We are of the same opinion.

Judgments will be entered wider Rule 50.


author: ARUndbul, :

text:
    Pearl A. Long, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 75899.
    Promulgated February 12, 1937.

      Chandler P. Ward, Esq., for the petitioner.

      Frank M. Thompson, Esq., for the respondent.
   OPINION.

ARUndbul, :

This proceeding raises the issue of petitioner’s right to deduct as a worthless debt the $112,450 agreed by her former husband to be paid in settlement of her marital claims, which remained unpaid at the time of his death, insolvent, in 1931. The Commissioner disallowed the claim for the deduction.

We think the Commissioner was right. In a long line of cases we have held that a taxpayer on a cash basis may not take a deduction for income items, such as interest, rent, and attorney fees, which have never been included in income. Charles A. Collin, 1 B. T. A. 305; Howard J. Simons, 1 B. T. A. 351; J. Noble Hayes, 7 B. T. A. 936; Henry V. Poor, 11 B. T. A. 781; John H. Wourms, 25 B. T. A. 671; Oscar T. Crosby, 27 B. T. A. 1234. The petitioner argues that the rule of the above cases does not apply here for the reason that items of the kind here involved are not included in income when received. “Neither alimony nor an allowance based on a separation agreement is taxable income.” Art. 83, Regulations 74; Gould v. Gould, 245 U. S. 151; Mary R. Spencer, 20 B. T. A. 58. This is an ingenious argument made in an effort to stretch the rule of those cases on a fine spun technicality. Its weakness is that it is founded on a reading into the cases of something that is not there. Those cases simply say that where there is an income item that has not been reported as income no bad debt deduction may be taken when it proves uncollectible. The cases do not say that a nonincome item is subject to a different rule. Support is sought for the premise of petitioner’s argument in W. Van E. Thompson, 10 B. T. A. 1125. In that case' it was directly stated that the notes for which a deduction was claimed and allowed “did not constitute income.” The notes did, however, represent capital of the taxpayer. The taxing statute, as has often been said, is concerned with realized gains and losses. This, it seems to us, is the proper test to be applied in these cases. The taxpayer was not out of pocket anything as the result of the promisor’s failure to comply with his agreement. There was no realization either as a gain or loss at any time. There was no outlay of cash or property by the petitioner in the taxable year, or any other year, by which to measure a loss. She merely failed to receive something promised, which is vastly different from the loss of something once reduced to possession.

Reviewed by the Board.

Decision will be entered for the respondent.

Murdock and Leech concur only in the result.

SteRnhagen, Mellott, Tyson, and Disney dissent.


author: Arnold: Murdock,

text:
    L. T. Alverson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 76130.
    Promulgated February 12, 1937.

      Lyle T. Alverson, Esq., pro se.

      George Brabson, Esq., for the respondent.
   OPINION.

Arnold:

This proceeding involves a deficiency in income tax for the year 1931 in the sum of $3,472.54. The questions for our determination are the correctness of the Commissioner’s action in (a) using, as to securities bought prior to 1931 and sold in 1931, cost adjusted to conform to market values as of December 31, 1930, as a basis for determining gain or loss, instead of the original cost of the securities, and (b) in refusing to allow as a deduction from gross income $600 paid by petitioner for a statistical market service claimed by petitioner as an ordinary and necessary business expense.

The case was submitted on oral and documentary evidence.

Petitioner, an individual, a resident of New York City, during the year before us and for many years prior thereto was engaged in the practice of law. During those years he also bought and sold substantial quantities of stocks and bonds on the New York Stock Exchange. For many years prior to 1931 he kept an inventory of his securities, reflecting on his books profit and loss based on market fluctuations at the beginning and end of each year. Prior to 1927 he made his returns on the basis of actual transactions.

Beginning with the year 1927, through and including 1931, he made his returns on the basis of book or inventory values. Securities when purchased were entered at cost, and at the beginning and end of each year adjustments were made as to each security to conform to market values. For the year 1932 he again changed and began making his returns on the basis of actual transactions. In his return for 1931 he took an inventory loss of $52,892.86. This sum represented the difference between the opening and closing inventories for that year. As to securities purchased and sold in 1931, he used the cost price as a basis. The adjustments in his book values to conform to market values were made separately as to each security and not en gros, except as they were totaled.

The petitioner during the year 1931 sold securities as set out below. The cost of such securities sold and the market value as; reflected in the closing inventory of December 31, 1930, were as. follows:

The total cost of all securities sold in 1981 was $50,323.18. The December 31, 1930, adjusted to market values of the securities on band at the beginning of. the tax year which were sold in 1931, together with the cost of securities bought and sold in 1931, amounted to $39,338.43. The Commissioner, in computing the deficiency for 1931, used this latter amount as the basis, while petitioner insists the original cost should be taken as the basis for determining his gain or loss on the stock sold in 1931. This results in a difference of $10,984.75, which gives rise to the controversy here.

Petitioner claims he began making his returns in 1927 by the inventory method, at the suggestion of a revenue agent who had inspected his books, and that if he is not permitted to use that method in computing his 1931 taxes in making the change to actual transactions, he should be permitted to use the original cost as a basis. In other words, he claims that in making the change from the method used from 1927 to 1930 to the actual transaction method it should be consistently applied and he should not' be required to use the book or inventory values adjusted to market values at the beginning of the year 1931 as to securities owned at the beginning of that year and sold during the year.

Section 22 (c) of the Revenue Act of 1928 provides:

(c) Inventories. — Whenever in the opinion of the Commissioner the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Commissioner, with the approval of the Secretary, may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income.

Article 105 of Regulations 74, promulgated pursuant to the above section of the statute, provides that a dealer in securities who in his books of account regularly inventories unsold securities on hand either at (a) cost, (b) cost or market, whichever is lower; or (c) at market value, “may make his return upon the basis upon which his accounts are kept; provided that a description of the method employed shall be included in or attached to the return, that all the securities must be inventoried by the same method, and that such method must be adhered to in subsequent years, unless another be authorized by the Commissioner.” The regulations define who will be considered a dealer in securities for the purpose of this rule and who will not. Petitioner had long kept his books on the inventory method, and in 1927, at the suggestion of a revenue agent and after determining that it would be to his advantage, he reported income on that basis, and continued to do so with the approval of the Commissioner up to the taxable year 1931. Acting under his statutory authority and in accordance with his regulations, the Commissioner changed the method of reporting, effective in 1931, and recomputed petitioner’s income for that year, such recomputation resulting in the deficiency here in question. There is no contention by petitioner that the method of accounting employed by him clearly reflected his income or that he is entitled to compute his income on that basis. His contention goes no further than to challenge the method of computation employed by the Commissioner in so far as it affects the basis of the securities on hand at the beginning of the taxable year. He argues that the Commissioner to be consistent must take as a basis for computing gain or loss the original cost of the securities sold which were on hand at the close of 1930. There is no showing that the method used by the Commissioner is unequitable or that it does not clearly reflect income.

We think evidence as to the original cost of the securities in question is not controlling when we consider the whole record. For four years prior to 1931 petitioner, with the approval of the Commissioner, computed income from securities by .'adjusting the cost to market as shown by his inventories at the beginning and end of the year. The cost, therefore, as shown by his books at December 31, 1930, represented the actual adjusted cost of the securities on hand. The difference between the original cost and such adjusted cost had been accounted for in the tax returns for 1930 and prior years, and in our judgment the adjusted cost was the proper basis from which to compute gain or loss for tax purposes in 1931. Any other basis would have resulted in a distortion of taxable income.

It is the theory of the law to allow a taxpayer, upon the sale of property, to recover the cost of such property before any taxable gain is realized. Firemen's Insurance Co., 30 B. T. A. 1004; Graves, Cox & Co., 27 B. T. A. 546; Elliott-Granite Linen Corporation, 26 B. T. A. 936; Alpin J. Cameron, 8 B. T. A. 120; Gould Paper Co., 26 B. T. A. 560; United States v. Ludey, 274 U. S. 295. Cf. United States v. Tindle, 276 U. S. 582. It sometimes occurs that a mistake is made in returning income which can not be corrected in a subsequent year without resulting in a distortion of income. Cf. Gould Paper Co., supra; Chatham Phenix National Bank, 1 B. T. A. 460; Northern National Bank, 16 B. T. A. 608; Bank of Hartsville, 1 B. T. A. 920; MacMillan Co., 4 B. T. A. 251, or that a taxpayer elects to change his method of accounting and is required to compute his income according to the method of accounting employed, W. R. Ramsey, 26 B. T. A. 277; C. Niss & Sons, Inc., 22 B. T. A. 730; Blum’s, Inc., 7 B. T. A. 737, but nowhere does the law contemplate that a taxpayer may recover more than the cost of the property before taxable gain is realized.

Here the difference between cost and inventory value was reflected in the tax returns for prior years and a new cost established at market as of December 31, 1930. This cost when established was satisfactory to both petitioner and the Commissioner and it is not claimed that it was erroneous. We think the use of the cost as thus established in the computation of gain or loss on a subsequent sale of the securities clearly reflects petitioner’s income for tax purposes, cf. John G. Barbas, 1 B. T. A. 589; Hyams Coal Co. v. United States, 26 Fed. (2d) 805, and that the Commissioner was justified in using such adjusted cost in recomputing the income tax liability of petitioner.

Whether the petitioner or the Commissioner benefited most from the method in the four years prior to 1931 we can not say, nor do we deem it material. The fact is petitioner made his returns and computed his income during those years by that method. The returns were approved by the Commissioner and taxes were paid in accordance therewith. A reference to the list of securities sold in 1931, which is set out above, indicates that most of them were purchased in 1980 and that the market as reflected in the inventory at the end of the year was in most instances lower than cost. The difference was allowed as a deduction in 1930. Petitioner does not offer to go back and readjust his tax liability for 1927 to 1930, inclusive, and the statute of limitations has run against some if not all of those years. To adjust petitioner’s cost basis to the original cost for the taxable year only would result in a distortion of income unjustified by the facts before us. We think petitioner has failed to show that the method contended for by him more clearly reflects his income than that used by the Commissioner, or that Commissioner’s method does not clearly reflect his income. Cf. W. R. Ramsey, supra; John G. Barbas, supra; Hurwitz v. Commissioner, 45 Fed. (2d) 780.

The conclusion here reached is not inconsistent with the principle {.hat in determining tax liability each taxable period should be separately considered for the purpose of determining gains or losses within the period. We are here concerned only with the basis to be used in computing gain or loss in 1931 on a sale of securities on hand at the beginning of the year. The fact that such cost basis had been readjusted in a prior year does not do violence to the above principle. For example, depreciation is taken into account and the cost adjusted on a sale of the property in a subsequent year, cf. Firemen’s Insurance Co., supra; United States v. Ludey, supra, but this method does not result in a distortion of income in the year the property is sold.

The Commissioner is given wide discretion by the statute in his administrative determination of the method to be used in order to determine clearly the income of any taxpayer and, “short of being arbitrary or capricious or based on a clear demonstration of error, the determination in any single instance ought not to be disturbed”, and it is “an attitude of the Board in the exercise of its jurisdiction not to interfere lightly with general administrative matters which the Congress has intrusted to the Commissioner’s discretion.” Alfred E. Hamill, 30 B. T. A 955.

In Finance & Guaranty Co. v. Commissioner, 50 Fed. (2d) 1061, the court said:

As will be seen from the Act, Congress plainly placed the question of the proper use of inventories within the opinion of the Commissioner, and that question was left by Congress to the discretion of the Commissioner. In such a case a heavy burden of proving that the Commissioner’s action was plainly arbitrary rests upon the taxpayer. Lucas v. Kansas City Structural Steel Co., 281 U. S. 264. Where, a statute commits to an executive department of the government a duty required in the exercise of an administrative discretion the decision of the executive department, as to such questions is final and conclusive, unless it is clearly proven arbitrary or capricious or fraudulent, or involving a mistake of law. * * * A study of the records leads us to the conclusion that the action of the Commissioner was not only not arbitrary or capricious but was correct.

The question here is not merely one of fact as to the original cost of the securities, but is one of discretion as to whether the original cost or the adjusted cost is the proper cost basis to be used in the computation to clearly reflect income. This, we think, imposes a burden on the taxpayer much heavier than that of overthrowing a purely factual determination. Cf. Alfred E. Hamill, supra; Lucas v. Kansas City Structural Steel Co., 281 U. S. 264. As was said in Hyams Coal Co. v. United States, supra, “Courts, in the absence of positive law to the contrary, will construe a revenue act as intended to reach actual income.” Where, as here, -a change from one method of accounting to another is necessary, the statute requires that the net income be computed in accordance with such method as in the opinion of the Commissioner clearly reflects income. Unless it is shown that the method used by the Commissioner is unreasonable or arbitrary, or that it does not clearly reflect income, it should be approved. Cf. Maine Dairy Co., 4 B. T. A. 375; Stuart A. Russell, 12 B. T. A. 56; Southern Abstract & Loan Co., 25 B. T. A. 1095; Coley v. Pickering, 21 Fed. (2d) 247. No such showing has been made here by the petitioner.

Chatham & Phenix National Bank, supra, and MacMillan Co., supra, cited and relied on by petitioner in support of his proposition that he should be allowed actual cost as his basis for the securities owned at the beginning of the year 1931 and sold during that year, are not authority on the question before us. Those cases hold that the fact that the tax has been erroneously computed in prior years does not justify an erroneous computation of the tax liability for any subsequent year.

Section 23 of the Revenue Act of 1928 provides that in computation of income there shall be allowed as deductions:

(a) All the ordinary and necessary expenses, paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered * * *.

Petitioner was engaged in the practice of law. In his return he gave his occupation as attorney. That was his principal business. He was also engaged in buying and selling stocks and securities for his own account on the New York Stock Exchange. Buying and selling for his own account does not bring him within the statutory definition of “dealer in securities.”

He paid $600 in the taxable year for special statistical service, advice and information in handling his securities to the best advantage to gain profit or minimize his losses. During the year he had some seventy transactions on the stock exchange involving more than $150,000 in sales. He bought and sold the securities for the profits he hoped to reap. The word “necessary” as used in the statute means “appropriate” and “helpful.” Blackmer v. Commissioner, 70 Fed. (2d) 255.

Situated as petitioner was with reference to his business affairs and his method of handling them, he deemed it appropriate and helpful to make the expenditure in order to realize maximum returns. Profits made on his investments in his dealings on the stock exchange are taxable, and losses minimized serve to increase his taxable net income from other sources. It is not material that petitioner had other or larger business interests in which he was engaged'. The statute is not so restricted as to confine deductions to a single business or principal business of the taxpayer. A taxpayer may carry on more than one trade or business at the same time. “Any trade or business” is the broad language of the statute.

We, therefore, conclude that taxpayer, in dealing on the stock exchange to the extent he was during the taxable year, was carrying on a trade or business within the meaning of the statute, and that the amount expended for statistical services, information and advice was reasonable, in view of the volume of business transacted, and was an ordinary and necessary expense in connection with the business and the deduction should be allowed.

Reviewed by the Board.

Judgment will he entered under Rule 50.

Sternhagen, Van Fossan, and Disney concur only in the result.

Murdock,

dissenting: The evidence shows that the petitioner was never entitled to inventory his securities for income tax purposes. The statute fixes but one basis for determining his gain or loss upon the sale of securities. That basis is cost. Sec. 113 (a), Revenue Act of 1928. Cost means the amount which he paid for the securities. It is a distortion of the term “cost” to interpret it as meaning the original cost adjusted for such changes, resulting from the unauthorized use in prior years of inventories, as will bring the petitioner and the Commissioner into balance in regard to income tax. If he had been entitled to inventory these securities in 1930, then his closing inventory figures would be a proper basis. See section 113 (a) (1) of the Revenue Act of 1928. But, since he was not entitled to use inventories in 1930, the closing inventory which he erroneously used is not his basis. The function of the Board is to decide correctly the petitioner’s income tax liability for the year before it. It should not distort the law in order to correct mutual errors which the taxpayer and the Commissioner have made in prior years; to attempt to do so will lead to hopeless confusion. I think the prevailing opinion is in error in permitting the use of a figure other than cost as a basis for computing the petitioner’s losses from sales of securities. ■

Leech agrees with this dissent.

       SEC. 41. GENERAL RULE.
      The net income shall he 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 in accordance with such method as in the opinion of the Commissioner does clearly reflect the income. If the taxpayer’s annual accounting period is other than a fiscal year as defined in section 48 or if the taxpayer has no annual accounting period or does not keep books, the net income shall be computed on the basis of the calendar year.


author: Leech:

text:
    Central National Bank of Cleveland (Successor by Change of Corporate Title to Central United National Bank of Cleveland), Administrator, Estate of John F. McInerney, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 83276.
    Promulgated February 12, 1937.

      Arthur A. Sayre, Esq., for the petitioner.

      G. G. Holmes, Esq., for the respondent.
   OPINION.

Leech:

This proceeding seeks redetermination of $249.54 in income tax determined for the period January 1 to March 10, 1934, against the petitioner as the administrator of the estate of John F. McInerney, deceased. The only error assigned is respondent’s dis-allowance of a deduction of interest, paid, in the sum of $1,653.82. The proceeding is submitted upon a formal stipulation of fact, reading as follows:

John F. McInerney, a Catholic priest, died on March 10, 1934. Shortly after his death it was discovered that he had accumulated $375,000.00 over the period 3913 to the date of his death. The source of the greater part of the accumulation is not known. He had failed to file a Federal Income tax return at any time, except for the years 1925 and 1926, and in those years his income was understated. No Federal Income tax was paid on any of the accumulations during his lifetime. Immediately after the decedent’s death the local revenue agent’s office proceeded to determine the amount of the deficiency of Federal Income tax due from the decedent, as well as interest properly chargeable thereon. The total tax and interest so determined amounted to $27,209.36, of which amount $7,653.82 was interest.
Central National Bank of Cleveland, 308 Euclid Avenue, Cleveland, Ohio is the administrator of said decedent’s estate. The full amount of the tax and interest so determined by the respondent, $27,209.36 was agreed to and paid by the administrator on May 26, 1934.
It was not known by respondent at the date of decedent’s death or prior thereto that he was liable for Federal Income taxes. The investigation was begun following his death and the income tax finally determined by agreement on Hay 26. 1934.
In the preparation of the income tax return for the decedent for the period from January 1, 1934 to March 10, 1934, the latter date being the day of the decedent’s death, there was deducted the amount of §7,653.82, which was interest accrued on the deficiencies of income tax determined to be due from the decedent for the years 1913 to 1933, inclusive.
The deficiency alleged in this proceeding is $249.54 and is predicated solely upon the disallowance by respondent as a deduction on the above return of the amount $7,653.82.

The petitioner, in filing a return for the decedent for the period January X, 1934, to the date of death on March 10, 1934, accrued and reported income for that period whether received or not. This was done in accordance with section 42 of the Revenue Act of 1934, and, consistent with the provisions of section 43 of the same act, it likewise accrued the deductions applicable to such period which were owing at decedent’s death. Included in these deductions was the amount of $7,653.82, paid by it on May 26, 1934, as interest to that date on deficiencies in income tax due from the decedent.

We assume, from the record, decedent was on the cash basis. See George A. Neracher, 32 B. T. A. 236.

Respondent does not question petitioner’s accrual of income for the period in question but has disallowed deduction of the interest payment. His theory for this contested action is stated by his counsel upon brief in the following words: “Where all events fixing the liability for interest transpire subsequent to decedent's death, no deduction of such interest is allowable in determining the taxable income of decedent on the income tax return filed for the period January 1,193 f. to March 10,1931¡., the date of decedent's death."

The rule thus stated is undoubtedly correct. If the events fixing the liability did not transpire until after decedent’s death, no basis for accrual then existed. However, here, we think, at decedent’s death, the liability for the disputed interest had been fixed in an amount ascertainable with reasonable certainty. That sustained the questioned accrual. United States v. Anderson, 269 U. S. 422.

The receipt of income and the revenue acts applicable thereto, not the mere assessment of the tax, fixed the liability for the tax and its amount. Upon the date of decedent’s death, the events which had then transpired were that in prior years the decedent had realized large amounts in taxable income which he had failed to report and on which an income tax was then due and unpaid. The various revenue acts creating a liability for payment of these taxes also fixed a liability for interest upon the amounts due. Revenue Act of 1915,. sec. G; Revenue Act of 1916, sec. 9; Revenue Act of 1918, sec. 250; Revenue Act of 1919, sec. 250; Revenue Act of 1921, sec. 250; Revenue Act of 1924, secs. 274 and 276; Revenue Act of 1926, secs. 273 and 276; Revenue Act of 1928, secs. 292 and 294; Revenue Act of 1932, secs. 292 and 294; and Revenue Act of 1934, secs. 292 and 294. This liability was not different from that of the tax itself. Its assessment and collection were not discretionary with respondent.

Thus, it is clear that, at decedent’s death, he was indebted to the Federal Government for deficiencies constituting unpaid income taxes, pertaining to prior years, in a total amount of $19,555.54, together with interest on these deficiencies at a rate fixed by the statute and for periods in each instance determined by the due date of the tax.

It is thus evident that all of the facts necessary for accrual of the indebtedness of decedent for the disputed interest had occurred at the time of his death.

We hold that petitioner is entitled to accrue, for purposes of deduction, the decedent’s liability for interest upon unpaid tax deficiencies owing at the time of his death. In this connection it is noted that the full amount of the interest paid by petitioner, as administrator, is included in the deduction in question. This appears to be the interest from the due date of the tax, in the case of each prior year’s liability, to the date of payment on May. 26, 1934. This sum exceeds the amount of the liability of decedent for interest as of the date of his death on March 10,1934. The deduction should be adjusted by elimination of the interest from the date of death to the date of payment.

Judgment will he entered v/nder Rule 50.

       SEC. 42. PERIOD IN WHICH ITEMS OF GROSS INCOME INCLUDED.
      * * * In the case of the death of a taxpayer there shall be Included in computing net Income for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly includible in respect of such period or a prior period.

       SEC. 43. PERIOD FOR WHICH DEDUCTIONS AND CREDITS TAKEN.
      * * * In the case of the death of a taxpayer there shall be allowed as deductions and credits for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly allowable in respect of such period or a prior period.


author: Hill:

text:
    Volunteer State Life Insurance Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 69058, 70851.
    Promulgated February 16, 1937.

      Robert A. Littleton, Esq., and F. Linton Martin, Esq., for the petitioner.

      Olay 0. Holmes, Esq., for the respondent.
   OPINION.

Hill:

These proceedings, duly consolidated for hearing, involve deficiences in petitioner’s income tax for the years 1929 and 1930 in the amounts of $1,676.21 and $2,757.98, respectively.

In the original pleadings the following issues were raised: (1) Whether respondent erred in including in income the rental value of space occupied by petitioner in its home office building; (2) whether respondent erred in disallowing a portion of the deductions claimed by petitioner for investment expense by holding that items of general expense were in part assigned to or included in investment expense in petitioner’s returns, and on that ground limiting the deductions for investment expense to one-fourth of one percent of the mean of petitioner’s invested assets; (3) whether respondent erred in disallowing deductions for commissions upon sales of real estate; (4) whether respondent erred in disallowing as a deduction for 1929 farm sales expenses alleged to represent expenditures for advertising for sale real estate owned by petitioner; and (5) whether respondent erred in disallowing a deduction for 1930 on account of depreciation on furniture and fixtures.

Issues (1) and (5) have been conceded and abandoned by petitioner in view of the decisions of the Supreme Court in Helvering v. Independent Life Insurance Co., 292 U. S. 371, and Rockford Life Insurance Co. v. Commissioner, 292 U. S. 382. Issue (4) has been abandoned by petitioner because of the fact that the identical issue was raised in Docket No. 54176 (to which further reference is made hereinbelow) and was there conceded and abandoned by petitioner. Accordingly, respondent’s determinations are approved in so far as they rest upon adjustments involved in issues (1), (4), and (5). Of the original issues this leaves for consideration only issues (2) and (8).

By order of the Board entered November 27,1935, leave was granted petitioner to file a supplemental petition in each of these cases raising an issue of res judicata predicated upon facts arising since the original petitions were filed. This latter issue will be here considered, first, for the reason that if it should be decided in accordance with petitioner’s contention, the estoppel of res judicata will be determinative of original issues (2) and (3), above referred to.

Petitioner is a Tennessee life insurance corporation, with its principal office at Chattanooga. Respondent determined a deficiency in petitioner’s income tax for the year 1928, from which petitioner appealed to- the Board under Docket No. 54176. After full hearing and consideration of the case upon the merits, the Board on April 10, 1933, promulgated its report, which is published at 27 B. T. A. 1149. Tu that proceeding three issues were submitted for decision as follows: (1) Whether or not there should be included in gross income the rental value of the space occupied by petitioner in its home office building; (2) whether petitioner was entitled to deduct as an investment expense salaries paid to officers for their services in connection with investments, or whether the salaries paid to the officers constituted a general expense in part assigned to or included in investment expenses; and (3) whether petitioner was entitled to deduct as investment expense commissions paid on sales of real estate. The Board decided issues (1) and (2) in favor of the petitioner, and decided issue (3) in favor of respondent. Thereafter, on August 10, 1933, pursuant to its said report, the Board entered its decision that there was an overpayment of petitioner’s income tax for 1928 in the amount of $2,719.94.

At the time the original petitions in the present proceedings were filed, the proceeding under Docket No. 54176 was pending undecided. On February 18, 1933, in Docket No. 69058, and on May 18, 1933, in Docket No. 70851, the parties filed stipulations each to the effect that the issues in these proceedings are the same as those presented in Docket No. 54176, and requested that the present cases be placed upon the reserve calendar pending decision in Docket No. 54176.

Respondent filed a petition for review of the decision of the Board in Docket No. 54176, and, while the case was pending review by the United States Circuit Court of Appeals for the Sixth Circuit, the Supreme Court of the United States, on May 21, 1934, decided the case of Helvering v. Independent Life Insurance Co., supra, holding that the rental value of space occupied by a life insurance company in its home office building should be included in gross income, if deductions were claimed for taxes, expenses, and depreciation on the building.

The Supreme Court having decided this question contrary to petitioner’s contention and the decision of the Board in Docket No. 54176, counsel for the parties filed a stipulation in the Circuit Court of Appeals as follows:

That the United States Circuit Court of Appeals for the Sixth Circuit may reverse and remand this cause to the United States Board of Tax Appeals for such orders as may be stipulated or jointly moved by the parties thereto.

On March 5, 1935, the Circuit Court of Appeals issued the following order:

Pursuant to stipulation of counsel, it is ordered that the decision of the Board of Tax Appeals in this cause be and the same is hereby reversed and the cause is remanded to the Board for such orders as may be stipulated or jointly moved by the parties.

On March 20, 1935, the following stipulation was filed with the Board:

It is hereby stipulated by and between the parties hereto, through their respective attorneys of record, that whereas the parties have heretofore stipulated and agreed that this cause should be reversed by the United! States Circuit Court ot Appeals for the Sixth Circuit and remanded to this Board for such orders as may be stipulated or jointly moved by the parties, a copy of said stipulation being filed herewith:
Now, therefore, the Board upon receipt of said mandate from said Circuit Court of Appeals may find an overpayment in taxi by the Volunteer State Life Insurance Company for the year 1928 in the amount of $1,585.08, and may enter its order accordingly.

On March 22, 1935, the Board entered its order as follows:

Pursuant to stipulation of the parties filed in the above entitled proceeding on March 20, 1935, in accordance with an order of the United States Circuit Court of Appeals for the Sixth Circuit entered by said Court on March 5, 1935, it is
Obdered and Decideb' : That there is an overpayment of tax for the year 1928 in the amount of $1,535.08.

The decision so entered has now become final.

The petitioner contends that the facts show, and the parties have so stipulated, that the issues in these proceedings are the same as those decided in Docket No. 54176 and that hence the former adjudication is determinative of the issues presented for decision here. Despondent argues that the doctrine of res judicata is not applicable for the reason, first, that the issues are not the same, and, second, because the final decision of the Board in the prior case was not a judgment upon the merits, but a “consent” judgment.

The petitioner insists that the Board’s final order was the same in result as if the Circuit Court had reversed the Board’s original decision on the question concerning rental value of space in the home office building and affirmed the Board’s decision on all other issues involved in Docket No. 54176. However, the court affirmed no part of that decision, but reversed it in toto and directed the Board to enter such orders as might be stipulated or jointly moved by the parties. No discretion or power was either exercised or retained by the court or left to the Board to make a judicial decision of the case on the merits. The reversal and mandate by the Circuit Court was based solely upon the stipulation of the parties pursuant to an agreed plan of a settlement of the case by the parties themselves without a judicial determination.

Under the mandate of the Circuit Court the stipulation of the parties superseded the discretion and power of the Board to determine the kind of order it should enter. The force of such an order as res judicata is confined to the cause of action in which it is entered.

A “consent” judgment has been defined as a contract of the parties spread upon the record with approval and sanction of a court of competent jurisdiction. Weaver v. Hampton, 201 N. C. 798; 161 S. E. 480. A “consent decree” is not a judgment of the court, but is a contract between the parties entered into of record with the court’s consent, and is not necessarily based upon pleadings or records in the case. Standard Supply Co. v. Delmar Coal Co., 110 W. Va. 560; 158 S. E. 907. The order in question was a disposition of the suit by the parties and not by the Board, Berry v. Somerset R. Co., 89 Me. 552; 36 Atl. 904. It was not a judicial rendition on the merits and can not be the basis of a claim of res judicata in the present proceeding. Almours Securities, Inc., 35 B. T. A. 61. Cf. Wayne Body Corporation, 22 B. T. A. 401; Stanley Co. of America, 26 B. T. A. 705.

But even if the order in question were a j uclicial determination, it would not constitute res judicata as' to the issues in the present proceeding. The test as to what constitutes res judicata is succinctly stated in Tait v. Western Maryland Railway Co., 289 U. S. 620, as follows:

The scope of the estoppel of a judgment depends upon whether the question arises in a subsequent action between the same parties upon the same claim or demand or upon a different claim or demand. In the former case a judgment upon the merits is an absolute bar to the subsequent action. In the latter the inquiry is whether the point or question to be determined in the latter is the same as that litigated or determined in the original action.

The parties in this and in the previous proceeding are the same but the cause of action in Docket No. 54176 is different from that in Docket No. 69058 and in Docket No. 70851, under consideration here, since the instant proceedings involve taxes for the years 1929 and 1930 and the earlier proceeding involved taxes for the year 1928. Tait v. Western Maryland Railway Co., supra. The causes of action in the prior and the present proceedings being different, the next inquiry is whether the same point, facts, or question now being litigated is the same as that involved in the previous action. The questions involved in Docket No. 54176 were (1) whether salaries paid to officers of petitioner for their services in 1928 devoted to its investments were allowable deductions as investment expenses or whether such payments constituted an assignment or inclusion in part of general expense in investment expenses, and (2) whether commissions paid on sales of real estate acquired as the result of investments were allowable as deductions either as investment expenses or otherwise. Like questions are involved in the instant proceeding as to the years 1929 and 1930.

The petitioner in 1927 adopted the plan of segregating the salaries paid to its general officers, whereby a certain amount was paid for services in connection with its general insurance business and another certain amount was paid for services devoted to its investments. Separate salary checks were issued for each character of service. The amounts of salaries so paid for each character of service were fixed in advance by agreement between the officers and petitioner’s finance committee and were ratified by its board of directors. A separate agreement was made in each year from July 1, 1927, to August 1, 1931, and in each agreement a change was made in the amounts of the salaries paid both for services in connection with the general business of insurance and for the services devoted to investments. Therefore, the questions involved in Docket No. 54176 are different from those involved in the present proceeding and res judicata has no application. D. F. Strickland, 32 B. T. A. 804. Cf. United Business Corporation of America, 33 B. T. A. 83, 87. The cases cited by petitioner to support its claim of res judicata are not in point for the reason that in each of the cited cases the point or question to be determined was the same as that in the former action. Such is not the case here.

The filing of stipulations by the parties in each of the dockets included in the present proceeding to the effect that the issues therein are the same as those presented in Docket No. 54176 does not change the fact that the issues are not the same. Such stipulations are stipulations of conclusions, without basis in facts, but contrary to them, and are not to be regarded in the decision of the case. Commissioner v. Cummings, 77 Fed. (2d) 670; Swift & Co. v. Hocking Valley R. R., 243 U. S. 281; Smith v. Commissioner, 59 Fed. (2d) 533; United States v. Pugh, 99 U. S. 265.

On the merits, the first question for determination is whether petitioner included in its income tax returns deductions as investment expenses which were in part at least general expenses. The deductions claimed as investment expenses are as follows:

Respondent contends that such expenses, although designated as compensation for services devoted to petitioner’s investments, were part of the general expenses of petitioner in carrying on its insurance business and their inclusion in deductions for investment expenses makes the proviso in section 203 (a) (5) of the Revenue Act of 1928 applicable in limiting the amount allowable as such deductions to one-fourth of one percent of the mean of petitioner’s invested assets. Section 203 (a) (5) is as follows:

Sec. 203. (a) General Rule.- — In the case of a life insurance company the term “net income” means the gross income less — ■
* * * * * * *
(5) Investment expenses paid during the taxable year; Provided, that if any general expenses are in part assigned to or included in the investment expenses, the total deduction under this paragraph shall not exceed one-fourth of one per centum of the book value of the mean of the invested assets held at the beginning and end of the taxable year.

Petitioner contends tliat such, deductions are investment expenses, not part of the general expenses, and that it is entitled to deduct the full amount thereof.

The principal items in controversy in this connection are the salaries paid to officers of the petitioner in 1929, totaling $18,401.66, and in 1930, totaling $18,473.50, claimed as deductions for investment expenses.

In 1929 A. L. Key, the president of petitioner, was paid a salary of $10,500 for services devoted to investments and a salary of $7,000 for general services. In that year Oscar Mather, treasurer of petitioner, was paid $7,901.66 for investment services and $898.34 for general services. In the year 1930 Key was paid $10,800 for investment services and $7,200 for general services. In that year Mather was paid $873.50 for investment services and $76.50 for general services. In 1930 S. L. Phelps, who succeeded Mather as treasurer, was paid $7,000 for investment services and $4,500 for general services.

The salaries for each character of service were agreed upon in advance and paid by separate checks. The evidence is clear and convincing that the greater part of the time of the officers whose salaries are in question was devoted to the investment business of petitioner. The relative amounts of the two salaries paid to each of the officers named were determined by the estimated time devoted to each of the two services. We are convinced from the evidence that the salaries in question were investment expenses and were fair and reasonable. We, therefore, sustain the petitioner’s right to deduct them as investment expenses. Sun Life Insurance Co. of America v. United States (Ct. of Cls.), 12 Fed. Supp. 450.

All of the other items included in petitioner’s income tax returns as investment expenses are shown by the .evidence to be properly deductible as such, except the item of $15 designated “licenses and fees.” This item is clearly one of general expense and it is so conceded by petitioner. It appears, however, that it was included in investment expenses by mistake and petitioner has withdrawn it as a deduction. It is thereby eliminated from consideration.

The second question for determination is whether commissions paid in 1929 and 1930 on real estate sales are allowable deductions. Under the heading “Other real estate expenses” petitioner included in its tax return for 1929 as a deduction commissions on the sale of real estate in the amount of $4,451.42 and for 1930 a like deduction in the amount of $2,800. These commissions were listed as having been paid in 1929 and 1930 in the respective amounts above stated. The commissions actually paid in 1929 and 1930 were $1,347.50 and $737.50, respectively.

It is conceded that if a profit bad been realized on the sales on which the commissions were paid it would not have been includable in petitioner’s gross income for tax purposes. The commissions contributed nothing to the production of petitioner’s taxable income. They were expenses incurred in business operations that had no relationship to petitioner’s tax liability and hence do not constitute allowable deductions. Rockford Life Insurance Co. case, supra. Petitioner contends, however, that such commissions are.investment expenses and should be deductible as such, but it did not so include them in its income tax returns. This contention can not be sustained. The investment transactions were complete when the real estate in question was acquired by petitioner. The sale of the real estate was not an investment and consequently the commissions paid thereon were not investment expenses.

Reviewed by the Board.

Judgment will be entered under Rule 50.

Sternhagen and Disney concur only in the result.


author: Murdock. :

text:
    The Kensico Cemetery, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 76703.
    Promulgated February 16, 1937.

      Henry Rmenel, Esq., Lawrence A. Baker, Esq., Gustavus T. Kirby, Esq., and E. T. Weiler, G. P. A., for the petitioner.

      D. A. Taylor, Esq., for the respondent.
   OPINION.

Murdock. :

The Commissioner determined deficiencies and xienalties as follows:

The Commissioner claims increased deficiencies and penalties. There are issues raised in regard to the penalties and the amount of the petitioner’s income for each year. These need not be discussed in view of the decision on the issue as to whether or not the petitioner is exempt from tax under section 231 (5) of the Revenue Act of 1926 and similar provisions of later revenue acts. The facts have been stipulated, thus obviating the necessity of findings of fact.

The petitioner is a cemetery corporation organized in 1889 under chapter 133 of the Laws of 1847 of the State of New York. It is a membership corporation, not a stock corporation. Its members consist of lot owners who alone have a voice in conducting the affairs of the corporation, except that lot prices can not be changed without the consent of the certificate holders. No capital was paid in to the petitioner when it was organized, and, in order to acquire necessary land, the petitioner issued land share certificates. The original certificates were issued to the land owner, or owners, as consideration for the land. This was in accordance with the law under which the petitioner was organized. The certificates entitled the holders thereof to one-half of the amount realized from the sale of lots in the cemetery, but did not give to the holders any interest in the petitioner or any right to share its income. All of the land which the petitioner ever acquired was acquired by this same method.

The petitioner acquired some adjoining land in 1906. The financial affairs of the petitioner were not in good condition at that time and the other party to the contract agreed that 30,000 land share certificates should be issued, of which '4,707 should be returned to the petitioner, 7,793 should go to subscribers for cash and the balance of 17,500 should go to the owners of the land.

The petitioner made payments to the holders of the land share certificates. It also borrowed money and paid interest thereon. The petitioner has not been permitted by its charter or the law under which it was organized to engage in any business not incidental to the business of conducting a cemetery. It has never engaged in any business other than that incident to the conduct of a cemetery. The petitioner is required by its charter, and by the laws under which it was organized and the amendments thereto, to retain any income which it may have from any source and to use it for the purpose of maintaining, improving and embellishing the cemetery. It, of course, had authority to pay its debts and expenses.

Section 231 of the Revenue Act of 1926 provides in part as follows:

CONDITIONAL AND OTHEK EXEMPTIONS OF CORPORATIONS
Seo. 231. The following organizations shall be exempt from taxation under this title—
*******
(5) Cemetery companies owned and operated exclusively for the benefit of their members or which are not operated for profit; and any corporation cnar-tered solely for burial purposes as a cemetery corporation and not permitted by its charter to engage in any business not necessarily incident to that purpose, no part of the net earnings of which inures to the benefit of any private shareholder or individual.

Sections 103 (5) of the Revenue Acts of 1928 and 1932 are identical with the above quoted provision. The petitioner was owned and operated exclusively for the benefit of its members. It was chartered solely for burial purposes as a cemetery corporation and was not permitted by its charter to engage in any business not necessarily incident to that purpose. No part of its net earnings inures to the benefit of any private shareholder or individual. Thus it seems clear that the petitioner is exempt from tax.

The respondent argues that the petitioner was organized and operated for the benefit of the land share certificate holders. That is true only in the sense that the petitioner was operated in such a way as to pay to the land share certificate holders the amount which was due them as creditors of the petitioner. Obviously the petitioner had to acquire land and pay for it. Since it did not have the capital to buy land, some other means of acquiring land had to be devised. The land share certificates were used for the purpose. They were essentially different from stock certificates and represented promises to pay money. American Exchange National Bank v. Woodlawn Cemetery, 194 N. Y. 116. If the petitioner had given back a purchase money mortgage on some of its lands and had so conducted its affairs as to pay the interest and principal on the mortgage, that fact would not prevent it from being exempt from tax. Likewise it is not denied the exemption because it pays its creditors, the holders of the land share certificates. A contrary holding would give to the statute an absurd interpretation. If it be a fact, as the respondent contends, that some of the certificates were actually issued for cash and some were issued to the petitioner itself, those circumstances do not change the result. Any advantage to the petitioner from holding certificates would not inure to the benefit of individuals any more than would profits which it derived in other ways. Whether the certificates were issued for cash or whether they were issued for land, they represented a debt due from the petitioner to the holders. Those debts were payable as the lots were sold, regardless of whether or not the petitioner had income.

Since the holding is that the petitioner is exempt from tax, the other issues in the case become immaterial.

Decision will he entered for the 'petitioner.