MacMaster v. Commissioner , 18 B.T.A. 1119 ( 1930 )

WATSON MACMASTER AND GEORGE W. HERRIOTT, EXECUTORS, ESTATE OF DANIEL MACMASTER, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

MacMaster v. Commissioner

Docket No. 26812.

United States Board of Tax Appeals

18 B.T.A. 1119; 1930 BTA LEXIS 2516;

February 13, 1930, Promulgated

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The evidence is insufficient to establish that the contract involved had no readily realizable market value. Respondent's determination, with adjustments to reflect facts stipulated, is affirmed.

George W. Herriott, Esq., for the petitioners.

Bruce A. Low, Esq., and Leslie Rushbrook, Esq., for the respondent.

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ARUNDELL

The respondent determined deficiencies in income tax for the years 1922 and 1923 in the respective amounts of $8,014.30 and $2,816.42. Errors alleged relate to depletion allowances for 1922 on account of the removal of coal, deductions for 1922 for direct and incidental damage to land occasioned by coal mining, and the amount of profit realized in 1922 and 1923 from the sale of coal and surface land. At the hearing it was stipulated that for the year 1922 depletion is allowable at the rate of 30 cents per ton on 52,202 tons; that $1,414 is deductible for direct damage to the surface of land, and that no deduction is allowable for incidental damage to the land surface.

It was also stipulated that the amount of profit realized by petitioners' decedent from the sale of surface land and coal under a contract dated November 21, 1922, is $44,933. The issue to be decided is the amount of profit realized in the years 1922 and 1923 from the sale under this contract.

FINDINGS OF FACT.

Petitioners are the executors of the estate of Daniel MacMaster, deceased.

By contract dated November 21, 1922, the decedent sold to R. H. Cunningham & Sons Co., a corporation "the right and privilege of mining by stripping and removing" the coal contained "in the Upper or Pittsburgh Vein" underlying tracts of land known as the "Hughey Farm" and the "Beatty Farm." The consideration for the sale was $98,000, to be paid as follows: $10,000 at the time of signing the contract; $10,000 on November 30, 1922; $10,000 on January 15, 1923; $2,500 on January 31, 1923, and a like amount on the last day of every month thereafter until the balance was paid. The contract provided for interest at 6 per cent on all deferred payments after June 1, 1923.

Payments under the contract were made regularly by the purchaser through March, 1924. Thereafter, difficulty was experienced in making collection of the installments due. Only one payment was made in 1924 after the March payment. In 1925 three payments aggregating $12,500 were made. In 1926 there were six payments at irregular intervals totaling $9,575. It was not until March 13, 1928, that final payment was made to the executors of decedent's estate.

The purchaser, Cunningham & Sons Co., began mining operations on June 1, 1923, and finished on May 17, 1924.

The respondent in determining the deficiencies involved treated the sale under the contract as an installment sale and made his computation on the basis of a profit of $82,314.29.

OPINION.

ARUNDELL: In view of the facts that have been stipulated, we have only to determine whether the respondent erred in his method of computing the taxable gain realized under the contract of sale of November 21, 1922. The respondent made his computation on the theory that it was an installment sale. Petitioners claim that this was error because the contract had no readily realizable market value, and that therefore all payments under it should be applied to reduce the basis until that was eliminated and then the balance would be profit.

Petitioner's evidence consisted of the testimony of three witnesses. One of them, a brother of the decedent and one of the executors, was familiar with the details of the sale, but no attempt was made to qualify him to express an opinion as to the value of the contract. His testimony dealt principally with the difficulty that was experienced in collecting from the purchaser. He knew the members of the Cunningham Co., but apparently had little or no knowledge as to its solvency or ability to pay. The other two witnesses were officers and members of the loan committees of banks doing business in the community in which decedent's coal land was located. They gave it as their opinion that the contract had no readily realizable market value. Their testimony was based on the loan procedure of their banks, which, in substance, was that loans would be made only on improved real estate up to 50 per cent of the value fixed by the appraisal committee of the bank.

The question here is that of the value of the contract giving the right to remove coal, and not the value of the land to which the contract related. Whether a bank would or would not loan money on a certain piece of land might have some bearing on the value of the land, but in our opinion such evidence is of little weight in determining the value of a contract of the kind here involved. It is not shown that the witnesses or the banks with which they were connected ever dealt in contracts of this sort or had any occasion to pass upon their value. Nor were the witnesses familiar with the personal responsibility of the purchaser or the security behind the contract. Under the circumstances, we regard their testimony as advisory only and not binding. ; . In our opinion, for reasons above given, the evidence is inadequate to overcome the presumption of correctness of respondent's determination.

In his brief counsel for petitioners states that, in view of that part of the stipulation setting forth the total profit realized as $44,933 instead of $82,314.29 as determined by the respondent, the deficiency for 1923 will be reduced to an amount which he is willing to concede. We are not inclined to accept this concession, because a recomputation may or may not accord with counsel's present view of it. Accordingly, the deficiencies for both years should be recomputed.

Decision will be entered under Rule 50.