McEwan v. Commissioner , 26 B.T.A. 726 ( 1932 )

LILLIAN G. MCEWAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

A. F. MCEWAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

ANNA B. MCEWAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

ANNA B. MCEWAN AND LEO S. BLACK AS EXECUTORS OF THE WILL OF W. H. MCEWAN (DECEASED), PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

McEwan v. Commissioner

Docket Nos. 25994-25997.

United States Board of Tax Appeals

26 B.T.A. 726; 1932 BTA LEXIS 1260;

July 27, 1932, Promulgated

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R. H. Evans, Esq., for the petitioners.

T. M. Mather, Esq., for the respondent.

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MATTHEWS

These four proceedings arise upon the same issues and have been consolidated for hearing. They involve deficiencies in income tax for the year 1922 in the following amounts:

Lillian G. McEwan	$4,283.57
A. F. McEwan	4,612.39
Anna B. McEwan	3,874.16
Anna B. McEwan and
Leo S. Black, as executors	4,202.98

The sole issue is whether taxable gain was realized on the sale of the Tyee Company's shares received by petitioners as part of the assets in liquidation of the Wolverine Company, the value of which, through the Tyee Company's ownership of stock in the Sutton Company, is determined by the value of the Sutton Company's shares; and the value of these, since there were no sales of its shares, in turn depends upon that of certain standing timber and timber rights held in fee and on lease by the Sutton Company on March 1, 1913, and still so held at the time of the sale of shares in question in 1922. The value of other assets of the several corporations is not in issue. The issue resolves itelf therefore into a question of fact, whether the timber was greater in extent and value on March 1, 1913, than as determined by the respondent.

FINDINGS OF FACT.

In 1922 the petitioners were the owners of all the capital stock of the Wolverine Company, a State of Washington corporation, hereinafter called Wolverine, which in that year was dissolved and its assets in kind distributed to stockholders. Wolverine at that time owned 50 per cent of the capital stock of another Washington corporation, the Tyee Logging Company, hereinafter called Tyee. In the course of Wolverine's liquidation the shares of Tyee held by it were sold to the Seattle Cedar Lumber Manufacturing Company, a Washington corporation, for cash in the sum of $310,757.63. At the time of such sale Tyee owned 25 per cent of the capital stock of the Sutton Lumber & Trading Company, a British Columbian corporation, hereinafter called Sutton.

Sutton, on March 1, 1913, and still in 1922, at the time of the sale in qeustion owned certain timber and timber rights on the west coast of Vancouver Island, British Columbia. Such properties consisted in part of 5,469 acres of land granted to Sutton in fee by the Crown in 1886. Four thousand six hundred and twenty-eight acres of these lands were subject to a permianent fixed royalty of 50 cents per M board feet of timber cut, while 841 acres (on Nootka Sound) carried no royalty. In addition, it had leased 68,281 acres from the Province of British Columbia in 1903 and 1904 for twenty-one years, renewable at the end of the term, with a fixed royalty of 50 cents per M board feet and an annual rental of 25 cents an acre. The rental was subject to reduction to 15 cents on condition of the lessee being able to produce by its mill a certain amount of lumber a day. The royalty was paid as the timber was cut.

The Sutton holdings were the first selections made on this part of Vancouver Island. The land, except that covered by Crown grants, was unsurveyed when Sutton's cruiser, Riley, an experienced timber locater, and others, went in. They surveyed the land, and in doing so, were allowed to make "10 chain jogs" to include the best timber. Sutton then obtained leases of the land thus staked out and in 1906 built a sawmill on its holdings at Mosquito Harbor, but did not operate it for more than a year. It closed in the general panic of 1907, but has been kept in repair.

Sutton had a cursory cruise made of its Crown grants on Kennedy Lake in 1902, but no systematic cruise of all its holdings until 1921, when the firm of Gardiner & Baxter, Inc., of Vancouver made a cruise, which was completed in June, 1922. Gardiner & Baxter, Inc., had been timber cruisers since about 1909 and had cruised in all 300 square miles of Vancouver Island, including the entire west coast from Port Renfrew north. They made a systematic survey of the Sutton holdings, based on official surveys, making 50-foot contour maps and where necessary restablishing doubtful lines. Their notes were made in the field. The method used was the "two-run cruise." Two acres are tabulated along one line through the tract and another two acres on the return trip by the second line, so that four out of each 40 acres are covered in the tabulation.

The amount of timber on the Sutton holdings in 1921 and 1922, classified by species and divided into "saw timber" and "small timber" is shown in the following table prepared by Gardiner & Baxter, Inc., from their survey:

Species	Saw timber	Small timber	Total
Crown land, 5,469 acres	M feet	M feet	M feet
Fir	9,102	31	9,136
Cedar	109,285	1,586	110,871
Hemlock	35,002
Balsam	15,036	1,391	51,429
Spruce	10,811		10,811
Pine	749		749
Cypress
	179,985	3,011	182,996
Lease, 68,281 acres
Fir	122,323	1,041	123,364
Cedar	1,123,548	20,940	1,144,488
Hemlock	481,305
Balsam	286,270	24,202	791,777
Spruce	37,174		37,174
Pine	5,479		5,479
Cypress	6,100		6,100
	2,062,199	46,183	2,108,382
Recapitulation
Fir	131,425	1,075	(5.8%) 132,500
Cedar	1,232,833	22,526	(54.7%) 1,255,359
Hemlock	516,307
Balsam	301,306	25,593	(36.8%) 843,206
Spruce	47,985		(2.1%) 47,985
Pine	6,228		(0.3%) 6,228
Cypress	6,100		(0.3%) 6,100
Total	2,242,184	49,194	2,291,378
Percentage	97.9%	2.1%	100.0%
Average M ft. per acre
on the whole 73,750 acres	30.4 M ft.	0.67 M ft.	31.1 M ft.
Average M ft. per acre
on timbered area, 63,344
acres	35.4 M ft.	0.78 M ft.	36.2 M ft.
Relative percentage by
species:
Fir	99,19%	0.81%	100%
Cedar	98.21%	1.79%	100%
Hemlock and balsam	96.97%	3.03%	100%

It was customary in 1913 to cruise down to 16-inch diameter on hemlock and balsam, the British Columbia log scale going to the 10-inch diameter log. Gardiner & Baxter, Inc., cruised down to 20 inches diameter, breast-high, on fir, cedar, spruce and pine; to 16 inch, breast-high, on hemlock and balsam, all timber from these dimensions up being included as "saw timber"; and timber between these limits and 10-inch diameter, breast-high, on the stump, being included as "small timber." The small firs are shown as piling and in M feet; cedar, as poles and small pulpwood; and hemlock and balsam, as small pulpwood, in M feet. It is usual to include hemlock and balsam in a cruise.

The cedar and spruce on Sutton's holding were of a high order and a very heavy stand. The hemlock was of a fair quality and the fir good. The cedar was virgin timber and a very mature stand, as indicated by the high percentage of large timber. Some of the cedar was overmature. "Down" or fallen cedar, as well as standing dead timber, was included in the cruise estimate. The decay of cedar is very slow, often taking as long as 50 to 100 years. No down hemlock was so included. Owing to the heavy rainfall on the west coast of the island there is little fire damage, but there is considerable damage from wind around Nootka Sound. Some of this wind damage was caused a few years before 1922. Small growth replaced the fallen timber.

There was in the Sutton holdings no increase in timber between 1913 and 1922. The amount of timber on the Sutton holdings on March 1, 1913, was not less than 2,291,378 M board feet.

All of the Sutton holdings, with a few exceptions, were on inside passages of water, the average distance of haul from the point of felling to tidewater being not over a mile. The topography of its property shows in most instances gentle slopes toward the water. The logging conditions were good. The average cost of transportation to water on most holdings was $2 per M feet, as against 50 cents to $1 on the Sutton lands. Ordinarily transportation by water is much cheaper than by rail. The channels to the Sutton holdings are all deep water suitable for draught. The nearest railroad in 1913 was at Port Alberni, which could be reached by water by way of Barkley Sound and Alberni Canal, an average distance of 70 miles from the Sutton holdings. The distance by water to Vancouver, the nearest mill in 1913, is about 200 miles by water. Since the invention of the Davis boom, towing logs by sea to Vancouver is feasible, likewise towage to Victoria, but not profitable even in 1913. During the operation of the Sutton mill in 1907, lumber was shipped to Seattle direct and to New York by sea around the Horn. There was sufficient timber on the Sutton holdings to justify a large mill.

In 1913 hemlock and balsam were used as substitutes for fir for box purposes and "dimension lumber"; and if less than 16 inches, for wood pulp. In 1913 or very soon thereafter a pulp mill was built at Port Alice, on Quatsino Sound, and has since operated. There is no rail connection there, and the mill depends entirely on offshore shipping.

In 1913 the value of timber accessible to water was increased by the building of the Panama Canal. There was a great increase in water shipments from the Pacific to the Atlantic coasts by this route. In 1914, the outbreak of the war with Germany caused the Canadian authorities to encourage the production of fir and spruce for ship timber and airplane purposes and resulted in the withdrawal of operators from cedar. Cedar value on the west coast of the island has never regained the prewar level.

The value of the timber on the Sutton holdings on March 1, 1913, was on an average not less than 75 cents per M board feet.

OPINION.

MATTHEWS: The value of the Tyee stock in 1913 held by the Wolverine and sold in 1922 on the dissolution of the latter corporation, in the absence of evidence of any previous sales of the stock around 1913, and of any evidence on the value in 1913 of the stock of Sutton, 25 per cent of whose stock constituted assets of Tyee, must be determined by the value of the underlying assets of the several corporations. ; . It was admitted by respondent in the pleadings and again at the hearing that no question as to value of assets arose save as to the Vancouver Island timber holdings of the Sutton Company, upon which the respondent placed a March 1, 1913, value of $1,200,000 calculated on the basis of 2,000,000,000 board feet at 60 cents per M feet. The petitioner contends that the value should be $1,718,547, based on 2,291,396,000 board feet at 75 cents per M feet. The issue, therefore, becomes solely one of fact and, since we have found for the petitioner on both facts in issue, extended comment is unnecessary.

Respondent admitted in his brief that the "quantity of timber shown by Gardiner & Baxter's cruise is correct." Since the cruise was made in 1922 and the timber for the most part was a virgin stand, this is tantamount to an admission that there were at least as many board feet in the holdings on March 1, 1913, as in 1922; and leaves in effect only the question of valuation.

Respondent's determination rests solely, it is admitted, on the value of 60 cents per M feet employed in the settlement of a Federal estate tax case (the decedent having been the husband of one of the petitioners) in 1923.

The principal factors upon which respondent relies are (1) the amount of hemlock and balsam, about 37 per cent, in the Sutton holdings; and (2) the inaccessibility of western Vancouver Island from the lumber market by reason of its distance from the railhead at Alberni. Respondent's only witness, W. T. Andrews, valuation engineer of forests and forest industry in the Bureau of Internal Revenue, knew of no sales in 1913 on Vancouver Island and admitted that the major factor inducing to his conclusion of valuation at 60 cents per M was the McEwan estate settlement of 1923. We do not think that the valuation found in the McEwan estate settlement is conclusive in this proceeding.

The petitioners produced nine witnesses, all well qualified as to their knowledge of timber values, and also introduced evidence of sales of property from 1909 to 1913 in the vicinity of the property in question, which testimony sustained the valuation of 75 cents per thousand feet claimed by the petitioners.

Upon consideration of all the evidence, we have come to the conclusion, as above stated, that the amount of timber on the Sutton holdings on March 1, 1913, was 2,291,378,000 feet, and that its value, on an average, was 75 cents per M feet. Accordingly, upon a recomputation under Rule 50, these figures should be used to determine the profit or loss resulting from the sale in 1922.

Judgment will be entered under Rule 50.