Big Rapids Elec. Co. v. Commissioner , 9 B.T.A. 737 ( 1927 )

BIG RAPIDS ELECTRIC CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Big Rapids Elec. Co. v. Commissioner

Docket No. 14868.

United States Board of Tax Appeals

9 B.T.A. 737; 1927 BTA LEXIS 2518;

December 21, 1927, Promulgated

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Value of water rights as of March 1, 1913, determined.

Oscar E. Waer, Esq., for the petitioner.

J. F. Greaney, Esq., for the respondent.

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SIEFKIN

This is a proceeding for the redetermination of a deficiency in income taxes for the year 1924 in the amount of $4,906.25. The question concerns the March 1, 1913, value of certain property sold in 1924 for $175,000, alleged by petitioner to have had a fair market value on March 1, 1913, of $88,114.06.

FINDINGS OF FACT.

On or about January 18, 1909, following its organization, petitioner purchased the hydro-electric property and business of W. E. Donnelly Light & Power Co. of Big Rapids, Mich., for $10,000 cash. After that date and up to March 1, 1913, it expended $40,614.06 for additions. Between March 1, 1913, and September 4, 1924, petitioner made other additions costing $81,102.44. Depreciation allowed prior to the date of sale on September 4, 1924, amounted to the sum of $32,945.06. On September 4, 1924, all of petitioner's property was sold for the sum of $175,000.

The assets purchased of the W. E. Donnelly Light & Power Co. did not include any water power and, on January 29, 1909, petitioner purchased 400 inches of water power on the Muskegon River, on which its property was located, from Charles H. Milner for $3,500.

Later, in the same year, petitioner acquired 1,200 inches at the same dam in exchange for the 400 inches purchased from Milner and $8,000 cash. From 1909 to the date of sale the 1,200 inches was the amount of water rights owned by petitioner.

At the time of the organization of petitioner in 1909, it had 107 customers (a small part of the total business in the community) acquired from the Donnelly Light & Power Co., and the line and plant. The equipment purchased was in a run-down and inefficient condition, but during the summer of 1909, it leased a right to build a plant on the dam and built a cement flume and wood structure, equipped with two water wheels, 50-inch Sampson's rated at 160 horsepower each under a 10-foot head. The line and equipment were rebuilt and extended and in 1913 the petitioner had 499 customers, about half the business in the community. Its competitor in 1913, the Consumers Power Co., owing to high tension troubles and because it had 25 cycles, was frequently out of service and operated below par, and petitioner was able, with its rebuilt plant and equipment, to give better service.

On March 1, 1913, the equipment of petitioner consisted of the two water wheels above mentioned, two 120 kilowatt alternators and two 75 kilowatt direct-current generators. Between 1909 and 1913 it made repairs from earnings and charged them to expense. Those repairs were such as to offset depreciation. The annual expenditures of petitioner during the years prior to 1913 for supplies and labor in maintenance of the power plant, did not exceed $1,500 a year.

On March 20, 1913, petitioner's dam was washed out, and between that date and December, 1913, it purchased power from the Grand Rapids & Muskegon Power Co. at its best power rate and resold the power to its customers. It paid a total of $6,362.90 for such power during such period.

Between March 1, 1913, and the date of sale petitioner received the same rate per kilowatt for each class of service.

The only real estate owned by petitioner in 1924 was a small parcel which cost $250 and which was of about that value in 1924.

Between 1909 and 1924 the population of Big Rapids, Mich., remained practically stationary.

The March 1, 1913, value of petitioner's property was $88,114.06.

OPINION.

SIEFKIN: Petitioner, in support of its contention as to the March 1, 1913, value of the property sold in 1924, introduced the testimony of two witnesses who gave opinion evidence. The first witness had been intimately connected with the petitioner and its predecessor corporation since 1904, was familiar with the property, its operating conditions and values in that vicinity. He testified that the fair market value of the tangible properties, aside from water power, on March 1, 1913, was $40,000, equally divided between the generating plant and its equipment and the distribution system. He further placed a value of $50,000 on the 1,200 inches of water power on that date. The second witness was a civil engineer engaged in water power plant work in Michigan for a long period of years and fully qualified to testify as an expert as well as having some experience with the water power in question. His opinion was that the March 1, 1913, fair market value of the 1,200 inches of water was about $50,000. He explained that the increase between 1909 and 1913 was due, in a large part, to the rapid increase in demand for better and more electrical service, its change from the status of a luxury to that of a necessity, and the progress in transmission lines which made possible the development of water power isolated from centers of distribution.

He further gave as his opinion that water power such as this did not materially increase in value between 1913 and 1924, basing such opinion upon (1) the fact that the City of Big Rapids did not grow in population during those years, (2) development of long distance transmission lines robbed local plants of the advantage of proximity, and (3) increased building costs since 1913, electric rates remaining stationary, gave a greater value to the water power in 1913 because it could be utilized at a lower cost.

On the other hand, counsel for the respondent contends that such opinions are unsupported by facts upon which a reasonable opinion could be based; that there is no evidence of sales earnings and that the evidence of costs is meaningless. Respondent further urges that it is unreasonable to attribute approximately one-half of the gain in the property to the water power, whereas, the costs in water power originally were only about 10 per cent of the entire property. Respondent also argues that from the increased cost of labor and materials after March 1, 1913, the gain in the value of the property sold must be attributed chiefly to the gain in the value of the physical plant rather than the water power.

We have considered these contentions of the respondent but must disagree with them when we consider the opinions of the witnesses and the facts upon which they base those opinions. Considering all of the facts and relying upon the opinions of the witnesses, which were strengthened rather than weakened by cross-examination, we believe that the value of petitioner's plant on March 1, 1913, was as set forth in our findings.

Reviewed by the Board.

Judgment will be entered on 15 days' notice, under Rule 50.