Luton Mining Co. v. Commissioner , 12 B.T.A. 720 ( 1928 )

LUTON MINING CO., INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Luton Mining Co. v. Commissioner

Docket No. 13680.

United States Board of Tax Appeals

12 B.T.A. 720; 1928 BTA LEXIS 3476;

June 20, 1928, Promulgated

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1. VALUATIONS. - Value of leasehold for invested capital purposes as of the date of transfer to the corporation determined.

2. INVESTED CAPITAL. - Section 331 of the 1918 Act does not apply where an individual after March 3, 1917, obtains a leasehold and transfers it to a newly organized corporation and after the transfer is the owner on only 20 per cent of the corporation's stock.

E. J. Wells, Esq., and Attilla Cox. Esq., for the petitioner.

J. L. Backstrom, Esq., and H. H. Mathis, Esq., for the respondent.

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GREEN

In this proceeding the petitioner seeks a redetermination of its income and profits-tax liabilities for the years 1919 and 1920, for which the respondent in his deficiency letter dated March 18, 1926, determined deficiencies of $635.68 and $1,855.63, respectively. The error alleged is that the respondent failed to allow as a part of the petitioner's invested capital the value of a leasehold which was acquired by petitioner in exchange for capital stock.

FINDINGS OF FACT.

The petitioner was incorporated under the laws of the State of Kentucky on April 22, 1918, with its principal office at Providence, Ky.

On November 9, 1917, one S. K. Luton secured from the Nisbet and Ramsey heirs a 50-year lease on 450 acres of the No. 9 seam of undeveloped coal in Webster County, Kentucky, for no consideration other than an agreement to pay a royalty of 6 cents per ton for every ton of coal mined. The lessee had the right to remove his property within 90 days after the termination of the lease and, if prior to such termination all the coal had been mined, the lessee then had the right of ingress for the purpose of mining adjoining tracts for another period of 50 years. The property covered by the lease was underlaid with approximately 300 acres of recoverable and marketable coal which averaged approximately 5,000 tons to the acre or a total estimated recoverable content of 1,500,000 tons.

Luton, not being financially able to develop the lease himself, succeeded in obtaining four other individuals to go in with him for the purpose of forming a corporation, the petitioner herein. The five of them on January 1, 1918, agreed to each contribute $10,000, if necessary, and Luton agreed that in addition to his $10,000 he would assign the lease to the corporation to be formed. The agreement in so far as it is material here is as follows:

Whereas party of first part, S. K. Luton had obtained for himself a certain lease upon about 450 acres of coal land, from the owners thereof viz; * * * and whereas it has been agreed between the parties to this contract, that a coal mine is to be opened on this land and development of same made into to modern producing mine, and it has been agreed that said W. J. Nisbet, and others, parties of the second part hereto, will join said S. K. Luton equally as to each of the five parties hereto, and put up and expend a sum of money in cash to the total amount of Fifty Thousand Dollars, if such sum is necessary to fully develop said mine or mines, and that all parties hereto will proceed to incorporate a Company having a capital stock of One Hundred Thousand Dollers, Fifty Thousand Dollars of which stock shall be issued in lieu of and as a consideration for said lease.

In consideration of said above parties being experienced coal operators, and agreeing to join said S. K. Luton in the opening of the above mentioned mine or mines, said S. K. Luton hereby agrees to convey to the Company to be organized and incorporated, all of his rights to said lease and its privileges, which he claims is reasonably worth the said sum of Fifty Thousand Dollars, that the prospects of earnings in the enterprise would produce a reasonable return on the investment as above described, and he hereby agrees to make said conveyance.

As stated above, the petitioner was incorporated on April 22, 1918. Luton transferred the lease to the petitioner in May, 1918, and in addition thereto paid in $5,000 in cash. A like amount in case was also paid in by each of the other four incorporators. The entire authorized capital stock of the petitioner was issued to Luton and his four associates as follows:

S. K. Luton	$20,000
N. F. Cox	20,000
W. J. Nisbet	20,000
Percy D. Berry	20,000
C. J. Miedreich	20,000
Total	100,000

The petitioner considered that it received the following values in payment for its capital stock:

Leasehold	$50,000
Cash	25,000
Alleged good will	25,000
Total	100,000

At the time the lease was transferred to the petitioner, the prevailing royalty rate in the Western Kentucky coal fields on the grade of coal covered by the lease transferred was at least 10 cents per ton. Some leases on small tracts were made at as high as 25 cents per ton.

At the time the petitioner acquired the lease from Luton in 1918, its officers estimated that it would take 17 years to mine the coal covered by the lease which was in close proximity to railroad facilities and could be operated with a drift opening and developed at a less expense than if it had been necessary to open the mine by a shaft. The No. 9 seam of coal was admittedly the best seam of coal in Webster County, Kentucky.

The actual cash value of the lease acquired by Luton on November 9, 1917, and transferred to the petitioner in May, 1918, was on the latter date at least $50,000.

In computing the petitioner's invested capital for the years 1919 and 1920, the respondent held that the leasehold in question had no value whatever at the date of acquisition by the petitioner in 1918.

During 1918, 1919, and 1920, the petitioner mined from the Luton lease 15,535, 36,099.75, and 43,667.30 tons of coal, respectively.

OPINION.

GREEN: This is both a fact and law question. First, What was the actual cash value of the lease at the time the petitioner acquired it?, and, second, If the lease had a value at that time, may such value be included in the petitioner's invested capital?

The evidence stands uncontradicted that the prevailing royalty rate of coal in the Western Kentucky coal fields of the kind of coal covered by the Luton lease in April, 1918, was at least 10 cents per ton, with several leases being made in excess of that price; that the property covered by the lease was in close proximity to railroad facilities; and that the coal could be mined without the necessity and expense of sinking a shaft. Several witnesses of long experience in the coal business testified to a value of $50,000. In our opinion the lease was worth at least that amount at the time it was transferred to the petitioner in May, 1918.

The counsel for the respondent in his opening statement remarked that, "We further contend that even though the Board should find the lease did have a value that the corporation is not entitled to any value of this lease for invested capital purposes under Section 331 of the Revenue Act of 1918." This section reads in part as follows:

SEC. 331. In the case of the reorganization, consolidation, or change of ownership of a trade or business, or change of ownership of property, after March 3, 1917, if an interest or control in such trade or business or property of 50 per centum or more remains in the same persons, or any of them, then no asset transferred or received from the previous owner shall, for the purpose of determining invested capital, be allowed a greater value than would have been allowed under this title in computing the invested capital of such previous owner if such asset had not been so transferred or received; * * *

We fail, however, to see where this section of the statute is applicable to the facts in this case. Before the incorporation of the petitioner Luton was the sole owner of the lease in question. After incorporation he was the owner of only 20 per cent of the petitioner's stock. The facts show that an interest of considerably less than 50 per cent remained in the same person, which, in our opinion, precludes the application of section 331.

The actual cash value of the lease, which we have found was $50,000, should, in accordance with section 326(a)(2) of the Revenue Act of 1918, be included in the petitioner's invested capital for the years 1919 and 1920 with, of course, appropriate adjustments for exhaustion.

Judgment will be entered under Rule 50.