Louis Werner Saw Mill Co. v. Commissioner , 26 B.T.A. 141 ( 1932 )

LOUIS WERNER SAW MILL COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Louis Werner Saw Mill Co. v. Commissioner

Docket Nos. 30064, 42923.

United States Board of Tax Appeals

26 B.T.A. 141; 1932 BTA LEXIS 1359;

May 24, 1932, Promulgated

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1. In 1918 petitioner sold timber upon semiannual payments covering nine years. A profit was realized, but was not reported in petitioner's income-tax returns. Respondent asserted deficiencies based in part upon said profit and treated the transaction as an installment sale. Petitioner paid the deficiencies for 1918 to 1921, inclusive, without protesting the installment method of taxation Held, petitioner can not now repudiate that method with respect to later years and insist that all the profits accrued in the year 1918.

2. In 1921 petitioner executed a lease of oil and gas lands, receiving from the lessee $50,000 in 1921 and a like amount in 1922 as advance royalty and additional compensation for executing the lease. Petitioner did not report the $50,000 as income in either year because of a condition subsequent in the contract. Respondent asserted deficiencies for both years, based in part upon treating the payments of $50,000 as income in each year. Petitioner paid the deficiency for 1921 without protest. Held, it can not now repudiate that method of taxation with respect to 1922 and insist that the entire $100,000 constituted accrued income in 1921.

3. Upon the facts, held that sundry adjustments in computing income tax should be allowed.

Chase Morsey, Esq., for the petitioner.

John H. Pigg, Esq., for the respondent.

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MARQUETTE

These proceedings, which were consolidated for hearing, are for the redetermination of deficiencies in income taxes asserted by the respondent as follows:

1922	$12,333.12
1923	8,841.00
1924	10,742.84
1925	6,741.97

The errors alleged are that respondent failed (1) to use the March 1, 1913, value of certain timber as a basis for determining gain or loss, and failed to find a loss from the sale of the timber; (2) to determine the full amount of depletion sustained on timber cut during each of the taxable years; (3) to determine that certain amounts received during 1922 were conditional deposits and were not income; (4) to determine the full amount of depreciation on petitioner's Lenwil sawmill during 1922 and 1923; (5) to allow to petitioner as lessor of certain gas properties, depletion sustained during 1922 and 1923; (6) to allow to petitioner as lessor of certain oil properties, depletion sustained during 1923; (7) to determine that petitioner sustained a net loss from the operation of its Little Bear sawmill during 1925.

FINDINGS OF FACT.

Petitioner is a corporation engaged in manufacturing lumber from tracts of timber owned by it, and in producing oil and gas from its properties. One of its timber tracts, known as the Panola Block, was acquired prior to March 1, 1913, and on that date its fair market value was $1,054,609.68. On June 1, 1918, petitioner sold the Panola Block for $1,215,000, to be paid $175,000 in cash, $55,000 every six months from December 1, 1919, to June 1, 1928, the remaining $50,000 to be withheld to guarantee fulfillment of the contract.

Petitioner kept its books and filed its income-tax returns upon the accrual basis. It did not report as income for any of the taxable years any part of the payments received from the sale of the Panola Block. Respondent has included as income his computation of the proportionate net profits arising from the payments made in each taxable year.

On May 14, 1921, petitioner executed a gas and oil lease with respect to certain lands in Caddo Parish, Louisiana, and Panola County, Texas. On the same day the petitioner as lessor, and the lessee, entered into a supplemental agreement, the pertinent provisions of which are as follows:

THAT WHEREAS, the lessor and the lessee have this day entered into an operating agreement covering the development for gas and oil of certain lands situated in the Parish of Caddo, Louisiana, and County of Panola, Texas; and

* * *

WHEREAS, the consideration expressed in said operating agreement and in said grant and conveyance is the sum of One Dollar and other valuable considerations; and,

WHEREAS, * * * the lessee agreed to pay unto the lessor as advance royalty, and as additional consideration for the execution of said operating agreement and of this collateral agreement and of said grant and conveyance, the sum of One Hundred Thousand Dollars, as herein stipulated and provided:

NOW THEREFORE, in consideration of the premises and of all of the promises, covenants and agreements hereinafter contained and contained in said operating agreement and in said grant and conveyance, the lessee has paid unto the lessor, upon the execution and delivery of collateral agreement and of said operating agreement and of said grant and conveyance, the sum of Twenty-five Thousand Dollars cash in hand, the receipt of which the lessor acknowledges and grants full acquittance therefor; and the lessee binds and obligates itself to pay, or cause to be paid unto the lessor an additional sum of Twenty-Five Thousand Dollars on November 15th, 1921; an additional sum of Twenty-Five Thousand Dollars on May 15th, 1922; and an additional sum of Twenty-Five Thousand Dollars on November 15th, 1922; - the said deferred payments shall not bear any interest except after their respective maturities, and all of said payments covering advance royalty as aforesaid.

It is further agreed and understood that if, in any year after the year 1923, the royalties or other amounts accruing to the lessor under the terms of said operating agreement shall be in excess of the sum of One Hundred Thousand Dollars, then the lessee shall be entitled to retain, out of said excess, as a credit on said One Hundred Thousand Dollars paid and to be paid as advance royalty as aforesaid, an amount not to exceed Twenty-five Thousand Dollars per annum, until the said One Hundred Thousand Dollars, without interest, has been repaid to the lessee. * * *

The amount of $100,000 was paid according to the agreement, $50,000 in 1921 and $50,000 in 1922, but petitioner's books did not reflect those amounts as income in either year. At no time has the amount of earned royalties exceeded $100,000 in any one year, and petitioner has not repaid any part of the advance amount paid by the lessee. Petitioner did not report the $50,000 paid to it in 1922 as income, but respondent has so treated it.

The parties have stipulated and we so find:

That petitioner's taxable net income should be adjusted to include $11,227.17 received as oil royalty in 1923.

That if it is finally determined that the sale of the Panola Block was an installment sale and to be reported on that basis, the amount of profit to petitioner for each taxable year is $14,520.93.

That petitioner is entitled to the following deductions for depletion: With respect to timber cut from the tract known as the V.S. & P. Block, $50,703.83 for 1922; $49,924.73 for 1923; and $42,206.94 for 1924; with respect to its gas-producing properties, $8,569.70 for 1922, and $29,881.20 for 1923; with respect to oil-producing property located in Arkansas, $8,002.41 for 1922.

That petitioner sustained deductible depreciation upon its plants in the following amounts: Upon the Lenwil Saw Mill, $19,428.92 for 1922; $19,441.65 for 1923; $19,238.42 for each of the years 1924 and 1925; upon the Little Bear Saw Mill during 1925, $21,858.08.

Petitioner's income-tax reports for the years 1918, 1919, 1920 and 1921 were timely filed. Respondent asserted deficiencies in the amounts of $3,518.30, $10,399.71, $3,804.10 and $7,297.95, respectively. Those deficiencies were based in part upon his determination of petitioner's profits from the sale of the Panola Block timber tract. Petitioner paid each of the deficiencies asserted and filed no claim for refund or other claim or protest respecting such deficiencies, except for the year 1920. For that year refund was claimed and allowed, based in part upon a reduction of $1,113.37 in the amount of profit from the Panola Block transaction. In its claim for such refund petitioner alleged that the profit it derived in 1920 from the sale of the Panola Block amounted to $14,520.93. That amount was accepted by respondent as correct.

The deficiency asserted for 1921 was based in part upon respondent's determination that the advance payment of $50,000 under the oil and gas lease contract constituted taxable income to petitioner.

OPINION.

MARQUETTE: The first question is whether the Panola Block timber transaction should be treated as an installment sale. The contract made in 1918 provided for a cash payment of $175,000 and for further payments of $55,000 each six months thereafter for a period of nine years.

The total sale price of the tract was $1,215,000, which produced a net profit of $160,390.32. No part of that profit was reported as income by the petitioner in its income-tax returns, but for the years 1918 to 1921, inclusive, respondent asserted deficiencies based in part upon proportionate profits, computed upon an installment sale basis. Petitioner paid the deficiencies without protest or claim for refund, except for the year 1920. In its claim for refund for that year petitioner contended that its proportionate profit from the timber sale, when computed upon the proper basis, amounted to $14,520.93. That amount was determined upon the installment plan.

Section 212(d) of the Revenue Act of 1926 provides that:

Under regulations prescribed by the Commissioner with the approval of the Secretary, a person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any taxable year that proportion of the installment payments actually received in that year which the total profit realized or to be realized when the payment is completed, bears to the total contract price. In the case (1) of a casual sale or other casual disposition of personal property for a price exceeding $1,000, or (2) of a sale or other disposition of real property, if in either case the initial payments do not exceed one-fourth of the purchase price, the income may, under regulations prescribed by the Commissioner with the approval of the Secretary, be returned on the basis and in the manner above prescribed in this subdivision. As used in this subdivision the term "initial payments" means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made.

The same act, in section 1208, gives retroactive effect to section 212(d) and makes it applicable to all the years here involved.

As the initial payment for the timber tract did not exceed one-fourth the purchase price the transaction was one which, under the statute, might be treated as an installment sale. Petitioner had the option of returning the profits from the sale as an entirety, accruing in 1918 with the execution of the contract, or upon the installment basis. Neither plan was used. The simple expedient was adopted of not reporting the sale at all, of making no return of the profits derived. Hence, petitioner says, it has exercised no choice in the matter and it is not within respondent's province to make such choice for a taxpayer. Petitioner further contends that whatever profit resulted from the timber sale accrued in 1918, and is taxable only in that year.

We can not agree with those contentions. The petitioner has acquiesced, without protest, in respondent's basis of taxing the profits in question with respect to the years 1918 to 1921. The statute of limitations now precludes any revision of the tax return of 1918 so as to include therein all the accrued profits from the sale. Without complaint or protest, respondent's installment plan of taxing those profits for the years 1918 to 1921 has been accepted by the petitioner. It has accepted the benefits flowing from such basis of taxation, and can not now repudiate that basis and escape the burden of present taxation under the same method, respecting profits from the same transaction, retaining the benefits enjoyed for earlier years. Cf. . Petitioner's acquiescence in respondent's determination for the years 1918 to 1921, if it did not create an estoppel strictly, at least amounted to an election to adopt the method used, or a ratification of it. In our opinion the attitude taken has foreclosed the petitioner from claiming, at this late day, the right to choose a different method of taxation, especially one which is now ineffective and which would render the income immune from its just tax. ; . The respondent's determination respecting taxable income from the sale of the Panola Block tract will be sustained.

The next point in controversy is whether the advance payment of $50,000 to petitioner in 1922 constitutes taxable income for that year.

The amount in question was one-half the total to be paid "as advance royalties and additional compensation" for executing an oil and gas lease. The first half of the total amount was paid to petitioner in 1921, and was included in taxable income for that year by the respondent in his determination of deficiency. Petitioner paid the amount of the deficiency without protest and no claim for refund was filed. He contends, however, that the amount paid in 1922 as advance royalty did not constitute income because of the contingent provision of its repayment and that it will constitute income only if, as, and when the oil and gas lease royalties exceed $100,000 per year. That contention misinterprets the plain facts of the agreement of May 14, 1921. There is nothing therein requiring petitioner to repay the amounts received as advance royalties. Such amounts became the property of the petitioner immediately upon their receipt. There was no condition precedent to their vesting in the petitioner. The agreement does provide that if in any year the oil and gas royalties exceed $100,000 the amount of such excess, up to $25,000, shall be retained by the lessee as a credit upon the advances paid. That is a subsequent condition which may never be fulfilled and no credits against the advance royalties may ever be earned. If not, those advances remain with petitioner, undiminished. And even if such credits should be earned and applied, petitioner's royalty income will not be diminished; part of it, to the extent of $25,000 per year for four years, will have been paid in advance.

Petitioner further contends that, as it kept its books upon the accrual basis, if the $50,000 received in 1922 is income at all it must be considered as having accrued in 1921 upon execution of the contract providing for its payment. We can not accept that contention, in view of the circumstances disclosed by the record. It was petitioner's duty to report the income received by virtue of the oil and gas contract in its return for 1921, but this was not done. The respondent correctly determined that the amounts received constituted income and gave petitioner the benefit of taxing one-half in each of two years instead of accruing all as taxable income in 1921. Petitioner accepted that determination with respect to 1921 and paid the deficiency asserted upon that basis. There is no difference in principle between the transaction concerning the oil and gas lease and that concerning the Panola Block timber tract. In each the petitioner has elected to accept the benefits flowing from respondent's determination of a method of taxation. Having so elected, petitioner can not now renounce that method and insist upon another under which taxes can not be collected because the statute of limitations has run. "Men must turn square corners when they deal with the Government." .

Several other questions herein raised are disposed of upon the facts. It appears that the following adjustments should be made in computing the deficiencies here involved: Deductions allowable for depletion of the V.S. & P. Block timber tract amount to $50,703.83 for 1922, $49,924.73 for 1923, and $42,206.94 for 1924. For depletion of gas-producing properties deductions of $8,569.70 for 1922, and $29,881.20 for 1923 should be allowed. For depletion of oilproducing property in Arkansas $8,002.41 is allowable as a deduction for 1922. For depreciation of the Lenwil Saw Mill deductions amounting to $19,429.92 for 1922, $19,441.65 for 1923, and $19,238.42 for each of the years 1924 and 1925, should be allowed. Depreciation of the Little Bear Saw Mill is allowable in the amount of $21,858.08 for 1925. Petitioner's income for 1923 should be increased by $11,227.17 received as oil royalty.

Decision will be entered under Rule 50.