Taylor v. Commissioner

ELI J. TAYLOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

JAMES D. BOONE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

J. A. BOONE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

D. W. BOONE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

W. F. BOONE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Taylor v. Commissioner

Docket Nos. 3050-3053, 3163.

United States Board of Tax Appeals

9 B.T.A. 442; 1927 BTA LEXIS 2581;

December 1, 1927, Promulgated

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">*2581 Value at March 1, 1913, of a lease of coal lands, determined.

Lee I. Park, Esq., S. L. Walker, Esq., and S. A. Blustein, C.P.A., for the petitioners.

M. E. McDowell, Esq., and J. Harry Byrne, Esq., for the respondent.

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LOVE

">*442 These proceedings were brought to redetermine deficiencies in income taxes for the year 1919 in the following amounts:

Eli J. Taylor	$366.18
James D. Boone	546.67
J. A. Boone	402.22
D. W. Boone	206.00
W. F. Boone	5,149.87

They were consolidated for hearing upon the applicable and agreement of counsel. Certain facts were agreed to in a written stipulation duly filed. Certain other facts were covered by a stipulation read into the record at the hearing. The only controverted issue is the value, if any, on March 1, 1913, of a lease of coal lands, for the purpose of determining a reasonable reasonable allowance for depletion or exhaustion.

FINDINGS OF FACT.

The petitioners, Taylor, James D. Boone, J. A. Boone, and W. F. Boone, in the year 1919 were engaged in operating coal mines in partnership under the name of Brown Coal Co., each having a one-fourth interest thprein. The partnership">*2582 was the lessee under a lease made July 2, 1894, by the Coal Run Land Co., which granted the right to mine all the coal on approximately 1,300 acres of land in Fayette County, West Virginia, on the south side of the New River, for a royalty of 10 cents a ton, with a minimum royalty based on an annual output of 30,000 tons. After acquiring the lease, the partners ">*443 prospected and developed the property. They made openings, drove entries, constructed an incline and sidetracks and built houses. The vein of coal was about four feet think and the conditions were favorable for recovery of a large percentage of it. Prior to March 1, 1913, there had been mined 829,193 tons, and on that date there was available a balance of 3,795,466 tons based on a recovery of 90 per cent. It would take 40 years to mine the balance of the coal.

The lease provided that during its continuance the lessee should have the privilege of using so much of the surface of the land and the timber, stone and water thereon as might be necessary for mining, coking and building purposes and the business connected therewith on the premises. At the termination of the lease, the lessee has the right to remove">*2583 from the premises any building and structures erected thereon.

The partnership conducted a mercantile business and also had houses which it rented to employees, on the leased premises. It derived income from both of these sources. The operating profits for the years 1907 to 1916, inclusive, as shown by the books of the partnership, before deductions for depreciation and depletion, were as follows:

Year	Coal sales	Merchandise sales	Tenement rents	Total
1907	$1,668.87 (Loss)	$5,809.00	$1,801.19	$5,941.32
1908	1,134.19(Loss)	6,057.56	1,925.45	6,848.82
1909	2,833.11(Loss)	10,934.96	2,177.86	10,279.71
1910	14,881.07	9,610.11	1,842.65	26,333.83
1911	8,890.78	10,191.97	2,086.11	21,168.86
1912	16,262.30	8,958.06	3,361.72	28,582.08
1913	14,093.04	211.63	10,806.31	25,110.98
1914	9,878.02	7,291.08	1,079.59	18,248.69
1915	28,076.40	10,477.63	2,163.68	40,717.71
1916	34,098.25	1,831.23	344.49	36,273.97
	120,543.69	71,373.23	27,589.05	219,505.97

The number of tons of coal produced in the years 1907 to 1916, inclusive, are as follows:

Year	Gross tons
1907	36,850.14
1908	51,582.90
1909	76,630.80
1910	71,004.17
1911	69,244.50
1912	76,234.20
1913	69,043.30
1914	67,488.90
1915	104,251.90
1916	66,428.07

">*2584 The sound value of the plant and equipment at March 1, 1913, was:

Mining plant and equipment	$104,334.01
Store building and fixtures	3,095.67
Tenements	20,053.20
	127,482.88

">*444 The present worth at March 1, 1913, of prospective replacement of plant and equipment during 40-year life (4 per cent discount; present worth per dollar, 49.482 cents) was:

Mining plant and equipment	$51,626.55
Store buildings and fixtures	1,531.80
Tenements	9,922.73
	63,081.08

We find the leasehold had a value at March 1, 1913, of $45,000.

The following facts are found from stipulations made by counsel:

The petitioners, James D. Boone, J. A. Boone, D. W. Boone, and W. F. Boone, were members of a partnership known as the Blume Coal & Coke Co., each having a one-fourth interest therein. The income of each of these petitioners from this partnership in 1919 was $4,417.94.

James D. Boone, and J. A. Boone owned jointly certain tenement houses, and each received income therefrom in 1919 of $154.16.

In the case of petitioner James D. Boone, the correct amount of the deduction for interest paid is $1,072.87.

In the case of D. W. Boone, the value">*2585 at March 1, 1913, of tenement houses owned by petitioner is $8,400, and the correct rate of depreciation thereof is 4 per cent. The net income therefrom in 1919 was $1,292.

Petitioner W. F. Boone sustained a loss in 1919 in farming operations of $3,557.93.

OPINION.

LOVE: The issues in this case have all been disposed of by stipulation except one. This one is the value, if any, at March 1, 1913, of the lease of the Brown Coal Co. for the purpose of depletion or exhaustion.

The petitioners undertook to prove the value by three witnesses. One was a partner in the Brown Coal Co., who testified that the partnership gave an option in 1913 to sell the leasehold for $300,000, including the plant and equipment. The option was never exercised. It was in effect merely an offer to sell and as such is worthless as evidence of the value.

Another witness, a mining engineer and geologist, was of the opinion that the lease had a value of $189,000 on the basis of an estimated value of 5 cents a ton for the coal in place over and above the royalty of 10 cents a ton provided by the lease. It appeared, however, that a lease of coal lands in the vicinity of this mine was made in 1913">*2586 at 10 cents a ton. While those lands were less favorably situated than petitioner's mine, we think that the testimony does not satisfactorily show that this fact would result in a difference ">*445 in value of 5 cents a ton, or what difference in value would result from the difference in location.

The other evidence as to value consisted of the statistics showing the results of operation set forth in the findings of fact (which were stipulated), and testimony as to an appraisal based thereon by the so-called Hoskold's formula. The petitioners, as a part of their proof, attempted to appraise the leasehold by this formula as it is applied in appraising mineral in place, and they contend for a valuation thus arrived at of $172,604.16.

While such appraisals are used to aid in determining value in the absence of more persuasive evidence, there are two defects in petitioners' application of the formula, which preclude us from accepting their conclusions therefrom. One is that in finding the average annual operating profit (which is one of the factors in the formula), the petitioners used the operating profits for the years from 1911 to 1915, inclusive; the other is, that they">*2587 included in the figures used not only operating profits from coal sales but also those arising from selling merchandise and renting tenement houses.

As to the first, it is almost axiomatic that the ascertainment of value retrospectively must be based on facts known or reasonably in prospect at the valuation date. It therefore follows that subsequent earnings are not evidentiary of value on that date. While such earnings have been admitted in evidence by the Board, it was only as corroborative of other testimony as to prospects based on factors known at the valuation date to exist. . In the present case, the testimony does not show that from facts known on March 1, 1913, increased earnings might then reasonably have been anticipated. It was therefore improper to employ in the calculation the profits for the years 1913, 1914, and 1915.

It was also improper to include with the operating profits from coal sales the profits from the mercantile business and tenement houses. As stated above, the formula as employed by petitioners is a method which purports to appraise mineral in place. Among the factors in the">*2588 formula, as applied to a coal mine, are the operating profits per ton, the remaining number of tons in the mine, the rate at which it will be extracted. To these factors, the sale of merchandise and the renting of houses have no direct mathematical relation, however closely they may be related as business adjuncts to the mining operations. They are different kinds of businesses, affected by different conditions. When other than the prescribed factors are introduced into a formula, its validity is destroyed.

If only profits from coal sales, for the years 1908 to 1912, are used, the analytical appraisal shows a present worth March 1, 1913, of ">*446 $109,677.11. It will be seen that this amount falls short by $46,283.45 of funding the value, including replacement, of the mining plant and equipment, which was stipulated to be $155,960.56.

On the other hand, the profits from the mercantile business and tenement houses were relatively large. On an investment in buildings and fixtures valued at $23,148.87, the average operating profit during the five years preceding 1913, was $11,429.29. These profits must be considered in determining what value, if any, the leasehold had">*2589 on March 1, 1913. If the leasehold as a whole had a value, the petitioners are entitled to deduct the exhaustion of such value over the remaining life of the leasehold. .

After a careful consideration and analysis of the results of all of the operations carried on under the lease, we have found that it had a value on March 1, 1913, of $45,000. The petitioner is entitled to deductions for the exhaustion of this value over the life of the lease, which we have found to be 40 years.

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

Considered by TRUSSELL, SMITH, and LITTLETON.