Houston Bros. v. Commissioner

HOUSTON BROTHERS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

GEORGE T. HOUSTON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

PHILIP D. HOUSTON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

HORACE K. HOUSTON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Houston Bros. v. Commissioner

Docket Nos. 12052, 13104, 22007, 22008, 22009.

United States Board of Tax Appeals

22 B.T.A. 51; 1931 BTA LEXIS 2179;

February 4, 1931, Promulgated

---

">*2179 1. A father was in partnership with his brother. The former desired to introduce his two sons into the firm as partners, but the uncle would not consent. Held, that the father was taxable upon his entire distributive share of the partnership profits; held, further, that the same result should be reached even if a subpartnership were found to exist between the father and his sons.

2. The fair market value of certain lands and timber on March 1, 1913, determined from the evidence.

3. An amount paid for removing certain sprouts and brush from previously cultivated land preparatory to raising a current crop of produce, held to be an ordinary and necessary expense of doing business.

4. Evidence offered by respondent held insufficient to overcome his determination of the actual number of feet of timber cut during the calendar year 1919.

Frank S. Bright, Esq., John E. Brown, Esq., and James A. Councilor, C.P.A., for the petitioners.

John E. Marshall, Esq., for the respondent.

---

LOVE

">*52 These proceedings, which were consolidated for hearing and decision, are for the redetermination of deficiencies in income and excess-profits">*2180 taxes, as follows:

Petitioner	Docket No.	Year	Kind of tax	Deficiency
Houston Bros	12052	1917	Excess profits	$2,645.90
George T. Houston	13104	1919	Income	53,365.97
Do	22008	1920	do	27,519.93
Do	22008	1921	do	45.97
Philip D. Houston	22007	1920	do	4,095.48
Horace K. Houston	22009	1920	do	4,156.43
Do	22009	1921	do	1.99

Twenty-two separate errors were assigned. When grouped together, they form three principal issues, as follows:

1. Did the respondent err in including in George T. Houston's income for the calendar year 1919, 69 per cent of the net income of the partnership of Houston Brothers for the period January 1, 1919, to August 31, 1919, instead of apportioning such 69 per cent between that petitioner and his two sons, Philip and Horace, on a basis of 60 per cent of the 69 per cent, 20 per cent of the 69 per cent, and 20 per cent of the 69 per cent, respectively?

2. Did the respondent err in determining the March 1, 1913, fair market value of lands and timber owned by Houston Brothers for the purposes of ascertaining the depletion of timber allowance for the years 1917, 1919, 1920, and 1921, and the profit or">*2181 loss from sales of lands and timber during the years 1917, 1919, and 1920?

3. Did the respondent err in refusing to allow the partnership of Houston Brothers a deduction from gross income, for the year 1920, of an amount of $2,577.21 expended in removing certain sprouts and brush from previously cultivated land owned by the partnership?

At the hearing the parties agreed that the respondent had erred in the amount of depreciation which he had allowed the old partnership of Houston Brothers for the year 1917, and the period January 1, 1919, to August 31, 1919; that the correct amounts of depreciation allowable for such periods were $21,455.48 and $14,963.49, respectively; that the respondent had also erred in the amount of depreciation which he had allowed the new partnership of Houston Brothers for the period September 1, 1919, to December 31, 1919; and that the correct amount of depreciation allowable for this latter period was $7,481.75.

The depletion issue was enlarged on motion by the respondent at the hearing to include, in addition to the question of the March 1, 1913, fair market value of standing timber, the question of the actual number of feet of timber cut during">*2182 the calendar year 1919 on which the depletion allowance to the old partnership during the ">*53 first eight months, and the new partnership during the last four months of that year, should be computed.

At the close of the hearing, the respondent moved for an increased deficiency in the proceeding of George T. Houston for the calendar year 1919, due to an admitted excessive depreciation allowance and an alleged excessive depletion allowance to the old and new partnerships, respectively.

FINDINGS OF FACT.

George T. Houston and Frank B. Houston were brothers. They operated a lumber business as partners, under the names of Houston Brothers, and George T. Houston & Company, for many years until August 31, 1919, on a profit-sharing basis of 69 per cent and 31 per cent, respectively. On November 1, 1919, they signed a dissolution agreement, the material part of which is as follows:

WHEREAS, WE, GEORGE T. HOUSTON and FRANK B. HOUSTON, copartners doing business both in Vicksburg, Warren County, Mississippi, and in Chicago, State of Illinois, under the firm name of Houston Brothers and George T. Houston & Company, desire and have agreed to dissolve the copartnership now and">*2183 heretofore existing between us on the terms and conditions hereinafter set forth in this agreement of dissolution: and -

WHEREAS, it is desired that the terms of said dissolution should be set forth in writing and duly signed and acknowledged by both of the parties hereto:

NOW, THEREFORE, this instrument witnesseth:

THAT the said copartnerships heretofore existing between us under the firm name and style of Houston Brothers and George T. Houston & Company be and the same are hereby mutually dissolved as of the date of midnight of August 31, 1919, on the following terms and conditions, namely:

* * *

SECOND: It is mutually agreed by the parties hereto that the interest of the parties hereto in all of the partnership assets as at said date of August 31, 1919, or every character and nature whether real, personal, or mixed is as follows:

FRANK B. HOUSTON, Thirty-one Per cent (31%).

GEORGE T. HOUSTON, Sixty-nine Per cent (69%).

and further that a division of said total assets is to be made on said basis.

Philip D. and Horace K. Houston are brothers, and sons of George T. Houston, all petitioners in these proceedings. Philip was born in February, 1893, and Horace in">*2184 November, 1894. Both Philip and Horace served with the United States Army in Europe during the World War. Philip returned to the United States on April 16, 1919, and Horace returned March 3, 1919. Philip and Horace had an older brother who also served in the World War, but did not return.

Philip first commenced working for the partnership of Houston Brothers in 1915 as a millwright. Before the three brothers went to war, their father had told them and had talked it over with them ">*54 time and again, that he would introduce the three of them into the firm of Houston Brothers on a 15 per cent basis. After the death of the oldest son it was understood between Philip and Horace and their father and mother (Cora M. Houston) that the two remaining sons were to be partners in the original partnership of Houston Brothers beginning January 1, 1919, on a basis of 20 per cent each of the father's 69 per cent, or, in other words, that the profits of the firm were to be divided as follows:

	Per cent
George T. Houston	41.4
Frank B. Houston	31.0
Philip D. Houston	13.8
Horace K. Houston	13.8

But Frank would not consent to the introduction by George of his">*2185 two sons into the firm, which refusal led to the dissolution of the partnership between George and Frank, as set forth above in the November 1, 1919, agreement.

Immediately upon Philip's return from France, he went to Vicksburg, Miss., and took charge of the Vicksburg operations for the partnership of Houston Brothers. He continued in charge of such operations until August 31, 1919. Horace first went to work for the partnership on or about March 3, 1919. His duties were in connection with the logging department, investigating possible log and lumber purchases, and the movement of the logs in general.

Neither Philip nor Horace contributed any money or assets to the original partnership of Houston Brothers. No partnership articles of agreement were drawn up between these two petitioners and their father and uncle. No profits were credited either to Philip or Horace on the books of the partnership of Houston Brothers during the period January 1, 1919, to August 31, 1919. The only understanding relative to being a partner in the firm was with their father. They had no such understanding with their Uncle Frank.

The partnership income tax return of Houston Brothers for the">*2186 period January 1, 1919, to August 31, 1919, was prepared by a firm of certified public accountants. In Schedule, C, the members' shares of income were reported as follows:

	Per cent
George T. Houston	41.4
Frank B. Houston	31.0
Philip D. Houston	13.8
Horace K. Houston	13.8

Among the deductions shown on the return was "Compensation of Members" as follows:

Philip D. Houston, manager	$1,050
Horace K. Houston, assistant manager	1,000
	2,050

">*55 The respondent determined that 69 per cent of the profits of the partnership of Houston Brothers for the period January 1, 1919, to August 31, 1919, should be included in George T. Houston's calendar year 1919 income, in accordance with section 218 of the Revenue Act of 1918.

The respondent also determined that during the period September 1, 1919, to December 31, 1921, there existed a new partnership operating under the name of Houston Brothers, and that the members of the latter partnership, together with their respective interests, were as follows:

	Per cent
George T. Houston	60
Philip D. Houston	20
Horace K. Houston	20

On March 1, 1913, the partnership of Houston">*2187 Brothers, composed of George T. Houston and Frank B. Houston, owned 112,875.96 acres of land in Washington and Sharkey Counties, Mississippi, upon which there was standing the following virgin timber:

Species	Feet	Per cent
Ash	30,216,216	5.03
Oak (overcup)	278,854.224	46.42
Oak (red)	46,195,368	7.69
Gum	142,490,784	23.72
Cypress	63,796.464	10.62
Miscellaneous	39,166,944	6.52
Total	600,720,000	100.00

On March 1, 1913, the above-mentioned partnership also owned a 2,033.46-acre farm in Washington County, Mississippi, known as Wildwood Plantation; a 1,735.01-acre farm in Sharkey County, Mississippi, known as the Gum Ridge Plantation; and 11,171.50 acres of land in Itawamba and Monroe Counties, Mississippi.

Washington and Sharkey Counties are located in the west central part of the State of Mississippi, in what is known as the Mississippi Delta region. Washington County lies north of Sharkey County and borders on the Mississippi River. Sharkey County is about ten miles east of the Mississippi River, and about twenty-two miles north of the city of Vicksburg. Itawamba and Monroe Counties are situated in the northeastern part of the State of">*2188 Mississippi and border on the State of Alabama.

The Houstons first began business at Centerville, Iowa, about the year 1882. A few years later they opened a small lumberyard in Chicago and shipped lumber from Missouri and Iowa. In 1887 they began operations at Cairo, Ill., and about five years later acquired the properties hereinbefore mentioned in Itawamba and Monroe Counties, Mississippi. They erected a sawmill at the junction of the Tombigbee River and the St. Louis & San Francisco Railroad, at a station called Bigbee, in Monroe County. During ">*56 the next eight to eleven years, they made three separate cuts of timber in this territory. Their first cut took matured timber 30 inches and up; their second cut, 26 inches and up; and their third cut, 18 inches and up. Every effort was made to protect the remaining trees, and the method thus used has since been adopted as the standard for forestry operations in all of the Southern States.

The properties in Washington and Sharkey Counties were acquired by the Houstons about the year 1900. They erected a mill at Vicksburg on the Mississippi, and began operation about 1903. This land was traversed by the Little Sunflower">*2189 River and the Big Sunflower River, which flowed into the Yazoo River, which in turn emptied into the Mississippi. Numerous navigable bayous branched through the properties from the several rivers, which made an ideal network for water transportation. The farthest that any timber in these counties was away from either rail or water transportation was about two miles. Practically all of the timber cut in this territory was transported to the mill at Vicksburg on barges. It was possible to move at one time about 500,000 feet of timber on barges, which is equivalent to about 100 train carloads.

The cost of rail logging was more expensive than river logging. The cost of moving logs by barge to Vicksburg was about $1 per thousand feet, as against $4.50 or $4 by rail. Another advantage in river logging was a saving of demurrage charges.

The cost of labor in Vicksburg was less than in Memphis. Because of the low cost of labor and the low cost of transportation to the mill, the partnership of Houston Brothers was able to compete in Central Freight Association territory, where the differential in freight was a disadvantageous factor.

On March 1, 1913, the freight rate on hardwood">*2190 lumber in carload lots from Vicksburg to New Orleans was 10 cents per 100 pounds. On the same date the freight rate on the same commodity from other points in Mississippi, Arkansas, and Tennessee to New Orleans, was as follows:

Mississippi:	Cents.
Aberdeen	15
Armory	15
Bigbee	13
Columbus	15
Corinth	16
Juka	16
Pontotoc	18 1/2
Starksville	15
Arkansas:
Brinkley	14
Camden	15
Crossett	15
Blytheville	23
Clarendon	15
Crittenden	15
Little Rock	15
Newport	15
Paragould	17
Hot Springs	17
Lake City	23
Tennessee:
Covington	15
Dickson	20
Dyersburg	15
Jackson	17
Memphis	10 and 12
Menglewood	15
Nashville	15

">*57 The weight of oak, gum, cottonwood and cypress per thousand feet was 4,250, 3,300, 2,800, and 2,800 pounds respectively.

The legal description of the 112,875.96 acres of land in Washington and Sharkey Counties owned by Houston Brothers on March 1, 1913, is as follows:

1. Sharkey County, Townships 10, 11 and 12 North, Ranges V, VI and VII West of the Choctaw Meridian; Township 13 North, Range V West of the Choctaw Meridian; Township 14 North, Ranges V and VI West of the Choctaw Meridian; and

">*2191 2. Washington County, Townships 15 and 16 North, Range V West of the Choctaw Meridian.

The timber on the above-described lands, with the exception of the oak and the lower cuts of ash in township 10, was of a high grade. The lands in township 10 were subject more or less to overflow, which caused the oak in that region to be subject to pin and grub worms, and the ash to swell out at the bottom, producing what is commonly referred to as "pumpkin" ash. There was ash on the ridges, however, that was as fine as ever grew. Petitioners used this lower-grade oak in making ties, both for export and local consumption, at a price that ranged about 45 cents per tie, of which about 25 cents was net profit. The latter translated into net profit per thousand feet, amounted to a net profit of about $7.30 or $7.40 per thousand feet. The upper cuts of the pumpkin ash made good lumber. The cypress was somewhat better in the lower regions than in the upper.

The capacity of Houston Brothers' mill at Vicksburg was about 100,000 feet a day. Petitioners have cut as high as 140,000 feet in a day.

Petitioners usually paid from 5 per cent to 6 per cent interest on borrowed money.

">*2192 On June 6, 1918, Frank B. Houston wrote a letter to the Collector of Internal Revenue at Chicago, in which the following statements were made:

We wish to make as brief as possible a review of the affairs of our Company, explaining the reasons for not making report in 1916, and also the delay in report for 1917.

For five or six years prior to 1916, our business was not profitable, and we sustained losses in the operations of our plant, and at the same time extremely heavy losses on account of high waters, floods, and levee breaks on the Mississippi River adjacent to our plant at Vicksburg, Mississippi. The last inventory we made prior to the two year period we are now reporting on, was made May 1, 1916, which showed a loss. Shortly after that time we got into financial difficulties and our bank creditors demanded payment of our liabilities, and on August 8, 1916, we were forced to turn our affairs over to a creditors' committee, which conducted the business from that time purely along the lines of liquidation in order to satisfy the creditors. ">*58 No inventory was made by the committee at the time they took charge or when they turned the business back, and there was">*2193 no possible way of ascertaining the gain or loss for the year 1916. However, during that period the partners of the Company drew no money except expenses, and had no outside income; in fact, borrowed money for living expenses. The liabilities were finally liquidated and the business turned back to the partners on December 28, 1917, too late at that time to make an inventory of December 31, and it was then decided not to make a further inventory until the end of the Company's fiscal year, May 1, 1918.

The "Profit and Loss" account on the books of Houston Brothers for the fiscal years ending April 30, 1911, to April 30, 1914, reflected the following:

Fiscal year ended Apr. 30	Loss	Profit
1911	$17,889.90
1912		$23,599.38
1913	$92,464.42
1914		$3,832.54

On or about August 9, 1916, the principal creditors of Houston Brothers held a meeting at which the financial affairs of the partnership were discussed. At this meeting William Wilms, an experienced timberman, was asked to make an investigation of the partnership's affairs. This was agreeable to the two Houstons, and Wilms submitted a report to the creditors' committee on September 6, 1916, which">*2194 is quoted in part as follows:

My conclusions and recommendations can be briefly summarized as follows:

If the lumber purchase contracts, to which reference is made in Exhibit "E," could be financed independently through the local Vicksburg Banks, under a guarantee by the Creditors Committee, by which the Vicksburg Banks would be indemnified against any losses arising from those contracts, the Vicksburg plant can be operated without loss, on resources available, for a period of six months on log supply on hand and contracted for, especially if some of the logging operations now conducted on lands not owned by the Company, would be transferred to the Company's own holdings.

A thorough review of the past operations of the business at Vicksburg, has disclosed to me convincingly that the Saw Mill has never been operated profitably, owing to the inadequate river equipment for transportation of logs and also on account of planless and inefficient management.

In order to realize on the log supply now on hand and contracted for, I suggest that authority be given to operate the plant, although no material improvement in the financial condition of the business can be gained thereby. ">*2195 It might be possible, however, if the lumber market continues as active as it has been lately and if some changes are made in the logging operations, to increase the quick assets during the next six months by $25,000.00 to $30,000.00, without impairing the Timber resources.

To insure continuous operation of the Vicksburg plant from the Company's own Timber holdings, would require an investment of at least $25,000.00 in additional River and Logging Equipment, which I can not recommend at this time.

">*59 It will be impossible to liquidate the indebtedness of the firm through realization by mill operations and I suggest that the Creditors Committee authorize its representatives to have a thorough investigation of the Timber Lands made by competent cruisers and to have plans devised by which a portion of the holdings can be disposed of.

On November 1, 1916, an agreement was entered into between Houston Brothers as parties of the first part, and their principal creditors as parties of the second part, in which the first parties agreed to permit the second parties to take over the sole and exclusive management of their properties with full authority to sell such of the properties">*2196 as the second parties thought was for the best interests of all concerned. It took about a year for the creditors' committee to straighten out the financial difficulties of the partnership and in December, 1917, the properties, with the exception of about 9,576.19 acres which had been sold in the meantime, were turned back to the partners, George T. Houston and Frank B. Houston.

During 1917 the following lands of Houston Brothers in Monroe, Sharkey, and Washington Counties were sold:

Date of	Purchaser	County	Township	Range	Acres	Price per	Amount
sale						acres
4-17-17	Wright Tie Co	Sharkey	10	7	4,404.04	$12.00	$52,848.48
5-17-17	G. M. McCuney	Monroe	12	7	159.32	10.00	1,590.00
7- 7-17	Wright Tie Co	Sharkey	10	7	120.00	12.00	1,440.00
10-17-17	Darnell Love	Washington	15	5	405.10	13.40	5,428.34
	Lbr. Co.
12-12-17	J. Tanner	Sharkey	11	5	40.44	17.50	707.90
12-26-17	A. Ramsey	Sharkey	12	6	74.38	21.51	1,600.00
	Total				5,203.28		63,614.72

On December 17, 1918, the partnership sold 90 acres in Sharkey County, township 12, range 6, to S. Gaunt for a consideration of $1,575, ">*2197 or $17.50 per acre.

During 1919 Houston Brothers sold parts of their land as follows:

Date of	Purchaser	County	Township	Range	Acres	Price per	Amount
1- 6-19	D. Bowles	Sharkey	12	6	295.00	$15.00	$4,425.00
1-10-19	W. Young	do	12	6	60.00	17.50	1,050.00
1-18-19	Sprivey & Wood	Washington	15	5	183.42	125.00	22,927.50
1-22-19	C. Mann	Sharkey	12	7	571.27	30.00	17,138.10
2- 5-19	T. Pittman	do	12	6	96.22	17.50	1,686.85
2-18-19	T. Robinson	do	10	7	39.61	45.00	1,785.45
2-18-19	F. Glasscock	do	12	5	57.80	18.00	1,040.40
3-10-19	O. Palmer et al	Monroe	12	8	79.33	12.00	951.56
6- 9-19	J. Garland	Sharkey	11	6	106.59	20.00	2,131.80
6-11-19	W. Wilson et al	do	12	6	159.17	20.00	3,183.40
6-16-19	do	do	11	7	706.82	20.00	14,136.40
6-30-19	Gaston T. Ward	do	13	5	79.40	32.00	2,540.80
7- 9-19	Marlow & McNeal	Washington	16	5	169.60	35.00	5,936.00
8-20-19	J. Hand	Sharkey	11	6	2,273.93	40.00	90,957.20
8-20-19	do	do	11	7	1,828.75	40.00	73,150.00
8-20-19	do	do	12	6	1,663.22	40.00	66,512.80
8-20-19	do	do	12	7	281.10	40.00	11,244.00
10-19-19	Bigbee Land & Tmbr. Co	Itawamba	8	873.49	20.00	17,469.80
10-19-19	do	do	9	8	2,801.69	20.00	56,033.80
10-19-19	do	do	10	8	1,907.91	20.00	38,158.20
10-19-19	Bigbee Lamd & Tmbr. Co	Itawamba	10	9	544.43	$20.00	$10,888.60
10-19-19	do	do	11	8	746.40	20.00	14,928.00
10-19-19	do	do	11	9	969.88	20.00	19,397.60
10-19-19	do	Monroe	11	8	988.22	20.00	19,764.40
10-19-19	do	do	12	7	903.22	50.00	45,161.00
10-19-19	do	do	12	8	406.87	27.74	11,287.40
11-29-19	F. Ehrhardt	Sharkey	12	6	519.28	30.00	15,578.40
	Total				19,312.62		569,464.46
	Less part of sale in township 12, range 7, Monroe County				110.00		2,200.00
	Corrected total				19,202.62		567,264.46

">*2198 ">*60 During 1920 Houston Brothers sold parts of their land as follows:

Date of sale	Purchaser	County	Township	Range	Acres	Price per acre	Amount
1- 6-20	A. Dimond	Sharkey	12	6	199.88	$30	$5,996.40
1- 6-20	C. Finfgeld	do	12	6	222.15	30	6,664.50
2-23-20	P. Kincaid	do	11	5	40.44	20	808.80
4- 4-20	J. Williams	do	11	5	40.00	35	1,400.00
	Total				502.47		14,869.70

In 1909 Johns. M. Goff purchased 1,600 acres of land and timber in sections 30, 32, 33, 34, and 35 in township 14 north, range V west of the Choctaw Meridian in Sharkey County, Mississippi. The price paid was $16,000, or at the rate of $10 per acre. Of the 1,600 acres, about 1,280 acres consisted of good hardwood virgin timber. The following year Goff secured the services of Clarence W. Griffith, an experienced timberman, to make a detailed cruise of the timber Goff had purchased the year before. The result of the cruise showed that on the 1,280 acres, there were 14,956,000 feet of standing timber, itemized according to species as follows:

Species	Feet	Per cent
Genuine white oak	491,000	3.28
Overcup oak	1,085,000	7.25
Red oak	4,127,000	27.59
Ash	236,000	1.58
Cypress	200,000	1.34
Gum	8,070,000	53.96
Miscellaneous	747,000	5.00
Total	14,956,000	100.00

">*2199 On March 1, 1913, white oak was about four times as valuable as overcup oak.

During 1913 Goff sold the 14,956,000 feet of timber, exclusive of the land, for a lump-sum consideration of $16,000, or at an average rate of about $1.07 per thousand feet.

The respondent determined that the fair market value on March 1, 1913, of all of the standing timber owned by Houston Brothers on that date in Washington and Sharkey Counties, Mississippi, was an average of $3 per thousand feet. The fair market value on ">*61 March 1, 1913, of all of the standing timber owned by Houston Brothers on that date in Washington and Sharkey Counties, Mississippi, was an average of $4.93 per thousand feet, itemized according to species as follows:

Species	Fair market value per thousand	Number of feet
Ash	$8.00	30,216,216
Overcup oak	5.00	278,854,224
Red oak	5.50	46,195,368
Gum	4.00	142,490,784
Cypress	6.00	63,796,464
Miscellaneous	3.00	39,166.944

The 112,875.96 acres of land under timber in Washington and Sharkey Counties, Mississippi, owned by Houston Brothers on March 1, 1913, may be divided into three different zones, as follows:

	Acres
1. Southern zone:
Township 10, Ranges V, VI and VII in Sharkey County	34,475.72
2. Middle zone:
Area bounded by the north line of Township 10, the Big Sunflower River and an east and west line running through the town of Rolling Fork	34,450.75
3. Northern zone:
All the remainder	43,949.49
	112,875.96

">*2200 The respondent determined that the fair market value of the 112,875.96 acres of land under timber in Washington and Sharkey Counties, Mississippi, on March 1, 1913, was $886,195.10, or a fraction more than at the rate of $7.85 an acre. The fair market value of this land on March 1, 1913, was no more than that determined by the respondent.

The boll weevil invaded the northwestern section of the State of Mississippi in about the year 1910. The farmers in that region have been troubled with it at various times from then until even the present time. It is a disturbing element with the farmer. In very bad seasons it would cut the yield of cotton to as much as 50 per cent.

On March 1, 1913, Houston Brothers owned 2,033.46 acres of cultivated land in Washington County, Mississippi, known as the Wildwood Plantation, and 1,735.01 acres of cultivated land in Sharkey County, Mississippi, known as the Gum Ridge Plantation. These lands were in a high state of cultivation in 1913, and had been spoken of at that time as "bale to the acre cotton lands." Both plantations were accessible to water transportation. Part of the lands of the Gum Ridge Plantation was subject to overflow waters">*2201 during certain months of the year, but with the exception of the recent years of 1927 and 1929, the owners of this land have always ">*62 been able to raise thereon an annual crop of cotton, corn and hay. The improvements on the Gum Ridge Plantation on March 1, 1913, consisted of a one-story manager's house built of cypress, containing five or six rooms, and about 16 or 17 small tenant houses. The improvements on the Wildwood Plantation on March 1, 1913, consisted of a one-story manager's house, about 70 small tenant houses, an old store building, and an old gin.

The respondent determined that the fair market value on March 1, 1913, of the lands and improvements known as the Gum Ridge and Wildwood Plantations was $7.85 an acre. The fair market value on March 1, 1913, of the Gum Ridge Plantation was $40 an acre. The fair market value on March 1, 1913, of the Wildwood Plantation was $50 an acre.

The 11,171.50 acres owned by Houston Brothers on March 1, 1913, in Itawamba and Monroe Counties, Mississippi, contained about 1,008 acres of cultivated land and the balance was second-growth timber which averaged about 4,500 feet to the acre, or approximately 45,735,750 feet. Petitioners">*2202 were offering the cultivated land for sale in 1913 for $50 an acre. During 1919, they sold substantially all the cultivated land for $50 an acre, and the remaining land and timber for $20 an acre. On or about March 3, 1920, Houston Brothers filed with the respondent a General Forest Industries Questionnaire. In this questionnaire they claimed a March 1, 1913, fair market value of $15 an acre for the entire 11,171.50 acres. The respondent determined the fair market value of the entire 11,171.50 acres on March 1, 1913, to be $15 an acre. The fair market value of the land and timber in Itawamba and Monroe Counties on March 1, 1913, exclusive of the 1,008 acres of cultivated land, was $15 an acre. The fair market value on the same date of the 1,008 acres of cultivated land was at least $45 an acre.

During the calendar year 1920 the new partnership of Houston Brothers paid the sum of $2,577.21 for removing sprouts and brush that had grown up on a portion of the cultivated land of the Wildwood Plantation. The land had stood idle for several years and it was necessary to remove the sprouts and brush in question before it could again be cultivated in 1920. The partnership deducted">*2203 the amount paid as an ordinary and necessary expense. The respondent disallowed the deduction on the ground that it represented a capital expenditure.

In addition to the timber which Houston Brothers cut from their own holdings, they also purchased logs from other people which they manufactured into lumber along with their own.

On or about January 19, 1920, Houston Brothers filed with the respondent a Forest Industries Schedule for the taxable year ended ">*63 December 31, 1919. In this schedule they reported the total number of feet of timber actually cut during the calendar year 1919 as being 11,454,000 feet. The respondent accepted this figure in arriving at the amount of depletion allowable to the old and new partnerships during the first eight months of 1919, and the last four months of 1919, respectively.

OPINION.

LOVE: We will discuss the three principal issues in the order previously stated.

The first issue is whether George T. Houston was taxable on 69 per cent of the net income of the partnership of Houston Brothers for the period January 1, 1919, to August 31, 1919, as determined by the respondent, or on 41.4 per cent as contended for by that petitioner. ">*2204 It is petitioner's position that the difference of 27.6 per cent of such net income should be equally divided and reported by his two sons, Philip and Horace.

The applicable statute is section 218(a) of the Revenue Act of 1918, which provides in part:

That individuals carrying on business in partnership shall be liable for income tax only in their individual capacity. There shall be included in computing the net income of each partner his distributive share, whether distributed or not, of the net income of the partnership for the taxable year * * *. (Italics supplied.)

Philip and Horace were listed as partners in Houston Brothers for the period January 1, 1919, to August 31, 1919, in the partnership income tax return filed for that period. George T. Houston alleged in his petition as a fact, that the "partners" in the firm for the first eight months of 1919 were himself, his two sons and his brother. At the hearing, however, it was very definitely conceded by petitioners' counsel that the evidence failed to show that Philip and Horace had been made partners in the firm with their father and uncle. We are of the opinion that this concession is harmonious with the facts">*2205 and the law, for the reason that Frank B. Houston would not consent to is partner's sons being made partners in the firm. See , wherein the Court said, "In any such aspect it must be remembered that the attempt was not to give her any direct interest in the firm of Cohan & Harris, or if it was, it was ineffectual, because of Harris's failure to assent."

As a substitute for the first contention, counsel for petitioner, George T. Houston, then argued that we should find from the facts that Philip and Horace were at least subpartners with their father, and that their father's 69 per cent interest in the main partnership should be divided and reported by him and his two sons in the proportions ">*64 hereinbefore set forth. Counsel for respondent argues in his brief that this latter contention was not pleaded and can not, therefore, be considered. We do not agree with the respondent on this procedural contention. The assignment of error in the petition filed by George T. Houston on this feature of the case, is as follows:

The Commissioner has erred in apportioning to the taxpayer for the period January 1, to August 31, 1919, 69">*2206 per cent of the income of the partnership.

We think the above assignment is sufficient to support the contention now being made by this petitioner. Cf. , wherein the Court held that it was not consonant with modern ideals of judicial administration to deny a taxpayer the right to have as a deduction from its gross income, a certain "loss" for the sole and only reason that the taxpayer there had pleaded the amount was deductible as a "business expense." But we can not sustain petitioner's alternative contention for the reason that the statute makes it mandatory that the net income of a partnership be taxable to the individual partners thereof, and petitioner's sons were not partners in the partnership under consideration. ; ;; ; and . In the latter case Leininger was a partner in the Eagle Laundry Co. During the latter part of 1920 he entered into">*2207 a written contract with his wife "wherein it was acknowledged that petitioner's wife had been and was a full equal partner with him in the interest in the Eagle Laundry Co., entitled to share equally in the profits and obligated to bear equally any losses. The contract was effective from the beginning of 1920." In the last paragraph of our opinion, we said:

Even if petitioner's wife be considered as a subpartner or in partnership solely with her husband, the incidence of the taxing statute would not thereby be avoided, for the income earned on the one-half interest standing in the name of C. P. Leininger would first be income to him, taxable as such before its division with his wife. See ; affd., ; .

Petitioners' alternative contention is, therefore, denied.

There is some suggestion in petitioners' brief that the instant case might be controlled by the decision of the Fourth Circuit in the case of . In that case Cohen was a partner in several partnerships and a stockholder in a corporation. His three sons were">*2208 in his employ, for which they were paid a certain salary. As a further inducement to his sons, Cohen entered into a written contract with them to credit on his books to each son, 25 per cent of all profits he received from his various businesses, which sum was to be held in trust and paid to the sons on ">*65 condition that they marry girls of a certain religious faith or reach the age of thirty-five without marrying. In case of breach, no further sums would be credited to the sons, but the sums already credited would still be held in trust until the conditions specified in the contract were fulfilled.

The court, in reversing the Board, held that the amounts so credited represented additional compensation to the three sons and, as such, was not income to the father. We do not think that the evidence introduced in the instant case establishes any such relationship as existed in the Cohen case. Although George T. Houston was present at the hearing, he did not testify on this feature of the case. His wife testified that she understood her sons "were to be taken into the partnership" and that they were to have a share in "their father's part of the business," effective">*2209 January 1, 1919. The sons testified that it was their understanding that they were each to have a 20 per cent interest in their father's 69 per cent, but their testimony was contradictory as to whether they understood they were partners with their father and uncle, or only with their father. Their testimony was likewise contradictory as to whether they understood the 20 per cent was to be paid to them as compensation for services rendered, or as their distributive share of the profits of a partnership. No part of petitioner's 69 per cent of the profits of the partnership of Houston Brothers for the period January 1 to August 31, 1919, was credited to the sons during 1919, and there is no evidence that any part of such profits was ever paid to them. Neither is there any evidence as to what would constitute a reasonable allowance for the services rendered the partnership by the sons, or that the sons were not fully compensated for the rendition of such services. Under such circumstances, we do not think the principles enunciated in the Cohen case are controlling here. The respondent's determination on this issue is approved.

The second principal issue involves the determination">*2210 of the March 1, 1913, fair market value of the following lands and timber:

1. 600,720,000 feet of standing timber in Washington and Sharkey Counties, Mississippi;

2. The land supporting the above 600,720,000 feet of standing timber;

3. 2,033.46 acres of cultivated land in Washington County known as the Wildwood Plantation;

4. 1,735.01 acres of cultivated land in Sharkey County known as the Gum Ridge Plantation; and

5. 11,171.50 acres of timbered and cultivated land in Itawamba and Monroe Counties, Mississippi.

The respondent determined that the March 1, 1913, fair market value of the 600,720,000 feet of standing timber was an average of $3 per thousand feet. Petitioners contend it was at least $7 per ">*66 thousand. To weigh properly all of the evidence introduced and to determine as nearly as possible what the fair market value of petitioners' timber was on the basic date in question, is no small task, for there is evidence in the record of average values for all species all the way from $1.07 per thousand feet, to $8.67 per thousand. We have found, for reasons hereinafter stated, that the fair market value of petitioners' timber on March 1, 1913, was an">*2211 average of $4.93 per thousand feet.

The evidence clearly shows that, generally speaking, petitioners' timber was of a very high grade. It was ideally located from the standpoint of economical logging. A virtual network of navigable bayous spread out over the land owned by petitioners in Washington and Sharkey Counties, affording petitioners the advantage of the lower cost of logging by water. This amounted to a saving over rail logging of about $3 to $3.50 per thousand feet.

In addition to the testimony of several witnesses who testified to the quality and excellent availability of petitioners' timber, petitioners introduced the testimony of three experienced lumbermen and timbermen, who on March 1, 1913, were actually buying and selling timber in and about the area known as the Mississippi Delta. These men testified to values per thousand feet on March 1, 1913, as follows:

Species	Hines	Brattain	Wellford
Ash	$15.00	$9.00	No testimony.
Overcup oak	8.50	8.00	$7.00
Red oak	9.25	8.00	7.00
Gum	8.00	5.00	6.00
Cypress	11.00	10.00	11.00
Miscellaneous	3.00	4.00	No testimony.
Average	8.67	7.29

One of the witnesses for the respondent">*2212 was Claude H. Rickets, the stenographer and bookkeeper on March 1, 1913, for the Crenshaw-Gary Lumber Company. The latter's plant was located at Richey, Sharkey County, Miss. The books of this company have been destroyed. Rickets testified, however, that, as well as he could remember, the books of the Crenshaw-Gary Lumber Company showed that on March 1, 1913, the latter company was paying the following prices for standing timber located in Washington and Sharkey Counties, Mississippi:

	M feet
Ash	$3.00
Overcup oak	1.50
Red oak	2.00
Gum	1.50
Cypress	3.00
Miscellaneous (question withdrawn).

">*67 In the absence of further details as to the circumstances surrounding such purchases of timber, the quality of the timber as compared with petitioners', and whether it was logged by river or by rail, in view of the large differential in the two kinds of logging, we hesitate go give more than slight weight to Rickets' testimony. Rickets did testify that the Crenshaw-Gary plant was located on the Sunflower River, and we might assume that at least some of the logging was carried on by water, but this would not help much towards curing the defects already mentioned. ">*2213 The Goff sale, the details of which are set forth in our findings, is subject to much the same criticism. The sale of 1,280 acres was small, in comparison with petitioners' holdings of 112,875.96 acres, and it is quite possible in a small tract of that area for the quality of the timber to be either considerably poorer or better than the general run of a tract 88 times in size. Neither are we informed whether the Goff sale was at arm's length, that is, whether it was a transaction between a willing seller not compelled to sell, and a willing buyer not compelled to buy, both having knowledge of all the material facts.

In addition to the above-mentioned evidence respecting sales, the respondent also offered the testimony of four well qualified and experienced timbermen who testified that in their opinion, petitioners' timber on March 1, 1913, had the following fair market values:

Species	Lockwood	Gary	Griffith	Wilms
Ash	$5.00	$4.25	$8.00	(No testimony by species.)
Overcup oak	3.25	1.75	3.00
Red oak	3.25	3.00	5.00
Gum	2.25	2.00	1.00
Cypress	4.00	4.50	5.00
Miscellaneous	1.00	.60	1.00
Average	3.03	2.25	3.01	$2.75

We have">*2214 carefully examined the testimony of the witnesses, both for petitioners and for the respondent, and with no reflection on their reputations as expert timbermen, we are of the opinion that the witnesses for petitioners did not make sufficient allowance in their testimony for carrying charges, such as interest and taxes, whereas the respondent's witnesses did not give sufficient weight to the unusually advantageous logging facilities present all through the petitioners' holdings. With respect to carrying charges, it would make considerable difference in the market price of timber if one purchased a block of standing timber which was to be cut and sawed into lumber immediately, or whether it was purchased with the intention of cutting it within the time of 15 or 20 years. That petitioners' witness, Brattain, had in mind an immediate cut, is apparent from the following portion of his testimony on cross-examination:

">*68 Q. Now, in arriving at the values that you gave us, did you take into consideration any speculative features?

A. No, sir, only to this extent that I would consider this about the value we would have placed on it, if we had an opportunity to buy, and were">*2215 buying timber, we usually endeavored to buy it at the price it was worth at the time, and we expected the increase in value to take care of carrying charges.

Q. Now, do these values represent a period for the cut basis over a period of years?

A. No, that would have been about the value it would have been worth if cut in that year. (Italics supplied.)

That respondent's witness, Gary, did not take into consideration petitioners' favorable logging facilities, is obvious from the following questions and answers on cross-examination:

By Mr. BRIGHT:

Q. Do you know anything about Houston Brothers' facilities in 1913 for getting any of this timber to their mill and market?

A. No, sir.

Q. The testimony that you have given has taken into consideration no factors of that kind?

A. No, sir, I was not there at that time.

Considering all the evidence and giving to each portion thereof the weight to which we think it is entitled, we believe, and so find, that the fair market value on March 1, 1913, of petitioners' standing timber in Washington and Sharkey Counties, Mississippi, is as we have set out in our findings for each species, or an average for the entire holdings">*2216 of $4.93 per thousand feet. The deduction for depletion and the computations of gain or loss from the subsequent sale of such timber should be redetermined on this basis instead of the $3 value determined by the respondent.

With respect to the fair market value on March 1, 1913, of the land under timber in Washington and Sharkey Counties, Mississippi, we approve the respondent's determination. There was evidence on behalf of petitioners that this land under timber should be divided into three zones, a northern zone, a southern zone, and a middle zone; that the land in the southern zone was worth on March 1, 1913, about $15 an acre; that the land in the middle zone was worth on March 1, 1913, about $20 to $30 an acre; and that the land in the northern zone was worth on March 1, 1913, about $30 an acre. On the other hand, there was evidence introduced on behalf of the respondent that land with timber on it could not be put to any possible use; that there was no market for such land; and that in any event the fair market value for such land would not exceed $1 an acre. Under such circumstances, we do not think the respondent's determination on this issue should be disturbed.

">*2217 The respondent determined that the March 1, 1913, fair market value of the Gum Ridge and Wildwood Plantations was $7.85 an acre. The evidence shows that this valuation was obviously erroneous. ">*69 Hines, at the close of his testimony on the value of standing timber, testified that the open land on these two plantations was worth about $90 to $100 an acre on March 1, 1913. Petitioner, George T. Houston, testified that they were worth $100 per acre. F. H. Shreiner, a witness for the respondent, testified that the fair market value on March 1, 1913, of the Gum Ridge Plantation, was $30 to $40 an acre, and that on the same date the fair market value of the Wildwood Plantation was $50 an acre. Shreiner graduated from the Kansas State Agricultural College in 1910, with the degree of Bachelor of Civil Engineering. Since 1912, and up to the present time, Shreiner has been engaged in appraising farm lands in the Mississippi Delta area, including lands in Washington and Sharkey Counties. From 1912 to 1916 or 1917, he was with the Southern Abstract & Loan Company of Memphis; then until 1920 with the Guaranty Bank & Trust Company of Memphis; and from 1920 until the present time">*2218 he has been appraising farm lands for the Federal Farm Loan Board. We have ascribed considerable weight to Shreiner's testimony, and after a careful consideration of all the evidence on this issue, we find that the March 1, 1913, fair market value of the Gum Ridge and Wildwood Plantations was $40 and $50 an acre, respectively.

Houston Brothers' holding in Itawamba and Monroe Counties, Mississippi, consisted of 1,008 acres of cultivated land, and 10,163.50 acres of land and timber on which all timber over 18 inches had been cut. In their General Forest Industries Questionnaire filed with the respondent, they claimed a March 1, 1913, fair market value of the entire 11,171.50 acres of $15 an acre, which value the respondent determined to be correct.

During 1919 the partnership sold substantially all its holdings in these counties at the rate of $50 an acre for the cultivated land, and $20 an acre for the remaining land and timber. Petitioners, in their brief, now claim a March 1, 1913, fair market value of $50 an acre for the cultivated land, and $35 an acre for the remaining land and timber. Petitioner, George T. Houston, was the only witness to place a value on the 10,163.50">*2219 acres of land and timber. For convenience, his testimony on this particular question is set out in full as follows:

Q. Now, what would you say was the value of that timber land in the 11,000 acres an acre?

A. It was worth $30 to $35. The timber on the land was worth $30 to $35

Q. What was the land under the timber worth? A. It was worth certainly the price we got for it.

Q. $20 would you say?

A. $18 to $20, - I do not recall exactly, except the millsite and the lumberyard side and the land we had in connection with the mill.

">*70 When consideration is given to the fact that both the land and timber in this 10,163.50-acre tract sold in 1919 for $20 an acre at a time when, as Hines testified, "stumpage would have been worth four times what it was prior to that," we do not believe that the testimony of this witness is sufficient to overcome the prima facie correctness of the respondent's determination of a March 1, 1913, value of $15 an acre.

Relative to the question of the March 1, 1913, fair market value of the 1,008 acres of cultivated land in Itawamba and Monroe Counties, we have the testimony of three witnesses, W. A. Bonds and George T. Houston">*2220 for petitioners, and Shreiner for the respondent. Bonds has been in the employ of the Houstons since 1899. He testified that he would place the March 1, 1913, fair market value at $50 an acre or better. He also testified that Houston Brothers had advertised it for sale in 1913, at $50 an acre, and had been offered "$100 an acre for part of it," but did not specify the number of acres on which the offer was made. Houston testified to a value of $100 an acre, but we can not reconcile this figure with the price at which Houston Brothers were advertising the property for sale at the basic date. Shreiner said "about $10 an acre, I guess." Our criticism of Shreiner's testimony on this issue is that the territory was outside of that in which he was most familiar. We believe that on the basis of the entire record, the fair market value of the 1,008 acres of cultivated land on March 1, 1913, was $45 an acre. The profit on the sale of this land in 1919 should be recomputed accordingly.

The amount of $2,577.21 paid by the partnership in 1920 for removing certain sprouts and brush from previously cultivated land, preparatory to raising a crop of produce in 1920, was an ordinary and necessary">*2221 expense of doing business and deductible from gross income under the provisions of section 214(a)(1) of the Revenue Act of 1918.

The last issue involves the determination of the actual number of feet of timber cut from the holdings of Houston Brothers, during the calendar year 1919. Houston Brothers reported, and the respondent in his determination of a deficiency against George T. Houston for the calendar year 1919, determined this figure to be 11,454,000 feet. The respondent now contends that he was in error in his determination, and that the correct number of feet cut from the holdings of Houston Brothers during the calendar year 1919, was only 6,287,908 feet. In support of his contention, he offered in evidence certain sheets taken from the partnership's books of account, with information and facts recorded in columns captioned as follows: "Year," "Scale No.," "Stumpage," "Cutter and Hauler," "Mississippi Rever," "Yazoo River," "Big Sunflower River," "Little Sunflower River," "Bought at Mill," "Timber Rights," "Company Land," ">*71 and "Railroad." All the columns beginning with the "Mississippi River" column, are further divided into subcolumns captioned: "Logs," "Feet, ">*2222 " and "Amount." It is the respondent's position that only the number of feet shown in that column under the caption of "Company Land" may be taken as the number of feet cut during the year and this number he now determines to be 6,287,908 feet. But Philip D. Houston testified that there was considerable memoranda material in the nature of scale cards, on the back of letters, envelopes and writing paper that were never recorded on these sheets introduced by the respondent. On that state of the record, we do not think that the original figure of 11,454,000 feet should be disturbed.

The deficiencies should be redetermined in accordance with our findings of fact and opinion, and in accordance with the correct amount of depreciation agreed upon by the parties referred to in our preliminary statement of the issues.

Judgment will be entered under Rule 50.