Benson Timber Co. v. Commissioner

BENSON TIMBER CO. AND BENSON LUMBER CO., PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Benson Timber Co. v. Commissioner

Docket Nos. 16311, 19519.

United States Board of Tax Appeals

9 B.T.A. 593; 1927 BTA LEXIS 2552;

December 15, 1927, Promulgated

---

1. INVESTED CAPITAL. - Where individuals acquired an option to purchase property and after exercising such option, paid in to a corporation all of their rights thus acquired for stock of the corporation, the corporation is entitled to include in invested capital the value of the property acquired.

2. INVESTED CAPITAL. - Value and quantity of standing timber, land under standing timber, cut-over lands, mill site, and plant and equipment determined.

3. DEPLETION. - Value of standing timber at March 1, 1913, and depletion rate determined.

4. VALUATION OF OTHER PROPERTY AT MARCH 1, 1913. - Value of cut-over land, land under standing timber, mill site, and plant equipment determined.

A. C. Shaw, Esq., for the petitioners.

George G. Witter, Esq., for the respondent.

---

ARUNDELL

In this proceeding petitioners seek a redetermination of the income and profits taxes for the years 1918 and 1921, inclusive, for which the respondent has determined deficiencies, as follows:

1918	$3,260.30
1919	10,807.17
1920	42,895.12
1921	3,734.06

For the year 1918 the petitioners also filed a claim in abatement, March 26, 1924, amounting to $12,662.56, and a claim for refund February 28, 1924, amounting to $16,834.65.

Error on the part of the Commissioner is alleged in computing the consolidated invested capital for the years in question by disallowing as a paid-in surplus the value of various assets paid in to the Benson Timber Co. at the time of its organization. This issue also involves the question as to whether or not the Benson Timber Co. acquired the timber land and equipment by direct purchase for cash from the vendor, or by the issuance of stock to Frank R. Lynch and associates.

It is also alleged that the Commissioner erred in his determination of the fair market value of the timber at March 1, 1913, and the proper basis for its depletion and in his determination of the fair market value of land as of March 1, 1913.

FINDINGS OF FACT.

The Benson Timber Co. is an Oregon corporation with its principal offices at Clatskanie, Oreg. The Benson Lumber Co., its affiliated corporation, was an Oregon corporation with its principal offices at Clatskanie, Oreg., but is now a California corporation with its principal office at San Diego, Calif.

The property of the Benson Timber Co. is situated on the water shed of the Columbia River, at Clatskanie, Oreg., and consists of a body of timber and cut-over lands and complete logging equipment, including a privately owned logging railroad not a common carrier, extending from the lands to Beaver Slough, an arm of the Columbia River.

In 1910 this property was owned by S. Benson, an individual. On December 31, 1910, he entered into a contract with his son, A. S. Benson, and O. J. Evenson, for the sale to them of a two-fifths interest at a price of $1,200,000, to be paid out of the profits from the operation of the timber property, without interest. This contract provided for the operation of the property and the division of the profits between the seller and buyers and permitted the seller otherwise to dispose of the property in his discretion upon payment to the purchasers in addition to the then accrued profits the sum of $4 per thousand feet for all timber measuring 16 inches and over, cut between January 1, 1911, and the date of said sale. S. Benson and his son Amos S. Benson were not in the best of health and were unable to perform the duties imposed upon them in the operation of the property. The former endeavored to sell the property in question both prior to December 31, 1910, and subsequent thereto. While at a sanitarium in Paradise Valley, near San Diego, he met Frank R. Lynch, to whom he had previously sold his stock holdings in the Benson Lumber Co. Benson gave Lynch a 30-day option on the timber property and equipment for $2,100,000. In determining the price at which he would sell to Lynch, Benson assumed that the timber on the land would cruise 700,000,000 feet, and was worth $3 per thousand feet. At the time the option was made there were plant and equipment on the property worth $455,000, and lands amounting to 16,810 acres, of which approximately 1,700 acres had been cut over. Included in the latter was a mill site on Westport Slough, which contained 250 acres. Lynch thereupon interested L. B. Hanna of North Dakota and had as an associate in this venture O. J. Evenson.

These parties employed W. E. Conyers, a timber cruiser who had at one time cruised the land for Benson, to make a check cruise of many of the tracts. This check cruise included sound timber 14 inches or over on the stump and disclosed a quantity of timber about 15 per cent in excess of the Benson cruise. The cutting records also confirmed this fact.

John T. Peterson, who was employed as a bookkeeper and scaler, together with Evenson, inventoried all of the property, including the timber, lands, sawmill site and physical property, and a value was placed thereon as of June 5, 1911.

Lynch, Hanna, and Evenson decided to exercise the option given by Benson and on June 5, 1911, Lynch executed a contract for the purchase of the property at a price of $2,100,000, to be paid $100,000 in cash, a personal note of Lynch and wife for $350,000, a credit of $50,000 in favor of O. J. Evenson, and a note and mortgage for the balance of the purchase price of $1,600,000, to be executed either by Lynch personally or by a corporation created under the laws of the State of Oregon, to take over the contract and the property. The contract also provided that no timber should be cut from the property of 14 inches or over until and unless the purchaser had paid on principal and interest upon the contract in excess of $5 per thousand feet therefor. It also provided for the sale to Lynch of all the logs then in Beaver Slough, not scaled or rafted, for $6,000, and that this sale should be separate from and in addition to the purchase price mentioned above.

Contract to purchase was executed on the morning of June 5, 1911, at which time it was not decided whether the property would be operated by a partnership or a corporation. Later in the day it was decided to form a corporation with a capital stock of $3,000,000, divided into 30,000 shares of the par value of $100 each. The articles of incorporation were filed with the Secretary of State of the State of Oregon on June 10, 1911, and the Secretary issued his certificate on that date. The first meeting of the stockholders was held on June 12, 1911, and the contract between Lynch and Benson was on that date taken over by the corporation and on that date the property was conveyed to the corporation by Benson, and the corporation executed the note and mortgage for $1,600,000 to Benson and issued paid-up capital stock to Lynch for $449,900 par value, to Evenson for $50,000 par value, and to E. E. Coovert for $100 par value. On July 26, 1911, additional stock in the sum of $900,000 par value was issued to Lynch and Evenson and the balance of the stock of $1,600,000 was left in the treasury. The inventory which was used as a basis of capitalization of the Benson Timber Co. June 5, 1911, was as follows:

Land, 15,730 acres at $10		$157,300.00
Mill site at Westport		25,000.00
Timber:
Yellow fir, estimated	201,938,000 feet
Red fir, estimated	515,948,000 feet
Cedar	21,150,000 feet
	739,036,000 feet
	at $3 per thousand feet	2,217,108.00
Dead fir	6,710,000 feet
Hemlock	44,520,000 feet
	51,230,000 feet
	at $2 per thousand feet	102,460.00
Maple	230,000 feet
	at $4 per thousand feet	920.00
Less: 250 acres cut-over, average 53,000 feet, 12,250,000 feet at $3 per thousand feet		39,750.00
Cedar poles, 20,826, average 35 feet	728,910 lineal feet
Fir piling, 44,295, average 75 feet	3,322,125 lineal feet
	4,051,035 lineal feet
	at 1 3/4??	70,893.11
Total estimated value of timber set up		2,351,531.11
Balance allocated to plant, equipment, supplies, etc		466,068.89
Total		3,000,000.00

The Benson Timber Co. thereupon began to operate the property it acquired, cutting the timber and shipping it to market. The quantity of timber cut from the lands from 1911 to 1921, inclusive, was as follows:

	Feet.
1911	27,451,000
1912	58,460,000
1913	65,402,000
1914	55,557,000
1915	47,721,000
1916	40,212,000
1917	46,709,000
1918	39,569,000
1919	23,053,000
1920	31,491,000
1921	16,911,088

The depreciation deductions to which the Benson Timber Co. was entitled in its income and profits-tax returns for the various years were as follows:

1911	$13,920.29
1912	25,427.28
1913	53,775.62
1914	32,222.83
1915	28,244.22
1916	24,529.32
1917	$28,959.58
1918	38,776.52
1919	16,414.72
1920	22,673.52
1921	11,564.93

The cutting records of the Benson Timber Co. disclosed that a greater amount of timber was being cut and shipped to market than was indicated by the so-called Benson Cruise and that the overrun exceeded that cruise by about 15 7/8 per cent. Explanation, at least in part, of this overrun on the Benson Cruise is shown on page 4 of the Forest Industries Questionnaire of the Benson Timber Co. for the years prior to 1919, as follows:

That the cut had exceeded the cruise about 15 7/8ths per cent, which may seem large on first inspection, but ever since the time of the purchase of this property our utilization has been extremely high, due to our connection with the Benson Lumber Company at San Diego, California, where the logs are manufactured into lumber for the local market, our stand of timber carries a large amount of small timber which would be unsalable on the Columbia River market at a price that would justify logging same. The latter timber was properly not included in Mr. S. Benson's timber estimate, however, this class of timber is particularly well suited to the construction of the ocean rafts of the above mentioned company, who pay a price for this material sufficient to justify our logging it, together with the better grades of defective timber which are also put in ocean rafts.

By March 1, 1913, the Benson Timber Co. had cut and shipped 90,883,671 feet and on March 1, 1913, there remained uncut 714,457,000 feet of timber. On June 5, 1911, there was on the land 805,330,671 feet of timber. On March 1, 1913, the value of the plant and equipment was $443,472.

During the years 1911 to March 1, 1913, the percentage of the annual production of timber from the property of the Benson Timber Co. which was sold to the Benson Lumber Co. was as follows:

1911	26.913 per cent
1912	18.7 per cent
1913	13.68 per cent

From 5 per cent to 10 per cent of the logs shipped from the property were of a grade that could not have been readily marketed in the Columbia River market.

The net profits per thousand feet of timber of the Benson Timber Co. from the operation of this timber property, as shown by the books before deducting depletion, depreciation or interest paid on purchase-money mortgage, were as follows:

1911	$5.6257
1912	6.0793
1913	6.1736
1914	5.2096
1915	$4.30
1916	4.9021
1917	6.7718
1918	7.5513

On March 1, 1913, the Benson Timber Co. owned 16,810 acres of land, 13,246 acres of which was under timber and 3,564 acres had been cut over. Included in the latter acreage was the Westport mill site containing 250 acres.

On April 25, 1913, the stockholders of the Benson Timber Co. gave an option to M. D. Olds to purchase their entire stock ownership in the petitioner corporation for $2,500,000, plus certain payments of interest and payments for logs. There was pending in Congress at this time a bill which imposed restrictions on the rafting of timber on the ocean, and petitioner was fearful that its passage in the form suggested would make impracticable the marketing of its timber through the Benson Lumber Co. at San Diego, Calif. The option so given was induced by that situation. The option was never exercised and was not renewed by petitioner. Later the Benson Timber Co. refused to grant an option to Olds on the timber at a much higher price.

The value at June 12, 1911, of the land was $105,160, the value of the timber $2,234,792.33, and the value of the plant and equipment on that date $455,000. The value of the timber at March 1, 1913, was $2,313,054.54. The value of the cut-over land at March 1, 1913, and June 12, 1911, was $10 an acre and the value of land under timber on the same dates was $6 an acre, resulting in a value of land at March 1, 1913, of $112,616. The value of the plant and equipment at March 1, 1913; was $443, 472. The value of the Westport mill site at the time paid in to petitioner on June 12, 1911, and on March 1, 1913, was $25,000.

OPINION.

ARUNDELL: We have no hesitancy in reaching the conclusion that the purchase from Benson in the first instance was by Lunch on behalf of himself and his colleagues, Hanna, and Evenson, and was not a direct purchase by the Benson Timber Co. Both the option and the contract of sale ran to Lynch, and at the time of the exercise of the option and the execution of the contract of sale it had not even been definitely determined whether or not a corporation would be organized. Its subsequent organization and the transfer to it of the property for stock can not be related back so as to treat the transaction as one occurring directly between Benson and the Benson Timber Co. In so holding the Commissioner erred.

With the preliminary question disposed of, our whole problem is in determining the value of the property paid in to the corporation for stock in June, 1911, and its value on March 1, 1913, for the purpose of determining the proper basis for allowing the Benson Timber Co. its depletion and depreciation granted by the statute. The value of the plant and equipment as of June, 1911, and as of March 1, 1913, has been agreed to in the amount found in the findings of fact and we think the evidence amply supports a value of $25,000 for the Westport mill site on these dates. Our real problem is to determine the value of the timber and of the land in the years 1911 and 1913. The record from which our conclusion has been drawn is voluminous and contains the testimony of men recognized as thoroughly qualified to place a value on the growing timber of the Northwest on the dates with which we are concerned.

There is a practical unanimity of opinion that the timber on this land, marketable in the Columbia River market, was in June, 1911, worth $3 per thousand feet and that the same timber at March 1, 1913, was worth $3.50 per thousand feet. If we are to give any credence whatever to the evidence, we must accept these values as established. Benson, who undoubtedly knew the timber better than anyone else, and who since 1911 has had no financial interest in the enterprise, was unequivocal in his testimony that the value in June, 1911, was $3 per thousand, and on March 1, 1913, $3.50 per thousand. The parties have stipulated the amount of timber on the land in 1911 and on March 1, 1913, and it would seem at first blush that the matter of determining the value would now be a mere mathematical calculation. The difficulty, however, arises from the fact that the persons testifying to values had not themselves cruised the timber and the stipulation as to the quantity of timber goes rather to the quantity on which depletion should be allowed and does not definitely state that the quantity so stipulated is merchantable timber in the Columbia River market. The difficulty is made apparent from the testimony of Benson in which he gives as his opinion that the value in June, 1911, was $3 per thousand, but in making the sale he accepted the quantity of timber on the land as 700,000,000 feet. We have found, however, from the stipulated facts that there were 805,000,000 feet. The actual cutting experience, both prior to the sale of the timber by Benson and subsequent thereto, showed an overrun of some 15 per cent over the estimate on which Benson dealt and this quantity was corroborated by the check cruise made by Conyers for Lunch during the option period. It was made possible undoubtedly by the greater utilization incident to the shipment of the timber to the San Diego mill and to the fact that with the passage of time timber measuring less at the stump found an increasing market. Most of the witnesses who testified to the value of $3 and $3.50 a thousand feet of timber stated that such values were to be applied to the quantity of timber considered merchantable in the Columbia River market. From this it appears that the method of determining the value of a timber tract adopted by owners or purchasers of standing timber was to use a certain rate or value per thousand feet of timber and apply such rate to certain grades and sizes of timber in the tract, and thus arrive at a figure which represented the value of all of the timber in the tract. Since this method is used by the witnesses it is necessary to make a correction to the quantities of timber admitted to be on the property in 1911 to which these values apply.

Witness Evenson stated that from 5 to 10 per cent of the timber shipped from the property would be considered unmerchantable in the Columbia River market. It is also admitted by stipulation that a part of the 15 per cent overrun was due to the shipment of timber considered unmerchantable in the Columbia River market. In view of this testimony we believe that the quantities of timber of 805,330,571 feet in 1911 and 714,457,000 feet in 1913 should be reduced by 7 1/2 per cent, the mean between the estimate of 5 per cent and 10 per cent, for the purpose of applying the $3 and $3.50 values, respectively, in arriving at the total values of the timber. This results in a value of timber in 1911 of $2,234,792.61 and in 1913 of $2,313,043.54. The unit rates based on the total quantities of timber on the property would be, in 1911, $2.775 a thousand and in 1913, $3,2375 a thousand.

The values ascribed to cut-over lands by the witnesses ranged from $8 to $15 an acre, and lands under timber were valued from practically nothing to $15 an acre. After a careful review of all of this testimony we are of the opinion that at June, 1911, and at March 1, 1913, the cut-over land other than the mill site, which has been valued separately, was worth $10 an acre and the land under timber was worth $6 an acre.

The value of the Benson Timber Co.'s property in 1911 and 1913 was as follows:

	1911	1913
Timber	$2,234,792.61	$2,313,043.54
Plant and equipment	455,000.00	443,472.00
Mill site	25,000.00	25,000.00
Cut-over land	14,500.00	33,140.00
Land under timber	90,660.00	79,476.00
Total	2,819,952.61	2,894,131.54

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

Considered by LANSDON, STERNHAGEN, and GREEN.