Court Opinion

ID: 4589129
Source: CourtListenerOpinion
Date Created: 2020-11-20 18:43:33.334848+00
Date Added: 2024-06-11T07:50:12.598217
License: Public Domain

A. B. FORNCROOK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  MABEL N. THOMPSON, EXECUTRIX OF THE WILL OF WILLIAM H. THOMPSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Forncrook v. CommissionerDocket Nos. 11195, 11196.United States Board of Tax Appeals12 B.T.A. 1338; 1928 BTA LEXIS 3362; July 13, 1928, Promulgated 1928 BTA LEXIS 3362">*3362  The evidence adduced is held insufficient to enable a valuation of interests in coal deposits conveyed by quitclaim deeds without consideration other than friendship.  Maynard Teall, Esq., for the petitioners.  Thomas P. Dudley, Jr., Esq., for the respondent.  LOVE 12 B.T.A. 1338">*1338  These proceedings result from the determination of deficiencies in income taxes amounting as follows: A. B. Forncrook for 1919, $7,908.58, for 1921, $498.69; Mabel N. Thompson, Executrix, for 1919, $8,605.13.  Petitioners allege error with reference to the failure of the respondent to allow any value whatever for an interest in certain coal deposits at the date in 1918 when acquired by gift, whereas said value was 12 B.T.A. 1338">*1339  $300 per acre, and it should be included in the amount of cost for the purpose of computing the gain or loss through sales of the deposits in 1919 and 1921.  Upon motion duly made and granted the appeals were consolidated for purposes of hearing and decision.  FINDINGS OF FACT.  Petitioner A. B. Forncrook is a resident of Edgewood, Pa.  Petitioner Mabel N. Thompson is a resident of Edgewood, Pa., and she is the duly appointed, qualified, acting1928 BTA LEXIS 3362">*3363  and sole executrix of the last will of William H. Thompson, deceased.  William H. Thompson was associated with Forncrook in the acquisition and sale of the coal deposits whose value is at issue.  In 1917 petitioner Forncrook, as the result of a conversation with an old friend of his named W. Harry Brown, who was an elderly and very wealthy coal operator in the Pittsburgh district, became interested in the money-making possibilities of the purchase and resale of a certain tract of coal, Freeport vein, situated in North Versailles Township, Allegheny County, Pennsylvania.  The upper or Pittsburgh vein of coal had been previously mined out of the area, and the fact that the lower or Freeport vein was present in commercial quantity and quality was not publicly known.  Brown, however, possessed this knowledge, because in 1887 he had constructed a shaft and made entries on the tract and then developed the fact that the Freeport vein was there.  Forncrook's interest being aroused by the conversation referred to, he procured from Brown written confirmation as to the presence and commercial value of the Freeport coal; then, in association with Thompson and during the last four months of 1917, 1928 BTA LEXIS 3362">*3364  optioned from various persons several contiguous parcels comprising a tract of 1,126 acres thereof.  These options were taken at $200 per acre and exclusively for the purpose of resale of the property, since Forncrook and Thompson were not themselves possessed of the means either to take over or develop it.  During the winter of 1917 and spring of 1918 Forncrook and Thompson caused drillings to be made on the optioned tract by mining engineers, which confirmed Brown's statements and definitely established the presence of the Freeport coal in a vein over 7 feet thick and of very good quality - so good, indeed, as to be suitable for coking purposes.  After the engineers had reported, Forncrook and Thompson set about finding a purchaser for the property.  Certain negotiations in that behalf were conducted with the Crucible Steel Co., but did not result in a sale.  Meanwhile, the period within which the options might be exercised was expiring.  Effort was made to extend them, 12 B.T.A. 1338">*1340  but the findings of the engineers having become public, the optionors would not further extend the options at the original price of $200 per acre.  In this status of affairs, and when most of the1928 BTA LEXIS 3362">*3365  options had only about 30 days still to run, Forncrook approached Mr. Miller, president of the Westinghouse Air Brake Co., with a view to selling the tract to that corporation.  In the conversation with Miller, Forncrook "told him exactly the conditions, laid the cards on the table," stating that the property was for sale, that most of the options would expire within about 30 days, that some of them could not be renewed at all, or at least could not be renewed save at a much higher figure.  Miller replied that he knew the property, that he had discussed it with the president of the Westinghouse Electric Co., and that there would be an executive meeting of his board of directors in New York in the following week, at which he would submit the matter and then make a definite offer to be accepted or rejected without bargaining.  Forncrook was to return a week later for the answer, which he did, and then received an offer of $350 per acre, sellers to make title.  The bargain was later reduced to writing, and the East Pittsburgh & Wilmerding Coal Co. was organized by the Westinghouse interests to receive and hold title.  When the sale had been agreed upon a title company was employed to1928 BTA LEXIS 3362">*3366  search and examine the title.  Early in the examination the company reported informally to Forncrook "that on a considerable portion of the property we had got options from the wrong people" and "that a certain portion, coal underlying a certain portion, was in the name of W. Harry Brown." Forncrook then went to Brown and told him what the title company had reported, to which Brown replied in substance that he knew he owned some part of the coal, that the title examination should proceed, and that when it should be determined just what Brown did own he would let Forncrook know what he would do about the matter.  A month later, on receipt of a formal report from the title company, Forncrook returned to Brown with his papers and stated that according to the title company Brown owned a certain portion of the acreage of Freeport coal.  Brown replied that he had decided to give Forncrook such part of the property as he owned, Forncrook should take his papers to Brown's attorney, who would check the descriptions, whereupon Brown would give a deed to it.  The attorney prepared the deed, which was executed and delivered by Brown and wife to Forncrook under date of November 15, 1918, and1928 BTA LEXIS 3362">*3367  purported to convey to Forncrook all the right, title, interest and estate of the grantors in and to the Freeport vein of coal on certain premises therein more particularly described.  The acreage covered by the deed was 537,857.  12 B.T.A. 1338">*1341  There was no consideration for the deed of Brown to Forncrook except the friendship between the parties.  They were intimate personal friends of some twenty years standing.  Brown was one of the largest coal operators in the Pittsburgh district.  He was a very wealthy man, residing on the finest residential street of Pittsburgh, while Forncrook was in very moderate circumstances.  Brown had done many favors for Forncrook before.  At the date of the deed, Brown was an elderly man between sixty-five and seventy years of age, and when Forncrook suggested some consideration for the conveyance of the Brown coal, he replied that he had "more money now than any man ought to have" and that he would like to see the field developed anyhow.  Both Brown and his attorney died prior to the hearing.  In accordance with the sales agreement Forncrook delivered the deeds to a portion but not of all of the acreage in 1919.  Included in the acreage sold in 19191928 BTA LEXIS 3362">*3368  were the rights to over 300 acres which had been the subject of the quitclaim deed from Brown to Forncrook.  Title to these acres was acquired by the East Pittsburgh & Wilmerding Coal Co., by deeds direct to this corporation from the optionors and, in addition, by deeds from Forncrook and his wife of all rights they possessed to the same acres, acquired by the quitclaim deed of Brown or by quitclaim deeds from four other parties who are named in the Forncrook deeds.  The rights for 113,538 acres, which were sold by Forncrook in 1921, and which were also the subject of the quitclaim deed from Brown, were deeded to Forncrook by the executrix of the estate of James White in December, 1920, and title was conveyed from Forncrook to the East Pittsburgh & Wilmerding Coal Co. in February, 1921.  Three option agreements with Mary L. Hughes, Bowman, as trustee for Frazier, and the Bowman Real Estate Co. provided as follows: The said party of the first part hereby covenants and agrees that he/she/it shall and will, on the payment of the purchase money, as hereinafter provided, well and sufficiently, by deed of General Warranty, convey in fee simple, clear of all encumbrances, except as1928 BTA LEXIS 3362">*3369  hereinafter specified, the above described coal and mining rights unto the said party of the second part.  It is further agreed by and between the parties hereto that thisoption and all rights thereunder is given subject to the rights of parties holding oil or gas leases upon the said described premises, or any part thereof, and subject to any deeds, rights of way, or other agreements affecting said land, outstanding.  Three option agreements with Hollywood Land Co., Albert L. and Mary Beech, and E. W. Bowman provided as follows: The said party of the first part hereby covenants and agrees that it shall and will on the payment of the purchase money as hereinbefore provided, well and sufficiently by deed of General Warranty, convey in fee simple, clear of all 12 B.T.A. 1338">*1342  liens and encumbrances, the above described coal and mining rights unto the party of the second part * * *.  The above options were relative to coal deposits which were subject to quitclaim deeds by Brown.  The options acquired and sold by Forncrook agreed to waive surface damage.  OPINION.  LOVE: The sole issue in this appeal arises out of the computation of gain or loss from certain sales of coal rights. 1928 BTA LEXIS 3362">*3370  In addition to the cost, which is undisputed, there is a question of the value, if any, to be assigned to a gift to petitioners of rights in the coal by W. Harry Brown.  In 1919 and 1921 the petitioners sold rights to two valuable veins of coal, together with surface rights incident to the mining of the coal, and also releases from liability for damage to the surface.  The interests held by the petitioners had been acquired in part from the owners of the surface by option agreement to purchase rights to the coal and to the use of the surface and in part by quitclaim deeds from five individuals.  The quitclaim deed from W. Harry Brown, one of the five individuals, conveyed his interests in various tracts exceeding in extent in the aggregate, 500 acres, and was without consideration other than Brown's friendship for one of the petitioners and his desire to see the coal deposits developed.  Petitioner contends that a value should be determined for the rights which Brown conveyed to petitioners and such value should be deducted from the proceeds of the sales in computing the amount of gain or loss for income-tax purposes.  The parties are in agreement in principle.  Article 1562 of1928 BTA LEXIS 3362">*3371  Regulations 45 and article 1563 of Regulations 62 provide for the procedure contended for by petitioners.  However, in his letter to Forncrook dated August 8, 1925, respondent states, "No value has been allowed for the gift of W. Harry Brown in determining the profit from sales in 1919 and 1921" and in the deficiency letter he states, "The information furnished has been carefully considered and the value of the Freeport coal as previously determined by this office, has been sustained as was explained to you in office letter dated August 8, 1925." In an able and lengthy argument petitioners contend that they have fully sustained the burden of proof.  Possibly this would be so were the issue whether Brown had some sort of an interest in the coal deposits, but the issue is not exactly that.  The question requires a determination of the amount of value which may be attributed to whatever rights Brown conveyed to the petitioners.  The record does not support a claim that Brown held clear and undisputed title to 12 B.T.A. 1338">*1343  the coal.  Certain of the optionors were apparently claimants to the coal and they had undertaken in the option agreements to furnish warranty deeds conveying title1928 BTA LEXIS 3362">*3372  clear of incumbrances.  Whether the four parties from whom quitclaim deeds were obtained were rival claimants to Brown we do not know.  With nothing more than the deed of the coal to Brown in 1884, his quitclaim deed to Forncrook, and Forncrook's testimony that he was orally informed by the title company that the coal "stood in the name of Brown" and he had "acquired options from the wrong parties" we are uncertain of the extent of the rights which remained in Brown after so many years.  The Pittsburgh vein which Brown formerly actively mined had long since been exhausted and there is no evidence of any further operations on his part.  A valuation witness for the petitioners testified to his opinion that the Freeport coal with full rights was worth $700 per acre and the proportional value attributable to waivers of surface damage such as the petitioners secured under the options was about 15 per cent thereof, but his opinion does not satisfactorily account for the full amount of the price of $200 per acre actually paid in exercising the options or for the fact that the purchase price was paid to the optionors even though petitioners contend that Brown was deemed to own the coal.  We1928 BTA LEXIS 3362">*3373  are not convinced that Brown conveyed to Forncrook interests of any such value as $300 to $500 per acre as claimed by the petitioners, and we do not see that there is a basis for the definite determination of any amount of value thereof.  Judgment will be entered for the respondent.