Court Opinion

ID: 4595082
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:14:17.869268+00
Date Added: 2024-06-11T07:51:22.380049
License: Public Domain

E. F. SIMMS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Simms v. CommissionerDocket Nos. 19175, 19791.United States Board of Tax Appeals28 B.T.A. 988; 1933 BTA LEXIS 1053; August 11, 1933, Promulgated *1053  1.  Petitioner transferred oil leases to a newly organized corporation in exchange for its entire capital stock, all of which stock, pursuant to prior agreements contemplating the creation of a second corporation to develop the leases, was thereafter transferred to the second corporation in exchange for part of its stock, and the remaining stock of the second corporation was sold to or through syndicate participants for cash.  Held, under the Revenue Act of 1918, (a) that the first exchange was a separate and completed transaction, the gain or loss upon which must be computed on the difference between the cost to petitioner of the leases and the fair market value of the stock received; and the separate character of the transaction was not affected by the subsisting contractual obligation of petitioner to exchange his stock for stock of the second corporation; (b) that the second exchange was an exchange in connection with a "reorganization", as that term is defined in Regulations 45, article 1567, and, under section 202(b), no gain or loss may be computed on account of it; (c) that the evidence establishes that the stock received in the first exchange had a fair market value when*1054  received by petitioner, and that such value is reasonably determinable at an amount equivalent to the cost of the leases to petitioner.  2.  A sale of assets of a partnership composed of petitioner and another, each of whom owned an undivided one-half interest, effected by separate but identical instruments executed at the same time by each partner as an individual, conveying an undivided one-half interest in the partnership assets and reciting the separate consideration moving to each partner, held a partnership sale rather than separate sales by the individual partners.  3.  In determining gain or loss from the sale of oil leases and oil lands for a consideration consisting of cash, notes, and the right to a specified quantity of oil produced from the property, if the property should produce that quantity, plus an overriding royalty on all oil produced, the rights to the oil and royalties may not be regarded as part of the proceeds of the sale, as they are contingent in character and do not represent either property actually received or amounts accrued at the time of the sale.  Burnet v. Logan,283 U.S. 404">283 U.S. 404. 4.  A partner who transfers to another an*1055  undivided one-half interest in his share of the partnership assets, thereby vesting in the transferee an interest in the corpus which produced the income rather than an interest in the income, is not taxable upon the portion of the profit from the sale of the partnership assets attributable to the interest transferred.  The fact that the transferee did not become a member of the partnership is immaterial.  5.  In 1921 the petitioner sold certain oil leases, reserving an overriding royalty and a right to a specific quantity of oil (see par. 3, supra ), and in 1922 he sold for cash the right to receive further oil after January 1, 1923.  Held, (1) That he is entitled to depletion deductions based on discovery value in respect of the royalty and the oil delivered in 1921 and 1922, and the right to receive oil is properly allocable as consideration for the leases, as distinguished from equipment; and (2) that, since his economic interest in the right to receive oil ceased on January 1, 1923, the cash consideration received in 1922 may not be allocated as consideration for the transfer of the producing leases and subjected to depletion based on discovery value.  6.  The transfer*1056  of stock by a taxpayer to a creditor in satisfaction of a valid and subsisting debt may result in taxable income.  There is no difference, in result, between such a transaction and a sale of the stock by the taxpayer and the application of the proceeds in satisfaction of the indebtedness.  7.  The value of stock as of March 1, 1913, determined, for the purpose of computing gain or loss upon its transfer in satisfaction of a debt, upon the entire evidence, consisting of evidence of the mineral reserves contained in mining property and the present worth of expected royalties under a contract which was the only asset behind the stock, the character of the mining property from the standpoint of its importance in maintaining a monopoly in the product, and opinion testimony of witnesses for both parties.  8.  The respondent is sustained on issues involving profit from sales of thoroughbred horses, and the capitalization of expenditures for fixtures, radiators, roofing, and heating equipment, temporary buildings and storehouses, for lack of evidence.  9.  Deductions of losses from betting on horse races in excess of winnings, disallowed for lack of evidence segregating losses arising*1057  from bets made in states where betting on horse races is legal from those arising from bets made in states where it is illegal.  Furthermore, the evidence does not establish that betting was on ordinary and necessary expense of petitioner in training race horses and operating a racing stable.  Fred R. Angevine, Esq., for the petitioner.  Elden McFarland, Esq., and Arthur Clark, Esq., for the respondent.  MARQUETTE *990  BEFORE MARQUETTE AND SEAWELL.  These proceedings, which were consolidated for hearing, involve deficiencies in income tax as determined by the respondent for 1919, 1921, and 1922 in the respective amounts of $4,288,488.32, $395,763.30, and $30,993.16.  The major issues presented are as follows: (1) What profit, if any, was realized by the petitioner in 1919 when he assigned certain oil leases to the Simms Oil Co. in exchange for its entire issue of capital stock and shortly thereafter exchanged the stock so received for stock in the Simms Petroleum Co. in a transaction whereby the petitioner received approximately two thirds of the stock issued by the Simms Petroleum Co. and the remainder was sold for cash; (2) the profit*1058  realized by the petitioner on account of the sale in 1921 of certain oil properties by E. F. Simms & Co., a partnership in which petitioner was a partner, to the Humble Oil & Refining Co.; (3) the profit, if any, realized by the petitioner through the transfer in 1921 of 36 shares of stock of the American Sulphur Royalty Co. to his wife in satisfaction of a debt then owing by him to her in the amount of $850,000; (4) miscellaneous errors assigned on account of the deductibility of wagering losses and as to whether expenditures in connection with certain racing stables were to be capitalized or allowed as deductions in the year when made; (5) the failure of the respondent to allow a deduction for depletion upon the petitioner's interest in properties sold to the Humble Oil & Refining Co.  The facts relating to this issue were stipulated by the parties, and will be considered in connection with issue (2) above.  *991  FINDINGS OF FACT.  Issue No. 1.1.  The petitioner is an individual, with residence and a business office in Houston, Texas.  2.  Since about 1901 the petitioner has been principally engaged in the oil business.  His activities began with the discovery*1059  of the first important oil field in Texas known as Spindle Top and have covered various phases of that business, including production and transportation of oil, buying and selling oil properties and leases, and developing and operating oil properties in the Coastal Plain of Texas and in the Tampico District of Mexico.  3.  During October 1917, oil was discovered at Ranger in the northeastern part of Eastland County, Texas.  The discovery well, known as McCloskey well, was the beginning of the well known Ranger oil field and attracted wide attention not only in Texas but throughout the United States.  Prior to that time oil had been produced from shallow wells - 500 to 800 feet deep - but no successful deep well production, that is, wells of a depth from 3,000 to 4,000 feet, had been carried out in that territory.  The oil produced was what is known as "light" oil and its discovery here caused the oil fraternity to believe that this field might mean a repetition or recurrence of the famous Oklahoma oil fields where oil of that character had been produced.  An active drilling campaign was begun which resulted in the bringing in of a large number of wells.  These wells showed high*1060  initial productions and indicated that a highly productive field had been discovered.  It was soon found, however, that there was no sustained production in the Ranger field for any great length of time, but that there was a decline in the initial production of a given well of from 70 to 90 percent in the first nine or ten months of its life, and in many instances the wells would be completely exhausted within 12 months.  In addition, a substantial number of "dry holes" were being drilled, thus revealing a "spotty" condition, that is, a condition which showed a part of the field was productive and a part nonproductive.  4.  In the summer of 1918 another oil field was discovered in the southeastern part of Eastland County, Texas, at and near the intersection of the boundary lines of Erath and Comanche Counties, Texas.  This was known as the Desdemona field.  The activity and interest engendered by the discovery of this field and the circumstances and results attendant upon its development were similar to those in the Ranger field.  *992  5.  The major oil companies were active in both the Ranger and Desdemona fields during the period of their development and operation and*1061  acquired a large amount of acreage therein, not only for production, but also for protection purposes.  In addition, a large number of individuals, small companies, and promoters of various kinds were active in the same area.  These activities of large and small interests were not confined to the Ranger and Desdemona fields, but extended into the various counties where the petitioner's acreage was located, as hereinafter shown.  The major oil companies kept large scouting organizations in the field which reported to them as to the progress of drilling, production obtained, character of soil and strata encountered, and other similar information.  From the information obtained it was known by them prior to June 19, 1919, that these fields were not of the high character expected when they were discovered.  Leasing activity on their part decreased prior to June 1919, though there remained a substantial amount of activity on the part of individuals and the smaller companies.  Drilling activity, which was always some weeks or months behind the leasing activity, depending upon the time required to perfect a lease and prepare for drilling, reached its height in the summer and fall of 1919, *1062  and the maximum daily production of oil was reached in July 1919.  Prices were being paid for leases on or about June 19, 1919, from $1 to $6,000 per acre, depending upon their location and the peculiar conditions surrounding the sale, though the acreage involved in individual sales was relatively small - in most cases from 5 to 100 acres.  6.  In the latter part of 1917, after the discovery of the McCloskey well, petitioner went to Ranger for the purpose of investigating the oil situation in that territory.  He found that the lands at and near Ranger were held in large blocks and that interest in oil had been so aroused by the discovery of the McCloskey well that such lands could only be acquired at what seemed to him unreasonable prices.  A study of the situation, however, caused him to form the conclusion that the geological structure responsible for oil in that territory might reasonably be expected to show one or more oil pools south or southwest of Ranger.  At that time there were small oil fields south of Ranger where oil was being produced from shallow wells.  Those developments were in Brown and Coleman Counties which adjoined, or almost adjoined, Eastland County on the*1063  south or southwest.  In addition, there were surface structures in those or other adjacent counties in the same section which indicated the presence of oil in that locality.  7.  The petitioner accordingly became very much interested in the possibilities of the territory south and southwest of Ranger and *993  began to acquire leases wherever possible in that general part of the country.  Not only was the petitioner actively engaged in the field in acquiring the acreage sought by him and keeping in touch with the general situation as it developed at Ranger, Desdemona and other places, but he also had agents and associates who were given almost unlimited authority to make acquisitions.  As a result, during the latter part of 1917, during 1918 and during the early part of 1919, the petitioner acquired leases on approximately 421,000 acres of land in the following counties of central west Texas; Brown, Callahan, Coleman, Comanche, Concho, Eastland, Edwards, Erath, Kimble, Menard, McCulloch, Mills, Navarro, Runnells, San Saba, Schleicher, Stephens, Sutton, and Val Verde.  With the exception of Navarro County, those named are adjacent to each other.  The acreage, however, did not*1064  form a connected area, but was widely scattered over the various counties mentioned above.  None of the acreage acquired was located in the producing area of the Ranger or Desdemona fields and only a relatively small part was near thereto.  The parcels varied in size from less than 100 acres to approximately 45,000 acres, a large percentage of the leases being for less than 500 acres.  The total cost of the leases to petitioner and his associate, Henry Oliver, was $972,012.94.  Oliver contributed $300,000 of the foregoing amount under an agreement by which he became the owner of an undivided interest in the leases acquired, thus reducing the net cost to petitioner to $672,012.94.  The cost of the leases varied from a few cents to $5 per acre.  In addition, a yearly rental was required under the leases of approximately $100,000, and in at least one case there was an obligation to dig a well.  The leases acquired were all on what is termed "wildcat" oil lands, that is, unproven acreage on which there had been no commercial production of oil.  There had likewise been no commercial production of oil on these properties on June 19, 1919, when the leases were exchanged for stock in the Simms*1065  Oil Co. as hereafter shown.  Nor, except for Ranger and Desdemona and certain shallow production, had there been any commercial production in that area.  However, by or before June 19, 1919, at least 45 dry holes had been drilled at various points near where the petitioner's acreage was located, though petitioner was then unaware of the extent to which such wells had been drilled.  8.  For some weeks or months prior to June 19, 1919, petitioner had been in contact with certain New York bankers who indicated a desire to become associated with him in his oil enterprises and who had gone into the fullest discussion with the petitioner as "to how and on what terms and under what obligations" the parties could have a community of interest in the property.  As a result of various discussions between the parties, a visit was made to Texas*994  prior to June 19, 1919, by Oscar Gubelman, at that time head of the firm of Knauth, Nachod & Kuhne of New York City, investment bankers, Harry Bronner, at that time president of the Missouri Pacific Railroad Co., the petitioner and several other men.  They made an examination of the oil properties heretofore referred to as having been owned*1066  by the petitioner and, among other things, visited a place in Coleman County where the petitioner owned what was known as the Dibrell lease.  At that time a well had been dug on the Dibrell lease which had reached the oil sands where there was a showing of oil of a good quality, though no oil was flowing.  Upon completion of the well subsequent to June 1919 it proved a failure.  As a result of the visit and inspection the parties were convinced that the properties owned by petitioner were of great value.  At that time a report had been prepared or was being prepared for the interested parties by I. C. White, former state geologist of West Virginia and one of the most eminent geologists in the country.  9.  In the meantime, the petitioner and the above mentioned parties were seeking to advance and finance a venture, either in corporate form of otherwise, which would involve the oil leases owned by the petitioner, and on May 29, 1919, the following agreement was entered into: AGREEMENT, made at the City of New York, this 29th day of May, 1919, between E. F. SIMMS (hereinafter called the "Vendor"), KNAUTH, NACHOD & KUHNE, of the City of New York (hereinafter called the "Bankers"), *1067  and HARRY BRONNER (hereinafter called the "Associate"): The Vendor represents that he owns or controls, through oil leases, the right to produce oil from approximately 424,000 acres of land in the State of Texas, more particularly described in the Memorandum hereto annexed marked "Schedules A to G" inclusive.  In consideration of the mutual agreements hereof, it is agreed as follows: 1.  Subject to the provisions of Article Sixth hereof, the Bankers agree to cause a corporation to be formed under the laws of texas, or such other State as they shall deem advisable, with an authorized capital stock consisting of 500,000 shares of no par value (herein called the "Company"), for the purpose of producing and marketing oil and otherwise making use of the property to be acquired by it as herein provided.  2.  The Vendor agrees to transfer or cause to be transferred to the Company (or to some subsidiary company the entire amount of whose capital stock shall be owned by the Company) such interests as he holds or controls in the scheduled property, free and clear of indebtedness other than rentals thereafter to accrue under the oil leases as set forth in said Schedule, and to pay into*1068  the Treasury of said Company, $3,250,000 in cash in return for 411,000 shares of stock of the Company issued as full-paid and non-assessable, leaving unissued or in the Treasury of the Company, 89,000 shares for the subsequent purposes of the Company.  The vendor's obligation under this paragraph is conditional upon the payment to him either previously or simultaneously of that portion of the proceeds of the sale of the stock hereinafter provided to be paid to the vendor and to the company for the vendor's benefit.  *995  3.  The Bankers and the Associate agree to form a Syndicate which will agree to purchase, and subject to the terms of this agreement, will purchase 274,000 shares of said stock so received by the Vendor at the price of $25 per share, payment for such stock to be made simultaneously with the payment to be made by the Vendor to the Company as hereinabove provided, under the terms of an underwriting agreement which shall provide that the Bankers shall be Syndicate Managers and shall have the right to sell for the account of the Syndicate the stock so acquired by the Syndicate at such prices as the Bankers shall determine in their discretion, not less than cost*1069  to the Syndicate.  The Bankers and the Associate shall have the right to be members of the Syndicate, and the Vendor agrees to become a subscriber to the said Syndicate Agreement to the extent of not less than 88,000 shares.  4.  The proceeds of the sale of said stock to the Syndicate shall be applied as follows: $3,250,000 shall be paid to the Company, in discharge of the Vendor's obligation to pay into the Treasury of the Company a similar amount as provided in paragraph 2 hereof.  $2,200,000 shall be retained by the Vendor; such amount shall be paid to him in installments from time to time simultaneously as he is called upon for payments as a subscriber to the Syndicate under the terms of paragraph 3 hereof so that he shall not be required to provide other funds to complete payment of his Syndicate subscription for 88,000 shares of stock.  $1,400,000 shall belong to the Bankers and the Associate, without responsibility to account therefor to the Vendor or to the Company.  5.  The expenses of the formation of the new company and the issuance of its stock, including stamp taxes, legal expenses, expenses of investigation of, and report on, the property, and other incidental*1070  expenses, the amount of which shall be satisfactory to the Bankers, shall be met by and divided between the Vendor and the Bankers and the Associate in the following proportions: Eighty-eight one hundred and forty-fourths (88/144ths) shall be met by the Vendor and fifty-six one hundred and forty-fourths (56/144ths) by the Bankers and the Associate.  6.  The obligation of the Bankers and the Associate hereunder is subject to their investigations and approval of the character of said property and as to the desirability of the organization of the proposed company and of the reports of experts thereon and to reports and approval by counsel of their selection upon the titles to said properties and the terms of said oil leases and all legal proceedings involved herein, including the form of all documents required in the performance of this agreement.  7.  If for any reason the Bankers and Associate under the provisions of section 6 hereof shall elect not to proceed within fifteen days from the delivery to the Bankers of the report of I. C. White upon said properties, and, in any event, within 45 days, and of a detailed statement from the Vendor as to the terms of the leases upon said*1071  properties and any obligations against said leases or outstanding interests therein, this agreement shall terminate without liability of either party to the other except with respect to the adjustment of the preliminary expenses of investigation hereinbefore referred to.  If, however, they proceed, they shall notify the Vendor in writing by registered mail addressed to him at Houston, Texas, within said period; and the Bankers and Associate shall thereupon become bound to make the payments to the Vendor and the Company for the Vendor's benefit provided for in paragraph 4 hereof within such time as with due diligence the corporate organization can be effected and the titles transferred.  *996  8.  The Bankers and the Associate agree to provide suitable persons to act as the directors of the Company and the Associate agrees to act as Chairman of the Board.  9.  This agreement shall not constitute a partnership between any of the parties hereto.  Signed by KNAUTH, NACHOD & KUHNE, E. F. SIMMS, and HARRY BRONNER.  10.  On June 10, 1919, the following supplemental agreement was entered into: SUPPLEMENTAL AGREEMENT, made this 10th day of June, 1919, between E. F. SIMMS*1072  (herein called the "Vendor"), KNAUTH, NACHOD & KUHNE (herein called the "Bankers"), and HARRY BRONNER (herein called the "Associate").  IN CONSIDERATION of the mutual agreements hereof it is agree as follows: 1.  The following modifications shall be made in the Agreement heretofore enter into between the parties hereto, dated May 29, 1919: (a) The amount of cash to be paid into the Treasury of the New Company specified in Articles 2 and 4 of said Agreement as $3,250,000, shall be $3,600,000.  (b) The number of shares of stock of the Company to be issued to the Vendor specified in Article 2 of said Agreement as 411,000 shares, shall be 425,000 shares, leaving unissued or in the Treasury of the Company 75,000 shares instead of 89,000 shares as specified in said Article 2.  (c) The number of shares to be purchased by the Syndicate specified in Article 3 of said Agreement as 274,000 shares, shall be 288,000 shares.  2.  The Vendor agrees that during the life of the Syndicate he will not sell or allow to be sold or otherwise come upon the market any part of the 137,000 shares of stock of the Company to be retained by him, including five thousand of said shares to be used by*1073  him in payment to outside parties for certain of said properties.  [Signed] E. F. SIMMS, KNAUTH, NACHOD & KUHNE, HARRY BRONNER.  11.  The parties had as counsel, or at least one member of their counsel, Edward Cornell, who on June 16, 1919, wrote petitioner as follows: Dear Mr. Simms: I desire to confirm my two telegrams to you of this date, reading as follows: JUNE 16th, 1919.  E. F. SIMMS, Chronicle Building, Houston, Texas.Referring to my letter of June thirteenth and Revised regulation Article 1566, we think you would come more clearly within the provisions of this regulation if the Texas Company stock were not issued to you in exchange for the property and that the transaction would better take the form of your offer to the Delaware Company to transfer the property to it or its subsidiary company in exchange for the Delaware Company's stock, thus having the Texas Company stock issued in the first instance direct to the Delaware Company.  *997  Our purpose in this is to bring you beyond the question within the terms of subdivision b of Section 211 of the Income Tax Law so that the tax on any profit on the sale by you of the Delaware Company's*1074  stock would be limited to 20% of the selling price.  EDWARD CORNELL.  JUNE 16, 1919.  E. F. SIMMS, Chronicle Building, Houston, Texas.My letter to you of June thirteenth fifth line of paragraph numbered fourth figures 281,000 should read 225,000.  EDWARD CORNELL.  12.  On June 19, 1919, the Simms Oil Co., a Texas corporation, was organized with an authorized capital stock of $10,000,000, and all of its authorized capital stock (except qualifying shares) was issued to the petitioner (or his nominee, W. C. Hardcastle) in exchange for the 421,000 acres of oil leases referred to above.  The affidavit filed by the incorporators to accompany the charter set out that the five qualifying shares were paid for in cash at par and contained the following statement as to the oil leases: All in cash except the subscription of the said W. C. Hardcastle, which was paid in lands, and in oil, gas and mineral leases on lands, a description of which is attached hereto, marked Exhibit "A", and is also shown on a map attached hereto, marked Exhibit "B", both of which are to be regarded as a part hereof, and said Exhibit "A" also contains a statement of the cash value of all property*1075  so received, and the price at which it was received.  13.  At or shortly after the formation of the Simms Oil Co. the petitioner, who was then in Houston, Texas, left for New York City, where he gain met the parties with whom he had been negotiating in regard to the leases heretofore referred to.  On or about June 25, 1919, the following agreement was entered into: AGREEMENT, made at the City of New York, this day of June, 1919, between E. F. SIMMS, hereinafter called the "Vendor", and KNAUTH, NACHOD & KUHNE, of the City of New York, hereinafter called the "Bankers".  The Vendor represents that he owns or controls 99,994 shares, being the entire capital stock less 6 shares owned by directors of Simms Oil Company, a Texas corporation, which company owns, through oil leases, the right to produce oil from approximately 424,000 acres of land in the State of Texas, more particularly described in the memorandum hereto annexed, marked Schedule A, containing a detailed statement as to the terms of the leases and any obligations against said leases or outstanding interest therein, and has agreed or will agree to sell the same to Simms Petroleum Company, a corporation formed or to be formed*1076  under the laws of Delaware, with an authorized capital stock consisting of 500,000 shares of no par value, in return for 281,000 shares of such stock, to be issued as full paid and non-assessable.  IN CONSIDERATION of the mutual agreements hereof, it is agreed as follows: FIRST: The Bankers agree to form a syndicate which will agree to purchase and, subject to the terms of this agreement, will within 30 days from this date *998  purchase from the Delaware Company 144,000 shares of its capital stock at the price of $25 per share under the terms of a Syndicate Agreement, in such form as shall be determined by the Bankers.  SECOND: The remaining 75,000 shares of the Delaware Company shall be left unissued or in its treasury for its future corporate purposes.  THIRD: The Vendor agrees to pay the Bankers for their services in forming said syndicate and as managers thereof the sum of $280,000 in cash.  FOURTH: The Vendor agrees that during the life of the Syndicate not exceeding six months, he will not sell, or allow to be sold or otherwise put upon the market, any part of the 255,000 shares of stock of the Company to be retained by him, including 5,000 of said shares to*1077  be used by him in payment to outside parties for certain of said oil properties.  FIFTH: This agreement shall not constitute a partnership between the parties hereto.  SIXTH: All previous agreements to which the parties hereto are parties are cancelled.  [Signed] E. F. SIMMS, KNAUTH, NACHOD & KUHNE.  14.  In the meantime, but prior to the formation of the Simms Petroleum Co. (as hereinafter shown) a prospectus was issued by Knauth, Nachod & Kuhne to various parties who, it was thought, might be interested in becoming participants in an underwriting agreement for the sale of the stock of the proposed Simms Petroleum Co. or in acquiring stock therein.  The prospectus set out a proposed authorized capital stock of 500,000 shares (no par value) of which 425,000 shares would be outstanding and that the company would have cash in its treasury of $3,600,000.  It was further stated that the corporation would own the entire capital stock of the Simms Oil Co., whose properties were described as follows: The SIMMS OIL COMPANY (The Texas corporation) owns leases on approximately four hundred twenty-four thousand (424,000) acres in twenty (20) counties in Texas, which, with the exception*1078  of Navarro County, the county in which is located the well-known Corsicana Oil Field, are the counties which embrace the celebrated Ranger Oil Field and its southern and southwestern extensions.  With few unimportant exceptions these leases were acquired in 1917 and 1918 under very favorable terms, and in large part can be carried from three (3) to five (5) years on reasonable rental, with no obligations to develop until oil is found on adjoining properties.  These properties in the opinion of the operating management and of geologic experts are most favorably located, both by reason of evidence of oil formation existing thereon, or adjacent thereto, or by reason of development work carried on by other companies, which in many instances has shown the Company's leases to lie between districts where production has already been secured.  After a discussion of the management of the proposed corporation which was to be directed by the petitioner, the following letter was quoted in the prospectus from the petitioner: *999 NEW YORK, June 19, 1919.Messrs. KNAUTH, NACHOD & KUHNE, 120 Broadway, New York City.DEAR SIRS: The SIMMS PETROLEUM COMPANY (herein*1079  called the "Company"), a corporation to be organized under the laws of the State of Delaware, with a capital stock of Five Hundred Thousand (500,000) Shares of no par value, will own all the stock (except directors' qualifying shares) of its operating subsidiary corporation, the SIMMS OIL COMPANY of Texas, which in turn owns oil leases on approximately 424,000 acres in the State of Texas.  The Company will have in its Treasury $3,600,000 cash available for developing its present properties, as well as for acquiring, prospecting and developing such other properties as may seem desirable, and for other corporate purposes.  Four hundred and twenty-five thousand (425,000) shares of capital stock of the Company will now be issued, leaving seventy-five thousand (75,000) shares unissued or in the Treasury of the Company for its future corporate purposes.  The holdings will embrace leases in twenty counties in Texas, which, with the exception of Navarro County, the county in which is located the well-known Corsicana Oil Field, are the counties which embrace the celebrated Ranger Oil Field and its southern and southwestern extensions, as follows: Stephens, McCulloch, Erath, Comanche, *1080  Brown, Coleman, Callahan, Eastland, San Saba, Runnels, Concho, Tom Green, Mills, Menard, Schleicher, Sutton, Kimble, Val Verde and Edwards.  These groups of properties, which in the aggregate represent a vast area, approximately 650 square miles of territory, were acquired because the localities and geological evidences either on the properties themselves or on lands adjacent thereto, pointed strongly to their high oil value.  The leases have been acquired during the past three years considerably ahead of active development, and at the present time could not, in my judgment, be duplicated.  In large part they can be carried from three to five years on the payment of reasonable rentals, without any obligation to develop until oil is found on property adjoining, enabling the corporation to profit by the extensive exploration work which at the present time is conducted by other interests in the vicinity of these properties.  It is not to be inferred, however, that it will be the Company's policy to defer active operations.  The ample cash capital has been provided in order that the Company may carry forward operations not only on the leases it now owns, but also acquire production*1081  and new leases wherever the result of the work being carried on seems to justify it.  The efforts of the Company will be to secure oil production, particularly light oil, in Texas, and to engage further, when deemed advisable, in other branches and departments of the petroleum business.  Thousands of acres of the Company's lands lie between districts where production has already been secured by other companies in Stephens, Comanche, Brown and Coleman counties.  The successful development of these lands in the vicinity of the Company's leases indicates points for drilling operations, and development work has already been started on the Company's lands.  From my personal staff the Company will be provided with an efficient organization to initiate and carry on its work.  My wide acquaintance and close relations of the past twenty years with the best operators in the oil fields of the Southwest will enable me to extend this organization as the necessities of the Company require.  *1000  By pursuing the vigorous campaign which has been planned for the development of its properties, the Company will, I am confident, rapidly develop into a very large and important producing oil*1082  company.  Very truly yours, [Signed] E. F. SIMMS.  15.  On June 27, 1919, the Simms Petroleum Co. was organized under the laws of Delaware, with an authorized capital stock of 500,000 shares (no par value).  16.  On June 30, 1919, at a meeting of the board of directors of the Simms Petroleum Co., the following offer of the petitioner to transfer his stock in the Simms Oil Co. to the Simms Petroleum Co. in consideration for the issuance to him of stock in the latter corporation was accepted: I hereby offer to transfer or cause to be transferred to you the entire capital stock of $10,000,000 (less directors' qualifying shares) of Simms Oil Company, a Texas corporation, which Company owns through oil leases the right to produce oil from approximately 424,000 acres of land in the State of Texas, more particularly described in the memorandum submitted herewith, marked Schedule A, containing a detailed statement as to the terms of the leases and any obligations against said leases or outstanding interests therein, all in return for 280,990 shares of the stock of your company, to be issued to me or upon my order as full-paid and nonassessable.  17.  At the same meeting the following*1083  offer from Knauth, Nachod & Kuhne was received and accepted: On behalf of a Syndicate, of which we are managers, we hereby offer to purchase from your Company 144,000 shares of its capital stock at the price of $25 per share, payment to be made within 30 days from this date.  18.  At the same time or shortly thereafter, 280,990 shares of stock of the Simms Petroleum Co. were issued to the petitioner in exchange for the entire capital stock of the Simms Oil Co. (except qualifying shares), thus making the Simms Oil Co. a wholly owned subsidiary of the Simms Petroleum Co.  Of the aforementioned 280,990 shares, 50,000 belonged to Henry Oliver on account of his investment of $300,000 in the leases acquired by the petitioner.  19.  Of the 280,990 shares of stock received by the petitioner, Harry Bronner, one of the parties instrumental in the formation of the Simms Petroleum Co. and the Simms Oil Co., as hereinbefore shown, received 56,000 shares in satisfaction of the liability to him for the services which he and his associates had rendered in connection with the transactions in question, and for the further payment by him of $5 per share.  In connection with the transfer of the*1084  stock to Bronner the following letter was written by the petitioner: *1001 NEW YORK, N.Y., June 25, 1919.Mr. HARRY BRONNER, 120 Broadway, New York, N.Y.DEAR SIR: I have completed arrangements for the formation of a Delaware corporation to be known as the Simms Petroleum Company, with a capital stock of 500,000 shares without par value, to which company, in consideration of the issue to me of 281,000 shares of stock, I have arranged to and will transfer all the stock held by me, with the exception of directors' shares, in the Simms Oil Company of Texas.  I have also arranged with Messrs. Knauth, Nachod & Kuhne to organize a syndicate to acquire from the Simms Petroleum Company 144,000 shares of stock for $25 a share, and agreed to pay them a cash commission of $280,000 for their services in that regard.  I hereby agree to transfer to you 56,000 shares of the capital stock of the Simms Petroleum Company, in consideration of your assuming my obligation with respect to the $280,000 payable to Knauth, Nachod & Kuhne as aforesaid, the stock to be transferred to you contemporaneously with the delivery to me of a release of my obligation for the $280,000 to Knauth, *1085  Nachod & Kuhne.  Very truly yours, [Signed] E. F. SIMMS.  And in reply thereto there was had the following letter from Bronner: JERSEY CITY, June 26, 1919.E. F. SIMMS, esq.  DEAR SIR: I have your letter of June 25, and agree to purchase the 56,000 shares of capital stock of Simms Petroleum Company, therein mentioned, at the price of $280,000, to be paid to Knauth, Nachod & Kuhne, as stated in your letter.  Yours very truly, [Signed] HARRY BRONNER.  20.  At or about the same time 144,000 shares of stock of the Simms Petroleum Co. were delivered to Knauth, Nachod & Kuhne, who proceeded with its sale under a syndicate which had been formed.  The 144,000 shares of stock were immediately sold by Knauth, Nachod & Kuhne directly and through syndicate participants at $31 per share, the difference between the amount agreed to be paid for the stock by Knauth, Nachod & Kuhne ( $25 per share) and the amount received by them ( $31 per share) representing a commission to them and their associates.  Shortly thereafter, but within the time specified in the agreement, Knauth, Nachod & Kuhne paid to the Simms Petroleum Co. $3,600,000 in cash.  On or about July 19, 1919, the*1086  syndicate was terminated, all of the stock held by it having been sold.  21.  Among the directors secured for the Simms Petroleum Co. were: Harry Bronner, president of the Missouri Pacific Railroad Co., New York City; Edward Cornell, member of the law firm of Davies, Auerbach & Cornell, New York City; O. L. Gubelman, senior *1002  partner of the investment banking firm of Knauth, Nachod & Kuhne, New York City; Henry Oliver, president of the Oliver Iron & Steel Co., pittsburgh, Pa.; Frederic W. Scott, member of the investment banking firm of Scott & Stringfelloe, Richmond, Va.; Finley J. Shepard, vice president of the Missouri Pacific Railroad Co., New York City; Ernest Stauffen, Jr., vice president of the Liberty National Bank, New York City, and John J. Watson, Jr., vice president of the International Agricultural Corporation, New York City.  22.  During the week ended July 12, 1919, the stock of the Simms Petroleum Co. was admitted to trading privileges on the New York Curb Market, where there was an active market for it during 1919 and 1920.  During the remainder of 1919 and the early part of 1920, the sales of stock were generally substantially in excess of the price*1087  of $31 at which sold by the syndicate.  A monthly summary of high and los quotations and the volume of sales on the New York Curb Market, as reported weekly by the Commercial & Financial Chronicle, from July 1919 to September 1920, inclusive, follows: 19191920LowHighShares soldLowHighShares soldJanuary4573 1/2444,400February3351 3/4351,900March3338 1/2133,900April17 5/834 1/2156,200May142195,200June15 3/41954,600July30 3/433 3/8101,50014 1/217 1/261,300August28 1/234 7/835,7259 5/814 3/4141,300September29 3/433 1/423,80011 1/214 1/875,500October3145130,600November37 1/453221,100December5071 1/2306,500Total819,2251,514,30023.  During July, August, and September, a pool was operating in the stock of the Simms Petroleum Co., to which petitioner was a party.  Later a second pool was organized to which petitioner was likewise a party.  The purpose of these pooling agreements was to provide an orderly market for the stock of the Simms Petroleum Co.  Under these agreements*1088  petitioner agreed not to place on the market any of the stock received by him.  The petitioner respected the agreements made by him with respect to the sale of the stock and during 1919 did not sell a share of the stock received by him.  Henry Oliver, who was entitled to receive, and did receive, 50,000 shares of the stock shown as issued to the petitioner, likewise considered himself bound in the same manner as the petitioner not to offer any of his stock for sale and did not sell any of his stock during 1919.  The stock thus not placed on the market during 1919 amounted *1003  to at least 224,990 shares, 174,990 of which belonged to the petitioner and 50,000 to Henry Oliver.  24.  The fair market value of the stock of the Simms Oil Co. when received by the petitioner was $972,012.94.  Issues Nos. 2 and 5.(Sale of Oil Properties by Partnership.) 25.  The August 19, 1916, the petitioner, being the owner of certain mineral leases and rights, sold and conveyed an undivided one-half interest therein to H. F. Sinclair.  Thereafter, on October 4, 1916, and on February 24, 1917, the petitioner, then being the owner of certain other mineral leases and rights, sold and conveyed*1089  an undivided one-half interest therein to the said H. F. Sinclair.  The properties covered by these leases were situated in the Goose Creek Oil Field in Texas.  26.  On or about August 19, 1916, the petitioner and H. F. Sinclair formed a copartnership, under the firm name of E. F. Simms & Co., for the development of the foregoing and other properties, and entered actively into the business of drilling for and producing oil from said properties.  At the time the partnership began the development of the properties in question no oil was being produced therefrom except by three shallow wells, but when a sale, hereinafter referred to, was made in 1921 there were approximately 43 producing wells with a total average daily capacity of 2,500 barrels.  The shallow wells existing at the beginning of the partnership had been abandoned.  27.  By instruments dated September 9, 1916, and February 2, 1917, by and between the petitioner and one Henry Oliver, the petitioner sold and assigned to Oliver an undivided one-half interest in the one-half interest which he owned in certain of the assets owned by the petitioner and H. F. Sinclair under the firm name of E. F. Simms & Co.  The properties*1090  involved in the agreements between the petitioner and Oliver did not include all of the properties in which the petitioner had an interest with Sinclair under the partnership of E. F. Simms & Co., but in the sale hereinafter referred to the respective interests of the petitioner and Oliver in the proceeds were computed on the basis of three fourths and one fourth; that is, one eighth of the entire proceeds were paid to Oliver.  Oliver did not become a partner in the partnership of E. F. Simms & Co., but he was entitled, under the agreement with the petitioner, to receive from the petitioner a share of the profits from the properties in which he purchased the interest.  *1004  28.  On April 26, 1921, the properties and assets of the partnership of E. F. Simms & Co. were sold to the Humble Oil & Refining Co. The sale was evidenced by two written instruments, identical in form, except that in one H. F. Sinclair was the grantor of an undivided one-half interest in the properties and assets of the partnership and in the other the petitioner was the grantor of his undivided one-half interest in the same properties and assets.  Each instrument contained the following paragraph, except*1091  that in one instance H. F. Sinclair was the grantor and in the other, the petitioner was grantor: The party of the first part hereby bargains, sells and conveys unto the party of the second part all his undivided one-half (1/2) interest in all those certain oil, gas and mineral leases and fee lands located in the Goose Creek Oil District, Harris County, Texas, belonging to E. F. Simms & Company, a copartnership consisting of E. F. Simms and H. F. Sinclair, and also to all oil, gas and mineral leases and fee lands located in Liberty County, Texas, belonging to said E. F. Simms & Company, whether standing in the name of E. F. Simms, or otherwise, as aforesaid.  A list of these properties will be attached hereto and made a part hereof, and regular conveyances will be executed by the said E. F. Simms to the undivided one-half (1/2) interest hereby conveyed.  The total consideration for the transfer, one half of which was set forth in each instrument, except as indicated below, was as follows: (a) $1,200,000 in cash; (b) $1,200,000 in notes, payable over a five-year period, each grantor to receive $120,000 per year; (c) a royalty of 5 cents per barrel on all oil thereafter produced*1092  from the said properties, one half to be paid to each grantor on the 15th day of each month next succeeding that during which the oil was produced; (d) as further consideration for the sale each agreement contained a provision wherein the grantee (Humble Oil & Refining Co.) agreed as follows: * * * to deliver to the credit of the party of the first part, free of all charge to said party of the first part, in the pipe lines of the party of the second part, Four Hundred Thousand (400,000) barrels of oil, provided the undivided one-half (1/2) interest in Goose Creek properties hereby conveyed, less royalty interests, produces that much oil.  This delivery is to be at the rate of Eighty Thousand (80,000) barrels per year, and delivery is to be made on an equal proportionate basis each month.  In the event production for any year does not equal Eighty Thousand (80,000) barrels, the deficiency for that year shall be made up out of the production for the preceding or the succeeding year, if production in those years exceeds Eighty Thousand (80,000) barrels, and it is understood that this contract contemplates and intends that a total of Four Hundred Thousand (400,000) barrels of oil shall*1093  be delivered to the party of the first part, even though not delivered at the rate of eighty thousand (80,000) barrels per year for five (5) years, provided only that one-half (1/2) undivided interest, less royalty interests, produces that amount of oil.  This provision only relates to the properties at Goose Creek, and it is expressly understood that a lien is reserved against the interest hereby conveyed to secure fulfillment of this obligation.  *1005  The agreements included as property to be conveyed or transferred not only the grantors' interest in the leases, wells thereon, drilling rigs and machinery, pipe and pipe lines, and other similar property, but all money on hand and in bank to the credit of the partnership, and all accounts receivable, promissory notes, claims, and choses in action, and the grantee assumed all liabilities and contracts of the partnership, except as to certain limitations or qualifications both as to assets and liabilities not here material.  29.  The agreements referred to above were carried out.  The delivery of oil as provided in the agreement with the petitioner was made at the rate of 6,666.66 barrels per month from April 26, 1921, to*1094  and including December 1922.  On November 8, 1922, the petitioner sold, as of January 1, 1923, the undelivered portion of the contract, that is, the oil to be received, to the Sinclair Oil & Gas Co. for $278,833.60, which amount was included in petitioner's income for 1922.  30.  The partnership of E. F. Simms & Co. kept its books and accounts on the accrual basis.  The petitioner kept his books and rendered his returns on the basis of cash receipts and disbursements.  31.  In determining the deficiency for 1921 the Commissioner computed a profit from the aforementioned sale to the Humble Oil & Refining Co., as follows: Amount Received:Cash$600,000.00Notes600,000.00Value of 400,000 barrels of oil254,163.20Value of $0.05 per barrel over-riding royalty170,633.94Total received$1,624,797.14Costs:Capital invested$369,249.62Undivided profits223,678.50Total592,923.12Adjusted profit$1,031,869.02In determining the profit taxable to the petitioner on account of this transaction, the Commissioner did not recognize an interest therein as belonging to Henry Oliver, that is, one half of the profit from the sale, as*1095  computed by the Commissioner, was considered as taxable to the petitioner.  32.  In determining the deficiency for 1922, the Commissioner computed a profit to the petitioner on account of the sale on November 8, 1922, to the Sinclair Oil & Gas Co. of the undelivered portion of oil under the contract with the Humble Oil & Refining Co. by deducting from the sale price the value which he had placed on the contract at the time of its receipt in 1921 less the deliveries under the contract to the date of sale.  No allowance was made for depletion in respect of the petitioner's interest in either 1921 and 1922.  *1006  By the agreement of April 26, 1921, the following four leases were transferred to Humble Oil & Refining Co.: the Hughes lease, Ashbell Smith lease, Sweet lease, and Schilling lease.  The partnership of E. F. Simms & Co. was allowed depletion deductions based on discovery value in respect to the producing wells on the above leases.  At April 26, 1921, the depletable base or capital sum of the partnership, based on discovery value, remaining to be recovered through depletion deductions in respect of each of the above leases was as follows: Hughes lease$21,787.59Ashbell Smith lease1,740,309.13Sweet lease481,763.33Schilling lease403,377.03Total2,647,237.08*1096  The number of barrels of oil expected to be produced from the Hughes, Smith, Sweet, and Schilling properties after April 26, 1921, upon production of which the petitioner was entitled to receive 5 cents per barrel under the terms of the agreement of April 26, 1921, was 2,335,000 barrels.  The petitioner's cost allocated to equipment on all properties and to all leaseholds and oil reserves, except hughes, Sweet, Smith and Schilling, is $234,641.82.  The undivided profits of petitioner remaining in the partnership at April 26, 1921, were $223,678.50.  Of the $1,200,000 consideration received by the petitioner in 1921 in cash and notes, $615,150 was consideration for the oil and gas rights in the Hughes, Smith, Sweet, and Schilling leases, and the difference, or $584,850, was consideration for equipment on these properties and for other property.  Any additional consideration received for the Hughes, Smith, Sweet, and Schilling leases was for oil and gas rights as distinguished from equipment.  The number of barrels of oil and the price therefor received by petitioner, pursuant to the agreement of April 26, 1921, for the delivery of 400,000 barrels of oil at the rate of 80,000 barrels*1097  per year, were as follows, for the years 1921 and 1922: PeriodBarrelsPriceAmount4-26-21 to 12/31/2154,444.38$1.03$56,222.161- 1-22 to 12/31/2279,999.921.50119,999.88The number of barrels of oil produced on the Hughes, Smith, Sweet, and Schilling leases upon which petitioner was entitled to receive 5 cents per barrel for the years 1921 and 1922, was as follows: PeriodBarrels (1/2 production)Amount4/6/21 to 12/31/21215,840.47$10,792.02Year 1922273,755.0413,687.73*1007 Issue No. 3.(Sulphur Properties.) 33.  In or about 1907, the petitioner became interested in prospecting for oil at Bryan Heights, Texas.  He and his associates drilled several wells, but no oil was found.  However, in drilling these wells evidence was found of the existence of sulphur deposits and the petitioner became interested in the possibilities of the property as a sulphur mine.  At that time the petitioner either owned in fee or through leasehold rights the entire Bryan Heights property, consisting of about 500 acres.  34.  At that time the only sulphur-producing property on the Western Hemisphere was that*1098  of the Union Sulphur Co. in Louisiana and that condition continued to exist until the development of the Bryan Heights property as hereinafter indicated.  In order to carry out the exploration and development work at Bryan Heights, the petitioner secured the services of Ben Andrews, a highly competent mechanical engineer who had had much experience in investigating underground conditions in that section of Texas - particularly in drilling for oil and also in drilling for sulphur for the Union Sulphur Co., with which company he had been identified in its early development.  In addition to the work of Andrews, petitioner was also actively engaged in the pursuit of information in connection with the sulphur enterprise.  In carrying out such purpose, he secured employment at the plant of the Union Sulphur Co., as a common laborer, but was eventually put off the property.  Prior to his discharge, however, he took a large quantity of cores from the wells of the Union Sulphur plant which he compared with the cores from the wells which were being drilled at Bryan Heights.  As a result of some four or five years work by the petitioner, in conjunction with Andrews, the two men were satisfied*1099  that the property at Bryan Heights was extremely valuable as a sulphurbearing property, containing large deposits of sulphur and being advantageously located.  35.  In or about 1910 or 1911 the petitioner, while seeking to dispose of the Bryan Heights property, made contact with a syndicate which became interested as prospective purchasers.  A member of the syndicate, or at least the engineer employed by the syndicate to investigate the properties, was Seely W. Mudd, one of the most distinguished *1008  mining engineers in the world.  Mudd had never examined a sulphur property prior to that time, though he had wise experience in valuing ore reserves where the method followed was not basically unlike that to be followed in estimating the content of a sulphur mine.  Mudd accompanied the petitioner to Bryan Heights, where several months were spent in investigating the properties in question.  In this work he was assisted by Spencer C. Browne, a mining engineer and geologist of high standing, as well as by the petitioner and Ben Andrews.  Browne had likewise had no experience in estimating the content of a sulphur property, though he had had experience similar to that of Mudd in*1100  estimating the content of ore properties other than those containing sulphur.  Since that time Browne has directed the development of all the important sulphur mines which have been brought into production.  36.  As a result of the foregoing investigations three reports were prepared prior to March 1, 1913, as to the sulphur content of the Bryan Heights properties, as follows: a.  Report by Mudd in March, 1911, assisted by Browne, in which the estimated deposit was shown at 7,560,000 long tons.  b.  Report by Andrews in April, 1911, showing an estimated deposit of 17,000,000 short tons.  c.  Report by Mudd in April, 1911, assisted by Browne, replying to the Andrews report and criticizing various features therein.  37.  No trade was made with the prospective purchasers with whom Mudd and Browne were working, but on November 30, 1911, the petitioner sold the properties in question to S. M. Swenson & Sons for a cash consideration of $450,000, a royalty of 75 cents per ton for each ton of sulphur mined from the property, and in addition $1 per ton royalty on the first 200,000 tons mined or taken from the properties.  Swenson & Sons started in immediately to develop the properties, *1101  constructing a plant and securing a small amount of production in 1912.  Later Swenson & Sons was succeeded by the Freeport Sulphur Co., which has continued to operate the Bryan Heights properties.  38.  In or about December 1912, the American Sulphur Royalty Co. was formed, with an authorized capital stock of $10,000 divided into 100 shares of a par value of $100 each.  Upon incorporation the aforementioned contract of the petitioner with S. M. Swenson & Sons was paid in to the corporation for its capital stock and constituted the only asset of the corporation except for moneys paid thereunder.  39.  At the date of the hearing in these proceedings there had been produced approximately 4,200,000 tons of sulphur from the property in question and the reasonable remaining recovery was approximately 600,000 tons.  The production from 1912 to 1922, inclusive, *1009  was as follows, all reference below as well as elsewhere in this report being to long tons, except as otherwise indicated: Tons1912636191310,504191441,8721915136,7511916261,7791917537,2481918420,4841919314,8451920280,736192155,8341922161,44640.  In*1102  1921 the petitioner transferred 36 shares of stock in the American Sulphur Royalty Co. which he held on March 1, 1913, to his wife, Lillie Weir Simms, in satisfaction of a debt then owing her by him in the amount of $850,000.  The fair market value on March 1, 1913, of the stock transferred was $20,000 per share.  Facts as to Miscellaneous Errors Pertaining to Racing Stables and Wagering Losses.41.  During the year 1921 the petitioner was engaged in a construction program at his farm in Kentucky where he raised thoroughbred stock and bred and trained race horses.  The amount expended in such program was in excess of $2,000,000.  Among the amounts expended was $29,566.64 for temporary buildings to house laborers who were carrying on the work and for use as storerooms.  The buildings had a life of more than one year and were not torn down until after 1922.  In addition, the petitioner expended $26,004.23, in connection with the same program, for certain fixtures, radiators, roofing, and heating equipment.  Both of the aforementioned amounts were added by the Commissioner to the capital cost of improvements on the farm.  42.  Petitioner not only maintained a racing stable as*1103  indicated above, but also bet on various races in different states, including Kentucky, Maryland, and New York.  In making such bets in 1921, the petitioner sustained losses in the net amount of $131,730.95, such net amounts representing the excess of losses by the petitioner over his winnings for that year.  The bets were made either by the petitioner personally or through responsible agents or commissioners.  The petitioner was always paid when he won and in turn made payments when he lost.  OPINION.  MARQUETTE: The major issue presented in these proceedings is what profit, if any, the petitioner realized through the transfer of certain oil leases on June 19, 1919, to a corporation for its entire capital stock, and the exchange of the foregoing stock on June 30, 1919, for stock in a second corporations.  Stated briefly, the controversy arises on the basis of the following facts: During 1917, *1010  1918 and the early part of 1919, the petitioner acquired oil leases on approximately 421,000 acres of land at a cost of $972,012.94.  (The petitioner had as an associate, Henry Oliver, who furnished $300,000 of the purchase price, but for the purpose of a discussion of the important*1104  principles involved the Oliver interest will be disregarded.) On June 19, 1919, the Simms Oil Co. (a Texas corporation) was formed, to which the petitioner transferred the oil leases in consideration for the issuance to him of its entire capital stock of a par value of $10,000,000.  Prior to that time negotiations had been in progress between the petitioner and certain New York bankers and capitalists looking to the formation of a corporation for the exploitation and development of the leases, and to that end agreements were entered into on May 29, 1919, and June 10, 1919.  On June 25, 1919, a further agreement was entered into under which the Simms Petroleum Co. (a Delaware corporation) was formed on June 27, 1919, with an authorized capital stock of 500,000 shares (no par value).  Pursuant to the agreement of June 25, 1919, the petitioner on June 30, 1919, transferred the entire capital stock of the Simms Oil Co. to the Simms Petroleum Co. in consideration for the issuance to him of 280,990 shares of its capital stock.  In accordance with the same agreement, the bankers formed a syndicate which agreed to purchase 144,000 shares of the stock of the Simms Petroleum Co. at $25 per share. *1105  The syndicate immediately sold the stock to or through syndicate participants at $31 per share and paid $3,600,000 in cash to the Simms Petroleum Co.  The shares were issued as qualifying shares and the remaining shares, 75,000, were not issued at that time.  Of the 280,990 shares received by the petitioner, 56,000 shares were turned over by him to Harry Bronner, partly in consideration for his services in forming the corporation, thus reducing the number of shares held by him to 224,990.  Of the foregoing shares, 50,000 belonged to Henry Oliver on account of his contribution of $300,000 towards the acquisition of the leases, leaving 174,990 shares in the hands of the petitioner.  In other words, to state the matter very simply, from 1917 to 1919 the petitioner expended $672,012.94 in the acquisition of oil leases and at the conclusion of the transaction or transactions outlined above he had in place of the leases 174,990 shares of stock of the Simms Petroleum Co., and our question is whether the petitioner realized a gain as a result thereof, and, if so, how much.  The petitioner says that the situation presented is properly divisible for tax purposes into two separate and distinct*1106  transactions, namely, first, the transfer of his leases to the Simms Oil Co. in consideration for the issuance to him of its entire capital stock and, second, the exchange of the stock so received for stock of the Simms Petroleum Co.  As to this first transaction, the petitioner says that *1011  no taxable gain was realized because the Simms Oil Co. stock received had no fair market value, and as to the second transaction, he also says that no taxable gain was realized because the exchange was in connection with a reorganization or consolidation of the Simms Oil Co. as contemplated by section 202(b) of the Revenue Act of 1918.  The contention of the Commissioner is that the two transfers are to be viewed as one transaction and that accordingly the taxable gain to the petitioner is the difference between the cost of his interest in the leases and the fair market value of the stock of the Simms Petroleum Co., which he says was not less than $25 per share, thus showing a profit of not less than $3,702,737.06.  Of course, if both of the transactions set out under the petitioner's contentions are to be considered taxable, or even if the first is non-taxable and the second is taxable, *1107  the same result would be reached as if we followed the Commissioner's contention.  In the first place, are we to view what occurred as constituting one or two transactions?  In considering a situation of this nature we start out with the fundamental and well established principles that the question must be decided on the basis of what was done and not the effect of what occurred, and that the design and purpose are not controlling.  It is immaterial that the same result might have been accomplished in some other way; even though the practical effect may be the same in either case, the resulting tax liability must be determined upon the basis of the actualities of the situation. United States v. Phellis,257 U.S. 156">257 U.S. 156; Weiss v. Stearn,265 U.S. 242">265 U.S. 242. The foregoing principles have been consistently followed by the Board.  Anna M. Harkness,1 B.T.A. 127">1 B.T.A. 127; B. F. Saul,4 B.T.A. 639">4 B.T.A. 639; William H. Mullins,14 B.T.A. 426">14 B.T.A. 426; and W. E. Guild,19 B.T.A. 1186">19 B.T.A. 1186. When we view the situation here presented on the basis of the above principles, we can see no answer other than that there were two*1108  distinct steps which must be considered separately for tax purposes.  Because of the earnestness with which the Commissioner urged the single transaction theory, the large record which was prepared on that basis, and the difference which might result, depending on which of the two theories urged is adopted, we have set out at length the facts which were related to the formation of the two corporations.  In our opinion the first transaction was completed when the petitioner exchanged his oil leases for the entire capital stock of the Simms Oil Co.  It is undoubtedly true that prior to that time negotiations had been in progress between the petitioner and Knauth, Nachod & Kuhne and others looking to the consummation of that which was not completed until the Simms Petroleum Co. was formed and the commitments which were contained in the agreement to form the Simms Petroleum Co. were carried out, but *1012  it does not necessarily follow that more than one taxable transaction of a separate and distinct tax nature may not have been completed in carrying out the design and purpose of the parties.  As heretofore stated, design and purpose are not conclusive, nor would it be argued that, *1109  even though several distinct transactions occurred in carrying out some general plan, they should nevertheless necessarily be considered as one inseparable transaction for tax purposes.  What here occurred was that prior to June 19, 1919, the petitioner had acquired leases which he owned on that day and he then exchanged the leases for the entire capital stock of the Simms Oil Co.  Both the leases and the capital stock were property, and the governing statute (section 202(b) of the Revenue Act of 1918) provides that "When property is exchanged for other property, the property received in exchange shall for the purpose of determining gain or loss be treated as the equivalent of cash of the amount of its fair market value, if any," Assuming for the purpose of this part of the discussion that the stock received had a fair market value, what basis is there for saying that a completed transaction did not result from which gain or loss would be computed?  The Commissioner says it should be so considered for the reason that when the petitioner received the stock he took it subject to the rights of Knauth, Nachod & Kuhne and Harry Bronner as set out in the agreements of May 29, 1919, and June 10, 1919. *1110  The agreements referred to set out a plan for organizing and financing a corporation to which the petitioner would transfer his leases or the entire capital stock of a corporation which would own the leases and the bankers would underwrite a part of the corporation's stock and thus furnish a substantial amount of working capital for the corporation.  The agreements, however, were subject to the condition that the bankers should first satisfy themselves as to the character of the property and the desirability of forming a corporation, and the bankers and associates were given a specified time within which to elect to proceed thereunder.  While we can not accept the petitioner's testimony to the effect that the agreements did not place any obligation on him "to enter into an agreement with them (the bankers and associates)," nor the argument of petitioner's counsel that the agreements should be disregarded because the conditions precedent contained therein had not been performed and therefore the binding contract contemplated had not become operative, we do think the agreements should not be given an effect beyond that plainly intended, namely, that the petitioner obligated himself to*1111  carry out its terms within the time specified, provided the other parties evidenced a willingness within that time to go forward with their part of the agreement.  Under such circumstances the bankers and their associates could *1013  have withdrawn or proceeded at their election, whereas the petitioner did not have a similar election, but such a situation would not have the effect of invalidating the agreements or cause them to be without force and effect.  The same condition exists with respect to many options - in fact, it is quite often true that where a person gives an option he is bound to what might be called inaction during a given period, whereas the other party is left to decide within that period what course he will pursue.  The Commissioner does not argue that the conditions named in the agreements had been fulfilled on June 19, 1919, and there is nothing in the record to show that such was the case; what he says is that the agreements of May 29, 1919, and June 10, 1919, were in full force and effect on June 19, 1919, and constituted a valid and subsisting option on that date.  We are of opinion that such was the case and that the effect for tax purposes of the exchange*1112  of the leases for the stock of Simms Oil Co. on June 19, 1919, should be determined by taking into consideration that such a fact did exist.  But does the fact that a valid and subsisting option was in effect on June 19, 1919, under which the petitioner was bound to do certain things provided the other parties elected to proceed under the agreements, mean that a closed and completed transaction for tax purposes did not result when he exchanged his leases for stock? We think not.  Obviously, if the subsequent transactions had never occurred (as well might have been the case), it would not be urged that no gain or loss should be computed merely because when the stock was received the petitioner was under certain conditional obligations as to its disposition.  Federal taxes are determined upon an annual basis and all events which occur within a given year must be considered in arriving at the tax liability for such annual period.  It so happens here that both of the transactions in controversy occurred within the same year, but the result should not be different if one transaction had occurred in one year and the other within the same length of time but in a subsequent year.  *1113 It is urged further that both steps, even though constituting in a sense separate transactions, were part of a general plan and therefore we should regard the substance rather than the form and say that the two transactions were in substance and in fact one inseparable transaction.  That substance rather than form should govern in tax matters is of course a well established principle (Eisner v. Macomber,252 U.S. 189">252 U.S. 189, and United States v. Phellis, supra ), but adherence to that principle does not solve our problem because we still have the difficult task of distinguishing between form and substance.  (Cf. Edward A. Langenbach,2 B.T.A. 777">2 B.T.A. 777). Here, however, we think it clear that in substance as well as in form there were *1014  two separate and distinct transactions, though we think it equally clear that it was carried out pursuant to a general plan wherein the leases owned by the petitioner would be developed and operated and the financing of the venture and the supplying of a high-class board of directors would be taken care of by the bankers.  As we said in *1114 William H. Mullins,14 B.T.A. 426">14 B.T.A. 426, "material and essential facts will not be dismissed or set aside as mere matters of form simply because they are related to and are steps in a comprehensive plan or reorganization or together constitute a method for the attainment of a desired result." See also Regal Shoe Co.,1 B.T.A. 896">1 B.T.A. 896; Edward A. Langenbach, supra;Herman Adaskin,8 B.T.A. 460">8 B.T.A. 460; and J. D. Bigger,19 B.T.A. 797">19 B.T.A. 797. The cases of Southern Pacific Co. v. Lowe,247 U.S. 330">247 U.S. 330, and Gulf Oil Corp. v. Lewellyn,248 U.S. 71">248 U.S. 71, which the Commissioner cites in support of his position, are so dissimilar as to facts and as to the questions decided that they are of little help in solving the problem before us.  Looked at in a substantive manner, we find that the stock which the petitioner received upon the formation of the first corporation was essentially different from that which he received upon the formation of the second corporation.  Not only were the corporations incorporated in different states (Texas and Delaware), with entirely different capitalizations, but also the*1115  stocks themselves were essentially different in so far as the assets back of them were concerned.  The only assets back of the stock of the Simms Oil Co. were the undeveloped oil leases, whereas the Simms Petroleum Co. had not only the entire capital stock of the Simms Oil Co. (which in turn owned the oil leases) but also, through the agreement of June 25, 1919, it in effect came into being with cash (working capital) in the amount of $3,600,000.  In other words, the very substance of the transactions themselves as well as their form reveal two separate and distinct transactions within the contemplation of the Revenue Act of 1918.  As to the first transaction, we are of opinion that it comes within the portion of section 202(b) quoted above and that gain or loss should be computed on the difference between the cost of the leases and the fair market value, if any, on June 19, 1919, of the stock of the Simms Oil Co. received in exchange therefor.  What the fair market value of such stock was on June 19, 1919, or whether it had a then market value, we shall discuss after we have disposed of the second transaction.  The petitioner's position on the second transaction is that no gain*1116  or loss resulted therefrom since what occurred amounted to a "reorganization" within the meaning of that part of section 202(b) which provides, as an exception to that portion of the section which we held controlling as to the first transaction, that: *1015  * * * when in connection with the reorganization, merger, or consolidation of a corporation a person receives in place of stock or securities owned by him new stock or securities of no greater aggregate par or face value, no gain or loss shall be deemed to occur from the exchange, and the new stock or securities received shall be treated as taking the place of the stock, securities, or property exchanged.  No definition of the term "reorganization" occurs in the Revenue Act of 1918, but in the regulations promulgated thereunder (art. 1567, Regulation 45) the following definition is given: * * * The term "reorganization," as used in section 202 of the statute, includes cases of corporate readjustment where stockholders exchange their stock for the stock of a holding corporation, provided the holding corporation and the original corporation, in which it holds stock, are so closely related that the two corporations are*1117  affiliated as defined in section 240(b) of the statute and article 633, and are thus required to file consolidated returns.  * * * No suggestion is made by the Commissioner that the foregoing definition does not represent his consistent practice in situations where applicable, nor does he argue that the foregoing definition is an improper interpretation of the term "reorganization" or that it is here inapplicable if we should view what occurred as two transactions.  What he says is that there was in effect only one transaction, but that if we should hold there were two transactions to be considered it would be immaterial that we had to value the Simms Oil Co. stock rather than that of Simms Petroleum Co., thus seemingly agreeing by inference that what must be considered to have occurred in the second instance under the "two-transaction" theory was a reorganization within the meaning of the Revenue Act of 1918.  Implied approval may be said to have been given to the definition by Congress in enacting section 202(c)(2) of the Revenue Act of 1921, where a somewhat similar definition of the term "reorganization" is given.  Further, the Board, in *1118 George B. Markle, Jr., III,10 B.T.A. 763">10 B.T.A. 763, quoted article 1567 with approval and applied the same in connection with a reorganization there involved.  In view of the foregoing, we are of opinion that the term "reorganization" as used in section 202(b), supra, is to be here applied in accordance with the definition in article 1567 of Regulations 45.  When we come to apply the foregoing definition to the facts involved in the second transaction, we find every element present for compliance therewith.  In other words, there was a corporate readjustment, the arrangement between the bankers and the petitioner for financing the venture, through which the petitioner as sole stockholder of the Simms Oil Co. exchanged his stock for stock of the holding company, Simms Petroleum Co., and the original company, Simms Oil Co., was so closely related to the holding company, represented *1016  by a complete ownership of the stock of the former by the latter, that the two corporations were affiliated within the meaning of section 240(b) of the Revenue Act of 1918 and were thus required to file a consolidated return.  It therefore follows that a reorganization, within the*1119  meaning of the statute, resulted from the exchange and no gain or loss may be computed on account thereof.  With the second transaction eliminated as one giving rise to gain or loss, it remains for us to determine whether gain or loss resulted from the first transaction; that is, we are to determine whether gain or loss arose on account of the exchange by the petitioner on June 19, 1919, of oil leases which cost him and his associate $972,012.94, during 1917, 1918, and 1919, for the entire capital stock less qualifying shares of the Simms Oil Co.  The governing statute, section 202(a), provides in effect that gain or loss under such circumstances would be the difference between the cost of the leases and the fair market value of the stock, if the stock can be said to have had a market value, but if the stock had no fair market value, no gain or loss would arise.  The petitioner's position is that the stock in question had no fair market value on June 19, 1919, or in any event, if a fair market value is to be ascribed thereto, such value was some $300,000 less than the cost of the leases and therefore a deductible loss was sustained to that textent.  Neither in the determination of*1120  the deficiency nor in the presentation of his theory of the case did the Commissioner place a value on the Simms Oil Co. stock per se, but instead used and urged a value of $25 per share for the stock of the Simms Petroleum Co. as determinative of the issue before us.  What he does say, however, is that it should make but little difference which stock we value since the second exchange followed so closely upon the first that the fair market value of the Simms Petroleum Co. stock would be the best evidence of the value of the Simms Oil Co. stock.  In the first place, let us consider the contention of the petitioner that the Simms Oil Co. stock had no fair market value on June 19, 1919, when received by him.  The basis of this contention is that the only assets of the corporation were wildcat or unproven and undeveloped leases of a highly speculative nature, and that the corporation had no earnings, no good will or going-concern value and had not been financed, Further, it was shown that none of the stock was sold or traded in on the market.  While the foregoing considerations, separately or collectively, may be persuasive of the lack of a fair market value, they could hardly be*1121  said to be conclusive.  The value of specific property at a particular time "depends upon the relative intensity of the social desire for it at that time, expressed in the money that it would bring in the market." Ithaca*1017 Trust Co. v. United States,279 U.S. 151">279 U.S. 151. And a desire for an interest in a venture can not be said to be lacking merely because of its speculative nature.  As the court said in Commissioner v. Swenson, 56 Fed.(2d) 544: "Though a venture is as speculative as a lottery, a chance or interest in it may be readily salable for a substantial sum of money.  The law does not forbid the recognition of the proved exchangeable value of an asset because of the speculative nature of it." Admittedly, there was much in the developments surrounding and near the properties in question which might lead to a desire for an interest in the same.  The Ranger oil field had been discovered in 1917 and was attracting attention in 1917, 1918 and 1919, and the Desdemona field, another important oil development, was brought in during 1918 and was active during 1919.  It is true that many of the bright prospects in these fields were not*1122  realized, but it is also true that at June 19, 1919, much remained which might attract an investor in that territory.  Lack of earnings or an established good will or operating capital might make the stock less attractive to an investor, or make the market price less, but, as we said in regard to its speculative nature, it would not mean an entire absence of market value.  Further, we have evidence of active interest in oil stocks at or about that time, such as the sales of Simms Petroleum Co. stock, which convinces us of the existence of a market for the stock regardless of its speculative nature.  The expert testimony offered as to the absence of a market value was based largely upon the foregoing considerations and obviously such testimony can not be stronger than the foundation upon which it rests.  On the whole record, we are of the opinion that the stock in question did have a fair market value on June 19, 1919.  A more difficult question arises when we come to determine the fair market value of the Simms Oil Co. stock.  In the first place, we have the contention of the Commissioner that the best evidence as to the value of that stock is the sales of the Simms Petroleum Co. *1123  stock; in other words, since the entire capital stock of the Simms Oil Co. was exchanged for a part of the stock of Simms Petroleum Co. on June 30, 1919 - only 11 days after the exchange of leases for the Simms Oil Co. stock - a determination of the value of the part of the Simms Petroleumn Co. stock received should fix the value for the Simms Oil Co. stock.  In view of the close proximity in point of time of the two exchanges, we think such a contention might be well taken if both stocks had been fundamentally and basically the same and there had been no unusual circumstances connected with the sales of the Simms Petroleum Co. stock, but such was not the case.  The Simms Oil Co. was a Texas corporation, with the undeveloped leases as its only assets, whereas the Simms Petroleum Co.  *1018  was a Delaware corporation which owned not only the entire capital stock of the Simms Oil Co., but also had been financed through the underwriting agreement with Knauth, Nachod & Kuhne by which cash in the amount of $3,600,000 was paid into its treasury.  In contrast to the relatively unknown and what might be termed "dummy" directors of the Simms Oil Co., we find the Simms Petroleum Co. manned*1124  by a board of directors of the highest class, representing some of the best known business men in the country.  What, therefore, was sold on the curb market at the prices indicated in our findings was not stock which had back of it merely "wildcat" leases, but it was stock which not only had the leases back of it but also cash to the extent of four times the cost of the leases.  Further, the latter stock had been made attractive to the investing public through the confidence which would be created by highly successful business men as its directors.  The picture painted in the prospectus of Knauth, Nachod & Kuhne was for the sale of Simms Petroleum Co. stock and it set forth not only that it had leases but also that it had ample cash for operating and development purposes and was in every way prepared to carry forward the venture.  Obviously, the price at which the stock would sell might be vastly different from that of the other and what a willing buyer would pay to a willing seller would vary in a corresponding manner.  Particularly would such be true in this instance where so much concerned the participation by the bankers with the promotion of the Simms Petroleum Co. and the sale*1125  of its stock, and where there is every evidence of a market bolstered at their instigation.  Further, when we come to examine the agreements between the bankers and the petitioner, we find that the latter agreed that he would not sell his stock during a certain period while the stock was being sold by the syndicate.  With such assurance on the part of the petitioner, the bankers obligated themselves to pay and did pay $25 per share to the Simms Petroleum Co. for approximately one third (144,000 shares) of that stock, but even aside from the restriction as to sale, the purchase was not as prospective permanent stockholders or even as investors, but rather as those who would effect an immediate sale or resale.  Further, the cash paid in by the bankers was made available as working capital and the new corporation had a board of directors of prominent business men and capitalists who were calculated to attract prospective investors.  The corporation bore the name of the petitioner and the emphasis in the prospectus included extended reference to the direction of the corporation by the petitioner and his experience and knowledge of oil properties.  Upon the termination of the sales by*1126  the syndicate under the underwriting agreement, the petitioner was released from *1019  the restrictions as to the sale of his stock in competition with the 144,000 shares sold by the bankers, and it is argued that sales thereafter would indicate market value, but again we find pooling arrangements operating to which the petitioner was a party.  The record is not clear as to how extensive these latter operations were, but it is clear that the petitioner and the bankers were dealing in the stocks for several months after June 30, 1919.  It is said, and one witness testified, that the purpose of the pools was to provide an orderly market, but whatever may have been the purpose it is conceded on all sides that the dealings were in what might be termed the "free" stock, that is, the 144,000 shares which were sold by the bankers and possibly the 56,000 which were delivered to Bronner.  None of the 224,990 shares which were delivered to the petitioner for himself and his associate were sold during 1919, nor do we understand any of such stock was offered for sale.  Some of the reasons for the failure to sell had their basis in the legal inhibitions referred to above and others were*1127  of a moral nature because of the petitioner's connection with the enterprise.  But whatever the reasons, the fact remains that none of the stock which we are asked to value as a basis for a valuation of the Simms Oil Co. stock was sold and we are convinced that if it had been placed upon the market an entirely different market value would have resulted.  What the net effect on the market would have been is problematical and a mere guess at best, but what we would emphasize is that there was not only a restricted, but apparently also a manipulated, market.  It is true that many of the sales - perhaps most of them - were bona fide, but they were entirely of the "free" stock and in a market which we are convinced was bolstered and influenced by the petitioner and the bankers or other associates.  That a market was created during their period of operations and existed after their operations ceased is a long way from saying that a market existed in June 1919, when the transactions with which we are concerned took place, wherein the petitioner could have disposed of his stock at the price prevailing on the curb exchange.  What such a market might be evidence of if all of the stock of the*1128  Simms Petroleum Co. had been the source of the sales, or what it would show as to the stock sold, is not our question; what we are asked to say is that the part which was not sold has a fair market value which is determinable from the dealings in that which was sold.  The old axiom that "things equal to the same thing are equal to each other" could hardly be said to be applicable when we consider that that which was not sold was kept from the market for the very evident purpose of permitting the sale of the other stock at a better price.  We are here seeking to determine not alone *1020  "market value" but more particularly "fair market value" as that term is used in the statute.  The necessity for considering the circumstances under which sales are made when sales are used as evidence of such value is well stated by the court in Walter v. Duffy,287 Fed. 41: Now, what is the market price?  What is the fair market price of the statute? We say "fair," since every word used by Congress must be given due effect in the construction of this widely applicable statute, for obviously, while a stock might be bought and sold - and so marketed - and might thus be*1129  said to evidence some market price, yet it is obvious that Congress by the addition of the words "fair market price," certainly meant that not only must the market price be ascertained by sales, but that sales so made, the circumstances under which they were made, the subject-matter of the sales, all the attendant circumstances, were to be considered to determine whether such sales served to evidence not alone a market sale, but the fair price which Congress said should be the statutory start or base from which subsequent "gain derived" should be determined.  As to sales in a restricted market, see Wallis Tractor Co.,3 B.T.A. 981">3 B.T.A. 981, wherein we refused to accept such sales as evidence of the fair market value of the restricted stock.  To a similar effect see also Heiner v. Crosby, 24 Fed.(2d) 191. While in the Wallis Tractor Co. case the restrictions extended much further than in the case at bar, much that was there said is here applicable - at least to the extent that the sales of the "free" stock are not necessarily controlling as to the stock of the petitioner which was not sold.  Much more might be said of our reasons for rejecting the*1130  sales of the Simms Petroleum Co. stock as conclusively establishing the fair market value of the Simms Oil Co. stock on June 19, 1919, but we think the foregoing sufficient.  In short, the specific property which we are valuing is the stock of the Simms Oil Co. on June 19, 1919, and we do not think a fair market value for such stock is determinable by attempting to translate the sales of "free" stock of the Simms Petroleum Co. under the conditions under which it was sold into a fair market value of the other stock of the Simms Petroleum Co. which was neither sold nor offered for sale, and, in fact, at or about the basic date in question, could not be offered for sale.  The other evidence in the record as to the value of the stock has to do with the value of the leases for which the stock was issued, and much of our voluminous record is directed to this point in the form of evidence by both parties.  The contention of the petitioner is that if a fair market value is to be said to have existed for the Simms Oil Co. stock on June 19, 1919, the best evidence of such value is the fair market value of the leases which constituted the only assets of the corporation and which, he says, had*1131  a value of some $300,000 less than their cost to him.  On the other hand, the *1021  Commissioner, while insisting that the best evidence of such value is represented by the sales of Simms Petroleum Co. stock, as heretofore referred to, says that the value of the leases more than confirms a value for the stock as determined by using a fair market value for the Simms Petroleum Co. stock of $25 or more per share.  In other words, the petitioner's position is that the maximum value attaching to the leases on the basic date was some $672,000, whereas the Commissioner would fix a value of from $6,000,000 to $10,000,000.  Much of the large record on this point was in the form of expert testimony, though a substantial amount of it consists of documentary evidence and oral testimony as to sales and leases.  A detailed discussion or an attempted reconciliation of all the oral testimony and documentary evidence offered would unduly extend this opinion and would serve no useful purpose.  In general, it might be said that we have, first, the opinions of various officers and employees of the major oil companies who were actively interested from 1917 to 1919 in the Ranger and Desdemona areas*1132  and the territory where the petitioner's acreage was located.  They testified to acquisitions by their companies in those areas, both for direct development and for protection purposes.  These companies kept a large force in the field, including mining engineers, geologists, scouts, and others, who were constantly in touch with developments as they occurred, both favorable and unfavorable.  They were kept advised as to the wells which were being drilled and the results after their completion.  Instead of the fields extending for any great distance or showing any favorable evidence of a recurrence to the south or southwest where the petitioner's acreage was located, it was found that the fields were confined to relatively narrow limits.  The major companies and others had acreage in the territory where the petitioner's leases were located and some 45 or 50 wells were drilled thereon prior to June 19, 1919, but all were unsuccessful - dry holes.  These witnesses, as well as those offered by the Commissioner, seem agreed that these wells were not of themselves sufficient to condemn entirely the area where petitioner's acreage was located, but that they were unfavorable factors which must*1133  be taken into consideration in valuing this property.  Further, it was shown from a study of the geological structure, as evidenced by the drilling, that a sand of sufficient thickness and lateral extent to serve as a reservoir for the oil was not being found in that area.  We do not think the evidence establishes that the disappointing character of these producing areas was fully known by June 19, 1919, but we do think there was sufficient evidence then in existence to have a depressing influence on the value of oil leases in that territory.  The interest in the counties where petitioner's acreage was *1022  located was brought about almost entirely by the discovery of the Ranger and Desdemona fields, and when those fields were proving disappointing and when the drilling which had been carried out in the area where petitioner's acreage was located was not productive, the effect on the market value of petitioner's acreage becomes apparent.  Various well qualified witnesses who were familiar with the conditions existing on June 19, 1919, as set out above - most of them leaders in the oil industry in that area at that time and well qualified from actual dealing in, and general*1134  knowledge of, the value of oil leases - gave opinions as to the fair market value of the leases, taking the acreage as a whole.  These opinions varied from 50 cents to $2 per acre.  On the other hand, we have various witnesses who were presented on behalf of the Commissioner, though little of their evidence was in the form of opinion testimony as to the value of the acreage as a whole, most of it being directed at individual sales of small acreage for the purpose of showing the value of adjacent or nearby acreage of the petitioner.  The sales varied from $1 to $6,000 per acre, depending on the location of the property and the peculiar circumstances surrounding each sale.  Many of these afford little aid in the solution of our problem, because of their location, size of the acreage involved, and conditions under which made.  As heretofore stated, most of the purchases which were being made by the major oil companies were in the form of protection acreage; that is, small purchases which were made not because of the proved character of the territory, but because of the fear that an owner in that locality might strike oil, and it was desired to share in whatever was developed.  And again*1135  a lease might be taken which carried with it an obligation to drill a well.  The cost of drilling a well at that time to the depth desired was from $30,000 to $40,000, and in order to raise the money to drill the well the lessor would sell small leases from his large holding.  Further, the prices in close proximity to a proven field (such as Ranger and Desdemona) would have little or no weight in determining the value of unproved leases many miles away.  None of petitioner's acreage was in and only a small part was near proved territory.  Another class of purchases was represented in the promotion of small corporations, some of which were of a fraudulent nature.  In other words, the sales were of relatively small acreage rather than of a spread of acreage comparable to that which we are considering.  Of course, such sales are evidence of leasing activity and of value of similar property when sales are made under similar conditions, but whether we view them as evidence of leasing activity or evidence of value we must consider all factors surrounding such sales, including locations and the conditions which prompted the sales.  *1023  Some emphasis is placed by the Commissioner*1136  upon a report of L. W. White, a well known geologist, who prepared a report on the properties at the time it was proposed to carry out the transactions here in question.  White had died prior to the hearing in these proceedings and the report was not submitted in evidence.  What we have is a prospectus which was sent out by Knauth, Nachod & Kuhne in connection with the sale of Simms Petroleum Co. stock, and in this prospectus is an alleged quotation from the White report.  The prospectus was merely admitted as proof that such a prospectus was sent out by the bankers, and not as proof that the quotation was properly from White's report.  Opinion evidence appearing in the record under such circumstances can hardly be said to be very helpful in deciding the question before us.  At best, the portion of the report referred to does not attempt to fix a fair market value of the leases, but "[suggests] an estimate of twenty to twenty five million dollars as representing its value and potential possibilities." Such a generalization might be sufficient in a stock selling campaign, but it affords little aid to us when we are seeking to determine "fair market value" within the meaning of the*1137  statute.  Further, the Commissioner urges upon us the par value of stock of the Simms Oil Co. ($10,000,000) which was issued for the leases as well as the affidavit filed by the incorporators fixing a cash value for the leases of $10,000,000.  We think it well established that such evidence is not proof of the fair market value of property.  William Ziegler, Jr.,1 B.T.A. 186">1 B.T.A. 186; Stephen Ransom, Inc.,9 B.T.A. 120">9 B.T.A. 120; and Cook v. United States, 30 Fed.(2d) 917. Suffice it to say we have given the most careful consideration to the mass of evidence introduced, having in mind the possibility of error which always exists in opinion evidence given long after a basic date, the infirmities existing in the evidence offered as to sales, and all other factors both favorable and unfavorable, and we have reached the conclusion that the fair market value of the leases on June 19, 1919, was not more than their cost to the petitioner in 1917, 1918, and 1919.  What we are asked to value is a vast area of some 420,000 acres of unproved oil territory, scattered over 19 large counties of Texas.  The purchases were made as a result of the excitement which*1138  was aroused when the Ranger and Desdemona fields were brought in; in other words, the petitioner did not make his acquisitions on the basis of scientific geological information or of proved territory, but apparently largely on the theory that surface indications would justify the gamble that a similar producing area might be found in the territory where the leases were acquired.  In spite of the unsuccessful drilling which had occurred on lands adjacent to petitioner's acreage, a different *1024  result might be justified if the Ranger and Desdemona fields had been completely developed and proved successful at June 19, 1919.  While those fields, particularly Desdemona, were being actively drilled at that date and were producing substantial quantities of oil, there was reason to believe that they would not be profitable because of the short life of the wells.  Small purchases might well have been made at high prices without thorough investigation, but we are here talking in terms of a large acreage and we are asked to say that such acreage had a value which could then be realized upon for several million dollars.  A fair market value for such property contemplates a willing seller*1139  with the property available for sale (the petitioner) and a buyer who was able and willing to acquire at a price measured in terms of money or money's worth.  When viewed in the foregoing manner, we are of the opinion that a fair market value for the leases here in question may fairly be fixed at their cost to the petitioner.  Our ultimate question, however, as we have heretofore indicated, is not the value of the leases but rather the stock which was issued for the leases, and evidence of the value of the leases was received only for the purpose of establishing the fair market value of the stock.  We have also discussed the evidence offered as to the sales of Simms Petroleum Co. stock which was received by the petitioner for his Simms Oil Co. stock shortly after June 19, 1919.  After a careful consideration of all evidence offered, we are of opinion that the record supports the conclusion that the stock of Simms Oil Co. had a fair market value when received by the petitioner on June 19, 1919, and that such value is reasonably determinable at the cost of the leases to the petitioner, and his associate, namely, $972,012.94.  It accordingly follows that the petitioner neither realized*1140  a gain nor sustained a loss on account of the exchange.  Issue No. 2.The second issue involves various questions which arise on account of a sale of the assets of E. F. Simms & Co., a partnership, to the Humble Oil & Refining Co.  The partnership was formed in 1916 between H. F. Sinclair and the petitioner, each of whom owned an undivided one-half interest in certain oil properties, and after it had been operating for some five years the sale was accomplished through the execution of separate instruments by the two partners.  The instruments were identical in form, except as to the use of the name of Sinclair as grantor in one case and that of the petitioner in the other, and both were executed on the same day.  Likewise, each referred to the sale of an undivided one-half interest in the assets "belonging to E. F. Simms & Company, a co-partnership consisting *1025  of E. F. Simms & H. F. Sinclair." The sale included not only oil leases and fee lands, but also cash, accounts receivable, and similar personal property.  The purchaser assumed the liabilities and contracts of the partnership, except as to limitations not here material.  The argument is here made by the petitioner*1141  that this was not a partnership sale in which we would compute partnership profits, but rather two individual sales in which we compute the profits as if there had been no partnership.  We are unable to agree with this contention.  An allegation in the petition, which is admitted in the answer, is, in effect, that there was a partnership sale and the Commissioner in his determination seems to have proceeded on that basis.  It is true that we have two instruments in which the separate consideration flowing to each is set out, but we regard these as merely instrumentalities for the sale by the partnership through the medium of its partners.  There had been no dissolution, as far as the record shows, of the partnership and the assets sold were referred to as belonging to the partnership.  Under the laws of Texas a partnership is not a legal entity or legal person separate and distinct from its members (Frank v. Tatum,87 Tex. 204">87 Tex. 204; 25 S.W. 409">25 S.W. 409, and Williams Land Co. v. Crull,125 S.W. 339">125 S.W. 339) and title to real estate belonging to a partnership is consequently vested in the partners.  We know nothing of the negotiations leading up to the*1142  sale, that is, the manner in which the Humble Oil & Refining Co. negotiated for the property - whether jointly with the two partners or in some other manner - but from the identity in character and dates of the contracts of sale as well as the laws of Texas with respect to partnerships, we are of opinion that this transaction must be looked upon as a partnership sale and the profit resulting therefrom computed on that basis.  The foregoing question becomes material only because the partnership kept its books on the accrual basis whereas the petitioner was on the receipts and disbursements basis, but as a result of the view which we take of the next question it becomes largely, if not entirely, immaterial, whether we view the sale as that of the partnership or of two separate sales by the partners.  The question to which we refer arises from the following circumstances: The consideration for the sale consisted of cash, $1,200,000, notes, $1,200,000, oil in the amount of 800,000 barrels to be delivered in a certain quantity per month, if the properties produced that much oil, and a 5-cent overriding royalty on all oil produced.  One half of the consideration was to be paid to each*1143  partner.  There is no disagreement as to the first two items, nor as to the cost to the petitioner, and as we understand the situation the petitioner has accounted for profit as the difference between cost to him of his share in the partnership and his share of the cash and notes received.  What the Commissioner did was to fix *1026  as the total consideration received the cash and notes received plus a present worth value of the royalties to be paid and the oil to be delivered.  That is, the Commissioner rpoceeded on the theory and here contends that the rights to receive royalty payments and have oil delivered in the future represented property of a definite value then ascertainable and that, since the partnership was on the accrual basis, it was proper to include the value of such rights in the selling price and include the petitioner's proportionate part of the profit shown thereby as taxable to him, whether distributed or not.  The petitioner of course takes the opposite view, namely, that both of these rights were so contingent in character that they could not be said to represent either property then actually received, or as amounts then accrued which should be included*1144  in determining the profit taxable to the partners in 1921.  On the whole, we are of the opinion that the situation presented is governed by Burnet v. Logan,283 U.S. 404">283 U.S. 404, and that accordingly the petitioner's contention should be sustained.  In the aforementioned case the taxpayer sold certain stock in consideration of a cash payment and the right to receive a royalty of 60 cents per ton on certain iron ore which might thereafter be produced from a certain mine.  The Court, in holding that a return of capital theory should be applied rather than a closed transaction theory wherein gain or loss would be computed on the basis of the cash received plus a then present value of the royalties to be received, said: The 1916 transaction was a sale of stock - not an exchange of property.  We are not dealing with royalties or deductions from gross income because of depletion of mining property.  Nor does the situation demand that an effort be made to place according to the best available data some approximate value upon the contract for future payments.  This probably was necessary in order to assess the mother's estate.  As annual payments on account of extracted ore*1145  come in, they can be readily apportioned first as return of capital and later as profit.  The liability for income tax ultimately can be fairly determined without resort to mere estimates, assumptions, and speculation.  When the profit, if any, is actually realized, the taxpayer will be required to respond.  The consideration for the sale was $2,200,000 in cash and the promise of future money payments wholly contingent upon facts and circumstances not possible to foretell with anything like fair certainty. The promise was in no proper sense equivalent to cash.  It had no ascertainable fair market value.  The transaction was not a closed one.  Respondent might never recoup her capital investment from payments only conditionally promised.  Prior to 1921, all receipts from the sale of her shares amounted to less than their value on March 1, 1913.  She properly demanded the return of her capital investment before assessment of any taxable profit based on conjecture.  [Italics supplied.] And, further, it was said that "a promise to pay indeterminate sums of money is not necessarily taxable income." It is urged by the Commissioner that the foregoing case may be distinguished from*1146  the case at bar on the ground that in the former *1027  case the taxpayer was on the receipts and disbursements basis, whereas we are here determining partnership income on the accrual basis, which is taxable to the petitioner whether distributed to him or not.  We do not so understand the Logan case, but rather that the court refused to consider the royalties as a part of the consideration, until actually received, because of their contingent character.  An item accrues when all events have occurred necessary to fix the amount to be paid and determine the liability of the party to pay it.  United States v. Anderson,269 U.S. 422">269 U.S. 422. One very essential element in the accrual of the royalties and in an accrual on account of the delivery of oil was the production of oil, and the occurrence of this event or these recurring events was even more uncertain than the production of iron ore in the Logan case, since, as contrasted with the fixed nature of iron ore, oil is fugitive, elusive, and migratory in character.  A "gusher" of today may be a mere "pumper" or even a dry hole tomorrow.  In reaching this conclusion we are not overlooking the fact that the undelivered*1147  portion of the contract for the delivery of oil was sold by the petitioner in 1922 for a substantial amount, but until that occurred the amount which he would receive was uncertain and contingent in character.  Nor do we regard it as material that in the Logan case the entire capital cost had not been returned either by cash payments made at the date of the sale or through the payment of that amount plus the royalties paid from the date of the sale through the years involved in the court proceedings, whereas in the instant proceedings the capital cost and more were returned at the date of the sale.  In either event, we regard the principle the same, namely, all amounts in excess of the capital cost would be taxable when received or reduced to a certainty.  It follows that the petitioner"s contention on this question should be sustained.  In the next place, it is contended by the petitioner that the Commissioner erroneously refused to reduce the one half of the consideration referred to in the sales agreements as payable to the petitioner by the part thereof belonging to and payable to Henry Oliver.  What occurred was that after the petitioner and Sinclair had formed the partnership*1148  (E. F. Simms & Co.) Oliver acquired from the petitioner an undivided one-half interest in petitioner's share of certain of the assets of the partnership.  The exact interest which Oliver acquired does not definitely appear, though the parties seem agreed, and the distribution of the proceeds was made on the basis, that Oliver was entitled to one fourth of the proceeds which would otherwise have gone to the petitioner.  Oliver was not a partner in the partnership of E. F. Simms & Co., but occupied a relationship to the petitioner under which his share of the profits from the partnership *1028  would be paid to him by the petitioner, and this arrangement was carried out upon the sale of the partnership assets, that is, one fourth of petitioner's one half of the proceeds went to Oliver.  The contention of the Commissioner is that since Oliver was not a member of the partnership one half of the profits from the sale must first be taxed to the petitioner without any reduction on account of the Oliver interest, citing E. W. Battleson,22 B.T.A. 455">22 B.T.A. 455; affd., *1149 62 Fed.(2d) 125. We are of opinion that the fact that Oliver was not a partner is not controlling as to the person to whom the profit should be taxed.  Oliver's interest was not merely in the income, but also in the corpus which produced the income, and in this latter respect the case at bar is to be distinguished from that line of cases, typified by Ormsby McKnight Mitchel,1 B.T.A. 143">1 B.T.A. 143; Charles P. Leininger,19 B.T.A. 621">19 B.T.A. 621; affd., Burnet v. Leininger,285 U.S. 136">285 U.S. 136; and Mitchel v. Bowers, 15 Fed.(2d) 287, wherein there was an assignment of income without the assignee becoming interested as owner in any part of the corpus.  Oliver reported a profit on the transaction based on the difference between the amount invested by him in the venture and the share of the proceeds from the sale allocated to him.  We are not concerned with the profit reported by Oliver nor with whether the petitioner made a profit when he sold an interest in his interest to Oliver, but we are concerned with the taxation of the profits on account of the sale in 1921 of the entire partnership assets and as to these profits we are*1150  unwilling to say that one half should be taxed to the petitioner when prior thereto he had sold a part of his interest in such assets to another person and such other person received his share of the proceeds upon which he paid a tax.  It accordingly follows that the petitioner's contention on this point is sustained.  Issue No. 5.The proceeding was reopened to permit the petitioner to amend its petition by the assignment of additional errors by reason of the decision of the Supreme Court in Palmer v. Bender,287 U.S. 551">287 U.S. 551. This issue is whether, in computing gain on the transfer by petitioner of certain producing oil leases to the Humble Co., he is entitled to deductions for depletion based on discovery value, to be taken against the gross consideration received on such sale.  The facts in respect of this issue were stipulated, and we have for decision the proper application of the statute (sec. 214, Revenue Act of 1921) in the light of recent court decision.  Under the decision in Palmer v. Bender, supra, we are of opinion that the petitioner is entitled to depletion deductions based upon discovery value in respect of the 5 cents*1151  per barrel overriding royalty, *1029  and as to the oil delivered in 1921 and 1922 under the right reserved in the contract to receive oil; and that this right to receive oil is properly allocable as consideration for the transfer of the leases, as distinguished from equipment.  The petitioner also claims that the consideration received in 1922 from the sale of his right to receive further oil payments should be allocated as consideration for the transfer of the producing leases and subject to depletion.  The stipulated facts show that in 1921 petitioner sold the leases and as part consideration therefor was to receive 400,000 barrels of oil over a period of time; that on November 8, 1922, he sold the right to receive further oil as of January 1, 1923, for a cash consideration which amounted to $278,833.36, and said amount has been included as income in 1922.  The question is, Should depletion be allowed as against this amount, based on discovery values? We are of opinion that the petitioner is not within the rationale of the decisions upon which he relies in respect of this claim.  He cites, in addition to *1152 Palmer v. Bender, supra,Alexander v. Continental Petroleum Co., 63 Fed.(2d) 927, and Mrs. A. H. Murchison,28 B.T.A. 257">28 B.T.A. 257, to support his position.  These cases are distinguishable from the facts in the present case, in that in all of those cases an economic interest was retained in respect of the oil payments, while here, the petitioner sold his right to receive oil as of January 1, 1923, and thereafter had no economic interest in the oil in respect of that right.  He is allowed depletion herein in 1921 and through 1922, at which time his right to receive oil ceased, and we believe the right to the deduction is not permissible under the statute or the decisions relied upon.  The interest of Oliver in these properties has been upheld, supra, and proper adjustments in the depletion deductions should be made in respect of his interest under the Rule 50 computation.  An issue was made by petitioner of his right to the benefit of the surtax limitation provided in section 211(b) of the Revenue Act of 1918 on the sale by E. F. Simms & Co. to the Humble Co. of the properties enumerated in the findings.  This issue has now been*1153  abandoned.  Issue No. 3.The third major issue presented arises on account of a transaction by which in 1921 the petitioner transferred 36 shares of stock of the American Sulphur Royalty Co. to his wife in satisfaction of an indebtedness of $850,000 then owning by him to her.  The shares of stock were owned by the petitioner on March 1, 1913, and apparently the cost to the petitioner was less than the March 1, 1913, value - at least the parties have dealt with the stock on that basis and the record *1030  justifies our proceeding in the same manner.  Likewise, there is no question raised as to the bona fides of the transaction; the debt has been treated throughout the proceedings as valid and subsisting and the transaction as if carried out at arm's length.  What the Commissioner did was to determine a profit on the transaction on the theory of a sale in 1921 of the 36 shares of stock for the amount of the indebtedness, measuring such profit by the difference between a March 1, 1913, value of the stock (less certain adjustments) and the amount of the indebtedness.  The first contention advanced by the petitioner is that income within the meaning of the Sixteenth Amendment*1154  could not arise from such a transaction, basing such contention on the theory that "the mere improvement in financial condition as shown by a taxpayer's balance sheet after the elimination of liabilities therefrom does not constitute taxable income." We are of opinion that such a position is not tenable.  Certainly, if the petitioner had sold the stock for $850,000 and had used such amount in satisfaction of the indebtedness, a taxable profit would have arisen on account of the sale, leaving out of consideration any question as to the cost and March 1, 1913, value being less than the selling price.  We do not think the situation is changed because the stock is used directly with the creditor in satisfying the indebtedness; the position of the petitioner after the transactions were completed would have been the same in each instance.  The petitioner's contention on this point is accordingly denied.  Cf. United States v. Kirby Lumber Co.,284 U.S. 1">284 U.S. 1, and Commissioner v. Woods Machine Co., 57 Fed.(2d) 635; certiorari denied, *1155 287 U.S. 613">287 U.S. 613. The principal controversy on this issue arises on account of differences between the parties as to the March 1, 1913, value of the stock of the American Suphur Royalty Co. which was used in satisfaction of the indebtedness in question.  No sales were made of the stock at or about the basic date in 1921 nor apparently even at any time prior to that date.  Resort was therefore had to expert testimony and documentary evidence, both as to the value of the assets back of the stock and as to the value of the stock itself, which is our ultimate concern.  The contention of the petitioner on the basis of the evidence presented is that the stock had a value on March 1, 1913, of $30,000 per share, whereas the Commissioner contends that such value was $10,000 per share or at least not more than a maximum of $15,000 per share.  The determination of the Commissioner is based upon a March 1, 1913, value of $19,631.35, less an amount referred to as "March 1, 1913, value returned to stockholders to date of sale" (apparently dividends), which gave an amount of $8,977.11 per share to be deducted from the *1031  selling price.  No contention is made that it was proper*1156  to make the reduction as made by the Commissioner; in other words, the parties are agreed that if the transaction is held to be taxable (as we have heretofore held herein) the profit (if any) will be reflected by the difference between the March, 1, 1913, value so found and the selling price, that is, the amount of the debt liquidated.  Since there had been no sales of the American Sulphur Royalty stock and since the only asset of that company was the contract of the petitioner with Swenson & Sons (exclusive of undistributed cash paid thereunder), the principal part of the evidence was directed at a valuation of the contract, which, in turn, depended on the recoverable sulphur at Bryan Heights on which royalties would be paid under the contract.  Three reports were prepared shortly prior to March 1, 1913, as to the sulphur content, and in view of the importance attached thereto by the parties we have referred to them at some length in our findings.  The first was prepared for a group of prospective purchasers by Seely W. Mudd, acknowledged by both sides to be one of the eminent mining engineers in the country.  His report showed a gross tonnage of approximately 7,500,000 long tons. *1157  Strong objection is made by the petitioner to his report on the ground of his unfamiliarity with a sulphur property, but in view of the evidence offered as to the similarity in methods generally pursued in estimating the content of a sulphur mine as compared with those used in estimating ore reserves of a different character where Mudd had had much experience, this objection loses much of its weight.  Particularly, it would seem that the objection would more properly apply to the amount of the content which was recoverable rather than to the gross content itself.  The recovery suggested in his report was approximately 75 percent of the gross tonnage.  Following the submission of the Mudd report, a report was submitted by Ben Andrews, a mechanical engineer of acknowledged ability, who had several years of experience in exploration work on the particular properties involved.  From a practical standpoint he was unquestionably well qualified to report on the properties, though he was not a mining engineer and the record does not show that he had ever had any experience in estimating the content of a mine, whether sulphur or some other mineral.  His experience seems to have been largely*1158  in drilling oil wells and in sulphur work on petitioner's property and that of the Union Sulphur Co.  By this we do not mean that his report is to be disregarded; on the contrary, we are satisfied that it contains much of merit and is based upon a first-hand knowledge of the properties, but we are unwilling to accept its ultimate conclusion as a basis for the reasonably expected *1032  recoverable tonnage.  He estimated a gross tonnage of 17,000,000 short tons.  The Andrews report was followed by a second report by Mudd which was directed largely at the Andrews report, pointing out what Mudd considered inaccuracies or errors on the part of Andrews, such as the use of a short ton for measuring sulphur instead of the long ton which is the basis upon which royalties were paid under the contract, failure to give proper consideration to the porosity of the formation, consideration of deposits not commercially workable, and other similar criticisms.  Some slight changes were suggested from his (Mudd's) previous report, though it would not have resulted in a very material increase from his previous report.  In addition to the foregoing, a report was made by Browne (Mudd's assistant*1159  on the earlier reports) in 1920 in which he estimated a recoverable content as of March 1, 1913, of approximately 4,000,000 tons.  We have further the testimony of various witnesses for the petitioner and the Commissioner who testified as to both the estimated gross tonnage on March 1, 1913, and the percentage of recovery reasonably to be expected at that time, such testimony ranging from approximately 50 to 85 percent.  The testimony differed little as to the probable time which would be required to recover the sulphur in question, namely, from 17 to 20 years.  The actual sulphur produced by the property to the date of the hearing in February 1931, was 4,200,000 tons and we are satisfied from the evidence that the reasonably expected remaining recovery at that time was approximately 600,000 tons.  From all the evidence submitted, we are of opinion that the amount which has been recovered plus the amount now expected to be recovered is not substantially less than what could reasonably have been expected on March 1, 1913 - at least, we do not think the recovery then reasonably to have been expected on the basis of the methods being pursued would have exceeded 6,000,000 tons, though, *1160  of course, there was the additional speculative element which might be said to have existed because of the possibility that improved methods might result in a greater percentage of recovery of the estimated gross tonnage.  In addition to a present worth of the expected royalties which would form a basis of valuing the only asset back of the stock in question, the petitioner urges that the stock had a large value from a monopolistic standpoint - that is, he urges that, since the Bryan Heights properties and the Union Sulphur properties in Louisiana constituted the only known sulphur properties in this country, the opening of the mine at Bryan Heights threatened to destroy the monopoly then controlled by the Union Sulphur, and that in any trade involving the acquisition or disposition of Bryan Heights it *1033  would be necessary to acquire the stock here in question, thus giving to the stock a large value over and above the value of its royalty rights.  We are unable to see much merit in this contention.  Of course, anyone acquiiring the Bryan Heights properties would have to pay the royalties set out in the contract entered into between the petitioner and Swenson & Sons, but*1161  we fail to see anything in the contract which would prevent the sale of the Bryan Heights properties by Swenson & Sons (or their successor) without the approval of the American Sulphur Royalty Co.  In fact, Swenson & Sons was succeeded by the Freeport Sulphur Co. and it is not suggested that the Royalty Co. or its stockholders were parties to such action.  The obligation to mine sulphur under the royalty contract of course existed, but, in view of the evidence offered as to the rapidly increasing demand for sulphur, we do not think it would seriously impair the value of the properties from a monopolistic standpoint or otherwise to be required to mine sulphur as required by the royalty contract, that is, proceed with due diligence in the development and operation of the properties.  In addition, we have the testimony of the petitioner and one of his witnesses that the stock in question had a fair market value on March 1, 1913, of $30,000 per share and the testimony of a witness for the respondent of a then value of $10,000 per share.  We have given careful consideration to this evidence, as well as to the present worth on March 1, 1913, of the expected royalties to be received under*1162  the contract.  We have also considered all other evidence presented as to the value of the stock in question and have reached the conclusion that its fair market value on March 1, 1913, was $20,000 per share.  The petitioner accordingly realized a profit in 1921 of the difference between $850,000 (the debt satisfied) and $720,000 (36 shares at $20,000 per share), or $130,000.  Miscellaneous Errors Pertaining to Racing Stables and Wagering Losses.In the petition an error was assigned as to the profit in 1921 on the sale of the thoroughbred horses, but no satisfactory evidence was introduced in support thereof and in his brief the petitioner stated that he was "compelled to abandon this item." The Commissioner is accordingly sustained as to this issue.  The Commissioner is likewise sustained as to an item of $26,004.23 which he capitalized in the determination of the deficiency now before us for 1921.  The only witness who testified on this point stated that he was unable specifically to allocate these costs to any particular unit of construction and apparently for this reason charged them to expense.  Since the amount was expended for fixtures, *1034  radiators, roofing, *1163  and heating equipment which might well form a part of the permanent and initial capital costs, we can see no basis in the record to disturb the Commissioner's action.  A third item comprises amounts expended in 1921, totaling $29,566.64, for the construction of temporary buildings for housing laborers engaged in a construction program and for storehouses.  The petitioner urges their allowance as a deduction in 1921 on the ground of their temporary character, citing Robert Buedingen,6 B.T.A. 335">6 B.T.A. 335. In the foregoing case, however, the cost of temporary construction therein allowed as a deduction represented expenditures made in a given year where the facilities had no use or value beyond the year when constructed.  The term "temporary buildings" may well connote buildings with only a short life, but unless it is shown that such structures had no useful life beyond the year in which constructed, it is not proper to treat their entire cost as a deductible expense of the year in which expended.  Since the foregoing has not been shown and since we do not know the useful life of the buildings in question, the action of the Commissioner in capitalizing this amount and adding*1164  it to the cost of improvements for depreciation purposes is sustained.  The final issue is whether the petitioner is entitled to a deduction in 1921 on account of losses from betting on horse races in excess of the amount won from the same source.  Some of the bets were made in Kentucky and Maryland and some in New York.  The petitioner was unable to say whether bets had been placed in other states, nor was he able to make any allocation among the states named of the amount lost.  We have heretofore held that gambling losses, where the gambling took place in a state which prohibited such acts, were not allowable deductions since they were not losses "incurred" in "transactions" entered into for profit within the meaning of the governing statute. Mitchell M. Frey, Jr., et al., Executors,1 B.T.A. 338">1 B.T.A. 338; M. Rea Gano,19 B.T.A. 518">19 B.T.A. 518; and Louis D. Beaumont,25 B.T.A. 474">25 B.T.A. 474. By the laws of New York (secs. 991 and 992 of the Penal Laws of New York), bets made at a race track in that state are unlawful and any contract on account of such act is void.  Since some of the losses here in question arose on account of bets placed in New York and*1165  since we have no segregation of the amount as between the states where they might be allowable and where they are not allowable, the action of the Commissioner in denying the entire amount must be sustained.  The case of George D. Widener,8 B.T.A. 651">8 B.T.A. 651, cited by the petitioner, is not controlling since the deductions there allowed as expenses in the conduct of a racing stable did not include losses in betting on races; in fact, it was specifically found that the petitioner did not bet on the races.  Further, *1035  we are not convinced from the evidence here presented that betting on the races was an ordinary and necessary expense of the petitioner in training race horses and operating a racing stable - certainly the evidence is far from conclusive that the bets were placed by the petitioner exclusively on his own horses, but rather it would appear that he bet on horses as it suited his fancy.  We do not think the evidence supports a finding that they would constitute an ordinary and necessary expense of petitioner's business.  Reviewed by the Board.  Judgment will be entered under Rule 50.BLACK BLACK, dissenting: I dissent from the majority*1166  opinion which holds that the transfer of the oil leases in question by E. F. Simms to the Simms Oil Co., a Texas corporation, in consideration of all its capital stock and the contemporaneous transfer of all this capital stock to Simms Petroleum Co., a Delaware corporation, in consideration of 174,990 shares of its stock, were separate taxable transactions.  It is my view that they are parts of one transaction by which Simms sold his oil leases to the Delaware corporation in consideration of 174,990 shares of its capital stock and that Simms' gain or loss in the transaction is measured by the difference between the cost of his leases and the fair market value of the 174,990 shares Simms Petroleum Co. (Delaware corporation) stock at the time he received it.  We had practically this same question and situation in Teck Hobbs,26 B.T.A. 241">26 B.T.A. 241. In that case, petitioner Henry Hobbs and about 30 associates were the owners of various oil leases in the Burkburnett oil field in Texas.  In November 1919, Hobbs and his associates agreed to sell these oil leases to a group of individuals in New York City, headed by C. N. Haskell.  After the negotiations had progressed a while, it*1167  was agreed that a Delaware corporation should be organized, just as it was agreed in the instant case that a Delaware corporation, the Simms Petroleum Co., should be organized.  It was further agreed that the oil leases owned by Hobbs and his associates should not be transferred directly to the Delaware corporation, but that Hobbs and his associates should organize a Texas common law trust, to be called Hobbs Oil Co., all of its capital stock to be issued to Hobbs and his associates in payment of the leases, and then Hobbs and his associates were immediately to transfer this stock of the Hobbs Oil Co. to the Delaware corporation, as had been agreed upon.  Under such circumstances we held that it was all part of one transaction, to wit, the selling by Hobbs and his associates of their *1036  oil leases to the Delaware corporation for stock of the latter and cash.  In that case we said: Petitioners' next contention is that the transfer by Hobbs and associates of their oil properties to the Hobbs Oil Company, a joint stock association, was a taxable transaction completed in 1919, and that the value of that stock so received in 1919, rather than the cost of the properties so*1168  exchanged for said stock, is the proper basis for determining the profit on the sale of the Hobbs Oil Company stock in 1920 to C. N. Haskell and associates.  In determining the gain of petitioners in the Haskell transaction, the respondent took as his basis the cost of the property which petitioners conveyed to the Hobbs Oil Company, while it is contended by petitioners that the proper basis was the fair market value of the Hobbs Oil Company stock on the date of its issue, December 15, 1919; that said stock was worth more on that day than they received for it; and that a loss was sustained rather than a gain.  We do not agree to this contention.  The organization of the Hobbs Oil Company and the transfer to it of the lands and leases was merely a part of one main transaction, which was to sell certain oil lands and interests in oil lands which were specified in the contract, plus 75 per cent of the stock in the Texas Chief Oil & Gas Company, for a consideration of $2,100,000 cash and $600,000 capital stock of the Delaware Company.  The fact that to perform the contract the organization of a common law trust or association was resorted to as a means to carry through the deal, does*1169  not alter the character of the transaction.  There was no intention on the part of Hobbs or his associates to effect an exchange of their oil lands for stock in the Hobbs Oil Company, but their intention was to make a sale of their lands to Haskell and the Delaware Company by which they were to receive a large part of the agreed purchase price in cash and the balance in stock of the Delaware Company.  All the shares of stock of the Hobbs Oil Company were issued to Hobbs and by him immediately sent to New York for delivery to the Delaware Company to be held by it as a part of its own property.  No owner of the oil lands and leases conveyed to the Hobbs Oil Company had any beneficial interest in or power of disposition over the stock, as it belonged to the Delaware Company as soon as issued.  The interest of the owners of the oil lands and leases conveyed to Hobbs Oil Company was in the consideration which they were to receive under the main contract and supplements thereto.  We hold that the respondent was correct in fixing, as the basis for the calculation of gain, the cost of the oil properties to petitioners.  *1170 Commissioner v. Moore, 48 Fed.(2d) 526; certiorari denied, October 12, 1931; Commissioner v. Garber, 50 Fed.(2d) 588. Just as we said in the foregoing quotation, that "The organization of the Hobbs Oil Co. and the transfer to it of the lands and leases was merely a part of one main transaction," to sell the leases and other property to the Delaware corporation, so do I say that in the instant case the organization of the Simms Oil Co. (Texas corporation) and the transfer to it of the oil leases were merely a part of one main transaction, which was to sell these leases to the Delaware corporation.  That petitioner himself looked upon these transactions as parts of one completed transaction is disclosed by his pleadings.  *1037  In his original petition he says: "In June of that year (1919) he transferred said undeveloped leases to the Simms Oil Co., a Texas corporation, in return for which all of the stock of said Simms Oil Co. except qualifying shares were issued to petitioner.  Contemporaneously petitioner transferred all of the shares of Simms Oil Co. to the Simms Petroleum Co., a Delaware Corporation." (Italics supplied.) A*1171  similar statement is contained in the amended petition filed in September 1927.  Because I believe that there are no facts in the instant case on the point which I am here discussing sufficient to distinguish it from the facts in the Hobbs case, supra, and because I believe our holding in the Hobbs case was correct, I record my dissent from the majority opinion in the instant case.  I think the Commissioner treated the transaction correctly when he held that the leases owned by Simms were exchanged for 174,990 shares of the Simms Petroleum Co. (Delaware corporation) and treated the intermediate transactions as but parts of the one main transaction.  The measure of gain, as I have said, is the difference between the cost of these leases and the fair market value of the shares in the Delaware company which Simms received.  MATTHEWS agrees with this dissent.