Court Opinion

ID: 4617507
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:36:43.844791+00
Date Added: 2024-06-11T08:13:29.895782
License: Public Domain

WHITING LUMBER CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Whiting Lumber Co. v. CommissionerDocket No. 29071.United States Board of Tax Appeals21 B.T.A. 721; 1930 BTA LEXIS 1801; December 16, 1930, Promulgated *1801  1.  No taxable gain resulted from the sale by the petitioner in 1921 of certain water-power rights acquired by it in 1917 in exchange for capital stock, the value of which at the date of acquisition was not less than the sale price.  2.  A payment of $25,000 received by petitioner under an installment sale contract held taxable in the year when received.  William S. Cole, Esq., for the petitioner.  P. M. Clark, Esq., for the respondent.  SMITH*721  This proceeding is for the redetermination of a deficiency in income tax for the calendar year 1921 in the amount of $11,012.16, practically all of which is in controversy.  FINDINGS OF FACT.  The petitioner is a corporation with its principal place of business at Whiting, Me.  It was organized in 1917, for the purpose of taking over and operating certain properties consisting of timber lands, a sawmill, logging equipment, timber, water-power rights, and other property situated in Washington County, Me.  The timber lands comprised a tract of about 500 acres.  The water-power site was a separate tract comprising about one acre.  All of these properties had been theretofore owned by Lester S. *1802  Crane, a resident of Whiting, and had been acquired by him prior to 1913 partly by inheritance from his father and partly by purchase.  Crane undertook for several years to operate the properties himself, but on account of ill health he found it advisable in 1917 to make some arrangement that would relieve him of the responsibilities of active management.  He consulted Robert J. Peacock, president of the Lubec Bank & Trust Co., of Lubec, Me., and upon his advice decided to organize the Whiting Lumber Co., the petitioner, and to convey to it all of the above named properties.  Peacock agreed to *722  advance $30,000 with which to pay off existing mortgages on the properties in exchange for that amount, par value, of the stock.  The petitioner was organized in 1917 with a capital stock of $70,000, $40,000 par value of which was issued to Crane in exchange for all of the above mentioned properties, including the water-power rights.  The remaining $30,000 par value of stock was issued to Peacock as agreed.  The cash value of the assets transferred to the petitioner upon its incorporation exclusive of the water-power rights was $70,000 and the cost of those assets at the date*1803  of sale was $75,127.13.  In 1920 the petitioner entered into an agreement for the sale of all of its assets with the exception of the water-power rights to one John McKay for a consideration of $150,000.  A cash payment of $10,000 was made on the purchase price.  On October 15, 1920, the petitioner executed a further agreement providing for payment of the balance of the purchase price, $40,000 on or before January 15, 1921, $50,000 on or before January 15, 1922, and $50,000 on or before January 15, 1923.  This agreement further provided, in so far as material here, that - * * * any stumpage cut from said lands during the season of 1920-1921 shall be paid for and a settlement made therefor on or before July 1, 1921 at the rate of Five Dollars ($5.00) per cord, or Ten Dollars ($10.00) per thousand feet, according as it may be most convenient to estimate or scale the same; and similarly any stumpage cut during the season of 1921-1922 (or any later season provided anything remains due hereunder) shall be paid for and a settlement made therefor on or before July 1, 1922, (or, if in a later season, then on the corresponding July 1st), at Three Dollars ($3.00) per cord, or Six Dollars*1804  ($6.00) per thousand feet, all such payments for stumpage to apply on account of the purchase price hereunder.  During 1921 the petitioner received the $40,000 payment provided in the said agreement and the additional amount of $25,000 under the provisions of the above quoted clause.  During 1921 the petitioner sold the above mentioned water-power rights to the city of Lubec for a consideration of $10,000.  These water-power rights had never been set up separately in petitioner's books at any valuation, notwithstanding that prior to the petitioner's organization Crane considered them of value and had conferred with several parties relative to their sale.  The value of the waterpower rights in 1917 was at least equal to the sale price of $10,000.  OPINION.  SMITH: The petitioner alleges, first, that the respondent erred in including in its taxable income for 1921 the amount of $10,000 representing the gross amount received in that year from the sale of the water-power rights to the city of Lubec.  We are unable to determine *723  from the computation attached to the deficiency notice, or from any other information before us, just what action the respondent has taken with*1805  respect to the $10,000 item, but at the hearing counsel for the respondent stated that it is respondent's position that these water-power rights had no value when acquired by the petitioner in 1917 and that the $10,000 received therefor by the petitioner in 1921 is taxable as a profit of that year.  Section 202 of the Revenue Act of 1921 provides that, with certain exceptions not material here, the basis for ascertaining the gain derived or loss sustained from a sale or other disposition of property, real, personal, or mixed, acquired after February 28, 1913, shall be the cost of such property.  The cost of the water-power rights to the petitioner was their fair market value at the date of acquisition.  ; . It is the unchallenged testimony of petitioner's witnesses that the value of the water-power rights in 1917 was no greater nor less than the value in 1921 when sold for $10,000.  We are convinced that this is the true situation and that there was neither gain nor loss from the transaction.  The second allegation of error is with respect to respondent's inclusion*1806  in gross income of the amount of $25,000 received by the petitioner from McKay in 1921 under the terms of the agreement of October 15, 1920.  The petitioner contends that this amount represents a return of capital in the form of a depletion charge covering the timber removed by McKay and was not income.  This contention is not sustained.  The amount in question was clearly a part of the gross sale price of the entire property received by the petitioner during the taxable year 1921.  While the original sale agreement between the petitioner and McKay may not have called for a payment in 1921 of more than $40,000 (the agreement was not offered in evidence nor otherwise proven), the agreement of October 15, 1920, permitted an additional payment, to cover the timber removed which, if made, was to apply against the original purchase price.  The petitioner apparently credited the $25,000 against the installment payment for the next succeeding year and reported it in that year.  The statute requires that income be reported for tax purposes in the year when received by the taxpayer.  The disputed amount represents a part of the sale price of the properties as a whole, and, having been received*1807  by the petitioner in 1921, is taxable in that year.  Judgment will be entered under Rule 50.