Court Opinion

ID: 4589487
Source: CourtListenerOpinion
Date Created: 2020-11-20 18:44:17.594728+00
Date Added: 2024-06-11T07:50:16.828804
License: Public Domain

MRS. T. E. STEVENS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.  T. E. STEVENS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Stevens v. CommissionerDocket Nos. 10185, 10186.United States Board of Tax Appeals10 B.T.A. 197; 1928 BTA LEXIS 4170; January 25, 1928, Promulgated *4170  In the circumstances of these proceedings it is held that petitioners did not have such title to certain potash deposits in Lake Jesse, in the State of Nebraska, on March 1, 1913, as would entitle them to a deduction in the taxable years 1919 and 1920 for depletion based upon a value on March 1, 1913.  F. W. McReynolds, Esq., for the petitioners.  Maxwell E. McDowell, Esq., for the respondent.  LITTLETON*197  The Commissioner determined deficiencies of $8,054.63 and $6,402.71 against each of the petitioners for the calendar years 1919 and 1920, respectively.  These proceedings involve the same issue, namely, whether petitioners were the owners of certain potash deposits on March 1, 1913, and if so, the fair market value on that date of petitioners' one-tenth interest in said alleged deposits.  The error assigned in each proceeding is that the Commissioner erred in arriving at the amount of depletion to which the petitioners were entitled for the taxable years "of mining claims located in Sheridan County, Nebraska, of which the taxpayer was one of the original locators in the year 1912 and has been in undisputed possession of the property from*4171  the time is was located, and is now in possession jointly with other locators." Petitioners claim that on and prior to March 1, 1913, they were the owners of a one-tenth interest in certain mining claims on 150 acres of potash deposits in Jesse Lake in the State of Nebraska and that said potash deposits contained in said 150 acres had a fair market value on March 1, 1913, in excess of $600,000.  In his determination the Commissioner determined that the total value of the potash deposits on March 1, 1913, was $30,000, based upon such information as was then before him, and upon the basis of this valuation allowed each of the petitioners depletion on one-tenth of that amount, or $3,000.  At the hearing of the proceedings, the Commissioner by amendment to his answers in each proceeding affirmatively alleged that he erred in arriving at the proposed deficiencies for the years 1919 and 1920 and that he allowed as a deduction to the taxpayer, depletion on a March 1, 1913, value of mining claims, whereas not title existed in the petitioners on March 1, 1913, on which an allowance for depletion could be predicated under the statute.  It is now the position of the Commissioner that the mining*4172  claims under which petitioners claim the right to a deduction for depletion, with *198  the exception of a tract of 20 acres, were not located until after March 1, 1913.  Therefore, the only amount upon which the petitioners may be allowed depletion for the taxable years is the total sum of $2,000 shown to have been expended by them for development purposes.  FINDINGS OF FACT.  Petitioners are residents and citizens of Omaha, Nebr.  In Sheridan County, in the western portion of that State, is located a brine lake comprising an area of 200 acres of Government land, known as Jesse Lake, and it is the March 1, 1913, value for depletion purposes of certain placer mining claims filed and perfected by the petitioners and others associated with them on 150 acres of this lake that constituted the original issue in these proceedings.  At the hearing the Commissioner alleged that he had erred in allowing any depletion upon any value as of March 1, 1913, in respect of the potash deposits alleged by petitioners to have been covered by claims filed by them prior to March 1, 1913.  About 1909, two men, believing that Jesse Lake contained valuable potash deposits, obtained samples of*4173  the contents of the lake for analysis.  Preliminary analysis showed that the lake content was rich in potash.  In the following years 1910, 1911 and throughout the year 1912, considerable time was spent by these men and a chemical engineer whom they had interested in the matter, in making a survey of the lake, making tests by drilling holes in the lake and investigating the potash deposits for the purpose of determining whether production of potash and other chemicals which might be found in the lake deposits would be commercially profitable.  Thereafter they estimated that the 200 acres comprising the lake contained approximately 233,656 tons of dry alkali salts.  They also estimated that a profit of from $6 to $11 a ton could be realized on the refined potash salts.  The commercial production of potash had not up to that time been demonstrated in this country.  Germany controlled the potash market in the United States and continued to do so until some time after the commencement of the war in August, 1914.  During 1912, one of the men interested in prospecting for potash in Lake Jesse approached the petitioner, T. E. Stevens, with the view of inducing him to render financial assistance*4174  toward making further investigation, the prospectors at that time having in view the erection of a solar evaporator to test out the deposits of the lake in a small way as an experiment for the purpose of determining whether potash could be secured from the lake contents in such form as to be commercially used in the fertilizer trade and chemical industry.  Petitioner and his wife each invested $1,000 to be used in further *199  prospecting and in making tests relative to the recovery of potash from the lake.  The results of these tests and analyses were also brought to the attention of other individuals and this resulted in the following mining claims being located under the Saline Lands Act of January 12, 1877 (sec. 4752, U.S. Comp. Stats.), and the Act of March 3, 1891 (sec. 4752, U.S. Comp. Stats., vol. 5, p. 5794), on the following dates: Date of filingAcresMarch 16, 191220April 14, 191320April 14, 191320April 14, 191320April 14, 191310April 14, 191320April 14, 191320April 14, 191320150Fifty acres of the lake were already covered by homestead claims so that petitioners and others associated with them filed claims covering*4175  only 150 acres of the lake and estimated that this acreage contained 133,656 tons of potash.  Petitioners each had a one-tenth interest under the claims filed.  The locators of the above mentioned claims were denied a patent to them by the United States Department of Interior under the Saline Act under which they had been located, and the claimants were advised that in order to perfect claims upon the property it would be necessary for them to locate the claims under the placer mining laws, Act of January 31, 1901, sec. 4641, U.S. Comp. Stats., vol. 5, p. 5684.  Accordingly, the petitioners, together with those associated with them in the matter, located the same claims under the Placer Mining Act, in 1914.  These claims were soon thereafter approved by the Interior Department.  Shortly thereafter, the locators installed certain experimental machinery and equipment at a cost of approximately $5,000.  Several unsuccessful attempts were made to sell the mining claims.  Later, due to the elimination of German potash from the United States market as a result of the war, the locators, including the petitioners, concluded to undertake the operation of the property themselves.  They needed*4176  additional capital for this purpose.  They organized a corporation known as the Potash Products Co., with an authorized capital stock of $50,000, to erect a plant.  This corporation at no time had any ownership or interest in the mining claims.  The locators succeeded in interesting three business men in Omaha, Nebr., in the matter and they agreed to invest a total of $30,000 for the erection of a plant, for which they were to receive that amount of the capital stock of the Potash Products Co.  As an inducement for this investment, the locators agreed to and did give these three gentlemen a one-ninth interest in the mining claims.  The plant was constructed in April, 1915, and operations were begun in June, 1915.  Only $10,000 of the $30,000 which the three individuals agreed to *200  invest was paid, since the locators were able to complete payment for the construction of the plant from profits of the business.  When the German potash was removed from the United States market, the market price for that product advanced at least 1,000 per cent, and while the cost of production was greater than it would have been prior to the war, the owners of the claims were able to produce*4177  potash in 1915 and subsequent years at a profit of approximately $6 a ton.  From June, 1915, to and including the year 1920, when operations ceased by reason of the exhaustion of the mineral content covered by the claims, a total of 105,000 tons of potash had been produced; 14,632.6 tons were produced in the year 1919 and 11,699.04 tons were produced in 1920.  From the time the locators began prospecting until they filed and perfected valid claims in August, 1914, and until the exhaustion of the mineral content of the area covered by their claims, they experienced no interference from any source.  In their returns for 1919 and 1920, petitioners claimed a deduction for depletion at the arbitrary figure of 10 per cent of their one-tenth interest in the profits derived from operations.  The Commissioner, acting upon the only information before him at the time of his original determination, namely that the one-third interest was acquired by outside investors for $10,000 subsequent to March 1, 1913, but sufficiently near that time to justify the same being considered, determined the total value of the potash deposits to be $30,000.  The Commissioner's audit was based upon the return and*4178  other information furnished by the petitioners.  He made no independent investigation.  On the basis of this determination, each of the petitioners was allowed a deduction for depletion on a one-tenth interest, or $3,000.  OPINION.  LITTLETON: These proceedings were instituted on the theory that the locators, among whom were these petitioners, had title to the deposits contained in 150 acres of Jesse Lake, on March 1, 1913.  The Commissioner having made no independent investigation and having no definite information in this regard, since his audit of the return was based upon a claim made therein and certain other information furnished him by the petitioner, and also acting upon the assumption that the petitioners had a valid title to the potash deposits through claims filed on this Government property prior to March 1, 1913, made the allowance for depletion hereinbefore mentioned At the hearing, however, he amended his answer in each case so as affirmatively to allege the acquisition of the mining claims by petitioners subsequent to the basic date and that he had erred in allowing a depletion upon a March 1, 1913, value.  It seems to *201  us reasonably clear from the evidence*4179  that only one claim, covering 20 acres, was located prior to March 1, 1913; that the other claims covering 130 acres were located on April 14, 1913; that all of these claims were filed under the wrong statute and patents to them were therefore refused by the Interior Department; that subsequently, on August 22, 1914, the petitioners and their colocators made new locations under and pursuant to the placer mining laws, covering the same descriptions as theretofore made under the Saline Act, which last-mentioned claims were thereafter approved by the Department of the Interior.  It is apparent therefore that for the purpose of the claim for depletion, these petitioners acquired their interests in deposits in Jesse Lake subsequent to March 1, 1913, and that whatever allowance for depletion may be made to these petitioners must be upon the basis of cost.  The cost to petitioners is shown by the evidence and admitted by the Commissioner to have been $2,000.  While it is true that certain individuals were investigating and making tests and analyses to determine the extent and nature of the deposits of Jesse Leke, this investigation in and of itself did not give them such an interest in the*4180  deposits as would entitle them to a valuation for depletion purposes prior to the filing of valid locations under the mining laws.  Others were at liberty to make analyses of the lake content and until proper claims to the deposits had been filed petitioners did not acquire possession or ownership of the potash deposits.  The petitioner, T. E. Stevens, testified that claims upon this property were filed some time in 1912, but the record evidence of such filing shows that even the locations made under the Saline Act on which patents were denied were not filed until subsequent to March 1, 1913, with the exception of a tract of 20 acres.  The evidence is not such as would enable the Board to determine the fair market value of 20 of the 200 acres comprising Jesse Lake.  The value of $4,000 an acre claimed by the petitioners is predicated upon possession and ownership of the entire deposits and is arrived at upon the theory that an expenditure sufficient to construct and operate a plant of sufficient magnitude to extract and refine the deposit would be productive of sufficient proceeds to warrant such a value.  It is manifest that upon this basis only 20 acres would not have a fair market*4181  value of $80,000 and we have no sufficient evidence from which we could determine what the fair market value of 20 acres would have been on March 1, 1913.  In view of the foregoing, an allowance for depletion for these petitioners should be computed upon the total cost of $1,000 to each of them.  Reviewed by the Board.  Judgment will be entered on 15 days' notice, under Rule 50.