Court Opinion

ID: 4588928
Source: CourtListenerOpinion
Date Created: 2020-11-20 18:43:07.766982+00
Date Added: 2024-06-11T08:00:05.860479
License: Public Domain

RESERVE NATURAL GAS CO. OF LOUISIANA, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Reserve Natural Gas Co. v. CommissionerDocket Nos. 8704, 9006.United States Board of Tax Appeals12 B.T.A. 219; 1928 BTA LEXIS 3580; May 29, 1928, Promulgated *3580  Valuation of a contract for the purchase, transportation, and sale of natural gas determined as a basis for invested capital and exhaustion.  James S. Y. Ivins, Esq., for the petitioner.  Granville S. Borden, Esq., for the respondent.  MILLIKEN *219  In this proceeding the petitioner seeks a redetermination of the income and profits taxes for the years 1918 and 1919, for which the Commissioner has determined deficiencies of $58,211.17 and $42,576.23, respectively.  The petitioner alleges error on the part of the Commissioner (1) in reducing invested capital by $870,000 due to the valuation of a contract by the Commissioner at $330,000 instead of the amount claimed and entered on the books of $1,200,000; (2) in increasing net income by $43,500 due to the disallowance of that amount claimed as depreciation or exhaustion of the contract.  At the hearing, the petitioner amended its petition, claiming a value of $2,400,000 for the contract, and the respondent amended his answer asking for affirmative relief on the ground that the contract had no value.  A third issue relating to the depreciation of a pipe line was withdrawn by the petitioner.  *3581 *220  FINDINGS OF FACT.  The petitioner is a corporation organized under the laws of the State of Delaware on or about August 8, 1914, with an authorized capital stock of a par value of $3,000,000, consisting of 40,000 shares of 7 per cent cumulative preferred stock and 80,000 shares of common stock; all shares being of a par value of $25 a share.  The Arkansas Natural Gas Co., the Southwestern Gas & Electric Co., and The Texas Co. were in 1914 engaged in producing natural gas from certain territories in the northwestern corner of the State of Louisiana and in distributing such gas at varying distances from such gas-producing fields, to communicate in such State and in the northeastern corner of the State of Texas and the southwestern corner of the State of Arkansas.  The Arkansas Natural Gas Co. was distributing gas to the City of Little Rock, Ark.  Its supply of gas was insufficient to meet its expanding requirements.  The Southwestern Gas & Electric Co. was distributing gas in Shreveport and Texarkana and had sufficient gas to meet the requirements.  The Texas Co. was distributing gas only on a small scale at Marshall, Tex., and other towns in its immediate vicinity, *3582  but it had resources of considerable extent and was seeking means of increased distribution.  The president of the Arkansas Natural Gas Co. was J. C. Trees; the president of The Texas Co. was E. C. Lufkin, and M. W. Bahan was general manager of the Natural Gas Department of The Texas Co.  The president of the Southwestern Gas & Electric Co. was Rufus C. Dawes.  The individuals above named, acting on behalf of the companies with which they were associated and as the nominees of such companies, together with M. L. Benedum and Booth & Flinn, Ltd., parties experienced in pipe-line construction, organized the Reserve Natural Gas Co. of Louisiana for the purpose of building a pipe line to transport gas produced by the three above companies.  The capital stock was subscribed for by the following individuals in the amounts indicated: Amount subscribedSubscriberPreferredCommonM. L. Benedum$100,000$175,000J. C. Trees (Arkansas Natural Gas Co.)100,000175,000Booth & Flinn, Ltd100,000175,000E. C. Lufkin (The Texas Co.)100,000250,000M. W. Bahan (The Texas Co.)100,000250,000Rufus C. Dawes (Southwestern Gas & Electric Co.)100,000175,000Total600,0001,200,000*3583 *221  At substantially the same time these individuals entered into a joint contract with the three companies which provided as follows: THIS AGREEMENT made and entered into the twelfth day of September, A.D. 1914, by and between the Arkansas Natural Gas Company, a corporation created and organized under the laws of the State of Delaware, The Texas Company, a corporation created and organized under the laws of the State of Texas, and the Southwestern Gas and Electric Company, a corporation created and organized under the laws of the State of Delaware, parties of the first part, and M. L. Benedum, J. C. Trees, and Booth and Flinn, Limited, all of Pittsburgh, Pennsylvania, E. C. Lufkin, of New York City, New York, M. W. Bahan, of Fort Worth, Texas, and Rufus C. Dawes, of Chicago, Illinois, parties of the second part, WITNESSETH: WHEREAS, the said parties of the first part represent that they severally have and hold large acreages of lands in the Parishes of Caddo and De Soto in the State of Louisiana, for the production of natural gas and desire to dispose of their several and respective productions of natural gas therefrom, present and future, in a way and manner that will*3584  best promote the interests of all persons and parties concerned; and WHEREAS, the said parties of the second part have projected a main natural gas pipeline to commence at a point near Oil City in the State of Louisiana, at the De Soto Compressing Plant of the De Soto Company, about a mile and a half north of the Lake of Mooringsport, and running thence in a southeasterly direction crossing Ferry Lake at the narrowest point near Mooringsport, thence parallel with the route of the Kansas City Southern Railroad between Blanchard and Soda Lake to the western boundary line of the City of Shreveport, and thence still paralleling the route of the said Kansas City Southern Railroad to Wallace Lake; thence crossing the route of the said Kansas City Southern Railroad near that point and thence in a southerly course to a point at or near Naborton, Parish of De Soto, State of Louisiana, and the said main line will be about fifty-four miles in length and consist approximately of forty-four miles of 16"-1/4" thick 42 lb. plain and wrought steel pipe extending from the end of the said route, located as aforesaid at or near Oil City, and approximately of ten miles of 16"-5/16" thick plain end wrought*3585  steel pipe the rest of the distance, the whole to be put together with wrought steel rubber joint couplings of approved design, and the line to be provided with all the necessary drips, gate valves, fittings, regulators, stations and all things required to render it a complete and modern natural gas pipe line, plant or system adequate for the purposes of its construction, and there will be obtained the necessary rights of way for the said main line; and WHEREAS, the said parties of the second part have caused to be created and organized under the laws of the State of Delaware, that certain corporation known as the Reserve Natural Gas Company of Louisiana for the purpose of carrying forward and accomplishing the said project and have underwritten a major part constituting the entire subscription to the date hereof of the stock of the said corporation.  Now THEREFORE IT IS FOR AND IN CONSIDERATION of the premises and the covenants, agreements, stipulations and conditions of these presents on their respective parts to be done, paid, kept, observed or performed, that the said parties thereto have covenanted, promised and agreed, and by these presents do covenant, promise and agree, *3586  to and with each other and each for their respective parts in the manner following, that is to say: *222  FIRST: That the said parties of the second part shall cause the work of constructing the said main line and providing things therefor of the character, dimensions and quantities hereinbefore set forth to be commenced forthwith and prosecuted without any useless or avoidable delay to full completion and there result a complete and modern natural gas pipe line, plant or system adequate for the purposes of its construction as hereinbefore set forth, as well as the purposes of these presents.  And in addition to the things above provided for and as part of the said plant or system there shall be provided, connected, maintained and operated along the route of its main pipe line a telephone line in such form and manner as will permit what it known as a tour station to be maintained and each department of the plant or system be in touch with the other.  SECOND: That the said parties of the second part shall assign, transfer, set over and convey, but for a lawful, adequate and valuable consideration as they may elect and agree, unto the said Reserve Natural Gas Company each and*3587  every right acquired by them under these presents and thereupon and by force and virtue of the said conveyance and these presents the said Reserve Natural Gas Company shall undertake and be liable for and on account of all and singular the covenants, agreements, stipulations and conditions of these presents yet remaining to be done, paid, kept, observed or performed by the said parties of the second part thereto; and the said parties of the second part shall thereupon be released therefrom.  THIRD: That the said parties of the first part in the event the said pipe line be completed in the location and in the way and manner hereinbefore set forth shall have the right to sell and deliver each day of twenty-four hours and will do so in preference to selling and delivering to other persons or parties, save as hereinafter set forth from their holdings in the said Parishes of De Soto and Caddo, or these conveniently tributary to the said line, unto the said Reserve Natural Gas Company during the months of April, May, June, July, August and September of each year an aggregate daily amount of twelve million cubic feet of natural gas, whereof the said Arkansas Natural Gas Company may furnish*3588  twenty-six and two-third per centum of 3,200,000 cu. ft., the said The Texas Company may furnish sixty per centum or 7,200,000 cu. ft. and the said Southwestern Gas and Electric Company may furnish thirteen and one-third per centum, or 1,600,000 cu. ft. and during the months of October, November, December, January, February and March of each year an aggregate daily amount of twenty-four million cubic feet of natural gas, of which the said Arkansas Natural Gas Company may furnish twenty-six and two-thirds per centum or 6,400,000 cu. ft., the said The Texas Company may furnish sixty percentum or 14,400,000 cu. ft. and the said Southwestern Gas and Electric Company may furnish thirteen and one-third percentum or 3,200,000 cu. ft. but it is provided always nevertheless in this behalf that in the event the said Reserve Natural Gas Company shall require at any time more than either of the said daily aggregate amounts, such excess may be supplied by the said parties of the first part in like proportions as the delivery of the said aggregate amounts, unless any one or more of the said parties of the first part may be unable to supply its or their proportion, whereupon the other party or parties*3589  of the said parties of the first part may supply such deficiency in proportion, to their respective proportions; and it is further provided always nevertheless in this behalf that if, during any month the amount of natural gas supplied by any one or more of the said parties of the first part shall average for that month less than the amount required from it under these presents, that such party or parties shall have the right to make up such deficiency during the next succeeding month, but not afterwards, unless there be a vacancy in the capacity *223  of the main line during a period that will not interfere with its or their requirements otherwise; and that all deliveries under these presents shall be against the varying pressures of the main line of the said Reserve Natural Gas Company, but always such as will deliver the said natural gas at a pressure of at least one hundred pounds at the compressing station of the said Arkansas Natural Gas Company, at or near the Town of Lewis, in the State of Louisiana, unless it may be impossible by natural rock pressure of gas wells supplying gas to Reserve line to maintain one hundred pound pressure in which event the gas may be delivered*3590  so as to enter the said main line at a pressure as low as fifty pounds at the said compressing station at Lewis, but nothing herein contained shall require the use of a compressing station or other mechanical appliance or means to increase or maintain pressure.  The obligations to sell and deliver natural gas imposed on parties of the first part by this paragraph shall be deemed several and not joint.  FOURTH: That the said Reserve Natural Gas Company shall, in the event the said pipe line be completed in the location and in the way and manner hereinbefore set forth sell and deliver each day of twenty-four hours during the months of April, May, June, July, August and September of each year unto the said parties of the first part, and the said parties of the first part will take and pay for, or cause to be taken and paid for, an aggregate amount of twelve million cubic feet of natural gas each twenty-four hours whereof the said Arkansas Natural Gas Company will take and pay for, or cause to be taken and paid for, sixty-one percentum or 7,320,000 cu. ft., the said The Texas Company will take and pay for, or cause to be taken and paid for, eleven percentum or 1,320,000 cu. ft., and*3591  the said Southwestern Gas & Electric Company will take and pay for, or cause to be taken and paid for, twenty-eight percentum or 3,360,000 cu. ft. and during the months of October, November, December, January, February and March of each year the said Reserve Natural Gas Company shall sell and deliver unto the said parties of the first part each day of twenty-four hours, and the said parties of the first part will take and pay for, or cause to be taken and paid for, an aggregate amount of twenty-four million cubic feet of natural gas each twenty-four hours, whereof the said Arkansas Natural Gas Company will take and pay for, or cause to be taken and paid for, sixty-one percentum or 14,640,000 cu. ft., the said The Texas Company will take and pay for, or cause to be taken and paid for, eleven percentum or 2,640,000 cu. ft., and the said Southwestern Gas and Electric Company will take and pay for, or cause to be taken and paid for, twenty-eight percentum or 6,720,000 cu. ft., that in the event the said Reserve Natural Gas Company for any reason fails to be able at any time to deliver the aggregate daily amount of natural gas required of it under these presents, such amount as it may be*3592  able to deliver shall be apportioned in the same way as if the whole amount had been delivered.  The obligations to take and pay for natural gas, or to cause the same to be taken and paid for as imposed on parties of the first part by this paragraph shall be deemed several and not joint.  FIFTH: That in the event the said pipe line be laid, in the location and in the way and manner hereinbefore set forth, the said Reserve Natural Gas Company shall furnish, lay, maintain and operate all gathering lines necessary for the collection and transportation of the natural gas required to be taken by it under these presents; that all natural gas received by the said Reserve Natural Gas Company under these presents shall be through and by means of meters and regulators or other measuring devices of proper size and mechanism to take and accurately measure and record the quantity thereof; that all meters and regulators or other measuring devices required for the purpose of receiving the said natural gas by the said Reserve Natural Gas Company shall *224  be furnished, set up, connected, operated and maintained by it at its own proper charge, cost and expense and likewise all natural gas*3593  delivered by the said Reserve Natural Gas Company under these presents shall be through and by means of meters and regulators or other measuring devices of proper size and mechanism to take and accurately measure and record the quantity thereof and shall be furnished, set up, connected, maintained and operated at the joint cost, charge and expense of the said Reserve Natural Gas Company, and the said parties of the first part, that is to say, all meters and regulators or other measuring devices required for the delivery of natural gas to the said Arkansas Natural Gas Company shall be furnished, set up, connected, maintained and operated at the equal joint cost, charge and expense of the said Reserve Natural Gas Company, and the said Arkansas Natural Gas Company, that all meters and regulators or other measuring devices required for the delivery of natural gas to the said The Texas Company shall be furnished, set up, connected, maintained and operated at the equal joint cost, charge and expense of the said Reserve Natural Gas Company and the said The Texas Company and all meters and regulators or other measuring devices required for the delivery of natural gas to the said Southwestern*3594  Gas and Electric Company shall be furnished, set up, connected, maintained and operated at the equal joint cost, charge and expense of the said Reserve Natural Gas Company and the said Southwestern Gas and Electric Company, but nevertheless all of the said meters and regulators or other measuring devices no matter what natural gas may be received or delivered through them shall be and remain under the sole and exclusive control of the said Reserve Natural Gas Company; that all natural gas received and delivered under these presents shall be computed at 14.70 atmosphere; that the said parties of the first part or any of them shall have the right at all reasonable times to examine and test any of the meters, regulators, or other measuring devices required for the reception or delivery of natural gas under these presents and whenever any meter, regulator or other measuring device may be found faulty to an important degree, whether the discovery be made by the said parties of the first part, or the said Reserve Natural Gas Company, or otherwise howsoever, the same shall be forthwith removed, repaired or replaced; that these presents are made and accepted with full knowledge of and subject*3595  to the many causes that in the business of operating for the production, transportation, sale, delivery or reception of natural gas may not reasonably be anticipated and provided against and may prevent, hinder or restrain, in whole or in part, the production, transportation, sale, delivery or reception of natural gas and no claim shall be made, permitted or recovered on account thereof; that if, among the causes that may prevent, hinder or restrain in whole or in part, the production, transportation, sale, delivery or reception of the natural gas required under these presents, any of the meters, regulators, or other measuring devices used for measuring the said gas get out of proper working order or have to be temporarily removed to make repairs each of the said parties of the first part shall have the right as to such appliances as may be used to receive or deliver the natural gas respectively due from or to them under these presents to temporarily remove the measuring device, that is to say, for period not to exceed ten days and the natural gas that may have passed through such meter or defective appliances shall be estimated for the time they may have been defective upon the basis*3596  of the amount of gas registered by such meter or other appliance after the same shall have been repaired or by the meter or other appliances by which the defective ones may have been replaced for a period of time and under similar pressure as nearly as practicable; and it is further provided in this behalf that *225  if the delivery of natural gas show a serious variation either of the said parties to these presents may request that whatsoever meter or measuring device may be suspected of being inaccurate shall be tested and the expense of making such test shall be paid by the said parties share and share alike; and that should the meter or other appliances be found to be incorrect to the extent of three percent, or over, an adjustment of the amount of gas delivered shall be made in the way and manner hereinbefore set forth and the period of time upon which all estimates for defective meter or other appliances may be made shall not in each instance exceed forty-five days.  SIXTH: That readings or records from the said meters or measuring devices through which the said natural gas received and delivered shall have passed shall be taken daily by the said Reserve Natural Gas Company*3597  and kept in its main office at present located at Shreveport, Louisiana; that the said Company shall render unto the said parties of the first part, on or before the 10th day of each and every calendar month, a statement taken and made up from the readings and records of the then previous month as based and computed upon 14.70 atmospheric pressure; that the said Reserve Natural Gas Company shall well and truly pay on or before the twentieth day of each and every calendar month during the term of these presents unto the said parties of the first part respectively, the sum of two cents for each and every thousand cubic feet of natural gas which may have been received by it from them respectively during the then previous calendar month and the said parties of the first part shall respectively well and truly pay or cause to be paid unto the said Reserve Natural Gas Company at the same time the sum of four and one-half cents for each and every thousand cubic feet of natural gas that may have been received by them respectively from it during the then previous month.  SEVENTH: That should the said Reserve Natural Gas Company at any time or times require more natural gas than the said parties*3598  of the first part may be able to provide, it shall have the right to purchase from others and take into its said main pipe line such excess quantity or quantities, but it is provided always in this behalf that the said parties of the first part shall each be entitled to have, if they so elect, the same proportionate part of all excess quantities of natural gas obtained by the said Reserve Natural Gas Company whether the same be obtained from the said parties of the first part or from others as they are respectively entitled to have in the daily and minimum quantity hereinbefore set forth.  EIGHTH: That these presents are made with full knowledge and notice of and subject to all, and all manner of contacts existing prior to the date hereof touching the production, purchase, sale and delivery of natural gas by the said parties of the first part, and nothing herein contained shall prevent any of the said parties from making a reasonable extension of their respective plants for the supply of districts already being supplied by them and to which the said lands in the Parishes of Caddo and De Soto may be tributary; and it is further provided always with reference to the natural gas to*3599  be respectively supplied the said parties of the first part that each shall put forth its best endeavors in every way to maintain the production and delivery of its respective proportion.  NINTH: That the term of these presents shall be the twenty years next ensuing the date thereof and that all and singular the covenants, agreements, stipulations, and conditions of these presents on the part of the parties thereto to be done, paid, kept, observed or performed shall extend to, include and mean their respective heirs, executors, administrators, successors and assigns.  *226  IN WITNESS WHEREOF the said parties personal have hereunto set their respective hands and seals and the said parties corporate have caused their names by the hands of their respective presidents and their respective common and corporate seals to be hereunto affixed the day and year first above written.  On August 22, 1914, at a meeting of the board of directors of the petitioner, the following motion was adopted: There was presented, and on motion, duly seconded, there was adopted, by unanimous vote in the affirmative, the following resolution, to-wit: WHEREAS, M. L. Benedum, J. C. Trees, Booth & *3600  Flinn, Limited, E. C. Lufkin, M. W. Bahan, and Rufus C. Dawes, have submitted the form of a proposed agreement to be made by and between them as parties of the second part, and the Arkansas Natural Gas Company, the Texas Company, and the Southwestern Gas & Electric Company, as parties of the first part, which if accomplished by them and assigned to this Company, it is expected will provide for it, during the term of the said agreement, and the months of April, May, June, July, August and September, of each year, an aggregate daily amount of twelve (12) million cubic feet of natural gas, and the months of October, November, December, January, February and March, of each year, an aggregate daily amount of twenty-four (24) million cubic feet of natural gas, and without taking into consideration the amounts of natural gas that may be supplied under the said agreement, in addition to the amounts hereinbefore set forth, it is estimated there will result to this Company an annual net profit of about One Hundred and Forty Thousand Dollars ($140,000); and WHEREAS, the said agreement provides, among other things, that the said parties of the second part thereto, shall assign, transfer, set*3601  over and convey unto this Company, but for a lawful, adequate and valuable consideration as they may elect and agree, each and every right acquired by them under the said agreement, and thereupon and by force and virtue of the said conveyance, this Company shall undertake and be liable for and on account of all and singular the covenants, agreements, stipulations and conditions of the said agreement yet remaining to be done, paid, kept, observed or performed by them, the said parties of the second part, under the said agreement, and the said parties of the second part shall thereupon be released therefrom; and WHEREAS, it is deemed necessary and for the best interests of this Company, that the rights of the said parties of the second part to the said agreement be obtained by this Company, in the way and manner hereinbefore and in the said agreement provided and required; NOW, THEREFORE, BE IT RESOLVED: That the President of this Company be, and he is hereby authorized, empowered and directed, to purchase and obtain for this Company, for such consideration and upon such terms as to him shall seem meet, all the rights of the said M. L. Benedum, the said J. C. Trees, the said Booth*3602  & Flinn, Limited, the said E. C. Lufkin, the said M. W. Bahan, and the said Rufus C. Dawes, under the said proposed form of agreement as it now stands, or may be hereafter altered, changed, or amended, if satisfactory to the said President of this Company, and if and when made, executed and delivered on the part of the said Arkansas Natural Gas Company, the said Texas Company, and the said Southwestern Gas & Electric Company, on the one part, and the said M. L. Benedum, J. C. Trees, Booth & Flinn, Limited, E. C. Lufkin, M. W. Bahan and Rufus C. Dawes, on the other part, as hereinbefore recited.  * * * On September 22, 1914, the petitioner corporation formally accepted the proposal of the individuals who had contracted with the *227  three producing and distributing companies to transfer their rights and interest in the contract to the petitioner, together with $600,000 cash, in payment for their subscriptions to the stock of the petitioner.  On September 22, 1914, the contract was assigned to the petitioner.  The proposal to assign the contract and the assignment thereof were as follows: To the Board of Directors of the Reserve Natural Gas Company, We, the undersigned, *3603  respectively present and make the following proposition, to-wit: WHEREAS, Your president, Mr. M. W. Bahan, has brought to our knowledge and for our consideration that certain Resolution adopted by you at a meeting held by you on the 22nd day of August, 1914, in Shreveport, Louisiana, consequent upon the presentation of the form of a proposed Agreement to be made between us and the Arkansas Natural Gas Company, The Texas Company and the Southwestern Gas & Electric Company, for the purchase, sale and delivery of natural gas, whereby your said President was authorized, empowered and directed to purchase and obtain for your said company for such consideration and upon such terms as to him should seem meet all our rights under the said proposed Agreement as it then stood or as it might be thereafter altered, changed or amended, if satisfactory to him, and if and when made, executed and delivered on the part of the said Arkansas Natural Gas Company, the said The Texas Company and the said Southwestern Gas and Electric Company on the one part and ourselves on the other part; and WHEREAS, the said Agreement has been made, executed and delivered by all of the parties thereto in form satisfactory*3604  to your President, as in and by the said resolution required, and your said President has requested that we make and present our proposition to you for your consideration, approval, acceptance of rejection; and WHEREAS, we are subscribers to the capital stock of your said company, preferred and common, as follows, that is to say: M. L. Benedum, 4000 shares preferred stock, 7000 shares common stock; J. C. Trees, 4000 shares preferred stock, 7000 shares common stock; Booth & Flinn, Limited, 4000 shares preferred stock, 7000 shares common stock; E. C. Lufkin, 4000 shares preferred stock, 10,000 shares common stock; M. W. Bahan, 4000 shares preferred stock, 10,000 shares common stock; Rufus C. Dawes, 4000 shares preferred stock, 7000 shares common stock.  THEREFORE, we propose that for and in consideration of the capital stock of your said Company, preferred and common, respectively subscribed for by us as hereinbefore set forth and in payment of our respective subscriptions thereto in full we will assign, transfer, set over and convey on demand in due form of law unto your said company all the rights and interests which we have and hold or to which we may be entitled in*3605  law and equity under the hereinbefore recited Agreement between us and the said Arkansas Natural Gas Company, The Texas Company and the Southwestern Gas and Electric Company, and in addition to the said conveyance, we will severally and well and truly pay unto your said Company in money on demand in such sums or installments as it may from time to time require the following several and respective amounts, to-wit: One hundred thousand dollars by M. L. Benedum, One hundred thousand dollars by J. C. Trees, One hundred thousand dollars by Booth & Flinn, Limited, One hundred thousand dollars by E. C. Lufkin, *228  One hundred thousand dollars by M. W. Bahan, One hundred thousand dollars by Rufus C. Dawes.  AND IT IS PROVIDED always with reference to the said several sums of money that none of us shall under any circumstances be bound to pay more than our respective amounts or be held responsible or liable for or on account of any default of the others or any of them.  ASSIGNMENT.  THIS INDENTURE made the twenty-second day of September, A.D. 1914, between M. L. Benedum, J. C. Trees, and Booth and Flinn, Limited, all of Pittsburgh, Pennsylvania, E. C. Lufkin of New*3606  York City, New York, M. W. Bahan, of Fort Worth, Texas, and Rufus C. Dawes of Chicago, Illinois, parties of the first part, and the Reserve Natural Gas Company of Louisiana, a corporation created and organized under the laws of the State of Delaware, party of the second part, WITNESSETH: That the said parties of the first part for and in consideration of the sum of one dollar, lawful money of the United States of America, unto them well and truly paid by the said party of the second part, the receipt of which said sum by the said parties of the first part at and before the ensealing and delivery of these presents is hereby acknowledged, as well as other valuable consideration from the said party of the second part moving and by the said parties of the first part received have granted, bargained, sold, assigned, transferred, set over and conveyed and by these presents do grant, bargain, sell, assign, transfer, set over and convey unto the said party of the second part, its successors and assigns, each and every right and interest which they, the said parties of the first part, have and hold or to which they may be entitled in law and equity under and by virtue of that certain Agreement*3607  bearing date of the 12th day of September, A.D. 1914, made by and between the Arkansas Natural Gas Company, a corporation created and organized under the laws of the State of Delaware, The Texas Company, a corporation created and organized under the laws of the State of Texas and the Southwestern Gas and Electric Company, a corporation created and organized under the laws of the State of Delaware, parties of the first part, and the said M. L. Benedum, J. C. Trees, Booth & Flinn, Limited, E. C. Lufkin, M. W. Bahan and Rufus C. Dawes, parties of the second part, relating to the purchase, sale, transportation and delivery of natural gas - reference had to the said agreement the same will in its every part fully and at large appear.  TO HAVE AND TO HOLD the said rights and interests by these presents granted, bargained, sold, assigned, transferred, set over and conveyed unto the said party of the second part to its own proper use, benefit and behoof, its successors and assigns, forever.  IN WITNESS WHEREOF the said parties of the first part have hereunto set their hands and seals the day and year first above written.  Thereupon the $600,000 cash was paid in to the petitioner and*3608  48,000 shares of common stock and 24,000 shares of preferred stock were issued to the individuals or their nominees.  The contract was entered on the books of the petitioner at a value of $1,200,000 and so appeared during the years at issue.  Prior to the formation of the petitioner, the Texas Company had a large supply of gas for which it had no market.  It owned from 40,000 to 50,000 acres of oil and gas leases in territory adjacent to *229  the proposed pipe line and at the time of the formation of the petitioner had producing wells of an open-flow capacity of some 97,000,000 feet a day, from 30 to 35 wells.  The Arkansas Natural Gas Co. was selling large quantities of gas in Little Rock and along the route of its line to Little Rock, and was getting to a point where it needed an additional source of supply.  The Southwestern Gas & Electric Co. was in a somewhat similar position.  This situation is reflected in the contract as shown by the percentages of gas supplied by each and to be purchased by each.  Gas bought fromGas resold toPer centPer centArkansas Natural Gas Co26 2/361The Texas Co6011Southwestern Gas & Electric Co13 1/328*3609  Representatives of the three companies met to devise a means of relieving the situation which might be of mutual benefit and eventually presented to their companies the proposition later embodied in the contract in question.  In considering this problem the representatives made a thorough investigation into the conditions affecting the supply of gas and found an adequate amount of gas was available to tax the capacity of the pipe line, and that the gas field had a life of from 30 to 40 years.  They also investigated the maket for the gas and reached the conclusion that the domestic consumption would increase 100 per cent in 20 years, and that the industrial consumption would also increase.  This was borne out by the statistical history of consuming centers in the district and the personal knowledge and experience of the individuals.  With the assurance of a demand and supply of gas greatly in excess of the minimum amounts of 12,000,000 and 24,000,000 feet a day specified in the contract a pipe line was proposed and installed having a diameter of 16 inches and a capacity of about 65,000,000 feet a day.  The cost of a pipe line of this capacity was much greater than would have*3610  been necessary to supply a maximum of 24,000,000 feet a day.  Of the parties who acquired the contract, Messrs. Lufkin and Bahan represented The Texas Co., which furnished the money for the cash payment.  The stock of the petitioner issued to these men was later transferred to The Texas Co.  Mr. Dawes transferred the stock issued to him to the Union Gas & Electric Co., which owned *230  the capital stock of the Southwestern Gas & Electric Co.  Messers. Benedum and Trees and Booth & Flinn, Ltd., who had underwritten the subscription to pay $300,000 cash, offered the stock they acquired to the stockholders of the Arkansas Natural Gas Co. as set forth in the notice to stockholders dated August 1, 1914, reading: During the past two years there has been an important extension of the Caddo Gas Field, south of the present producing field, and also a large and promising gas field has been developed in De Soto Parish, Louisiana, about 60 miles south of the old Caddo Gas Field.  This territory is largely held by the Arkansas Natural Gas Company, the Dawes' interests, through the Southwestern Gas & Electric Company, and other interests, who have also a large number of gas wells completed*3611  on their leases, and these interests have decided to form a corporation for the purpose of securing this gas and making it available for the present, as well as to provide an abundant supply of gas for the future needs of the Arkansas Natural Gas Company, the Southwestern Gas & Electric Company, and markets of other interests in the same vicinity.  It is proposed that the New Company build a sixteen inch (16") pipe line, approximately 54 miles in length, having a capacity of over forty (40) million cubic feet of gas per day; this line to extend from the present lines of the Arkansas Natural Gas Company, near Oil City, Louisiana, into the De Soto Gas Field, and the Arkansas Natural Gas Company is to control sixty-one per cent (61%) of the total pipe line capacity, but the amount of gas it is required to take from the new Company's line will at present only be a little over twenty-five per cent (25%) of its capacity; this quantity of gas will be in addition to what the Arkansas Natural Gas Company is already marketing from its production in the Caddo Field, and the new supply will be very important and advantageous to the Arkansas Company for its future needs.  The new Company will*3612  be known as the RESERVE NATURAL GAS COMPANY OF LOUISIANA, and the authorized capital stock will be $3,000,000.00, divided into 40,000 shares of seven per cent (7%) Cumulative Preferred Stock, of the par value of $25.00 each, and 80,000 shares of Common Stock, of the par value of $25.00 each; but it is proposed to issue at present, only 24,000 shares of the Preferred Stock, amounting to $600,000.00, and 48,000 shares of the Common Stock, amounting to $1,200,000.00, which it is estimated will be sufficient to install the proposed pipe line system; the balance of the authorized stock to remain in the Treasury of the Company.  The Preferred Stock will be redeemed at any dividend paying period after January 1st 1915, but shall be preferred both as to dividends and assets, and no dividends are to be declared upon the Common Stock until the Preferred Stock shall have been first reduced and retired.  The quantity of gas to be purchased by the several interests, from the Reserve Pipe Line, is to average eighteen (18) million cubic feet per day, throughout the year for which it receives the sum of four and one-half cents (4 1/2c) per thousand cubic feet, delivered at the several points at*3613  which connections are made by the Companies to the Reserve Pipe Line.  This quantity of gas should bring Net Earnings of $139,250.00, after all operating charges are paid, which sum will be applied to the payment of dividends on Preferred Stock and the retirement of same.  The construction of the proposed pipe line will require about $600,000.00 cash, of which one-half has been underwritten by Messrs. Benedum and Trees and Booth & Flinn, Ltd., for which they receive 12,000 shares of the Preferred Stock and 21,000 shares of the Common Stock, and they desire to offer to all the stockholders of the Arkansas Natural Gas Company, the privilege of taking *231  their proportion of the stock underwritten by them in the Reserve Natural Gas Company, at the same price and terms paid by them, and accordingly we submit the following offer authorized by them: From our Stock Ledger Record of your holdings of shares in the Arkansas Natural Gas Company, you are entitled to subscribe for and receive shares of the Preferred and shares of the Common Stock of the Reserve Natural Gas Company, amounting to $ .  In case you subscribe for more than your proportion, the right is reserved to reduce*3614  your subscription to the proportionate amount to which you are entitled by your holdings in the Arkansas Natural Gas Company.  Your subscription for the stock will be payable in the following manner: Certified Check or Draft for fifty per centum (50%) of the amount, or $ , with your subscription for the stock; twenty-five per centum (25%) within sixty (60) days from date of subscription; and the remaining twenty-five per centum (25%) within three (3) months from date of subscription, at which time certificates will be delivered to you for the stock.  The right to subscribe for this stock must be exercised by you on or before August 15th, 1914.  The value of the contract paid into the petitioner in 1914, was $1,200,000.  The contract had a life of 20 years and the annual deduction due to the exhaustion of the contract is $60,000.  OPINION.  MILLIKEN: The respondent determined the deficiencies here in question by allowing a value of $330,000 for the contract, for both invested capital and exhaustion purposes.  The petition as filed seeks a value of $1,200,000.  At the hearing the respondent took the position that he erred in allowing any value for the contract and the petitioner*3615  took the position that the contract had a value of $2,400,000.  Thus, the parties, as a result of the hearing, find themselves further apart.  In the original value determined and claimed, both parties employed the same method, i.e., by the determination of the present worth of future estimated profits.  They differed as to the estimated annual net profits and the amount of discount by which such profits should be reduced in the redetermination of their present worth.  Petitioner, in support of the valuation claimed, also offered the testimony of expert witnesses.  We are convinced that both parties, as concerns their present contentions, have gone to extremes.  The respondent contends that the contract in question had no value because it was acquired by parties dealing at arm's length with the three gas companies and, since it appears that no bonus was paid by the individuals, the acquisition of the contract without cost is evidence of the fact that it had no bonus value.  Assuming that the individuals were dealing at arm's length with the gas companies and acquired the contract without cost, yet the *232  contract may have had a substantial value, and the petitioner would*3616  be entitled to such value when it acquired the contract for stock.  The question at issue is the value of the contract and the transaction by which the individual acquired it would be only one element of proof which might be rebutted by more competent evidence of value.  It is not of uncommon occurrence for leases and contracts to be acquired at no cost and be sold to a third party for substantial amounts.  We do not believe, however, that the transaction in question was at arm's length, since it appears from the record that all of the companies or their stockholders either participated directly or had the opportunity to participate in proportion to their stock interests.  The officers of the three corporations participated as trustees or agents.  The respondent further contends that in any event the value of the contract should be confined to the enforceable provisions contained in it.  While in many cases this might be true, in the instant case there are circumstances which overcome that presumption.  In the first place, the creation of the petitioner was necessary to the successful operation of the three gas companies which obligated themselves to take a certain quantity each*3617  year.  Two of the companies furnished 89 per cent of the market, and the other company was to furnish 60 per cent of the supply.  For any one of these companies to start competition with the pipe line company it would have to increase either its market or its supply, the condition which the creation of the petitioner remedied.  The companies were obligated to take a definite quantity each year from the petitioner, so that the competition could only be for the excess over that amount.  Until a point was reached where such excess was sufficient to warrant the installation of another pipe line, none of the gas companies or a third party would be justified in entering the competitive field.  Such a point would not be reached until the market had increased at least 50 to 75 per cent.  Also it is not reasonable to assume that the three companies would enter into competition with petitioner and thus render of questionable value the investment of $600,000 in the pipe line constructed by them for petitioner.  The purchaser of the contract acquired two elements of value - first, by the terms of the contract it had an assured return, enforceable under the contract, of 2 1/2 cents a thousand*3618  from the purchase and sale of 6,750,000,000 feet of gas a year during 20 years.  Second, in addition to the assured and enforceable business, it acquired a business relationship and strategical position that would practically assure it of handling any additional business of the three gas companies.  The latter was the prime factor in the organization of petitioner.  *233  This second element would of course extend beyond the life of the contract, but during the life of the contract it was inseparable therefrom and would have passed with the contract to a purchaser thereof.  This element also was susceptible of valuation and a prospective purchaser would have been called upon to pay therefor an amount representing its fair value.  The contract had a life of 20 years and, in determining the value of the contract to a prospective purchaser, we can only consider the two elements of value for a period of 20 years.  Any value beyond that period could not be a part and parcel of the contract, although growing out of it and resulting from it.  An analogous condition results in the case of patents.  The patent has a limited life of 17 years, but after the 17 years have expired the*3619  company which has utilized the patent may continue to realize gains or profits from the manufacture or use of the patented article.  The petitioner's witness, who was experienced in the gas industry, stated that at the time of the formation of the petitioner, the parties were convinced both from their experience and investigation that domestic consumption would increase 100 per cent in 20 years, and further stated, "As to the industrial, of course that was something of a guess, but we had statistics and the history to show us what the domestic would be." This witness and another witness also expressed the opinion that within 20 years from the date of the contract it would not be unreasonable to expect the operations of the petitioner would have reached the capacity of the pipe line, or about 60,000,000 feet per 24 hours.  In view of these conditions, we believe that a willing purchaser would have been justified in considering that the average assured market for the 20 years would be at least 9,855,000 feet a day, or 50 per cent in excess of the minimum guarantee.  This would represent assured gross receipts of $246,375 a year and net receipts of about $150,000 a year after deducting*3620  operating expenses, depreciation, and all other annual charges, except interest on the investment, which a prospective purchaser would make.  The value of this annual earning after making allowance for interest on the investment in pipe line and other equipment would reasonably amount to $1,200,000, the value originally claimed in the petition.  We have used the operating expenses and other annual charges that the parties used as a basis for their original valuations.  We are, therefore, of the opinion that the value of the contract in September, 1914, acquired for stock, was $1,200,000, which value should be allowed for invested capital and used for exhaustion purposes.  Judgment will be entered under Rule 50.