Court Opinion

ID: 4625252
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:56:51.815911+00
Date Added: 2024-06-11T07:56:39.896876
License: Public Domain

BUENA VISTA LAND & DEVELOPMENT CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Buena Vista Land & Dev. Co. v. CommissionerDocket No. 2025.United States Board of Tax Appeals13 B.T.A. 895; 1928 BTA LEXIS 3156; October 10, 1928, Promulgated 1928 BTA LEXIS 3156">*3156  In the absence of evidence from which the value on March 1, 1913, of petitioner's "right, title and interest, if any" in and to certain selections of land could be determined, respondent is affirmed.  Shirley C. Ward, Esq., and Chandler P. Ward, Esq., for the petitioner.  LeRoy Hight, Esq., and John D. Foley, Esq., for the respondent.  VAN FOSSAN 13 B.T.A. 895">*895  This proceeding is for a redetermination of a deficiency in income and profits tax for the year 1921 asserted by the Commissioner in the amount of $76,019.64.  The petitioner alleges that the respondent erred in holding that the right, title and interest, termed an "equitable title," of the petitioner 13 B.T.A. 895">*896  to certain lands in township 32 south, range 24 east, Mount Diablo Meridian, in the State of California, had no fair market value on March 1, 1913, and, consequently, in assessing an income and profits tax on $174,259.43, the net amount received in stock by the petitioner in 1921 from the sale of its title.  FINDINGS OF FACT.  The petitioner is a corporation organized under the laws of the State of California, with its principal office at 138 South Main Street, Los Angeles. 1928 BTA LEXIS 3156">*3157  By an Act of Congress of March 3, 1953 (10 Stat. 248) every sixteenth and thirty-sixth section of public lands, with immaterial exceptions, in the State of California, was granted to the State in aid of the common schools.  In order to secure exclusive control of all lands within the boundaries of its National Forest Reserves, by Act of Congress of February 28, 1891, chapter 348 (20 Stat. 796; Comp. Stats., secs. 4860, 4861, amending secs. 2275 and 2276, Rev. Stats.), the United States made to the several States an offer of exchange, under which it granted to the State certain lands to be selected by it in lieu or exchange for school lands, known as "base lands," which had been granted to the State under the said Act of Congress of March 3, 1853, but which theretofore had been, or thereafter might be, included in Forest Reserves.  In January, 1900, the lands in township 32 south, range 24 east, Mount Diablo Meridian, in the State of California, were alleged to be mineral in character and valuable for production of petroleum and were, in effect, withdrawn from agricultural appropriation.  On April 5, 1904, the said lands were restored to agricultural entry.  In 1905 the Stanislaus, 1928 BTA LEXIS 3156">*3158  Inyo, and Shasta National Forest Reserves were created in California by the United States Government.  Within those reserves were some of the sixteenth and thirty-sixth sections covered by the Act of Congress of 1853.  In October and November, 1906, the State of California made application to select 23 other parcels of land in lieu of certain sixteenth and thirty-sixth sections granted to it and did so select the north half and southeast quarter of section 2; sections 4 and 12; the south half of section 14; and section 20, township 32 south, range 24 east, Mount Diablo Base Meridian, in Kern County, California.  In June and August, 1907, the State made four additional selections relating to sections 6 and 8 from public lands.  All selections, 27 in number, aggregating 4,020 acres, so made were unappropriated surveyed public lands of the United States, listed as agricultural in character and comprised the lands under consideration in this proceeding.  13 B.T.A. 895">*897  The State of California complied with all the requirements established by the United States governing the selection of such lieu lands and the perfecting of its equitable title thereto.  On various dates from October 13, 1906, to1928 BTA LEXIS 3156">*3159  August 19, 1907, inclusive, the State filed in the United States Land Office at Visalia, Calif., the 27 selections above mentioned.  Twenty-three of them (Visalia serial numbers 01917, 01918, 01919, 01920, 01921, 01922, 01910, 01911, 01912, 01913, 01914, 01915, 01916, 01596, 01597, 01598, 01599, 01923, 01924, 0402, 0403, 0404, 0405) made in October and November, 1906, and covering the north half and southeast quarter of section 2, the south half of section 14, and all of sections 4, 12, and 20, followed a uniform course of procedure, chronologically as follows: 1.  The State paid to the United States the required fees.  2.  The State filed its selection lists.  3.  It filed an appointment of its Land Agent to examine the selections made and to execute an affidavit as to their mineral or non-mineral character.  4.  The Land Agent filed his affidavit stating that "the land is essentially non-mineral in character." 5.  The Register and Receiver of the United States Land Office at Visalia, California, posted the notices of the State's selection in his own office and filed proof thereof.  6.  The State filed the appointment of another Land Agent to post notices upon the land1928 BTA LEXIS 3156">*3160  selected and to make proof of continuous posting.  7.  Such posting was made and proof thereof filed.  8.  The required publication in a local newspaper was made and proof thereof filed.  9.  A Special Agent of the General Land Office was appointed to visit and inspect each separate subdivision of the lands selected.  10.  Such Special Agent of the General Land Office filed his report that the land was non-mineral in character.  11.  The State filed certificates of the County Recorders of the several Counties in which the base lands were situated showing that such base lands were unencumbered and had not been transferred by the State.  12.  In each of these twenty-three selections, after the period of posting and publication had elapsed without any adverse claim having been filed or any objection to the non-mineral character having been made, the Register and Receiver forwarded to the Commissioner of the General Land Office the records and papers therein, stating that according to the records of the Register and Receiver the lands selected were "subject to disposition thereby." 13.  In April, May and June, 1907, the Commissioner of the General Land Office adjudicated1928 BTA LEXIS 3156">*3161  the facts contained in the records as outlined above and returned the papers to the Register and Receiver "for allowance." 14.  The Register and Receiver accepted the selections, endorsed his acceptance on the selection lists and notified the State of his action, as well as of the "allowance" thereof by the Commissioner of the General Land Office.  15.  Within a month after such notification and in all cases prior to July, 1907, the State sold and conveyed its title to the selected lands to the predecessors in interest of the petitioner and received the purchase price thereof from them.  The regulations of the General Land Office governing the selection and disposition of lieu lands as above set forth were adopted in 13 B.T.A. 895">*898  March, 1903, but modified in April, 1907.  Under the modified regulations the State of California made four selections in sections 6 and 8 of the said township (Visalia serial numbers 01907, 01908, 01909, and 01602) in June and August, 1907.  The modified procedure was identical with the original, except that after the completion of steps 1 to 11, inclusive, mentioned in the preceding paragraph, the Register and Receiver did not forward the record to1928 BTA LEXIS 3156">*3162  the Commissioner of the General Land Office, but certified on the selection list that it was "allowed and approved." The above four selections made in sections 6 and 8 were thus allowed and approved by the Register and Receiver in August and September, 1907.  He then transmitted the record to the Commissioner of the General Land Office and notified the State accordingly.  In all of the 27 selections the State accurately and carefully complied with all the requirements of the Government relating thereto and only the formal "approval" of the Secretary of the Interior remained to be entered in order to accomplish the vesting of the legal title to the lands in question in the State of California.  This written approval of the Secretary, known as the "clear-list" constitutes the muniment of the complete legal title in state lieu selections cases.  In the stipulation of facts entered into between the petitioner and the respondent appears the following: * * * It is stipulated by the respondent that the State of California fully complied with any and all statutes, and any and all rules and regulations of the Land Office then existing with respect to relinquishments of base lands, so far1928 BTA LEXIS 3156">*3163  as, if at all, such relinquishment was authorized by said statutes, rules or regulations.  The first discovery of oil, gas or other hydrocarbons in township 32 south, range 24 east, Mount Diablo Meridian in the State of California, was made on June 16, 1909, when gas was discovered on section 10 in the said township.  On February 1, 1910, oil was discovered on the said section 10 and later other discoveries of oil and gas on the said section 10 and also on the lands in question resulted in there being at least 17 producing wells on the lands involved in this proceeding at March 1, 1913.  On September 8, 1908, the Commissioner of the General Land Office recommended to the Secretary of the Interior the temporary withdrawal from agricultural entry of a large acreage of public lands, including all of township 32 south, range 24 east, Mount Diablo Meridian, pending their examination and classification by the United States Geological Survey as to their oil-bearing character.  On September 21, 1908, the General Land Office notified the Register and Receiver at Visalia of such temporary withdrawal.  On June 22, 1909, the Commissioner of the General Land Office reaffirmed the temporary1928 BTA LEXIS 3156">*3164  withdrawal, except where it was shown that lands in 13 B.T.A. 895">*899  fact did not contain oil.  Upon the recommendation of the United States Geological Survey a large acreage, including the said township 32, was withdrawn by the President of the United States from all forms of entry and made to constitute Petroleum Reserve No. 2, subject to valid existing rights.  The Secretary of the Interior retained the selection records relating to the lands under consideration and took no action thereon from 1907 to February 27, 1913.  On October 17, 1911, the attorney for the State of California filed a petition praying that the Secretary proceed to exercise his supervisory powers in order to complete the formal steps required to convert the equitable title of the State - and hence of its transferee, the petitioner - into a legal title.  On February 27, 1913, the Secretary of the Interior, by Samuel Adams, his first assistant, completed the review of the record, found it regular but held that the selections mentioned therein were subject to rejection unless the lands covered thereby were specifically shown to be nonmineral in character and that, in effect, the Executive withdrawal of and the discovery1928 BTA LEXIS 3156">*3165  of oil in the selected land constituted ground for rejection and that the selections should be canceled.  On April 23, 1913, a motion for rehearing was denied by the Assistant Secretary of the Interior.  During October, November, and December, 1908, placer mineral claims were filed by one Fox, B. M. Howe, and O. O. McReynolds upon the lands selected by the petitioner's transferors and such claims were transferred later to the Honolulu Consolidated Oil Co. That company had acquired the legal title to section 10 and the southwest quarter of section 2 in the said township 32 and discovered gas thereon on June 16, 1909, and oil on February 1, 1910.  Later it drilled for and obtained oil and gas from the lands involved in this proceeding.  On November 20, 1917, the United States brought suit against the Honolulu Consolidated Oil Co. in the District Court of the United States for the Southern District of California, Northern Division, to quiet title to certain lands, including those involved in this proceeding, upon which the Honolulu Company had filed mineral claims and from which large amounts of oil and gas were being produced.  A receiver was appointed on November 23, 1918, and continued1928 BTA LEXIS 3156">*3166  in control of the property until about December 1, 1921, during which period he accumulated over $5,500,000 from the sale of oil and gas derived therefrom.  In September, 1920, the petitioner intervened in that action and prayed that a decision therein be withheld until the Supreme Court of the United States should render its decision in the case of State of Wyoming & Ridgely v.United States (Docket No. 763), then pending before it and involving quite similar, if not parallel, facts.  Previously, on July 11, 1919, the petitioner 13 B.T.A. 895">*900  and the State of California had applied to the Secretary of the Interior to reinstate the selections canceled by him under his above mentioned order of February 27, 1913.  On February 27, 1920, the Secretary refused to reinstate such selections and on that date the petitioner brought suit in the Supreme Court of the District of Columbia to compel him to do so.  This action in the Supreme Court of the District of Columbia also was held in abeyance pending the decision of the United States Supreme Court in the case of State of Wyoming & Ridgely v.United States. That decision was rendered on 1928 BTA LEXIS 3156">*3167  March 28, 1921 (; ), and held, in effect, that the condition at the time of perfecting lieu selections and not the conditions at the time the Secretary was called upon to approve the selections, determined the validity of and the right to the selections made by the State, and that the State's rights under such selections were to be determined without regard to any withdrawal subsequent to such selections so perfected.  On April 7, 1921, Secretary of the Interior Fall wrote to Mr. F. W. Clements, attorney for the petitioners, as follows: Mr. F. W. CLEMENTS, Wilkins Building, Washington, D.C.DEAR MR. CLEMENTS: In the matter of California and Buena Vista Land and Development Co. v. The Secretary, Supreme Court, D.C. Eq. 37,626, involving certain State lieu selection lists heretofore rejected for reasons set forth in ), and in which injunction is sought to restrain cancellation or rejection of the selections as well as disposition of the lands to other parties, you are advised that the same has been considered in connection with the recent decision of the Supreme1928 BTA LEXIS 3156">*3168  Court in Wyoming et al. v.United States, commonly known as the Ridgely case.  I am, of course, convinced that the action of the Department in rejecting the selections on the ground that the withdrawal intervening between selection and presentation for approval bars favorable consideration is no longer tenable under the Ridgely decision, and that the selections must now be considered or their merits.  Consequently, if pursuant to the usual practice in these matters you will discontinue the proceeding in the court and so notify counsel for the Department, the selections will be reinstated and readjudicated without unnecessary delay, in the light of the Ridgely decision.  This, perhaps I need not add, will necessarily suspend consideration of or action on any pending application for a lease under the provisions of the act of February 25, 1920.  Respectfully, (Signed) ALBERT B. FALL, Secretary.On April 30, 1921, the Secretary of the Interior ordered that the selections be reinstated and that the hearing be held before the Register and Receiver of the United States Land Office at Visalia, California, as ordered on March 31, 1910.  In his order appears this statement: 1928 BTA LEXIS 3156">*3169  "The issue of fact being the character of land as known or13 B.T.A. 895">*901 believed to be mineral or non-mineral as of the time of the perfection of the several selections therein." (Italics ours.) On June 28, 1921, the petitioner entered into a contract with the Honolulu Consolidated Oil Co., whereby petitioner relinquished its right, title and interest in and to the lands in controversy to the State of California, and that State in turn relinquished to the United States, in consideration of the fransfer to the petitioner of 50,000 shares of the capital stock of the Honolulu Consolidated Oil Co., with the provision that 50,000 additional shares would be transferred if the Honolulu Company should secure patents to the said lands or 25,000 additional shares if the Honolulu Company should secure leases thereto.  The leases were obtained and consequently the entire amount received by the petitioner was 75,000 shares of the Honolulu Company at the market value of $5 per share, or $375,000, of which amount, after settling with various interests, petitioner retained in its own right stock valued at $180,000.  From this amount there were expenses stipulated to be deductible of $5,740.57, 1928 BTA LEXIS 3156">*3170  leaving a net amount of $174,259.43.  On November 18, 1921, in a lengthy decision () Secretary of the Interior Fall disposed of the claims of the Honolulu Consolidated Oil Co. upon its request that the Secretary vacate a former order dated June 17, 1920, denying patents to the said company.  The decision contained the following important statements: At the time of the filing of this petition, there were three claimants to the lands above described, viz: The Buena Vista Land and Development Company, the United States, and this petitioner.  The Buena Vista Company was pressing claims here, and in the United States District Court for the Southern District of California, and in the Supreme Court of the District of Columbia, based on certain selections of the lands in question made by the state of California in October, 1906, and June and August, 1907, under sections 2275 and 2276, Revised Statutes, and the act of February 28, 1891 (26 Stats. 796), and in each of the three forums mentioned was asserting that, by virtue of the said state selections, the lands in question belonged to it as by complete equitable title and had ceased to be public lands of the United1928 BTA LEXIS 3156">*3171  States as early as September, 1909.  This Department had held against this contention February 27, 1913, in State of California et al.  (), in a ruling to the effect that conditions existing at the time when the Secretary of the Interior was called upon to approve the selections controlled the right to the selections and that inasmuch as it appeared on that date that the lands were mineral in character (oil having been discovered thereon and the lands having been withdrawn on September 27, 1906, and December 13, 1912,) for that reason the Secretary had no authority to approve the selections.  This decision stood until March 28, 1921, when the Supreme Court of the United States in deciding the Ridgely case () held that conditions at the time of perfecting lieu selections, not conditions at the time of approval determine the right to the selections, and that the state's rights under such selections are to be determined without regard to any withdrawal subsequent to such perfected selections.  Thus the Buena Vista decision of February 27, 1913, was nullified, and that 13 B.T.A. 895">*902  company1928 BTA LEXIS 3156">*3172  immediately became entitled, at the least, to have its claims considered on their merits.  Accordingly, on April 30, 1921, the cases embracing these selections were remanded to the local land officers at Visalia with instructions to hold a hearing on the question of the character of the land as known or believed to be mineral or non-mineral as of the time of the perfecting of the several selections.  But, relying upon the authority of the Ridgely case, and upon its suit then pending against the Secretary of the Interior and the Commissioner of the General Land Office in the Supreme Court of the District of Columbia (In Equity, No. 37,620), the Buena Vista Company, through its attorneys, effectually blocked the Visalia hearing until such time as a court decision could be had determining the jurisdiction of this Department under the Ridgely case.  (Italics are the Secretary's.) After a review of the history of the Honolulu Company's efforts to acquire title to the lands and of the status of its case in the United States Court for the Southern District of California prior to its settlement agreement with the petitioner, the Secretary concluded as follows: Such, in brief, and with1928 BTA LEXIS 3156">*3173  one exception to be presently noticed, is the history of this case prior to the date of the filing of the instant petition, and such also was substantially the posture of it on June 15 and 16, when the petition was argued and submitted.  Recently, however, the Honolulu Company procured from the State of California and the Buena Vista Company waivers of their claims to all the lands involved herein, thus clearing the records in this Department and in the California and District of Columbia courts of litigation that threatened to be not only protracted but serious, and which, if the Buena Vista Company had prevailed in this Department on the facts or had brought itself within the decision of the Ridgely case in either the California or District of Columbia Court, would not only have resulted in depriving the Honolulu Company of its claims, but, as well, in conclusively divesting the United States of all its right, title and interest in and to the lands in question and in and to the oil and gas therein.  But these dangers and delays having been averted and obviated by the procuring of the waivers aforesaid, the main case upon the petition of the Honolulu Company may now be considered1928 BTA LEXIS 3156">*3174  and decided.  OPINION.  VAN FOSSAN: On June 28, 1921, petitioner, in consideration of the transfer to it by Honolulu Consolidated Oil Co. of 75,000 shares of its capital stock of a then fair market value of $375,000, relinquished to the State of California its "right, title and interest, if any," to certain oil-bearing lands located in that State.  Petitioner's ultimate share in this sum was $180,000.  The respondent taxed this entire sum as income.  Petitioner contends that its "right, title and interest, if any," was worth at least as much on March 1, 1913, as at the date of relinquishment, and that accordingly, there was no gain.  The problem thus confronting us is the fair market value as of March 1, 1913, of whatever right, title and interest, if any, petitioner had on said date.  We do not conceive it necessary in solving this 13 B.T.A. 895">*903  problem to determine the precise character and legal attributes of this interest.  The claim or right that was relinquished in 1921 was not defined or described other than in the most general terms it was possible to employ.  It was not then asserted unquivocally that the petitioner had any real right, title or interest.  The words "if1928 BTA LEXIS 3156">*3175  any" were used to obviate the necessity of such assertion.  Nor do we deem it necessary to determine the motives that led the Honolulu Consolidated Oil Co. to pay $375,000 for the relinquishment of petitioner's claims.  Whether this payment represented merely the nuisance value of the claims or evidenced a belief that they were acquiring some tangible interest is not considered germane to this decision.  The evidence does not establish the actuating reasons and to speculate is idle.  Whatever it was that was relinquished was deemed by the parties then to be worth $375,000.  Was it worth the same, or more, or less on March 1, 1913?  On February 27, 1913 (two days before the basic valuation date), the Secretary of the Interior rendered a decision bearing directly on the rights of petitioner.  In this decision the Secretary, after a full review of the petitioner's attempt to perfect the selections in question and the pertinent facts and court decisions, held: The Department is accordingly of opinion that the school indemnity selections here involved are subject to rejection unless the lands covered thereby are specifically shown to be nonmineral in character.  The Buena Vista Company's1928 BTA LEXIS 3156">*3176  contention that the Commissioner's letter of June 1, 1907, returning certain State indemnity school land lists "for allowance," constituted an approval of such selection is without merit.  This contention is inconsistent with the present plea of the selectors for an immediate hearing with respect to these lands.  * * * In view of all the circumstances and by reason of the later executive withdrawals, the Department is of opinion that the orders for hearing issued in March, 1910, should not be revived or further pursued in regard to these proffered selections.  Moreover, since the President has, on account of their mineral character, withdrawn these lands from disposition, it is evident that the Secretary has no authority to approve the selections and they must therefore be rejected.  If the withdrawal shall be canceled the State May apply anew for the lands if it is so advised.  However, counsel seem to admit that the lands are in fact mineral.  The State selections involved will be canceled.  This is without prejudice to the right in the State to submit such showing as to nonmineral character of the lands involved as a fact, as may warrant further investigation to the end that1928 BTA LEXIS 3156">*3177  the existing classification may be set aside and recommendation, based thereon, made to the President to relieve the lands from the existing withdrawal.  Such was the situation facing petitioner on March 1, 1913.  The decision in , rendered in 1921 could not then be anticipated.  There was scant 13 B.T.A. 895">*904  basis for hope that the Secretary of the Interior, whose approval was necessary to perfect title to the selections, would reverse himself and reinstate the claims so disallowed.  Indeed, on the basic date it would seem that petitioner's affairs were at extreme low tide.  The chance of success, tested by all reasonable measures, had been reduced to a point where it appeared to be little if anything more than a gamble against very heavy odds.  This is not to say that in law petitioner's claims were any less valid than in 1921.  But that is not the test of fair market value.  Market value and intrinsic value may or may not coincide.  Many of the factors that affect market value may have little relation to intrinsic value.  In forming a judgment of the 1913 market value we must limit our consideration to those1928 BTA LEXIS 3156">*3178  facts then known or reasonably to be predicted.  Subsequent facts are useful as confirmatory of the reasonableness of judgments previously formed but should not be used in making an original determination.  Turning to 1921 we find a very different picture.  The Supreme Court in the Ridgely case had held the Secretary to be in error; that the mineral or nonmineral character of the lands was to be determined as of the dates of the making of the selections, not the date of their approval; and that a State's rights are to be determined without regard to any subsequent withdrawals.  Furthermore, the Secretary of the Interior had written a letter bowing to the mandate of the Supreme Court and offering, on condition of discontinuance by petitioner of a court action for injunction, to reinstate the selections and readjudicate the same in the light of the Ridgely case. On April 30, 1921, by order of the Secretary the selections were reinstated.  Though petitioner complains that in order for hearing the Secretary laid down an impossible proposition, namely, that petitioner must show that at the time of the selections the lands were not known or believed to be mineral in character, 1928 BTA LEXIS 3156">*3179  we can not escape the conviction that petitioner's chances of success in perfection of its selections would have appealed much more strongly to the average man on this date than on March 1, 1913.  Nor do we believe it a fair assumption that in meeting the test so laid down it would have been impossible to have obtained honest opinions and judgments of qualified experts, a point on which petitioner places great stress.  It was under these conditions that the sale in 1921 was made.  Though petitioner contends that the price received was unfairly depressed by the "artificial test" imposed on petitioner by the Secretary, the record does not establish this contention as a fact and the sale for $375,000 furnishes us with our best measure of the fair market value in 1921.  The strong logic of facts and surrounding circumstances demonstrates conclusively that the market value was 13 B.T.A. 895">*905  much less in 1913.  The Secretary's decision of February 27, 1913, must inevitably have depressed the market value at that date, while the decision in the Ridgely case and the subsequent reinstatement of the claims, however circumscribed, must have stimulated interest and increased their attractiveness1928 BTA LEXIS 3156">*3180  to possible purchasers in 1921.  For these and other reasons appearing in the testimony itself we can give little weight to the opinion of petitioner's witness, who placed a value of $450,000 on the claims as of March 1, 1913.  This witness, failing to qualify as an expert, was permitted to express his opinion as an officer and stockholder of petitioner, but the facts and circumstances on the respective dates are so strongly to the contrary that they overcome any advantage that might accure to petitioner from this expression of opinion.  If $375,000 represented the market value of petitioner's right, title and interest, if any, in 1921, and we have no evidence to the contrary, then their market value in 1913 must have been much less.  This brings us to the crux of the matter.  The record is insufficient to enable us to determine with any assurance of correctness the fair market value of petitioner's claims on March 1, 1913.  The logic of fact and circumstance forbids us to adopt the value suggested by petitioner's witness.  By the same process of reasoning we are convinced that the value in 1913 was much less than in 1921.  The evidence is insufficient to indicate the amount of1928 BTA LEXIS 3156">*3181  this lesser value.  We can not speculate; our conclusion must be based on facts to be found in the record.  Where the record fails to furnish the facts from which we can construct a judgment as to the value we have no alternative but to hold that petitioner has failed in proof of his case.  He has not proved the respondent to be in error.  Judgment will be entered under Rule 50.