1933 BTA LEXIS 1053 | B.T.A. | 1933
Lead Opinion
The major issue presented in these proceedings is what profit, if any, the petitioner realized through the transfer of certain oil leases on June 19, 1919, to a corporation for its entire capital stock, and the exchange of the foregoing stock on June 30, 1919, for stock in a second corporation. Stated briefly, the controversy arises on the basis of the following facts: During 1917,
The petitioner says that the situation presented is properly divisible for tax purposes into two separate and distinct transactions, namely, first, the transfer of his leases to the Simms Oil Co. in consideration for the issuance to him of its entire capital stock and, second, the exchange of the stock so received for stock of the Simms Petroleum Co. As to this first transaction, the petitioner says that
In the first place, are we to view what occurred as constituting one or two transactions? In considering a situation of this nature we start out with the fundamental and well established principles that the question must be decided on the basis of what was done and not the effect of what occurred, and that the design and purpose are not controlling. It is immaterial that the same result might have been accomplished in some other way; even though the practical effect may be the same in either case, the resulting tax liability must be determined upon the basis of the actualities of the situation. United States v. Phellis, 257 U.S. 156; Weiss v. Steam, 265 U.S. 242. The foregoing principles have been consistently followed by the Board. Anna M. Harkness, 1 B.T.A. 127; B. F. Saul, 4 B.T.A. 639; William, H. Mullins, 14 B.T.A. 426; and W. E. Guild, 19 B.T.A. 1186.
When we view the situation here presented on the basis of the above principles, we can see no answer other than that there were two distinct steps which must be considered separately for tax purposes. Because of the earnestness with which the Commissioner urged the single transaction theory, the large record which was prepared on that basis, and the difference which might result, depending on which of the two theories urged is adopted, we have set out at length the facts which were related to the formation of the two corporations. In our opinion the first transaction was completed when the petitioner exchanged his oil leases for the entire capital stock of the Simms Oil Co. It is undoubtedly true that prior to that time negotiations had been in progress between the petitioner and Knauth, Nachod-& Kuhne and others looking to the consummation of that which was not completed until the Simms Petroleum Co. was formed and the commitments which were contained in the agreement to form the Simms Petroleum Co. were carried out, but
But does the fact that a valid and subsisting option was in effect on June 19, 1919, under which the petitioner was bound to do certain things provided the other parties elected to proceed under the agreements, mean that a closed and completed transaction for tax purposes did not result when he exchanged his leases for stock? We think not. Obviously, if the subsequent transactions had never occurred (as well might have been the case), it would not be urged that no gain or loss should be computed merely because when the stock was received the petitioner was under certain conditional obligations as to its disposition. Federal taxes are determined upon an annual basis and all events which occur within a given year must be considered in arriving at the tax liability for such annual period. It so happens here that both of the transactions in controversy occurred within the same year, but the result should not be different if one transaction had occurred in one year and the other within the same length of time but in a subsequent year.
It is urged further that both steps, even though constituting in a sense separate transactions, were part of a general plan and therefore we should regard the substance rather than the form and say that the two transactions were in substance and in fact one inseparable transaction. That substance rather than form should govern in tax matters is of course a well established principle (Eisner v. Macomber, 252 U.S. 189, and United States v. Phellis, supra), but adherence to that principle does not solve our problem because we still have the difficult task of distinguishing between form and substance. (Cf. Edward A. Langenbach, 2 B.T.A. 777). Here, however, we think it clear that in substance as well as in form there were
The petitioner’s position on the second transaction is that no gain or loss resulted therefrom since what occurred amounted to a “ reorganization ” within the meaning of that part of section 202 (b) which provides, as an exception to that portion of the section which we held controlling as to the first transaction, that:
*1015 * * * when in connection with the reorganization, merger, or consolidation of a corporation a person receives in place of stock or securities owned by him new stock or securities of no greater aggregate par or face value, no gain or loss shall be deemed to occur from the exchange, and the new stock or securities received shall be treated as taking the place of the stock, securities, or property exchanged.
No definition of the term “ reorganization ” occurs in the Revenue Act of 1918, but in the regulations promulgated thereunder (art. 1567, Regulations 45) the following definition is given:
* * * The term “ reorganization,” as used in section 202 of the statute, includes cases of corporate readjustment where stockholders exchange their stock for the stock of a holding corporation, provided the holding corporation and the original corporation, in which it holds stock, are so closely related that the two corporations are affiliated as defined in section 240 (b) of the statute and article 633, and are thus required to file consolidated returns. * * *
No suggestion is made by the Commissioner that the foregoing definition does not represent his consistent practice in situations where applicable, nor does he argue that the foregoing definition is an improper interpretation of the term “ reorganization ” or that it is here inapplicable if we should view what occurred as two transactions. What he says is that there was in effect only one transaction, but that if we should hold there were two transactions to be considered it would be immaterial that we had to value the Simms Oil Co. stock rather than that of Simms Petroleum Co., thus seemingly agreeing by inference that what must be considered to have occurred in the second instance under the “ two-transaction ” theory was a reorganization within the meaning of the Revenue Act of 1918. Implied approval may be said to have been given to the definition by Congress in enacting section 202 (c) (2) of the Revenue Act of 1921, where a somewhat similar definition of the term “ reorganization ” is given. Further, the Board, in George B. Markle, Jr., III, 10 B.T.A. 768, quoted article 1567 with approval and applied the same in connection with a reorganization there involved. In view of the foregoing, we are of opinion that the term “ reorganization ” as used in section 202 (b), supra, is to be here applied in accordance with the definition in article 1567 of Regulations 45.
When we come to apply the foregoing definition to the facts involved in the second transaction, we find every element present for compliance therewith. In other words, there was a corporate readjustment, the arrangement between the bankers and the petitioner for financing the venture, through which the petitioner as sole stockholder of the Simms Oil Co. exchanged his stock for stock of the holding company, Simms Petroleum Co., and the original company, Simms Oil Co., was so closely related to the holding company, rep
With the second transaction eliminated as one giving rise to gain or loss, it remains for us to determine whether .gain or loss resulted from the first transaction; that is, we are to determine whether gain or loss arose on account of the exchange by the petitioner on June 19, 1919, of oil leases which cost him and his associate $972,012.94, during 1917, 1918, and 1919, for the entire capital stock less qualifying shares of the Simms Oil Co. The governing statute, section 202 (a), provides in effect that gain or loss under such circumstances would be the difference between the cost of the leases and the fair market value of the stock, if the stock can be said to have had a market value, but if the stock had no fair market value, no gain or loss would arise. The petitioner’s position is that the stock in question had no fair market value on June 19, 1919, or in any event, if a fair market value is to be ascribed thereto, such value was some $300,000 less than the cost of the leases and therefore a deductible loss was sustained to that extent. Neither in the determination of the deficiency nor in the presentation of his theory of the case did the Commissioner place a value on the Simms Oil Co. stock per se, but instead used and urged a value of $25 per share for the stock of the Simms Petroleum Co. as determinative of the issue before us. What he does say, however, is that it should make but little difference which stock we value since the second exchange followed so closely upon the first that the fair market value of the Simms Petroleum Co. stock would be the best evidence of the value of the Simms Oil Co. stock.
In the first place, let us consider the contention of the petitioner that the Simms Oil Co. stock had no fair market value on June 19, 1919, when received by him. The basis of this contention is that the only assets of the corporation were wildcat or unproven and undeveloped leases of a highly speculative nature, and that the corporation had no earnings, no good will or going-concern value and had not been financed. Further, it was shown that none of the stock was sold or traded in on the market. While the foregoing considerations, separately or collectively, may be persuasive of the lack of a fair market value, they could hardly be said to be conclusive. The value of specific property at a particular time “ depends upon the relative intensity of the social desire for it at that time, expressed in the money that it would bring in the market.” Ithaca
A more difficult question arises when we come to determine the fair market value of the Simms Oil Co. stock. In the first place, we have the contention of the Commissioner that the best evidence as to the value of that stock is the sales of the Simms Petroleum Co. stock; in other words, since the entire capital stock of the Simms Oil Co. was exchanged for a part of the stock of Simms Petroleum Co. on June 30, 1919 — only 11 days after the exchange of leases for the Simms Oil Co. stock — a determination of the value of the part of the Simms Petroleum Co. stock received should fix the value for the Simms Oil Co. stock. In view of the close proximity in point of time of the two exchanges, we think such a contention might be well taken if both stocks had been fundamentally and basically the same and there had been no unusual circumstances connected with the sales of the Simms Petroleum Co. stock, but such was not the case. The Simms Oil Co. was a Texas corporation, with the undeveloped leases as its only assets, whereas the Simms Petroleum Co.
Further, when we come to examine the agreements between the bankers and the petitioner, we find that the latter agreed that he would not sell his stock during a certain period while the stock was being sold by the syndicate. With such assurance on the part of the petitioner, the bankers obligated themselves to pay and did pay $25 per share to the Simms Petroleum Co. for approximately one third (144,000 shares) of that stock, but even aside from the restriction as to sale, the purchase was not as prospective permanent stockholders or even as investors, but rather as those who would effect an immediate sale or resale. Further, the cash paid in by the bankers was made available as working capital and the new corporation had a board of directors of prominent business men and capitalists who were calculated to attract prospective investors. The corporation bore the name of the petitioner and the emphasis in the prospectus included extended reference to the direction of the corporation by the petitioner and his experience and knowledge of oil properties. Upon the termination of the sales by the syndicate under the underwriting agreement, the petitioner was released from
What such a market might be evidence of if all of the stock of the Simms Petroleum Co. had been the source of the sales, or what it would show as to the stock sold, is not our question; what we are asked to say is that the part which was not sold has a fair market value which is determinable from the dealings in that which was sold. The old axiom that “ things equal to the same thing are equal to each other ” could hardly be said to be applicable when we consider that that which was not sold was kept from the market for the very evident purpose of permitting the sale of the other stock at a better price. We are here seeking to determine not alone
Now, what is the market price? What is the fair market price of the statute? We say “ fair,” since every word used by Congress must be given due effect in the construction of this widely applicable statute, for obviously, while a stock might be bought and sold — and so marketed — and might thus be said to evidence some market price, yet it is obvious that Congress by the addition of the words “ fair market price,” certainly meant that not only must the market price be ascertained by sales, but that sales so ma'dfe, the circumstances under which they were made, the subject-matter of the sales, all the attendant circumstances, were to be considered to determine whether such sales served to evidence not alone a market sale, but the fair price which Congress said should be the statutory start or base from which subsequent “ gain derived ” should be determined.
As to sales in a restricted market, see Wallis Tractor Co., 3 B.T.A. 981, wherein we refused to accept such sales as evidence of the fair market value of the restricted stock. To a similar effect see also Heiner v. Crosby, 24 Fed. (2d) 191. While in the Wallis Tractor Co. case the restrictions extended much further than in the case at bar, much that was there said is here applicable — at least to the extent that the sales of the “ free ” stock are not necessarily controlling as to the stock of the petitioner which was not sold. Much more might be said of our reasons for rejecting the sales of the Simms Petroleum Co. stock as conclusively establishing the fair market value of the Simms Oil Co. stock on June 19, 1919, but we think the foregoing sufficient. In short, the specific property which we are valuing is the stock of the Simms Oil Co. on June 19, 1919, and we do not think a fair market value for such stock is determinable by attempting to translate the sales of “ free ” stock of the Simms Petroleum Co. under the conditions under which it was sold into a fair market value of the other stock of the Simms Petroleum Co. which was neither sold nor offered for sale, and, in fact, at or about the basic dat-e in question, could not be offered for sale.
The other evidence in the record as to the value of the stock has to do with the value of the leases for which the stock was issued, and much of our voluminous record is directed to this point in the form of evidence by both parties. The contention of the petitioner is that if a fair market value is to be said to have existed for the Simms Oil Co. stock on June 19, 1919, the best evidence of such value is the fair market value of the leases which constituted the only assets of the corporation and which, he says, had a value of some $300,000 less than their cost to him. On the other hand, the
A detailed discussion or an attempted reconciliation of all the oral testimony and documentary evidence offered would unduly extend this opinion and would serve no useful purpose. In general, it might be said that we have, first, the opinions of various officers and employees of the major oil companies who were actively interested from 1917 to 1919 in the Banger and Desdemona areas and the territory where the petitioner’s acreage was located. They testified to acquisitions by their companies in those areas, both for direct development and for protection purposes. These companies kept a large force in the field, including mining engineers, geologists, scouts, and others, who were constantly in touch with developments as they occurred, both favorable and unfavorable. They were kept advised as to the wells which were being drilled and the results after their completion. Instead of the fields extending for any great distance or showing any favorable evidence of a recurrence to the south or southwest where the petitioner’s acreage was located, it was found that the fields were confined to relatively narrow limits. The major companies and others had acreage in the territory where the petitioner’s leases were located and some 45 or 50 wells were drilled thereon prior to June 19, 1919, but all were unsuccessful— dry holes. These witnesses, as well as those offered by the Commissioner, seem agreed that these wells were not of themselves sufficient to condemn entirely the area where petitioner’s acreage was located, but that they were unfavorable factors which must be taken into consideration in valuing this property. Further, it was shown from a study of the geological structure, as evidenced by the drilling, that a sand of sufficient thickness and lateral extent to serve as a reservoir for the oil was not being found in that area.
We do not think the evidence establishes that the disappointing character of these producing areas was fully known by June 19, 1919, but we do think there was sufficient evidence then in existence to have a depressing influence on the value of oil leases in that territory. The interest in the counties where petitioner’s acreage was
On the other hand, we have various witnesses who were presented on behalf of the Commissioner, though little of their evidence was in the form of opinion testimony as to the value of the acreage as a whole, most of it being directed at individual sales of small acreage for the purpose of showing the value of adjacent or nearby acreage of the petitioner. The sales varied from $1 to $G,000 per acre, depending on the location of the property and the peculiar circumstances surrounding each sale. Many of these afford little aid in the solution of our problem, because of their location, size of the acreage involved, and conditions under which made. As heretofore stated, most of the purchases which were being made by the major oil companies were in the form of protection acreage; that is, small purchases which were made not because of the proved character of the territory, but because of the fear that an owner in that locality might strike oil, and it was desired to share in whatever was developed. And again a lease might be taken which carried with it an obligation to drill a well. The cost of drilling a well at that time to the depth desired was from $30,000 to $40,000, and in order to raise the money to drill the well the lessor would sell small leases from his large holding. Further, the prices in close proximity to a proven field (such as Ranger and Desdemona) would have little or no weight in determining the value of unproved leases many miles away. None of petitioner’s acreage was in and only a small part was near proved territory. Another class of purchases was represented in the promotion of small corporations, some of which were of a fraudulent nature. In other words, the sales were of relatively small acreage rather than of a spread of acreage comparable to that which we are considering. Of course, such sales are evidence of leasing activity and of value of similar property when sales are made under similar conditions, but whether we view them as evidence of leasing activity or evidence of value we must consider all factors surrounding such sales, including locations and the conditions which prompted the sales.
Suffice it to say we have given the most careful consideration to the mass of evidence introduced, having in mind the possibility of error which always exists in opinion evidence given long after a basic date, the infirmities existing in the evidence offered as to sales, and all other factors both favorable and unfavorable, and we have reached the conclusion that the fair market value of the leases on June 19, 1919, was not more than their cost to the petitioner in 1917, 1918, and 1919. What we are asked to value is a vast area of some 420,000 acres of unproved oil territory, scattered over 19 large counties of Texas. The purchases were made as a result of the excitement which was aroused when the Ranger and Desdemona fields were brought in; in other words, the petitioner did not make his acquisitions on the basis of scientific geological information or of proved territory, but apparently largely on the theory that surface indications would justify the gamble that a similar producing area might be found in the territory where the leases were acquired. In spite of the unsuccessful drilling which had occurred on lands adjacent to petitioner’s acreage, a different
Our ultimate question, however, as we have heretofore indicated, is not the value of the leases but rather the stock which was issued for the leases, and evidence of the value of the leases was received only for the purpose of establishing the fair market value of the stock. We have also discussed the evidence offered as to the sales of Simms Petroleum Co. stock which was received by the petitioner for his Simms Oil Co. stock shortly after June 19, 1919. After a careful consideration of all evidence offered, we are of opinion that the record supports the conclusion that the stock of Simms Oil Co. had a fair market value when received by the petitioner on June 19, 1919, and that such value is reasonably determinable at the cost of the leases to the petitioner, and his associate, namely, $972,012.94. It accordingly follows that the petitioner neither realized a gain nor sustained a loss on account of the exchange.
Issue No. 2.
The second issue involves various questions which arise on account of a sale of the assets of E. F. Simms & Co., a pai'tnership, to the Humble Oil & Kefining Co. The partnership was formed in 1916 between H. F. Sinclair and the petitioner, each of whom owned an undivided one-half interest in certain oil properties, and after it had been operating for some five years the sale was accomplished through the execution of separate instruments by the two partners. The instruments were identical in form, except as to the use of the name of Sinclair as grantor in one case and that of the petitioner in the other, and both were executed on the same day. Likewise, each referred to the sale of an undivided one-half interest in the assets “ belonging to E. F. Simms & Company, a co-partnership consisting
The foregoing question becomes material only because the partnership kept its books on the accrual basis whereas the petitioner was on the receipts and disbursements basis, but as a result of the view which we take of the next question it becomes largely, if not entirely, immaterial, whether we view the sale as that of the partnership or of two separate sales by the partners. The question to which we refer arises from the following circumstances: The consideration for the sale consisted of cash, $1,200,000, notes, $1,200,000, oil in the amount of 800,000 barrels to be delivered in a certain quantity per month, if the properties produced that much oil, and a 5-cent overriding royalty on all oil produced. One half of the consideration was to be paid to each partner. There is no disagreement as to the first two items, nor as to the cost to the petitioner, and as we understand the situation the petitioner has accounted for profit as the difference between cost to him of his share in the partnership and his share of the cash and notes received. What the Commissioner did was to fix
The 1916 transaction was a sale oE stock — not an exchange of property. We are not dealing with royalties or deductions from gross income because of depletion of mining property. Nor does the situation demand that an effort be made to place according to the best available data some approximate value upon the contract for future payments. This probably was necessary in order to assess the mother’s estate. As annual payments on account of extracted ore come in, they can be readily apportioned first as return of capital and later as profit. The liability for income tax ultimately can be fairly determined without resort to mere estimates, assumptions, and speculation. When the profit, if any, is actually realized, the taxpayer will be required to respond. The consideration for the sale was $2,200,000 in cash and the promise of future money payments wholly contingent upon facts and circumstances not possible to foretell with anything like fair certainty. The promise was in no proper sense equivalent to cash. It had no ascertainable fair market value. The transaction was not a closed one. Respondent might never recoup her capital investment from payments only conditionally promised. Prior to 1921, all receipts from the sale of her shares amounted to less than their value on March 1, 1913. She properly demanded the return of her capital investment before assessment of any taxable profit based on conjecture. [Italics supplied.]
And, further, it was said that “ a promise to pay indeterminate sums of money is not necessarily taxable income.”
It is urged by the Commissioner that the foregoing case may be distinguished from the case at bar on the ground that in the former
In the next place, it is contended by the petitioner that the Commissioner erroneously refused to reduce the one half of the consideration referred to in the sales agreements as payable to the petitioner by the part thereof belonging to and payable to Henry Oliver. What occurred was that after the. petitioner and Sinclair had formed the partnership (E. F. Simms & Co.) Oliver acquired from the petitioner an imdivided one-half interest in petitioner’s share of certain of the assets of the partnership. The exact interest which Oliver acquired does not definitely appear, though the parties seem agreed, and the distribution of the proceeds was made on the basis, that Oliver was entitled to one fourth of the proceeds which would otherwise have gone to the petitioner. Oliver was not a partner in the partnership of E. F. Simms & Co., but occupied a relationship to the petitioner under which his share of the profits from the partner
The contention of the Commissioner is that since Oliver was not a member of the partnership one half of the profits from the sale must first be taxed to the petitioner without any reduction on account of the Oliver interest, citing E. W. Battleson, 22 B.T.A. 455; affd., 62 Fed. (2d) 125. We are of opinion that the fact that Oliver was not a partner is not controlling as to the person to whom the profit should be taxed. Oliver’s interest was not merely in the income, but also in the corpus which produced the income, and in this latter respect the case at bar is to be distinguished from that line of cases, typified by Ormsby McKnight Mitchel, 1 B.T.A. 143; Charles P. Leininger, 19 B.T.A. 621; affd., Burnet v. Leininger, 285 U.S. 136; and Mitchel v. Bowers, 15 Fed. (2d) 287, wherein there was an assignment of income without the assignee becoming interested as owner in any part of the corpus. Oliver reported a profit on the transaction based on the difference between the amount invested by him in the venture and the share of the proceeds from the sale allocated to him. We are not concerned with the profit reported by Oliver nor with whether the petitioner made a profit when he sold an interest in his interest to Oliver, but we are concerned with the taxation of the profits on account of the sale in 1921 of the entire partnership assets and as to these profits we are unwilling to say that one half should be taxed to the petitioner when prior thereto he had sold a part of his interest in such assets to another person and such other person received his share of the proceeds upon which he paid a tax. It accordingly follows that the petitioner’s contention on this point is sustained.
Issue No. 5.
The proceeding was reopened to permit the petitioner to amend its petition by the assignment of additional errors by reason of the decision of the Supreme Court in Palmer v. Bender, 287 U.S. 551. This issue is whether, in computing gain on the transfer by petitioner of certain producing oil leases to the Humble Co., he is entitled to deductions for depletion based on discovery value, to be taken against the gross consideration received on such sale. The facts in respect of this issue were stipulated, and we have for decision the proper application of the statute (sec. 214, Revenue Act of 1921) in the light of recent court decisions.
Under the decision in Palmer v. Bender, supra, we are of opinion that the petitioner is entitled to depletion deductions based upon discovery value in respect of the 5 cents per barrel overriding royalty,
The petitioner also claims that the consideration received in 1922 from the sale of his right to receive further oil payments should be allocated as consideration for the transfer of the producing leases and subject to depletion. The stipulated facts show that in 1921 petitioner sold the leases and as part consideration therefor was to receive 400,000 barrels of oil over a period of time; that on November 8, 1922, he sold the right to receive further oil as of January 1, 1923, for a cash consideration which amounted to $278,833.36, and said amount has been included as income in 1922. The question is, Should depletion be allowed as against this amount, based on discovery values? We are of opinion that the petitioner is not within the rationale of the decisions upon which he relies in respect of this claim. He cites, in addition to Palmer v. Bender, supra, Alexander v. Continental Petroleum Co., 63 Fed. (2d) 927, and Mrs. A. H. Murchison, 28 B.T.A. 257, to support his position. These cases are distinguishable from the facts in the present case, in that in all of those cases an economic interest was retained in respect of the oil payments, while here, the petitioner sold his right to receive oil as of January 1, 1923, and thereafter had no economic interest in the oil in respect of that right. He is allowed depletion herein in 1921 and through 1922, at which time his right to receive oil ceased, and we believe the right to the deduction is not permissible under the statute or the decisions relied upon.
The interest of Oliver in these properties has been upheld, supra, and proper adjustments in the depletion deductions should be made in respect of his interest under the Buie 50 computation.
An issue was made by petitioner of his right to the benefit of the surtax limitation provided in section 211 (b) of the Eevenue Act of 1918 on the sale by E. F. Simms & Co. to the Humble Co. of the properties enumerated in the findings. This issue has now been abandoned.
Issue No. 3.
The third major issue presented arises on account of a transaction by which in 1921 the petitioner transferred 36 shares of stock of the American Sulphur Eoyalty Co. to his wife in satisfaction of an indebtedness of $850,000 then owing by him to her. The shares of stock were owned by the petitioner on March 1,1913, and apparently the cost to the petitioner was less than the March 1, 1913, value — at least the parties have dealt with the stock on that basis and the record
The first contention advanced by the petitioner is that income within the meaning of the Sixteenth Amendment could not arise from such a transaction, basing such contention on the theory that “ the mere improvement in financial condition as shown by a taxpayer’s balance sheet after the elimination of liabilities therefrom does not constitute taxable income.” We are of opinion that such a position is not tenable. Certainty, if the petitioner had sold the stock for $850,000 and had used such amount in satisfaction of the indebtedness, a taxable profit would have arisen on account of the sale, leaving out of consideration any question as to the cost and March 1, 1913, value being less than the selling price. We do not think the situation is changed because the stock is used directly with the creditor in satisfying the indebtedness; the position of the petitioner after the transactions were completed would have been the same in each instance. The petitioner’s contention on this point is accordingly denied. Cf. United States v. Kirby Lumber Co., 284 U.S. 1, and Commissioner v. Woods Machine Co., 57 Fed. (2d) 635; certiorari denied, 287 U.S. 613.
The principal controversy on this issue arises on account of differences between the parties as to the March 1,1913, value of the stock of the American Suphur Royalty Co. which was used in satisfaction of the indebtedness in question. No sales were made of the stock at or about the basic date in 1921 nor apparently even at any time prior to that date. Resort was therefore had to expert testimony and documentary evidence, both as to the value of the assets back of the stock and as to the value of the stock itself, which is our ultimate concern. The contention of the petitioner on the basis of the evidence presented is that the stock had a value on March 1, 1913, of $30,000 per share, whereas the Commissioner contends that such value was $10,000 per share or at least not more than a maximum of $15,000 per share. The determination of the Commissioner is based upon a March 1, 1913, .value of $19,631.35, less an amount referred to as “ March 1, 1913, value returned to stockholders to date of sale ” (apparently dividends), which aave an amount of $8,977.11 per share to be deducted from the
Since there had been no sales of the American Sulphur Royalty stock and since the only asset of that company was the contract of the petitioner with Swenson & Sons (exclusive of undistributed cash paid thereunder), the principal part of the evidence was directed at a valuation of the contract, which, in turn, depended on the recoverable sulphur at Bryan Heights on which royalties would be paid under the contract. Three reports were prepared shortly prior to March 1, 1913, as to the sulphur content, and in view of the importance attached thereto by the parties we have referred to them at some length in our findings. The first was prepared for a group of prospective purchasers by Seely W. Mudd, acknowledged by both sides to be one of the eminent mining engineers in the country. His report showed a gross tonnage of approximately 7,500,000 long tons. Strong objection is made by the petitioner to his report on the ground of his unfamiliarity with a sulphur property, but in view of the evidence offered as to the similarity in methods generally pursued in estimating the content of a sulphur mine as compared with those used in estimating ore reserves of a different character where Mudd had had much experience, this objection loses much of its weight. Particularly, it would seem that the objection would more properly apply to the amount of the content which was recoverable rather than to the gross content itself. The recovery suggested in his report was approximately 75 percent of the gross tonnage.
Following the submission of the Mudd report, a report was submitted by Ben Andrews, a mechanical engineer of acknowledged ability, who had several years of experience in exploration work on the particular properties involved. From a practical standpoint he was tmquestionably well qualified to report on the properties, though he was not a mining engineer and the record does not show that he had ever had any experience in estimating the content of a mine, whether sulphur or some other mineral. His experience seems to have been largely in drilling oil wells and in sulphur work on petitioner’s property and that of the Union Sulphur Co. By this we do not mean that his report is to be disregarded; on the contrary, we are satisfied that it contains much of merit and is based upon a first-hand knowledge of the properties, but we are unwilling to accept its ultimate conclusion as a basis for the reasonably expected
The Andrews report was followed by a second report by Mudd which was directed largely at the Andrews report, pointing out what Mudd considered inaccuracies or errors on the part of Andrews, such as the use of a short ton for measuring sulphur instead of the long ton which is the basis upon which royalties were paid under the contract, failure to give proper consideration to the porosity of the formation, consideration of deposits not commercially workable, and other similar criticisms. Some slight changes were suggested from his (Mudd’s) previous report, though it would not have resulted in a very material increase from his previous report.
In addition to the foregoing, a report was made by Browne (Mudd’s assistant on the earlier reports) in 1920 in which he estimated a recoverable content as of March 1, 1913, of approximately 1,000,000 tons. We have further the testimony of various witnesses for the petitioner and the Commissioner who testified as to both the estimated gross tonnage on March 1, 1913, and the percentage of recovery reasonably to be expected at that time, such testimony ranging from approximately 50 to 85 percent. The testimony differed little as to the probable time which would be required to recover the sulphur in question, namely, from 17 to 20 years. The actual sulphur produced by the property to the date of the hearing in February 1931, was 4,200,000 tons and we are satisfied from the evidence that the reasonably expected remaining recovery at that time was approximately 600,000 tons. From all the evidence submitted, we are of opinion that the amount which has been recovered plus the amount now expected to be recovered is not substantially less than what could reasonably have been expected on March 1, 1913 — at least, we do not think the recovery then reasonably to have been expected on the basis of the methods being pursued would have exceeded 6,000,000 tons, though, of course, there was the additional speculative element which might be said to have existed because of the possibility that improved methods might result in a greater percentage of recovery of the estimated gross tonnage.
In addition to a present worth of the expected royalties which would form a basis of valuing the only asset back of the stock in question, the petitioner urges that the stock had a large value from a monopolistic standpoint — that is, he urges that, since the Bryan Heights properties and the Union Sulphur properties in Louisiana constituted the only known sulphur properties in this country, the opening of the mine at Bryan Heights threatened to destroy the monopoly then controlled by the Union Sulphur, and that in any trade involving- the acquisition or disposition of Bryan Heights it
In addition, we have the testimony of the petitioner and one of his witnesses that the stock in question had a fair market value on March 1, 1918, of $30,000 per share and the testimony of a witness for the respondent of a then value of $10,000 per share. We have given careful consideration to this evidence, as well as to the present worth on March 1, 1913, of the expected royalties to be received under the contract. We have also considered all other evidence presented as to the value of the stock in question and have reached the conclusion that its fair market value on March 1, 1913, was $20,000 per share. The petitioner accordingly realized a profit in 1921 of the difference between $850,000 (the debt satisfied) and $120,000 (36 shares at $20,000 per share), or $130,000.
Miscellaneous Errors Pertaining to Pacing Stables and 'Wagering Losses.
In the petition an error was assigned as to the profit in 1921 on the sale of thoroughbred horses, but no satisfactory evidence was introduced in support thereof and in his brief the petitioner stated that he was “ compelled to abandon this item.” The Commissioner is accordingly sustained as to this issue.
The Commissioner is likewise sustained as to an item of $26,004.23 which he capitalized in the determination of the deficiency now before us for 1921. The only witness who testified on this point stated that he was unable specifically to allocate these costs to any particular unit of construction and apparently for this reason charged them to expense. Since the amount was expended for fix
A third item comprises amounts expended in 1921, totaling $29,-566.64, for the construction of temporary buildings for housing-laborers engaged in a construction program and for storehouses. The petitioner urges their allowance as a deduction in 1921 on the ground of their temporary character, citing Robert Buedingen, 6 B.T.A. 335. In the foregoing case, however, the cost of temporary construction therein allowed as a deduction represented expenditures made in a given year where the facilities had no use or value beyond the year when constructed. The term “ temporary buildings ” may well connote buildings with only a short life, but unless it is shown that such structures had no useful life beyond the year in which constructed, it is not proper to treat their entire cost as a deductible expense of the year in which expended. Since the foregoing has not been shown and since we do not know the useful life of the buildings in question, the action of the Commissioner in capitalizing this amount and adding it to the cost of improvements for depreciation purposes is sustained.
The final issue is whether the petitioner is entitled to a deduction in 1921 on account of losses from betting on horse races in excess of the amount won from the same source. Some of the bets were made in Kentucky and Maryland and some in New York. The petitioner was unable to say whether bets had been placed in other states, nor was he able to make any allocation among the states named of the amount lost. We have heretofore held that gambling losses, where the gambling took place in a state which prohibited such acts, were not allowable deductions since they were not losses “ incurred ” in “ transactions ” entered into for profit within the meaning of the governing statute. Mitchell M. Frey, Jr., et al., Executors, 1 B.T.A. 338; M. Rea Gano, 19 B.T.A. 518; and Louis D. Beaumont, 25 B.T.A. 474. By the laws of New York (secs. 991 and 992 of the Penal Laws of New York), bets made at a race track in that state are unlawful and any contract on account of such act is void. Since some of the losses here in question arose on account of bets placed in New York and since we have no segregation of the amount as between the states where they might be allowable and where they are not allowable, the action of the Commissioner in denying the entire amount must be sustained. The case of George D. Widener, 8 B.T.A. 651, cited by the petitioner, is not controlling since the deductions there allowed as expenses in the conduct of a racing stable did not include losses in betting on races; in fact, it was specifically found that the petitioner did not bet on the races. Further,
Reviewed by the Board.
Judgment will he entered under Rule 60.
Dissenting Opinion
dissenting: I dissent from the majority opinion which holds that the transfer of the oil leases in question by E. F. Simms to the Simms Oil Co., a Texas corporation, in consideration of all its capital stock and the contemporaneous transfer of all this capital stock to Simms Petroleum Co., a Delaware corporation, in consideration of 174,990 shares of its stock, were separate taxable transactions. It is my view that they are parts of one transaction by which Simms sold his oil leases to the Delaware corporation in consideration of 174,990 shares of its capital stock and that Simms’ gain or loss in the transaction is measured by the difference between the cost of his leases and the fair market value of the 174,990 shares Simms Petroleum Co. (Delaware corporation) stock at the time he received it. We had practically this same question and situation in Teck Hobbs, 26 B.T.A. 241. In that case, petitioner Henry Hobbs and about 30 associates were the owners of various oil leases in the Burkburnett oil field in Texas. In November 1919, Hobbs and his associates agreed to sell these oil leases to a group of individuals in New York City, headed by C. N. Haskell. After the negotiations had progressed a while, it was agreed that a Delaware corporation should be organized, just as it was agreed in the instant case that a Delaware corporation, the Simms Petroleum Co., should be organized. It was further agreed that the oil leases owned by Hobbs and his associates should not be transferred directly to the Delaware corporation, but that Hobbs and his associates should organize a Texas common law trust, to be called Hobbs Oil Co., all of its capital stock to be issued to Hobbs and his associates in payment of the leases, and then Hobbs and his associates were immediately to transfer this stock of the Hobbs Oil Co. to the Delaware corporation, as had been agreed upon.
Under such circumstances we held that it was all part of one transaction, to wit, the selling by Hobbs and his associates of their
Petitioners’ next contention is that the transfer by Hobbs and associates of their oil properties to the Hobbs Oil Company, a joint stock association, was a taxable transaction completed in 1919, and that the value of that stock so received in 1919, rather than the cost of the properties so exchanged for said stock, is the proper basis for determining the profit on the sale of the Hobbs Oil Company stock in 1920 to C. N. Haskell and associates.
In determining the gain of petitioners in the Haskell transaction, the respondent took as his basis the cost of the property which petitioners conveyed to the Hobbs Oil Company, while it is contended by petitioners that the proper basis was the fair market value of the Hobbs Oil Company stock on the date of its issue, December 15, 1919; that said stock was worth more on that day than they received for it; and that a loss was sustained rather than a gain.
We do not agree to this contention. The organization of the Hobbs Oil Company and the transfer to it of the lands and leases was merely a part of one main transaction, which was to sell certain oil lands and interests in oil lands which were specified in the contract, plus 75 per cent of the stock in the Texas Chief Oil & Gas Company, for a consideration of $2,100,000 cash and $600,000 capital stock of the Delaware Company. The fact that to perform the contract the organization of a common law trust or association was resorted to as a means ta carry through the deal, does not alter the character of the transaction. There was no intention on the part of Hobbs or his associates to effect an exchange of their oil lands for stock in the Hobbs Oil Company, but their intention was to make a sale of their lands to Haskell and the Delaware Company by which they were to receive a large part of the agreed purchase price in cash and the balance in stock of the Delaware Company. All the shares of stock of the Hobbs Oil Company were issued to Hobbs and by him immediately sent to New York for delivery to the Delaware Company to be held by it as a part of its own property. No owner of the oil lands and leases conveyed to the Hobbs Oil Company had any beneficial interest in or power of disposition over the stock, as it belonged to the Delaware Company as soon as issued. The interest of the owners of the oil lands and leases conveyed to Hobbs Oil Company was in the consideration which they were to receive under the main contract and supplements thereto. We hold that the respondent was correct in fixing, as the basis for the calculation of gain, the cost of the oil properties to petitioners. Commissioner v. Moore, 48 Fed. (2d) 526; certiorari denied, October 12, 1931; Commissioner v. Garber, 50 Fed. (2d) 588.
Just as we said in the foregoing quotation, that “ The organization of the Hobbs Oil Co. and the transfer to it of the lands and leases was merely a part of one main transaction,” to sell the leases and other property to the Delaware corporation, so do I say that in the instant case the organization of the Simms Oil Co. (Texas corporation) and the transfer to it of the oil leases were merely a part of one main transaction, which was to sell these leases to the Delaware corporation. That petitioner himself looked upon these transactions as parts of one completed transaction is disclosed by his pleadings.
Because I believe that there are no facts in the instant case on the point which I am here discussing sufficient to distinguish it from the facts in the Hobbs case, supra, and because I believe our holding in the Hobbs case was correct, I record my dissent from the majority opinion in the instant case.
I think the Commissioner treated the transaction correctly when he held that the leases owned by Simms were exchanged for 174,990 shares of the Simmis Petroleum Co. (Delaware corporation) and treated the intermediate transactions as but parts of the one main transaction. The measure of gain, as I have said, is the difference between the cost of these leases and the fair market value of the shares in the Delaware company which Simms received.