1930 BTA LEXIS 2117">*2117 Value of turpentine rights reserved by petitioner in the sale of a tract of timber determined for the purpose of computing the amount of gain realized or loss sustained in the sale.
20 B.T.A. 423">*423 This proceeding is for the redetermination of a deficiency of $10,824.76 in income tax for the year 1923. The petitioner alleges that respondent erred (1) in reducing by $6,537.50 the amount of depreciation claimed as a deduction; (2) by placing a value of $40,381.25 on turpentine rights reserved in the sale of a tract of timber; and (3) in refusing to consider net losses sustained in 1921 and 1922 in his determination of the deficiency.
20 B.T.A. 423">*424 FINDINGS OF FACT.
Petitioner is a Florida corporation engaged in the manufacture of naval stores, with its principal office at Tampa, Fla.
In 1919 G. A. McLeod, petitioner's president, acquired at a cost of $161,525 about 180,000 acres of timber situated in Manatee County, Florida. G. A. McLeod & Sons, a partnership, operated a turpentine location on the property at Laurel, Fla., for two and one-half or three years1930 BTA LEXIS 2117">*2118 prior to the time in 1922 when the property was transferred to petitioner. At the time of the transfer there were about 23 crops of turpentine on the tract. A turpentine crop consists of 10,000 cups or boxes, receptacles placed on the trees to receive the raw product.
The sap in the timber on the tract was very thin and produced a very poor grade of turpentine. Turpentine trees in the southern part of Florida, where the tract was located, grow very showly and are usually worked about three years, after which it is not profitable to rework them. The value of turpentine privileges depends largely upon the amount of gum the timber will produce. In 1922 the turpentine rights on the tract had a value of $400 per crop.
In 1923 petitioner sold the timber on the tract to the J. Ray Arnold Lumber Co. for $250,000. In such sale petitioner reserved the right to work the timber for raw turpentine before it was cut. Petitioner worked part of the tract during the years 1924 to 1929, inclusive, and is working a very small portion of the tract at the present time. Petitioner and the partnership installed 29 crops of boxes or cups on the entire tract over a period of five or six years. 1930 BTA LEXIS 2117">*2119 The cost of the boxes and cups installed on the trees is about $1,000 per crop.
In computing the amount of profit realized on the sale of timber, petitioner did not place any value on the turpentine rights reserved to it. In his determination of the deficiency respondent held that such rights had a value of $40,381.25. The value of the turpentine rights at the time of the sale was $11,600.
Petitioner's Alsace distillery was destroyed by fire in 1922. It determined its loss on account of the fire as follows:
| 1. Still, fixtures and raw gum | $ 2,000 |
| 2. 150 used dip barrels | 300 |
| 3. Still buildings, warehouse and tanks | 1,500 |
| 4. 269 barrels rosin at $8 per barrel | 2,152 |
| 5. 48 barrels of spirits of turpentine at $30 per barrel | 1,440 |
| 6. Strainers | 50 |
| 7. Tools | 30 |
| 8. 75 barrels for manufactured turpentine | 180 |
| 9. Barrel heads and staves | 85 |
| 7,737 |
20 B.T.A. 423">*425 The amount of the loss in item 1 represents the cost of the property destroyed. The cost of each barrel in item 2, without heads, which were inserted by petitioner, was $3.50. The amount of the loss in item 3 is less than 50 per cent of the cost of the property. The loss in items 4 and1930 BTA LEXIS 2117">*2120 5 was computed on the basis of market, which was less than cost. The amount of the loss in item 6 in about 25 per cent of the cost of the property. None of the property burned had any salvage value. Of the amount of the loss sustained, petitioner charged off its books, and in its return for 1922 claimed as a deduction on account of losses by fire, the sum of $5,000. Part of the amount claimed was disallowed by respondent on the ground that the cost of producing the naval stores was allowed in 1923 as an ordinary and necessary business expense.
In determining that petitioner had net income in 1922 of $5,266.09, respondent allowed as a deduction in the computation thereof, the sum of $16,869.52 as a net loss sustained by petitioner in 1921.
OPINION.
ARUNDELL: No evidence was offered by petitioner to support its allegation that respondent erred in reducing the amount of depreciation claimed by $6,537.50. Accordingly, the respondent's action is sustained.
The only point in controversy as to the amount of profit realized or loss sustained on the sale of the timber is whether the turpentine rights reserved to petitioner in the transaction had any value.
G. A. McLeod, 1930 BTA LEXIS 2117">*2121 the only witness produced by petitioner at the hearing, based his opinion that the turpentine rights had no value at the time the sale was made upon the very low price at which manufactured turpentine was then selling and because of this condition, its inability to manufacture the produce at a profit. This condition, he admitted, was only temporary. In 1922, a year before the sale was made, the turpentine privileges on the tract had a value of $400 per crop. The value of $40,381.25 for the rights determined by respondent is equivalent to about $1,400 per crop on the basis of 29 crops developed on the entire tract. This figure is regarded as excessive because of the law grade of timber on the tract, the period of time the trees had been worked prior to the sale, and the low market price for turpentine in 1923. The opinion of McLeod that the turpentine rights were valueless in 1923 can not be accepted as establishing such a fact in the presence of proof that some part of the uncut timber on the tract was worked during the years 1924 to 1929, inclusive, and a very small portion of it is still being worked. In 1922 there were about 23 crops on the tract and the petitioner 20 B.T.A. 423">*426 1930 BTA LEXIS 2117">*2122 subsequently increased the number of crops to 29. In our opinion the turpentine rights had a value at the time of the sale of $400 per crop, or $11,600 for the entire tract.
The only item in dispute under the net loss issue is the amount of the loss sustained by petitioner in 1922 in the destruction by fire of its Alsace distillery. We think the evidence supports the claim of petitioner that the fire resulted in a loss of $5,000, which amount should be allowed as a deduction from gross income in 1922. If, after making this adjustment under Rule 50, the net loss sustained in 1921 is in excess of the adjusted net income for 1922, the excess amount should be carried forward and allowed as a deduction in computing net income for 1923.
Decision will be entered under Rule 50.