*1788 1. Valuation of coal properties determined for depletion purposes.
2. Royalties to be applied, in case of purchase of properties, to purchase price, retain their character as royalties.
*950 These proceedings, consolidated for hearing, involve deficiencies for 1922, 1924 and 1925, in the amounts of $361.38, $6,574.71 and $309.90, respectively.
The questions involved relate to the amount of depletion to be deducted, the amount of taxable profit from the sale of coal properties in 1924, the amount of profit on the sale of properties as the result of royalties received in previous years to be applied against the purchase price if option to purchase were exercised, and the amount of net loss in 1923 which rests upon the amount of depletion allowable. The issue as to affiliation raised by an amendment to the petition was withdrawn at the hearing.
The cost of the properties, the selling price thereof, the amount of coal mined and the amount of royalties paid were stipulated, leaving only, with*1789 respect to the question of depletion, the value on March 1, 1913, to be determined from the evidence.
FINDINGS OF FACT.
The petitioner is a corporation having its principal office in Pittsburgh, Pa. Prior to March 1, 1913, it had acquired 1,668.4 acres of coal land at a cost of $31,683.09. Subsequent to March 1, 1913, it acquired 4,742.62 acres at a cost of $197,225.35. The property acquired prior to March 1, 1913, had a fair market value on that date of $100 per acre.
The petitioner leased to the Melcroft Coal Company on July 1, 1919, the property which it had acquired prior to March 1, 1913, and the property acquired subsequent thereto. The taxpayer paid out attorney fees and costs in connection with the sale of the properties in 1924 in the amount of $28,536.62.
The lease of the property to the Melcroft Coal Company contained an option to purchase the same for the sum of $600,000 cash at the expiration of four years from the date of the lease. There *951 were to be allowed credits on this purchase price of all amounts paid as royalties under the terms of the lease, with interest thereon at 5 per cent per annum. In 1924 the Melcroft Coal Company exercised*1790 this option and paid the purchase price, less a credit of all royalties paid with interest thereon pursuant to the agreement.
The respondent included the entire amount of all royalties received under the lease which were to be applied on the purchase price of the property in 1924 as being a part of the purchase price for the property.
The petitioner received royalties over the term of the lease as follows:
| 1920 and previous years | $8,006.03 |
| 1921 | 5,673.81 |
| 1922 | 7,491.95 |
| 1923 up to July 1 | 3,316.08 |
| 1923 minimum royalty paid on July 1/23 | 73,300.21 |
| 1923 Interest paid on royalties | 2,211.92 |
making a total of $100,000 royalties paid, which was the minimum amount to be paid over the four-year term of the lease. In 1923, the last six months of the year, royalties were paid in the amount of $3,774.76; in 1924, $9,345.10. The total amount of all royalties paid was $113,119.86. These amounts applied against the purchase price left an amount of $486,880.14, which was paid in cash as consideration for the property.
The taxpayer did not report the royalties received previous to 1924 as a part of the purchase price of the properties sold in 1924.
Following*1791 is a statement showing tons of coal mined by the Melcroft Coal Company under the lease aforesaid, and the amount of depletion allowed by the Commissioner as a deduction in the different years:
| Year | Tons mined | Rate | Depletion allowed |
| 1918 | 25,608 | $0.01 | $256.08 |
| 1919 | 108,539 | .01 | 1,095.39 |
| 1920 | 65,341 | .01 | 653.41 |
| 1921 | 113,525 | .01 | 1,135.25 |
| 1922 | 182,448 | .01 | 1,824.48 |
| 1923 | (1) | ||
| 1924 | (1) | ||
| 4,964.61 |
The following is a statement showing tons of coal mined by the taxpayer, depletion rate and amount allowed by the Commissioner *952 and depletion rate claimed and deducted by the taxpayer, for 1922 to 1925, inclusive:
| Commissioner's allowance | Amount deducted on returns | ||||
| Year | Tons mined | Rate | Amount | Rate | Amount |
| 1922 | 134,731.00 | 0.015 | $2,020.97 | 0.05 | $6,736.55 |
| 1923 | 99,467.85 | .015 | 1,492.02 | .05 | 4,968.36 |
| 1924 | 100,885.60 | .015 | 1,513.27 | .05 | 5,044.28 |
| 1925 | 91,662.40 | .015 | 1,374.94 | .05 | 4,583.12 |
OPINION.
TRAMMELL: The only questions to be determined in this proceeding are the March 1, 1913, value of the coal properties owned on that date for depletion purposes, *1792 the question of law as to whether the royalties received from the Melcroft Coal Company under the lease should be added to the purchase price received for the property or should be included in income in the years when received, and the question with respect to the net loss for 1923, which is in fact determined by our findings with respect to the March 1, 1913, value of the coal properties for depletion purposes as this question depends upon the amount of depletion allowed.
With respect to the value on March 1, 1913, there is some conflict in the testimony. Witnesses whom we consider to be well qualified and experienced men, having a knowledge of the properties and other properties in the territory, testified that the properties had a value on March 1, 1913, of $100 per acre. On the other hand, another witness testified that the properties had a value of $50 per acre on that date. We have considered all of this testimony and are of the opinion that the properties had a value of $100 per acre on March 1, 1913, and have so found as a fact. Where the testimony is conflicting and capable men differ, it is our duty to determine the weight to be given the testimony and to consider*1793 the facts and reasons upon which the testimony is based and decide which is entitled to more weight. We have done so with the above result.
With respect to the question as to the royalties received in previous years from the Melcroft Coal Company lease, it is our opinion that they were royalties when received and, as such, income. It is true they were to be applied in the event the lessee exercised its option to purchase the property, against the purchase price and the lessee was to have credits therefor. It was not known at the time when these royalties were paid whether they would ultimately be added to the purchase price of the property. In any event, they were still royalties which were to be credited on the purchase price and they did not lose their characterization because they were eventually so applied. We *953 do not think, therefore, that because the option to purchase was exercised in 1924 and credit allowed on the purchase price to be paid in that year on account of royalties paid in previous years, those royalties should be considered a part of the purchase price paid in 1924 when the option was exercised. The effect of the transaction was that the purchase*1794 price to be paid in 1924 was reduced to the extent of royalties previously paid. This being true, the Commissioner was in error in adding these royalties of previous years to the purchase price paid in 1924 in determining the income from the sale in that year.
With respect to the question of the net loss for 1923, we have no evidence as to what that loss was, if any, but the case was apparently tried upon the theory that there was a net loss in 1923 which was to be increased or decreased in accordance with the amount of depletion allowable, which question rested upon the March 1, 1913, value of the coal properties. There was no controversy in this proceeding as to whether there was a net loss in 1923 or the amount thereof, but only the question as to whether the depletion allowable based upon the March 1, 1913, value would affect the net loss determined by the Commissioner. The March 1, 1913, value of the coal properties having been determined, the deduction on account of depletion should be allowed on the basis of that valuation, and, in so far as this allowable depletion would affect the net income of 1923, the net loss for that year should be allowed as a deduction in computing*1795 the net income for 1924, as provided in section 206(f) of the Revenue Act of 1924.
Judgment will be entered under Rule 50.
Footnotes
1. No allowance. ↩