*3513 1. Inclusion in invested capital of certain assets acquired at organization for capital stock disallowed for lack of evidence as to value.
2. Amounts expended for labor in resurveying and remarking boundaries of petitioner's property held deductible expenses.
3. Amounts expended for labor, materials, freight and miscellaneous boiler fittings and accessories, in connection with installing a new boiler in a mine of limited life, in place of another which had been rendered useless by an accident due to negligence, held to be deductible expenses.
4. Expenditures for steel rails and switches, mine cars and trolley wire in petitioner's mines held to be capital expenditures.
5. The depletion rate applicable to coal deposits determined.
*500 These are proceedings under Docket Nos. 11406, 19365, and 28186, duly consolidated for hearing and decision, for*3514 the redetermination of deficiencies in income and profits taxes for the years 1918, 1919, 1920, 1922, and 1923, as follows:
| Year | Docket No. | Kind of tax | Deficiency in tax |
| 1918 | 11406 | Income and excess profits | $51,783.63 |
| 1919 | 11406 | do | 1,234.85 |
| 1920 | 19365 | do | 30,777.32 |
| 1922 | 28186 | Income | 1,768.38 |
| 1923 | 28186 | do | 1,855.93 |
The issues raised by the pleadings are as follows:
1. The amount allowable for depletion of coal lands during each of the years in question;
2. Whether the invested capital of the petitioner paid in for stock is $450,000 or $1,000,000;
3. Whether there should be included in the invested capital of petitioner for the years 1918 to 1920, inclusive, certain amounts on account of the net value of the assets paid in for stock in excess of liabilities acquired from the Crawford Coal & Iron Co.;
4. The value of certain timber for purposes of invested capital during the years 1918 to 1920, inclusive;
5. The value for purposes of invested capital during the years 1918 to 1920, inclusive, of certain lands including surface coal and timber acquired by the petitioner by the exchange of its stock;
*501 6. The deductibility*3515 as a business expense in 1918 of the amount of $783.20 expended for labor and material at the Twin Mine;
7. The deductibility as a business expense for the year 1918 of $3,441.44 expended in replacing a boiler at Baker mine;
8. The deductibility as a business expense in the year 1918 in the sum of $3,077.78 expended for labor and materials at Laurel Creek mine during that year;
9. The deductibility as business expenses for the years 1918, 1919, and 1920 of certain amounts expended for rails, switches, mine cars, trucks and trolley wire alleged to be necessary to maintain the output in Twin Mine after it had passed the development stage;
10. The deductibility as a business expense for the year 1918 of the sum of $1,896.63, being the cost of resurveying, maintaining and marking the boundary of petitioner's property in Tennessee in the year 1918, and the deductibility of the amount of $3,960.91 for similar purposes in the year 1919;
11. The deductibility as a business expense for the year 1919 of the sum of $76.52 and an amount of $1,111.84 for the year 1920; and
12. The inclusion in invested capital of the petitioner of the sum of $39,801.93 at the beginning of the*3516 year 1918, and the sum of $231,311.33 at the beginning of the year 1919, and $268,942.01 at the beginning of the year 1920.
FINDINGS OF FACT.
The petitioner is a Maine corporation organized in 1904, which, in October, 1904, issued $999,000 par value of its capital stock for the assets of the Crawford Coal & Iron Co. The property acquired consisted of merchandise, certain items of personal property used at the coal mine, and a large tract of land in Cumberland, Overton, and Fentress Counties, Tennessee, containing bituminous coal and bearing timber. Petitioner also assumed the liabilities of the Crawford Coal & Iron Co. The value of the coal and surface of this property at the date acquired by the petitioner as allowed by the respondent for invested capital purposes, was $350,000, and this is not in dispute. The timber on the property had a value, in 1904, of $250,000.
The stock in payment for the assets acquired was issued to J. C. Van Blarcom, Trustee, who is now dead.
The operating ledger of the Crawford Coal & Iron Co. showed the following assets and liabilities, exclusive of real estate and cash, as of September 30, 1904:
| Assets: | ||
| Accounts receivable | $41,895.15 | |
| Nashville yard equipment | 7,682.59 | |
| Materials | 3,924.09 | |
| Mine development | $15,410.89 | |
| Tram roads | 6,508.36 | |
| Mine cars | 4,129.17 | |
| Dwelling houses | 35,740.04 | |
| General buildings | 11,460.48 | |
| Machinery and equipment | 19,513.47 | |
| Tools and implements | 466.18 | |
| Live stock | 1,817.15 | |
| Wagons and harness | 174.15 | |
| Furniture and fixtures | 298.50 | |
| Railroad tracks | 4,024.80 | |
| Ground grandings | 261.25 | |
| Crawford mine store | 7,388.38 | |
| $160,694.65 | ||
| Liabilities: | ||
| Accounts payable | $33,616.76 | |
| Bills payable | 29,596.29 | |
| Tennessee Construction Co | 27,682.64 | |
| Holcomb Loff Co | 8,934.08 | |
| Duffields | 55.08 | |
| Jeffrey Manufacturing Co | 10.00 | |
| Insurance collected | 82.01 | |
| Wages due (unclaimed) | 64.05 | |
| J. C. Van Blarcom | 1,600.00 | |
| John D. Fletcher | 4,000.00 | |
| Contingent liability | 319.63 | |
| Wear and tear | 4,414.18 | |
| 110,374.72 | ||
| Surplus | 50,319.93 |
*3517 *502 A balance sheet prepared by the petitioner, taken from its ledger as of November 30, 1904, shows practically the same assets. There is included, however, in this balance sheet an item of "cash, $849.69," whereas there is no such item upon the books of the Crawford Coal & Iron Co.
The operating ledger of the Crawford Coal & Iron Co. has entries beginning at February, 1902, and all of the entries represent items acquired for either cash or notes within the period of about two years prior to the time the petitioner acquired the assets.
The property of the petitioner consisted of wild, wooded and partly isolated mountain land, some of which the petitioner lost to persons who gained title by adverse possession. To avoid such losses the petitioner employed about 42 tenants to live upon the land and maintained a separate department to look after the boundaries. The land had been surveyed and marked a long time prior to 1918, but in 1918, as the marking had deteriorated, it was found necessary to resurvey and remark the boundaries. In 1918, the petitioner paid $1,896.63 and in 1919, $3,960.91 for this purpose. This does not include cost of material. It is simply for*3518 labor, and some traveling expenses.
*503 In 1918, due to negligence of a fireman, a boiler in petitioner's Baker Mine bellied down over the fire and caused such damage that the boiler could not be used or repaired. The petitioner had on hand two new boilers destined for its Central Power Plant and one of these was used to replace the old boiler. It was necessary to tear out the side of the building to get the old boiler out, as well as the fire bridge and part of the boiler setting. The new boiler was installed and the setting and walls built up around it. The old boiler, except for the accident, would have lasted the life of Baker Mine which closed down in 1920. The total cost of this work is summarized as follows:
| Labor, mechanical - installation | $1,788.35 |
| Boiler fittings and miscellaneous hardware | 165.57 |
| Brick, sand, cement, etc | 1,109.24 |
| Wire rope for stack | 53.57 |
| Packing | 32.07 |
| Freight, express and hauling | 292.64 |
| 3,441.44 |
The petitioner's mine called Twin Mine was opened in three directions at one time, and by June, 1918, there were 20 entries being used. A maximum of 22 entries was reached but this number was later reduced to 6 or*3519 8. As the entries extended farther, the hauls became longer and the petitioner ran additional trains, and installed more track and trolley wire. Expenditures necessary to do this did not increase the productive capacity of the mine but only served to maintain the normal capacity of the mine. This mine reached its maximum capacity in August, 1918.
In 1918 the petitioner expended for steel rails in the mines, $9,691.90, and for mine cars, $5,757.07. In the year 1919, the petitioner expended $5,618.15 for steel rails and switches, and $5,471.04 for mine cars and tracks for mine cars. In the year 1920, the petitioner expended for mine cars, $7,361.11, for car rails, $9,120.90, and for trolley wires, $625.31.
The petitioner expended, in 1918, $7,883.22 and $3,077.78 in connection with Twin Mine and Laurel Creek Mine, respectively.
In 1919, when the petitioner had its books audited, the above amounts were made the subject of adjustment entries and were charged to expense. The journal voucher with regard to Twin Mine expenditures was as follows:
| Development prior to July 1, 1917 | $4,336.98 | |
| July 1, 1917, to December 31, 1917: | ||
| Labor - | ||
| Mining | $2,614.75 | |
| Development | 246.13 | |
| Ventilation | 418.70 | |
| Drainage | 39.46 | |
| Yardage and deadwork | $901.30 | |
| Haulage | 508.63 | |
| Tipple | 271.62 | |
| Power | 21.70 | |
| Blacksmith | 123.82 | |
| General overhead labor | 151.43 | |
| Total labor | $5,279.54 | |
| Supplies - | ||
| Small tools | 256.83 | |
| Miscellaneous hardware | 450.97 | |
| Timber and props | 841.92 | |
| Lumber | 1,088.98 | |
| Explosives | 127.53 | |
| Sundry expense | 28.91 | |
| Gasoline | 24.84 | |
| Freight and supplies | 45.07 | |
| Total supplies | 2,865.05 | |
| Total labor and supplies expended during 1917 | 12,499.57 | |
| Less amount credited out and charged against 1917 | ||
| sales | 4,475.80 | |
| 8,023.77 | ||
| Less reserve for depreciation - 6 months at 10% per | ||
| annum charged to operations | 401.18 | |
| Balance deferred against 1918 operations | 7,622.59 | |
| January 1, 1918, to December 31, 1918: | ||
| Labor - general overhead labor | 332.03 | |
| Supplies - | ||
| Small tools | 330.23 | |
| Miscellaneous hardware | 74.08 | |
| Explosives | 326.66 | |
| Total labor and supplies expended during 1918 | 1,063.00 | |
| 8,685.59 | ||
| Less reserve for depreciation - 12 months at 10% on | ||
| $8,023.77 charged to operations | 802.37 | |
| Total labor and supplies in the development of direct | ||
| mining operations chargeable to 1918 operations | 7,883.22 |
*3520 *504 The journal voucher with regard to Laurel Creek Mine was as follows:
| August 1, 1917, to December 31, 1917: | ||
| Labor - | ||
| Mining | $1,150.97 | |
| Mine development | 1,626.28 | |
| January 1, 1918, to December 31, 1918: | ||
| Yardage | 834.46 | |
| General overhead labor | 39.35 | |
| Saw mill clearing | 32.93 | |
| Haulage (trestle from mine opening) | 635.03 | |
| $4,337.92 | ||
| Supplies - | ||
| Small tools | $9.43 | |
| Rail, frogs, spikes, and switches | 156.75 | |
| Miscellaneous hardware | 94.40 | |
| Trolley wire | 44.97 | |
| Timbers and props | 64.54 | |
| Pipe | 298.01 | |
| Lumber | 25.11 | |
| Explosives | 102.94 | |
| Freight, express, and hauling | 35.55 | |
| Ventilation | 265.27 | |
| Total supplies | $1,096.97 | |
| Total labor and supplies, 1917 | 5,434.89 | |
| Loss reserve for depreciation | 144.10 | |
| Amount credited out and charged against 1917 sales | 2,687.40 | |
| 2,831.50 | ||
| Balance deferred against 1918 operations | 2,603.39 | |
| January 1, 1918, to December 31, 1918: | ||
| Labor - | ||
| Underground track work | 28.20 | |
| General overhead labor | 29.00 | |
| Drainage | 32.50 | |
| Saw mill clearing | 139.80 | |
| Ventilation | 166.21 | |
| Total labor | 395.71 | |
| Liability insurance | 57.39 | |
| Supplies - | ||
| Small tools | 13.50 | |
| Miscellaneous hardware | 1.40 | |
| Lumber | 105.49 | |
| Freight, express, and hauling | 85.16 | |
| Ventilation | 103.94 | |
| Total supplies | 309.49 | |
| Total labor and supplies | 3,365.98 | |
| Less reserve for depreciation | 288.20 | |
| Labor and supplies chargeable against 1918 operations | 3,077.78 |
*3521 *505 Laurel Creek Mine consisted of merely two sets of entries directly into the outcrop of the coal and leading off from a door hall which was used for transporting coal from Baker Mine to the tipple. Laurel Creek Mine was a small development and was hardly a separate mine, but part of Baker Mine. It had a brief stage of development which had been passed by April, 1918.
It is stipulated between the parties that the petitioner is entitled to the allowance of additional ordinary and necessary business expenses amounting to $600 in the year 1920.
*506 Only the coal in the Overton County land could, at March 1, 1913, be worked. Petitioner owned 16,642 acres of land in this county. The testimony showed that the land of the petitioner in Fentress County was separated from that in Overton County by a river which was a formidable obstacle to railroad building.
In 1921 there were remaining to petitioner 428 acres of workable coal land containing 4,800 tons of coal per acre. Since March 1, 1913, there had been extracted 1,035,550 tons of coal.
In 1912 the Peacock Mine, a mine in the vicinity of petitioner's property, was leased on the basis of 8 per cent of*3522 the sales price of the coal. The market price of coal at that time was about $1.50 per ton.
In 1913 the Highlands property adjacent to the petitioner's property, in the same seam of coal, on this same spur of the railroad, was leased by the owner to the Highlands Coal & Lumber Co. on a basis of 10 cents per ton royalty.
The Gooch Mine, adjoining that of petitioner, was leased on the basis of 10 cents per ton royalty.
OPINION.
SIEFKIN: At the hearing counsel for the respondent stipulated that the timber acquired by the petitioner at the time of its organization in 1904 had a fair market value of $250,000. Since the respondent, in determining the deficiency here involved, allowed only $100,000, the additional amount of $150,000 should be included in invested capital in the computation of the tax for the years 1918 to 1920, inclusive.
The parties also agreed at the hearing that the petitioner was entitled to the allowance of additional ordinary and necessary business expenses amounting to $600 in the year 1920 instead of the sum of $1,111.84. An additional deduction of $600 in therefore allowed for that year.
Other errors assigned in the petition and the amendments*3523 thereto have, apparently, been abandoned by the petitioner, and, since no evidence has been adduced with regard to them, a decision in those respects must be for the respondent.
The remaining issues for decision are as follows:
1. Failure of the respondent to include in invested capital of the petitioner during the years 1918, 1919, and 1920, a value for the assets paid in for stock in excess of liabilities assumed, taken over from the Crawford Coal & Iron Works, consisting of mine development, dwelling houses and buildings, machinery and equipment, *507 accounts receivable, and similar items as shown by the books of the petitioner and the Crawford Coal Co.;
2. Whether petitioner is entitled to deduct as an ordinary and necessary expense in the years 1918 and 1919, certain costs of resurveying, maintaining and marking the boundaries of petitioner's property;
3. Whether petitioner is entitled to deduct as an ordinary and necessary expense in the years 1918 and 1919, the cost of removing a boiler injured as the result of an accident and installing a new one;
4. Whether petitioner is entitled to deduct as an ordinary and necessary expense in the years 1918, 1919, *3524 and 1920, expenditures for track, trolley wire, rails and cars at the Twin Mine;
5. Whether petitioner should be allowed a deduction as an ordinary and necessary expense in the year 1918, costs of development work at Laurel Creek Mine and Twin Mine;
6. Whether the respondent erred in determining the amount of coal depletion by the petitioner during the years 1918 to 1923, inclusive.
1. In Docket Nos. 11406 and 19365, relating to the years 1918, 1919, and 1920, the petitioner alleges error of the respondent in failing to include in petitioner's invested capital the net value of assets paid in for stock in excess of liabilities assumed, taken over from the Crawford Coal & Iron Co., as shown by the books of the petitioner and the Crawford Coal & Iron Co.
While the petitioner has shown that the excess of the assets over the liabilities of the Crawford Coal & Iron Co., as of September 30, 1904, was $50,319.93, as shown by the books of the predecessor company, we are of the opinion that this evidence does not prove the value of the assets acquired. There is evidence to the effect that all such assets were purchased within two years prior to 1904, but whether such assets continued*3525 of that value to 1904 or were expended before then is not proved. The petitioner, in its brief, also claims that an item of cash in the amount of $1,954.95 was included in the assets acquired and that it should be included in invested capital. However, no proper evidence was introduced to show that such was the case. The action of the respondent is approved.
2. The petitioner owned a large acreage of wild, wooded, mountainous land which was hard of access. The land had been surveyed and the boundaries marked a long time prior to 1918, but the marks having been obliterated, the petitioner, in 1918 and 1919, employed a surveyor to resurvey the land and remark the boundaries. The cost of this work, exclusive of material, was $1,896.63 in 1918, and *508 $3,960.91 in 1919. The reason for resurveying and remarking the boundaries was to try to prevent the loss of land by adverse possession. Under Tennessee law adverse possession under color of title for seven years passes title. The respondent disallowed these amounts as expenses of the business upon the ground that they were costs of defending title to the property. However, we find that they were not costs of defending*3526 title, but were ordinary and necessary expenses incurred in protecting petitioner's property, and, therefore, hold that the petitioner is entitled to deductions of the amounts expended.
3. In 1918, due to negligence of a fireman, a boiler in petitioner's Baker Mine bellied down over the fire and caused such damage that it could not be used or repaired. The petitioner installed a new boiler in place of the old one and in doing so had to tear out a side of the building as well as the fire bridge and part of the boiler setting. The setting and the walls were then built up around the new boiler. Except for the accident, the old boiler would have lasted the life of Baker Mine which closed down in 1920. The cost of this work was $3,441.44, and consisted of expenditures for labor, materials, freight and miscellaneous boiler fittings and accessories.
In
A repair is an expenditure for the purpose of keeping the property in an ordinarily efficient operating condition. It does not add to the value of the property, nor does it appreciably prolong its life. It merely keeps the property in an operating condition over its probable useful life for the uses for which it was required. Expenditures for that purpose are distinguishable from those for replacements, alterations, improvements or additions which prolong the life of the property, increase its value, or make it adaptable to a different use.
In the instant case, while a new boiler was installed to take the place of the old one, the effect was the same as a repair, since Baker Mine had a limited life. We consider expenses incurred in repairing machinery injured due to negligence of a workman, ordinary and necessary expenses incurred in the business. No claim is made for deduction of the cost of the boiler. We are of the opinion that the petitioner is entitled to a deduction of $3,441.44, for the expense of installing the new boiler.
4. It was stipulated between the parties that in the year 1918, the petitioner expended for steel rails, $9,691.90, *3528 and for mine cars, $5,757.07; that in the year 1919, there was expended for steel rails and *509 switches, $5,618.15, and for mine cars and tracks for mine cars, $5,471.04; and that in the year 1920, the petitioner expended for mine cars, $7,361.11, for car rails, $9,120.90; and for trolley wire, $625.31. All of these amounts were incurred at the petitioner's Twin Mine. The petitioner contends that these are ordinary and necessary expenses and should be allowed as deductions, basing such position upon the "normal output" theory, and without any evidence of the life of the assets acquired. We have heretofore held contrary to this contention in
5. For the year 1918, the petitioner claimed as expense an amount of $7,883.22 expended in connection with Twin Mine, and an amount of $3,077.78 expended in connection with Laurel Creek Mine. The parties stipulate that these amounts were expended, but in the deficiency letter the respondent charged them to capital as development costs of the mines.
Petitioner depends upon*3529 article 222, Regulation 45 (1920 Ed.), which provides:
All expenditures for development, rent and royalty in excess of receipts for minerals sold shall be charged to capital account, recoverable through depletion, while the mine is in the development stage. Thereafter any development which adds value to the mineral deposit beyond the current year shall be carried as a deferred charge and apportioned and deducted as an operating expense in the year to which it is applicable.
The holding of the respondent must be approved. See
6. The respondent allowed petitioner depletion of 3.1 cents upon its coal. Petitioner contends that a larger rate should be allowed in each of the years in controversy.
Section 234(a) of the Revenue Acts of 1918 and 1921, provides:
That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions;
* * *
(9) In the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case, based upon cost*3530 including cost of development not otherwise deducted: Provided, That in the case of such properties acquired prior to March 1, 1913, the fair market value of the property (or the taxpayer's interest therein) on that date shall be taken in lieu of cost up to that date.
From all the evidence submitted, we are of the opinion that depletion should be allowed at the rate of 10 cents per ton of coal mined in each of the years in controversy.
Judgment will be entered under Rule 50.