*1547 1. The respondent's determination of the March 1, 1913, fair market value of petitioner's limestone deposits for depletion purposes sustained.
2. The deductibility of alleged business expenses, designated as "contributions, subscriptions or donations," determined.
3. The amount of the amortization of discount on bonds issued by an affiliated corporation and held by petitioner is not deductible in computing consolidated net income.
*305 The Commissioner determined deficiencies in the petitioner's income and profits taxes for the years and in the amounts as follows:
| 1923 | $4,998.64 |
| 1924 | 4,911.59 |
| 1925 | 6,248.15 |
| 1926 | 8,214.86 |
The petitioner alleges that the Commissioner's determination is based upon the following errors:
(a) In computing taxable net income for each of the years, respondent has erroneously understated the depletion deduction to which petitioner is entitled.
(b) In computing taxable net income for the respective years, respondent has erroneously disallowed as deductions*1548 so-called donations made by petitioner in said years, as follows:
| 1923 | $3,134.51 |
| 1924 | 4,963.31 |
| 1925 | 7,957.58 |
| 1926 | 15,851.44 |
*306 (c) In computing taxable net income for 1923, respondent has erroneously included therein the sum of $3,769.57, as a profit on redemption of its own bonds during the year at less than par.
(d) In computing net income or loss of the California Central Railroad Company for the respective years, respondent has erroneously disallowed as deductions from gross income the following amounts representing amortization of bond discount, viz:
| 1923 | $3,005.19 |
| 1924 | 3,005.19 |
| 1925 | 3,005.19 |
| 1926 | 3,160.39 |
FINDINGS OF FACT.
The petitioner is a corporation, organized under the laws of California on February 10, 1912, for the purpose of engaging in the manufacture of Portland cement. Its principal office is at San Francisco. Its capital stock consists of 350,000 shares of common stock of the par value of $10 per share.
The San Juan Portland Cement Company was organized in 1906, at which time it acquired the Barbee, Underwood, and Flint limestone deposits involved in this proceeding. These deposits were located*1549 about 88 miles south of San Francisco and about 7 miles from the Southern Pacific Railway, which was reached by a connecting railway known as the San Juan Pacific Railway Company whose stock was owned by the San Juan Portland Cement Company. Machinery for a cement plant was ordered and some of it delivered and set up at the plant site prior to 1912, when the company encountered financial difficulties due to dissension among the promoters of the enterprise. In 1912 the company defaulted in the payment of interest upon its bonds outstanding in the amount of $1,300,000. A committee representing the owners of these bonds instituted foreclosure proceedings and purchased the assets of the San Juan Portland Cement Company at the sheriff's sale for $20,700, the actual costs of the sale, etc. The bondholders' committee thereby acquired all of the assets of the San Juan Portland Cement Company, consisting of stock and bonds of the San Juan Pacific Railway Company, the unfinished cement plant, the Chittenden Ranch, and the above mentioned limestone deposits. Shortly thereafter the bondholders' committee organized the California Central Railroad Company and turned over to that company the*1550 stocks and bonds of the San Juan Pacific Railway Company in exchange for its stock and bonds.
The petitioner was then organized and in exchange for 175,000 shares of its common stock of the par value of $10 per share acquired from the bondholders' committee the unfinished cement plant, machinery, equipment, etc., which were valued at approximately *307 $500,000, and the above mentioned tracts, containing 2,463 acres of land. In 1916 the petitioner made the necessary financial arrangements, procured capable management, and undertook the completion of its cement plant. The plant was finished at an additional cost of about $500,000 and production started in 1918.
The Barbee deposit was adjacent to the plant; the Underwood and Flint deposits were two and three miles, respectively, from the plant and were reached by a narrow gauge railroad constructed after 1913 and extended as operations progressed after 1918. The deposits were exhausted in or about 1927.
On December 19, 1922, the petitioner filed with the Commissioner Form F, "Schedules for Substantiation of Valuation, Depletion, and Depreciation - Inorganic Nonmetallic Mineral Properties," on which these limestone*1551 deposits, comprising "1293 acres of surface (fee) containing mineral," were valued for depletion purposes at $1,034,398.10. Attached to Form F was a letter of explanation which contained, inter alia, the following:
* * * the book entries covering the transfer [that is, the acquisition from the bondholders' committee] of the aforementioned properties are:
| Lands | $1,202,653.10 |
| Uncompleted Cement Plant | 545,346.90 |
| Organization and Development | 2,000.00 |
| $1,750,000.00 |
The Underwood property has been practically depleted of lime rock since early in 1920, but still contains sufficient clay to supply the Mill at its present capacity for a number of years. Both lime rock and clay are necessary to the manufacture of Portland Cement.
The Barbee property contains no high grade limestone but considerable clay similar to that of Underwood.
The Flint property is now supplying the lime rock used at the Plant. From development work done in 1918 the available tonnage was estimated as sufficient to run the Mill for eight years.
We started to use the material in March, 1921, but from present indications it would seem that the supply will be exhausted in another*1552 five years - that is in say, 6 1/2 years from March, 1921.
From March, 1920, when Underwood was exhausted until March, 1921, when arrangements were completed to enable us to draw upon Flint, lime rock was obtained from the property of Judge E. A. Pearce of San Juan.
For the purpose of depletion the Plant Site acreage which we estimate to be worth $48,000, may be eliminated. The Chittenden Ranch, eight miles from the Plant was bought principally for the Clay beds and Oil prospects. The Clay is unnecessary, as equally good material can be obtained from Underwood and Barbee, which are much nearer the Mill; and, concerning the Oil, nothing has been done so far to prove its existence. We suggest, therefore, that the Ranch be also omitted in computing the cost of mineral lands until we begin to draw upon its resources. Our estimate of its value for agricultural purposes is $75,000, which includes the buildings.
*308 The cost therefore of the mineral lands bought on August 7th, 1912 would be:
| Land | $1,202,653.10 | |
| Less: | ||
| Plant Site | $48,000 | |
| Chittenden Ranch | 75,000 | |
| 123,000.00 | ||
| 1,079,653.10 |
The Company commenced to quarry for Rock and*1553 Shale in April, 1918, and commenced Mill Operation on May 1st of the same year. The output to December 31st, 1912 [sic] has been:
| Tons | |
| Underwood and Vicinity | 203,586.81 |
| E. A. Pearce - on royalty basis | 50,093.50 |
| Flint | 75,656.81 |
| 329,337.12 |
| Years | ||
| The estimated life of Flint is | 6 1/2 | |
| We commenced to take out Rock in March, 1921, which gives an elapsed time to December 31, 1921 | 3/4 | |
| Leaving probable life from | 5 3/4 | |
| During this period of 5 3/4 years the Mill will require at its present capacity, Rock and Shale | 1,035,000.00 | |
| 1,364,337.12 | ||
| Deduct Rock taken from Pearce property | 50,093.50 | |
| Estimated commercial tonnage | 1,314,243.62 | |
| If we figure the residual value of the land at $35.00 per acre, we get: | ||
| Rock Cost less Plant Site and Ranch | 1,079,653.10 | |
| 1293 acres at 35.00 per acre | 45,255.00 | |
| $1,034,398.10 |
which divided by 1,314,244 tons gives a depletion rate of nearly 79 cents a ton.
On September 23, 1912, the Company purchased the mineral rights to 8750 acres on the El Gabilan Rancho for 50,000 shares of Common Stock. This land is about three miles beyond the Flint property in a mountainous district*1554 inaccessible except by pack mule and of no use for Cement making purposes until a suitable means of transportation has been provided. Work is now being done with a view to estimating the useful tonnage available, and we hope to find sufficient rock to meet the Company's requirements for the remainder of its corporate life.
The Company will either have to go to Gabilan within the next few years, purchase new deposits, or go out of business. The question is whether depletion is to be figured only on the deposits bought in August 1912 or whether we should endeavor to reach a rate that would cover the Gabilan deposits also.
If the Company goes to Gabilan, as in all probability it will, we would suggest that we allow for 25% increase in the capacity of the Mill, and figure depletion over an assumed corporate life of 40 years from May 1st, 1918. Under these conditions, we would get a tonnage of:
| Tons | |
| Commercial tonnage from original purchase to Sept. 30th, 1927 asshown above | 1,314,244 |
| Allowing for an increase of 25% in production, the Rock and Shale required from Sept. 1927 to April 30th, 1958, would be 220,000 tons a year. 220,000 tons X 30 years and 7 months | 6,728,333 |
| Estimate total tonnage required during 40 years from May 1st, 1918 | 8,042.577 |
*1555 *309 We make no attempt to forecast the value of the Gabilan mineral rights after 40 years - there is the possibility that substitute for Portland Cement may be developed, or that something else may arise to depreciate its value.
If the depletion rate be based on the cost of the entire deposits spread over a life of 40 years, we get:
| Cost of original properties less Plant Site, Ranch and residual value | $1,034,398.10 |
| Gabilan Mineral Rights | 500,000.00 |
| 1,534,398.10 |
which divided by the commercial tonnage required, viz: 8,042,577 gives a rate of over 19 cents per ton.
Should the Company decide that it would not go to Gabilan, a rate of 79 cents per ton would have to be applied to write off the original quarry lands by September 1927. Should the Commissioner decide that this figure is too much to allow under the heading of Depletion, the Company will have to adjust the difference in some other way.
In sizing up the general situation we have reached a conclusion that the rate taken over the entire deposits should be about 20 cents a ton. We submit this figure for your consideration, and would be glad to receive your opinion as early as possible, *1556 that we may make whatever adjustments are necessary before closing the books.
Upon its income-tax returns for the years 1918, 1919, 1920, and 1921 the petitioner claimed deductions for depletion of mineral deposits at the rate of 10 cents per ton. Upon its income-tax returns for the years 1922, 1923, 1924, 1925, and 1926 the petitioner claimed deductions for depletion of mineral deposits at the rate of 20 cents per ton, basing this rate on the data furnished in Form F referred to above.
The Commissioner determined the March 1, 1913, value of the petitioner's limestone deposits at $63,121, and the tonnage therein of 1,700,000 tons. Upon this basis the Commissioner has allowed deductions for depletion of mineral deposits at the rate of 3.713 cents per ton.
The amount of limestone produced from the Barbee, Underwood, and Flint deposits and the deductions for depletion claimed by the petitioner and allowed by the Commissioner, for the taxable years under consideration, are as follows:
| Year | Tons produced | Depletion claimed at 20 cents per ton | Depletion allowed at 3.713 cents per ton |
| 1923 | 241,684.35 | $48,336.87 | $8,973.73 |
| 1924 | 212,116 | 42,423.29 | 7,875.87 |
| 1925 | 247,016.67 | 49,403.33 | 9,171.74 |
| 1926 | 246,046.40 | 49,209.28 | 9,135.69 |
*1557 *310 During the years under consideration the petitioner made the fellowing expenditures, designated as "contributions, subscriptions or donations," which have not been allowed as deductions:
| Item No. | 1923 | 1924 | 1925 | 1926 | |
| 1 | San Francisco Community Chest | $1,000.00 | $1,000.00 | $1,000.00 | $1,000.00 |
| 2 | Cement to San Juan Mission | 472.38 | |||
| 3 | Cement to San Juan Memorial | 10.13 | |||
| 4 | Mills College | 150.00 | |||
| 5 | John Bryan | 100.00 | |||
| 6 | Working Girls Aid | 5.00 | 10.00 | 10.00 | 10.00 |
| 7 | Californians, Inc | 1,000.00 | 1,000.00 | 1,000.00 | 1,000.00 |
| 8 | Japanese Relief | 250.00 | |||
| 9 | Municipal Railway Ball | 2.00 | 10.00 | 10.00 | 10.00 |
| 10 | American Legion Com | 100.00 | 96.50 | ||
| 11 | Cash | 10.00 | |||
| 12 | West Coast Veterans | 25,00 | 20.00 | ||
| 13 | St. Francis Girls Directory | 10.00 | |||
| 14 | Police Ball | 5.00 | 5.00 | ||
| 15 | Mooseheart Governors (School) | 50.00 | 25.00 | ||
| 16 | Mission Dolores | 100.00 | |||
| 17 | Athletic Fund | 25.00 | |||
| 18 | Mills Bldg. Employees | 105.00 | |||
| 19 | Firemen | 35.00 | 30.00 | 5.00 | |
| 20 | News Boys | 5.00 | 20.00 | 15.00 | |
| 21 | Letter Carriers | 5.00 | 5.00 | 5.00 | |
| 22 | Munstermen | 25.00 | 25.00 | ||
| 23 | St. Patricks Church | 20.00 | 70.00 | ||
| 24 | British Fleet | 26.02 | |||
| 25 | U.S. Govt. Research | 29.00 | |||
| 26 | Olympiad (Adv.) | 300.00 | |||
| 27 | Narcotic Crusade | 25.00 | |||
| 28 | L. R. Lurie | 250.00 | |||
| 29 | Coolidge Campaign | 250.00 | |||
| 30 | P. L. Ryan | 150.00 | |||
| 31 | Monitor Publishing Co | 25.00 | |||
| 32 | Jap. Fleet | 50.00 | |||
| 33 | Industrial Assn. of San Francisco | 300.00 | 1,800.00 | 1,800.00 | |
| 34 | Olympic Games | 200.00 | |||
| 35 | San Francisco Opera Assn | 250.00 | |||
| 36 | Cement to Highway Com. (Samples) | 6.54 | |||
| 37 | Cement to Citizens Military Tr. Camp | 77.50 | 25.00 | ||
| 38 | Cement to San Juan Com. Hall | 73.75 | |||
| 39 | Cement to McGillibvray Cons. Co | 367.90 | |||
| 40 | Cement Donated | 71.10 | 111.27 | 1.30 | |
| 41 | Cement to Cal. C. C. Los Gatos | 847.85 | |||
| 42 | St. Leo's Rectory | 25.00 | |||
| 43 | American Fleet | 50.00 | |||
| 44 | Emporium | 2.10 | |||
| 45 | San Juan Cemetery Cement | 5.63 | |||
| 46 | Cement - Native Daughters | .84 | |||
| 47 | St. Josephs Hospital | 500.00 | |||
| 48 | American Bankers League | 25.00 | |||
| 49 | 30th Infantry | 25.00 | |||
| 50 | Legion News | 25.00 | |||
| 51 | Diamond Jubilee | 82.00 | |||
| 52 | Switchmens Union | 10.00 | 10.00 | ||
| 53 | Labor Council | 25.00 | 50.00 | ||
| 54 | Happyland Fund (Ad) | 10.00 | 5.00 | ||
| 55 | Fremont Peak Flag Pole | 609.33 | |||
| 56 | Calif. Mineral Assn | 10.00 | |||
| 57 | Childrens Hospital | 250.00 | |||
| 58 | Marin Co. "Good Roads" (Ad) | 250.00 | |||
| 59 | Election Donation | 10.00 | |||
| 60 | Cement to S. McCarthy | 1,058.56 | |||
| 61 | E. Sonetter, Christmas | 25.00 | |||
| 62 | Sixty Sixth Coast Artillery | 10.00 | |||
| 63 | St. Francis School | 91.88 | |||
| 64 | Veteran Firemen | 25.00 | |||
| 65 | Elks Golden Jubilee Conv | 10.00 | |||
| 66 | State Highway Patrol | 80.00 | |||
| 67 | Federal Employees | 10.00 | |||
| 68 | Mission Restoration | 250.00 | |||
| 69 | Valley Bldg. Matl. Co. (Gypsum) | 3.54 | |||
| Valley Bldg. Matl. Co. et al. Cement | 77.68 | ||||
| 70 | Ricard Historical Fund (Santa Clara Univ.) | 100.00 | |||
| 71 | John McLaren Fund | 90.00 | |||
| 72 | Mrs. Carlson | 25.00 | |||
| 73 | Sausalito Fire Alarm | 5.00 | |||
| 74 | Republican Campaign | 500.00 | |||
| 75 | Calif. National Guard | $10.00 | |||
| 76 | Boy Scouts San Juan | 25.00 | |||
| 77 | Presbyterian Church - Hollister | 50.00 | |||
| 78 | Red Cross San Juan | 25.00 | |||
| 79 | San Francisco Bulletin | 25.00 | |||
| 80 | Y.M.C.A | 2,500.00 | |||
| 81 | Master Plasterers | 100.00 | |||
| 82 | California Concrete Pipe Mfrs | 300.00 | |||
| 83 | All California Highway Lobbying | 3,000.00 | |||
| 84 | Stanford University | 4,000.00 | |||
| 85 | Valley Lbr. Co. Cement | 4.76 | |||
| 86 | Keystone Const. Co. Cement | 196.90 | |||
| 87 | John O. Loftgrist Cement | 400.38 | |||
| Total | $3,134.51 | $4,963.31 | $7,957.58 | $15,851.44 |
*1558 *311 Petitioner operated under a budget and, when the appropriation for any department was exhausted, further expenditures within that year were charged to some other account. In this manner some advertising expense was charged to "contributions, subscriptions or donations." As a matter of business policy the petitioner contributed to organizations and enterprises that benefitted the community, believing that such contributions to the community welfare resulted in good will toward petitioner and increased its business.
Item 1. The San Francisco Community Chest, like Community Chest organizations in other cities, represented the several charitable organizations of the city and gifts to the Community Chest were apportioned among these organizations. publicity through the newspapers and by means of placards on doors was given to the contributors.
Items 2, 16, and 68 represent contributions of cement for the restoration of old missions in California, some of which date back to the Spanish days. These missions were of adobe construction and were in bad condition due somewhat to the earthquake disasters at San Francisco and Santa Barbara. The San Juan Mission and*1559 the petitioner's plant were located in the same town and the Mission Dolores was in San Francisco, where petitioner sold most of its product. Some of petitioner's employees attended services in the San Juan Mission.
Item 4. This contribution was made to the Mills College building campaign for the purpose of procuring the order for some of the cement to be used in the new construction at the college. Petitioner procured the order for the cement.
Item 5. John Bryan owned land over which petitioner desired an easement. Bryan requested a contribution from petitioner for a pageant at Hollister, about eight miles from San Juan. Petitioner contributed $100 for this purpose through Bryan, who granted favors to the petitioner from time to time.
Items 6, 8, 12, 15, 27, 42, 44, and 46 were charitable gifts.
*312 Item 7. Californians, Inc., is an organization for advertising the State of California with particular reference to the San Francisco Bay district. Industrial and business interests of the State supported the enterprise which by means of nation-wide advertising and publicity attracted people and industries to California. Petitioner did not have*1560 an individual advertisement in "Californians," the publication of the organization.
Items 9, 14, 20, 21, and 52 were either the purchase of tickets or donations.
Item 10. Several of petitioner's employees were members of the American Legion and it was considered advisable to make these contributions.
Items 13, 26, 31, 50, 54, and 58 were advertising expense.
Item 18. Petitioner moved its offices from the Mills Building and gave this sum to the employees of that building so that they would direct people to petitioner's new location.
Item 23 represents contributions to the Catholic Church, which was very strong in California and which had a large building program.
Items 24, 32, and 43 were contributions for the celebrations and entertainments for the fleets during their stay at San Francisco. These celebrations advertised the city, but did not directly benefit the petitioner.
Item 28 is a gift to Lurie for services rendered the petitioner in procuring business. He specified the petitioner's cement on various jobs.
Items 29, 59, and 74 were contributions to political campaigns.
Item 30 is a contribution to a religious organization*1561 to which petitioner sold cement.
Item 33. The petitioner and allied industries organized the Industrial Association of San Francisco to combat the labor unions that were in control of the building trades. The labor unions had established yards for supplying building materials and were importing foreign cement, which competed with the petitioner's product. The petitioner's business was affected by the activities of the labor unions and benefited by a cessation of such activities.
Item 34 is a contribution toward the expenses of athletes going to Europe for the Olympic games.
Item 35 is a contribution to the expense of providing operas at the San Francisco Civic Auditorium at a nominal cost to the individual.
Item 36 represents the cost of cement samples sent to the Highway Commission for special tests. Petitioner sold cement to the Highway Commission and supplied these samples from time to time.
*313 Item 37. Some of petitioner's employees were interested in the Citizens' Military Training Camp and petitioner gave cement for use in fixing up headquarters at the camp.
Item 38. Petitioner contributed cement for the building of the Community*1562 Hall, which was a direct benefit to its employees.
Item 41. Petitioner contributed cement to the California Central College at Los Gatos for the purpose of creating friendly relations and obtaining new business. Petitioner subsequently sold cement to the institution.
Item 47. This contribution was made to obtain business from St. Josephs Hospital, which had a large building program. Petitioner received a share of the business.
Item 51 is a contribution to a San Francisco celebration.
Item 55 represents a contribution for the marking of Fremont's Peak, of historical interest in California, and the celebration of Native Sons and Daughters.
Item 80 is a contribution to the building of the Army and Navy Y.M.C.A. in San Francisco.
Item 82. The members of this association were petitioner's customers and this contribution was made for the purpose of keeping their business.
Item 83 is a contribution to a state-wide referendum for increasing the gasoline tax for the purposes of road building. The referendum was successful and the State of California undertook a large road-building program, involving the use of cement and other materials.
*1563 Item 84. This contribution to Stanford University was for the purpose of making a study of construction involving the use of cement. The university had the facilities and technical staff and could extend its research in the various fields, thereby doing experimental work of great value to the cement and other industries supplying materials for building construction.
Contributions of cement were entered upon the petitioner's books at the sale price, less the allowance for containers returned, and were credited to sales and charged to donations, etc.
The California Central Railroad Company was organized under the laws of California in 1912, at which time it acquired in exchange for its stock and bonds all of the assets of the San Juan Pacific Railway Company, a California corporation organized prior to 1912. During the taxable years under consideration the petitioner was affiliated with the two railroad companies. The books of the three companies were kept, and consolidated income-tax returns filed, on the accrual basis.
*314 In 1912 the California Central Railroad Company issued its own bonds at a discount. In amortizing this bond discount over the life of the*1564 bonds the amount of amortization applicable to each of the four years under consideration is $3,381.18. In computing the consolidated net income for the respective years, the Commissioner has allowed as a deduction for bond discount the sum of $375.99 for the years 1923, 1924, and 1925, and $220.79 for the year 1926. The balance applicable to each of these years, disallowed by the Commissioner, represents the amortization of bond discount applicable to bonds owned by the petitioner during these years.
OPINION.
SMITH: The principal issue for our determination is the fair market value of the petitioner's limestone deposits, designated as the Barbee, Underwood, and Flint deposits, on March 1, 1913, which the petitioner acquired prior to that date in the manner set forth in our findings of fact. The facts relating to the acquisition of these properties are not in dispute, and the petitioner concedes the correctness of the respondent's determination of the estimated tonnage on the basic date. The respondent determined the March 1, 1913, value of these deposits to be $63,121, estimated the tonnage thereof at 1,700,000 tons, and allowed depletion deductions at the rate of 3.713*1565 cents per ton upon the stone removed during the taxable years 1923 to 1926, inclusive. The petitioner claimed deductions for depletion upon its income-tax returns for the taxable years under consideration at the rate of 20 cents per ton, which rate is explained on brief as "a charge spread over all its holdings and was not restricted to the Barbee, Underwood and Flint deposits." The petitioner contends that the March 1, 1913, value of these deposits was not less than $1 per ton, and in support of this valuation offered opinion evidence by three men experienced in the cement industry.
The petitioner's first witness, Ira Judson Coe, testified that he had been interested in California limestone properties since 1903 and that as a consulting engineer he had examined practically all such deposits in that State. Between 1904 and 1906 he examined the properties involved in this proceeding, and, finding them suitable for cement production, recommended operations thereon. On direct examination Coe stated that in 1906 he valued the limestone in place on these properties at $1,000,000, and later stated that he probably did not place a valuation upon the properties at that time, but made*1566 a recommendation as to "the value, or I would not have recommended the investment." The interests that he represented put about $300,000 into the development of these properties at that *315 time, and, according to Coe, a total of about $1,300,000 was expended for the construction of the cement plant and the development of the properties before 1913. From a consideration of all of his testimony it is difficult to determine whether he valued the properties at $1,000,000 in 1906 or merely found that they were of such a nature as to warrant an investment of $1,000,000. In 1905 or 1906 he procured an option on the Sky Blue Marble Quarries near Riverside and Los Angeles, California, for the Henshaw Brother. In making his examination of these properties Coe made 23 diamond drill holes and tunneled the deposits to determine the tonnage, which he estimated at 2,000,000 tons. He recommended the construction of a cement plant and the operation of the Sky Blue properties. The option was exercised and the Sky Blue properties acquired for $55,000 and turned over to the Riverside Portland Cement Company. Coe stated that the Riverside plant for the operation of the Sky Blue properties*1567 cost about $1,000,000 and was about the same as the plant which was started in 1906 by the San Juan Portland Cement Company for the operation of the Barbee, Underwood, and Flint deposits. Shortly before the hearing in this proceeding in February, 1931, Coe computed the March 1, 1913, value of the Barbee, Underwood, and Flint deposits, which he estimated at 2,000,000 tons, by the use of figures on the estimated (not actual) cost of 82 1/2 cents for manufacturing a barrel of cement at the Riverside plant in 1906, a selling price of $1.50 per barrel for the cement, an estimated gross profit of 67 1/2 cents per barrel of cement or $2.16 per ton of raw material, or a total estimated gross profit of $4,320,000. The remainder of his computation is as follows:
| Present value of deposits based on 10 year life and discount factors of 8% and 4% (Hoskold's Table) before deducting cost of plant, $4,320,000. x .6124 | $2,645,568 |
| Deduct: | |
| Estimated cost of plant | 1,000,000 |
| Total value of deposits | $1,645,568 |
| Value of deposits, per ton | $0.822784 |
Coe did not value the particular properties with which we are here concerned either in 1906 or 1913, and his testimony shows no familiarity*1568 with these properties at or near the basic date. In fact, he has not examined these properties since 1907. His computation based on the Riverside properties might have more probative value if the comparison had been based upon actual instead of estimated costs of manufacturing cement. Coe stated that there was not much change in the value of limestone deposits in California between 1906 and 1913 and that any value determined in 1906 would hold *316 good in 1913, and yet he stated that the Sky Blue properties, with the same estimate tonnage as the Barbee, Underwood, and Flint properties, cost only $55,000 in 1906. At that time both properties were undeveloped and may be considered comparable.
Herbert Coffman, petitioner's second witness, has had about 30 years experience in the cement industry as a chemist and executive officer. His first contact with the petitioner's properties was in 1916, when he made an analysis of some samples of the limestone in these deposits. Between 1907 and 1914 Coffman was chief chemist for the Riverside Portland Cement Company. He stated that the petitioner's properties could have been as successfully operated as the Riverside properties, *1569 that the Riverside Company made a profit of $1.815 per ton before deducting depreciation at the rate of 25 cents a ton, or a profit of $1.565 per ton of raw material, and that the limestone in place was worth at least one-half of this amount, or 78 cents per ton. On cross-examination it was shown that Coffman did not know the methods used in computing costs or the actual profit per ton at the Riverside plant, and that he had never checked the figures as to costs in the cement industry. His opinion of value was based upon assumptions of plant costs, depreciation, cost of manufacturing and selling price of cement, and not actual costs at the Riverside plant.
F. S. Richards, petitioner's third witness, has had many years of experience in the cement industry in the United States and Australia, but had never seen the properties involved in this proceeding until 1923. His testimony was based entirely upon an historical study of conditions in the cement industry in California, and not upon actual experience and observation of conditions at or near the basic date. Richards studied the records of the petitioner's operations after production was begun in 1918, from which he computed a*1570 value for the limestone deposits with which we are here concerned. He stated that the valuation so determined as of 1918 would be the same as the valuation as of March 1, 1913, since there were no operations on these properties between 1913 and 1918, and the general state of the cement industry during that period would not affect the valuation. Although he detailed much information about the development and use of cement in California building construction following the San Francisco earthquake, the impetus to the development of that section by the opening of the Panama Canal, transportation costs and differentials in freight charges, etc., he failed to mention the effect, if any, of conditions produced by the World War on the cement industry and particularly upon the value of petitioner's limestone deposits. Even assuming, but not deciding, that his valuation as of 1918 was correct, that valuation should be discounted *317 by reason of the unusual conditions tending toward inflated values then prevailing. Cf. Bogle & Co. v. Commissioner, 26 Fed.(2d) 771, 772.
Richards testified that it is difficult to determine the actual tonnage of a limestone deposit*1571 in California, due to the lay of the rock, the strata of which may have been disrupted by physical changes in the land, and, further, that no estimate of the tonnage in a deposit is worth anything until it is backed up by definite prospect work. Although he did not explain just what he meant by "definite prospect work," neither his testimony nor that of the other witnesses reveals a definite prospecting of the deposits involved in this proceeding at or near the basic date, or at any other time. The first witnesses used an estimated tonnage of 2,000,000 tons, while Richards used the respondent's determination of 1,700,000 tons in computing valuation. Shortly before the hearing, Richards prepared a statement showing the total tonnage removed from the Barbee, Underwood, and Flint deposits to be 1,700,000 tons, and the revenue for the years 1918 to 1928, inclusive, before depletion and depreciation in the amount of $3,715,959.42, to which he applied "Discount factor Hoskold's 8 & 4 for 11 years .589748," in determining a discounted value of $2,191,479.62, "Less one-half of plant cost and improvements $675,059.79," or a net valuation of $1,516,419.83 for these deposits. This last sum*1572 divided by 1,700,000 tons, Richards stated gave the limestone in place a value of 89.2 cents per ton. It is to be noted that this valuation is based upon revenue derived from these deposits during the postwar period and not upon expected profits estimated prior to operations (See Reinecke v. Spalding,280 U.S. 227">280 U.S. 227, in re discounting revenue to arrive at a March 1, 1913, value for depletion purposes). This witness did not know of any sales of limestone properties in the United States on the basis of a computation by Hoskold's formula discounting expected profits from the sale of manufactured cement. Although Richards computes a value of 89.2 cents per ton for the limestone in these deposits as of 1918, which he states would be the same value in 1913, he also tells us that in 1920 and 1921 the petitioner purchased limestone rock in place for 10 cents a ton and acquired a lease in 1927 for quarrying limestone at a royalty of 10 cents a ton. Such sales in 1920 and 1921 are not consistent with a 1918 valuation of 89.2 cents per ton, even after considering possible factors such as quarrying and transportation conditions and the available tonnage, etc.
*1573 On brief the petitioner argues that the testimony of these witnesses overcomes the prima Facie correctness of the respondent's determination and that this evidence supports a valuation of approximately $1 *318 per ton, citing Russell v. Commissioner, 45 Fed.(2d) 100, wherein the Circuit Court of Appeals for the First Circuit said:
While there is a presumption that the Commissioner's findings are correct, Avery v. Commissioner (C.C.A.) 22 F.(2d) 6, 55 A.L.R. 1277">55 A.L.R. 1277, when it appears, as in this record it does appear, that the methods pursued by the Commissioner were mathematically and legally erroneous, that presumption no longer avails. New York Life Ins. Co. v. Ross (C.C.A.) 30 F.(2d) 80, 82.
There is no contention here that the respondent's determination of the depletion deductions is mathematically erroneous and we do not think that the record shows that determination to be legally erroneous. The only evidence offered by the petitioner to refute the respondent's determination is the opinion testimony of these witnesses, which has been carefully considered. Such evidence is entitled to consideration, but, *1574 as the Circuit Court of Appeals for the Sixth Circuit said in a recent decision, Tracy v. Commissioner, 53 Fed.(2d) 575, affirming our decision at 15 B.T.A. 1107">15 B.T.A. 1107: B.T.A. 1107:
* * * while the opinions of experts are competent and often very helpful, such evidence is not considered binding upon the tribunal before which it is produced, at least not to the extent that such tribunal is bound to follow it if contrary to the best judgment of its members. Anchor Co. v. Commissioner,42 F.(2d) 99 (C.C.A. 4); Am-Plus Storage Battery Co. v. Commissioner,35 F.(2d) 167 (C.C.A. 7). * * *
In Anchor Co. v. Commissioner, 42 Fed.(2d) 99, is the following:
* * * Such evidence is competent, but it is not to be blindly followed. It should be weighed by the Board in the light of the other facts developed in the case and of the general knowledge and experience of the members, and is by them to be given only such weight as in the light thereof may seem to be just and reasonable. *1575 The Conqueror,166 U.S. 110">166 U.S. 110, 131, * * *; Head v. Hargrave,105 U.S. 45">105 U.S. 45, 49 * * *; Am-Plus Storage Battery Co. v. Commissioner (C.C.A. 7th) 35 F.(2d) 167, 169.
See also Balaban & Katz Corporation v. Commissioner (C.C.A., 7th Cir.), 30 Fed.(2d) 807; Am-Plus Storage Battery Co. v. Commissioner, 35 Fed.(2d) 167; H. H. Blumenthal,21 B.T.A. 901">21 B.T.A. 901.
The record is not clear as to whether witness Coe valued the properties in question in 1906 or 1913, or in both of these years. The valuations of the other witnesses were made approximately 18 years after the basic date with which we are here concerned. The March 1, 1913, fair market value of these limestone deposits must be determined in the light of facts then known or then reasonably to be anticipated. J. J. White Lumber Co.,24 B.T.A. 274">24 B.T.A. 274. None of the witnesses has adequately shown a knowledge of the petitioner's limestone deposits on or about the basic date to support his valuation. Each testified to a retrospective valuation which is doubtless "colored by subsequent prosperity" of the cement industry. *1576 Bogle& *319 Co. v. Commissioner, supra. As we said in E. Louis Jacobs,20 B.T.A. 529">20 B.T.A. 529, 535: "* * * The longer the period which has elapsed since the date as of which value is expressed, the less reliable is the opinion of value likely to be."
It was within the province of the petitioner to show its actual investment in these properties, which would or would not support the claimed valuation. The allowance for depletion is, after all, a return of capital arising out of a gradual sale of the properties. Lisk Manufacturing Co., Ltd.,15 B.T.A. 1048">15 B.T.A. 1048; United States v. Ludey,274 U.S. 295">274 U.S. 295. The undisputed facts of record show that these properties, together with a partially completed cement plant and the large acreage designated as the Chittenden Ranch, were acquired in 1912 by the petitioner in exchange for its stock of the par value of $1,700,000, but no value has been established for this stock and no attempt has been made to allocate such value to the several properties so acquired. Such facts would aid our determination. The information submitted in connection with Form F filed with the Commissioner in 1922, *1577 in substantiation of petitioner's increase of its claimed depletion deductions from 10 cents to 20 cents per ton, does not support the valuation now claimed by the petitioner. It is to be noted that the estimates and computations submitted in connection with Form F are based upon the tonnage requirements of the mill at its 1922 capacity. There is nothing in this data that shows with any degree of certainty the relevent facts known or reasonably anticipated at or near the basic date with which we are concerned.
The determination of the fair market value of any property is largely a matter of judgment and various theories of valuation are useful, only so far as they support a result consonant with sound judgment. Portage Silica Co.,11 B.T.A. 700">11 B.T.A. 700, 705; affd., 49 Fed.(2d) 985. The theoretical computations of witnesses Coe and Coffman, based upon 1906 estimates of cost and selling price, and the theoretical computation of witness Richards, based upon revenue produced by these deposits, which were discounted by Hoskold's formula, with varying results, do not, in our opinion, establish the fair market value of these properties as of the basic date. As*1578 the Circuit Court of Appeals for the Ninth Circuit said in Simons Brick Co. v. Commissioner, 45 Fed.(2d) 57, 58 (certiorari denied, 283 U.S. 834">283 U.S. 834):
* * * whatever the value of this [Hoskold's] formula may be in cases where there is no other evidence of the value of deposits of minerals, etc., in place, and where the necessary factors are more clearly proved than in this case, this is not a case for its application. Here there is other evidence of a definite character as to the actual value of the clay lands on March 1, 1913 * * *.
Upon *320 a consideration of all of the evidence, we are of the opinion that the respondent's determination of the March 1, 1913, value of the petitioner's limestone deposits and his allowances for depletion should not be disturbed.
The next issue is the deductiblity of certain amounts designated as "contributions, subscriptions, or donations." This opinion would be inordinately prolonged by a discussion of and decision on each of the enumerated items set forth in our findings of fact. Suffice it to say that such items are deductible or not, when considered in the light of the facts of each case, upon the*1579 application of the general principle that "the question always is whether, balancing the outlay against the benefits to be reasonably expected, the business interest of the taxpayer will be advanced." See American Rolling Mill Co. v. Commissioner, 41 Fed.(2d) 314, 315, for a fuller discussion and citation of authorities. See also Yamhill Electric Co.,20 B.T.A. 1232">20 B.T.A. 1232.
Applying this principle to the items in controversy, we hold that items 2, 4, 5, 7, 10, 13, 16, 18, 23, 26, 28, 30, 31, 33, 36, 37, 38, 41, 47, 50, 54, 58, 68, 82, and 84 are deductible; and that items 1, 6, 8, 9, 12, 14, 15, 20, 21, 24, 27, 29, 32, 34, 35, 42, 43, 44, 46, 51, 52, 55, 59, 74, 80, and 83 are not deductible. No evidence was offered regarding items 3, 11, 17, 19, 22, 25, 39, 40, 45, 48, 49, 53, 56, 57, 60 to 67, inclusive, 69 to 73, inclusive, 75 to 79, inclusive, 81, 85, 86, and 87, and the respondent's disallowance of same is approved.
In view of the petitioner's method of handling contributions of cement upon its books, no adjustment of the allowed items representing contributions of cement is necessary, since the credit of the full amount to sales is offset*1580 by the allowed deduction. However, the disallowed deductions representing contributions of cement require an adjustment by eliminating the profit upon this cement which has been credited to sales and erroneously included in gross income.
At the hearing, counsel for the respondent conceded error as alleged in the third issue and stipulated that petitioner's gross income had been overstated by the amount of $3,769.57.
The remaining issue is whether the amount of the amortization of bond discount on the bonds of the petitioner's affiliate, the California Central Railroad Company, held by the petitioner during the taxable years under consideration is deductible in computing the consolidated net income of the affiliated corporations for these years. The facts of record do not distinguish the situation here presented from that ruled upon in New Orleans, Texas & Mexico Ry. Co.,6 B.T.A. 436">6 B.T.A. 436, 441, wherein we held that such bond discount was not deductible. Following that decision, the respondent's action in this particular *321 is sustained. See also *1581 Gulf, Mobile & Northern R.R. Co.,22 B.T.A. 233">22 B.T.A. 233, 261, wherein we followed our earlier decision on this point.
Reviewed by the Board.
Judgment will be entered under Rule 50.
GOODRICH dissents.
MURDOCK, dissenting: I believe that a correct result has been reached in the prevailing opinion on the first and last points, but I do not agree that the other issue has been decided properly. The findings of fact indicate that there is insufficient evidence as to many of the items in controversy to determine whether or not they are deductible. Where the petitioner gave away cement of its own manufacture, it did not make sales, and it should not have included the market price of this cement in its gross sales for income-tax purposes. It is a misconception to say that some of these items are "deductible." It is only necessary to eliminate the items from gross sales to settle the present controversy as to these items.
MARQUETTE agrees with this dissent.