*688 Prior to 1913 the petitioner agreed to sell a large quantity of timber at specified prices and during each taxable period it received under the agreement of sale mininum amounts which were in excess of the selling price of the timber cut and removed during such periods. Held, that the gain realized or loss sustained in the taxable periods from the receipt of the payments should be computed on the basis of the fair market value of the timber on March 1, 1913.
*472 These proceedings were consolidated for hearing and report and involve the redetermination of the following deficiencies in income taxes:
| Jan. 1 to Sept. 30, 1918 | $9,454.32 |
| Year ended Sept. 30, 1919 | 17,573.80 |
| Oct. 1 to Dec. 31, 1919 | 10,217.42 |
| 1920 | 98,376.97 |
| 1921 | 52,524.42 |
The issues are: (1) The proper basis for determining gain or loss from the sale of timber during the taxable periods; (2) whether invested capital should be increased for property paid in for stock; and (3) whether petitioner is entitled to deductions*689 for net losses.
FINDINGS OF FACT.
Prior to July 17, 1901, the petitioner, a Texas corporation, incorporated July 3, 1901, acquired from its organizer, John H. Kirby, for $20,000,000 par value of its common stock, title to and assignments of options to purchase about 800,000 acres of land in Texas and Louisiana on which were located long and short leaf yellow pine timber and numerous varieties of hardwood timber. The unpaid purchase price of the properties, not exceeding $17,500,000, was assumed by petitioner.
By the terms of a written agreement entered into on July 17, 1901, known as the stumpage contract, the petitioner agreed to sell to Kirby, and Kirby agreed to buy from the petitioner, the merchantable yellow pine trees and timber on the lands having a diameter of 12 or more inches at the stump at the time of cutting, but not exceeding eight billion feet, Herring or Beaumont measurement. About 80 percent of the timber was long leaf and the remainder *473 short leaf. The purchaser agreed to purchase each year not less than certain quantities of timber at specified prices, the price being $5 per thousand feet after the first 1,400,000,000 feet had been paid for. *690 Such price prevailed under the contract at all times after July 1, 1905. The agreement also provided that if in any year Kirby paid for more timber than he cut and removed, the excess could be cut and removed at any time thereafter without any additional payment.
Thereafter on July 17, 1901, with the consent of petitioner, Kirby transferred all of his rights under the stumpage contract to the Kirby Lumber Co., a Texas corporation organized by him on July 5, 1901. The petitioner on July 30, 1901, transferred its rights under the contract to the Maryland Trust Co., trustee, Baltimore, Maryland, to secure certain timber certificates (bonds) issued and sold by the Trust Co. The transfer was a mortgage and was thereafter satisfied and released.
The petitioner and the Lumber Co. operated under the contract until March 1, 1904, when they were placed in the hands of receivers. In 1908 the court entered a consent decree construing and reforming the stumpage contract. The decree provided, among other things, that:
(1) Not in excess of 6,400,000,000 feet of timber could be delivered under the stumpage contract.
(2) All timber in excess of 1,120,000,000 feet should be at the rate*691 of $5 per thousand feet.
(3) That not less than 400,000,000 feet of timber should be purchased by the Lumber Co. each year, commencing July 1, 1916.
(4) In case failure of the Lumber Co. to cut timber from the lands continued beyond June 30, 1920, it was to pay the taxes, plus interest, on lands and timber or lands from which the timber should have been removed.
In 1909 the receiverships were closed and the properties of each company were delivered back to it.
The petitioner made returns for and paid the taxes on the timber covered by the stumpage contract.
On August 4, 1916, the petitioner conveyed to the Southwestern Settlement & Development Co., a Massachusetts trust organized July 14, 1916, all of its title to certain lands, including those covered by the stumpage contract, for a recited consideration of $10 and the assumption of outstanding timber certificates not exceeding $4,000,000 (amount changed to $6,739,563.34 by an instrument executed September 18, 1916), and subject, however, to a reservation of all oil and gas on, in and under the lands, with rights of ingress and egress to develop the property, and to such rights as had accrued or might thereafter accrue*692 under the stumpage contract and the consent decree construing and reforming such contract. The timber *474 conveyed under the deed was acquired by the Development Co. at a cost of $5 per thousand feet ofr yellow pine and $2.50 per thousand feet for hardwood. None of the timber so acquired was covered by the stumpage contract. The method employed in carrying out the stumpage contract was not altered after the conveyance of the land and other timber thereon to the Development Co.
The quantities of timber cut by the Lumber Co. under the stumpage contract and court decree during 1918 and 1919, and to June 30, in 1920, and the contract price therefor, the quantity of timber purchased each year and the amount paid therefor, and the timber credits (excess of payments over contract price for timber cut) made under the stumpage contract and decree during such periods, were as follows:
| 1918 | 1919 | 1920 | |
| Timber cut (feet) | 220,890,630 | 224,745,514 | 1 126,295,357 |
| Stumpage contract price | $1,104,453.15 | $1,123,727.57 | $631,476.78 |
| Timber paid for (feet) | 312,500,000 | 312,500,000 | 156,250,000 |
| Paid by Lumber Co | $1,562,500.00 | $1,562,500.00 | $781,250.00 |
| Timber credit | $458,046.85 | $438,772.43 | $149,773.22 |
As of June 30, 1920, the Lumber Co. had paid for 5,005,251,160 feet of timber, which was 951,243,489 feet in excess of the quantity it had cut. Estimates made fixed 243,944,351 feet of timber as the remaining quantity available for purchase under the stumpage contract and decree, making 5,249,195,511 feet paid for and available for purchase.
Numerous controversies arose between the petitioner, the Lumber Co. and the Trust Co. respecting the operations and dealings of the parties in connection with the stumpage contract and decree. Tc settle the differences, and for other purposes, these parties and the Development Co. entered into a contract on May 27, 1921, effective as of July 12, 1920, in which the petitioner received the sum of $1,165,208.76 from the Lumber Co. for the 243,944,351 feet of pine timber just referred to, and the Development Co. received from the same source the sum of $423,294.37 for 100,000,000 feet of pine timber from 8 to 11 inches in diameter, and the further sum of $740,881.57 for 350,000,000 feet of hardwood timber 6 inches and over in diameter. The consideration of $3,000,000 recited in*694 the contract was evidenced by a series of promissory notes. The difference of $670,615.30 between such consideration and the price of $2,329,384.70 paid for the timber does not represent taxable income and is not in controversy.
The petitioner filed consolidated returns for the taxable periods for itself and affiliates, including the Development Co.
*475 All of the timber sold by the petitioner to the Lumber Co. under the stumpage contract and decree and on May 27, 1921, namely 5,249,195,511 feet, cost the petitioner $2.36739 per thousand feet when acquired from Kirby in 1901. Such timber had a fair market value of $6 per thousand feet on March 1, 1913.
In determining the deficiencies the respondent allowed deductions for depletion at the rate of $3,315.16 per thousand feet of timber paid for by the Lumber Co. under the stumpage contract and decree in each of the taxable periods. He included the amounts of $423,294.37 and $740,881.57 received by the Development Co. for pine and hardwood timber sold under the contract of May 27, 1921, in gross income for 1921 and allowed the sum of $900,000 as a deduction therefrom in computing taxable gain.
In 1920 the Development*695 Co. sold 2,330,532 additional feet of hardwood timber for $20,273.24, and 109,377 feet of pine timber for $887.25. The respondent included the amounts in gross income for 1920 and allowed the sum of $4,879.82 as a deduction therefrom in computing taxable gain.
All of the timber referred to in these findings of fact as having been sold by the Development Co. was acquired by the seller from the petitioner under the conveyance dated August 4, 1916, as corrected September 18, 1916, and had been acquired by the petitioner from Kirby prior to July 17, 1901.
OPINION.
SEAWELL: In determining the deficiencies the respondent included all of the amounts received under the stumpage contract and agreement of May 27, 1921, in petitioner's gross income and allowed as a deduction therefrom depletion at the rate of $3,31516 per thousand feet. The transactions were treated in that manner on the theory that the relationship of lessor and lessee existed between the petitioner and the Lumber Co. Such contention has been abandoned and his present view is that the amount includable in gross income is the selling price, less the petitioner's basis, which, he contends, is the value on March 1, 1913, of*696 its interest in the timber covered by the stumpage contract and decree. He thinks the value of such interest should be determined by what the right to receive $5 in the taxable periods was worth in 1913. Such a theory could not be applied to the 1921 sale, since the agreement therefor was not entered into until that year. It is claimed by the respondent that the testimony of his sole witness supports a valuation of such interest equal to the amount he allowed for depletion. The witness testified to a valuation of $3.81 per thousand, based upon the contract price of $5 per thousand existing *476 on March 1, 1913, discounted for a period of eight years, without any allowance for storm damage, etc. The respondent thinks that the valuation should be reduced to $3.31516 per thousand for storm damage, etc., without any proof of the extent of such damages, if any. By such methods he seeks to justify a March 1, 1913, basis for the timber equal to his allowance for depletion.
The position of the petitioner is that the subject for valuation as of March 1, 1913, is the timber, the thing owned at that time and sold in the taxable periods. It contends that such value should be*697 determined without reference to the terms of the stumpage contract.
The respondent properly abandoned his theory that the stumpage contract created the relationship of lessor and lessee. Clearly it was an agreement for the purchase and sale of timber. During each of the taxable periods the Lumber Co. paid for more timber than it cut and removed, and the sales contract fixed no definite time for cutting and removing timber paid for. Under the circumstances, title to the timber paid for remained in petitioner until the timber was cut and removed. ; ; ; affirmed on this point, ; ; affd., ; certiorari denied, .
In , the petitioner acquired under the will of her husband an interest in a contract for the sale of timber located in Texas. Title to the timber did not pass until the property was cut, removed, and paid for. The primary question*698 was whether the petitioner acquired timber under her husband's will, burdened with the contract, or rights to receive payments in the future. We held that the thing she acquired was timber, and, in computing loss from storm damage and gains from sales, used as a basis the fair market value of the timber as of the date of acquisition by the petitioner. The appellate court modified the Board's finding of value, but sustained the conclusion of the Board that the property for valuation was the timber rather than an interest in a contract. It held that such value should be fixed without reference to the contract for the sale of the timber. In so holding it said, among other things:
* * * Does the fact that, though the timber was in 1913 worth $5 per thousand, there was an option against it requiring the owner, if the purchasers proceeded in accordance with the contract minimum, to carry it until 1921, to receive then $5 without interest, authorize its valuation in 1913 for income tax purposes, at $3.50, roughly $5, discounted for the time? * * *
We do not think the existence of the contract affects the valuation at all. We find no warrant in the statutes or the regulations governing*699 the fixing of values for income tax purposes for this time discounting theory. They fix as the basis for determining loss or gain "the fair market price or value of *477 the property at the time of its acquisition." We think there is no more warrant for fixing the value in 1913 for income tax purposes at $3.50 by discounting forwards and thus establishing a gain in 1921 than there would be for fixing the amount received in 1921 at $3.50 by discounting backwards; that is, allowing the taxpayer a credit on the $5 value existing in 1913 for carrying charges, and thus establishing a loss. The question for decision here is not the value of the payments which Mrs. Foster might or might not, according to whether and how it was performed, receive at one time or another under the option contract. It is not whether she may have the benefit of the carrying charge to show a loss, nor whether, as here claimed, it may be used against her to depress the value of the base. The question simply is, What was the value in 1913 of the timber which she lost, and of that which she sold in 1920 and 1921? and we think the answer to it as simple, is that it was $5 per thousand.
*700 We find nothing in , contrary to the Foster case. There the question was the amount of depletion the taxpayer was entitled to as the owner of an interest in a lease giving the lessor the right to a royalty of 25 cents per ton for ore removed from mines. No sale of property, as here, was involved. The court refused to accept the suggestion that market value of the taxpayer's rights on March 1, 1913, was equivalent to the amount of the royalty, discounted to the time paid. No depletion was allowed because of failure to establish the fair market value of the taxpayer's interest in the mines on the basic date. Here, as in the Foster case, the question is simply the fair market value of the timber on the basic date.
The expert testimony offered by the parties to establish the fair market value of the timber on March 1, 1913, is conflicting. One of the petitioner's witnesses testified to a value of $6.35 per thousand feet, a figure based upon an estimate that of the timber 85 percent was long leaf and the remainder short leaf. The other witness expressed an opinion that the fair market value of the timber was $7 per*701 thousand feet. The respondent's witness, whose knowledge of the timber was limited to a small part thereof, placed a valuation of $4 per thousand feet on the property. The evidence discloses a sale of 275,000,000 feet of timber in 1908 at $5 per thousand feet, with no explanation of the circumstances surrounding the transaction. There was no testimony to show the fluctuation, if any, of the values from 1908 to 1913, but the proof is that they were about the same from 1910 to 1913. The Lumber Co. made some sales in 1912 and 1913 at from $6 to $6.50 per thousand feet, and at about that time it made a sale at the price of $5.50 per thousand feet. While these sales of the Lumber Co. were characterized as "sacrifice sales" to raise funds to meet semiannual payments under the stumpage contract, without proof that the timber so sold did not bring its fair market value, we think the sales are entitled to weight. From all *478 the evidence on the point we find that the timber covered by the stumpage contract and decree had a fair market value on March 1, 1913, of $6 per thousand feet.
Since the selling price of the timber was less than the March 1, 1913, fair market value thereof, *702 but in excess of cost, the sales made thereof by the petitioner did not result in taxable gain or a deductible loss in any of the taxable periods. ; section 202(b), Revenue Act of 1921; .
In computing gain realized by the Development Co. in 1920 and 1921 from the sale of timber the respondent allowed amounts as a deduction from the selling price which he designated as "value." The record furnishes no explanation of how he determined the amounts, $4,879.82 in the case of the small sales made in 1920, and $900,000 in the case of the sales in 1921, or why he used value on an undisclosed date rather than cost. The revenue agent used cost, $2.50 per thousand for the hardwood timber and $5 per thousand for the yellow pine. Such action was proper. The proof here is that the timber was acquired in 1916 from the petitioner at the costs used by the revenue agent. It was located on the same land as the timber under sale of the Lumber Co., but was different timber from that covered by the stumpage contract and decree. The gain realized or loss sustained will be recomputed on the*703 basis of cost of $2.50 per thousand feet for the hardwood timber and $5 per thousand feet for the yellow pine.
The petitioner alleges that the respondent erred in not increasing its invested capital in 1920 for the value of the land and options received from Kirby for $20,000,000 par value of its stock, claiming that such property had a value of not less than $30,000,000. While the issue is referred to in petitioner's brief as one of the questions present for decision, it is not discussed therein or in petitioner's reply brief.
The stock was issued in 1901 for tangible and intangible property, but no testimony was offered on the cash value of the property. Lacking any basis for increasing invested capital for the property received for stock, we must sustain the respondent.
The remaining issue relates to a net loss deduction in 1920 under the provisions of section 204(b) of the Revenue Act of 1918. Pursuant to agreement of counsel the amount of the net loss, if any, will be settled under Rule 50.
Decision will be entered under Rule 50.
Footnotes
1. To June 30; no record kept of timber cut thereafter. ↩