*2780 Held, the transaction here involved was the sale of a single body of assets and that gain or loss resulting therefrom must be determined by adding to the value at March 1, 1913, all additional capital investments subsequent to that date, giving due weight to depletion and depreciation.
*829 The respondent asserts deficiencies in income and profits taxes for the years 1921, 1922, and 1923, in the respective amounts of $4,746.72. $4,729.76, and $2,796.49. The petitioner avers that the Commissioner erroneously determined the basis for the computation of a loss alleged to have been sustained in 1921 by the sale of capital assets and that the effect of such error (1) prevents it from deducting from its gross income in 1921 a loss sustained in that year under the provisions of section 234(a)(4) of the Revenue Act of 1921, and (2) from taking credit for a net loss sustained in the operation of its trade or business in 1921 in the computation of its tax liability for the years 1922 and 1923, under the provisions of section 204(b) *2781 of the Revenue Act of 1921. By agreement of counsel the several proceedings were consolidated for hearing and decision.
FINDINGS OF FACT.
Petitioner is a Wisconsin corporation, with its principal office at Wausau. Prior to March 1, 1913, it acquired in fee certain contiguous *830 tracts of timber lands and the timber thereon, all located in the State of Arkansas, and aggregating 50,025.04 acres and also the timber on other adjacent tracts aggregating 3,623 acres, at prices not disclosed by the record. Subsequent to March 1, 1913, it acquired or constructed a sawmill plant, logging equipment and various other items of personal and real property for use in its business of logging and lumber manufacturing.
Sometime prior to 1921 the petitioner offered to sell all the above described property to the Wisconsin & Arkansas Lumber Co., which owned an adjacent tract of timber then substantially depleted, together with a sawmill and other equipment fully adequate to log and cut economically all the timber owned by both concerns. The proposed vendee desired to purchase only the timber land and timber owned by the petitioner. After negotiations extending over something like*2782 a year the interested parties entered into a contract for the sale and purchase of the timber and timber lands owned by the petitioner, of which the following are the provisions material to the issues of this controversy:
LAND CONTRACT.
This Article of Agreement, Made and concluded this 2nd day of November, Nineteen Hundred and Twenty-One, by and between the Arkansas Land & Lumber Company, a Wisconsin corporation, doing business in the State of Arkansas, party of the first part, and the Wisconsin and Arkansas Lumber Company, a Wisconsin corporation, doing business in the State of Arkansas, party of the second part.
WITNESSETH: That the said party of the second part agrees to pay to the said party of the first part the sum of Seven Hundred and Fifty Thousand dollars ($750,000) on or before seven and one-half years after date on terms hereinafter set forth, and in consideration of said sum the party of the first part agrees to sell to the party of the second part the lands described on the list hereto attached and marked "Lands in Fee". It being the intention to convey all the land now owned by the party of the first part not contracted to be conveyed by the contract between*2783 the parties to this agreement bearing even date herewith; and if any lands owned by the party of the first part shall hereafter be found to have been omitted, said party of the first part agrees to convey the same to the party of the second part.
The party of the first part, in further consideration of the above mentioned sum also agrees to convey all of the timber on the land described on the list attached and marked "Timber Deed", together with such portion of the railroad of the party of the first part that may be situated on said land. It being the intention to convey all of the timber held under timber deeds by the party of the first part and if any be found to be omitted said party of the first part agrees to convey the same to the party of the second part.
The party of the second part agrees to pay the consideration above mentioned to the party of the first part, at its office in Wausau, Wisconsin, in the manner following:
On the same day that the instrument above was executed the same parties entered into a contract for the sale and purchase of the plant *831 and equipment owned by the petitioner and used in its business of logging and cutting the timber located*2784 in the tracts included in the terms of the contract, supra, of which the following are the provisions material to the issues of this controversy:
WITNESSETH: For and in consideration of the party of the second part assuming and agreeing to pay all the liabilities of the party of the first part, as of this date, and the further consideration of One Hundred Twenty-Four thousand dollars ($124,000) in cash and four (4) promissory notes, bearing no interest, each for Eighty-four Thousand dollars ($84,000) falling due in Three, Six, Nine, and Twelve months, respectively, from this date, receipt of which cash and notes is hereby acknowledged by the party of the first part, and for the further consideration of a Land Contract between the parties hereto bearing even date with this agreement agreeing to convey all the timber and lands owned by the party of the first part to the party of the second part, said party of the first part hereby agrees to sell and convey to the party of the second part, the following described lands, including the lumber manufacturing plants and all other buildings used in connection with same situated thereon. -
*2785 NE-1/4 NE-1/4 Sec. 28, N-1/2 SE-1/4 of NE-1/4 Sec. 28, NW-1/4 NW-1/4 Sec. 27 and all that part of the SW-1/4 of NW-1/4 Sec. 27 lying West of right-of-way of the St. Louis, Iron Mountain and Southern Railway, all in Twp. 4 South of Range 17 West, containing one hundred twelve (112) acres more or less.
also all personal property of every description now owned by the said party of the first part including cash, bank deposits, bills, and accounts receivable, logging railroad and equipment, and choses in action, the party of the second part to enter into possession and occupy same immediately after the signing of this agreement, the title to the real estate hereinbefore mentioned to remain in the party of the first part until the above mentioned notes are fully paid and until payments are completed on the above mentioned land contract between the said parties bearing even date herewith.
The assets transferred by the second contract and the obligations assumed by the purchaser, with book values and depreciation reserves to which the parties agree, are fully set forth in the following statement:
| Assets sold (at cost after Mar. 1, 1913): | ||
| Bank balances | $47,462.68 | |
| Liberty loan bonds | 33,550.00 | |
| Accounts receivable (net) | 75,162.54 | |
| Notes receivable | 57,751.71 | |
| Inventory store merchandise | 20,200.00 | |
| Inventory lath and lumber | 208,603.65 | |
| Inventory logs | 21,785.74 | |
| Inventory wood | 885.04 | |
| Inventory script | 30.69 | |
| Inventory supplies | 19,106.38 | |
| Office and store equipment | $5,826.96 | |
| Autos, trucks, teams, etc | 20,420.82 | |
| Camp, store, and boarding equipment | 14,568.39 | |
| Office and houses | 26,621.20 | |
| Plant | 309,997.97 | |
| Railroad | $218,883.49 | |
| Railroad equipment | 103,591.00 | |
| Farm improvements | 2,276.60 | |
| Tie mill | 3,660.00 | |
| Total property | 705,846.43 | |
| Less reserve for depreciation | 304,506.92 | |
| Net value plant and equipment sold | $401,339.51 | |
| Prepaid insurance | 5,812.59 | |
| Pay roll advances | 7,276.83 | |
| Total assets disposed of | 898,967.36 | |
| Liabilities assumed by purchaser: | ||
| Accounts and notes payable | $78,541.20 | |
| Accrued pay roll | 14,799.72 | |
| Accrued interest | 1,302.67 | |
| Accrued taxes | 7,171.19 | |
| Miscellaneous liabilities | 224.43 | |
| Total liabilities assumed by purchaser | 102,039.21 | |
| Cost of net assets sold (all purchased after | ||
| Mar. 1, 1913) | 796,928.15 | |
| Sale price | 460,000.00 | |
| Loss | 336,928.15 |
*2786 *832 In its income and profits-tax return for 1921 the petitioner reported neither taxable gain nor deductible loss sustained in the sale of its timber lands and timber acquired prior to March 1, 1913, claimed a loss of $615,444.22 alleged to have been sustained in the sale of property acquired subsequent to March 1, 1913, and set forth that in such year it sustained a net loss under the provisions of section 204 of the Revenue Act of 1921. Upon audit of such return the Commissioner held the two contracts set forth above provided for the sale of a single body of capital assets and that as the property had been sold for more than cost but less than fair market value at March 1, 1913, neither taxable gain nor deductible loss could be recognized for Federal tax purposes. In its income-tax returns for 1922 and 1923 the petitioner applied to its gross income for such years the net loss alleged to have been sustained in the sale of 1921, and reported no tax liability for either year. The Commissioner disallowed the net losses so claimed and determined the deficiencies in controversy.
OPINION
LANSDON: The respondent contends that the two contracts set forth in our findings*2787 of fact are so closely related and so dependent upon each other that the sale of all the property of the petitioner must be regarded as a single transaction which in the circumstances resulted neither in taxable gain nor deductible loss, since "The March *833 1, 1913 value of all the assets (land, timber and plant) was in excess of the cost of such assets and also in excess of the selling price, such selling price being more than the cost but less than the March 1, 1913 value." The petitioner's contention is that in the taxable year it made two separate sales of capital assets, one body of which was acquired prior to March 1, 1913, and another, different and distinguishable, acquired after that date, and that gain or loss in each case must be ascertained by applying the plain provisions of the statutes to the admitted or proved facts. It now claims that it sustained a net loss in 1921 in the amount of $336,928.15 and asks that such net loss shall be applied to its tax liability which the Commissioner has determined for the years 1922 and 1923.
The provisions of the Revenue Act of 1921 which govern here are as follows:
SEC. 202. (a) That the basis for ascertaining the gain*2788 derived or loss sustained from a sale or other disposition of property, real, personal, or mixed, acquired after February 28, 1913, shall be the cost of such property; except that -
(1) In the case of such property, which should be included in the inventory, the basis shall be the last inventory value thereof;
(b) The basis for ascertaining the gain derived or loss sustained from the sale or other disposition of property, real, personal, or mixed, acquired before March 1, 1913, shall be the same as that provided by subdivision (a); but -
(1) If its fair market price or value as of March 1, 1913, is in excess of such basis, the gain to be included in the gross income shall be the excess of the amount realized therefor over such fair market price or value;
(2) If its fair market price or value as of March 1, 1913, is lower than such basis, the deductible loss is the excess of the fair market price or value as of March 1, 1913, over the amount realized therefor; and
(3) If the amount realized therefor is more than such basis but not more than its fair market price or value as of March 1, 1913, or less than such basis but not less than such fair market price or value, no gain*2789 shall be included in and no loss deducted from the gross income.
It is beyond dispute that the petitioner sold all its assets and business at one time to a single purchaser in pursuance of the terms and conditions set forth in two sale and purchase contracts which so far as we know were simultaneously executed. If these two contracts are so interrelated that they must be regarded as one, we think it follows that the two bodies of assets were disposed of in a single transaction. We have several times held that the effect of such sales or purchases must be determined by the terms and conditions of the instrument of transfer, that the parties are bound by the engagements so effected and that the Board will not construe such agreements contrary to the language therein. See ; ; ; . To the same effect is . In the *834 light of these decided cases the petitioner must prevail, unless the two instruments here involved*2790 must be construed as a single contract relating to the same subject matter.
A careful study of the two contracts here in question shows that each in its terms refers to the other and that the land contract is a part of the consideration for the sale of the plant and equipment. From the terms of these instruments we think it is clear that the second could not have been executed without the first. Measured only by the terms and conditions therein, it is possible that the first might have been executed without the second, but this possibility vanishes in the light of the fact that the two bodies of assets had a single owner who would not sell the timber and timberland involved in the first contract unless the plant and equipment were disposed of at the same time. The courts, with singular unanimity, have held that two instruments in relation to the same matter, executed at the same time, must be construed as a single instrument. ; . The courts of Arkansas, the jurisdiction in which this controversy arises, have many times considered the signification of two contracts relating to the same*2791 subject matter and simultaneously executed and have held that in such conditions the two are to be construed as one. ; ; ; ; ; cf. ; . Inasmuch as all the assets constituted all the property used by the petitioner in the single business in which it was engaged, we think the two instruments relate to the same subject matter and we are of the opinion that they must be regarded as a single contract setting forth the terms and conditions of a single transaction.
The record discloses that all the land and timber sold in the taxable year was acquired prior to March 1, 1913, and that all the other property was acquired subsequent to that date. It is also clear that the plant, railway tracks and other logging and manufacturing equipment acquired after March 1, 1913, were located on land acquired before that date and that was transferred by the second contract. *2792 The logging railroad which, with its equipment, represented an investment of more than $300,000, obviously for the most part must have been located on the timberlands and the lands involved in the timber deeds. In the circumstances it would have been difficult, if not impossible, to segregate the assets transferred by the two contracts in evidence and sell one body to one purchaser and the second to another. This being true, we think no segregation was made or could have been made in the sale of all the property to a *835 single purchaser in the circumstances herein. It is in evidence that the purchaser desired to buy only the timber, but the petitioner would consider no proposition that did not include all its property. We think it is clear that the petitioner sold the business and assets which it had operated as a unit for several years in a single transaction and that gain or loss resulting therefrom must be ascertained by comparison of the price received with a single base. Cf. ; *2793 .
Having reached the conclusion that the transaction in the taxable year was the sale of a single body of assets, if follows that the fair market value of the property owned at March 1, 1913, is the starting point in the computation of the basic cost of the property, to which should be added the subsequent additions to the capital invested, with due regard to depletion and depreciation. This is what the Commissioner has done and in the light of the evidence the determination of the resulting deficiency is approved. ; ; ;.
Reviewed by the Board.
Decision will be entered for the respondent.
PHILLIPS and SIEFKIN dissent.