*3643 On March 1, 1913, a partnership of which petitioners were members was, under an oral lease for a term of 15 years, engaged in mining coal from certain land situated in Pennsylvania. The oral lease was, on April 21, 1913, reduced to writing. Under the law of Pennsylvania the members of the partnership were, under the oral lease, only lessees at will. Under such circumstances, it is held that the oral lease had no fair market value on March 1, 1913, and it is further held that the lease agreement of April 21, 1913, is not subject to depletion or exhaustion deductions, it having cost the partnership nothing.
*1315 These proceedings are for the redetermination of deficiencies in income tax asserted by the Commissioner against the Estate of James A. Baxendell for the calendar year 1920, in the amount of $201.41; against George L. Hawkins for the calendar years 1918, 1919, and 1920, in the aggregate amount of $521.06; and against the Estate of James A. Hawkins for the calendar years 1918, 1919, and 1920, in the*3644 aggregate amount of $591.61.
The same issue being presented in each of the proceedings, they were, upon motion duly made, consolidated for hearing and disposition.
The petitioners allege that in determining the deficiencies the Commissioner erred in refusing to allow the Fredericktown Coal & Coke Co., a partnership, in which each had a one-sixth interest, to deplete, *1316 in determining the partners' distributive shares of profit, a certain coal mining lease which, it is further alleged, was acquired before March 18 1913, and had on that date a fair market value of $1,000,000.
FINDINGS OF FACT.
The petitioners were, during the years in question, members of a partnership doing business as the Fredericktown Coal & Coke Co. Each petitioner had a one-sixth interest in the partnership.
I. F. Peirsell had for some years owned 135 acres of coal land at Fredericktown, Greene County, Pa., on the Monongahela River.On April 21, 1913, a lease agreement covering the 135 acres of coal land was executed between I. F. Peirsell as lessor and party of the first part and seven lessees named below, as parties of the second part:
W. W. Hawkins,George Hawkins,
James Hawkins,
*3645 J. A. Baxendell,Charles Butler,
Mordecai McCarthy,
William Carroll.
The lease provided, among other things, that from the date thereof for a term of 15 years the lessees could mine the coal on a basis of 25 cents per ton royalty, plus one-eighth of the amount more than $1 per ton for which any coal might be sold. It also provided that if, at the expiration of the term of the lease, all of the coal had not been removed from the demised premises, then the lease would continue in force until all of the coal was exhausted.
The lease of April 21, 1913, constituted a reduction to writing of an oral lease made in the fall of 1912, between Peirsell and the Hawkins brothers as lessees, who had in that year, together with the other persons named in the agreement of April 21, 1913, entered upon the land and commenced the work of opening the mine and putting up necessary equipment.
In obtaining the oral lease made in the fall of 1912 under which, in the same year, the Hawkins brothers and their associates entered upon the land, no bonus was paid to Peirsell, the only consideration being the mutual promises of the parties thereto. The subsequent reduction of the terms of the*3646 oral lease to writing on April 21, 1913, was also accomplished without a bonus or payment being given or paid to the lessor Peirsell.
McCarthy, some time in 1913, withdrew from the partnership.
He had loaned the partnership the sum of $1,000 and had contributed services. Upon his withdrawal he was paid $2,500 for his interest in the business, including the loan and services, by the other *1317 members. Thereafter, and during the years in question, the six remaining partners conducted the business of mining coal from the demised land. All of the coal was subsequently removed, the last thereof being mined some time during the year 1923. The number of tons of coal mined each year from 1913 to 1923, inclusive, was as follows:
| Tons mined | |
| 1913 | 2,905 |
| 1914 | 68,492 |
| 1915 | 114,456 |
| 1916 | 130,934 |
| 1917 | 193,298 |
| 1918 | 223,158 |
| 1919 | 264,896 |
| 1920 | 198,846 |
| 1921 | 37,659 |
| 1922 | 50,021 |
| 1923 | 11,098 |
The land owned by Peirsell and leased, under the circumstances set forth above, to the persons comprising the partnership doing business as the Fredericktown Coal & Coke Co., possessed many natural advantages not found in other coal lands. The mouth of the mine, *3647 opened in 1912 by the Hawkins brothers and their associates, was within 200 feet of the Monongahela River which afforded, at that point, a natural harbor the dredging of which was unnecessary. A railroad track lay between the river and the mouth of the mine. Thus, coal could be shipped either by rail or water.
In addition to such a favorable location of the land itself, the coal vein therein was so situated that operations could be carried on very efficiently and at an unusually low cost. In many respects, such as drainage, equipment required for operation and as to coal structure, the mine was exceptionally valuable in that production costs were low.
The petitioner assert that the lease of Peirsell's coal land under which the partnership was operating on March 1, 1913, had on that date a fair market value of at least $250,000 and they claim the right, in determining their distributive partnership income, to have that value depleted over the life of the lease on a tonnage basis in accordance with the rate at which the coal was mined.
OPINION.
LOVE: The Commissioner, in denying the Fredericktown Coal & Coke Co., a partnership of which the petitioners are three of six*3648 members, the right to deductions from income for the years in question on account of depletion of the leasehold acquired from Peirsell on the 135 acres of coal land, takes the position (1) that the partnership did not obtain the lease until subsequent to March 1, 1913, and having paid nothing therefor it is not, under the provisions of *1318 section 214(a)(10) of the Revenue Act of 1918, 1 subject to deductions for depletion, and (2) that the lease, if acquired prior to March 1, 1913, had on that date no fair market value whatever, upon which, under section 214(a)(10) of the 1918 Act, supra, depletion deductions must be based.
*3649 The petitioners, on the other hand, contend that the lease of April 21, 1913, constituted merely a reduction to writing of the oral lease made in the fall of 1912, between Peirsell and the Hawkins brothers, with whom the other persons named in the agreement of April 21, 1913, had, in the year 1912, entered on the demised premises and started operations. It is urged, therefore, that the lease, which petitioners seek to deplete, was acquired prior to March 1, 1913, and that on that date it was reasonably worth $250,000.
Without discussing the evidence in detail, we are satisfied, upon consideration of it, that the oral lease made between Peirsell and the Hawkins brothers in 1912, and under which, in the same year, they and their associates entered upon the land in question, was merely reduced to writing on April 21, 1913. We conclude, therefore, that on March 1, 1913, the petitioners, together with their associates, had an oral lease, on a royalty basis, of Peirsell's coal land for a term of 15 years, or longer if the removal of all of the coal so required. We come, therefore to the question as to the fair market value of the oral lease on that date.
Section 1, of the Act*3650 of March 21, 1772, 1 Sm.L. 389, provides:
From and after April 10, 1772, all leases, estates, interests of freehold or term of years, or any uncertain interest of, in, or out of any messages, manors, lands, tenements or hereditaments, made or created by livery and seisin only, or by parol, and not put in writing, and signed by the parties so making or creating the same, or their agents, thereunto lawfully authorized by writing, shall have the force and effect of leases or estates at will only, and shall not, either in law or equity, be deemed or taken to have any other or greater force or effect, any consideration for making any such parol leases or estates, or any former law or usage to the contrary notwithstanding; except, nevertheless, all leases not exceeding the term of three years from the making thereof; and moreover, that no leases, estates or interests, either of freehold or terms of years, or any uncertain interest, of, in, to or out of any messages, manors, lands, tenements or hereditaments, shall at any time after the said April 10, 1772, be assigned, granted or surrendered, unless it be by deed or note, in writing, signed by the party so assigning, granting or surrendering*3651 the same, or their agents, thereto lawfully authorized by writing, or by act and operation of law.
*1319 In the case of ; , the court held that a lease for more than three years in Pennsylvania, under the statute of frauds (Act of March 21, 1772) must be in writing; otherwise, it has but the force and effect of a lease at will only. In the case of , the court held that a lease created by parol for a term of four years with the consideration of a round sum is, under the statute of frauds of March 21, 1772, a lease at will determinable at any time by either party. See ; ; ; . We are of the opinion, therefore, that on March 1, 1913, the oral lease in question being for more than three years, the petitioners and their associates were lessees at will and as such liable to ejectment on notice given. *3652
All the evidence adduced by petitioners relates to the value of the lease of April 21, 1913. As will be subsequently pointed out, the value of that lease has no bearing on the issue presented. The question which we are called upon to decide is whether the oral lease, existing on March 1, 1913, had a fair market value and, if so, in what amount. Petitioners adduced no evidence with respect to the value of the lease at will of which they were possessed on March 1, 1913, and in the absence of such evidence we are unable to determine that it had any value on that date. It may be that the lease at will which petitioners had on March 1, 1913, had some value, but the evidence of value of the written lease of April 21, 1913, can not be accepted as proving the value of that which petitioners possessed on March 1, 1913. .
The subsequent reduction to writing of the oral lease outstanding on March 1, 1913, can not be said, retroactively, to affect the value thereof on the basic date provided in section 214(a)(10) of the 1918 Act, supra. The value of the lease on March 1, 1913, must necessarily be determined by its legal status as*3653 of that date. Subsequent action, it is true, might give it value, but such value as might attach to it can be said to date only from the subsequent action.
Without discussing the question as to whether the lease of April 21, 1913, had a fair market value, it is sufficient to observe that petitioners and their associates having paid nothing of value therefor, that lease is not subject to depletion deductions since the statutory basis therefor is cost.
As to the Estate of J. A. Baxendell, the deficiency for the year 1920 is $201.41. As to George L. Hawkins, and the Estate of James A. Hawkins, judgment will be entered under Rule 50.
Footnotes
1. SEC. 214. (a) That in computing net income there shall be allowed as deductions:
(10) 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 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: * * *.