*4090 The Commissioner's determination of the value of gravel deposits approved in the absence of satisfactory evidence showing a different value.
*514 This is a proceeding for the redetermination of income and profits taxes for the calendar years 1920 and 1921, in the respective amounts of $2,172.50 and $5,939.28. The errors alleged are (1) that the Commissioner determined an insufficient value for the petitioner's real property, including mineral deposits, at the time of its incorporation and thereby allowed insufficient depletion and insufficient invested capital for the calendar years; (2) that he erroneously adjusted invested capital for each of the years by deducting therefrom additional income and profits taxes for previous years which had not been paid at the end of the taxable years; (3) that for the year 1920, he erroneously computed the "percentage of inadmissible assets to total admissible and inadmissible assets for purposes of invested [capital]"; and (4) that the Commissioner improperly adjusted invested capital for the year 1920, by deducting*4091 1919 income and profits taxes, prorated. Most of the facts were established by the respondent's admissions of the allegations of the petition.
FINDINGS OF FACT.
The petitioner is a New Jersey corporation, with its principal office at Spring Lake, N.J., and was incorporated October 7, 1914, for the purpose of engaging in the business of mining and selling sand and gravel. Subsequent to its incorporation, the petitioner acquired various parcels of property in fee, containing mineral land, and, in addition, acquired other nonmineral land consisting of rights of way, farms, etc.
Five men had been engaged during some years preceding in prospecting and acquiring this land. Their purpose was to acquire a sufficient deposit to last for about twenty years, from which not only road gravel but also washed and screened sand and gravel for use in concrete could be dug and marketed by rail in large quantities. When the petitioner was incorporated the owners of the land agreed among themselves as to the relative values of the various pieces with respect to the value of the property as a whole and then took payment in stock, bonds, or cash, as their interest in the properties appeared.
*4092 Included among these tracts were five separate parcels containing mineral land, the value of which is now in question. The following is a complete list of the properties acquired, the first five containing mineral deposits and being the properties the value of which is in dispute:
*515
| Names or property | Acreage |
| Romaine | 55.63 |
| Simpson # 2 | 5.67 |
| Smith Hurley | 2.57 |
| Probasco | 50.00 |
| Simpson Van Note | 37.52 |
| Powder Mill | 196.54 |
| Ely Tract | 11.40 |
| Conover | 18.40 |
| E. R. Shafto | .25 |
| Hall | .25 |
| Bond | 2.24 |
| Davison | 9.81 |
| Leggett | 61.10 |
| Sidwell | 4.45 |
| J. H. Morris | 2.89 |
| A. T. Morris | 58.08 |
| E. P. Hurley | 18.00 |
| Rosenstein | 1.00 |
| Jr. & J. H. Martin | 1.00 |
| C. A. Newman | 1.05 |
| Proprietors | 1.12 |
| Lehman | 1.25 |
| Rockhill | 5.17 |
| Hall & Newman | 3.50 |
| Marks | 51.97 |
| Ranear | 5.25 |
| Allaire Gravel & Lumber Co. | 128.60 |
| Eliz. Hampton Estate | 150.68 |
| Manasquan Gravel Co. | 179.10 |
| Total | 1,064.49 |
These five separate parcels containing mineral deposits extended a distance of four and one-half miles through the center of Monmouth County, New Jersey, with a total estimated deposit reserve of 1,950,000 tons. They had but little overburden. When the ground was cleared of*4093 trees and bushes the deposits were practically exposed.
These five mineral tracts contained deposits of sand, gravel, and what is known as road gravel and cost the petitioner as follows:
| Deposits (in carload units of 50 tons) | |||||
| Property | Acreage | Sand | Gravel | Road gravel | Cost to taxpayer in cash, stocks and bonds |
| Romaine | 55.63 | 7500 | 7000 | $44,731.84 | |
| Simpson No. 2 | 5.67 | 1000 | 550.00 | ||
| Smith Hurley | 2.57 | 266.67 | 826.00 | ||
| Probasco | 50.00 | 17,333.34 | 54,500.00 | ||
| Simpson Van Note | 37.52 | 600 | 5000 | 11,575.00 | |
| Balance of other property | 913.10 | 19,328.00 | |||
| Totals | 1,064.49 | 131,510.84 |
The petitioner, for this property, paid the following:
| Capital stock of company | $99,000.00 |
| Bonds of company | 16,000.00 |
| Cash | 16,510.84 |
| Total | 131,510.84 |
The Commissioner computed a total valuation of the entire holdings at $46,010.84, with an estimated depletion rate of 2.359 cents per ton for the mineral deposits.
The depletion of deposits was as follows:
| Year | Tons |
| 1915 | 75,550 |
| 1916 | 125,400 |
| 1917 | 89,300 |
| 1918 | 114,000 |
| 1919 | 90,750 |
| 1920 | 121,400 |
| 1921 | 149,459 |
*516 On November 1, 1913, a*4094 lease agreement was made by a competing sand and gravel company with the owner of a tract of land in Monmouth County, New Jersey, adjoining that purchased by the petitioner, whereby, for a period of 20 years and 5 months, this competitor could remove gravel or sand on payment of a royalty rate of $3 per car of 50 tons, or 6 cents per ton for all sand and gravel excavated, removed or shipped. This adjoining tract contained sand and gravel deposits substantially the same in quality and quantity as those purchased by the petitioner.
For the year 1919, an original income and profits tax of $775.48 was assessed against the petitioner. Additional income and profits taxes were assessed against the petitioner as follows:
| For the year 1917 | $846.40 |
| For the year 1918 | 4,095.29 |
| For the year 1919 | 3,206.09 |
in addition to which the present petition contests a proposed deficiency for the year 1920 of $2,172.50, which taxes were not paid during the years 1920 or 1921.
During all of the year 1920, the petitioner owned stocks of domestic corporations in the amount of $3,000.
The deficiency notice for the year 1920 sets forth that the excess profits tax has been computed*4095 under section 302, inasmuch as the tax so computed is less than the tax computed under section 301. The notice also sets forth an item of consolidated invested capital for the taxable year.
The deficiency notice for the year 1921 sets forth that the tax was computed under section 302, thereby allowing an excess-profits credit of $6,086.44, instead of an excess-profits credit of $4,948.32, using invested capital of $24,354.01.
OPINION.
MURDOCK: The Commissioner determined that the petitioner's property had a value of $46,010.84. The petitioner claims that the true value was much greater, and that the mineral deposit in five of the tracts had a value in October, 1914, of $112,182.84. If the fair market value of these deposits was in excess of $46,010.84, it follows that the Commissioner's allowance for depletion was erroneous, because the petitioner paid for the properties principally in its own stock, of which there have been no sales, and the value of this stock, and, therefore, the cost to the petitioner, would depend upon the value of the assets acquired.
*517 To prove this value the petitioner introduced the testimony of two witnesses. One of these witnesses*4096 had negotiated a lease for some property similar to and adjoining that of the petitioner. This lease gave the lessee the right to take sand and gravel from the premises in any quantity during the 20 years and 5 months following November 1, 1913, upon payment of a royalty of $3 per car of 50 tons, or at the rate of 6 cents a ton for all taken. In answer to the question "What, in your opinion, was the fair and reasonable market value on or about October, 1914, of these [the petitioner's] deposits in carload lots of 50 tons each?" he replied, " $3."
This question and answer is not intelligible in the light of the context. It does not clearly appear whether the witness was valuing the petitioner's deposits having in mind a sale and purchase of the fee, or whether he was valuing them having in mind a long-term lease. The indications are, however, that he had in mind the latter situation, which represented the method by which he had secured rights for his company, but which is not determinative of the value of the deposits purchased in fee by the petitioner. And even if he had in mind a sale and purchase of the deposits in fee, his opinion would be entitled to little weight, because, *4097 aside from the lease, he gave no satisfactory basis for a value of 6 cents a ton, which is the value given in his answer.
The only other witness was the secretary of the petitioner, who stated that, in his opinion, the deposits owned by the petitioner had, at the date of its incorporation, a value of 6 cents per ton. Here again we are unable to determine whether the witness had in mind a value for the purposes of a long-term lease, or a value for the purpose of a sale and purchase of the deposits in fee. We are concerned primarily with the fair market value of the deposits themselves, and not the royalty which they might bring on a lease. Aside from the lease this witness gave no satisfactory basis for his opinion, and, consequently, we can give it but little weight, even if he intended to value the fee.
Apparently this witness and the petitioner's counsel believed that the lease for 20 years, which gave the right to remove gravel upon the payment of a royalty of 6 cents per ton, establish the value of the deposits owned in fee. But with them we can not agree, for the value of the fee would be no more than the amount that a willing buyer would give and a willing seller would*4098 take as of October, 1914; whereas in the lease the lessee would not be required to pay for the gravel except as he removed it, and his payments would be spread over the life of the lease. Both witnesses anticipated that it would take about 18 or 20 years to remove the deposits in question. It is *518 altogether possible and to be expected that a lessor would be willing to sell his holding outright at a much less rate per ton than he would demand if he were to accept the risks and delays incident to a lease. We are likewise unwilling to adopt a valuation arrived at by the use of subsequent earnings, estimated life and Hoskold's formula, as given by the witness. There is no indication that the factors involved in such a valuation were known or even reasonably anticipated in October, 1914. No evidence was presented touching upon the value, if any, which the land acquired had independently of the value of the gravel bed.
Under all of the evidence we are unable to determine that the deposits had any greater value for the purpose of a depletion allowance or for the purpose of determining invested capital than that allowed by the Commissioner. Furthermore, it does not appear*4099 what the Commissioner used as the factors of invested capital, or by the comparison of what figures he determined that the tax under section 302 would be less than under section 301, and, even were we able to determine a value of the assets in excess of the value allowed by the Commissioner, we would be unable to give the petitioner any relief. See , and see also , decided November 30, 1927. Neither do we know what the Commissioner did in regard to including or excluding inadmissible assets or a percentage thereof in invested capital, but the petitioner concedes that the decision of this point will follow from our decision of the question raised by the first allegation of error. What the Commissioner did in regard to prorating income and profits taxes of prior years in the determination of invested capital is not disclosed, but since the allegation is to the effect that he merely reduced invested capital by the amount of taxes determined to be due for preceding years as and when they were due, whether paid or not, his action was not erroneous*4100 in view of section 1207 of the Revenue Act of 1926 and our decisions thereunder. See .
Inasmuch as the Commissioner has not used invested capital in his determination of the petitioner's tax liability, it becomes unnecessary for us to decide a question raised by the respondent's amended answer, which alleges that in the deficiency notice for the year 1920, there was included in the petitioner's invested capital a portion of the amount of the petitioner's tax liability for the calendar year 1919, although under section 1207, above mentioned, this issue would have to be decided adversely to the Commissioner's contention.
Judgment will be entered for the respondent.