*1251 1. SALE - WHEN COMPLETED AND TAXABLE. Where vendor corporation entered into a contract in October, 1922, to sell its hydroelectric power plant to the Commonwealth Power, Railway and Light Company and the purchase price was agreed upon and 10 per cent thereof was paid in 1922 and where under the terms of the contract the seller was to retain possession of the property and operate it and retain the revenues therefrom until in 1923, when the deed to the property was to pass and the balance of the purchase price was to be paid, held, the sale was consummated and taxable in 1923. Lucas v. North Texas Lumber Co.,281 U.S. 11">281 U.S. 11.
2. March 1, 1913, value of hydroelectric plant determined.
3. Installment Sales. Where facts are as stated in headnote 1, petitioner is not entitled to have profits computed on the installment basis under the provisions of section 212(d) of the Revenue Act of 1926, retroactively applied by section 1208 thereof. The sale was consummated in 1923 and in that year petitioner received more than 25 per cent of the agreed purchase price. Warren National Bank,22 B.T.A. 759">22 B.T.A. 759, followed.
4. Accruals of Interest. Interest*1252 liabilities of a taxpayer on an accrual basis should be accrued when all events have occurred which fix the time of accrual. Continental Tie & Lumber Co. v. United States,286 U.S. 290">286 U.S. 290. Held, under the facts of the instant case, petitioner was entitled to no greater deduction for interest accrued in 1923 than that shown to have been accrued on its books in that year and taken as a deduction in its income tax return for 1923.
*1097 This proceeding is for redetermination of a deficiency in income tax for the year 1923 in the amount of $20,870.95. The deficiency was determined by adding to petitioner's income for the taxable year $166,473.43 as profit on a sale of a hydroelectric plant previously owned by petitioner. This profit was determined by respondent in his deficiency notice as follows:
| Power House and Dam: | ||
| Cost to June 16, 1911 | $250,000.00 | |
| Cost June 16, 1911 to December 31, 1922 | 70,614.21 | |
| Cost December 31, 1922 to date of sale | 212.32 | |
| Total cost to date of sale | 320,826.53 | |
| Depreciation to date of sale | 139,391.70 | |
| Net value (cost less depreciation) on date of sale | 181,434.83 | |
| Electric Meters: | ||
| Cost to June 16, 1911 | $398.43 | |
| Cost June 16, 1911 to date of sale | 3,146.14 | |
| Total cost to date of sale | 3,544.57 | |
| Depreciation to date of sale | 1,452.83 | |
| Net value (cost less depreciation) on date of sale | $2,091.74 | |
| Riparian land, water-power rights and power-house site land value as at March 1, 1913 (no subsequent capital changes) applicable to date of sale | 100,000.00 | |
| 283,526.57 | ||
| Selling Price | 450,000.00 | |
| Net taxable profit | 166,473.43 |
*1253 *1098 By permission of the Board, respondent was given leave to file an amended answer, in which he alleged that the fair market value of the power house and dam, electric meters, riparian land, water power rights and power house site land owned by petitioner on March 1, 1913, was $206,000 at said date; that on sale of said property petitioner realized a profit in 1923 of $244,000 instead of $166,473.43 as found in the original deficiency notice and respondent affirmatively asked that the deficiency be increased accordingly. Petitioner contests respondent's determination of any deficiency on two grounds - (1) that although petitioner in its income tax return for 1923 reported the sale of its power plant as having taken place in 1923, such report was erroneous and the sale really took place in 1922 and the profit, if any, is taxable in 1922 and not in 1923; (2) if petitioner is wrong in its contention that the sale took place in 1922, nevertheless there is no deficiency because the March 1, 1913, value of the property sold, plus the cost of additions made to the plant subsequent to March 1, 1913, and prior to the date of sale, less accumulated depreciation, was greater than*1254 the price received for the property and there was no profit. In addition to the two foregoing contentions, petitioner alleges respondent committed the following errors:
(3) Should it be held that no error was committed by the Commissioner in determining that petitioner sold its hydroelectric plant in 1923, and that the sale resulted in a taxable gain, the Commissioner erred in failing to compute the taxable gain for the year 1923 on the installment basis.
(4) The Commissioner failed to deduct from taxable income interest accrued in the amount of $41,230.79 owing to Manitowoc Portland Cement Company at the end of the year 1923 by reason of an indebtedness to Manitowoc Portland Cement Company incurred in 1923.
*1099 FINDINGS OF FACT.
Petitioner is a corporation organized and existing under the laws of the State of Michigan, with its principal office and place of business at Newaygo, Michigan. It was incorporated on June 15, 1911, under the name of Grand Rapids Portland Cement Company, for the purpose of taking over the assets and business of a predecessor corporation known as the Newaygo Portland Cement Company, a Michigan corporation organized in 1899.
At the*1255 time petitioner's predecessor was organized the Newaygo Improvement Company built a dam, canal, power house and cement factory, and conveyed the entire plant to petitioner's predecessor in consideration for all of the latter's capital stock and bonds, consisting of $2,000,000 par value of common stock and $1,000,000 par value of bonds. Certain individuals then purchased from the Newaygo Improvement Company all of the bonds of petitioner's predecessor for a cash consideration of $1,000,000 and received from the Newaygo Improvement Company all of the common stock of petitioner's predecessor as a bonus for purchasing the bonds.
Petitioner's predecessor operated unsuccessfully until 1911, when its entire assets were sold at a foreclosure proceeding to one Wilder D. Stephens, trustee for the bondholders, who were also the stockholders. Petitioner was then incorporated with an authorized capital stock of $500,000. On June 16, 1911, petitioner issued $450,000 par value of its capital stock to Stephens, the trustee, for all of the assets purchased by him, and set the said assets up on its books at the following amounts:
| D. L. Stiver lands | $7,500.00 |
| Accounts receivable, inventory, supplies, and materials | 30,000.00 |
| New Eagle equipment | 10,000.00 |
| Cash | 68,309.69 |
| Real estate, plant, and machinery | 334,190.31 |
| Total | 450,000.00 |
*1256 There was no appraisal of the property at the time of sale and the segregation of the lump sum of $450,000 into the several items and values shown above was more or less arbitrarily done. The principal assets required by petitioner at its organization included a cement plant, riparian lands, water power rights and a water power plant, all in Newaygo. The cement plant was located in Newaygo primarily on account of the water power. It was located about 40 rods from the dam and up to the time of the sale in question petitioner obtained its power solely from its own power plant and never purchased power from outside sources.
*1100 After the transfer of the above mentioned assets to petitioner, the old Newaygo Portland Cement Company was dissolved and petitioner's name was changed from Grand Rapids Portland Cement Company to Newaygo Portland Cement Company in order to retain the value of the name and good will, if any, of the old company. There was no change in petitioner's corporate identity. The officers and stockholders of petitioner were the same as those of its predecessor.
Petitioner's principal business was that of manufacturing cement. Its act of furnishing*1257 the village of Newaygo with electric current was only incidental to its principal business. Petitioner's hydroelectric plant at Newaygo at the then height of its dam and the capacity of its then installed machinery, on March 1, 1913, could generate 2,160 dependable horsepower or 10,000,000 kilowatt hours of electric energy per annum. The capacity of the plant was capable of being considerably increased by raising the height of the dam to its maximum and installing the most modern machinery which could have been purchased at that time.
About 1920 or 1921 a "waste heat boiler system" was perfected in connection with the manufacture of cement, which petitioner desired to adopt because it regarded the new system as more efficient and economical than the one it was then using. Under this system it would have no further use for its water power, unless it went into the public utility business on a major scale, which it did not care to do. It also required additional funds to finance the construction of the waste heat boiler system. For these and other reasons it decided to sell its hydroelectric power plant.
On October 16, 1922, petitioner, as first party, and the Commonwealth*1258 Power, Railway and Light Company (the then holding company of the Consumers Power Company), as second party, entered into a written contract in which petitioner, in consideration of the sum of $450,000, "to be paid to it by the Power Company, hereby agrees to sell to the Power Company" the hydroelectric power plant in question. Paragraph (e) of the contract referred to certain equipment which "is hereby sold to the Power Company, and which, together with the other property above described, shall be delivered in its present condition to the Power Company, at the time herein provided." In paragraph (g) petitioner agreed to discontinue furnishing electric service for any purpose to any person (except itself and its officers) "as soon as the possession of said above described property shall be delivered * * *." Paragraph (h) recited that the Power Company "hereby agrees to purchase" of petitioner, the property here in question, and to pay therefor to petitioner the sum of $450,000, in the manner as follows:
*1101 Forty-five Thousand Dollars ($45,000.00) upon the execution hereof, the receipt of which sum is hereby confessed and acknowledged.
Two Hundred Five Thousand Dollars*1259 ($205,000.00) to be paid 6 months from the date hereof, and upon delivery of deeds of conveyance of said property as hereinafter provided.
Balance of Two Hundred Thousand Dollars ($200,000.00) to be paid on or before one year from the date hereof, as hereinafter provided.
Paragraphs (i) and (j) of the contract are as follows:
(i) It is further agreed that the Power Company may take possession of all of said property six months from the date hereof, and at the time said instruments of conveyance shall be delivered to it as aforesaid; provided, however, that at any time prior to the expiration of said six months, the Power Company may enter upon the premises adjacent to the power house and outside of the same, which are to be conveyed to it as aforesaid, for the purpose of erecting and installing thereon, its outdoor substation equipment and lines leading thereto, which said use shall not interfere with the business of the Cement Company. The Cement Company shall pay all taxes lawfully assessed upon said premises prior to the final date for the delivery of possession hereof, and thereafter all taxes shall be paid by the Power Company.
(j) Said Cement Company further agrees*1260 that upon the receipt of said payment of $205,000.00 payable six months from the date hereof, it will thereupon execute and deliver to the Power Company good sufficient instruments of conveyance of all of said property, containing full covenants of warranty of title, and will convey to the Power Company said property, free and clear from all incumbrances, claims and liens of every kind and nature. The Cement Company shall also deliver abstracts and tax histories of all of said real estate, showing good, marketable title of record. Upon the delivery of said instruments of conveyance, the Power Company shall execute and deliver to the Cement Company, its promissory note for said unpaid balance of $200,000.00, which said note shall be payable on or before six months from the date of its execution, and which shall bear interest at the rate of six per cent per annum, payable semi-annually. The Power Company may, if it desires, upon the delivery to it of said instruments of conveyance six months from the date hereof, pay the entire balance of Four Hundred Five Thousand Dollars ($405,000.00) in cash, at one payment.
On its fly leaf the contract was labeled "CONTRACT OF SALE."
On October 16, 1922, the*1261 Commonwealth Power, Railway and Light Company, in pursuance of the terms of the contract, paid petitioner, as part of the purchase price, the amount of $45,000. The balance of $405,000 was paid petitioner on June 18, 1923. This later date was the day that the deed of conveyance from the Newaygo Portland Cement Company to the Consumers Power Company for the hydroelectric plant in question was executed and delivered. This indenture, among other clauses, contains the following: "This instrument is executed in fulfillment of the contract for the sale of said property dated October 16, 1922, and entered into by said first party and Commonwealth Power, Railway and Light Company, the assignor of the second party hereunder."
*1102 Immediately after October 16, 1922, the Commonwealth Power, Railway and Light Company, acting through its subsidiary, Consumers Power Company, entered upon he premises involved in the contract, took possession of a two-story building and occupied it as a work shop, also using it to store equipment. It also dismantled an auxiliary steam plant, tore down the building and sold some of the junk for a small amount and retained the proceeds. It also began*1262 the creation of a new substation. All this occurred in 1922 and was done in pursuance of the understanding embodied in paragraph (i) of the contract of sale already quoted in full in these findings of fact.
After the execution of the contract and prior to the execution and delivery of the deed, petitioner began the construction of its waste heat boiler system to be used by it in lieu of the hydroelectric plant disposed of by its contract with the power company. Pending the construction of the substation by the power company (estimated to be completed by April 16, 1923), petitioner continued to occupy and use the hydroelectric power plant.
On April 16, 1923, the power company had not completed its substation and other features of the plant, which were necessary to its use of the power, and by agreement the execution and delivery of the deed were postponed until June 18, 1923. In accordance with the provisions of the contract, petitioner continued to use the hydroclectric power plant to produce power for its own use in its cement factory plant, and sold power to other persons and retained the proceeds. It also paid all taxes on the property up to the date of the deed. Petitioner*1263 in its income tax return for 1923 took deduction for depreciation on the part of the plant subject to depreciation, computed to the date of delivery of the deed, viz., June 18, 1923.
The fair market value on March 1, 1913, of petitioner's hydroelectric plant at Newaygo on the Muskegon River, including real estate, dam, race and race spillway, power house, power house equipment, water power rights, riparian land and everything appertaining thereto was $375,000. Of the assets included in the above amount the depreciable assets had a valuation as follows:
| Dam | $45,000 |
| Race and race spillway | 10,000 |
| Power house | 35,000 |
| Power house equipment | 90,000 |
| Total | 180,000 |
On June 2, 1923, petitioner entered into a contract with the Manitowoc Portland Cement Company, hereinafter called the "Manitowoc Company," wherein petitioner agreed to purchase all of the bond issue of the Manitowoc Company, consisting of "300 bonds in the principal sum of $5,000.00 each, all bearing date as of June 2, 1923, *1103 all maturing June 1, 1938, and all bearing interest at the rate of 7% per annum payable semi-annually on the first days of June and December in each year," at a price*1264 of 88 per cent of the par value thereof or the sum of $1,320,000, to be paid the Manitowoc Company from time to time as construction work on the Manitowoc Company's new cement manufacturing plant progressed. The contract in that respect provided:
All of said payments to be upon certificates signed by the construction engineer, each of which certificates shall state (1) the total amount expended up to the date of the last prior certificate in and about said construction work, and (2) the additional amount expended since the date of the last prior certificate and up to the date of such certificate in and about said construction work; it being the intent of the parties that payment by the Newaygo Company to the Manitowoc Company of portions of the total sum of $1,320,000.00 shall be in each case in an amount equal to the additional expenditure so certified to by the construction engineer. Any part of said total sum remainings in the hands of the Newaygo Company when said new cement manufacturing plant shall have been fully erected and completed shall be forthwith paid by the Newaygo Company to the Manitowoc Company.
Paragraph 9 of the agreement provided as follows:
It is understood*1265 and agreed between the parties that the promise of the Newaygo Company, hereby made, to pay to the Manitowoc Company the total sum of $1,320,000.00 for all of the bonds of the Manitowoc Company hereinbefore described shall be accepted by the Manitowoc Company as full consideration for the immediate issue of all of said bonds and for the immediate delivery of the same to the Newaygo Company, even though the Newaygo Company will actually pay said total sum in installments, from time to time, as the work progresses in the manner hereinbefore stipulated; and for the purpose of adjusting the matter of interest on said bonds, from the date thereof, to wit: June 2, 1923, to the several dates when the Newaygo Company shall hereafter pay said installments to the Manitowoc Company, it is further agreed that the Newaygo Company will enter on its books a credit to the Manitowoc Company representing the amount of interest at 7% per annum on the amount of each installment paid by the Newago Company, reckoned from June 2, 1923, to the date of such payment, and that the total amount of interest credits so entered shall be paid by the Newaygo Company to the Manitowoc Company when the new cement manufacturing*1266 plant of the latter company shall have been fully erected and completed.
Petitioner paid the $1,320,000 to the Manitowoc Company on the following dates:
| 1923 | |
| November 12 | $150,779.95 |
| December 3 | 151,550.17 |
| 1924 | |
| January 5 | 146,528.53 |
| January 26 | 154,893.25 |
| February 29 | 162,090.64 |
| March 22 | 153,131.20 |
| April 26 | $138,124.06 |
| May 26 | 119,053.77 |
| June 28 | 82,985.99 |
| August 18 | 60,862.44 |
| Total | 1,320,000.00 |
*1104 The account on petitioner's books called "Manitowoc Portland Cement Company (Accts Payable)" showed a credit balance at December 31, 1923, of $1,017,669.88.
On December 31, 1923, the petitioner accrued on its books $10,206.43 for interest payable to the Manitowoc Company on the $150,779.95 and $151,550.17 (being 7 per cent for 164 days on $150,779.95 and 7 per cent for 188 days on $151,550.17).
In 1924 petitioner accrued on its books and deducted in its 1924 income tax return $59,197.27 for interest payable to the Manitowoc Company on the eight payments that were made by petitioner to the Manitowoc Company in 1924 as set forth above. The respondent made no change in respect of such deduction.
On October 15, 1924, petitioner liquidated*1267 the accruals of $10,206.43 and $59,197.27 by a payment to the Manitowoc Company of $69,403.70.
Petitioner prepared its 1923 income tax return on the accrual basis and the respondent approved such basis. The only deduction for interest claimed by petitioner in its return for 1923 with respect to the foregoing transactions was the $10,206.43. The respondent made no change in this respect.
OPINION.
BLACK: We will first discuss petitioner's contention that its sale of the hydroelectric plant to the Consumers Power Company took place in 1922, when it entered into a contract to sell, with the Commonwealth Power, Railway and Light Company and not in 1923, when the deed of conveyance was signed and delivered and payments were completed and the purchaser went into complete possession of the property.
The facts in relation to the transaction have been fully stated in our findings of fact and will not be repeated here. Suffice it to say, we think these facts show that the sale was completed in 1923, and that the Commissioner is correct in so treating it. While it is true that the seller and proposed purchaser entered into an executory contract of sale in 1922 and part of the proposed*1268 purchase price was paid in 1922, it was not until the deed passed, June 18, 1923, that the sale was consummated. Then it was that the purchaser went into complete possession of the premises and exercised all elements of ownership. Up until that time the seller operated the power plant and used the energy generated therein in the production of its manufactured products, continued to sell some of the surplus power to the village of Newaygo and collected therefor and retained the proceeds in its business. Petitioner in its income tax return for 1923 deducted depreciation on the power plant and equipment computed on the basis of ownership in petitioner to the date of the passing of *1105 the deed. These things were inconsistent with the idea that ownership passed from petitioner to the Commonwealth Power, Railway and Light Company at the time of the execution of the contract, October 16, 1922. True it is that after the contract of sale was executed in October, 1922, the purchaser came upon the premises and began the erection of a substation and the making of other improvements on the premises, but this was by the agreement of the parties embodied in the contract of sale and*1269 was merely permissive and is not inconsistent with the idea that petitioner remained the owner of the property until the deed passed in June, 1923.
In , the question before the United States Supreme Court was whether a sale of timber lands occurred in 1916 or 1917. There the seller on December 27, 1916, gave the buyer a ten-day option to purchase for a specified price. On the same day title was examined and found satisfactory to the buyer, who was solvent and able to make the purchase. The buyer arranged for the money needed, and on December 30, 1916, notified the seller that it would exercise the option. On that day the seller ceased operations and withdrew all its employees from the land. On January 5, 1917, the papers which were required to effect the transfer were delivered, the purchase price was paid, and the transaction was finally closed. In holding that the sale in question occurred in 1917, the Supreme Court said in part:
An executory contract of sale was created by the option and notice, December 30, 1916. In the notice, the purchaser declared itself ready to close the transaction and pay the purchase*1270 price "as soon as the papers were prepared." Respondent did not prepare the papers necessary to effect the transfer or make tender of title or possession or demand the purchase price in 1916. The title and right of possession remained in it until the transaction was closed. Consequently unconditional liability of vendee for the purchase price was not created in that year. [Citations.] The entry of the purchase price in respondent's accounts as income in that year was not warranted. Respondent was not entitled to make return or have the tax computed on that basis, as clearly it did not reflect 1916 income.
On authority of , we hold that the title and right of possession to the hydroelectric plant remained in petitioner until the transaction was closed in 1923 and it was then that the sale was consummated and the profits, if any, were taxable. Cf. E. K. Wood Lumber Co., 25 B.T.A., at page 1024.
We will next take up petitioner's contention that even though the Board holds that the sale took place in 1923, nevertheless there was no taxable profit on the transaction because the March 1, 1913, value of*1271 the property after being adjusted to allow for additions made since that date to the date of sale, and to give effect to accumulated depreciation on the depreciable assets, was greater than the total price received for the property.
*1106 Much testimony was introduced on the subject of March 1, 1913, value, and there was a wide difference of opinion between the witnesses. One witness for respondent who was widely experienced in the valuation of utilities, testified that the March 1, 1913, value of the property was $206,000 and a witness for petitioner, who appeared equally as widely experienced, placed the valuation as high as $652,150. This witness based his valuation on $200,000 for the tangibles and $452,150 for the intangibles connected with the hydroelectric plant. We do not think there would be any profit in discussing the details of this evidence.
The fair market value of assets at any given date is a question of fact to be decided upon all the evidence admitted and no set rules, methods or formulas are controlling. *1272 ; affd., ; certiorari denied, ; ; ; affd., . From all the evidence we have found that the March 1, 1913, value of the entire hydroelectric plant, including tangibles and intangibles, was $375,000. This should be the basis used in computing petitioner's gain or loss, if any, on the sale in 1923. This basis should of course be adjusted down to the date of sale by giving effect to additions made to the plant from March 1, 1913, and also by giving effect to depreciation which had accumulated against the depreciable assets since March 1, 1913. As to additions made to the plant since March 1, 1913, and the rate of depreciation on the depreciable assets, there seems to be no controversy between the parties and hence we have made no findings of fact on those items.
Petitioner's third contention is that even though the Board should hold that the sale was made in 1923 and that there was a taxable profit therefrom, nevertheless such profit should be taxed on the installment*1273 basis. It is petitioner's position that the sale price was received in two years, viz., $45,000 in 1922 and $405,000 in 1923, and that since the $45,000 initial payment is less than 25 per cent of the contract price, only 90 per cent of the profit can be taxed in 1923, as 10 per cent (45/450) is attributable to 1922, under sections 1208 and 212(d) of the Revenue Act of 1926. In ; affd., , the Board decided adversely a contention similar to that now made by petitioner. Following that decision we hold against petitioner on this issue.
Petitioner's fourth and last contention is that it not only does not owe any deficiency, but that on the contrary it has made an overpayment of its taxes for 1923 because it failed to deduct $41,230.79 which it should have accrued upon its books as an interest liability on December 31, 1923, but which it did not accrue because of error on its part. We find no basis for this contention.
*1107 When petitioner agreed to purchase from the Manitowoc Portland Cement Company $1,500,000 of its bonds at a purchase price of $1,320,000, it was embodied in the agreement*1274 that all the purchase price should not be paid at once but that petitioner should advance it in installments as the work progressed on the Manitowoc Company plant. But inasmuch as the bonds of the Manitowoc Company which were delivered to petitioner drew interest from the date of said bonds, June 2, 1923, it was agreed that the Newaygo Company would enter on its books, whenever it made payment of an installment, a credit to the Manitowoc Company representing the amount of interest at 7 per cent per annum on the amount of each installment paid by the Newaygo Company reckoned from June 2, 1923, to the date of such payment, and that the total amount of interest credits so entered should be paid by the Newaygo Company to the Manitowoc Company, when the new cement manufacturing plant of the latter company should have been fully erected and completed. Under the terms of this contract petitioner paid the Manitowoc Company two installments in 1923, upon which interest of $10,206.43 was calculated and credited to the Manitowoc Company on petitioner's books, December 31, 1923. This amount was not paid until October 15, 1924, but petitioner, keeping its books on an accrual system, was entitled*1275 to accrue this liability in 1923, as it did so, and respondent has so allowed.
But no other payments of installments were made by petitioner under the terms of the contract in 1923 and no liability to pay interest accrued against petitioner in 1923 other than the $10,206.43 which it accrued on its books and which the respondent has allowed as a deduction. Petitioner was not entitled to a larger accrual of interest in 1923 than that shown by its books. Interest liabilities of a taxpayer should be accrued when all events have occurred which fix time of accrual. Cf. .
Under the terms of petitioner's contract with Manitowoc Company it could not tell what interest it would owe Manitowoc Company in any given year until the installments for that year were determined and paid. Consequently until such installment payments were made all events had not occurred which would enable petitioner to fix the time of its accrual of interest liabilities to the Manitowoc Company. On this issue we hold for respondent.
Reviewed by the Board.
Decision will be entered under Rule 50.
LOVE, *1276 dissenting: I heard this case and observed the witnesses who testified, and am convinced that the evidence clearly shows that the *1108 value of the "Riparian Land, Water-Power Rights & Power-House Site Land" was $300,000, instead of $100,000, as determined by the respondent; and that the basis used by the respondent of $183,526.57 for the "Power House, Dam & Electric Meters" should not be disturbed, as petitioner has not questioned the correctness of such determination and the evidence offered by the respondent does not prove that he erred in that respect.