*3365 1. Value of coal lands for invested capital and for depletion determined.
2. Profits on the sale of lands determined.
3. A corporation purchased its own stock at par during 1917. Held, that such purchase was a capital transaction and that invested capital should be reduced by prorating each purchase for the effective portion of the year thereafter, regardless of the amount of current earnings available at each date of purchase.
4. Earnings available for distribution of dividends in any year should not be reduced by a tentative tax on such earnings for the year. L. S. Ayers & Co.,1 B.T.A. 1135">1 B.T.A. 1135.
5. When capital stock of a corporation is sold by the corporation for cash at par during any year, invested capital should be increased in an amount proportionate to the effective period of use of such capital.
*1296 In this proceeding the petitioner seeks a redetermination of the income and profits taxes for the calendar years 1917, 1918, 1920, and 1921, for which the Commissioner has determined deficiencies of $27,366.93, *3366 $49,920.04, $32,936.98, and $28,599.92, respectively. Petitioner alleges error on the part of the Commissioner: (1) In allowing inadequate deductions for depletion during all of the years involved. This contention involves the value of the petitioner's coal lands at the date of acquisition in 1913. (2) In his computation of profits on the sale of coal lands during the years 1917 and 1918. (3) In failing to include in invested capital paid-in surplus of $487,065 for all years. (4) In excluding from invested capital for the year 1917 the sum of $92,992.41 on the theory that dividends were paid and stock was purchased by the petitioner in such year from its surplus on December 31, 1916, whereas, the petitioner claims that such dividends and purchases of stock were made principally out of its current earnings for 1917. (5) In failing to include in invested *1297 capital for the year 1918 the sum of $8,547.95 which should have been included therein by reason of the petitioner's sale on October 15, 1918, of $40,000 par value of this preferred stock. (6) In computing excess-profits taxes for the year 1917 by applying a deduction or credit of 7 per cent instead of 8 per cent*3367 to which it was entitled. (7) In refusing to give the petitioner the benefit of the computation of excess-profits taxes for the year 1917 under the provisions of section 210 of the Revenue Act of 1917 and for the year 1918, 1920, and 1921, under the provisions of sections 327 and 328 of the Revenue Act of 1918.
FINDINGS OF FACT.
Petitioner is a corporation organized under the laws of the State of West Virginia on April 21, 1913, with an authorized capital stock of a par value of $600,000, of which $100,000 was preferred stock and $500,000 was common stock. Shortly after incorporation the petitioner acquired 3,058.9 acres of coal lands in Marion and Monongalia Counties, West Virginia, together with 142.7 acres of surface land and certain plant and equipment, by the issuance of capital stock of a par value of $599,500 and cash to the amount of $136,500. Of the coal lands acquired 1,500 acres were located north-east of the City of Fairmont and were known as the Parker Run Mine, and 1,558.9 acres were located west of the Town of Monongah, between Taverbaugh Creek and Little Bingamon Creek, and were known as the Billingslea Tract. The coal lands thus acquired applied only to what*3368 was known as the Sewickley Seam of coal and did not include rights in respect to what was known as the Pittsburgh Seam which also occurs in this section, but underlies the Sewickley Seam and is separated therefrom by about 100 feet.
The fair market value at the date of acquisition and the cost to the petitioner of the plant and equipment acquired in this purchase was $86,275.
Prior to acquisition by the petitioner the Parker Run Mine was owned and operated by the Parker Run Coal & Coke Co. which had operated the property for about three years, having installed plant and dquipment, and developed and mined 218,888 tons from the property.
In the year 1912 William E. Watson and his associates entered into negotiations for the purpose of taking over the Parker Run Mine. This mine had attracted a great deal of attention because it was the only mine in the Sewickley Seam where commercial operations had been attempted and because the coal extracted from this property had a greater specific gravity than coal extracted from the Pittsburgh Seam. Watson, with his associates and engineers, made *1298 an examination of the property, investigating the outcrop, drainage, seam grade, *3369 and conditions with respect to operations. This mine was located on the Baltimore & Ohio Railroad, and immediately after Watson and his associates had acquired rights to the mine, arrangements were completed for extending the Buchanan & Northern Railroad, afterwards known as the Monongalia, to the property. This railroad connected with the Pennsylvania System and the New York Central System. By this arrangement the Parker Run Mine became situated upon two railroads, which was of material advantage from a standpoint of operation, both on account of the car supply and also because of the markets thus made available. The mining conditions were exceptionally good and because of such favorable mining conditions it was estimated that coal could be extracted from the property at a cost of 10 cents less per ton than the average coal operation in the district.
The roof was especially good, consisting for the most part of hard, brittle sandstone which stood up well and from which the coal parted readily. The floor was of hard, smooth fire clay, facilitating the operation of under-cutting machines. The coal seam had an average thickness of about 6 feet, it was of a hard structure and*3370 mined in very good commercial size of lump. Its chemical analysis differed from that of the Pittsburgh Seam only in having a slightly higher sulphur content and ash, and it sold in the markets for steam and general use at the same price as the Pittsburgh coal. However, it was not used for gas or coking purposes, and in that respect differed from the Pittsburgh coal.
The mine entry was at tipple height, and the grade of the coal during the early operations was in favor of the loads, requiring very little power for haulage and no cost for pumping. This applied to the southeastern portion of the property only, since in operating the northwestern half of the property it was necessary to drive a "dip heading" so that the coal had to be hauled on an upgrade, and making it necessary to pump the water from that portion of the mine. The mine was a safe mine for operations due to its roof and also to the fact that gas was not present in any quantity. In this respect it was superior to the Pittsburgh Seam, in which explosions occasionally took place and where the overlying rock was of such a nature that it was necessary to leave from 10 to 14 inches of coal as a roof. In this property*3371 the recoverable coal amounted to approximately 9,000 tons per acre, making a total recoverable reserve in the Parker Run Tract of 13,500,000 tons. This tonnage was assured in the case of the Parker Run Tract, since the Sewickley Seam at this point was uniform in thickness and openings and had been made in the coal on different parts of the property.
*1299 In the Billingslea Tract also the petitioner's rights consisted in the ownership of the Sewickley seam of coal. There were one or two openings on the outcrop on this property where the coal was from 6 to 7 feet thick, and some wells had been driven within the property which also indicated workable thickness of coal. However, there were two holes or wells driven in or near this property which would indicate that the southern portion of the property had little or no commercial coal. Those consisted of the E. H. Stevens well, No. 2138, one-half mile east of Sturms Mill, and the Nancy Billingslea Core Test No. 5, one-half mile west from Hutchinson. In the first of these only 3 feet of coal was found and in the second only three-tenths of a foot. In the report of the West Virginia Geological Survey, Bulletin, 2, 1911, appears*3372 the statement:
The bore hole number 5 on the Nancy Billingslea Tract, Camp Run, one mile west from Worthington, the Sewickley coal has an elevation of 913.77 feet but is only four inches thick, since this coal suddenly thins below commercial thickness just west from the longitude from Worthington.
At 1913 and prior thereto the Sewickley Seam of coal was not Widely known or highly regarded and had been operated on a commercial scale only at the Parket Run Mine. It had been mined in a small way by farmers for local consumption for many years and was found to be a very desirable coal for such use. Very few sales of Sewickley coal are of record, and mining companies who owned both Sewickley and Pittsburgh Seams paid little or no attention to the Sewickley Seam but devoted their activities to the Pittsburgh Seam. Shortly after 1913, however, the Sewickley coal attracted more attention, and several purchases were made during the years 1916 and 1917. Some of these transactions are as follows: S. D. Brady, Sr., in 1917 purchased from the New England Fuel & Transportation Co. 101 acres located near Big Paw Paw Creek, one-half mile south of the Parker Run tract at a price of $75 an*3373 acre.
S. D. Brady, Sr., purchased in 1917 from the New England Fuel & Transportation Co. 557 acres of Sewickley coal located five or six miles by winding railroad north of Parker Run Tract at a price of $75 an acre.
S. D. Brady, Sr., in 1917 purchased from the New England Fuel & Transportation Co. 600 acres of Sewickley coal adjoining the 557-acre purchase above cited at a price of $75 an acre.
Robert M. Talbot in 1917 purchased from George T. Massey 26 acres of Sewickley coal located three miles by road from the dipper between Parker Run Mine at a price of $100 an acre.
Robert M. Talbot, about the year 1917 or 1918, purchased from R. T. Stuart 208 3/4 acres of Sewickley coal located on Indian Creek *1300 contiguous to the Massey purchase above cited at a price of $100 an acre.
The Bethlehem Coal Co. in 1916 purchased 750 acres of Sewickley coal about one-half mile northeast of the petitioner's Billingslea tract at a price of $65.53 an acre.
The Bethlehem Coal Co. purchased about March, 1917, 15 acres of Sewickley coal about one-half mile northeast from the Billingslea tract at a price of $112.68 an acre, and also purchased about the same time 25 acres in the*3374 same locality at $274.12 an acre.
T. S. Neptune, about 1917, purchased 500 to 600 acres of Sewickley coal on Paw Paw Creek, just west of the petitioner's Parker Run Tract, at a price of $100 an acre.
The Monongalia Traction & Fuel Co. in 1918 purchased 100.66 acres adjacent to petitioner's Parker Run Tract at a price of $100 an acre.
The characteristics of the Sewickley Seam of coal in the tracts listed above and those of the petitioners were fairly uniform, such as the chemical analysis of the coal, the thickness of the seam, and the character of the roof and floor, and most of them were not far from railroad transportation. However, properties in the extreme north-east were free from clay seams, which became more abundant toward the southwest.
The petitioner's production of coal for the portion of the year 1913 following its organization and for the years 1914 through 1921 was not less than the following tonnages, and the deductions for depletion allowed by the respondent were at the rate of 4.04 cents, as follows:
| Year | Tons | Depletion |
| 1913 | 74,195 | $2,997.48 |
| 1914 | 111,933 | 4,522.09 |
| 1915 | 153,050 | 6,183.22 |
| 1916 | 220,113 | 8,892.57 |
| 1917 | 233,280 | 9,424.51 |
| 1918 | 240,216 | $9,704.73 |
| 1919 | 305,737 | 12,351.77 |
| 1920 | 325,919 | 13,167.13 |
| 1921 | 481,732 | 19,461.67 |
*3375 The fair market value of the 1,500 acres of coal contained in the Parker Run Tract at date of acquisition by the petitioner was $400 an acre or a total value of $600,000, and the depletion rate based upon the content of 13,500,000 tons is 4.4 cents a ton.
The fair market value of the 1,558.9 acres of coal land in the Billingslea Tract was $100 an acre, or a total value for the coal of $115,890.
The value of the 142.7 acres of surface land acquired by the petitioner was $9,000.
In 1917 the petitioner sold 60 acres of surface land and 339.11 acres of coal lands out of its original purchase of the Billingslea Tract *1301 for the sum of $88,670.83. The respondent determined a cost of $74,810.79 for the land so sold on the basis of a cost per acre of surface land of $63.07, and of an average cost per acre of the coal land of $209.45, and after adding a commission of $3,546.83, computed a profit of $10,313.21. The cost of the 60 acres of surface land was $3,784.20 and the cost of the 339.11 acres of coal lands was $71,026.59, making a total cost of $74,810.79. By adding to this cost the commission of $3,546.83 the petitioner's profit on the sale amounted to $10,313.21.
*3376 In 1918 the petitioner sold 280 acres of coal lands out of its original purchase of the Buillingslea Tract for $71,653.25. The respondent determined a cost of $58,646 for the coal lands so sold on the basis of an average cost per acre of $209.45, and after adding a commission of $2,866.13 computed a profit of $10,141.12. The cost of the 280 acres of coal lands to the petitioner was $58,646. By adding to this cost the commission of $2,866.13 the profit on the sale of the lands would amount to $10,141.12.
In 1917 the petitioner paid dividends and purchased its own preferred stock at par to the amount of $368,185 as shown by the following table, the items followed by "(s)" indicating the purchases of preferred stock:
| Date paid | Amount |
| Jan. 9 | $47,950.00 |
| Feb. 15 | 900.00 |
| Feb. 24 | 2,500.00 |
| Mar. 10 | 46,650.00 |
| Mar. 19 | 2,500.00 |
| Apr. 24(s) | 1,300.00 |
| May 16 | 49,000.00 |
| June 22 | 52,000.00 |
| July 3 | 1,000.00 |
| July 27 | $212.50 |
| July 27(s) | 10,000.00 |
| Aug 23 | 50,000.00 |
| Sept. 1(s) | 445.00 |
| Sept. 18 | 500.00 |
| Sept. 18 | 2,217.50 |
| Sept. 18 | 2,500.00 |
| Sept. 26(s) | 300.00 |
| Oct. 1(s) | 17,805.00 |
| Oct. 1 | $25,000.00 |
| Oct. 2(s) | 100.00 |
| Oct. 4(s) | 500.00 |
| Oct. 23(s) | 2,000.00 |
| Nov. 1(s) | 2,750.00 |
| Nov. 13 | 55.00 |
| Dec. 22 | 50,000.00 |
| Total | 368,185.00 |
*3377 The respondent reduced invested capital for the year 1917 by the amount of $92,992.41, on the ground that said distributions and purchases were made to the extent of $159,724.51 out of surplus existing at the beginning of 1917.
The respondent apparently made no distinction between his treatment of dividends and stock purchases but reduced surplus only when and to the extent that earnings were inadequate to satisfy the payment. By this method he computed an amount chargeable to surplus for the entire year of $159,724.51, which, prorated over the portions of the year applicable, resulted in a net reduction of invested capital for the year of $92,992.41. The available earnings were based upon a computation whereby the total net taxable income for the year was reduced by a tentative income and excess-profits tax for the same year amounting to $150,943.19, which resulted in an average available income per month for dividends of $17,607.28.
On October 15, 1918, petitioner sold $40,000 par value of its own preferred stock for cash at par and the respondent did not include *1302 any amount in invested capital for 1918 on account thereof. As the result of this sale of preferred*3378 stock $8,547.95 should be added to the petitioner's invested capital for 1918, representing $40,000 prorated 78 days.
The net income and invested capital of the petitioner for the several years under review have been determined by the respondent as follows:
| 1917 | 1918 | 1920 | 1921 | |
| Net income | $362,230.55 | $209,870.72 | $354,312.03 | $212,493.71 |
| Invested capital | 590,468.99 | 567,050.51 | 644,074.38 | 817,566.66 |
The petitioner and the respondent have agreed that the above figures are correct except for any adjustments in the allowance for depletion required by a decision of this Board that the correct rate of depletion should be greater or less than 4.04 cents per ton or for any adjustments in profit or loss on the sale of coal lands required by a decision of this Board, that the average cost per acre of coal lands sold by the petitioner was greater or less than $209.45, or for any adjustments in invested capital required by a decision of this Board that the value at date of acquisition of the petitioner's coal lands was greater or less than $640,725, or that the distributions of dividends and purchases of stock in 1917 were made otherwise than to the extent*3379 of $159,724.51 out of surplus accumulated before January 1, 1917, or that the invested capital for 1918 was increased because of the issue of additional preferred stock on October 15, 1918.
In computing the excess-profits taxes for the year 1917 the petitioner is entitled to a deduction or credit of 8 per cent.
OPINION.
ARUNDELL: The evidence presented in this case indicates that at March 1, 1913, the Parker Run Tract of the petitioner was unique in so far as operations in the Sewickley Seam of coal were concerned. It was the only property which had been operated on a commercial scale in this seam prior to 1913, so that at the date when the petitioner acquired the property the character of the coal within the property, the working conditions of the mine, and the operating costs were ascertainable. It was further unique in the fact that it was adjacent to two different lines of railroad which was of material advantage in that the petitioner was enabled to have a supply of railroad cars at all times sufficient to meet its demands, whereas properties located upon but one railroad in 1913 often suffered from the serious lack of railroad cars to get its product to the market.
*3380 *1303 The respondent has endeavored to have used as comparable the prices paid for properties in this district, subsequent to 1913, and has shown that there was a steady increase in prices subsequent to 1913. He, therefore, argues that the prices received in 1916 and 1917 for Sewickley coal lands would be indicative of the value of petitioner's property in 1913. However, it seems to us he has failed to show that the properties were comparable. In the first place none of the properties, the sales of which were submitted by the respondent, were shown to have been adjacent to two railroad lines. This advantage of the petitioner's property was shown by the petitioner to have added considerable value to its land. Second, the petitioner has shown that its property could be operated at a saving of 10 cents per ton in the cost over the average property in the district. The respondent has not shown that such advantage existed in any of the properties sold subsequently. Therefore, no direct comparison can be made between the Parker Run Tract of the petitioner and sales of other Sewickley properties. The petitioner presented several expert witnesses who had knowledge of the*3381 Parker Run Tract in 1913, who expressed the opinion that the property was worth from $400 an acre to $500 an acre. As opposed to this testimony the respondent presented only one witness who appeared sufficiently well acquainted with the situation and operation of the property in 1913 to express an opinion. This witness was of the opinion that the Parker Run Tract could not be operated as cheaply as the average of the Pittsburgh Seam properties in the district. We believe that the petitioner has proved that such is not the case and that on the contrary there was an advantage of 10 cents a ton in the Parker Run Tract over the average operations in other tracts. Since this is true there would have to be added to the value assigned by the respondent's witness an amount representing this saving per ton. If this were done the result would not be far from $400 an acre.
It is also indicated by the 60-day letter attached to the petition that the Commissioner arrived at a value of approximately $484,000 for the Parker Run Tract coal based upon 12,000,000 tons reserve. The petitioner has proved that there were at least 13,500,000 tons in the property. This difference would have added*3382 materially to the value of the property, and on the basis of the same value per ton determined by the Commissioner would have resulted in a value of approximately $545,000.
With all these points in view we are of the opinion that the value of the Parker Run Tract of coal acquired by the petitioner in 1913 was $400 per acre on that date, or total value of $600,000. Adjustment should be made by the respondent to invested capital and *1304 to the depletion by substituting this value for the one previously used.
The situation in respect to the Billingslea Tract is not the same as that of the Parker Run Tract. The petitioner has not shown that the Billingslea Tract has any advantages over some of the tracts which the Commissioner has submitted for comparison. It has further been pointed out in the findings of fact that the persistency of the coal seam in this tract was uncertain, and there was a possibility that the southern portion of the tract did not contain a workable deposit. The evidence presented by the petitioner and by the respondent is in our opinion insufficient to warrant changing the determination of the Commissioner that the tract was $100worth an acre in*3383 1913 when acquired by the petitioner. No evidence was submitted by either party as to the value at March 1, 1913, or the cost applicable to the particular portions of this tract sold in 1917 and 1918. The Commissioner determined a cost of $209.45 an acre in computing the profits on the sales. Although the Commissioner presented a plausible explanation of the establishment of this figure, and alleged error on his part in the determination thereof, he offered no proof as to a different value for the particular areas sold. Since it is evident that portions of this tract were more valuable than other portions, the average value per acre of the entire tract does not necessarily apply to the areas sold. We, therefore, have no justifiable basis for holding that the cost of these particular portions sold in 1917 and 1918 was other than $209.45 an acre.
The only evidence submitted as to the value of surface land was the opinion of one witness who was an officer of the company. While it is true that no evidence was submitted by the respondent on this issue, we do not feel that the unsupported opinion of an officer of the company who was not shown to have been especially familiar with*3384 the value of surface lands warrants us in finding that the Commissioner erred in determining a value of $63.07 an acre for surface land.
The petitioner paid dividends and purchased some of its capital stock in the year 1917, and claims that all of such payments should be treated as having been made from current earnings to the extent of such earnings, and that such earnings should not be reduced by a tentative tax for the year 1917.
This Board has frequently held that net income should not be reduced by a so-called tentative tax for the purpose of determining the earnings available for distribution. See . Having eliminated this issue we are then confronted *1305 with the problem of whether purchases of a corporation's own stock would be treated in the same manner as dividends paid by such corporation. The purchases by the petitioner of its own capital stock did not constitute a distribution of its earnings, but merely served to reduce the amount of capital embarked in the business. Such purchases did not affect the current earnings of the year and the surplus outstanding at the beginning of the year was also unchanged. *3385 The only source from which the payment could have been made was from the capital originally paid in for stock. We, therefore, hold that in so far as the purchases of the petitioner's own stock are concerned, such purchases were made from capital and the invested capital should be reduced at the beginning of the year by prorating each purchase from the date thereof to the end of the year. To hold otherwise would be to permit a portion of the surplus earned during the year to be included in the computation of invested capital for the year, which is contrary to the provisions of section 207(a)(3) of the Revenue Act of 1917. This decision is substantially in accord with the holding of the Board in ; ; and . No error has been shown in the Commissioner's adjustment of surplus incident to the payment of dividends, except that the taxable net income available for dividends should not be reduced by a tentative income and excess-profits tax for the year 1917, and except that the amounts paid for capital stock should*3386 also be eliminated from this computation.
On October 15, 1918, the petitioner sold $40,000 par value of its preferred stock, but the respondent failed to include in invested capital any amount on account of this sale. The respondent has admitted error in respect to this omission and has agreed that the sum of $8,547.95 should have been included in invested capital on account thereof. This transaction is just the reverse of the transaction set forth in the preceding issue and is consistent therewith.
The question of special assessment is dependent upon whether or not abnormalties exist, as prescribed by such relief sections, after the accounts had been adjusted in accordance with the decision of the Board on the various other issues presented. It is, therefore, held that the petitioner may have a further opportunity to show cause for the application of the relief sections after the computation of the deficiency has been determined under Rule 62(a).
Judgment will be entered under Rule 50.