*3652 1. JURISDICTION. - The respondent determined overassessments to be due for the years 1917 and 1918. Under section 274(g) of the Revenue Act of 1926 the Board does not have jurisdiction to redetermine the tax liability with respect to those years. Appeal of Cornelius Cotton Mills,4 B.T.A. 255">4 B.T.A. 255.
2. INVESTED CAPITAL. - The inclusion in invested capital for the years 1919 and 1920, of a part of the income and profits taxes for the preceding years, was in accordance with the respondent's regulations in force in respect of such taxable years and in accordance with section 1207 of the Revenue Act of 1926 "shall be considered as having been correctly made." Appeal of Russel Wheel & Foundry Co.,3 B.T.A. 1168">3 B.T.A. 1168.
3. ID. - The respondent erred in reducing the amount of current earnings available for payment of dividends by a tentative tax. Appeal of L. S. Ayers & Co.,1 B.T.A. 1135">1 B.T.A. 1135.
4. VALUATIONS. - Value of petitioner's land and timber owned on March 1, 1913, determined as of that date.
*1229 In*3653 this proceeding the petitioner seeks a redetermination of the income and profits taxes for the years 1917 to 1920, inclusive, for which the respondent has made the following determination:
| Year | Deficiency | Overassessment |
| 1917 | $205.26 | |
| 1918 | 2,739.40 | |
| 1919 | $5,949.02 | |
| 1920 | 2,359.62 |
The petitioner alleges error on the part of the respondent, (1) in reducing invested capital for 1919 by $1,699.28 on account of income taxes for the preceding year, and in reducing invested capital for 1920 by $5,268.71 on account of income and profits taxes for the preceding year; (2) in reducing invested capital for 1920, by $27,544.12 *1230 on account of the payment of dividends on May 17, 1920, in excess of the alleged current earnings available on that date, which were computed by deducting a tentative tax for the year 1920; (3) in placing an average value of $5 an acre on all lands (not including timber) owned by the petitioner on March 1, 1913; (4) in allowing an inadequate value for timber as at March 1, 1913, owned by the petitioner on that date.
FINDINGS OF FACT.
The petitioner is a corporation organized under the laws of the State of Wisconsin with principal*3654 office at Merrill.
On its original return of the year 1917, filed March 26, 1918, the petitioner computed a tax of $1,994.04 based on a net income of $33,234.08. On June 8, 1921, the petitioner filed an amended return showing a net loss. The respondent audited the return for the year 1917, and found a net taxable income of $25,512.02 and a tax liability of $1,530.72.
The petitioner's return for the year 1918 showed a net income of $58,336.78 and a tax of $6,760.41. The respondent audited the return and found a net taxable income of $35,508.38 and a tax liability of $4,021.01 or an overassessement of $2,739.40.
In computing the tax for the year 1919, the respondent reduced invested capital by $1,699.28, which represented a proration of the $4,021.01 tax for the year 1918.
In computing the tax for the year 1920, the respondent reduced invested capital by $5,253.75, representing a proration of the $12,467.37 tax which he had asserted for the year 1919.
On May 17, 1920, the petitioner paid dividends amounting to $90,204.07. In determining what amount of this dividend was paid from surplus, the respondent computed a tentative tax for the year 1920, amounting to $26,759.30, *3655 which he deducted from the total earnings of the year in order to determine the income available for distribution. This computation indicated that $44,024.11 was paid from surplus, which, prorated for 229 days, resulted in a reduction of invested capital for 1920 of $27,544.12.
On March 1, 1913, the petitioner owned 32,531.55 acres of land of which 23,732.87 acres were timber lands and 8,798.68 were cut-over lands. These lands were located in Lincoln and Marathon Counties, Wis.
There was a wide variance in the value of the lands due to topography, character of the soil and location with reference to farms, towns, schools, churches, creameries, and railroads. Approximately 90 per cent of the area was land suitable for agricultural purposes *1231 and 10 per cent was too rough and steep. About 70 per cent of the lands were located near farms, schools, roads, railroads, and otherwise developed countryside.
During the year 1912 the petitioner sold 1,367 acres of land at an average price of $10.48. During the year 1913 it sold 1,299.51 acres at an average price of $8.27. During the year 1914 it sold 398 acres at an average price of $15.46.
In September, 1914, the*3656 Wausau Paper Mills Co. entered into a contract with the Evangelical Lutheran Colonization Co. by the terms of which the Paper Company sold some 7,000 acres of land to the Colonization Company at an agreed price of $10 per acre. The purchaser agreed to take at least 1,000 acres per years, the consideration therefor to be paid as the lands were conveyed, one-half in cash and one-half by note secured by a mortgage. The contract carried no provision for the payment of interest other than that due upon the mortgages.
The price at which cut-over lands are sold depends, to a very considerable extent, upon the size or area of the tract sold, it being generally recognized that tracts of small size bring substantially larger prices than tracts of several thousand acres.
The respondent allowed an average value of approximately $5 an acre for the lands owned by the petitioner at March 1, 1913, a total of $163,000 for 32,531.55 acres.
On March 1, 1913, the petitioner owned the timber on 27,743.56 acres of land. The total timber owned, including by-products reduced to log scale and estimated in 1920, as of 1913, on a 100 per cent basis, was 223,295,000 feet.
The respondent allowed*3657 a value as at March 1, 1913, of $871,000, or $3.90 per 1,000 feet log scale.
The petitioner's timber was made up of the following:
| Species | Quantity | Percentage |
| M feet | ||
| Pine | 3,458 | 1.549 |
| Hemlock | 117,656 | 52.7 |
| Tamarack | 5,590 | 2.5 |
| Spruce | 2,103 | .942 |
| Balsam | 5,423 | 2.429 |
| Cedar | 2,592 | 1.161 |
| Total Softwoods | 61.281 | |
| Basswood | 15,034 | 6.733 |
| Ash | 1,875 | .84 |
| Birch | 41,641 | 18.648 |
| Elm | 9,990 | 4.478 |
| Maple | 17,033 | 7.664 |
| Oak | 635 | .28 |
| Butternut | 160 | .071 |
| Poplar | 105 | .005 |
| Total hardwoods | 38.719 |
Of the total of 223,295,000 feet, the saw timber amounted to 205,022,000 feet and the pulpwood, poles, posts and other by-products amounted to 18,273,000 feet.
*1232 These holdings consisted of over 70 scattered groups of a few forty-acre tracts each, with the exception of one large group located principally in T. 34, R. 8, which consisted of over 6,000 acres.
Prior to March 1, 1913, the petitioner entered into a contract with the Chicago, Milwaukee & St. Paul Railway Co. by the terms of which the Railway Company agreed to build approximately 10 miles of main logging railroad and certain spur tracks for the use of the petitioner in*3658 logging certain of the timber lands here under consideration. The petitioner agreed to furnish the right to way across its own lands. The spur tracks were to be constructed by the petitioner at its own cost, except that the Railway Company was to furnish the rails therefor. In consideration of the construction of the railway the petitioner agreed to ship all of its logs over the line of the Railway Company and to pay therefor the prevailing rates. In consideration of this the Company was to furnish cars, equipment, and transportation for the loaded cars.
The main line railroad called for in this agreement was constructed at a cost to the Railway Company of $110,000 and was known as the Long Lake Branch. The freight rate charged by the Railway Company from the northern tract of the petitioner's timber to the petitioner's plant at Merrill was from $1.60 to $1.75 per 1,000 feet log scale.
The operations of the petitioner from 1913 to 1925 showed the following amounts produced each year in log scale and lumber scale:
| Year | Log scale | Lumber scale | Overrun |
| Feet | Feet | Per cent | |
| 1913 | 9,976,210 | 14,845,805 | 48.8 |
| 1914 | 14,876,730 | 19,846,313 | 33.4 |
| 1915 | 8,947,190 | 12,383,925 | 38.4 |
| 1916 | 6,801,030 | 9,410,700 | 38.3 |
| 1917 | 3,157,630 | 4,345,601 | 37.3 |
| 1918 | 4,467,100 | 6,286,803 | 40.7 |
| 1919 | 4,813,520 | 5,893,848 | 22.5 |
| 1920 | 5,498,810 | 7,334,426 | 33.4 |
| 1921 | 4,543,000 | 5,673,681 | 25.0 |
| 1922 | (1) | (1) | |
| 1923 | 8,250,000 | 10,367,186 | 25.6 |
| 1924 | 9,982,540 | 12,711,489 | 27.3 |
| 1925 | 13,626,260 | 16,613,632 | 22.0 |
| Total | 94,940,020 | 125,713,407 | |
| Average overrun 1913 to 1925, inclusive | 32.4 |
The petitioner made the following statements in its questionnaire submitted to the Commissioner January, 1920:
When this corporation was organized in 1908, we fixed a value of $3.00 for hemlock and tamarac and $4.00 for all the other woods for depletion purposes and these figures have been used by us each and every year to date. There has of course been an increase in value and a carrying charge, for we have always figured the taxes on all real estate and timber as a carrying charge, *1233 have not deducted these taxes as an operating expense. We were aware that we were at liberty to fix a value as of March 1st, 1913, and also aware that since that date most operating companies have deducted all taxes as an operating expense. Owing to the many conflicting and confusing Treasury decisions and the fact that these decisions were entirely different at times than the decisions of the Wisconsin Tax Commissioner and that Court decisions in many instances did not agree with either, we thought best to adhere strictly to the same procedure that we had used before the law went into effect until such time as the matter was gotten down to a business*3660 basis, such as seems to be the intent of this questionnaire.
The estimate we have used for purpose of timber valuation was made by outside disinterested cruisers, except on a few descriptions as heretofore explained and we also desire to and did arrive at the stumpage values in the same way, figuring that our own figures might be prejudiced to a certain extent. In the summer of 1915, Mr. Marvin Rosenberry of Wausau, Wis., (now Associate Justice of the Supreme Court of Wisconsin) and Mr. A. T. Curtis, an attorney of Merrill, Wis., were engaged to make a friendly division between the B. Heineman Lumber Company of Wausau and this Company, of several thousand acres of land located within the confines of our tract. They were both men that had dealt in timberlands, were thoroughly posted in local conditions and they together made a careful investigation at that time to arrive at stumpage values to be used in making such division. They got confidential information from most of the operating companies in this vicinity. Their investigations were conducted in the summer of 1915, but at that time lumber and timber were lower and did not sell as readily or at as high a price as in 1913, *3661 this statement can be readily verified, but in making their inquiries they stated that they wanted to arrive at stumpage values under normal conditions not in boom or panic times, and their figures are the figures that we have used for the purpose of this valuation. Our own ideas of values were higher, we had hemlock at $3.50 per M feet in place of $3.00 as fixed herein and our average stumpage value was $4.17 in place of $4.02, as fixed herein. In fixing stumpage values, Curtis & Rosenberry had in mind a 100% basis and the estimate they used was on that basis as near as they could arrive at it.
The value of the petitioner's timber on March 1, 1913, was $937,839, which represents a unit rate of $4.20 a thousand for 223,295,000 feet.
OPINION.
GREEN: The respondent moved to dismiss the proceeding as to 1917 and 1918, upon the ground that as to those years the Board is without jurisdiction for the reason that no deficiencies were determined for those years. The motion is granted. See section 274(g) of the Revenue Act of 1926, and *3662 .
The issue of including in invested capital for the years 1919 and 1920 a part of the income and profits taxes for the years immediately preceding is decided adversely to the petitioner. See ; .
*1234 The respondent was in error in reducing the earnings available for distribution in 1920 by a tentative tax for the year 1920, in determining the amount of the dividends paid from surplus. See .
The petitioner contends that inasmuch as its lands vary in value as indicated by the sales prices ranging from $5 to $40 per acre, it is unfair to place an average value on all of the lands and compute the profit resulting from sale by using the average value as the basis. We feel that there is considerable merit in this contention, for obviously the March 1, 1913, value of 40 acres of land located adjacent to a thriving community with good roads and convenient access to schools, churches, stores, etc., was greater than*3663 the value of the lands not so fortunately situated, and consequently when this land is sold the profit thereon should be computed by using the actual 1913 value as the basis rather than the average value. A sale of this same parcel at its March 1, 1913, value may result in no actual profit, but if the average value is used in the computation of gain, an apparent taxable profit will result. We know of nothing in the statutes which requires the use of an average value as the basis under circumstances such as exist here. The petitioner's proof, while it sets forth three classifications of land and the estimated number of acres in each, does not give us the legal descriptions of the various tracts or parcels so classified, and for this reason it is impossible to apply the principle for which the petitioner contends, inasmuch as we can not determine from this record the actual March 1, 1913, value of the different parcels sold.
There are two major questions in the case, both relating to value, and of these we will first dispose of the one relating to value of the lands owned by the petitioner on March 1, 1913. The evidence upon this question is so confusing and so conflicting that*3664 we find it impossible to draw any definite conclusions therefrom and we therefore feel that the presumption of correctness which is attached to the Commissioner's determination of value has not been overcome, and accordingly affirm the valuation fixed by him in the amount of $163,000.
The second major question is as to the value of the timber on March 1, 1913. The evidence relating to this question is very voluminous and conflicting. In most of the instances the witnesses confine their answers to the value per thousand feet on March 1, 1913 The weight to be given to a witness's testimony as to the value per thousand feet obviously depends in part upon the factors which he had in mind at the time he gave his testimony as to value. For example, if the witness's testimony is hased upon the cruiser's estimate of the number of thousand feet in the tract, this value per *1235 thousand feet will be entirely different than if such value was based upon actual measure or mill tally taken as the boards actually came from the mill. In between these two places of measurement there are numerous others, such as the scale made at the time the trees are felled, which is known as the woods' *3665 scale; the scale taken at the landing before the logs are loaded on the cars, this being called the landing scale; the scale taken before the logs go to the mill, this being called the slip scale; and other types of scaling or measure not discussed in the record of this case. It is a matter of common knowledge among timber men that the mill scale or tally overruns the estimates as they were made in 1913 and prior years. The percentage of overrun, however, is a decidedly variable factor, depending, first, upon the accuracy of the cruiser, second, upon the type of scale or rule used, third, upon the timber which at the time of the cruise was regarded as merchantable, fourth, the closeness of the cut, and, fifth, the methods of manufacturing or milling the lumber. Unless the witness is testifying as an expert in response to hypothetical questions in which these variable factors are accurately specified, it is clear that his testimony is of little value until he has set forth the exact factors entering into his computation of value. In this case the situation is further confused by the fact that the overrun exceeded the normal overrun by approximately 15 per cent and by the further*3666 fact that this overrun was not consistent as to species of timber in that on the hemlock saw logs the cut exceeded the estimate by 10 per cent; on the hardwoods and pine the cut exceeded the estimate by 63 per cent; and on the pulp wood the cut was less than the estimate by 90 per cent. The cause of these variations from the average cannot be determined from the record. If they are due to closer cutting and a more complete utilization of the cut in the later years, they of course have little to do with the the value on March 1, 1913. If, however, they are due to increases in the original estimates made by the cruisers, they have much to do with the actual March 1, 1913, value.
The same difficulties are present in the case of comparable sales which one party or the other seeks to have used as the measure of value. The record in this case contains more or less complete evidence of many sales. In many instances this evidence was not sufficient to enable us to determine whether or not the sale was comparable and in only one instance was the evidence wholly complete, and as to that sale the individual who made it testified that in his judgment the sale price was in excess of the*3667 market value.
No effort has been made to summarize all of this voluminous and conflicting testimony. We have sorted it and weighed to as best we *1236 could and have arrived at a determination of value, and we hold that the value of the petitioner's timber on March 1, 1913, was $937,839. The petitioner and the respondent seem to agree that the amount of timber was 223,295,000 feet - applying these factors one to the other we arrive at a unit rate of $4.20 per thousand.
Because of the inordinate amount of time and effort expended upon this case in an attempt to arrive at a valuation of this timber, we feel impelled to say that our work would be far simpler and the likelihood of error in our valuations greatly reduced if qualified witnesses were placed upon the stand and asked to give their estimate of the value of the timber on a particular tract at March 1, 1913, rather than their value of the timber per thousand feet, and it is hoped that in the future the testimony will come in such a way that we will not be called upon to assume the factors which were in the mind of the witness at the time he testified as to value.
Judgment will be entered on 15 days' notice,*3668 under Rule 50.
Footnotes
1. Did not operate. ↩