*2553 1. Cost of real estate allocated, for purpose of computing depletion allowance, between residual value of land and value of clay content.
2. Held, that where a depletable asset has been fully exhausted, invested capital should be reduced by the amount of the cost and not by the amount of the total of the depletion allowances.
3. Evidence insufficient to warrant an increase of invested capital by reason of the transfer to the corporation of certain assets.
*589 In this proceeding the petitioner seeks a redetermination of its income and profits taxes for the calendar year 1920 for which the Commissioner determined a deficiency in the sum of $2,196.90.
Three issues are involved: (1) The residual value of a certain piece of property after the removal of the clay thereon, such value to be used in determining what portion of the cost of such property should be returned through the depletion allowance; (2) whether the Commissioner erred in reducing invested capital by the sum of $9,533.33, representing depletion allowed on a clay bank which*2554 was exhausted prior to the year in controversy, instead of reducing it by the amount of $5,400 which was the cost of the clay bank; and (3) whether the sum of $2,377.81, alleged by the petitioner to be the value of certain assets turned over to the petitioner by the original stockholders but not entered on the books of account until a later date, should be included in invested capital.
FINDINGS OF FACT.
The petitioner is a corporation engaged in the manufacture of brick in Pittsburgh, Pa. Its manufacturing plant and clay banks, acquired at various times from 1910 to 1921, are situated in the vicinity of the intersection of Bedford and Duff Streets, approximately 1 1/2 miles from the business district of the city.
In 1910 and 1911, two tracts of land were purchased. Upon one, acquired at a cost of $7,533.33, was erected the manufacturing plant. The other was acquired for its clay content at a cost of $5,400. Prior to the year in question all of the clay had been removed from this piece of property. The petitioner had claimed, and the Commissioner had allowed, depletion thereon in the total amount of $9,533.33. The respondent, in making the adjustment to invested capital*2555 of the petitioner which became necessary by reason of the exhaustion of this asset, reduced invested capital by the amount of the depletion theretofore allowed, namely, $9,533.33.
In 1919 the petitioner purchased what was known as the Atterbury tract containing .87 acre at a cost of $7,500. The parties hereto have agreed upon finished brick as the unit of measurement and that the total estimated production from this tract will be 11,700,000 brick. Upon the tract is located a frame building which is now practically worthless. The clay from a portion of the tract has been removed, with the result that in some places the contour of the ground has been left some 18 inches below the street level. In some places rock or boulders have been encountered making it impracticable to go lower. The forward portion of the tract, upon a part of which the house is situated, has not been worked, and if a quantity of clay sufficient to manufacture the estimated number of brick to be *590 gotten from the clay bank is to be recovered, it will be necessary in some places to excavate to a depth of from 20 to 25 feet. In his computation of the annual allowance for depletion, the respondent, *2556 after determining that of the total cost of $7,500, $6,375 should be allocated to residual value, allowed depletion upon the basis of the cost of clay measured by the difference between this amount and the cost of the tract. The residual value of the tract after the removal of the clay, we find to be $3,000.
In 1911 additional capital stock of the par value of $11,900 was issued. To offset this amount upon the books, the real estate account was written up $5,970 and the furniture and fixtures account was written up $2,377.81, and the balance in the amount of $3,552.19 was charged against profit and loss. The respondent regarding the write-ups on real estate and fixtures as representing appreciation in value, in his computation of invested capital, reduced these amounts to cost and charged the difference to good will. Seven wagons, eight sets of harness, and some secondhand lumber and brick, which were subsequently appraised at $2,300, were turned over to the corporation by two of its stockholders prior to the issue of the additional capital stock, above referred to.
OPINION.
GREEN: The first issue is as to the residual value of the Atterbury tract after the removal of*2557 all of the clay. The respondent adheres to his original valuation of $6,375 and the petitioner contends that after the clay has been removed the tract will be practically worthless. The evidence convinces us that the contention of neither party is correct as to the residual value of the property. Confronted with this situation, we have weighed the evidence - meager and conflicting as it is - and fixed a value of $3,000.
The respondent reduced petitioner's invested capital during the exhaustion of a certain clay bank, by the amount of $9,533.33, which amount equaled the total of the allowances for depletion theretofore made, instead of by the amount of $5,400 which was the actual cost of the exhausted asset. We assume that the discrepancy between the total of the depletion allowances and the cost results from the fact that the March 1, 1913, value of the depleted asset exceeded the cost. We think the Commissioner's action in this regard is erroneous. In computing invested capital, this asset was, during its existence, properly included at its cost and there is no reason upon its exhaustion for reducing invested capital by more than this amount. In the case of assets acquired*2558 prior to March 1, 1913, depletion for invested capital purposes and depletion for the purpose of computing the annual deduction from income may be two totally different *591 things and should never be confused. We take it that the respondent would not contend, if the depletion allowances were less than cost, that the invested capital should be reduced only by the amount of such depletion allowances. This is but another example of fact that the computation of invested capital may not be made to depend entirely upon the theory of the income-tax statutes.
With reference to the third issue in this proceeding, it would appear that additional stock was issued; a portion, it is now contended, was properly issued for assets which were acquired by the petitioner from two of its stockholders without compensation. The records of the petitioner corporation clearly indicate that the additional stock was issued for a totally different purpose. Nor are we satisfied that the stockholders in fact contributed property worth $2,300 in addition to that for which stock had been theretofore issued. Under such circumstances we must affirm the Commissioner.
Judgment will be entered on*2559 15 days' notice, under Rule 50.
Considered by STERNHAGEN and ARUNDELL.