*2129 1. March 1, 1913, fair market value of land determined.
2. Amounts paid to acquire property with which to fulfill a contract of sale held to be part of the cost of the property sold.
*387 This proceeding involves a redetermination of a deficiency in income tax for the calendar year 1922 in the amount of $13,931.71. The errors alleged in the original petition are (1) that respondent erroneously and illegally reduced the March 1, 1913, value of petitioner's land, which had been sold by it from $40 per acre to $15 per acre, and (2) that he erroneously and illegally disallowed as a deduction from petitioner's gross income the sum of $50,000, which represented a contractual liability incurred by petitioner. At the close of the hearing petitioner amended its petitioner to conform to the proof and claimed a March 1, 1913, value of the property sold of $60 to $65 per acre or such greater value as the Board might find, and, further, that if the Board should hold that the contractual liability*2130 of petitioner of $50,000 was not deductible in the year 1922, then that said amount be added to the cost of the property sold.
FINDINGS OF FACT.
Petitioner is a corporation, duly organized and existing under and by virtue of the laws of Idaho, with its principal office at Idaho Falls. Petitioner was incorporated in March, 1909, under the name of Idaho Falls Dry Farm Association, Limited. Its name was thereafter changed to Osgood Land and Livestock Company. Petitioner as party of the first part and Utah-Idaho Sugar Company, *388 as party of the second part, under date of April 15, 1920, entered into a written agreement wherein the petitioner agreed to sell and Utah-Idaho Sugar Company agreed to buy certain lands and water rights, the purchase price being $700,000 of which $140,000 was paid upon signing the contract, $150,000 by assuming a mortgage upon the property and the balance was agreed to be paid in nine equal annual installments. The contract called upon the petitioner to deposit deeds to the property in escrow pending payment of the full purchase price.
The Utah-Idaho Sugar Company paid the cash payment of $140,000 and took possession shortly after the making*2131 of the above contract all within the year 1920. Of the real estate referred to in the above contract petitioner acquired 3,800 acres prior to March 1, 1913, at which date it had a fair market value of $40 per acre.
Among the properties which petitioner contracted to convey were "five thousand (5,000) acre feet of stored water, the same being a storage right which the said party of the first part is acquiring for use upon the premises described in Group A."
There was organized about 1920 a corporation having a name similar to that of petitioner which will be referred to as the Wyoming Company. Certain of petitioner's stockholders held no stock in the Wyoming Company and certain stockholders of the Wyoming Company held no stock in petitioner, and others held stock in both. The Wyoming Company or certain of its stockholders acquired certain lands with water rights in two lakes in the State of Wyoming in the Jackson Hole country. The Wyoming Company had secured from the State of Wyoming a permit to enlarge the storage capacity of these two lakes, and it was from this source that petitioner expected to fulfill its contractual agreement with the Utah-Idaho Sugar Company to furnish*2132 that company 5,000 feet of stored water. To accomplish this purpose in its entirety it would have been necessary to erect dams and thereby flood a large tract of land and this in turn required the granting of an easement by the Federal Government. This the Wyoming Company applied for and prosecuted its application before the Interior Department. In the latter part of 1922 the Wyoming Company received information that its application would probably be denied. In the early part of 1923, petitioner caused an entry to be made on its journal in which water rights were debited $50,000, and the Utah-Idaho Sugar Company was credited with the same amount with the following explanation: "To set up a liability account for 5,000 acre feet of water to be furnished as set forth in paragraph 5, group B, page 1 of the sales contract. This has not yet been fulfilled, and as our present reservoir and storage application has been rejected, it is apparently *389 necessary to buy water at $10.00 per acre foot." Under date of May 14, 1923, the Department of the Interior rejected the application of the Wyoming Company.
About 1927, the Wyoming Company transferred to the Utah-Idaho Sugar Company, *2133 in satisfaction of the contract of the latter with petitioner, the property and water rights of the Wyoming Company in the Jackson Hole country, for which petitioner has agreed to pay $50,000.
OPINION.
PHILLIPS: One of the questions raised is the value on March 1, 1913, of certain lands then owned by the petitioner and sold in 1920, the profits being reported upon the installment sales basis. The testimony of several qualified witnesses supports the valuation placed upon these lands by the petitioner in preparing its tax return. We are of the opinion that the testimony of some of the witnesses to a greater value must be discounted as attributable to subsequent events.
The petitioner also claims the right to deduct $50,000 set up on its books in 1922 as the cost of acquiring certain water rights with which to fulfill its contract. We gather from the testimony that at the time this contract was made certain stockholders of the petitioner and others had organized a Wyoming corporation, purchased 160 acres of land and had acquired water rights in two small lakes. They hoped to be able to erect dams to store a much greater amount of water. They secured permission of the State*2134 of Wyoming and asked for a permit from the Federal Government, the lakes being in a national forest preserve. The petitioner was to purchase from the Wyoming Company the water rights necessary to fulfill its contract. It did not set up on its books any liability from it to the Wyoming Company. At the close of 1922 it appeared that the Wyoming Company would be unable to acquire all of the necessary rights and at that time the petitioner set up on its books a reserve for a liability to the Utah-Idaho Sugar Company. After 1922 that company accepted a conveyance from the Wyoming Company of its land and water rights in discharge of the obligation of the petitioner. The petitioner agreed to pay $50,000.
We see no basis on which the cost of these rights can be deducted in 1922. The taxpayer had never expected to acquire these without cost, but to purchase them from the Wyoming Company. It lost no property in 1922 when it appeared that the Wyoming Company would be unable to acquire the necessary rights. What happened was that petitioner contracted to sell property which it owned and some which it expected to acquire and delivered a deed for that which it owned. The consideration*2135 was to be paid in installments and it elected to *390 report the transaction on that basis. The price required to purchase that which the petitioner did not then own was no more or less than a part of the cost of the property sold. It should be so treated in computing the profit from the sale. ; .
Decision will be entered under Rule 50.