*2532 1. STATUTE OF LIMITATIONS. - The five-year period for assessment and/or collection of taxes for the year 1918 having expired prior to issuance of the deficiency notice without assessment or collection having been made, and there being no extension of the statutory period of limitation, held, that the assessment and collection are now barred.
2. CONTRACTS - VALUE. - Value of stock issued for contracts determined to have been par, and contracts held depreciable on basis of that value over their terms.
*696 These proceedings, which have been consolidated for hearing and decision, result from determinations of deficiencies in income and profits taxes as follows:
| Docket No. | Year | Deficiency |
| 9824 | 1918 | $6,675.40 |
| 13183 | 1920 | 11,447.93 |
| 24997 | 1922 | 2,211.68 |
| 24997 | 1923 | 775.76 |
| 21,110.77 |
Errors alleged by amended petition in Docket No. 9824 are:
1. Use of improper comparatives and an improper rate of tax in computing the petitioner's excess-profits taxes under section 328 of the Revenue Act*2533 of 1918 for the year 1918.
2. Failure to allow deductions for exhaustion of two contracts acquired for capital stock.
3. Exclusion from invested capital for 1918 of the entire amount of taxes refunded for the year 1917 subsequent to filing of the appeal.
4. Failure to hold that assessment and collection of the alleged deficiency for 1918 is barred by the statute of limitations.
Errors alleged in the petition in Docket No. 13183 are as follows:
1. Denial of the deduction of $29,900, alleged depreciation of certain contracts.
2. Failure to compute the petitioner's profits taxes for 1920 under the provisions of section 328 of the Revenue Act of 1918.
Errors alleged in the petition in Docket No. 24997 are as follows:
1. Denial of the deduction of $6,083.93 for the year 1922, as depreciation of certain contracts.
*697 2. Denial of the deduction of the correct amount of a net loss sustained during 1921, from net income for the years 1922 and 1923.
By agreement of counsel the hearing was limited in the first instance to the issues other than those relating to the rate of profits tax under section 328 for 1918, and the question of the right to special*2534 assessment for 1920.
FINDINGS OF FACT.
The petitioner is a New York corporation with its principal place of business at Binghamton.
For several years prior to 1917 Edward E. Powell, president of the Powell Coal Co., had been conducting experiments, with the assistance of engineers and technical advisors, in an attempt to devise a satisfactory method for use of the semianthracite coal produced in the Bernice Coal Field, of Sullivan County, Pennsylvania. Semianthracite is a coal having a degree of hardness intermediate of bituminous and anthracite coals. The Bernice Field was at that time the only commercially producing semianthracite field in the United States and its market was almost entirely local.
The object of the experiments mentioned was to devise formulas under which the Bernice coal would be adaptable to any boiler room conditions. Boiler room conditions are dependent upon length of the stack, draft, the load carried, and many other factors. Powell believed that under conditions adapted to its use semianthracite coal would have a market value beyond that of straight anthracite, steam sizes, and also beyond that of straight bituminous coal.
Through experimental*2535 uses of the semianthracite in various plants such as the Binghamton State Hospital, the Binghamton Railway Co., the Endicott-Johnson Co., Cornell University, the International Paper Co., the International Salt Co., and in textile mills around Utica, N.Y., Powell had developed, several years prior to 1917, formulas for the satisfactory use of the Bernice Field coal.
The Bernice Region had an area of approximately 20 square miles, in which there were only two large producers, namely the Connell Anthracite Mining Co. (hereinafter referred to as the Connell Company) and the Northern Anthracite Coal Co. (hereinafter referred to as the Northern Anthracite Co.). Upon successful completion of his experiments with the use of semianthracite coal Powell undertook to obtain the exclusive selling rights to the entire output of "screenings" of the Bernice Region mines of the two companies mentioned. After negotiations extending over approximately five years he entered into a contract with the Connell Company on January 15, 1917, for the purchase of the latter's entire output of "screenings." March 7, 1917, he entered into a similar contract with the Northern Anthracite *698 Co. Each*2536 of the companies reserved the right to complete deliveries already contracted for. "Screenings," by the terms of these contracts, was understood to include all coal of smaller size, breaker preparation, than "pea" coal. The contracts related only to the Bernice Region mines of the companies.
The contract with the Connell Company provided payment of $1 per long ton, f.o.b. the mines, with increase of the basic price in the event of increased costs of mining labor (to the extent of 40 per cent of such increased cost) and further, that if at any time on resale the purchaser secured a price greater than 10 cents per ton above the then prevailing basic price, such excess would be equally divided with the Connell Company. Under further provisions of the contract Powell made an advance of $10,000 to the Connell Company, to be held by it against various contingencies or retained as liquidated damages in event of breach of the contract. Screenings in bunker storage at the mine at the time of execution of the contract were covered by the instrument. The term of the contract was for five years from date, with an option of renewal for an additional five-year period contingent upon faithful*2537 performance.
The contract with the Northern Anthracite Co. provided for payment of $1.25 per long ton, f.o.b. the colliery, with increase of this basic price in the event of increased cost of mining labor (to the extent of 50 per cent of such increased cost) and further, that if at any time on resale the purchaser secured a price greater than $1.25 per long ton, then 30 per cent of such increase would be paid to the Northern Anthracite Co. Upon execution of the contract Powell made an advance of $10,000 to the Northern Anthracite Co. to be held by it against various contingencies and retained as liquidated damages in event of breach of the contract. Powell further agreed to furnish a reputable surety bond in the sum of $50,000, conditioned upon payment of any sum becoming due under the contract. Such a bond was accordingly posted. The term of this contract was five years from date, with the option of renewal for five years thereafter.
Neither of the vending companies agreed to furnish any specified quantity of screenings, each undertaking to furnish only such screenings as passed through its breaker, subject to the reservations above noted.
Each contract provided that, *2538 subject to approval of the company involved, Powell could assign it to a company organized or to be organized by him, the assignment in each instance to be subject to all conditions of the contract.
The first meeting of the board of directors of the Bernicedale Coal Co., the petitioner herein, was held on March 9, 1917. Powell made the following written offer to the petitioner at that meeting, to wit:
*699 MARCH 9TH, 1917.
BERNICEDALE COAL COMPANY, INC.
Binghamton, N.Y.
GENTLEMEN: I hereby offer to sell, assign, transfer, and turn over to your corporation certain contracts for the sale of the entire screenings output from the mines of the Connell Anthracite Mining Co. dated Jan. 15th, 1917, and a similar contract with the Northern Anthracite Coal Co. dated Mch. 7th, 1917 and I also offer to assign to you the deposits which I now have with each of these companies, viz: Ten Thousand Dollars with each, under the terms of said contracts, in consideration of your issuing to me or to my order 995 shares of the capital stock of the Bernicedale Coal Co., Inc., and in further consideration of the Bernicedale Coal Co., Inc., assuming and agreeing to pay two certain promissory*2539 notes of Ten Thousand Dollars each, dated February 17th, 1917, and February 20th, 1917, made by me and now held by the First National Bank of Binghamton, N.Y.
Respectfully,
EDW. E. POWELL.The following quoted resolution was thereupon offered and adopted:
On motion, it was unanimously ordered that Mr. Powell's offer be spread upon the minutes.
Mr. Roberts offered the following and moved its adoption:
RESOLVED, that Bernicedale Coal Co. does hereby accept the offer of Mr. E. E. Powell for the sale and transfer to this company of the Connell Anthracite Mining Co. contract and of the Northern Anthracite Coal Co. contract, together with the deposits of Ten Thousand (10,000) Dollars each made by him with said companies; and be it further
RESOLVED, that in consideration of the foregoing this company hereby assumes and agrees to perform said contracts; and also hereby assumes and agrees to pay two certain notes for Ten Thousand (10,000) Dollars each, made by Mr. E. E. Powell, bearing date respectively, February 17, 1917, and February 20, 1917, now held by the First National Bank of Binghamton, N.Y., and that the President and Secretary be authorized and directed to execute*2540 and deliver the writings necessary for the purposes aforesaid:
And that the President and Secretary be and they hereby are authorized and directed to issue 995 shares of the capital stock of this company to Edward E. Powell or to such person or persons as he may order and direct.
Unanimously carried.
The contracts were thereupon assigned to the petitioner, which issued 995 shares of its capital stock to Powell for them. The par value of the stock so issued was $99,500. The formulas developed for the use of semianthracite coal were donated to the petitioner by Powell. Total assets of the petitioner then consisted of the contracts and formulas and $500 in cash. It immediately received a bank loan of $20,000 and during 1918 or 1919 received a similar loan of $50,000. The only business of the petitioner was the sale of coal acquired under these contracts.
march 10, 1917, the petitioner entered into a contract with the Powell Coal Co., whereby it agreed to sell and the Powell Coal Co. *700 agreed to buy annually, for a period of five years, at least 100,000 and not to exceed 150,000 gross tons of "Lopez or Bernice Scgs," at $2.75 per gross ton f.o.b. the mines. The*2541 fair market value of Bernice screenings on March 10, 1917, was $3 per ton.
May 21, 1917, the petitioner entered into a contract with the Cayuga Power Corporation for the sale of 15,000 gross tons, Bernice screenings, at $4 per ton f.o.b. the mines. August 14, 1917, the petitioner sold to Wickwire Brothers, of Cortland, N.Y., 12,000 to 15,000 gross tons of "Lopez or Bernice Screenings" at $3.25 per ton at the mines.
In March, 1917, the Connell Company was producing 400 tons of Bernice screenings per day and it had in storage screenings accumulated in prior years to the amount of 50,000 or 55,000 tons. The Northern Anthracite Co. was then producing between 250 and 300 tons of Bernice screenings per day and it had in storage about 30,000 tons of screenings produced in prior years.
The total tonnage available to the purchaser under the contracts of January 15 and March 7, 1917, was about 150,000 tons of fresh mined coal annually and the total tonnage available during the five-year terms of the contracts was more than 750,000 tons.
Powell was the only active officer of the Bernicedale Coal Co. When that company, on March 10, 1917, contracted to sell almost its entire supply*2542 of Bernice screenings to the Powell Coal Co. he was commanding officer of a regiment of the New York State National Guard and about to be ordered to active service. He believed that before he entered active service the business of the Bernicedale Coal Co. should be settled on a permanent basis so far as possible. At the time the possibility that the United States would enter the war was generally known and it was believed that such action would result in an increased price for coal.
In the petitioner's capital-stock-tax returns for the calendar years 1917, 1918, 1919, the contracts of January 15, and March 7, 1917, were declared to have a joint value of $20,000.
Anthracite and bituminous coal are graded on different scales in the industry, each according to size. There is no recognized scale of sizes of semianthracite coal. The description "screenings" is a term used in relation to anthracite coal. "Screenings" of semianthracite coal produced in the Bernice Region are comparable in size to steam sizes of anthracite coal, classed as buckwheat, rice, boiler, and barley sizes. The average price per ton at the mine of the four sizes of anthracite coal last mentioned, as stated*2543 in an issue of "Coal Age," is a magazine devoted to the coal industry. ton. "Coal Age" is a magazine devoted to the coal industry.
Professional paper 100-A, entitled "The Coal Fields of the United States," published by the Department of the Interior, through the *701 United States Geological Survey, under date of February 24, 1917, and revised and republished April 27, 1922, states in the revised edition in regard to the "ash" content of certain coals:
Analysis of representative coals of the United States -
* * *
| Pennsylvania | Ash |
| Anthracite regions anthracite | 7.8 |
| Anthracite regions anthracite | 5.9 |
| Sullivan County, semianthracite | 11.7 |
The figures given represent the per cent of ash content. The ash content of samples taken from a mine in different years at the points then being worked may vary.
In response to an inquiry relative to its contract with Powell, dated January 15, 1917, the Connell Company by letter of March 19, 1928, advised the respondent "that the contracts in question were regularly renewed, the last expiration date being March 31, 1928."
By letter of March 19, 1917, the Northern Anthracite Co. advised the respondent that*2544 the option provided in its contract with Powell, dated March 7, 1917, "was exercised for the additional five years, but we have sold no screenings to the Bernicedale Coal Company since before the anthracite suspension of September 1, 1925."
The fair market value of the two contracts received by the petitioner from Powell on March 10, 1917, in exchange for $99,500 par value of its capital stock was, jointly, not less than $99,500. The stock so issued was worth par.
Subsequent to the filing of the original petition in Docket No. 9824 the respondent held that for the year 1917 the petitioner had no invested capital or not more than a nominal capital, and thereupon refunded to the petitioner, as taxes overpaid for the year 1917, the amount of $38,094.70.
The petitioner's income-tax returns for the calendar years 1918 and 1920 were properly filed April 16, 1919, and March 12, 1921, respectively. Each of these returns claimed a deduction for exhaustion of the petitioner's contracts with the Connell Company and the Northern Anthracite Coal Co. in the amount of $19,500, based upon the par value of the stock issued for such contracts.
The respondent's letter advising the petitioner*2545 of the determination of a deficiency for the year 1918 was mailed to the petitioner October 23, 1925. The respondent's answer to the amended petition in Docket No. 9824 was filed May 6, 1928. It "admits that the alleged deficiency for 1918 has not been collected or assessed to this date."
The petitioner sustained a net loss for the year 1921. So much of the deduction which it claimed on its returns for 1922 and 1923, by *702 reason of the said net loss, as did not result from disallowance of alleged exhaustion of the contracts acquired March 9, 1917, has been allowed as a deduction by the respondent.
OPINION.
LOVE: These proceedings present two primary questions for our determination. They are, first, whether or not assessment and collection of the alleged deficiency for the year 1918 is barred by the statute of limitations; and, second, the fair market value, if any, of the 995 shares of its capital stock issued by the petitioner in return for Powell's assignment of two contracts to it. In the event that our decision on the first question is adverse to the petitioner, we must also consider the alleged error in excluding from invested capital for 1918 a prorated*2546 portion of the refund of taxes for the year 1917.
Upon hearing the petitioner moved for leave to amend its pleadings to conform to proof in respect of the March 9, 1917, value of two contracts involved. Motion is granted and the pleadings will be considered as amended accordingly.
The petitioner's income-tax return for the year 1918 was properly filed April 16, 1919. On October 23, 1925, the respondent issued a deficiency letter to the petitioner in which he determined a deficiency for the year 1918 in the amount of $6,675.40. The petitioner's appeal with respect thereto was duly filed with the Board December 15, 1925. The deficiency had not been assessed or collected on March 6, 1928. Under section 277(a)(3) of the Revenue Act of 1926, the time within which any deficiency in taxes for 1918 could be assessed expired (April 16, 1924) long prior to the time when the respondent issued his deficiency letter on October 23, 1925. There is no evidence of conditions which would have prevented the tolling of the statute. No deficiency for the year 1918 can be assessed or collected now. *2547 ; ; see, also, ; ; and .
To establish the value of the contracts received on March 9, 1917. in return for $99,500 par value of its capital stock, the petitioner has offered a history of the circumstances under which Edward E. Powell acquired these contracts and transferred them to it; evidence of the resale price of the coal purchased under them; expert testimony on the fair market value of Bernice screenings covered by the contracts and similar evidence of the fair market value of the contracts when acquired by it.
It appears that for several years prior to 1917 Powell had conducted experiments to develop formulas for the satisfactory use of *703 the semianthracite coal produced in the Bernice Region. After the expenditure of approximately $60,000, formulas were devised under which the coal could be used for steam purposes in competition with anthracite and bituminous coals.
Semianthracite coal was produced only in the Bernice*2548 Region and had theretofore been restricted to local markets. The coal field was a small one, in which only two large producers operated. After prolonged negotiations Powell secured from these two operators contracts (hereinafter called "operators' contracts") giving him control for five years of virtually their entire production of screenings, which is the size of semianthracite used for steam purposes.
March 9, 1917, Powell transferred the operators' contracts to the petitioner which issued 995 shares of its capital stock for them. The formulas above mentioned were also transferred to the petitioner. By these contracts the petitioner acquired the right to purchase approximately 150,000 gross tons of Bernice screenings annually at variable base prices, plus a percentage of the price received on resale in excess of the base price. Each contract was for a term of five years subject to renewal for a like term.
Within 24 hours after acquiring the operators' contracts the petitioner contracted to sell 100,000 gross tons annually of "Lopez or Bernice" screenings at $2.75 per ton f.o.b. the mines. This price was about $1.50 higher per ton than the cost of the coal to the petitioner*2549 at that time, and quite evidently permitted the petitioner a considerable profit even after the required percentage of the resale price was paid the operators. Two subsequent sales in 15,000 ton lots brought $3.75 and $4 per ton. It should be noted that the petitioner bought and sold this coal f.o.b. the mines without having to handle it at any point.
The largest of the resale contracts above described was entered into with the Powell Coal Co. In , we held that this contract had a fair market value of $25,000 to the petitioner therein on March 10, 1917.
Relying upon the facts recited, and others appearing in our findings, the petitioner contends that the operators' contracts acquired by it had a value in excess of the par value of the stock issued for them. It claims such value for purposes of computing a deduction for exhaustion of the contracts annually over their terms. The respondent denies any value in the contracts.
The petitioner has offered the expert testimony of four men to establish the March 9, 1917, fair market value of the contracts now under discussion. Edward E. Powell, president of the petitioner and moving*2550 spirit in the whole project, testified that in his opinion the contracts were worth at least $250,000 when acquired by the *704 petitioner. A. J. Parsons, a banker of long experience, a stockholder of the petitioner and acquainted with its assets, testified that in his opinion the stock of the petitioner was worth "more than par" when issued. The assets at that time consisted of the operators' contracts, the formulas, and $500 in cash. Lloyd B. Cornell, a witness with 25 years experience in various phases of the coal business, retrospectively appraised the contracts as worth approximately $150,000 each on March 9, 1917. Alfred Hawke, a witness having about 15 years experience in the coal business, retrospectively appraised the contracts as having a value between $275,000 and $300,000 on March 9, 1917.
The petitioner has offered the contracts with the Cayuga Power Corporation and Wickwire Brothers, together with testimony of its witnesses, to establish the fair market value per ton to consumers, of Bernice screenings on March 9, 1917. The respondent in rebuttal has attempted to establish the fair market value of comparable sizes of anthracite. We believe that the fair*2551 market value of the coal covered by the contracts involved was not less than $3 per ton on March 9, 1917. This is material to our determination of the value of the contracts.
The respondent's brief is largely devoted to impugnment of the motives of the petitioner's witnesses. We consider it to have more rhetorical interest than persuasiveness. So far as the petitioner fails to establish the maximum asserted value of the contracts, its failure is due to our belief that the opinions of value offered, two of which are admittedly retrospective, have been predicated upon incomplete or hazily recollected information. We think it clearly evident however that the contracts had a considerable value, but we are unable on the whole record to determine that value with certainty. It is nevertheless our opinion that when acquired by the petitioner the contracts had such value that the stock issued for them was worth not less than its par value, which is $99,500. The petitioner is entitled to deductions for exhaustion of the contracts in annual amounts based upon this sum. Strong, Hewat & Co., 3. B.T.A. 1035, and *2552 .
As there has been no allocation of value to the contracts individually, we believe that depreciation on the entire value allowed should be computed on the basis of the term last expiring, that is, on the term of the Northern Anthracite Company contract.
Petitioner assigned as error the Commissioner's refusal to compute the profits tax for 1920 under the provisions of section 328 of the Revenue Act of 1918. By agreement of counsel, hearing upon this *705 issue was postponed until the determination by the Board upon other issues relating to that year. Our determination in respect of other issues as to 1920 may have the effect of eliminating the claim that upon the basis of the Commissioner's determination there were abnormalities for that year which entitled petitioner to a determination of its profits tax under section 328. The parties are therefore directed to file a computation of the tax liability for the years 1920, 1922, and 1923, in accordance with the determination herein, and if the petitioner desires and so moves, further hearing will be had upon the issue as to the abnormality for 1920. Otherwise*2553 judgment will be entered holding the deficiency for 1918 barred by the statute of limitation and judgment as to 1920, 1922, and 1923, will be entered under Rule 50.