*4050 1. The Board has no jurisdiction of this proceeding for the years 1914 to 1917, inclusive.
2. The evidence herein is insufficient to show that the Commissioner erred in his determination of the deficiencies for the years 1919 and 1920.
*690 This appeal is from the determination of deficiencies and overassessments in income and profits taxes set forth in a deficiency letter dated February 10, 1925, as follows:
| Deficiency | Overassessment | |
| 1914 | $46.86 | |
| 1915 | $3.00 | |
| 1916 | 21.00 | |
| 1917 | $2,882.07 | |
| 1919 | 13,563.75 | |
| 1920 | 39,517.43 |
*691 The additional taxes for the years 1914 to 1917, inclusive, were assessed some time prior to January 27, 1925, under the provisions of section 274(d) of the Revenue Act of 1924. No claim for the abatement of such additional tax or any part thereof has been filed by the taxpayer.
FINDINGS OF FACT.
The taxpayer was, during its existence, a California corporation with its principal office at San Francisco. It was dissolved in the year 1922.
For a number of years prior to 1913 the*4051 Stearns Lumber Co. of California, had been conducting a lumber manufacturing business at Wendling, now Navarro, Calif., where it owned a lumber-manufacturing plant consisting of a sawmill, planing mill, shingle mill and dry kiln, fully equipped with machinery, belts, tools, supplies and apparatus thereto belonging, a town site including a store, hotel and tenements, situated on 480 acres of land which it owned in fee, and a logging railroad with equipment and right of way therefor, all of which is hereinafter referred to as the Stearns plant. The Stearns Lumber Co. also owned certain timber lands in fee and the timber rights on other lands.
On November 22, 1913, a written contract was entered into between the Stearns Lumber Co., party of the first part, and W. A. Dusenbury, E. T. Dusenbury, R. T. Buzard and H. B. Hickey, parties of the second part. The material provisions of the contract are:
WITNESSETH: That whereas the said party of the first part is now the owner of a lumber manufacturing plant located at Wendling, County of Mendocino, State of California, in part consisting of a saw mill, planing mill, shingle mill, dry kiln, fully equipped with machinery, belts, tools, *4052 supplies and apparatus thereto belonging, also a complete logging equipment in part consisting of railroad, rails, ties, bridges, locomotive, cars, other rolling stock, donkey engines, yarders, cables, blocks, tools supplies and live stock; and
WHEREAS, said party of the first part part is also the owner of rights of way, water rights and other privileges, easements and agreements necessary and useful to properly carry on, operate and conduct the said lumbering plant in all its branches, and is also the owner of a store stocked with merchandise, located at said Wendling; and
WHEREAS said party of the first part is the owner in fee of all those certain lots, pieces and parcels of land, with the buildings, and improvements thereon, and the appurtenances thereto belonging, situate, lying and being in the said County of Mendocino, State of California, bounded and particularly described as follows, to-wit:
* * *
WHEREAS said party of the first part is the owner and entitled to the possession of all of the timber on those certain lots, pieces and parcels of land, situate, lying and being in said County of Mendocino, State aforesaid, bounded and particularly described as follows, *4053 to-wit:
* * *
WHEREAS *692 said party of the first part has the right to and may sell, assign and transfer said last mentioned timber and the right to manufacture and use the same, and all of its, said party's of the first part, rights therein and thereto; and
WHEREAS said party of the first part is the owner in fee of the lands upon which said store, mills and lumber and manufacturing plant are located; and
WHEREAS said party of the first part is desirous of having the merchantable redwood, pine and fir timber upon all of the hereinbefore specifically described lands removed and manufactured into lumber and timber products, and put to other commercial uses, upon the terms and for the prices hereinafter set forth; and said parties of the second part are desirous of securing, for the price and upon the terms herein mentioned, said merchantable redwood, pine and fir timber, for the purpose of manufacturing the same into lumber and timber products and putting the same to other commercial uses;
NOW, THEREFORE, in consideration of the premises, and of other good and valuable considerations from each of the parties hereto to the other moving, said parties hereto do hereby*4054 agree, each with the other, as follows, to-wit:
* * *
(2nd) Said parties of the first part agree, simultaneously with the execution of this agreement, the consideration thereof to be the execution of this agreement by the said parties of the second part, to properly convey to and absolutely vest in, said parties of the second part, conveying a good and merchantable title thereto, free from and clear of all liens or encumbrances of every kind other than what may arise from paragraph "26th" hereof, the lumber manufacturing plant located at Wending, California, in part consisting of a saw mill, planing mill, shingle mill, dry kiln, fully equipped with machinery, belts, tools, supplies and apparatus thereto belonging, also logging equipment, in part consisting of donkey engines, yarders, cables, blocks, tools, supplies, also live-stock, buildings and all other personal property and fixtures not provided for in paragraphs "1 & 3" hereof, which are now owned by the parties of the first part and were formerly used or intended to be used by said first parties in the lumbering operations at said Wendling, Mendocino County, California, also water rights and contracts and agreements of whatever*4055 nature, owned or controlled by the parties of the first part, which in the opinion of the parties of the second part are necessary or desirable for the proper operation of the lumber manufacturing plant or railroad located at said Wendling.
(3rd) The said parties of the first part simultaneously with the execution hereof, and also in consideration of the execution of this agreement by said parties of the second part, to properly convey to and absolutely vest in the parties of the second part, conveying a good and merchantable title thereto, free from and clear of all liens or encumbrances of every kind, other than what may arise from paragraph "26th" hereof, the said railroad, rails, ties, bridges, locomotive and other rolling stock.
(4th) Said party of the first part simultaneously with the execution hereof, and also in consideration of the execution of this agreement by the said parties of the second part, to properly convey to, and absolutely vest in the parties of the second part, conveying a good and merchantable title thereto, free from and clear of all liens or encumbrances of every kind, over than what may arise from paragraph "26th" hereof, all those certain lots, pieces*4056 or parcels of land, together with the buildings thereon, situate, lying or being in said County of Mendocino, State of California, and particularly described as follows, to-wit:
* * *
(7th) *693 Said parties of the first part agree to and do hereby give said parties of the second part, their agents and employees, possession of all the herein described land upon which said first party owns the timber, together with all rights of way and other easements over said property which said first party may own, have selected, or have the right to select, it being understood, however, that the said first parties are only to convey such rights as they may own or control.
(8th) Said party of the first part agrees to and does hereby give said parties of the second part, their agents and employees, the exclusive possession of all the hereinbefore described lands, owned by them, together with the free and uninterrupted right to entry thereon and ingress and agress thereto and therefrom, together with the right to cut and remove all the timber, wood or bark on said described lands, and the right to haul, over said land, any and all other lumber, timber, wood or bark, or the products thereof, *4057 adjacent to the railroad as the same is now or may hereafter be built on said described lands or any part thereof, and the right to establish and maintain on said lands, logging, and lumbering camps, and to do any and all things necessary to cut, log, remove and manufacture said timber into lumber and lumber and timber products, during the continuance of this agreement, and do further agree, before they become delinquent, to pay all taxes which may be levied against or upon all the particularly described property mentioned herein, during the continuance of this agreement, excepting upon the property which is to be conveyed to the second parties, as mentioned in paragraphs "4th and 5th."
(9th) Said parties of the second part agree, at their own cost and expense, to cut the merchantable redwood, pine and fir timber upon all of the hereinbefore described lands and where practicable into logs ten feet and over in length, and to remove and manufacture the same into lumber and lumber and timber products, and to pay said party of the first part, for logs so cut and removed, which said party of the first part agrees to accept, the following prices, to-wit: For merchantable redwood ten (10) *4058 feet and over in length, $2.50 per thousand feet; for merchantable pine and fir twelve (12) feet and over in length $1.50 per thousand feet; for merchantable pine and fir ten (10) feet in length $1.00 per thousand feet; said prices to be based upon, and ascertained from, board measurements, that is to say, upon the number of feet of merchantable lumber of above lengths actually manufactured from such logs, and to make payments therefor on the 15th day of each month for the number of feet shipped the previous calendar month, and upon receipt of said payment the parties of the first part will immediately furnish the parties of the second part with a receipt for the money received and said parties of the first part will further upon the first day of each year or as soon thereafter as yearly settlement has been made between the parties hereto, furnish said second parties with a receipt for all moneys received the previous year which receipt shall state that there has not been any default by the parties of the second part and shall be of such legal form as is required under the laws of the State of California, as is necessary to enable the parties of the second part to have the same recorded.
*4059 * * *
(12th) Said parties of the second part agree, upon the delivery of the property which by the terms hereof is to be conveyed to them to insure and keep insured, at their own expense, the said mills, mill plants, buildings and machinery, in the sum of at least Seventy Thousand ($70,000.00) Dollars, provided the rate made by the Board Companies will not exceed a rate or premium of more than One and 57/100 Dollars ($1.57) for each One Hundred Dollars of such insurance, it being understood that the second parties may place the insurance *694 with any good company or companies whether the said company or companies are members of said board or not, and that there shall be attached to each and every policy a rider stating that in case of loss the money due shall be paid to the Crocker National Bank of San Francisco, California, subject to paragraph "14th" hereof.
* * *
(21st) It is agreed that said parties of the second part will manufacture from timber standing or lying on said described lands no less than seven million (7,000,000) feet of lumber, or lumber and timber products, during the year 1914 and no less than twelve million (12,000,000) feet of lumber or lumber*4060 and timber products, each year thereafter, until all of the merchantable timber upon said described land has been manufactured into lumber and lumber and timber products; provided, however, that if said parties of the second part fail to manufacture said minimum amounts of lumber by reason of damage to said manufacturing plant caused by fire or by reason of labor strikes, or unavoidable accident, then they shall be excused from such failure and not held in any manner liable therefor. It being agreed that said parties of the second part shall not be required to manufacture lumber when said manufacturing plant has been destroyed by fire, or damaged by fire to an extent which prevents its use, or by reason of delay on account of labor strikes or other unavoidable accidents; it being agreed that manufacturing must be resumed as soon as possible, and in the case of fire as soon as said plant can be repaired or rebuilt, which repairing and rebuilding must be prosecuted with reasonable diligence, provided, however, that said parties of the second part shall elect, as they are hereinbefore given the right to do, or not to do, to repair or rebuild said destroyed or partially destroyed manufacturing*4061 plant.
* * *
(26th) It is understood and agreed between the parties hereto that in case the parties of the second part default in any of the payments herein agreed to be made for a period of 60 days after the same are due and payable, and are unable to sell to others who will carry out the terms of this agreement, then and in that case this agreement becomes null and void and the property conveyed to the said second parties reverts to and becomes the absolute ptoperty of the parties of the first part; and in case said agreement does become null and void through default on the part of the parties of the second part, then and in that case the parties of the first part do not waive any rights they may have under the laws of the State of California to enter suit and recover any amount due from said second parties.
* * *
(28th) It is agreed that the parties of the second part may associate others with them in carrying out and receiving the benefits and advantages of this agreement, and may assign an interest in the same to said associates or may, if they see fit, organize a partnership, or may organize a corporation, the majority of whose capital stock is or will be owned by the*4062 said parties of the second part, to either of which they may assign this agreement, and in the event of any such assignment or assignments, the assignee or assignees thereof shall have the same rights, privileges and benefits which the said parties of the second part have hereunder, and it is further agreed that the said parties of the second part may sell or assign their stock in said corporation, or the said corporation may sell and assign this agreement, providing the assignee or assignees are in all respects satisfactory to the parties of the first part, and in case said assignee or assignee are satisfactory to said first party and have been agreed to in writing, then said second parties shall be released from this agreement, *695 but should said second parties sell or assign their stock in said corporation, or should said corporation sell or assign this agreement without the written consent of the said first parties, then and in that case the said second parties will be held responsible for the carrying out of the provisions of this agreement.
On December 13, 1913, W. A. Dusenbury, E. T. Dusenbury, R. T. Buzard, and H. B. Hickey, incorporated the taxpayer under the laws*4063 of the State of California, and on December 31, 1913, they assigned to it the contract of November 22, 1913, pursuant to the 28th paragraph thereof.
The title to the Stearns plant, which by the contract of November 22, 1913, was to be conveyed to the Dusenburys, Buzard, and Hickey on the same day, was through oversight not conveyed to them until July 7, 1915. A mutual release of the rights and obligations growing out of the contract was executed by and between the Stearns Lumber Co. and the taxpayer. On July 30, 1920, by written instrument, the Dusenburys, Buzard, and Hickey conveyed to the taxpayer the title to the Stearns plant.
Prior to, and until November 22, 1913, the plant account stood on the books of the Stearns Lumber Co. at $324,210.33, and the timber account showed 132,952,792 feet of timber, valued at $1.70 per thousand feet, the total value of the timber shown by the books being $226,019.72. On November 22, 1913, an entry was made on the books of the Stearns Lumber Co. reducing the plant account to $150,000. The Stearns plant was built between 1905 and 1907. Some of the machinery installed therein was secondhand. No depreciation was ever charged by the Stearns*4064 Lumber Co. against the plant.
The taxpayer opened its books of account shortly after the contract of November 22, 1913, was assigned to it. It estimated that the total payments to be made under the contract would be $277,065, of which it allocated $132,154.32 to plant on March 27, 1914. A journal entry was made charging the Stearns plant with $132,154.32 and the same amount was credited directly to surplus.
The taxpayer charged all payments made under the contract of November 22, 1913, to expense and deducted the amounts thereof in computing its income for the years in which the payments were made. The total payments made by the taxpayer under the contract amounted to $140,825.05, of which it allocated $59,654.13 to stumpage and $81,170.92 to the Stearns plant. The Stearns Lumber Co. allocated these payments on its books, two-fifths to plant and land, and three-fifths to stumpage.
In the taxpayer's "Timber Questionnaire for the Navarro Lumber Company, San Francisco," dated February 1, 1922, the following statements appear:
The Navarro did not own this property. At best The Navarro was contingently buying on an installment basis, a mixture of real and personal property*4065 *696 in the condition in which this property would be found on the day of contingent release and delivery of title by Stearns. All of these installments were purely contingent investments by Navarro. The Stearns contract gave the Navarro presently, nothing but the use of the original Stearns property.
In these circumstances the Navarro was unintentionally in error when it charged the Plant on its books as having cost $132,154.32, and included as part of its invested capital, the surplus thus created. As will appear later, we have now corrected this error by reversing the entry on our books.
The taxpayer, during the years 1914 to 1920, made certain improvements and additions to the Stearns plant and in 1920 it sold the entire plant to the Albion Lumber Co. for $290,159.33, from which sale the Commissioner determined a profit of $140,910.95, computed as follows:
| Sale of Plant. | |||
| Sold for: | |||
| Plant and equipment | $176,655.86 | ||
| Tools equipment | 24,639.84 | ||
| Real estate | 88,863.63 | ||
| $290,159.33 | |||
| Book values: | |||
| Real estate | 42,618.68 | ||
| Plant and equipment | $79,160.11 | ||
| Depreciation reserve | 26,158.52 | ||
| 53,001.59 | |||
| R.R. construction | 68,466.59 | ||
| Depreciation | 14,838.48 | ||
| 53,628.11 | |||
| 149,248.38 | |||
| Adjusted profit on sale of plant | 140,910.95 |
*4066 No part of the payments made by the taxpayer to the Stearns Lumber Co. under the contract of November 22, 1913, were allowed by the Commissioner as applicable to the purchase of the Stearns plant, nor was any part of such payments included in the taxpayer's invested capital for the years hereinbefore mentioned.
OPINION.
MARQUETTE: The deficiency letter herein sets forth additional taxes for the years 1914 and 1917, and overassessments for the years 1915 and 1916. The additional taxes for 1914 and 1917 were assessed prior to January 27, 1925, and no claim for abatement of such taxes or any part thereof has ever been filed by the taxpayer. The taxes for 1915 and 1916 were assessed on the taxpayer's original return for those years and the overassessments herein do not arise from the disallowance or partial disallowance of any claim for abatement. We have no jurisdiction of this appeal in so far as it relates to any of the years 1914 to 1917, inclusive. ; *697 *4067 ; ; .
The taxpayer contends that the contract of November 22, 1913, was a contract of purchase of the Stearns plant and timber; that the purchase price of the plant should be taken into consideration in computing the profit realized on the subsequent sale of the plant in 1920, and that the amounts paid by the taxpayer on the purchase price should be included in invested capital as and when made. The position of the Commissioner is that the business of the Stearns Lumber Co. had been unprofitable, and that in order to induce Dusenbury and his associates to purchase the Stearns timber and undertake the logging and manufacturing thereof, it gave them the plant as a bonus for entering into the contract. It has also been suggested that the contract in question was a contract to purchase.
In view of the unsatisfactory state of the record in this proceeding, we do not see that it makes any material difference as to which of the three suggested constructions we place on the contract of November 22, 1913. If it be*4068 construed either as a contract of purchase or a contract to purchase, the purchase price, if ascertainable, should be the basis for determining the gain or loss on the subsequent sale, with proper adjustments for improvements and depreciation, and the payments thereon should be reflected in invested capital as and when made. If the Stearns plant was given to Dusenbury and his associates solely as a consideration for the execution of the contract and was turned in by them to the taxpayer, the actual cash value of the plant at the time turned in should be the basis for determining gain or loss from the subsequent sale, and the amount at which the plant should be included in the taxpayer's invested capital. However, sufficient evidence has not been presented to enable us to determine what that value was.
The pleadings herein raise the issues only in a general way, and the evidence presented is so vague, indefinite, and confusing that it is difficult to determine what the true facts of the case are. Assuming that Dusenbury and his associates intended to purchase the Stearns plant and to pay for it out of timber cut, there is not sufficient evidence to enable us to find what the purchase*4069 price was to be, except that a certain amount was arbitrarily allocated thereto on the taxpayer's books after the contract of November 22, 1913, had been assigned to it. According to the evidence the taxpayer started out with an estimated purchase price of $132,000, based upon the amount of timber it expected to cut, and wound up with a purchase price of $81,000, because the amount of timber fell short of the estimates. At best, the purchase price now claimed is only an estimate. The several amounts paid by the taxpayer to the Stearns Lumber Co., *698 which it is now contended constituted the purchase price of the Stearns plant, were originally considered by the taxpayer as a part of the cost of lumber cut and sold, and were so treated and deducted in its income-tax returns in the years in which the payments were made. In other words, if the taxpayer purchased the Stearns plant and paid for it out of the timber sold, it has actually charged the plant off through income in the years in which the payments were made.
In this proceeding the Commissioner has determined certain deficiencies. The burden is upon the taxpayer to show by competent evidence that the Commissioner*4070 has erred in his determination. As we have heretofore stated, the evidence which has been presented to us is vague, confusing and indefinite, and we are of the opinion that the taxpayer has failed to meet the burden of proof imposed upon it, and we are therefore not warranted in disturbing the Commissioner's determination.
Judgment will be entered for the Commissioner.