*1001 In determining the gain or loss from the disposition of burial space in a cemetery, the amount realized may be reduced by the basis which the land has. Where the lots sold in the taxable year were a part of a larger area owned by the taxpayer on March 1, 1913, their basis is a part of the fair market value on the basic date of the entire area. Although prices at which the petitioner was selling individual lots on or about March 1, 1913, are substantial evidence relating to the question of the fair market value of the remaining area, which included comparable lots, nevertheless, such evidence is not conclusive of the value of the remaining space, but other factors affecting the value of that remaining space may properly be considered.
*671 The Commissioner determined deficiencies in the petitioner's income tax for 1930 and 1931 in the amounts of $1,028.79 and $1,474.43. The principal issue is the determination of the petitioner's basis for gain or loss on certain of the land in its cemetery. *1002 The only other issue is whether or not the petitioner is entitled to deduct $1,163.06 in 1931 as a bad debt. Another issue was settled by agreement of the parties.
FINDINGS OF FACT.
The petitioner is an Illinois corporation which filed its income tax returns for the years in controversy with the collector of internal revenue at Chicago. It was organized in 1885 for the purpose of owning and operating a cemetery. Its charter was for a period of 99 years. Its authorized capital is $600,000 divided into 6,000 shares of the par value of $100 each. Eighty shares are held in the treasury and all of the remaining shares are outstanding. The petitioner owns and operates a cemetery known as the Mount Hope Cemetery, situated in Worth Township, near Chicago. The cemetery was dedicated in 1888.
The petitioner disposed of burial space for cash and also on deferred payment contracts. When the customer paid the entire consideration he was given a deed to the space which he had acquired. The deed provided that the cemetery does "grant, bargain, sell and convey" the lot, but "only for a place of interment", subject to the rules and regulations of the cemetery.
The petitioner during*1003 1930 received $58,001.50 from such deeds or contracts relating to 32,111 square feet of cemetery land, and in 1931 it received $48,883.23 from such deeds or contracts relating to 27,855 1/2 *672 square feet of cemetery land, exclusive of any separate charge for future or perpetual care. The following table breaks down these total amounts to show as to the separate sections the total amount received, the number of square feet of that section involved, and the average amount received per square foot of burial space disposed of:
| 1930 sales | 1931 sales | |||||
| Section No. | Sq. feet | Amount | Amount per sq. ft. | Sq. feet | Amount | Amount per sq. ft. |
| 2 | 5,271 | $7,113.97 | 1.35 | 5,234 1/2 | $6,030.90 | $1.15 |
| 3 | 526 | 735.70 | 1.40 | |||
| 4 | 831 1/2 | 1,642.67 | 1.98 | |||
| 5 | 1,350 | 3,057.50 | 2.26 | 394 | 1,183.30 | 3.00 |
| 7 | 2,537 1/2 | 5,886.77 | 2.32 | 3,163 1/2 | 7,483.87 | 2.37 |
| 12 | 213 | 482.85 | 2.27 | |||
| 13 | 2,718 | 9,736.10 | 3.58 | 3,365 | 12,760.25 | 3.79 |
| 14 | 290 1/2 | 488.35 | 1.68 | |||
| 16 | 165 | 409.25 | 2.48 | 121 | 233.45 | 1.93 |
| 17 | 5,590 | 4,904.05 | .88 | 3,132 | 3,101.75 | .99 |
| 18 | 188 | 136.60 | .73 | 91 | 111.95 | 1.23 |
| 19 | 1,821 | 4,431.31 | 2.43 | 1,292 | 3,374.40 | 2.61 |
| 19A | 4,067 1/2 | 6,217.73 | 1.53 | 2,449 | 3,178.65 | 1.30 |
| 33 | 644 | 1,577.80 | 2.45 | 470 | 1,163.50 | 2.475 |
| 34 | 220 | 479.00 | 2.18 | |||
| 35 | 2,284 | 2,346.00 | 1.03 | 6,218 | 5,466.24 | .88 |
| 36 | 3,614 | 8,834.85 | 2.445 | 1,705 1/2 | 4,315.97 | 2.53 |
*1004 The petitioner in its income tax returns for 1930 and 1931 reported incorrectly the number of square feet of burial space disposed of and the total payments received. It reported that in 1930 it had received $57,793.50 as a result of the disposition of 28,965 square feet of burial space which had a value on March 1, 1913, of $15,157.38, resulting in a profit of $42,636.12. It reported that in 1931 it had received $48,626.23 as a result of the disposition of 26,076.5 square feet of burial space which had a value on March 1, 1913, of $13,721.45, resulting in a profit of $34,904.78. The Commissioner, in computing the deficiency for 1930, determined that, of the total square feet disposed of, 22,664 represented improved land on March 1, 1913, which had a value at that time of 28.85 cents per square foot, and 6,301 represented unimproved land on March 1, 1913, which had a value at that time of 17.41 cents per square foot, or that the land disposed of had a March 1, 1913, value of $7,635.56 and the petitioner realized a profit of $50,157.94. The Commissioner, in computing the deficiency for 1931, stated that he was unable to determine whether the land was improved or unimproved on*1005 March 1, 1913, and therefore, he valued the entire 26,076.5 square feet at 12.75 cents per square foot, which resulted in a March 1, 1913, value of $4,346.08 and a profit of $44,280.15.
The petitioner in its income tax returns since 1920 has been deducting 52 cents per square foot as the fair market value on March 1, 1913, in computing its income from the sale of lots. This figure was fixed by an agent of the Commissioner.
*673 The fair market value on March 1, 1913, and the basis for gain or loss on the area sold in 1930 is $8,500 and on the area sold in 1931 is $7,000.
The petitioner acquired a tract of 305 acres during the period from 1885 to 1892 for a total consideration of $487,985.55, of which $468,800 was paid in capital stock of the petitioner. The balance was paid in cash. A tract of 83 acres, being the part of the property thus acquired which lies to the east of the Baltimore & Ohio Railroad tracks, was never used by the petitioner for cemetery purposes, was sold by the petitioner in 1926 for $750,000, and was thereafter developed as a real estate subdivision. Another tract of 65 acres, being the part of the property which lies to the west of the Chicago*1006 & Grand Trunk Railroad, has never been used by the petitioner for cemetery purposes, has been used for farming, and is still owned by the petitioner. The remainder of the tract, consisting of about 157 acres, has been used for cemetery purposes at all times material hereto.
The petitioner, prior to 1888, prepared a plan for the development of this latter tract of land under which the tract was to be subdivided into 36 sections. Since that time one of the sections has been divided into two sections. The plan provided that each section should be bordered by a road. The petitioner expended about $150,000 for developing a part of its plan prior to the opening of the cemetery. Those improvements included grading, construction of roads, sewers, and water connections, planting of trees and shrubbery, and erection of necessary buildings, such as an office, a chapel, a receiving vault, stables, sheds, and a superintendent's residence. The development of the western one-half of the cemetery had been completed on March 1, 1913. That portion included sections 1 to 19, 19A, and a part of 31. Portions of sections 21, 30, and 32, lying just to the east of this improved section, had been*1007 partially improved by March 1, 1913. These partial improvements included some primary planting and some grading. The remaining sections of the cemetery were not improved on March 1, 1913. They had been surveyed and marked off with stakes, and furrows had been plowed to indicate the boundaries between the sections and the location of the proposed roads.
The petitioner after March 1, 1913, and up to December 31, 1931, expended additional amounts for improving its cemetery. In 1915 it built a gate opening onto 115th Street at a cost of $2,312.29. It installed a connection with the city water system in 1916 at a cost of $2,332.25. It expended $28,242.57 for land improvements, exclusive of sewers and roads.
The petitioner set up land accounts on its books as of January 1, 1912. The improved land account showed 2,657,160 square feet. The unimproved land account showed 10,190,400 square feet. There was *674 no change in these figures up to March 1, 1913. Thereafter, in some years, transfers were made of land from the unimproved to the improved account. The entries indicate that the cost of changing the land from unimproved to improved was about 4 cents a square foot.
*1008 Twenty-four of the 37 sections in the cemetery were subdivided into lots at various times. The record does not show the time at which each section was subdivided. The lots are not uniform, either as to area or desirability of location. The following table shows the original salable area of each of the subdivided sections in square feet:
| Section | Original salable area |
| Sq. ft. | |
| 2 | 124,648 |
| 3 | 110,471 |
| 4 | 69,580 |
| 5 | 106,224 |
| 6 | 59,708 |
| 7 | 91,040 |
| 8 | 124,651 |
| 9 | 41,489 |
| 10 | 115,364 |
| 12 | 108,932 |
| 13 | 266,669 |
| 14 | 42,077 |
| 15 | 61,613 |
| 16 | 144,731 |
| 17 | 201,842 |
| 18 | 100,850 |
| 19 | 131,651 |
| 19A | 87,635 |
| 31 | 140,586 |
| 32 | 138,976 |
| 33 | 139,989 |
| 34 | 125,249 |
| 35 | 105,118 |
| 36 | 61,251 |
| Total | 2,700,344 |
The petitioner had sold 430,461.5 square feet of burial space prior to January 1, 1913. The following table shows the square feet sold and the average amount received per square foot in each section during the years 1909 to 1913, inclusive, also the total square feet sold and the total amount received in each year. The amounts received are exclusive of any separate charge for future or perpetual care.
| 1909 | 1910 | 1911 | 1912 | 1913 | ||||||
| Section | Sq. ft. | Average amount per sq. ft. | Sq. ft. | Average amount per sq. ft. | Sq. ft. | Average amount per sq. ft. | Average amount per sq. ft. | Sq. ft. | Average amount per sq. ft. | |
| 2 | 2,638 | $.6225 | 1,438.5 | $.69 | 1,722.5 | $.5867 | 2,087 | $.60 | 1,293 | $.67 |
| 3 | 164 | 1.00 | 24 | .83 | 2,646 | .7125 | 1,618 | .665 | 3,004 | .6667 |
| 4 | 640 | 1.00 | 219 | .75 | 1,120 | .75 | 692 | .91 | 704 | .7675 |
| 5 | 3,838 | 1.00 | 5,037 | 1.00 | 1,674 | 1.00 | 7,847 | 1.01 | 5,620.5 | 1.02 |
| 6 | 1,585 | 1.00 | 1,184 | 1.00 | 2,276 | 1.02 | 460 | 1.01 | ||
| 7 | 2,224 | 1.215 | 526 | 1.06 | 724 | .9667 | 404 | 1.03 | 24 | .8333 |
| 9 | 559.5 | 1.00 | 1,279 | 1.00 | 1,088 | 1.015 | 961.5 | 1.01 | 819 | 1.005 |
| 15 | 5,610 | 1.0375 | 4,693.5 | 1.09 | 2.637 | 1.0033 | 3,520.5 | 1.05 | 2,780 | 1.265 |
| 16 | 16,823 | .50 | 18,708 | .51 | 16,926.5 | .5025 | 6,996 | .545 | 4,927 | .65 |
| 17 | 4,786 | .565 | 7,259.5 | .5771 | 5,936.5 | .5033 | 7,051.5 | .585 | 11,150 | .60 |
| 18 | 4,560 | .5325 | 18,874 | .545 | 19,564 | .55 | ||||
| Total area | 38,867.5 | 40,368.5 | 39,034.5 | 52,327.5 | 50,345.5 | |||||
| Total amt. rec'd | $28,082 | $28,095.75 | $24,294.20 | $36,502.15 | $34,630.20 |
*1009 The space disposed of during 1912 and 1913 was sold in the regular course of business and was fairly representative of the other land in the sections involved.
*675 It could have been reasonably anticipated on March 1, 1913, that considerably more than 50 years would elapse before the petitioner would be able to dispose of all or substantially all of the burial space in its cemetery.
The petitioner had made no sales of burial space prior to March 1, 1913, in sections 12, 13, 14, 19, 19A, 33, 34, 35, and 36. The date of the first sale in each of those sections, the amount received per square foot, the number of square feet involved in the first 10 sales, and the average amount received per square foot, exclusive of any separate charge for future or perpetual care, were as follows:
| First sale | First 10 sales | |||
| Section | Date | Price per sq. ft. | Sq. ft. sold | Average price per sq. ft. |
| 12 | July 9, 1915 | $1.51 | 3,230 | $1.51 |
| 13 | Mar. 1930 | 3.45 | 1,157 | 3.32 |
| 14 | Feb. 26, 1915 | 1.14 | 1,158 | 1.04 |
| 19 | Nov. 20, 1917 | 1.02 | 985 | 1.24 |
| 19A | Aug. 21, 1924 | 1.53 | 972 | 1.48 |
| 33 | May 21, 1927 | 2.12 | 1,094.5 | 1.96 |
| 34 | Dec. 26, 1931 | 2.18 | 864 | 2.76 |
| 35 | Jan. 1930 | 2.23 | 675 | 1.62 |
| 36 | Jan. 23, 1928 | 1.41 | 885 | 2.165 |
*1010 The average prices per square foot of burial space, as set forth herein, were obtained by dividing the total amount received for the lots in each group by the total number of square feet sold from that group.
The land in section 12 is better situated and more desirable than land in the adjacent sections 5, 9, and 15. The petitioner had fixed the sale price of lots in section 12 at $2 per square foot as early as 1904. Section 13 contains the highest and the most desirable land in the cemetery. The land in section 14 is on a slope and is farther away from the entrance than section 15, which it adjoins. Sections 19 and 19A lie adjacent to but beyond section 14 in the southwest corner of the cemetery. Section 19A is devoted to single graves. Section 33 is near the present north entrance to the cemetery. That entrance had been planned in 1913 but had not been constructed. The land in that section is lower than the land to the west. Section 34 adjoins 33 on the east, is somewhat lower, and is somewhat less desirable than section 33. Section 35 is on the eastern boundary of the cemetary along the railroad tracks. Section 36 is along the northern boundary near the present main*1011 entrance to the cemetery. It is divided into small lots and is somewhat lower than section 7, which adjoins it on the west.
The petitioner from January 1, 1914, to January 1, 1937, disposed of something over 900,000 square feet of burial space. The gross *676 amount which it received on the contracts was about $1,317,084.58. The net amount received, after deducting cost of sales, was about $1,022,343.25. The average gross amount received, the average net amount received, and the average number of square feet disposed of, per year during the period were approximately $57,264.81, $47,058.43, and 41,283 square feet. During the first 10 years of that period sales, measured by the number of square feet sold, were lowest in 1917 and were highest in 1915. Gross sales and net sales measured in dollars were lowest during that decade in 1914 and were highest in 1923. During the remaining years of the period the number of square feet sold was lowest in 1934 and was highest in 1925, gross sales and net sales measured in dollars were lowest in 1934, gross sales were highest in 1925, and net sales were highest in 1928. The average gross amount received per square foot during the*1012 period from 1914 through 1936 ranged from a low of 72 cents in 1914 to a high of $1.85 in 1935. The average net amount received per square foot during the period from 1914 through 1936 ranged from a low of 57 cents in 1914 to a high of $1.54 in 1930.
The petitioner's gross operating income, expenses of operation, book net income, and dividends paid, as shown by its surplus account, were as follows:
| Year | Gross income | Expenses | Net income | Dividends |
| 1912 | $45,100.30 | $28,389.93 | $16,710.37 | $11,840 |
| 1913 | 43,276.15 | 30,461.44 | 12,864.71 | 35,520 |
| 1914 | 42,522.35 | 30,903.97 | 11,618.38 | 5,920 |
| 1915 | 62,656.41 | 35,369.33 | 27,287.08 | 5,920 |
| 1916 | 77,752.19 | 38,960.20 | 38,791.99 | 23,680 |
| 1917 | 54,802.70 | 44,998.97 | 9,803.73 | 17,760 |
| 1918 | 68,580.42 | 41,687.80 | 26,892.62 | 17,760 |
| 1919 | 73,665.42 | 48,158.55 | 25,506.87 | 23,680 |
| 1920 | 88,395.96 | 51,657.77 | 36,738.19 | 29,600 |
| 1921 | 80,055.87 | 48,750.72 | 31,305.15 | 23,680 |
| 1922 | 77,774.74 | 45,244.74 | 32,530.00 | 23,680 |
| 1923 | 105,731.91 | 50,982.03 | 54,749.88 | 29,600 |
| 1924 | 101,604.74 | 56,723.20 | 44,881.54 | 35,520 |
| 1925 | 116,465.80 | 64,132.65 | 52,333.15 | 35,520 |
| 1926 | 120,009.44 | 73,561.20 | 46,448.24 | 35,520 |
| 1927 | 138,251.20 | 60,468.63 | 77,782.57 | 35,520 |
| 1928 | 145,018.00 | 59,943.32 | 85,074.68 | 35,520 |
| 1929 | 144,022.36 | 66,382.01 | 77,640.35 | 39,960 |
| 1930 | 133,326.18 | 68,345.81 | 64,980.37 | 41,440 |
| 1931 | 119,785.59 | 60,420.68 | 59,364.91 | 41,440 |
| 1932 | 103,311.79 | 52,443.70 | 50,868.09 | 41,440 |
| 1933 | 79,464.29 | 55,855.61 | 23,608.68 | 31,080 |
| 1934 | 74,255.66 | 48,868.13 | 25,387.53 | 23,680 |
| 1935 | 86,277.05 | 60,411.63 | 25,865.42 | 17,760 |
| 1936 | 96,498.52 | 61,180.51 | 35,318.01 | 23,680 |
*1013 Up to January 1, 1912, the petitioner had paid dividends totaling $41,440. The credit balance in its surplus account at that date was $5,399.41.
Prior to January 1, 1912, the petitioner charged commissions of $15,438.96 to expense. The commissions charged to expense from 1912 to 1936 were as follows:
| Year | Amount |
| 1912 | $3,083.01 |
| 1913 | 3,377.23 |
| 1914 | 3,104.55 |
| 1915 | 3,795.27 |
| 1916 | 1,419.50 |
| 1917 | 836.87 |
| 1918 | 4,097.00 |
| 1919 | 4,570.45 |
| 1920 | 5,288.17 |
| 1921 | $4,822.47 |
| 1922 | 4,645.43 |
| 1923 | 4,644.40 |
| 1924 | 5,040.65 |
| 1925 | 16,300.41 |
| 1926 | 17,240.68 |
| 1927 | 5,828.68 |
| 1928 | 6,124.08 |
| 1929 | $5,388.30 |
| 1930 | 3,360.60 |
| 1931 | 3,395.30 |
| 1932 | 2,463.50 |
| 1933 | 2,286.10 |
| 1934 | 1,849.10 |
| 1935 | 3,053.50 |
| 1936 | 3,310.20 |
*677 In its capital stock tax return for the years 1916 to 1924 the petitioner declared its capital stock at values ranging from $170,000 to $210,000, and reported the book value of its real estate at slightly over $500,000, and the fair value of its real estate used for capital stock tax purposes as about $67,000.
The petitioner's books showed depreciated balances of assets as of January 1, 1913, as follows:
| Buildings | $11,119.09 |
| Water system | 5,236.05 |
| Roads | 2,332.84 |
| Fences (fully depreciated) | |
| Sewers | 1,364.00 |
| Trees (Jan. 1, 1912) | 2,606.86 |
*1014 The petitioner's cemetery is favorably located. It contains the highest land in the Chicago area, Mount Hope, which is about 100 feet above the level of Lake Michigan. The land is rolling, affords good drainage, and is well suited for cemetery purposes. The southern boundary of Chicago was about 10 miles to the north when the petitioner first acquired its land. The city limits were extended from time to time. They were two miles from the cemetery in 1913, and at the present time the southern boundary of the city touches the northern boundary of the cemetery. The cemetery is about 14 miles from the center of the city. Several large and important residential districts lie within a mile or so of the cemetery. Most of the land in the vicinity of the cemetery is used for residential purposes and was so used in 1913. The residential districts adjacent to the cemetery and nearby are inhabited by people who are relatively wealthy.
The population of the city of Chicago, as generally estimated or as shown by the official census on various dates, was as follows:
| 1885 | 750,000 |
| 1900 | 1,698,575 |
| 1910 | 2,185,283 |
| 1913 | 2,500,000 |
| 1620 | 2,701,705 |
| 1930 | 3,376,438 |
*1015 The number of deaths in the city ranged from 26,062 in 1900 to 35,298 in 1913. During the period from 1913 to 1934 they did not rise above 39,000 nor fall below 30,000 in any year except in 1918, when they amounted to 44,208.
*678 Members of some of the prominent families of Chicago had been buried in the petitioner's cemetery or were owners of lots therein in 1913. The cemetery at that time contained from 11 to 15 mausoleums. Burials were restricted to persons of the white race. The petitioner had a good clientele in 1913. The number of burials in the cemetery, most of which were of native born Americans from the southern part of Chicago, from 1888 to March 1, 1913, were as follows:
| Year | Burials |
| 1888 | 19 |
| 1889 | 46 |
| 1890 | 53 |
| 1891 | 68 |
| 1892 | 42 |
| 1893 | 62 |
| 1894 | 101 |
| 1895 | 123 |
| 1896 | 130 |
| 1897 | 133 |
| 1898 | 185 |
| 1899 | 185 |
| 1900 | 213 |
| 1901 | 203 |
| 1902 | 243 |
| 1903 | 281 |
| 1904 | 350 |
| 1905 | 353 |
| 1906 | 337 |
| 1907 | 404 |
| 1908 | 476 |
| 1909 | 486 |
| 1910 | 594 |
| 1911 | 621 |
| 1912 | 693 |
| To 3/1/1913 | 128 |
| Total | 6,529 |
The cemetery could be reached in 1913 over two railroads, over a nearby street car line, and over the public roads. The public roads and streets leading to the*1016 cemetery were good and led to all parts of the city. The street car line was four blocks from the cemetery. The petitioner at that time provided free bus service from the street car to the cemetery. Each of the two railroads maintained a station at the cemetery. Most of the lot burials in 1913 made use of the roads, while most of the single grave burials were brought in by railroad.
There were about 68 cemeteries in the metropolitan area of Chicago in 1913. They contained about 120,000,000 square feet of unsold burial space. Several other cemeteries were situated in the vicinity of Mount Hope Cemetery. Some of them were separated from the petitioner's cemetery only by dividing streets. The principal competitors of the petitioner, operating cemeteries of a similar type, were Mount Greenwood, situated about four blocks to the east, Oakwoods, about seven miles to the northeast, Forest Home, several miles to the northwest, and Rose Hill and Crestlawn, on the north side of Chicago. The Evergreen Cemetery, between 1915 and 1917, acquired 80 acres of unimproved land for cemetery purposes in the vicinity of Mount Hope Cemetery at prices ranging from $300 to $375 per acre. Thereafter, *1017 from 1918 to 1928, other cemeteries obtained some unimproved land for cemetery purposes in the same vicinity at prices ranging from $500 an acre to $2,500.
Several different kinds of contracts were used by the petitioner whereby purchasers of burial space contracted and paid separately for future or perpetual care of their lots. The petitioner since 1915 has required all purchasers to enter into a contract and pay separately *679 under that contract for the future care of the lot. Purchasers prior to 1915 were permitted to choose whether or not they would enter into any contract and pay separately for the future care of the lot. Funds have now been paid to the petitioner by lot owners to provide for perpetual care of about 85 percent of the lots sold prior to 1915. The remainder of the lots sold prior to 1915 are kept up by the petitioner through the use of its own funds. The deeds used in 1913 and thereafter have contained a provision requiring the cemetery to pay to its board of directors 1 percent of the consideration mentioned in that deed, and 1 percent of all money received on other lots as a trust fund to be known as the "Mount Hope Future Care Fund" for the purpose*1018 of keeping the cemetery and lots permanently in good order and repair, to accumulate the income from the fund in excess of the expense of management of the fund until 90 percent of the property of the cemetery appropriated for burial purposes shall have been sold for such purposes, and thereafter to apply the income from the fund, first, to pay the expenses of Management of the fund, second, to care for and keep permanently in good repair the public walks, fences, drives, parks, and structures of the cemetery, and thereafter for the general care and maintenance of the cemetery and lots.
The deferred payment contracts used by the petitioner during the taxable years contained a provisions as follows:
That said Association hereby agrees to set aside, out of said purchase price paid by said purchaser, upon completion of all payments due or to become due under this contract, but not before, the sum of Dollars as a deposit by said purchaser in perpetuity in trust as stated in and for the uses and purposes set forth in a certain form of agreement providing for Perpetual Care of said lot executed in duplicate by said purchaser and this day left with said Association for acceptance and*1019 execution by said Association if and when completion of said payments and all interest thereon shall have been made by said purchaser; and said Association hereby agrees to accept and execute said agreement upon completion of said payments and interest and thereupon to deliver an executed copy thereof to said purchaser.
The record does not show whether or not any such contracts were used in 1913.
The petitioner used during the taxable years a form of agreement captioned "Perpetual Care Agreement" which stated that the depositor had deposited in perpetuity in trust with the petitioner a certain sum in consideration of which the petitioner agreed to hold the principal in trust forever and to forever do in or on the depositor's lot the following:
Care for and maintain the foundations of any monument or headstones on said lot; cut and water the grass thereon; fill the graves thereon and keep them in good order, and resoil and resod said lot when necessary; it being specifically understood and agreed that all graves are to be made level and so maintained.
*680 The agreement further provided that the petitioner could combine the funds with other similar funds into a single*1020 fund known as the "Mount Hope Lot Owners' Fund", and could retain the income from the fund in consideration of its fulfillment of the agreement. The record does not show whether or not such agreements were used in 1913.
The record does not suggest that there was any provision or fund for the future care of the cemetery or any lots in the cemetery other than (1) the income from the funds created by the 1 percent of the purchase price which under the deeds was to be set aside for use after 90 percent of the available space in the cemetery had been sold, and (2) the income from the "Mount Hope Lot Owners' Fund" paid in under the special agreements for perpetual care of individual lots.
The petitioner kept its books of account and made its income tax returns on an accrual basis of accounting.
It was the owner of a first mortgage for $7,000 on an unimproved tract of farm land owned by P. E. Ivey. The interest on the mortgage was paid regularly up to December 1, 1927. The petitioner continued to accrue on its books the income on the mortgage for the years 1928, 1929, and 1930. It reported the income thus accrued as a part of its income on its income tax returns and paid taxes*1021 thereon. Ivey gave the petitioner his note in the amount of $420 for the interest due to December 1, 1928. Thereafter he paid small sums on the note, which sums amounted in all to $96.94. The last payment was made on December 1, 1931. The balance due on the note at that time was $323.06. The remainder of the interest payments due on and after December 1, 1928, were never paid. The total amount of the interest accrued and not paid up to the beginning of the year 1931 was $1,163.06. The latter amount was charged off the petitioner's books as a bad debt in closing the books for the year 1931. The amount was claimed as a deduction by the petitioner on its income tax return for 1931 and was disallowed by the Commissioner in determining the deficiency. A second mortgage on the land for a small amount was foreclosed on April 26, 1929, and title to the land was taken in the name of L. J. Cullen, with the understanding that the net return from rentals of the land would be applied in payment of the interest on the first mortgage, and upon any subsequent sale of the land the first mortgage would be either assumed or paid by the purchaser and an equitable division of any excess consideration*1022 would be made. The land has not been sold and no rentals were ever received or applied in payment of interest on the first mortgage. The record does not show the value of the land at any time material hereto or the individual worth of the mortgagor.
*681 The petitioner paid income tax for the year 1931 in the amount of $4,570.11. Payment was made in four installments, as follows:
| March 12, 1932 | $1,142.52 |
| June 14, 1932 | 1,142.52 |
| September 13, 1932 | 1,142.52 |
| December 13, 1932 | 1,142.55 |
OPINION.
MURDOCK: The petitioner in 1930 received $58,001.50 and in 1931 received $48,883.23 from persons to whom it sold burial space in its cemetery. Those amounts are not in dispute. The petitioner now seeks to reduce those amounts by $30,095.76 for 1930 and by $27,338.01 for 1931, as the fair market value on March 1, 1913, of the lots sold in the two taxable years. It claimed smaller amounts on its returns - $15,157.38 for 1930 and $13,721.45 for 1931. The Commissioner in determining the deficiencies allowed even smaller reductions - $7,635.56 for 1930 and $4,346.08 for 1931. He does not state in his lengthy brief just what values he thinks the evidence establishes, *1023 but his contention is that the evidence does not justify the use of any larger reductions than those which he has allowed in determining the deficiencies. We have found as a fact that the proper amounts to be used as a basis in reducing the amount realized in these years are $8,500 for 1930 and $7,000 for 1931.
The respondent has cited a number of cases which hold that a cemetery company does not dispose of the fee simple title to its land and the purchaser of a lot does not acquire a fee simple title, but merely a license or easement to use the land for burial purposes. However, it is apparent that the purchaser of a cemetery lot acquires a property right in the lot which the law recognizes, which can pass to his heirs or representatives at his death, and which may be enjoyed as long as the ground continues to be used as a cemetery. ; ; ; ; *1024 ; . The respondent agrees that the amount which the petitioner received during the taxable years may be reduced by a basis in order to determine the portion of it that represents taxable income, even though the fee was not sold. Cf. ; . Neither party has presented any argument showing that the basis should be different from that part of the fair market value on March 1, 1913, of the unsold land itself, which is allocable to the lots sold in the taxable years.
*682 Section 113(b) of the Revenue Act of 1928, which is controlling here, provides that the basis for gain or loss from the sale or other disposition of property acquired before March 1, 1913, shall be the cost of such property or its fair market value as of March 1, 1913, whichever is greater. The purpose of Congress was to permit a taxpayer to recover its capital investment on the basic date tax-free before taxing the gains. Cf. *1025 . The petitioner in 1930 and 1931 sold burial space in its cemetery which was a part of the land owned and held by it for such use on March 1, 1913. The only property involved in those profitable transactions which had any basis for gain or loss was the land. The petitioner's basis for gain or loss upon the disposition of that remaining burial space in its cemetery was the cost of that land or its fair market value on March 1, 1913, whichever was greater. The cost would include any improvements made up to March 1, 1913. The fair market value on March 1, 1913, was greater than cost, consequently the basis which the petitioner is entitled to deduct before any excess realized from the disposition of lots is subject to tax, is the fair market value of the land on March 1, 1913.
The land involved in the transactions of 1930 and 1931 was a part of the whole area which the petitioner owned on March 1, 1913. This fact must be kept in mind in determining the basis applicable to the space sold in the taxable years because the value of and the basis for the space sold in each year was a part of the value of the larger area. Cf. *1026 . In other words, the total basis which the petitioner was entitled to recover from the disposition of its burial space after March 1, 1913, was the same amount regardless of whether it should sell the entire space in one transaction or whether it should sell a few lots each year for a great many years. The sum of the bases for the space sold in the various years, after the entire area is sold, should exactly equal the value of the whole area as of March 1, 1913. That is, the sum of the bases for all of the separate burial spaces can not, under the circumstances of this case, exceed the fair market value on March 1, 1913, of all of the available burial space in the cemetery at that date considered as a whole. Cf. ; . Therefore, the result should be the same whether the basis applicable to the space sold in the taxable years be determined directly or whether the value of the whole be first determined and a proper portion thereof allocated to the space sold in these years. Cf. *1027 .
No attempt will be made to state any precise rule to be used to the exclusion of all others in determining value. The inquiry should be as broad as possible so that no important element or factor may *683 be disregarded. Consideration should be given to all pertinent information available. The record in this case includes the opinions of three witnesses as to values - one for the petitioner and two for the Government. It also contains many facts and figures relevant to the question involved. It is our duty to determine a basis, having due regard for all of the evidence, and if that evidence indicates that the values given by the petitioner's witness are too high and the values given by the respondent's witnesses are too low, we must determine whatever intermediate value the evidence supports. ; . Absolute certainty is, of course, impossible. The Board must make as close an approximation as it can. *1028 .
The petitioner has apparently risked its case principally upon the opinion of its one witness, Little, and the theory of valuation which he adopted. That theory is that the value of any unsold lot or burial space in the cemetery on March 1, 1913, was the same as the amount which the cemetery was obtaining on or about March 1, 1913, from the sale or disposition of comparable lots or burial space. It argues that this method of valuation has been approved by the Supreme Court as the proper method of valuing cemetery lots as of March 1, 1913, and, further, that the Supreme Court has disapproved of methods whereby the selling price of comparable lots at the basic date would be discounted on account of the years required to sell the remaining lots or for any other reason. It cites in support of this argument the decision of the Supreme Court in the case of ; reversing the decision of the Seventh Circuit in the same case reported at *1029 , which had reversed a memorandum opinion of the Board, and the case of , which reversed a memorandum opinion of the Board.
We disagree with the taxpayer's interpretation of the decision of the Supreme Court in the Elmhurst case. The Circuit Court was reversed because it substituted its judgment concerning facts for that of the Board, where there was substantial evidence to support the Board's finding of fact. ; dissenting opinion in . The Board in the Elmhurst case found the value as contended for by the petitioner, which was based upon sales of other lots just prior to March 1, 1913. It is one thing to say, as the Supreme Court did, that such evidence was substantial, but quite another thing to say, as the Court did not, that no other factors may be considered as bearing upon the question of value, or that the value to be found in all cases is the amount for which other comparable lots were selling on or about the basic date. If the Court of Appeals*1030 for the District of Columbia interpreted the *684 Elmhurst case differently in , then we respectfully disagree with that court, which recognized in its prior opinion in the same proceeding (), that "it is reasonable and fair to give consideration to the time element - the period of holding before a market can be had." The time element must be applied to the whole, not to the particular lots involved in sales in any particular year, since the basis can not change from year to year. .
The witness, Little, upon whose opinion the petitioner relies, had been in charge of the affairs of the cemetery for a great many years. He is a stockholder and an officer of the corporation. He was familiar with the cemetery, with the relative attractiveness of the various sections, and with the sales made. He was a well informed cemetery executive. Although he is interested in the outcome of this case, we do not question his integrity. He gave his opinion of the fair market value on March 1, 1913, of a representative square foot of land in each section*1031 from which space had been sold during 1930 or 1931 and from which there had been sales made prior to March 1, 1913. He also gave his opinion of the fair market value of a representative square foot in the other sections from which sales were made in 1930 or 1931, but from which no space had been sold up to March 1, 1913. He arrived at his opinion as to the latter sections by comparing the land in each of those sections with the land in other sections from which sales had been made prior to March 1, 1913. He considered the prices which the petitioner was obtaining for burial space on or about March 1, 1913, and determined the amount per square foot which was being obtained in those sales for land in each section which he thought was fairly representative of all of the land in that section, and then stated that, in his opinion, the fair market value per square foot of all of the remaining land in any particular section was the same as the price determined for a representative square foot in that section. Thus his value for any section could be obtained by multiplying the number of remaining square feet in that section by the value which he gave for a representative square foot.
*1032 Frequently sales of similar or comparable property on or about the basic date are regarded as the best evidence of the value of the property in question. However, if that be the general rule, there are exceptions to it. ; ; ; ; . The cases cited above involved the valuation as of the basic date of a large number of units which brought their owners no return until they were sold. Due to the limited demand, one could reasonably anticipate on March 1, 1913, that a considerable period of time would elapse before the retail price could be realized on all of the units. They had *685 to be marketed and the risks of the business had to be assumed. The method of valuation whereby the value of the whole was determined simply by multiplying the current retail price by the number of units was rejected. It confused the total amount of gross sales, ultimately expected, with present fair market value as of March 1, 1913, and overlooked other*1033 important factors. 1
The method of valuation urged by the petitioner here and used by its main witness is substantially the same as that which was unsatisfactory in the cases just cited. This petitioner had on hand on March 1, 1913, a large supply of land which it was holding for sale as burial space. There was a limited demand for burial space, and any reasonable person on March 1, 1913, would have foreseen that, in all probability, the space could not all be disposed of until many years had passed. The unsold portions of the cemetery would not carry themselves, i.e., until the petitioner could get its money out of its investment through sales, it would not receive any return on its investment. Instead, expenditures of one kind or another would have to be made by the petitioner. The cemetery would have to be maintained and sales expense would have to be paid. This discussion should not be read as indicating that the current retail prices as of the basic date for similar properties have no evidentiary value. Such sales*1034 are substantial evidence, as the Supreme Court said in the Elmhurst case, but they must be considered as parties negotiating for the purchase and sale of all of the space available on March 1, 1913, would consider them. Fair market value has been defined as the price at which property might be expected to change hands between a willing buyer and a willing seller where neither is under any compulsion. Each of these parties would consider the favorable as well as the unfavorable factors. They would consider not only the current retail price being obtained for space in the cemetery, but many other factors such as the demand for space, the probable delay which might be expected in selling all of the property and in receiving the purchase price for that property, the risk, the selling expenses, and any other expenditures which might have to be made. They might compare the probable return on this investment with the return which might reasonably be expected with no greater risk if a like amount of money were used for some other purpose. In short they would consider all of the factors having any bearing upon the value, and they might be expected to agree upon the amount that the*1035 property as a whole was worth. The willing purchaser must have some prospect of profits to compensate him for the use of his money, time, and efforts, and for the assumption of the risk involved. The petitioner, in attempting to fix the retail sales price as the fair *686 market value of the property, does not give due consideration to the necessary process of realizing those retail prices. Obviously, a purchaser of what the petitioner had on March 1, 1913, would not pay on that basis. The case of , involved the value of a stock of clothing owned by a retail dealer. The court held that the term "fair valuation", as used in the Bankruptcy Act, did not mean the retail price that could be realized in the slow process of trade involving large expenses and many risks. The same may be said in regard to "fair market value" as used in section 113 of the revenue act.
If all of the available burial space in the cemetery as of March 1, 1913, were valued, by using the figures given by the petitioner's witness and supplementing them with comparable figures for the sections which he did not value, the result would be a value of about*1036 $6,000,000.2 Yet it is utterly ridiculous to suppose that the space could have been sold for as much as $5,000,000 in 1913. An investor with $5,000,000 to invest might have compared his probable returns from an investment in the cemetery with the return which he might reasonably have expected from an investment of his money in some other way which involved no greater risk. His annual income would have been $200,000 had he invested his money in safe investments at 4 percent. Cf. . The annual income of the petitioner from all sources as shown by its books was rather insignificant in comparison 3 - 1912, $16,710.37; 1913, $12,864.71; best year, 1928, $85,074.68; average 1913 to 1936, inclusive, less than $41,000. The record does not indicate that the actual book earnings subsequent to March 1, 1913, were less than might have been reasonably anticipated on March 1, 1913. Prospective earnings, of course, furnish but one test of value, yet here that test demonstrates rather conclusively that the values placed upon the property by the petitioner's witness were grossly excessive. Furthermore, the evidence in this case otherwise*1037 demonstrates the excessiveness of his valuation. Thus, not only was his method faulty, but his result was wrong.
The respondent argues with considerable force that the amount which the petitioner received*1038 in its so-called sales of lots included, *687 in addition to the amount paid for the land alone, an amount which the petitioner had to collect at that time for the future services which it would be required to render. Although the granting of the burial privilege exhausts the petitioner's direct source of income from the land, the petitioner obligates itself to furnish certain things in the future, as its witness, Little, stated. For example, it must continue to keep up the roads, walks, drains, fences, essential buildings, landscaping, and at least a part of the cemetery organization. The Commissioner points out that some, or all, of those expenditures would have to be made regardless of whether or not a separate amount was paid for perpetual care of the lot. The expenditures are not the same as those to be paid from the perpetual care income. Apparently the price of a lot at March 1, 1913, was the same whether or not the purchaser entered into a separate contract for perpetual care. The Commissioner argues that the petitioner well knew that it would be paid but once and would have to recover in that payment, not only a fair price for the land, but, in addition, enough*1039 to compensate it for the expenditures which it would have to make later. Therefore, he says, the amounts which the petitioner was receiving on or about March 1, 1913, must be reduced to find even the current retail price of the land. The decision in the present case, however, need not and does not turn in any way upon this argument.
One witness for the respondent stated that, in his opinion, the value of the stock of the petitioner on March 1, 1913, was $300,000. The record does not show the amount of the liabilities, if any, of the petitioner on or about March 1, 1913. Apparently the witness assumed that it had no liabilities. The record shows that it had depreciable assets on March 1, 1913, including buildings, fences, gates, roads, sewers, and some other equipment. The petitioner had a right to recover, and apparently was recovering through depreciation, the fair market value as of March 1, 1913, of its depreciable assets. If the value of the capital stock and the amount of the liabilities were known, the value of the depreciable assets might be deducted and the value of the land determined. The land and the improvements, however, had cost the petitioner far more than*1040 $300,000 prior to March 1, 1913, only a small part of the burial space had been disposed of up to March 1, 1913, land values were increasing, and there is no doubt that the fair market value of the remaining space was far greater than the value attributed by this witness to the entire cemetery properties of the petitioner.
The other witness for the respondent, who expressed an opinion of value, was a theorist. He had had no experience in or special knowledge of sales of comparable properties. His method was to examine the records of the petitioner showing sales, expenses, earnings, and other details of the business to anticipate the profits which might *688 reasonably be expected in future years, and, by means of a formula, to reduce those future profits to their present worth as of March 1, 1913. Earnings are frequently an important aid in determining values. A formula need not be cast aside merely because it is a formula. It may be helpful, if there is evidence showing its applicability and the proper factors to be used. The same may be said of various discount methods. But in the present case we are unable to say from the demonstration made by this witness that*1041 the values determined by him may be safely relied upon as the actual fair market values as of March 1, 1913. There is also evidence of the purchase price brought by nearby vacant land at times somewhat remote from March 1, 1913. This latter evidence is not very helpful.
The decision in this case is difficult because the parties have failed to introduce the testimony of well informed and sound witnesses on valuation. However, the evidence in the case, including records of sales, expenses, earnings, dividends, and other information, is such that the Board must render a decision no matter how great the difficulty. Like a jury, it must render its decision on the evidence. It has used its best judgment to fix a reasonable figure within the bounds of the evidence, fully conscious that others may differ and that some forceful objections to its determination may logically be made from the evidence. But the same would be true no matter what the determination of the Board.
In determining the proper amount to be used as a basis in 1930 and 1931 for reducing the amount realized in order to arrive at the net income from the transactions, we have also determined a value for the entire*1042 unsold burial space as of March 1, 1913. We have considered the methods suggested for allocating a portion of that basis to the various subdivisions. The primary contention of the petitioner, of course, has been that the Board should follow the opinion of its witness and determine directly a certain value for a representative square foot of ground in each section in which sales were made in the taxable years. The Commissioner, on the other hand, has merely divided the cemetery into improved and unimproved land. Our computations indicate that the method urged by the Commissioner will give the petitioner a slightly larger deduction for each year than would be obtained by dividing the total value among the various sections in proportion to their relative values as indicated by the petitioner's witness. Therefore, we have followed the Commissioner's method in checking our figures for the areas sold. The final amounts which we have determined for the two years are given in round figures. This is partly because we realize that our computations are at best not accurate and the few odd dollars, one way or the other, are much less than the probable percentage of error to which any determination*1043 or computation which we could make would be subject. We have not made the *689 value which we have determined for the entire available burial space as of March 1, 1913, a part of our findings. One reason for that deliberate omission is that such a finding is not necessary, since the case is determined, not by the total basis, but by the part applicable to the area sold in 1930 and 1931.
The record shows that between March 1, 1913, and December 31, 1931, the petitioner expended $28,242.57 for land improvements, exclusive of sewers and roads. The petitioner claims that 10 percent of these expenditures should be allowed as a further reduction of the amount realized from the sales made in 1931. A witness stated that he thought 10 percent would be a proper amount to allocate to the year 1931, but he did not give satisfactory reasons for his opinion. It does not appear just what portion of the cemetery benefited by the improvements in question or that the lots sold in either of these years represented 10 percent of that area. The record does not show whether or not any part of the $28,242.57 expended for land improvements was charged off as an expense in prior years. If*1044 the record justified any increase of the basis on account of these expenditures, we would make some allocation, but, under the circumstances, the basis is not to be increased in this manner. Cf. .
The only other issue in the case is whether or not the petitioner may deduct $1,163.06 from its income for 1931 as a debt ascertained to be worthless and charged off. This debt represented the unpaid interest on a mortgage which the petitioner had accrued for the years 1928, 1929, and 1930. The record does not show that this debt became worthless in 1931. It does not show what information the petitioner had when it charged off the debt. It shows that the property itself was not worth the face amount of the mortgage some years after the close of 1931. Obviously, a taxpayer has to make a better showing than is made in this case before the Board can reverse the Commissioner's disallowance of a bad debt item.
Decision will be entered under Rule 50.
Footnotes
1. It would also prepare the way for a double deduction, since it would not eliminate from the basis the cost of sales which is separately deductible. ↩
2. The figure of $6,000,000 is but an approximation. The record does not show exactly how much burial space the petitioner had in the cemetery on March 1, 1913, but a reasonably accurate computation can be made. The witness did not give values for some of the sections and values had to be assigned to those sections comparable to the values which the witness gave for other comparable sections. ↩
3. The record shows that the petitioner's gross income from sources other than the sale of land was at least equal to its gross income from sales of land, and the Commissioner argues that the earnings from other sources should not be considered as having any effect upon the value of the land. We think, however, that the willing buyer and the willing seller would consider the possibility of those additional earnings and the effect of that circumstance upon the value of the land. See, however, ; affd., . ↩