*3779 The fair market value as of March 1, 1913, of petitioner's sand and gravel deposit determined for depletion purposes.
*517 This proceeding is for the redetermination of deficiencies in income and profits taxes of $390.75, $23.53, $306.78 and $491.89 for the calendar years 1917, 1918, 1919, and 1920, respectively. The error alleged is the failure of the respondent to allow a sufficient or reasonable amount on account of depletion of petitioner's sand and gravel deposit.
FINDINGS OF FACT.
The petitioner is a corporation organized January 25, 1911, under the laws of the State of Washington, with its principal office and place of business at Centralia. The capital stock consists of 50,000 shares, having a par value of $1 per share. It is engaged in mining sand and gravel, using the open-pit method of recovery. At March 1, 1913, it owned 11.67 acres containing reserves of sand and gravel of 326,899 cubic yards. The following contiguous tracts were subsequently purchased: in 1914, 1 1/2 acres, containing 55,136 cubic yards of sand and gravel, *3780 at a cost of $980.80; in 1917, 2 acres, containing 54,853 cubic yards, costing $917.73; and in 1919, 2.30 acres, containing 115,126 cubic yards, costing $640. The deposit was favorably located with respect to transportation and market facilities, being situated on the east bank of the Chehalis River and within the city limits of Centralia, Wash., which has a population of 8,000 or 10,000 people. The deposit runs about 50 per cent sand and 50 per cent gravel, which are practically the same proportions as the demand for such materials in the territory served by the petitioner.
The town of Centralia is located on three transcontinental railroads, namely, the Northern Pacific, the Great Northern, and the Oregon and Washington, with which petitioner had direct physical connection by virtue of a railroad switch. Additional transportation facilities were afforded by the Pacific Highway which was within a half mile of the plant. Petitioner found ready markets in the towns and cities located along the railroads, making shipments to 39 different places during 1913, some of its sand and gravel being shipped as far east as Seattle, Auburn, Snohomish, and west to Montesano, McCormack, Raymond, *3781 and Malone, and south to Winlock. In the territory north of Centralia competition of the large *518 Puget Sound companies was encountered, which had the advantage of water transportation and a larger volume of business. The large proportion of petitioner's business was in and around Centralia and to the territory south and west of that place. The only other commercially operated deposits within a radius of 75 miles were located at Steilacoom, which is approximately 40 miles from Centralia. Some of these deposits run strongly to sand or small gravel, while others are in good proportions.
In February, 1911, the National Bank of Tacoma, in order to protect its interests, sent Sidney Plummer to Centralia as secretary and treasurer of the petitioner. Plummer took control of the corporation's business and properties, and in the next two years placed it on a paying basis. When he took over the management of the corporation its properties consisted of something over 11 acres of land, bunkers, stables, live stock and equipment.
Plummer offered to purchase all of petitioner's capital stock from the National Bank of Tacoma, but because of a lack of funds his proposition called*3782 for payment of the purchase price out of the subsequent earnings of the corporation. The bank received another offer from a third party which involved a cash consideration, but this offer was refused in favor of Plummer, who was notified of the bank's acceptance by the following letter:
TACOMA, WASHINGTON, Sept. 10, 1913.
SIDNEY PLUMMER, ESQ.,
Centralia, Wash.
DEAR SIR: In consideration of your past and future services to the Twin City Gravel Co., we hereby give you an option for a period of two years for the purchase of all the stock of the said Twin City Gravel Co., for the price of Forty Thousand ($40,000) Dollars.
THE CONDITIONS of this option are, that you shall pay us Five Thousand ($5,000.00) Dollars every six months to apply on the purchase price, together with interest at 7%, upon any unpaid balance, which balance is to be taken up in full at the expiration of the two year period.
It is, of course, understood that if you pay more than Five Thousand ($5,000.00) Dollars in any one six months, you shall have credit for such over payment on the next six months.
All insurance and taxes are to be kept up and the machinery in the plant kept in good working*3783 order. Any details not covered by this option, are supposed to be settled in a fair manner as between us.
Yours truly,
(Signed) STEPHEN APPLEBY, Cashier.
P.S. - It is understood that this option is non-transferable and that after $10,000 has been paid, interest on the balance shall be at the rate of 6%.
In accordance with their agreement, Plummer paid the bank $3,000 cash on September 10, 1913, and continued paying on the purchase price from time to time until the final payment was made in 1919. Interest was paid in accordance with the terms above set *519 forth. in the interval between 1913 and 1919, the capital stock stood in the name of and was voted by the bank, the stock being transferred to Plummer when the final payment was made.
The value of all the petitioner's physical assets, other than land, at March 1, 1913, was stipulated to be $17,359.12. There was no appreciable change in these assets between that date and September 10, 1913.
Balance sheets attached to petitioner's 1918 return show the following assets and liabilities:
| December 31, 1912 | ||||
| ASSETS | LIABILITIES | |||
| Real estate | $41,973.54 | Capital stock | $50,000.00 | |
| Equipment | 17,652.77 | Accounts payable | 177.60 | |
| Accounts receivable | 4,556.82 | Notes | 4,000.00 | |
| Cash | 218.09 | Unpaid labor | 188.60 | |
| Profit and loss | $11,535.02 | |||
| Less dividend | 1,500.00 | |||
| 10,035.02 | ||||
| Total | 64,401.22 | Total | 64,401.22 |
| December 31, 1913 | |||
| ASSETS | LIABILITIES | ||
| Real estate | $41,973.54 | Capital stock | $50,000.00 |
| Equipment | 15,857.35 | Accounts payable | 10.65 |
| Accounts receivable | 4,504.63 | Notes | |
| Cash | 241.94 | Unpaid labor | 88.97 |
| Dividend | 6,000.00 | Profit and loss | 18,477.84 |
| Total | 68,577.46 | Total | 68,577.46 |
At December 31, 1914, the real estate account was reduced on the books to $18,750.70.
The respondent placed a value of $250 per acre on the deposit in determining its March 1, 1913, value and allowed deductions for depletion purposes based on such value, resulting in deficiencies for each of the calendar years 1917 to 1920, inclusive.
OPINION.
MORRIS: The sole question involved in this proceeding is the March 1, 1913, value for depletion purposes of the sand and gravel deposit owned by the petitioner on that date.
Petitioner is contending for a value of $22,640.88, the difference between the sale price of the capital stock to Plummer on September 10, 1913, and the March 1, 1913, stipulated value of the physical assets other than land.
Plummer was fortunately situated with respect to the property. He had actually conducted the business for more*3785 than two years prior to the date of purchase of the stock and was certainly in a position to judge whether $40,000 was an exorbitant price. He testified *520 that the purchase price in his opinion represented the fair and reasonable value of the property, and further that the difference between the stipulated value of the physical assets and the purchase price represented the value of the deposit.
It is our opinion, therefore, that the fair market value of the petitioner's deposits on March 1, 1913, was $22,640.88, and the depletion allowances for the taxable years in question should be based on that value.
Judgment will be entered on 15 days' notice, under Rule 50.