*3305 The value for invested capital purposes of a 5,140-acre tract of coal lands, acquired in 1902 in exchange for petitioner's capital stock, determined.
*116 This proceeding is for the redetermination of a deficiency of $13,781.66, income and profits taxes for 1920. *117 The sole issue presented is the value, if any, which petitioner is entitled to include in invested capital for certain coal lands acquired in 1902.
FINDINGS OF FACT.
The petitioner is a corporation, organized and incorporated October 30, 1902, under the laws of the State of West Virginia, with its principal office in East Lynn, Wayne County, W. Va.
Prior to and during a portion of 1902 B. J. Prichard, in conjunction with Wayne Ferguson and J. R. Miller, held in fee, in ownership of minerals, and under option, many thousands of acres of land in the Stonewall District of West Virginia. In 1902 these holdings of Prichard and his associates were gone over by A. J. Perry together with an engineer and two other men. From these holdings a 5,140-acre*3306 tract was blocked out by A. J. Perry and George W. Miles. The tract was blocked out in the form of an arc approximately 8 miles in length, but narrow as to width, and was situated at the mouth of the valley of Camp Creek, Little Lynn Creek, and the left fork of Twelve Pole Creek, approximately 8 miles from a railroad and about 23 miles from the Ohio River and near the junction of the Kentucky and Ohio lines. The acreage as carved out prevented the shipping of coal from the valley above except over this tract, which was the only outlet for the wholly valley. The area thus bottled up amounted to approximately 15 square miles.
In 1902 these lands were in a virgin and undeveloped field. Prichard and his associates had obtained a charter for a railroad on or about June 6, 1902, but had done only such work as was necessary to maintain their charter. The tract had two seams of coal and an estimated minimum tonnage of recoverable coal of 31,090,000 tons, which had a value in 1902 of one cent a ton.
A. J. Perry and Miles arranged with Prichard to buy the land and to procure the financial assistance necessary to build the railroad and develop the coal properties. Prichard and his*3307 wife, and Prichard as Trustee, conveyed the acreage blocked out to W. W. Hughes, Trustee, by deed dated September 1, 1902, and at that time the railroad facilities had not been assured.
On October 30, 1902, the petitioner was organized for the specific purpose of taking over and operating the coal properties aforesaid, with an authorized capitalization of $300,000, par value $100 per share. The financial plan evolved by A. J. Perry and Miles, on the one hand, and by Prichard and his associates, on the other hand, called for a cash payment to Prichard and his associates of $51,400 and 40 per cent of the petitioner's capital stock.
*118 The minutes of the first meeting of the stockholders of the petitioner held on October 30, 1902, showed the following stockholders as charter members with their holdings:
| Shares. | |
| George W. Miles | 4 |
| Wayne P. Ferguson | 1 |
| B. J. Prichard | 1 |
| A. J. Perry | 3 |
| J. R. Miller | 1 |
At this meeting the directors elected were the stockholders abovenamed, each of whom received 10 votes. At an adjourned meeting of the stockholders on the same date A. J. Perry and Miles submitted a proposition for the purchase of the aforesaid block*3308 of 5,140 acres as follows:
To the Stockholders and Board of Directors of the East Lynn Coal Company:
GENTLEMEN: We submit to you the following proposition:
(1) We will cause Mr. W. W. Hughes, Trustee, to convey to your Company all the title that is vested in him in and to certain tracts and parcels of land situate in Wayne County, West Virginia, at and near the mouth of Lynn Creek, on the left fork of Twelve Pole Creek, being the same lands and rights and privileges therein that were conveyed to the said Hughes, Trustee, by B. J. Prichard and wife and B. J. Prichard, Trustee, by deed dated the 1st day of September, 1902, which deed is recorded in Deed Book 55 at page - of the record for deeds in the Wayne County Court Clerk's office, reference to which is here made for more particular description of said property, - we joining in said deed with said W. W. Hughes, Trustee, and Mrs. Miles, the wife of George W. Miles, joining therein for the purpose of relinquishing her right of dower in said property; said deed to convey all of the lands that were conveyed to the said Hughes, Trustee, by B. J. Prichard and wife and B. J. Prichard, Trustee.
(2) In consideration of the conveyance*3309 of said land your Company to issue to us, or our assigns, 2990 shares of the capital stock of said company, fully paid up and non-assessable, and also your Company to execute and give a mortgage over said property to secure the issue of $150,000.00 of first mortgage bonds, of the denomination of $5,000.00 each, the Big Sandy, East Lynn and Guyan Railroad Company joining in said mortgage and including therein all of its property as a security for the payment of said bonds and the interest thereon. A form of mortgage is here submitted as a part of this proposition, marked 'Mortgage'.
(3) Ten (10) of said bonds are to go as a payment for the original purchase price of said lands; the other ten (10) bonds we will take and furnish therefor the sum of $50,000.00 to the credit of your Company, to be used for the purpose of opening up mines upon said property, building and constructing and providing and equipping houses, stores, and mining plant and operating the coal mines to be developed upon said lands.
FOURTH. We will also pay to the Big Sandy, East Lynn and Guyan Railroad Company the sum of fifty thousand dollars ($50,000) in cash, to be used by said Company in the construction*3310 and equipment of its railroad from a point at or near the town of Wayne, Wayne County, W. Va., to a point at or near the town of East Lynn, Wayne County, W. Va., in consideration of which sum of money so to be furnished at once $50,000.00 of the bonds provided for under *119 the joint mortgage executed by the East Lynn Coal Company and the Big Sandy, East Lynn and Guyan Railroad Company, and the further consideration of 2990 shares of the capital stock fully paid up and nonassessable of the Big Sandy, East Lynn and Guyan Railroad Company.
If the foregoing proposition is accepted, we hereby direct the President and Secretary of the East Lynn Coal Company to issue the stock contemplated in this proposition as follows:
| Shares. | |
| Wayne P. Ferguson | 249 |
| J. R. Miller | 249 |
| A. I. Miller | 50 |
| Clyde Miller | 50 |
| B. J. Prichard | 499 |
| George W. Miles, Trustee | 1893 |
And we also further direct that the stock of the Big Sandy, East Lynn and Guyan Railroad Company be issued by the Secretary and President of that Company to the following persons:
| Shares. | |
| Wayne P. Ferguson | 498 |
| J. R. Miller | 498 |
| B. J. Prichard | 448 |
| A. J. Perry, Trustee | 1546 |
All*3311 of which is respectfully submitted.
GEO. W. MILES. A. J. PERRY.The foregoing proposition was accepted by the other stockholders, A. J. Perry and Miles withdrawing while the vote was being taken. Accordingly, W. W. Hughes, Trustee, George W. Miles, Mattie M. Miles, his wife, and A. J. Perry as parties of the first part, conveyed the 5,140-acre tract to the petitioner by deed dated October 31, 1902, being the same acreage which had theretofore been conveyed by B. J. Prichard and his wife and B. J. Prichard, Trustee, to W. W. Hughes, Trustee. The stockholders of the petitioner and the stockholders of the Big Sandy, East Lynn & Guyan Railroad Co., hereinafter referred to as the railroad company, authorized the issuance of 30 bonds of the denomination $5,000 each, secured by a first mortgage on all the property of the petitioner and the railroad company. It was further provided that the properties of the two companies were to be conveyed to J. B. Perry and W. W. Hughes, as trustee, who were to hold the same until the said bonds had been retired.
On December 26, 1902, the company issued 249 shares of stock to Wayne B. Ferguson, 249 shares to J. R. Miller, 499 shares to B. *3312 J. Prichard, and 1,893 shares to G. W. Miles, Trustee, making a total of 2,890 shares issued in December.
After the bonds were issued they were turned over to George W. Miles and A. J. Perry, who entered into the following contract, as *120 parties of the first part, with the Bank of Bramwell, party of the second part, on December 27, 1902:
WITNESSETH: THAT WHEREAS, THE EAST LYNN COAL COMPANY, by action of the stockholders at a meeting held at the office of Vinson & Thompson, in the town of Huntington, State of West Virginia, on the 30th day of October, 1902, and by action of the Board of Directors of said Company held on the same day, at the same place, accepted a proposition made by the said GEORGE W. MILES and A. J. PERRY, parties of the first part, whereby the said THE EAST LYNN COAL COMPANY and THE BIG SANDY, EAST LYNN AND GUYAN RAILROAD COMPANY were to issue, sell, and deliver to the said GEORGE W. MILES and A. J. PERRY thirty (30) bonds of the denomination of FIVE THOUSAND DOLLARS ($5,000.00) each, making a total of ONE HUNDRED AND FIFTY THOUSAND DOLLARS ($150,000.00), the proceeds of which sale were to be applied as follows:
FIRST: The proceeds of the sale of*3313 ten (10) of said bonds were to go as a payment for the original purchase price of certain lands conveyed to W. W. HUGHES, TRUSTEE, by B. J. PRICHARD and wife, and B. J. PRICHARD, TRUSTEE, by deed bearing date on the 1st day of September, 1902, and by said W. W. HUGHES, TRUSTEE, conveyed to THE EAST LYNN COAL COMPANY by deed bearing date on the 30th day of October, 1902.
SECOND: The proceeds of the sale of ten (10) of said bonds, or the sum of FIFTY THOUSAND DOLLARS ($50,000.00) were to be used for the purpose of opening up mines upon said property, building, constructing, providing and equipping houses, stores, mining and operating coal mines to be developed on the said lands.
THIRD: The proceeds of the sale of ten (10) of said bonds, or the sum of FIFTH THOUSAND DOLLARS ($50,000.00), were to be used by THE BIG SANDY, EAST LYNN AND GUYAN RAILROAD COMPANY in the construction and equipment of its railroad from a point at or near the town of WAYNE, WAYNE COUNTY, WEST VIRGINIA, to a point at or near the town of EAST LYNN, WAYNE COUNTY, WEST VIRGINIA.
AND WHEREAS the said bonds have been issued, sold, and delivered to the said GEORGE W. MILES and A. J. PERRY.
Now THEREFORE in*3314 consideration of the terms, conditions and stipulations hereinafter contained, mutually binding the parties hereto, the said GEORGE W. MILES and A. J. PERRY, parties of the first part, have on the conditions hereafter named sold, and by these presents do sell and deliver to THE BANK OF BRAMWELL, BRAMWELL, WEST VIRGINIA, party of the second part, the said thirty (30) bonds at par value, or for the sum of ONE HUNDRED AND FIFTY THOUSAND DOLLARS ($150,000.00), which sum shall be paid as hereinafter provided.
IT IS MUTUALLY UNDERSTOOD AND AGREED, however, that this sale is and shall be on the following terms and conditions, to wit:
FIRST: The proceeds of the sale of said bonds shall be applied as set out and stipulated in the preamble of this contract, that is to say, FIFTY THOUSAND DOLLARS ($50,000.00) shall be on deposit in The Bank of Bramwell, Bramwell, West Virginia, to the credit of ISAAC T. MANN, TRUSTEE, for GEORGE W. MILES and A. J. PERRY, and shall be applied to the payment of the purchase money of the real estate hereinbefore mentioned. Said money shall be paid out only on proper voucher of THE EAST LYNN COAL COMPANY, approved by ISAAC T. MANN, TRUSTEE, as aforesaid.
*3315 SECOND: FIFTY THOUSAND DOLLARS ($50,000.00) shall be on deposit in the said THE BANK OF BRAMWELL to the credit of ISAAC T. MANN, TRUSTEE for GEORGE W. MILES and A. J. PERRY, coal company account, to be used, or so *121 much thereof as may be necessary for the purpose of opening up mines on the said property hereinbefore mentioned, building, constructing, providing and equipping houses, stores and mining plants, and operating coal mines to be developed upon said lands; said amount to be paid out only on proper voucher of THE EAST LYNN COAL COMPANY, approved by ISAAC T. MANN, TRUSTEE for GEORGE W. MILES and A. J. PERRY, coal company account.
THIRD: The sum of FIFTY THOUSAND DOLLARS ($50,000.00) shall be on deposit in said bank to the credit of ISAAC T. MANN, TRUSTEE for GEORGE W. MILES and A. J. PERRY, railroad Company account, to be used in the construction and equipment of a railroad from a point at or near the town of WAYNE, WAYNE COUNTY, WEST VIRGINIA, to a point at or near the town of EAST LYNN, in said County and State; said amount to be paid out only on proper voucher of THE BIG SANDY, EAST LYNN AND GUYAN RAILROAD COMPANY, approved by ISAAC T. MANN, TRUSTEE, as aforesaid.
*3316 * * *
The construction of the railroad was started in November, 1902, and was completed in December of the following year. Shipments of coal were made during 1903. In 1908 the railroad company was purchased by the Norfolk & Western Railroad.
The journal entry made by the company evidencing the above transactions, dated January 1, 1903, is as follows:
| Real estate | $351,400 | |
| G. W. Miles and A. J. Perry | $51,400 | |
| Capital stock account - | ||
| George W. Miles and A. J. Perry bought of B. J. Prichard, | ||
| 5,140 acres of land for the East Lynn Coal Company and | ||
| paid for same as follows: | ||
| Cash $51,400, and $300,000 of the stock of the East Lynn | ||
| Coal Company | 300,000 |
The balance sheet of the company on August 30, 1903, was as follows:
| Dr. | Cr. | |
| Geo. W. Miles and A. J. Perry | $25,129.92 | |
| Geo. W. Miles | 3.25 | |
| Bonded debt | $100,000.00 | |
| Real estate | 351,400.00 | |
| Capital stock | 300,000.00 | |
| Interest and discount | 79.85 | |
| Expense account | 1,675.43 | |
| Construction account | 10,146.90 | |
| Mine account | 9,924.53 | |
| Live stock account | 1,274.00 | |
| Books and stationery | 49.21 | |
| Transportation account | 225.80 | |
| A. J. Perry | 540.46 | |
| Coal account | 66.65 | |
| 223.00 | ||
| 400,369.50 | 400,369.50 |
*3317 During the entire history of the company the real estate account has been carried at $531,400.
*122 The production of the company from 1903 to 1920, inclusive, shows the tonnage mined and the cumulative totals for each year as follows:
| Year | Tons | Total |
| 1903 | 1,177.1 | |
| 1904 | 20,633.875 | 21,810.975 |
| 1905 | 19,684.87 | 41,495.845 |
| 1906 | 17,257.28 | 58,753.125 |
| 1907 | 46,232.60 | 104,985.725 |
| 1908 | 31,847.17 | 136,832.895 |
| 1910 | 41,865.276 | 224,988.551 |
| 1910 | 41,865.276 | 224,988.51 |
| 1911 | 33,560.29 | 258,548.841 |
| 1912 | 71,275.535 | 329,824.376 |
| 1913 | 73,868.45 | 403,692.826 |
| 1914 | 56,849.45 | 460,542.276 |
| 1915 | 68,462.60 | 529,004.876 |
| 1916 | 62,887.30 | 591,892.176 |
| 1917 | 55,073.90 | 646,966.076 |
| 1918 | 36,911.25 | 683,877.326 |
| 1919 | 25,309.55 | 709,186.876 |
| 1920 | 39,091.25 | 748,278.126 |
During the years 1903 to 1908, inclusive, the petitioner sustained losses, but thereafter, with the exception of a loss of $170.17 in 1919, it realized a profit for each year, so that for the 18 years the company realized a net gain of $192,578.03. During this period depreciation and depletion amounting to $36,242.86 were charged off. The $150,000 bond issue was retired by the petitioner*3318 prior to 1920.
The petitioner was the principal coal operator in this field until the war period, when some of the lands farther up the valley were opened up and operated. The outbreak of the world war quickened interest in the lands bottled up by the company's tract and sales occurred from time to time thereafter. In 1917 a tract of 123 acres contiguous to the company's tract was sold for $19,000. The owner of this tract in 1906 and 1907 asked $10,000 for it. Another sale of 368 acres was made in the same year of lands located father up the valley for $45,000. A third tract of approximately 368 acres, which adjoins a portion of the company's tract, changed hands in June, 1924, in a trade. The owner of this 368-acre tract had refused to sell it for $110,000. In 1926 the Katona Coal Co. purchased the remainder of the 123-acre tract hereinabove mentioned, which it had been operating under lease since 1923 and from which it had extracted 381,712 tons of coal and paid therefor the sum of $32,000. It was estimated at the date of purchase that there remained in this tract 50.1 acres of recoverable coal. All of the coal mined on these tracts situated in the valley back of the*3319 petitioner's acreage had to be shipped out over the petitioner's property. The petitioner collected toll on every ton of coal shipped from these tracts, except that during the war no charge was made. From March, 1923, until February 29, 1928, the Katona Coal Co. paid the petitioner at the rate of 3 cents per ton for coal hauled over its property, the total amount paid being $20,287.05.
In computing invested capital the respondent refused to allow any value for the property acquired in 1902 and determined that petitioner's invested capital had been erroneously computed in the *123 amount of $301,264.80, representing an overvaluation of the 5,140 acres of coal lands. The respondent allowed invested capital for 1920 in the amount of $48,110.38, which was less than the petitioner's surplus, which was $49,375.18.
OPINION.
MORRIS: The issue to be determined is the value of certain coal lands acquired by the petitioner in 1902 for all of its capital stock and $51,400 in cash. The petitioner contends that the value of the lands in 1902 was $351,400 and that they have always been carried at that amount on its books. The respondent refused to allow petitioner any value for*3320 such lands in computing its invested capital.
In 1902 Prichard, Ferguson, and Miller owned thousands of acres of coal lands, and on or about June 6, 1902, acquired a charter to construct a railroad but were unable to go ahead with it. In the summer of the same year A. J. Perry, with others, looked over these holdings of Prichard and his associates, and Perry, together with Miles, blocked out a tract of 5,140 acres, located approximately 8 miles from the railroad but lying across the mouth of a valley and successfully blocking off thousands of acres above this tract from the railroad.
Pursuant to some plan or agreement among them, which is not in evidence, Prichard and his associates conveyed this tract to W. W. Hughes, Trustee, by deed dated September 1. At that time the coal lands were in an undeveloped state without railroad facilities. Miles and Perry negotiated the financial scheme whereby capital was secured to build the railroad, equip and develop the mine, and pay to Prichard and his associates $51,400 in cash. At some time between September 1 and October 30, Perry and Miles acquired an inteerst in the 5,140-acre tract, as the deed which conveyed the property on that*3321 date to the petitioner ran from Hughes, Trustee, A. J. Perry, George W. Miles and Mattie Miles, as parties of the first part, to the petitioner, as party of the second part.
The consideration stated in the proposition submitted to the petitioner by Perry and Miles and as accepted by the petitioner shows that the lands were acquired by the issuance of all of the petitioner's capital stock to the six persons specified in the minutes of the stockholders' meeting held on October 30, the execution of a mortgage on all the property in the sum of $150,000, which was to be used for the purposes set forth in the proposition. Under these facts it seems clear that the lands were acquired in exchange for the petitioner's capital stock and $51,400 in cash.
It remains to determine whether the property exchanged for stock had a fair market value equal to the par value of the stock exchanged *124 therefor. The testimony shows that on October 30, 1902, the construction of a railroad was assured, and this fact, together with its favorable location, made the tract very valuable. Two witnesses were produced who testified that the value of the coal in 1902, with railroad facilities assured, *3322 was one cent per ton. One of the witnesses was a mining engineer, and the other a coal operator, and also an officer and stockholder of the petitioner. The latter witness testified that the tract had two seams of coal, which fact was known in 1902, and that the estimated minimum tonnage of recoverable coal was 31,090,000 tons. The respondent's witness was unable to refute this testimony, and these facts, when considered with the fact that petitioner was able to secure a $150,000 mortgage on the property, convince us that these lands had a cash value of $310,900 in 1902 when paid in for capital stock and that the respondent erred in failing to allow any value in the computation of invested capital.
Petitioner adduced testimony to show that the peculiar location of its tract further enhanced its value by something like $40,000 to $50,000. The testimony with respect thereto consisted of sales in and after 1917 of acreage in the valley above, and haulage charges which were collected on the coal mined in that region and shipped out over its land. We have carefully considered this phase of the case and have given full weight to the matter of location in arriving at the value of $310,900, *3323 but we do not believe from the evidence adduced that any further value should be allowed because of this factor.
Judgment will be entered under Rule 50.