*2945 The value of a clay deposit paid in for capital stock, determined for purposes of invested capital and of allowances for depletion.
*1359 These proceedings result from the determination of deficiencies amounting as follows: 1921, $1,578.02; 1924, $596.20.
The clay deposits paid in to the petitioner for capital stock of the petitioner in January, 1917, had an aggregate value of $117,477.80. The petitioner alleges error with reference to two issues: (1) Invested capital is understated, due to the failure to allow a value greater than $5,350 for the clay deposits, for invested capital purposes for 1921, and (2) allowances as deductions from income for depletion should amount to $2,596.37 in 1921, and $3,445.50 in 1924, in lieu of allowances by the respondent amounting respectively to $91.80 and $121.86.
Upon motions duly made and granted, the petitioner was permitted to file an amended petition, and the appeals were consolidated for purposes of hearing and decision.
FINDINGS OF FACT.
The petitioner is*2946 a Texas corporation with its principal place of business at Athens, Henderson County, Tex.
C. H. Coleman started in the business of manufacturing brick in Texas in 1892, at a location within one-half mile of the plant of the petitioner. Coleman continued the manufacture of brick until 1902, when he abandoned the site he had occupied in 1892. His reasons for doing so were that the clay deposit was poor in quality and the business unprofitable. Coleman then investigated other available deposits of clay and satisfied himself that the site under consideration in this case, located about one-half mile from Athens, Tex., contained good quality clay for his purposes, and he acquired the land and established a brick-making plant, erecting the plant buildings on that portion of the land which showed little or no content of clay. The business operations of Coleman in this enterprise were fairly successful, financially. He sold his products in the States of Texas, Oklahoma, and Louisiana. The records of operations prior to 1917, however, have been destroyed. In the earlier operations from 1902 to *1360 1915, Coleman was engaged mainly in the manufacture of common brick, although*2947 a small quantity of face brick was manufactured and sold, of a mixture of the upper and the lower deposits of clay. Through these earlier operations the deposits of clay nearer the surface were utilized and disposed of, resulting in the exposure of deposits, located deeper, containing high-grade clay suitable for fire brick and for face brick. In all three, strata of clay were encountered, the top stratum being some 8 or 9 feet in depth, and the lower strata containing the higher-grade clay, reaching to a depth of about 32 feet from the surface. At the time of the organization of the petitioner the deposit had been worked in a pit to a depth of 28 feet.
At this time the representatives of the Evans & Howard Brick Co., of St. Louis, Mo., which concern had been conducting a branch brick manufactory in the vicinity under the name of the Athens Fire Brick Co., were endeavoring to acquire a deposit of clay in order that they might continue operations in the neighborhood, the deposit of clay they had previously been working having reached exhaustion and in addition the main building and power house of their plant having been destroyed by fire shortly before, in 1916.
At the beginning*2948 of 1917 Coleman was anxious to take his wife away in order to better her health, and he was unwilling to leave his brick-making business to the management of his assistants. Coleman conceived the idea of inducing R. F. Williams, formerly manager of the Athens Fire Brick Co. plant at Athens, to associate himself with the business owned by Coleman. Williams was an experienced brick manufacturer, and, in addition, was connected with a competitor and likely to personally influence the patronage of new customers. Coleman acquainted Williams with his idea and found Williams unwilling to consider a proposition unless a new plant with increased capacity were provided. As a result of the negotiations between Coleman and Williams, the petitioner was organized in January, 1917, with an authorized capital stock of $65,000 par value, of which $35,000 par value was issued to Coleman in consideration of various assets which were valued as follows:
| Clay deposit | $5,350 |
| Other land | 900 |
| Plant | 19,750 |
| Additional equipment | 1,500 |
| Finished products | 7,500 |
| 35,000 |
Coleman turned over to Williams $5,000 par value of the stock, taking in return Williams' note for the amount of*2949 the par value, and bearing interest at 8 per cent per annum.
*1361 Twenty-seven thousand and one hundred dollars par value of the stock was issued for cash at par, paid in by various individuals, mainly friends or relatives of Coleman. None of the stock was offered for sale to the general public. In all, $62,100 par value of the capital stock was issued in 1917. In 1918 the remainder of the stock, $2,900 par value, was issued for cash at par, to the son of an individual who had originally subscribed for a greater amount but was prevented from taking the stock by ill health. The construction of a new plant on the site was immediately started, and it was completed by 1918.
Representatives of the Evans & Howard Brick Co. had been endeavoring to persuade Coleman to sell his clay property to them. They first proposed to purchase the property on a basis of 25 cents per ton of clay deposit, but this offer Coleman refused. In the late fall of 1917, the same people offered to purchase the capital stock of the petitioner for a price of $250 per share, conditioned upon acquisition of the entire outstanding stock. This was at a time when the new plant was nearly completed by*2950 the petitioner. This offer was also refused.
At the date in 1917, when the property was transferred to the petitioner for stock, the clay deposits contained an aggregate of 847,705 tons of all kinds of clay. Of this tonnage approximately one-fourth was clay near the surface, of a depth of 8 feet, and the remaining three-fourths lay below the surface clay, and of an average thickness of 22 feet. The deposit was located between two railroads, with a spur track less than 1,000 feet running from the factory to both railroads. The open-pit method of quarrying was in operation, the clay being dug with plows and scrapers and hauled a distance of 400 feet to the clay sheds.
In addition to the territory previously served by Coleman, the petitioner extended the sale of its products to Arkansas and Mexico.
Clay consumed was recorded upon the books of the petitioner as follows:
| Year | Milled fire clay | Burned products |
| Tons | Tons | |
| 1919 | 850 | 20,711.4 |
| 1920 | 1,213 | 22,119 |
| 1921 | 757 | 13,814 |
| 1922 | 755 | 19,583 |
| 1923 | 755 | 21,526 |
| 1924 | 195 | 19,091 |
| 1925 | 519 | 19,378 |
| 1926 | 176 | 15,774 |
The allowances which were charged off on the books for depletion of the*2951 clay deposit were at the following rates: 25 cents per ton in 1919, 1920, 1921, and in part of 1922; 15 cents per ton in the remainder of 1922, 1923, 1924, 1925, and 1926.
*1362 In connection with the manufactured products of the petitioner, the clay which is "burned" is subject to a loss in weight of approximately 24 per cent of the weight of the finished product. Thus, where the weight of the burned product is 100 tons, the probable weight of the clay consumed was 124 tons.
The output of the petitioner weighed as follows:
| Year | Manufactured burned products | Sales of milled fire clay |
| Tons | Tons | |
| 1921 | 14,070 | 464 |
| 1924 | 18,475 | 801 |
The profits, according to the books of the petitioner, amounted as follows:
| Year: | Amount |
| 1917 | $2,397.92 |
| 1918 | 28,775.76 |
| 1919 | 31,540.57 |
| 1920 | 51,498.70 |
| 1921 | 17,857.82 |
| 1922 | $47,658.98 |
| 1923 | 54,149.52 |
| 1924 | 23,880.59 |
| 1925 | 35,071.29 |
| 1926 | 11,019.51 |
Selling prices of the products of the petitioner advanced slightly toward the end of 1917, and they advanced sharply in 1918.
The fire clay in the deposit is of the plastic type as distinguished from flint clay. It can be worked by*2952 the dry-press method and also by the stiff-mud or soft-mud method. Under a test made by the Bureau of Standards, of the United States, the fusing point was determined to be as of cone 32, which is understood in the ceramic industry to indicate a high refractory power. The deposit is uniform and unusually thick, the average of the deposits being for the United States between 5 and 10 feet thick. Clay is plentiful in Texas but fire clay of the high grade of the petitioner's is not plentiful.
In the manufacture of burned-clay products, a large factor in the cost is the conveyance of the clay to the factory.
About the beginning of 1917, P. E. Miller, an experienced manufacturer of pottery and hollow building tile, entered into an agreement with the authorities of Henderson County, Texas, to extract at his own expense, fire clay from the poor farm, and to pay for the clay 5 cents per ton. Clay was quarried from the site in 1917, and hauled a distance of about a mile at a cost to Miller for the haul, of 60 cents per ton. The agreement is still in operation. The clay deposit paid in to petitioner for stock had a value at the date paid in, of $117,477.80.
*1363 OPINION.
*2953 LOVE: The major question for decision in this case is the value of a deposit of clay at the time when it was paid in to the petitioner for stock in 1917. No questions of law are at issue. It is undisputed that the amount of the value is allowable for invested capital purposes, and also for the purpose of the computation of deductions from income by way of allowances for depletion of the deposit.
The value originally entered upon the books for the clay amounted to $5,350, and has been accepted by the respondent. It appears, however, that there were many influences at work at the time when the petitioner was organized and capitalized for the purpose of taking over a going business and of expanding it through the construction and operation of a larger plant. We are satisfied that the amount is not representative of the then actual value of the clay deposit, and we are convinced of this, even though an amount of stock was sold in a restricted circle for cash at par concurrently with the acquisition of the clay deposit for stock.
It is in evidence, and uncontroverted, that there was a ready market for the clay deposit at the beginning of 1917. The deposit was unusual in extent, *2954 of good quality, and favorably situated. A competitor temporarily disabled by the destruction by fire of its plant, and by reason of the exhaustion of its available clay reserve was negotiating for a purchase, and was anxious to acquire the property. We do not know what was the offer of this competitor at the beginning of 1917. At the latter part of 1917 the offer was for the entire capital stock of the petitioner on a basis of $250 per share. "Sometime in 1917," an offer of 25 cents per ton "for the clay" had been made.
We agree with the respondent that this evidence is too indefinite to be relied upon as fully supporting the contention of the petitioner. However, fire clay, in the ground, in this part of Texas, was certainly worth 5 cents per ton, for an experienced manufacturer of fire clay products paid that price for clay quarried from the lands of the poor farm, in Henderson County wherein was located the petitioner's deposit, and the agreement to do so was entered into just about the time of the transfer here under consideration. After abstraction this 5-cent clay was hauled by the purchaser a distance of a mile or so at an additional cost, for the haul, of 60 cents*2955 per ton. Obviously this question of expense of hauling enters into the of a deposit, and the deposit of the petitioner, due to its favorable location very near to two railroads and to its own plant site was probably worth much more than 5 cents a ton. The purchaser of the clay from the poor farm testified, and gave his opinion of *1364 the value of the clay deposit of the petitioner. Petitioner does not claim the full amount of this value, proposing to discount it over the probable life of the deposit, using a mathematical formula. Upon a careful consideration of the record upon which this case must be decided we feel that the petitioner has sustained the burden of proof laid upon it. With no satisfactory evidence to show that the contention of the petitioner is not correct, we conclude that the value claimed, amounting to $117,477.80, should be allowed for purposes of invested capital and for the computation of the deductions for depletion.
The petitioner further contends that in the computation of the number of tons of clay extracted in each of the taxable years, recognition should be given to the fact that there is a loss of weight of the clay incident to the burning, *2956 consequently the amount of depletion charged off on the books and claimed in the returns does not measure the amount of clay extracted. The original records of the petitioner from 1919 to 1926, inclusive, are in evidence in the form of monthly vouchers prepared by Williams, who is now dead, charging off costs of manufacture and allowances for depletion. Williams was a practical and experienced manufacturer of clay products, probably well acquainted with the loss in weight of the clay. Some of the vouchers bear signs of probable consideration by the maker of them, of the loss in weight of the clay. Depletion should be based on the value herein determined, and on the clay, rather than the finished product tonnage.
Decision will be entered under Rule 50.