*4284 1. Value of contracts determined.
2. Certain depreciation deductions denied because of insufficient evidence.
*1143 There proceedings result from determinations of deficiencies in income and profits taxes in the following amounts: for 1920, $7,994.56; for 1921, $579.55; and for 1922, $1,893.34. The two proceedings were consolidated for the purpose of hearing and decision.
Petitioner alleges error with reference to the following issues: (1) No value for invested capital purposes has been allowed in any of the taxable years for two contracts paid in in 1915 for common *1144 stock of petitioner, alleged to have had a value of $197,025; (2) deductions from income have been disallowed in each of the taxable years for allowances set aside to cover the expense of brush disposal; (3) income has been increased for 1920 by the amount, $600, of a promissory note of petitioner for money advanced by a stockholder; (4) the allowances for exhaustion, wear and tear of the property of petitioner for the fiscal year ended October 31, 1920, are not*4285 reasonable, respondent having reduced the amounts claimed by petitioner in its return. An additional allowance is now claimed for the year 1920 on assets acquired during the year but previously overlooked.
At the hearing the second and third issues were abandoned by petitioner, and all of the fourth issue save the additional allowance on assets acquired during the year.
FINDINGS OF FACT.
The Wind River Timber Co. was incorporated prior to June 4, 1913, under the laws of the State of Wyoming, and issued eight shares of its capital stock, of which 200 shares of a par value of $1,000 each had been authorized and no more, as follows:
One share each to the following named persons:
W. J. McLaughlin L. E. McLaughlinRobert Coddington
E. M. Biggs A. C. FosterFred R. Wright
R. F. McLaughlin E. H. McLaughlinPrior to April 10, 1915, the Wind River Timber Co. acquired two contracts, one with the United States Government, dated January 23, 1914, providing for the purchase of 125,000,000 feet of timber, and one with the Chicago & North Western Railway Co., dated June 13, 1913, providing for the sale to that company of 3,200,000 railroad ties, deliveries to be at the*4286 rate of 350,000 to 400,000 ties per year.
The Wyoming Tie & Timber Co. was incorporated under the laws of the State of Delaware by articles of incorporation filed April 10, 1915, and was authorized generally to engage in a general tie, timber, and lumber business, including the manufacture and sale, both wholesale and retail, of all manner of ties, lumber and other timber products. It was also authorized to carry on a general merchandise business and lease and own real and personal property, to pledge the same and to borrow money. The capitalization consisted of 3,000 shares of preferred stock, par value $100 each, and 6,000 shares of common stock, par value $100 each, or a total capitalization of $900,000. The articles of incorporation provided that the preferred stock drew 8 per cent cumulative dividends beginning November 1, 1915, and the company was required, beginning January 1, 1917, to *1145 set aside $35,000 per year to retire preferred stock. The board of directors of this company consisted of E. M. Biggs, A. C. Foster, J. H. Potts, W. J. McLaughlin, R. F. McLaughlin, Fred R. Wright and Chas. D. Hayt, Jr.
Ever since the date of its incorporation the Wyoming*4287 Tie & Timber Co. has maintained its corporate existence and has been engaged in carrying out its corporate purposes, with its principal business being conducted in the State of Wyoming.
At their first meeting on April 19, 1915, a proposition was approved by the stockholders of petitioner to make an offer to purchase all of the property, real, personal, or mixed, wheresoever situate, owned by Wind River Timber Co., together with all contracts, rights, choses in action, claims or demands, bills receivable and assets of every description of said Wind River Timber Co., and to assume all contracts, contract obligations, duties, debts, and all other obligations of every sort of Wind River Timber Co., and to issue in consideration for the property and assets $350,000 of the authorized capital stock of petitioner.
By agreement dated June 12, 1913, between the Wind River Timber Co. and Chicago & Northwestern Railway Co., the Timber Company agreed to sell and deliver to the Railway Company, and the Railway Company agreed to receive and pay for 3,200,000 railroad cross ties at the rate of 65 cents for each No. 1 tie, and 45 cents for each No. 2 tie, delivery of ties on the first day of*4288 May, 1914, and thereafter to commence at the rate of not less than 350,000 ties per year, and not more than 400,000 ties per year.
The contract executed by Wind River Timber Co. to purchase timber from the United States was for a period of eight years beginning May 1, 1914. It was not assignable, and in order to effect the transfer to petitioner in 1915 of all of the contract rights of Wind River Timber Co. it was necessary for the Wind River Timber Co. to bring about the execution of a new contract in May, 1915, to which the petitioner and the United States were parties. This contract was signed by petitioner on May 7, 1915, approved by the Acting Forester on May 27, 1915, and it provided, so far as material here, that the petitioner purchase, from an area of approximately 68,000 acres, all the liver lodgepole and limber pine, Douglas and alpine fir, and Engelmann spruce timber marked or designated for cutting by a forest officer, and all the standing and down dead timber of the same species, merchantable as hereinafter defined for saw logs and hewn railroad ties, 125,000,000 feet up to and including the amount heretofore cut by the said Wind River Timber Co. under its contract*4289 aforesaid, and assume and and all damages of whatever nature accruing to the United States, or to which the United States may be *1146 entitled by reason of the said Wind River Timber Co.'s failure to fully perform all and singular the conditions and obligations of its contract aforesaid, and remove the timber cut and left on the ground by said Wind River Timber Co. and clean up said cut-over area and dispose of the brush thereon resulting from said cutting in the manner hereinafter provided for with respect to the timber purchased under this contract.
It was agreed and understood that the total amount of live and dead timber to be cut under this contract should not exceed board measure, log scale, or equivalent. Petitioner further agreed to pay to the Denver National Bank to the credit of the United States, a sum equal to the total value of all timber cut, as determined by the forest officer in charge, at the rate of $2.75 per thousand feet, board measure for the first 62,500,000 feet of live and dead saw logs, 85 cents each for live and dead hewn railroad ties, $1.50 per thousand feet for liver and dead post, mine, tie and prop material, and for the remainder of the timber*4290 such price, not exceeding $3.25 per thousand feet for saw logs, 12 cents each for railroad ties, and $2 per thousand feet of prop material, etc., as the forest officer should specify after the first 62,500,000 feet were cut. It was agreed that all timber should be cut and removed not later than February 2, 1922.
The assignment to petitioner by Wind River Timber Co. of its contract with the Chicago & North Western Railway Co. was agreed to in writing by the three parties under date of May 13, 1915, and it became effective upon the approval of the contract between petitioner and the United States, on May 27, 1915. The assets of Wind River Timber Co. were taken over June 1, 1915.
In addition to the assets acquired from the Wind River Timber Co., petitioner acquired $225,000 in cash, by sales of the securities of petitioner to the public through the firm of Sweet, Causey, Foster & Co. The cash was used to pay off liabilities of the Wind River Timber Co. which had been assumed by petitioner.
The area to which petitioner acquired the timber rights, was located in mountainous country at the head of the Wind River, about 100 miles by wagon road from Riverton, Wyo. The timber was*4291 mostly lodgepole pine and about 85 per cent of it was of a size suitable for hewing directly into railroad ties. Ties hewn from lodgepole pine were considered the best ties for railroad purposes. The area contained the source of timber located nearest to Riverton, where was located a timber treating plant. The territory contiguous contained from 100,000 acres to 200,000 acres of good timber lands but it was not all immediately available for timber cutting *1147 as the plans of the United States Forestry Service called for timber cutting on a basis which would enable a recut of an area every 40 years without denuding any part of the area. The Wind River is swiftly flowing, subject to an annual flood stage at the time of the melting of the snow in the mountains, but at other times it was a satisfactory stream for floating logs and ties to Riverton. It was necessary to remove rocks and boulders in the more rapid stretches. The Wind River Timber Co. engaged in the improvement of the river in 1914. A market for the entire production of ties was afforded by the contract with the Chicago & North Western Railway Co. For the lumber produced, as well as the by-products of sawdust, *4292 fence poles and mine props, there was a market at Riverton, eastward as far as Casper, and westward to Lander. The freight rates on lumber from other sources handicapped petitioner's competitors.
The community of Riverton was prosperous and booming in 1915.
The drive down the river by the Wind River Timber Co. in 1914 was between 30,000 and 40,000 ties. This was the only drive ever made by that company. There were many more ties produced in the woods which were not brought out in that year. At that time, that company was working about 100 tie choppers. The supply of labor grew very scarce in 1915. The trend of costs of production was upward.
The books of account of petitioner for the period from organization to October 31, 1916, can not be found. The books now available were opened November 1, 1916. Respondent disallowed from invested capital a value of $555,100, appearing on the books of petitioner in an account headed "Contracts and Goodwill."
The capital stock of petitioner outstanding on March 3, 1917, was of a par value of $788,100.
For the Du Noir operations, during 1919 and 1920, petitioner acquired by purchase and by construction additional assets and*4293 expended money on improvements, all of which were subject to exhaustion, wear and tear. Of their cost about $7,000 was expended in the summer of 1919 and the remainder from June 15, to October 31, 1920. The improvements included structures used for the housing of employees and the operation of the company store and these were used in 1920. The years of expected life of the assets were estimated by the president of petitioner upon estimates of the Forest Service and other information, and were the basis of the annual deductions claimed for exhaustion, wear and tear. The expected life was based on the probable duration of the immediate operation which the assets served. The assets will have no salvage value. *1148 For the additions which were completed prior to October 31, 1920, no deduction for exhaustion, wear and tear was claimed for the fiscal year ended October 31, 1920. The cost of the assets was as follows:
| Item | Assets on which no depreciation was taken in 1920 | Value |
| P1 | Dams (new dam) | $1,980.40 |
| P3 | Creek improvements (clearing new creek) | 52.00 |
| P10 | Buildings (New DuNoir buildings) | 19,704.93 |
| P12 | Roads and bridges (New DuNoir roads and bridges | 10,595.62 |
| P13 | Warm Springs Survey | 856.86 |
| P11 | Telephone (DuNoir telephone line) | 375.00 |
| E16 | Light plant (New DuNoir light plant) | 1,200.00 |
*4294 In 1915 the total cost of a No. 1 tie delivered at Riverton was about 46 cents and of a No. 2 tie about 39 cents. This included the amount paid to the United States under the contract.
The fair market value of the contracts taken over by the petitioner from the Wind River Co. at the time of acquisition was in excess of $197,025.
OPINION.
SIEFKIN: The questions involved in this case are whether petitioner should be allowed a value for invested capital for two contracts paid in in 1915 for common capital stock of petitioner, and whether petitioner should be allowed to take depreciation in the amount of $6,860.75 on permanent improvements for the year 1920.
Section 325(a) of the Revenue Act of 1918 provides that the term "intangible property" means patents, copyrights, secret processes and formulae, good will, trade-marks, trade-brands, franchises, and other like property.
The term "tangible property" means stocks, bonds, notes and other evidences of indebtedness, bills and accounts receivable, leaseholds, and other property other than intangible property.
Section 326(a)(4) provides that invested capital for any year means "intangible property bona fide paid in for*4295 stock or shares prior to March 3, 1917, in an amount not exceeding (a) the actual cash value of such property at the time paid in, (b) the par value of the stock or shares issued therefor, or (c) in the aggregate 25 per centum of the par value of the total stock or shares of the corporations outstanding on March 3, 1917, whichever is lowest."
The evidence in this case discloses that prior to April 10, 1915, the Wind River Timber Co. acquired two contracts, one with the United States Government, dated January 23, 1914, providing for the purchase of 125,000,000 feet of timber, and one with the Chicago & North Western Railway Co., dated June 12, 1913, providing for the sale to *1149 this company of 3,200,000 railroad ties, deliveries to be at the rate of 350,000 to 400,000 ties per year. The petitioner, shortly after its incorporation, entered into an agreement with the Wind River Timber Co. whereby petitioner, in exchange for $350,000 of its common capital stock, received all the assets and liabilities of the Wind River Co. and the assets of Wind River Co. actually were taken over June 1, 1915. The evidence in the case, which is meagre with regard to the records and operation*4296 of the Wind River Co., discloses that the only assets which the petitioner received from the said company for the $350,000 of capital stock, were the two contracts. It is, therefore, necessary to determine the value of the contracts.
The evidence shows that the timber land obtained by the petitioner contained the best kind of tie timber and was located about 100 miles by wagon road from Riverton, Wyo., but Wind River could be utilized at its flood stage to flat logs and ties to Riverton, which afforded a market for lumber produced, and the by-products, such as sawdust, fence poles, and mine props. The market for lumber products reached as far eastward as Casper and as far westward as Lander. The freight rates on lumber from other sources handicapped the petitioner's competitors. The contract with the railroad called for the delivery of the ties to a point on Wind River near Riverton. The price for No. 1 ties was to be 65 cents and for No. 2 ties 45 cents. It is shown that the cost of production of a No. 1 tie was about 46 cents and of a No. 2 tie, about 39 cents, including all expenses. The Wind River Co. had delivered 33,395 ties to the railroad and there remained 3,166,605*4297 ties yet to be delivered.
In view of the foregoing, we find that the value of the contracts is in excess of $197,025, and that amount should be included in invested capital. Since the petitioner has claimed only that amount as invested capital, it is unnecessary to determine whether the contracts are tangible or intangible property, as in either event $197,025 is within the statutory limitation.
With regard to the depreciation claimed for improvements for the year 1920, no evidence is submitted as to the dates on which the improvements were completed. It was testified that some were made in 1919 and some in 1920, and that all were completed and in use by October 31, 1920. From this evidence no determination can be made of the amount of depreciation on such assets up to October 31, 1920, and we are compelled to disallow the claim for the deduction.
Reviewed by the Board.
Judgment will be entered on 15 days' notice, under Rule 50.