*1322 Evidence held insufficient to establish that March 1, 1913, value of water-power site acquired prior to that date was in excess of its cost.
*341 These are proceedings, duly consolidated for hearing, for the redetermination of deficiencies in income tax for the year 1923, in Docket No. 33796 in the amount of $14,653.92, and in Docket No. 42544 in the amount of $14,870.40. The petition in Docket No. 42544 was filed on February 2, 1929, in the name of John A. Week. By order entered November 2, 1929, upon suggestion of the death of John A. Week, H. J. Finch, administrator of his estate, was substituted as party petitioner.
The only assignment of error, which is common to both petitions, is that the respondent erred in determining the amount of profit upon a sale in 1923, basing his determination of such profit upon a March 1, 1913, value equal to cost, while the petitioners contend that the March 1, 1913, value of such property was in excess of its cost.
FINDINGS OF FACT.
The petitioner, Edmund R. Week, is an individual, a resident of Spokane, *1323 Washington. Petitioner H. J. Finch is the administrator of the estate of John Arthur Week, the brother of Edmund R. Week, who was a resident of Steven's Point, Wisconsin.
About 1904 these two brothers acquired certain property on the Spokane River near Trent and about seven miles up the river from the city of Spokane. This property consisted of 158 acres of farm land adjacent to the river and certain overflow and riparian rights. They thought that the property so acquired would be a favorable site for a dam. From 1904 until 1911 they purchased other adjoining overflow and riparian rights necessary to create a storage pond sufficient to establish a 55-foot head upon the completion of the dam. This property and the various rights are hereafter referred to as the Week site. The total cost of the acquisition of the Week site was $43,254.50. The property was sold by John A. and Edmund R. Week on February 23, 1923, to the Inland Empire Paper Company for $200,000.
The respondent, in determining the deficiency herein, determined that the petitioner, Edmund R. Week, and his brother, John A. Week, realized a profit in an amount of $156,745.40 (one-half of which is allocable to each), *1324 being the difference between the sale price of $200,000 and the actual cost of the property.
The Spokane River has its source in Coeur d'Alene Lake, which is northwest of the city of Spokane, and flows from the lake to that city through a valley. This valley, known as the Spokane Valley, is from three to four miles wide and practically level. The river meanders approximately down the center of the valley.
About 1904 the Washington Water Power Company erected a dam at the lake, known as the Post Falls Dam, making a reservoir *342 of the lake and raising the water six and one-half feet, covering approximately 50 square miles. The Washington Water Power Company, prior to March 1, 1913, purchased other sites along the river and erected dams at Little Falls, Long Lake and one in the city of Spokane known as the Monroe Street Power Plant. On the Spokane River there were four other recognized power sites, including the Week site, purchased for development purposes, one prior to March 1, 1913, and the others after that date. On none of these had any improvements been erected at the time of the hearing. The damming up of the lake at Post Falls had the effect of increasing*1325 the flow of the water at the various other power sites. Except for a site near Spokane owned and developed by the city, the Washington Water Power Company owned on March 1, 1913, all the developed sites along the river between the lake and Spokane. In 1913 the plants erected and owned by this company were capable of generating an amount of electricity which was 80 per cent in excess of the demand.
In 1913 the International Portland Cement Company had a plant, which had been erected in 1910, about a mile from the Week site. Also, the Inland Empire Paper Company had a plant about two miles from this site. Both of these companies used electric power, which they purchased from the Washington Water Power Company. There were two railroad lines close to the Week site.
Between 1900 and 1912 there was a great increase in business in Spokane and the surrounding country, resulting in a great demand for power sites. This boom gradually decreased, beginning with 1913 and 1914.
The property sold in 1923, known as the Week site, did not have a fair market value on March 1, 1913, in excess of $43,254.50.
OPINION.
MATTHEWS: The only issue in this proceeding is the March 1, 1913, value*1326 of the property known as the Week site. We are of the opinion and have so found that such property did not have a value on March 1, 1913, in excess of $43,254.50, its cost. Accordingly, the action of the respondent in determining the deficiency herein was correct. We will briefly discuss the reasons upon which we base our conclusion as to the value of this property.
The petitioners are contending that on March 1, 1913, the property in question had a fair market value at least equal to its sale price. There is no contention that the property as farming property had any value in excess of its cost. The claim of a larger value is based upon its value as a potential water-power site. It is evident that for property to have a value as a power site is must not only be a feasible *343 place to erect a dam, but there must be a market for the power. There are doubtless many sites on rivers which are physically and geologically well suited for the erection of a dam, but where such sites are in unpopulated areas or where, on account of other power plants in the vicinity, there would be no market for the power, it can not be said that they have a "market value." The petitioners, *1327 therefore, must not only show that this was a feasible site for a dam, but that on March 1, 1913, there was a market for such sites or for the power developed therefrom, and then establish the actual fair market value thereof on the basic date.
The evidence introduced by the petitioners shows that the two Week brothers purchased the property because they thought that it would be valuable as a water-power site. E. R. Week, Jr., the son of petitioner Edmund R. Week, stated that he had made an investigation of the property in 1904 and from then until 1915 was employed at various times in connection with the property. He was of the opinion after such investigation that the site was a feasible one for the erection of a dam with a head of 55 feet and that a plant could be erected and operated economically. Upon cross-examination he admitted that he was not a graduate engineer and that he began the investigation of this site soon after he left college at a time when he had had very little experience in engineering work. His testimony is in conflict with that of four expert witnesses called by the respondent. These witnesses were Eugene Logan, a consulting engineer, who had been an*1328 employee of the Washington Water Power Company from 1907 until 1926, and had been familiar with the Spokane River territory since 1912; R. K. Tiffany, a graduate hydraulic engineer in the employ of the United States Reclamation Service from 1910 to 1920, and State Superintendent of Hydraulics for the State of Washington from 1925 to 1930; Joseph Jacobs, a graduate civil engineer who had had occasion to examine the Spokane River in 1905, 1909 and 1925 in connection with proposed projects; and David C. Henny, a graduate of the University of Delft, Holland, in 1881, who had been a supervising engineer on many notable dam and power projects. The two witnesses last named were often employed as consultants as to the practicability of proposed electrical projects. None of these witnesses had any interest in this case and their testimony can be regarded as wholly unbiased. They testified almost unanimously that they did not consider this site a feasible one for a dam or that it would be an economical place to erect a power plant. These opinions were based on their experience, on their knowledge of the geological formation at the site, the nature of the soil and of the river bed, and the*1329 fact that there was danger of considerable seepage.
*344 The evidence further shows that due to the increased business around Spokane there had been between 1906 and 1913 considerable activity along the river with respect to water-power sites. However, this activity had lessened to a considerable extent by 1913, by which time the Washington Water Power Company had erected four power plants and dams which were capable of generating an amount of electricity which was 80 per cent in excess of the demand. Any company or individual erecting a dam and power plant at the Week site would have had to compete with this company. It was the opinion of the four expert witnesses mentioned above that electricity generated from a single plant would not be as satisfactory as that generated from a connected system of plants. Although there were two companies closely adjacent to the Week site, which were both users of electricity to a considerable extent, and also the city of Spokane was in the market for electric power for their pumping station, the evidence was insufficient to show that it would have been feasible or more economical for these companies or anyone else to purchase this*1330 property and erect a dam than to purchase their electricity from the Washington Water Power Company. In fact, what little evidence there was on this point tended to show that such a project would have been more expensive.
As to the value of this property on March 1, 1913, the respondent's experts testified that the property had no value on March 1, 1913, other than its value as farming property, and that they would not have recommended its purchase as a potential power site on that date. The petitioner's only expert witness in hydraulic matters was not asked his opinion of the March 1, 1913, value and was careful to state that he would not say that the site was a feasible one for a dam. The only witness for the petitioners who was asked his opinion as to such value was Fred E. Baldwin, who owned real estate in this vicinity and had done appraisal work for water power companies. He stated that if the water-power site sold in 1923 for $200,000, he was of the opinion that its value on March 1, 1913, was fully as great. He had never examined the particular site and stated that he did not consider himself qualified to value a water-power site. Clearly, his testimony is of little*1331 or no value and is contradicted by that of the respondent's witnesses.
There was other testimony introduced as to the costs to the Washington Water Power Company of the various sites upon which it had erected dams, various offers made for this property in 1911, and the nature of the property and amount of flowage at the various water-power sites, which we have duly considered in reaching our conclusion, but which we do not deem necessary to discuss at any length. It is enough to say, in view of our finding and of the above discussion of the evidence, that the petitioners have failed to sustain the burden *345 of proving that there was a market on March 1, 1913, for this water site or that it had a fair market value on that date in excess of cost. Such a conclusion is strengthened by the evidence introduced by the respondent which showed that there was no market for such a site on the basic date and that it did not have a value on that date in excess of cost.
Reviewed by the Board.
Judgment will be entered for the respondent.
TRAMMELL dissents.
GOODRICH, dissenting: I can not agree that a site which sold for $200,000 in 1923 had no market*1332 value in excess of its cost as farm land at March 1, 1913, when, according to the evidence, there was then a greater demand for power sites sites because of a larger population within the area to be served and more activity in the development of water power and in general business than existed at the time the sale was made.
LANSDON and BLACK agree with this dissent.