Chartiers Greek Coal Co. v. Commissioner

CHARTIERS CREEK COAL CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Chartiers Greek Coal Co. v. Commissioner Docket No. 9652. United States Board of Tax Appeals 10 B.T.A. 984; 1928 BTA LEXIS 3982; February 24, 1928, Promulgated *3982 1. INVESTED CAPITAL. - Paid-in surplus allowed in an amount by which the proved value of coal property paid in for stock exceeds the par value of the stock issued therefor. 2. DEPLETION. - Value of coal lands determined for depletion purposes. Paul F. Myers, Esq., for the petitioner. Maxwell E. McDowell, Esq., for the respondent. LANSDON *984 The respondent has asserted deficiencies in income and profits taxes for the years 1918 and 1920 in the respective amounts of $26,625.86 and $44,703.22. The petitioner alleges error by respondent in reducing invested capital by eliminating therefrom paid-in surplus for each of the years and in refusing to accept the value used by petitioner in computing depletion deductions. *985 FINDINGS OF FACT. The petitioner is a Pennsylvania corporation, organized February 14, 1916, and maintaining its principal office at Pittsburgh. During the taxable years and since its organization, petitioner has been engaged in the operation of a coal mine. Early in January, 1916, A. M. Marion entered into negotiations for the purchase of a coal property known as the Hazel mine, then in the hands of the*3983 Union Trust Co. of Pittsburgh, Pa. The Hazel mine had formerly been owned by the Pettsburgh-Buffalo Coal Co., which had failed, and was acquired by the Union Trust Co. through foreclosure of a mortgage. It contained 620 acres or more of solid and pillar coal, which had been partly worked out, together with a tract of surface land adjoining the Pennsylvania Railroad at Canonsburg, Pa. Adjacent to the Hazel mine were 400 acres of coal land owned by the Pittsburgh Coal Co., which could profitably be worked from the Hazel mine without sinking another shaft. The Pittsburgh Coal Co. property had never been worked. On or about January 10, 1916, Marion offered to purchase the Hazel mine from the Union Trust Co., provided he could also purchase the 400-acre tract from the Pittsburgh Coal Co. Pursuant thereto, H. C. McEldowney, president of the Union Trust Co., and William I. Berryman, trust officer of the Union Trust Co., personally presented Marion's offer of $600 per acre to the chairman of the board of directors and other officers and engineers of the Pittsburgh Coal Co. The 400-acre tract in question was at that time mortgaged to the Union Trust Co. by the Pittsburgh Coal Co., *3984 and since there was no possibility of working the property in the near future, the offer of $600 per acre was accepted and Marion was so notified. Shortly thereafter and prior to January 15, 1916, Marion conferred with Samuel A. Taylor, chairman of the board of directors of the Pittsburgh Coal Co., regarding payment for the 400 acres and it was agreed that payment should be deferred for one year, during which time Marion should pay 5 per cent interest on the purchase price, together with taxes for the year 1916. The total purchase price, with interest and taxes, was to be paid on delivery of the deed one year later. The minutes of the directors' meeting of the Pittsburgh Coal Co., under date of January 26, 1916, appear as follows: Early in 1917, W. W. Keefer, a coal operator in the Pittsburgh 400 acres of coal rights adjoining what is known as the Hazel Mine, located near Canonsburg, Washington County, Pennsylvania, at a price of six hundred (600) dollars per acre, cash - submitted a map showing its location in relation to the present workings of the company, - made representations as to its tonnage possibility and necessity for the future, and recommended that in his judgment*3985 it was in the interest of the company that the sale should be made, when *986 On Motion duly made and seconded, it was Resolved, That the sale of the property as submitted, described and recommended by the Chairman, be and the same is hereby approved and authorized. On January 15, 1916, a written contract was entered into between Marion and Scott Hayes, holding title for the Union Trust Co., for the sale to Marion of the Hazel mine at a total consideration of $350,000, of which $2,500 was paid in cash, $47,500 was to be paid upon delivery of the deed, $50,000 was to be paid on February 1, 1917, and $250,000 was to be paid in twenty quarterly installments of $12,500 each. The contract of sale provided that Marion might, if he so desired, designate a corporation to receive title to the property. On or before January 15, 1916, Marion entered into possession of both the Hazel mine and the 400-acre tract acquired from the Pittsburgh Coal Co. and placed men thereon to do certain work preparatory to operation of the mine. Being unable to finance the deal alone, Marion proposed to J. H. Sanford and E. C. Gerry on February 1, 1916, that if they would contribute $30,000*3986 and $5,000, respectively, he would organize a corporation, transfer his coal properties to the corporation, and cause to be issued to them capital stock of a par value equal to their respective contributions. Both Sanford and Gerry thereupon on February 1, 1916, paid the amounts requested to Marion individually. An added consideration for taking these men into the business was the fact that Sanford owned two docks on the Great Lakes through which the coal might be marketed, and that Gerry, division superintendent for the Pittsburgh Coal Co., proposed to resign his position and become superintendent for the corporation to be organized. On that date, february 1, 1916, he did resign his position with the Pittsburgh Coal Co. and entered the employment of Marion, as superintendent, until the contemplated corporation could be organized. Work on the two tracts, which had already been started by Marion, was continued under the direction of Gerry. On February 14, 1916, a charter was granted by the Commonwealth of Pennsylvania to the Chartiers Creek Coal Co., and stock of a par value of $75,000 was issued to Marion or his nominees, in exchange for which he deposited $67,500 cash to the*3987 credit of the new corporation, retaining $5,000 for his services in organizing the corporation, and $2,500 for his cash payment to the Union Trust Co. Marion nominated Sanford and Gerry to receive respectively 300 shares and 50 shares of capital stock of a par value of $100 a share. The first stockholders' meeting was held on February 16, 1916, when Marion offered to transfer and assign to the petitioner all his right, title and interest in and to both his contracts for the purchase of the Hazel mine and the 400-acre tract from the Pettsburgh Coal Co. The *987 offer was accepted by the petitioner and it was agreed that inasmuch as Marion had deposited $67,500 to the credit of the corporation, the latter on behalf of Marion would make the $47,500 payment upon delivery of the deed to the Hazel mine property. On February 16, 1916, at the direction of Marion, a deed was issued by the Union Trust Co. to the Chartiers Creek Coal Co. and the payment of $47,500 was made by the corporation. From February 16, 1916, the corporation, having possession of both properties, proceeded to operate them as a unit and has so operated them since that time. Certain repairs of equipment, cleaning*3988 out of entries, pumping water from the mine, etc., were necessary before production of coal could be obtained. This work had been started by Marion on or about January 15, 1916, and was continued by the corporation until production was obtained early in April, 1916. By August, 1916, the mine was in full operation, including the mining of coal from the 400-acre tract. By the close of 1916 the 400-acre tract had been entered approximately 1,400 feet. The Chartiers Creek Coal Co. tendered payment of the purchase price to the Pittsburgh Coal Co. for the 400-acre tract on or about January 1, 1917, and Marion requested a deed to issue to it, but since the engineers assigned to resurvey the tract were otherwise engaged, no deed was submitted until May 25, 1917, when the purchase price of $24,000, plus interest and taxes, was paid. Recognizing the delay in submitting the deed as its fault, the Pittsburgh Coal Co. charged interest only for one year. A bond and mortgage in the amount of $253,303.50 was executed and delivered to the Pittsburgh Coal Co. in exchange for the deed, on May 25, 1917. In December, 1916, Marion, acting on behalf of the petitioner, received a bona fide*3989 offer through R. T. Donaldson, who represented the Berwin-White interests, of $1300,000 cash for the two coal properties combined. A check was tendered for hand money, and in case the offer was accepted, Marion was to receive the full amount in case and clear the property of indebtedness. After consideration by the board of directors of petitioner, the offer was rejected since the future profit to be derived from operation promised to exceed the profit from an immediate sale. Early in 1917, W. W. Keefer, a coal operator in the Pettsburgh vicinity since 1890, purchased unimproved coal property, known as the "Davis lands," located near petitioner's property and in the same vein of coal. The price paid was $1,250 per acre. The Hazel mine combined with the 400-acre tract contained 1,020 acres of coal land and 200 acres of surface land, and contained *988 5,610,000 tons of recoverable coal. The value of the combined property on February 16, 1916, was: 200 acres surface land $5,000.00 Plant and equipment 130,595.96 Coal 1,164,404.04 1,300,000.00 The respondent has disallowed petitioner's claim for a paid-in surplus and has computed depletion upon*3990 a value representing the price paid to the Union Trust Co. and the Pittsburgh Coal Co. under the contracts entered into by Marion. OPINION. LANSDON: The issues involved in this proceeding are: (1) Whether certain coal lands were paid in to petitioner for stock by Marion, or whether petitioner acquired title by purchase for cash direct from the grantors named in the deeds; and (2) the proper value at the basic date, should the right to a paid-in surplus be allowed both for purpose of invested capital and depletion. Section 326(a)(2) of the Revenue Act of 1918 provides in part: SEC. 326. (a) That as used in this title the term "invested capital" for any year means * * * (2) Actual cash value of tangible property, other than cash, bona fide paid in for stock or shares, at the time of such payment, but in no case to exceed the par value of the original stock or shares specifically issued therefor, unless the actual cash value of such tangible property at the time paid in is shown to the satisfaction of the Commissioner to have been clearly and substantially in excess of such par value, in which case such excess shall be treated as paid-in surplus: * * * The respondent contends: *3991 (1) That no right to a paid-in surplus exists, since petitioner acquired title to the coal lands direct from the grantors named in the deeds, the statute of frauds making void certain oral contracts and assignments by which petitioner takes title through Marion; and (2) that cost is the proper basis for computing depletion. The petitioner contends: (1) That the oral contracts and assignments are not affected by the statute of frauds; (2) that title to the coal lands was transferred by Marion to petitioner in exchange for stock; and (3) that the value both for purposes of invested capital and depletion is the fair market value at the date paid in to petitioner for stock. The validity of three contracts and assignments is involved: (1) The written contract of sale from the Union Trust Co. to Marion for the Hazel mine; (2) the oral contract of sale by the Pittsburgh Coal Co. to Marion of the 400-acre tract; and (3) the oral assignments of *989 both properties by Marion to petitioner. With regard to the written contract for the purchase of the Hazel mine there can be little doubt that Marion acquired right, title or interest sufficient to have compelled a conveyance to him*3992 by specific performance in equity. The oral contract with the Pittsburgh Coal Co. and the oral assignment by Marion to petitioner present a different situation. The only memoranda of these contracts were the minutes of the directors' meeting of the Pittsburgh Coal Co. on January 26, 1916, authorizing the sale, and the minutes of the stockholders' meeting of petitioner on February 16, 1916, accepting the assignment of the coal properties from Marion. The Pennsylvania Statutes (West Publishing Co., Edition, 1920), provide: § 20192. Parol Leases, Etc., Estate in Lands Not To Be Assigned, Etc., Except In Writing - From and after April 10, 1772, all leases, estates, interests of freehold or term of years, or any uncertain interest of, in, or out of any messuages, manors, lands, tenements or hereditaments, made or created by livery and seisin only, or by parol, and not put in writing, and signed by the parties so making or creating the same, or their agents, thereunto lawfully authorized by writing, shall have the force and effect of leases or estates at will only, and shall not, either in law or equity, be deemed or taken to have any other or greater force or effect, any consideration*3993 for making any such parol leases or estates, or any former law or usage to the contrary notwithstanding; except, nevertheless, all leases not exceeding the term of three years from the making thereof; and moreover, that no leases, estates or interests, either of freehold or terms of years, or any uncertain interest, of, in, to or out of any messuages, manors, lands, tenements or hereditaments, shall, at any time after the said April 10, 1772, be assigned, granted or surrendered, unless it be by deed or note, in writing, signed by the party so assigning, granting or surrendering the same, or their agents, thereto lawfully authorized by writing, or by act and operation of law. (1772, March 21; 1 Sm. L. 389, § 1.) Attested minutes of a meeting of corporate directors authorizing the sale of property have been held a sufficient memorandum to satisfy the statute. A reference in the minutes to a survey is a sufficient description of the land if the survey may be identified by parol evidence. The memorandum need only be signed by the grantor and the taking possession of the land is a sufficient acceptance by the grantee. *3994 ; . The minutes of the Pittsburgh Coal Co. of January 26, 1916, state the sale price of the property, the number of acres, and refer to a map showing the location of the tract to be sold, but do not designate the grantee. Marion, however, entered into and continued in possession of the property until a deed was issued at his direction to a corporation organized by him. In *990 , which is a much cited Pennsylvania case, the court states: Any memorandum in writing indicative of the intent of the parties, and so precise as to enable the inquirer to ascertain the terms of the contract, the land conveyed, and the price paid for it is sufficient. Taking possession of land pursuant to an oral contract of sale, together with payment in full or in part of the purchase price, or the making of valuable improvements by the vendee, is sufficient part performance to take the contract out of the operation of the statute of frauds. *3995 Pugh v. Good, 3 W. & S. (Pa.) 56; ; ; ; ; ; 36 Cyc. 654. Marion took possession of the 400-acre tract prior to January 15, 1916, placed workmen on the premises and started work through the adjoining Hazel mine preparatory to mining operations. The respondent has cited and seems to rely entirely on the safe ; . The facts in that case are different. As stated by the court, "It is not alleged that the coal company took possession of any definitely described tract of 200 acres, or in fact, of any coal land in pursuance of the sale, or made any improvements thereon." The court also found that the memorandum or agreement failed "to definitely describe any of the boundaries." In the instant case, Marion took possession of a definitely described tract of 400 acres, agreed to pay the taxes and did certain work on the premises. *3996 Also, the corporate memorandum refers to "a map showing its location in relation to the present workings of the company." Both the oral contract of sale to Marion and the oral assignment by him to the petitioner were complied with by the parties. On direction of Marion a deed to the 400-acre tract was delivered to petitioner by the Pittsburgh Coal Co. The parties not having taken advantage of any legal defects which may have existed in the contracts, but having chosen to carry out their provisions, the validity of the contracts will be recognized by the Board. ; ; . There is no allegation that Marion was acting as promotor or agent for petitioner when he entered into the contracts for the purchase of the two coal properties and the record is clear that he was not so acting. Petitioner's organization was first contemplated subsequent to the completion of the contracts by which Marion purchased the properties. We are convinced that Marion had right, title and interest in and to the two coal properties and that such right, title and interest*3997 were paid in to petitioner on February 16, 1916, for stock. *991 The petitioner contends that on February 16, 1916, when paid in for stock, the two properties had a combined value of $1,300,000, which amount exceeds the cost to Marion under the contracts of January 15, 1916, by $710,000. In , the Board held that the purchase price paid by petitioner's incorporators for limestone lands, shortly before petitioner was organized, and the land exchanged for stock, establishes the value of such lands for invested capital purposes. However, in the instant case the purchase price paid by Marion for the separate tracts does not establish the value of the two properties when combined. The Board held in , that the prices at which properties are knocked down at a sale conducted by a trustee in bankruptcy are not conclusive of the actual cash value of such assets when transferred by the purchasers to a corporation in exchange for corporate stock, and the true actual value of such properties may be proven by competent evidence. *3998 See also . The Hazel mine was purchased by Marion from the Union Trust Co., which had acquired the property through foreclosure of a mortgage. It was obliged to convert the property into cash as soon as possible and was interested chiefly in securing the return of its investment. The 400-acre tract purchased by Marion from the Pittsburgh Coal Co. was distant from the railroad, could not be worked in connection with its other property, and was heavily mortgaged to the Union Trust Co. Neither the sale by the Union Trust Co. nor the sale by the Pittsburgh Coal Co. was under such market conditions as to clearly establish the value of the property. The Hazel mine was a partly worked tract, the coal content of which was insufficient to make its operation profitable. The 400-acre tract was undeveloped, isolated from the railroad, and from mining operations of the Pittsburgh Coal Company, and of such small acreage that the development expense necessary to procure the coal prohibited its operation as a separate enterprise. Thus considered alone, neither the Hazel mine nor the 400-acre tract was a readily marketable property. When the two*3999 properties were combined, however, they became very valuable. The Hazel mine property had a mine shaft and equipment in good condition, and was connected with a railway spur. The 400-acre tract provided sufficient additional coal to make the combined operation highly profitable, since there was little development expense necessary to procure coal from the 400-acre tract. The record of this appeal convinces us that the petitioner's claim of $1,300,000 is a conservative valuation of the two properties combined. The evidence to support petitioner's valuation claim consists of the testimony of three disinterested witnesses who seem to have been *992 particularly well qualified to testify with respect to the value of the property in question; proof of the sale of coal land in close proximity to petitioner's property and in the same vein of coal at a price of $1,250 per acre; and proof of the rejection by petitioner in the fall of 1916 of an offer of $1,300,000 for the combined properties. Samuel A. Taylor, a mining engineer and coal operator who was thoroughly familiar with the property, testified that he appraised the property for Marion in 1916, and that a very conservative*4000 value of the two properties combined was on February 16, 1916, $1,115 per acre for the 1,020 acres of coal land. He testified that "if you had paid $1,500 an acre you would not have been paying an outside price." J. A. Donaldson, vice president of the Pittsburgh Coal Co. in charge of operations, testified on behalf of the petitioner that on February 16, 1916, the two coal properties combined were worth $1,500 per acre for the 1,020 acres of coal land. W. W. Keefer, who has been engaged as a coal operator since 1890 and is a member of American Institute of Mining Engineers, assisted in appraising the Hazel mine for the Federal court in 1914, and had for many years prior thereto been familiar with both the Hazel mine and the 400-acre tract adjoining. On February 16, 1916, the two properties combined, in his opinion, had a value of $1,200 an acre. On April 5, 1921, S. L. Clemons, valuation engineer of the Internal Revenue Bureau, submitted to the petitioner a "comment on valuation," which was approved by G. M. S. Tait, Chief, Coal Valuation Section, finding the value of the property on February 16, 1916, to be as follows: 200 acres surface land, at $25 $5,000.00 Plant 70,000.00 Equipment 60,595.96 Coal 1,164,404.04 1,300,000.00 *4001 After careful consideration of all the evidence we find the combined coal properties to have had an actual cash value of $1,300,000 on February 16, 1916, as claimed by the petitioner. This property, together with $67,500 in cash and $5,000 for services, was paid in by Marion for all the capital stock. Petitioner assumed payment of the balance of the purchase price which, including the $47,500 payment made on delivery of the deed, totaled $587,500. Deducting such amount from the total assets paid in, there remains a net value of $785,000 which was exchanged for stock of a par value of $75,000. It follows that petitioner is entitled to include in its invested capital as paid-in surplus an amount of $710,000. Depletion should be computed *993 on a valuation of $1,164,404.04, which we have found to be the value of the coal in place. The rate for computing depletion deductions is not in controversy. Reviewed by the Board. Judgment will be entered on 10 days' notice, under Rule 50. SMITH did not participate.