Ewa Plantation Co. v. Commissioner

EWA PLANTATION CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Ewa Plantation Co. v. Commissioner Docket Nos. 19221, 23610. United States Board of Tax Appeals 13 B.T.A. 625; 1928 BTA LEXIS 3220; September 27, 1928, Promulgated *3220 1. Decision in Kahuku Plantation Co.,12 B.T.A. 977, followed. 2. March 1, 1913, value of leasehold interests in sugar cane lands determined. A. A. Ballantine, Esq., S. Milton Simpson, Esq., and Bernard Knollenberg, Esq., for the petitioner. M. N. Fisher, Esq., and L. C. Mitchell, Esq., for the respondent. PHILLIPS *625 The Commissioner determined deficiencies in income and profits taxes for the calendar years 1919 and 1920 in the amounts of $43,845.23 and $610,775.20, respectively. Petitioner instituted these proceedings, *626 which were duly consolidated, for a redetermination of such taxes. It alleges that the Commissioner committed error in charging the petitioner with the receipt of an amount of strike loss indemnity in excess of the amount actually received and in including as taxable income for the year 1920 the amount of $477,487.74 received by the petitioner on December 31, 1920, a indemnity for losses to its 1921 and 1922 sugar crops. In each of the proceedings it is alleged that error was committed in failing to allow as a deduction in computing taxable income for such respective year $70,000*3221 for depreciation of leaseholds of cane lands acquired prior to March 1, 1913. The first assignment of error raises a question which is common to several proceedings, all heard at the same time. The proceeding known as Kahuku Plantation Co., Docket No. 19156, was made the test case for the determination of the principle involved. FINDINGS OF FACT. 1. Petitioner is a corporation organized under the laws of the Territory of Hawaii with its principal office in Honolulu. Its business is and has been the planting, cultivation and milling of sugar cane on the Island of Oahu in the Territory of Hawaii. 2. The findings of fact under this paragraph number are identical with the findings of fact of paragraph 2 in Kahuku Plantation Co., Docket No. 19156, and such findings are, by reference, incorporated herein and made a part hereof. 3. The petitioner, with the approval of the Commissioner of Internal Revenue, has for many years (before, during, and after 1920) kept its accounts and made its Federal income-tax returns on the so-called "crop basis" as permitted by the Treasury regulations. The crop basis of accounting was very generally in use by sugar plantations throughout*3222 the Islands. Under this system of accounts a crop was treated as a venture and an account kept for each crop. All expense incident to the crop, from the preparation of the soil to the harvest and manufacture of the cane into raw sugar, were charged to the crop account, and all receipts from the crop were credited to the crop account. When the crop was harvested and disposed of, the account was closed and it was determined whether there had been a profit realized or a loss sustained from the crop. 4-7. The findings of fact under these paragraph numbers are respectively identical with findings of fact, paragraphs 4-7 inclusive, in Kahuku Plantation Co., Docket No. 19156, and such findings of fact are, by reference, incorporated herein and made a part hereof. 8. The strike was finally broken in July, 1920, but not until the seven Oahu plantations affected by it, including petitioner's plantation, *627 had sustained damages to their growing crops of cane. During the period of the strike there was in the ground most of the 1920 crop planted in 1918; the 1921 crop planted in 1919; and the 1922 crop planted in 1920. The strike caused a shortage of labor. The strike-breakers*3223 were inexperienced men and the hours worked were less than the regular plantation hours. As a consequence, labor performed on the three crops was less than that which would normally have been performed. As a result of this shortage in labor and other conditions brought about by the strike, the harvest, and consequently the manufacture and marketing of the 1920 crop was delayed. During the period of delay the market price of sugar fell. The cultivation, irrigation and fertilization of the 1921 and 1922 crops were delayed and irregular. This stunted the growth of the cane and as a consequence the yield was less than it otherwise would have been. The planting of the 1922 crop was delayed and the acreage planted was less than that of the 1920 crop which it followed. When it became apparent that the stike was likely to continue for some time and that losses were being sustained against which there was no check, the Association decided that steps should be taken to have a record made of the conditions on each of the plantations so there might be some evidence of loss other than the statement of the respective managers. 9. The findings of fact under this paragraph number are respectively*3224 identical with the findings of fact in paragraph 9, in Kahuku Plantation Co., Docket No. 19156, and such findings of fact are, by reference, incorporated herein and made a part hereof. 10. When the strike had been settled, the Hawaiian Sugar Planters' Association, through its strike claims committee, estimated the net losses sustained by the affected plantations. 11. On December 29, 1920, the Association empowered the strike claims committee to make a final determination of the amount of strike loss indemnity to be allowed to the Oahu plantations. This committee then took up in detail the matter of determining the amount of losses occurring on each plantation with respect to each crop affected. On November 17, 1920, it presented to the trustees of the Association a detailed form to be employed by the plantations in submitting their claims for strike losses. It was the purpose of this form to measure losses by the decreased receipts from each crop, with adjustment for increased or decreased costs in the planting, cultivation and marketing of such crop. A recapitulation of the items entering into the petitioner's claim as filed by it on one of such forms, which claim was*3225 allowed substantially in full, follows: Losses Gains [1920] Exhibit 2(D) (Operations) $367,793.14 Exhibit 3 (D) (Bonus) $309,169.65 Exhibit 4 (B) (Receipts) 2,504,992.20 Exhibit 5(D) (E) (Rents) 95,759.84 Exhibit 6 (C) (Miscellaneous) 75,492.45 Total, 1920 crop 2,872,785.34 480,421.94 Subtract gains, 1920 crop 480,421.94 Net losses, 1920 crop 2,392,363.40 [1921] Exhibit 8 (C) (Operations) 14,703.61 Exhibit 9 (M) (Receipts) 174,650.22 Exhibit 10(D) (E) (Rents) 7,480.77 Exhibit 11 (C) (Miscellaneous) 14,115.12 Total, 1921 crop 174,650.22 36,299.50 Subtract gains, 1921 crop 36,299.50 Net losses, 1921 crop 138,350.72 [1922] Exhibit 13 (C) (Operations) 11,075.73 Exhibit 14 (M) (Receipts) 366,349.11 Exhibit 15(D) (E) (Rents) 15,375.50 Exhibit 16 (C) (Miscellaneous) 3,280.35 Total, 1922 crop 366,349.11 29,731.58 Subtract gains, 1922 crop 29,731.58 Net losses, 1922 crop 336,617.53 *628 The total amount of the strike indemnity received by petitioner in 1920 from the Hawaiian Sugar Planters' Association was $2,839,566.50 paid on account of estimated losses to the several crops as follows: [1920] $2,362,078.76 [1921] 138,350.72 [1922] 339,137.02 *3226 As to the year 1922, all of the strike loss with the exception of $40,273.27 was based on acreage which was either seeded or ratooned. To the extent of $40,273.27 the loss for 1922 was based on areas which were neither seeded nor ratooned. 12-17. The findings of fact under these paragraph numbers are respectively identical with the findings of fact, paragraphs 12 to 17, inclusive, in Kahuku Plantation Co., Docket No. 19156, and such findings are, by reference, incorporated herein and made part hereof. 18. The sum of $2,839,566.50, representing its estimated loss with respect to the three crops, was paid to petitioner by the Hawaiian Sugar Planters' Association in December, 1920. 19. In its accounts and in its Federal income-tax returns petitioner treated the amount received as indemnity for the estimated losses to its 1920 crop as income for 1920. It treated the amounts received as indemnity for the losses to its 1921 and 1922 crops as income for the years 1921 and 1922, respectively, and not as income for 1920. *629 20. The respondent, in the determination of the deficiency, included as taxable income to the petitioner as strike loss indemnity received in*3227 1920 the amount of $2,867,331.65. 21. In petitioner's business of running a sugar plantation there are items of expense and income that can not be allocated to any particular crop and are properly applied to the year in which they are incurred or received. 22. On or about February 4, 1890, the petitioner acquired a lease, expiring on November 30, 1939, upon about 8,000 acres of waste and arid land situated on the Island of Oahu. This lease demised the right to develop and use the land as a sugar plantation, including the right to construct and operate dams, flumes, ditches, bridges, acqueducts, siphons, pipings, railroads, mill buildings, etc. Petitioner agreed to pay an annual rental of at least $5,000, and agreed to keep an accurate account of all salable proceeds of the demised lands and to pay as and in lieu of rent 4 per cent of all such proceeds, deducting from such 4 per cent the cost of containers, transportation. commissions, taxes, and other charges actually paid upon such portion. Petitioner agreed to surrender the premises, together with all improvements thereon, at the expiration or earlier termination of the lease. The petitioner continued to own the lease*3228 throughout the years 1920 and 1921. When petitioner acquired the lease in 1890, the land was arid and barren. It contained no vegetation except a few dry-land shrubs and no water except one artesian well. The water from this well was good. The land contained many fissures. No sugar cane had been grown upon or within eight miles of the land. From an agricultural point of view, it offered serious problems of development. Petitioner, upon acquisition of the lease, proceeded to drill wells, cultivate the fields and develop the property. It overcame the difficulties incident to the irrigation of the land. On March 1, 1913, petitioner had 8,071 acres in growing crops and a complete sugar plantation, containing a water system, a mill and general equipment for growing sugar cane, making it into raw sugar and marketing its crop in that form. The lease had a fair market value on March 1, 1913, of $1,425,000. OPINION. PHILLIPS: The decision of the first of the issues involved in this proceeding is governed by our decision in *3229 . The record in the two cases is substantially the same. On the authority of the decision in that case it is held that the Commissioner erred in including in 1920 income the payments received on account of the net losses to the 1921 and 1922 crops except *630 to the extent that such losses were based upon acreage neither seeded nor planted. It also appears that the Commissioner overstated the total amount received and this should be corrected in the recomputation. The valuation of petitioner's leasehold interests as of March 1, 1913, involves the same general considerations discussed in our opinion in . Much of the evidence is common to both proceedings. The evidence as to petitioner's assets, earnings, costs, location, etc., are, of course, different. The leased premises which we are called upon to value were low lands near the coast. The plantation appears to have been fertile, producing an average crop of over eight tons an acre and the cost of irrigation was comparatively small. The cost of production was consequently less than on many other plantations. This*3230 not only increased its attractiveness as an investment, but served to place the plantation in a better position than others to withstand the competition which would result from any reduction or elimination of the tariff. Here, as in the case of Oahu, there is much room for differences of opinion as to the value of the petitioner's leasehold. Consideration of the detailed record which has been submitted leads us to the conclusion that on March 1, 1913, it had a fair market value of $1,425,000, exclusive of the value of the improvements thereon. Decision will be entered under Rule 50.