Edward G. Swartz, Inc. v. Commissioner

EDWARD G. SWARTZ, INC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Edward G. Swartz, Inc. v. Commissioner Docket No. 36650. United States Board of Tax Appeals 25 B.T.A. 1065; 1932 BTA LEXIS 1431; April 6, 1932, Promulgated *1431 An individual owning timber entered into a contract in 1919 with a lumber company for the cutting thereof, under the terms of which he was to receive specified sums per thousand feet as the timber was cut and sold and also a portion of the annual net profits of the lumber company, if any. In 1922 he assigned the comtract, together with certain securities, to a corporation for all of the latter's stock except two qualifying shares. Held, that the receipt of the contract in 1919 was not a closed transaction so as to give the individual a new basis for depletion. Held, further, that the basis for exhaustion of the contract in the hands of the individual and also the assignee corporation, is the March 1, 1913, value of the timber owned on that date plus the cost of subsequent acquisitions, the deductions to be spread over the period of cutting the timber. A. S. Lisenby, Esq., and W. D. Zirkle, C.P.A., for the petitioner. Brooks Fullerton, Esq., for the respondent. ARUNDELL *1065 This is a proceeding for the redetermination of a deficiency in income tax for the year 1926 in the amount of $273.08. The issue involves the determination*1432 of the amount of gain, profit, or taxable income, if any to the petitioner, arising out of the payments made to it in the taxable year under a certain contract executed on August 25, 1919, between Edward G. Swartz, individually and the St. Bernard Cypress Company, Ltd., and assigned to the petitioner by Swartz on March 11, 1922, in exchange for shares of its capital stock. FINDINGS OF FACT. The petitioner is a Louisiana corporation, with its principal office at New Orleans. On August 25, 1919, Edward G. Swartz, then being the owner of the timber therein referred to, entered into a contract with the *1066 St. Bernard Cypress Company, Ltd., which in material part was in words and figures as follows: STATE OF LOUISIANA, Parish of Orleans. THIS AGREEMENT, made and entered into this twenty-fifth day of August, 1919, by and between the ST. BERNARD CYPRESS COMPANY, LIMITED, a corporation organized under the laws of the State of Louisiana, and domiciled in the Parish of Orleans, hereinafter designated as the First Party, and Mr. E. G. SWARTZ, a resident of the Parish of St. James, State of Louisiana, who will hereinafter be known as the Second Party; WITNESSETH: *1433 The First Party, being the owner of a sawmill situated in the Parish of St. Bernard, State of Louisiana, and it being in need of timber with which to continue operation of the said mill, and the said Second Party being the owner of a tract of land upon which a quantity of timber is situated and being the owner of the timber upon other lands, with the right to enter upon the lands and cut and remove the timber therefrom; therefore, for the mutual benefit and advantage of each other, they have contracted as follows: I. (a) The Second Party agrees to sell and does sell and the First Party agrees to and does buy, all the timber situated upon the following described land, of which he is the sole owner of both land and timber: The following lands situated in the Parish of St. James, Louisiana: [Description omitted as immaterial; acres, 984.25]. The following lands situated in the Parish of St. Charles, Louisiana: [Description omitted as immaterial; acres, 3,300]. (b) The Second Party further agrees and does by these presents sell and the First Party does agree to and does hereby purchase, all of the timber standing, lying and being upon the following described lands, which*1434 he has purchased and now owns, separate from the land upon which it is situated, viz: All timber, standing and fallen, on the La Place Plantation belonging to Montegut Planting Co. [Description omitted as immaterial; containing approximately 1,681.02 acres.] And all situated in the Parish of St. John the Baptist, Louisiana. II. With reference to said sale, the Second Party covenants as follows: (a) That he has a good and valid title to all of the lands and timber described in Paragraph I (a) hereof and that the same is free of liens, mortgages, or encumbrances of any nature whatsoever, and he warrants the title or said timber against any and all claims, demands or actions of any name or nature whatsoever, hereby subrogating and substituting the said First Party in and to all of his rights of actions in warrantly, and does hereby transfer, assign, set over and deliver unto the said First Party the right to enter upon the lands described in said paragraph 1(a) hereof, construct tram roads and railroads, cut canals and float roads, erect skidders or use any means of removing the timber now in use or that may hereafter be used in removing timber from Louisiana swamps and*1435 does especially declare that the said First Party shall have all the time necessary in which to remove the timber from the said lands; *1067 (b) That he has a good and valid title to the timber described in Paragraph I (B) hereof and that the same is free of liens, mortgages or encumbrances of any nature whatsoever, and he warrants the title of said timber against all claims, demands or actions of any name or nature whatsoever, hereby subrogating and substituting the said First Party in and to all of his rights of actions in warranty, and he does further declare that he is vested with valid contracts covering the right of entry on and into said property and lands described in paragraph I(B) hereof, with the right to erect and construct tram roads, railroads and skidders, and he does hereby transfer to the said First Party all of the rights of any name or nature whatsoever which he might have under the contract or contracts whereby he acquired said timber described in Paragraph I(b) hereof, hereby subrogating and substituting the said First Party in and to all of his rights under said contracts; especially granting the right of entry and possession of said lands for the purpose*1436 of getting out said timber; the said Second Party does further guarantee and warrant that the rights above enumerated, and which he is transferring to the said First Party, exist and shall continue for a period of at least seven years from January 17, 1920, and that the said First Party shall have and enjoy the period of at least seven years from January 17, 1920, within which to remove any and all of said timber. (c) that he does also grant unto the said First Party the right to erect upon all of the property above described in Paragraph I, hereof, camps, loading stations and all other equipment and constructions necessary for the purpose of removing said timber and in the removal of said timber the said First Party is authorized to use all of the wood from the lands necessary to be used in running all machinery and the getting out of said timber, and to cut and use all the necessary trees and saplings for dunnage in the laying of tram roads, railroads and skidders and the right to use the timber standing or lying upon the land for the purpose of making cross ties for said tram roads, but in so doing, the said First Party must use hardwood or inferior Cypress. III. The First*1437 Party agrees to cut and remove and manufacture the said timber and pay for same in the following manner, to-wit: (a) It will commence operations in the swamps within ninety (90) days from the date of this contract, and will continue operations therein and thereon; provided, however, that the said First Party shall not be required to cut and remove the timber from lands on which there might be found less than five thousand feet (5,000) of merchantable cypress timber to the acre, though it may do so at its option; the First Party further binds and obligates itself not to cut or manufacture any timber other than the timber covered by this contract with its present mill, until all of the merchantable cypress timber covered by this contract shall have been cut and sawed, unless by mutual consent in writing the parties hereto agree to the contrary. Nothing contained herein, however, shall prevent the said First Party from constructing a new mill or mills and cutting other timber at such mill or mills. (b) It agrees to cut and remove all of the merchantable cypress timber standing or lying upon all of the lands which will measure ten (10) inches and up, at the top, on a stick sixteen*1438 (16) feet long, and it shall have the right, at its option, to cut and remove all of the gum and other hardwood timber upon the property suitable for sawmill purposes. (c) It will cut a minimum of ten million (10,000,000) feet per annum. *1068 (d) It obligates itself to pay for the timber promptly in the manner herein after provided, and further obligates itself to remove all the cypress timber on the lands on which there may be found five thousand (5,000) feet or more of merchantable cypress timber to the acre, and the fee of the land which is not owned by the Second Party, within the time within which the Second Party is required to remove same under the contracts entered into between him and the owners of said lands, and upon its failure so to do, it agrees to pay the Second Party for such cypress timber running five thousand (5,000) feet or more to the acre which it fails to remove from such lands, at the price of Nine Dollars ($9.00) per thousand feet for all merchantable cypress timber; the feetage to be determined by estimators, one to be appointed by each of the parties and a third selected by the two thus appointed, and the estimate of said timber submitted by*1439 said estimators shall be final. (e) It obligates itself to place its mill in good order and repair for the cutting of the timber without any cost to the Second Party; it being understood, however, that when operations once begin, the maintenance and up-keep of the said mill shall be charged as an expense against the operations had under this contract. IV. It is further mutually agreed between the parties that the said First Party will pay the Second Party for the timber cut and removed from said lands and manufactured by the First Party, at the rate of Nine Dollars ($9.00) per thousand feet for all merchantable cypress lumber and by-products, and Five Dollars ($5.00) per thousand feet for all merchantable pecky cypress lumber; the feetage to be ascertained by the number of feet cut at the mill (mill tally) from said timber, and settlement shall be made thereon eighty per cent (80%) of said mill tally to be paid monthly and the remainder at the end of each year, as hereinafter provided in paragraph V; the monthly mill report of the First Party to be the basis of monthly settlements. It is further understood and agreed that in determining the mill tally under this contract, *1440 shingles and laths shall be computed on the basis of seven thousand shingles equaling one thousand feet of lumber and five thousand laths equaling one thousand feet of lumber. A daily record of lumber and by-products manufactured, shipped or otherwise disposed of by the First Party shall be kept by said First Party. V. To ascertain the annual cut, an annual inventory and audit of the books shall be made as of the 31st day of December of each year by estimators and auditors appointed by the First Party and on February 1st during the life of this contract, the First Party shall render statements and make a full settlement for the merchantable cypress timber cut and sawed for the preceding year at the price above named in paragraph IV. In determining the annual cut, shingles and laths shall be computed on the basis of seven thousand shingles equaling one thousand feet of lumber and five thousand laths equaling one thousand feet of lumber. The first inventory and audit shall not be made until December 31st, 1920, and the first annual settlement shall be based thereon. The Second Party shall have sixty days from the first day of February of each year within which to check*1441 the said audit and said inventory and for this purpose shall have free access to the books and yard of the First Party, either personally or through his authorized agents, and shall urge any objections *1069 that he might have to said audit or said inventory within said period, and in the event of his failing to make such investigation or urge objections within said period, the said audit and the said inventory shall be considered as correct and shall be binding upon both parties. VI. In addition to the price of stumpage of Nine Dollars ($9.00) and five Dollars ($5.00) per thousand for merchantable cypress and merchantable pecky cypress respectively, as above provided, the First Party further agrees to pay to the Second Party as an additional price for said stumpage one-half of the sum realized from the sales of the lumber and other products manufactured under this contract, including gum and hardwood, if any, after deducting therefrom all costs of operation, as provided for in this contract, including the stumpage charge of Nine Dollars ($9.00) and Five Dollars ($5.00) per thousand feet, respectively, as above set forth for cypress. The additional amount to be paid for*1442 stumpage as herein set forth shall be determined annually from the auditor's report to be submitted in accordance with the provisions of Paragraph V above, and settlement shall be made annually on February 1st of each year, it being understood, however, that the total amount which the said Second Party shall receive under this Paragraph VI of the contract as additional stumpage shall be one-half of the total amount realized from the sales of the lumber and other products manufactured under the contract after deducting therefrom the cost of operation as above provided, the total of which amount to be paid the said Second Party shall be finally ascertained when all of the timber is sawed and there is a final liquidation under the terms of this contract, and if the said First Party has paid to the said Second Party by means of the annual payments under this Paragraph VI more or less than the amount due him, then the said Second Party shall pay to or receive from the said First Party such amount as may be owned by or due to him, as the case may be, and if any amount should be found to be due by the First Party to the said Second Party upon such final settlement, it obligates itself to*1443 pay such amounts to the said Second Party. VII. It is further mutually agreed that all taxes and assessments upon the land and timber, as well as operations of the First Party, under this contract, shall be borne by the First Party, and all such taxes paid by the First Party, whether State or Federal, of any description whatever, shall, as between the parties and for the purpose of arriving at the amount to be divided as above set forth in paragraph VI, be charged as a cost of operation. It is understood, however, no interest, depreciation or amortization or betterment charges shall be charged as a cost of operation. VIII. It is understood and agreed that should the First Party, for any reason, wish to temporarily suspend the operations under this contract, it may do so at its option on the condition, however, that during the period of such suspension of operations it will pay the Second Party annually for the cypress timber at the rate of Nine Dollars ($9.00) per thousand feet, based on a yearly cut of ten million (10,000,000) feet per annum, until all of the said cypress timber is paid for, should said suspension continue for a sufficient length of time, provided, *1070 *1444 however, that the said First Party shall not be required to pay for timber found on lands on which there is less than five thousand (5,000) feet of merchantable cypress timber to the acre. In the event of disagreement as to the total amount of cypress timber to be paid for under this clause of the contract, the amount thereof shall be determined by arbitration in the manner set forth in Paragraph XIV hereof. It is understood, however, that if, at the time of such suspension of operations, the first party shall have cut and paid for more cypress timber than an average of ten million feet per annum up to the time of said suspension, then in that event the cypress timber cut and paid for in excess of an average of ten million feet per annum is to be credited to the First Party for the purpose of arriving at the amount of timber to be paid for during the time of suspension; for example - if a suspension shall take place after two years of operation and the First Party shall have cut and paid for twenty-five million feet of cypress timber during said two years, then the First Party shall be credited with five million feet, and during the first year of such suspension shall pay for only*1445 five million feet of timber. The Second Party shall be charged with all payments made during this suspension of operations. The First Party agrees that it will not at any time suspend operations any longer than necessary. Provided, however, anything in this Paragraph to the contrary notwithstanding, that should the said First Party be forced to suspend operations because of conditions and circumstances beyond its control, then and in that event the First Party shall not be required to pay said amount for said timber during the first year that such operations may be suspended. IX. In case of the destruction or loss by fire, wind or floods of any portion of the lumber or by-products produced by the First Party, the amount of such loss is to be determined by the records of the First Party and the settlement for the period affected by any such loss shall be based upon the facts shown by such records in connection with the record of lumber sold and used and the inventory of stock on hand in case of partial loss. X. It is understood and agreed that during the life of this contract neither the said First Party nor the said Second Party shall encumber by mortgage or otherwise, *1446 the right, ownership or interest of either party in the timber, or any of the property covered by this contract. XI. It is understood that at the beginning of operations under this contract the First Party will have upon its mill yard a large amount of lumber which is and will be the exclusive property of the First Party. As it is realized that it will be impracticable to segregate said lumber from the lumber to be manufactured under this contract, it is understood and agreed that at the time the mill begins the cutting of the timber herein contracted for, the First Party will cause an accurate inventory to be made of all the lumber then upon the yard, in the taking of which inventory the Second Party shall have the right to be represented, and the value of said lumber, based upon said inventory, shall be arrived at by taking the list price of said lumber as evidenced by the list price of the Louisiana Red Cypress Company, Selling Agents, *1071 less Four Dollars ($4.00) per thousand feet to cover the expense of selling and shipping, and the value of said lumber and the feetage thereof shall be duly accounted for in the annual settlement. XII. It is mutually agreed*1447 and understood between the parties that after the completion of the sawing of the timber herein, in the event that there should be left upon the mill yard of the First Party and lumber then unsold, the First Party may at its option make final settlement with the said Second Party for said lumber before the same is sold, the value of the lumber to be based upon a joint inventory which shall be arrived at by taking the selling price of the said lumber as evidenced by the list price of the Louisiana Red Cypress Company, Selling Agents, or in the event the said Louisiana Red Cypress Company, Selling Agents, is not at that time in existence, then the average selling price of five (5) representative cypress companies in existence in the Gulf States, less four Dollars ($4.00) per thousand feet to cover the expense of selling and shipping, and settlement shall be accordingly made under the terms and conditions of this contract. XIII. It is understood and agreed that any cancellation or termination of this contract shall not affect any amount or amounts that may have been previously owing by one party to this agreement to the other party. XIV. It is further agreed and understood*1448 between the parties that in case any disagreement shall arise between the parties hereto, as to any matter arising under this agreement, then upon the written request of either party, such disagreement shall be submitted to three arbitrators, one of whom shall be appointed by the First Party, one by the Second Party and the third by the two so appointed. The decision of such arbitrators, or of any two of them, given after a hearing, of which both parties shall be duly notified, and at which they shall have had an opportunity to be heard, shall be final and binding upon both parties as to the matter or matters submitted for arbitration, and each of the parties agrees that forthwith upon the rendering of such decision it will perform and comply with the requirements thereof. And it is further understood and agreed that in the event either party, under this contract, should fail or refuse to appoint an arbitrator, after receiving thirty (30) days notice of the appointment of an arbitrator by the other party, the said arbitrator thus appointed by the other party shall immediately appoint a second arbitrator; this second shall appoint a third, and either, or both, parties may submit*1449 the matter or matters in dispute to such three arbitrators, and the decision of said arbitrators shall be final, and have the same effect as though both parties had originally appointed an arbitrator hereunder. XV. It is further understood that there is a right of way granted for a public road through the lands owned by the Second Party herein, and this grant is recognized by this agreement. *1072 XVI. It is agreed and understood that this contract shall continue in effect until all of the cypress timber covered by this contract shall be cut, removed, manufactured and a final settlement made, and that this contract is binding upon the heirs, administrators, successors and/or assigns of the First and Second Parties. XVII. It is understood and agreed between the parties that if the sawmill, timber or lands of either of the parties to this contract should be taken over by the State or the United States Government, or taken out of the hands of the owners and operated for the benefit of the State or the Federal Government, neither party shall be required to continue operations under this contract. And now to these presents appears CHARLES SEYBURN WILLIAMS, a*1450 resident of the Parish of St. Mary, who hereby takes cognizance of the above and foregoing contract, and in consideration of the fact that he is a stockholder of and interested in St. Bernard Cypress Company, Limited, and benefits will accrue to him by virtue of the fact that this contract is executed, guarantees the performance hereof by the First Party, the St. Bernard Cypress Company, Limited, and obligates himself to see that the results contemplated by this contract shall be accomplished. This obligation shall be binding upon the heirs, administrators, representatives, successors and assigns of the said C. S. Williams. Shortly after the aforesaid contract was entered into, the St. Bernard Cypress Company, Ltd., took possession of the timber therein referred to. About a week or ten days after the contract was entered into, it began the construction of camps and log roads, and began cutting the timber at its mill in January, 1920. After the contract was entered into the property taxes on the timber were paid by the St. Bernard Cypress Company, Ltd. A part of the timber which was the subject of the contract was owned by Swartz on March 1, 1913, and the fair market value*1451 thereof at that date was $365,973.48. The balance was acquired thereafter, but prior to August 25, 1919, at a cost of $233,540.10. The timber was favorably located with respect to railroad facilities and other factors which entered into the cost of logging it out and cutting and marketing the lumber. The capacity of the St. Bernard Company, Ltd., mill was from 16,000,000 to 18,000,000 feet per annum, and it was mutually understood between the contracting parties that the mill would be utilized to capacity in carrying out the contract. The St. Bernard Cypress Company, Ltd., was controlled by the Williams family, who had the highest reputation for responsibility and were generally known as successful timber operators. It disposed of from 30 to 50 per cent of its timber in the local markets of New Orleans, which gave it an advantage, estimated by it at $5 per thousand feet, over mills located outside of New Orleans. The St. Bernard Cypress Company, Ltd., was known to wholesale buyers of cypress lumber to manufacture and produce the very best *1073 of cypress lumber produced in Louisiana, considering grade, manufacture, mill work and every particular. When the contract*1452 was entered into on August 25, 1919, it could be reasonably estimated that Edward G. Swartz would receive approximately $2,000,000 under the contract over a period of about seven years. The petitioner was incorporated under the laws of the State of Louisiana on March 11, 1922. Its authorized capital stock was 3,750 shares of the par value of $100 per share, of which Edward G. Swartz received 3,748, or all except two qualifying shares, in exchange for the contract hereinbefore referred to and certain securities assigned by him to the petitioner at incorporation. The assignment of the contract by Edward G. Swartz to the petitioner was in writing and in words and figures as follows: STATE OF LOUISIANA, Parish of Orleans. Before me the undersigned authority in and for the Parish of Orleans, State of Louisiana, personally came and appeared E. G. Swartz, who being by me duly sworn, did depose and say: That he is the identical party mentioned in the foregoing contract, and that he does now, for value received, transfer, set over, assign, exchange, and abandon unto the corporation named and doing business under the name of EDWARD G. SWARTZ, INC., all his right, title and*1453 interest whatsoever that may be in and to the foregoing contract. In witness of which assignment, the said E. G. Swartz has this 11th day of March, 1922, at New Orleans, La., signed and executed this assignment. [Signed] E. G. SWARTZ. Sworn to and subscribed before me this 11th day of March, 1922, at New Orleans, La. [Signed] HARRY EMMET MCENERNY, Notary Public. [SEAL.] The contract was performed according to its terms. The St. Bernard Cypress Company completed cutting the timber in December, 1926. The St. Bernard Cypress Company, Ltd., never received any notice of the assignment on March 11, 1922, of the contract it had entered into with Edward G. Swartz, as hereinbefore quoted, on August 25, 1919. After March 11, 1922, it continued to make payments called for under the contract by check from the St. Bernard Cypress Company, Ltd., to Mr. Swartz, as theretofore it had. The payments called for under the contract and made by the St. Bernard Cypress Company, Ltd., to Swartz after March 11, 1922, were ultimately received by the petitioner, Edward G. Swartz, Inc. The payments made under the contract by the St. Bernard Cypress Company, Ltd., and received*1454 by Swartz and/or the petitioner, amounted to $2,037,321.77 during the period 1920 to 1929, inclusive. *1074 Edward G. Swartz filed an original, an amended and a second amended return for the year 1919. These returns disclosed no profit to him upon the exchange of timber for a contract. For the years 1920, 1921 and 1922 the St. Bernard Cypress Company, Ltd., represented to the Government that it owned no timber. Petitioner reported as taxable income all payments made by the St. Bernard Cypress Company, Ltd., under the contract for the years 1921 to 1926, inclusive. Edward G. Swartz, for the years 1921 to 1926, inclusive, did not include the payments made by the St. Bernard Cypress Company, Ltd., under the contract of August 25, 1919, in his Federal income-tax returns. In the audit of petitioner's corporation income-tax return for the year 1926 the respondent included in petitioner's income all the payments received during that year from the St. Bernard Cypress Company, Ltd. The respondent computed depletion based on the March 1, 1913, value of the timber owned on that date by Edward G. Swartz, plus the actual cost of timber later acquired by him, and allowed depletion*1455 deductions to Edward G. Swartz for the year 1920, and to the petitioner for the years 1921 to 1926, inclusive, according to the timber cut. The depletion allowed to petitioner for the year 1926 was $85,920. OPINION. ARUNDELL: Prior to the year 1919 Edward G. Swartz, individually, owned certain lands, together with the timber thereon, situated in the State of Louisiana, and also owned the timber only on other tracts of land in the same state. Some of this timber was acquired by Swartz prior to March 1, 1913, and some was purchased by him subsequent to that date and prior to 1919. On August 25, 1919, Swartz entered into a written contract (set out at length in our findings of fact) with the St. Bernard Cypress Company, Ltd., for the cutting of the timber owned by him. Shortly after the contract was executed the St. Bernard Company took possession of the timber, and within a week or ten days from the date of the contract began the construction of camps and log roads. It began the cutting of the timber at its mill in January, 1920. The cutting was completed in December, 1926, within the estimated period of seven years, and Swartz and/or his assignee received total payments*1456 under the contract of $2,037,321.77, the last payment being made in 1929. The petitioner corporation was organized under the laws of Louisiana, on March 11, 1922, with an authorized capital stock of 3,750 shares of the par value of $100 per share. On the same date Swartz *1075 assigned and transferred to the corporation the said contract of August 25, 1919, together with certain securities, in exchange for all the capital stock of the corporation, except two qualifying shares. Thereafter, all amounts due under the terms of the contract were paid through Swartz to the corporation, and were included in the gross income reported in its respective returns. The issue raised by the pleadings is whether or not any portion of the payments received by the petitioner in the taxable year 1926 under the contract assigned to it by Swartz constituted gain, profits, or income and, if so, to what extent. The respondent has amended his answer to allege that the petitioner is not entitled to any allowance for depletion or for exhaustion of the contract, and that the amount allowed as such deduction in computing the deficiency should be added to income and the deficiency increased accordingly. *1457 Since Swartz owned all but qualifying shares of the petitioner, under sections 203(b)(4) and 204(a)(8) of the Revenue Act of 1926 the basis for exhaustion of the contract in petitioner's hands is the same as in the hands of Swartz. On this point the parties are in agreement, but they do not agree as to what the proper basis is in the hands of Swartz. Respondent contends that the contract between Swartz and the St. Bernard Cypress Company was merely a working agreement between them, and, as Swartz retained title to the timber, the contract cost him nothing. Petitioner contends that under the contract title to the timber passed to the St. Bernard Cypress Company; that it evidenced a completed transaction which, under the Revenue Act of 1918, gave rise to gain or loss and likewise gave Swartz a new basis for exhaustion, namely, the value of the contract at the time of acquisition. In our opinion the transaction whereby Swartz obtained the contract with the St. Bernard Cypress Company is not such as to give rise to gain or loss, or to provide a new basis either for purposes of exhaustion or the computation of gain or loss on subsequent disposition. The amount Swartz was to receive*1458 under the contract in any year was contingent upon the amount of timber cut. While the contract provided for a minimum annual cut, this was subject to conditions under which the amount to be paid Swartz was rendered problematical. The amount to be received by him above the specified sums for the cypress as cut depended entirely on whether the St. Bernard Cypress, company made a profit. Swartz's share was to be determined and paid to him annually. If the company made no money, Swartz would receive only the specified sum of $9 per thousand feet of merchantable cypress and $5 per thousand feet of pecky cypress lumber. Swartz apparently was not of the opinion that the *1076 receipt of the contract in 1919 constituted a closed transaction. At any rate he did not so report it for tax purposes. In fact, none of the parties concerned with the contract have ever regarded it as evidencing a completed sale in 1919, as is now claimed by petitioner. In the years 1922 and 1924, inclusive, petitioner claimed deductions for exhaustion of the timber under the heading of "cost of goods sold," and in 1925 and 1926 it claimed and was allowed deductions for depletion. In forest industries*1459 schedules (Form T), filed by the St. Bernard Cypress Company for the years 1920, 1921, and 1922, that company represented that it owned no timber "but buys its timber as cut, currently paying therefor $9 per thousand feet for merchantable cypress and $5 per thousand feet for pecky cypress. There is therefore no depletion." Thus we find all parties interested in the contract, and also the respondent, pursuing a consistent course under which the holder of the contract was considered as the person entitled to an allowance in the nature of depletion. We find nothing in the record before us to convince us that that course was wrong. Under somewhat similar facts, in , the Supreme Court held that the transaction whereby the taxpayer received a promise, subject to contingencies as in this case, should not be regarded as a completed one giving rise to gain in the year the promise to pay was received. In the same case in the ), the court held that "where the right to receive moneys is contingent as provided by a contract until the property right secured by the contract has been relieved*1460 of its element of risk and turned into cash, the income taxing act does not reach it, and the contingent right is not income." The record in the present case contains testimony directed to showing the value of the contract when acquired by Swartz and also when he assigned it to the petitioner. We have no doubt that the contract did have some value. But, as pointed out above, it was not received by Swartz in payment for his timber and so there is no occasion for valuing it. Cases of this kind are distinguishable from those in which property is exchanged for securities such as stock or bonds, which pass readily from hand to hand and for which there is an established market. In such cases the property received is regarded as being accepted in payment. See ; affd., ; ; affd., . The parties argue at length the question of whether title to the timber was conveyed to the St. Bernard Company by the contract of August 25, 1919. The solution of this question does not appear to be decisive of the question before us. Even if title*1461 passed, as contended by petitioner, the amounts to be received in the future *1077 would not necessarily be income in 1919 to Swartz, who was on the cash basis. Title to the stock involved in , undoubtedly passed in 1916, but the promise of the purchaser was not regarded as realized income. On the other hand, a taxpayer actually realizing income on the sale of property may not escape or postpone the tax by withholding delivery of evidence of title. In our opinion the respondent is in error in the position taken in the present proceeding, namely, that the contract cost Swartz nothing and consequently there is no basis for exhaustion. Whether or not the contract served to convey title, it did divest Swartz of his theretofore absolute rights in the timber. By entering into the contract he parted with his outright ownership of the timber; he was no longer free to dispose of it as he saw fit, but was obligated to let the St. Bernard Company cut it on the terms specified. It is agreed by the parties that the March 1, 1913, value of the timber owned by Swartz on that date was $365,973.48. Thereafter, and prior to August 25, 1919, he*1462 acquired additional timber at a cost of $233,540.10. The sum of these amounts, $599,513.58, is the proper basis in Swartz's hands for the computation of gain or loss and depletion. He was entitled to recover that sum upon the sale or other disposition of the timber. We see no sound reason why, under the circumstances here, he should be deprived of that basis. Since the transaction by which the contract was assigned to the petitioner in exchange for its entire issue of stock was one which did not result in either gain or loss to Swartz, and under the statute the basis for exhaustion of the property received by the petitioner would be the same as that in the hands of its transferor, namely, Swartz, and since the transaction by which Swartz acquired the contract was not one in which gain or loss could then be computed, but rather one in which profit to Swartz would be computed as the timber was cut on the basis of the difference between the March 1, 1913, value plus subsequent cost of the timber and the amounts paid to Swartz, we are of the opinion that the proper basis for exhaustion of the contract to the petitioner is the March 1, 1913, value of the timber plus subsequent cost, *1463 namely, $599,513.58, and that this amount should be spread over the period of cutting the timber and a pro rata part allowed as a deduction in each year. It appears from the deficiency notice that that is the basis used by respondent in computing deduction for 1926, but if we are wrong in this it may be settled under Rule 50. We see no merit in petitioner's contention that this case comes within that group in which taxpayers have unsuccessfully attempted to escape tax by assigning income to others, such as ; . ; , *1078 and similar cases. In this case Swartz did not merely assign income; he assigned the property which gave rise to the income, as in , and , in which the taxpayers conveyed to others notes covering deferred payments on installment sales. See also *1464 ; affd., ; . Reviewed by the Board. Decision will be entered under Rule 50. TRAMMELL, LOVE, and MURDOCK dissent.