Alabama Mineral Land Co. v. Commissioner

ALABAMA MINERAL LAND COMPANY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Alabama Mineral Land Co. v. Commissioner Docket Nos. 56960, 69007. United States Board of Tax Appeals 28 B.T.A. 586; 1933 BTA LEXIS 1097; June 29, 1933, Promulgated *1097 1. Fair market value of timber and timber lands on March 1, 1913, determined. 2. Petitioner's right to take deductions from its gross income for funds embezzled by its secretary and treasurer, sustained. Geo. E. H. Goodner, Esq., for the petitioner. Hartford Allen, Esq., for the respondent. LANSDON *587 The respondent has determined deficiencies in income tax for the years 1928 and 1929 in the respective amounts of $3,971.01 and $4,927.59. For its causes of action petitioner avers (1) that it is entitled to reduce its tax liability for each of the years under review by reason of a net loss sustained in 1927; (2) that in computing profit or loss resulting from sales of timber and lands in 1927, 1928, and 1929 the respondent has erroneously determined the fair market value thereof at March 1, 1913; (3) that in the years 1928 and 1929 it sustained losses from embezzlement of is property by its secretary that are deductible from its income in each of such years; (4) that the respondent erroneously disallowed the amount of certain ordinary and necessary expenses as deductions from its income in 1927; and (5) that it is entitled to deduct from*1098 its income an amount which it lost in the repossession of certain lands. The two proceedings have been consolidated for hearing and report. FINDINGS OF FACT. The petitioner is an Alabama corporation with its principal place of business at Birmingham, where it is engaged in the business of buying and selling timber, timber lands and cut-over timber lands. Prior to March 1, 1913, it acquired all the properties from which the amount of profit realized from sales thereof in 1927, 1928, and 1929 is here in controversy, except 1,116,667 feet of standing timber found to have been purchased after that date for $5.08 per 1,000 feet. Prior to October 6, 1929, the petitioner's tax liability for the years 1924, 1925, 1926, and 1927 was settled under an agreement as authorized by section 606 of the Revenue Act of 1928. In the determination of the liability so settled an operating net loss of $16,430.52, sustained in 1927, was given consideration. In his deficiency notice to the petitioner for the year 1928 the respondent held that no net loss had been sustained in 1927, recomputed the results from the sale of petitioner's lands and timber in that year, and held that a profit of $4,350.91*1099 was realized in such year. In 1927 the petitioner sold 2,726,000 feet of standing timber for $14,600.77 and as the basis for computing gain or loss from such transaction reported on its return for that year a value at March 1, 1913, of $14,600.77, based on a timber price of that date of $5 per 1,000 feet. Upon audit the respondent determined that the basic value of the timber was $3 per 1,000 feet and determined profit from the transaction in the amount of $4,350.91. In the same year it sold 7,183 acres of cut-over lands and on its income tax return reported profit based on a March 1, 1913, value of $5 per acre. Upon audit *588 the respondent reduced the basic cost from $5 per acre and added $21,781.43 to income for that year. The lands sold in 1927, and another body sold in 1929, included hills and valleys. The soil is a sandy loam suitable for agricultural purposes. The average distance from Birmingham, one of the leading industrial centers of the South, is about ten miles. In 1913 land within a radius of ten miles of Birmingham was in good demand and sales were made for prices as high $100as per acre. In 1928 the petitioner sold 13,370,880 feet of standing timber*1100 and on its income tax return for that year computed profit from such sale on a basic cost of $5 per 1,000 feet, or a total of $77,183. Upon audit the respondent used a March 1, 1913, value of $4 per 1,000 feet in computing profit from the sale and increased petitioner's tax liability accordingly. In 1929 petitioner sold 16,254,379 feet of standing timber on which it reported a total March 1, 1913, value of $5 per acre, or a total of $81,823.14. Audit of this return disclosed that 1,116,667 feet of such timber had been acquired after March 1, 1913, at a cost of $5.08 per 1,000 feet. For the remainder the respondent determined a March 1, 1913, value of $2.50 per 1,000 feet and increased petitioner's income accordingly. In the same year it sold 2,756.3 acres of unimproved cut-over lands and on its income tax return reported profit based on 1913 value of $5 per acre, or a total basic cost of $12,099.26. Upon audit of such return the respondent determined a basic cost of $2 per acre and increased the reported profit by the amount of $6,586.86. In 1927 petitioner expended $2,320.86 for cruising timber. All this work was done by its regular employees, who were on its pay rolls*1101 throughout the year. A part of the cruising was done on land that petitioner contemplated buying but which was never bought. The remainder was on petitioner's own lands which were sold in 1927 or later years. The cost of cruising lands not purchased was $920.38 and of cruising its own lands later sold was $1,400.30. In October 1932, the secretary of the petitioner committed suicide. He left a letter in which he stated that he was short in his accounts in substantial amounts which he had lost in unsuccessful speculations. He left no property and only $3,000 of life insurance, which went to his family. The petitioner made an audit of the deceased secretary's accounts. Such audit disclosed that in the years 1928 and 1929 the secretary had embezzled funds of the petitioner in the respective amounts of $10,196 and $10,000. During the period of his employment the secretary was bonded by the U.S. Fidelity & Guaranty Co. in the amount of $20,000. The bond *589 was canceled by such company's Birmingham agent in October 1931. It contained a condition that the bonding company would not be liable for any loss on defalcation unless claims therefor were made within six months*1102 and ten days after the termination thereof. Upon the cancellation of the bond of the U.S. Fidelity & Guaranty Co. in October 1931, the secretary was bonded in another company. The new bond contined a condition that it covered only defalcations of the insured that were committed after the date of its execution. Petitioner's officers and directors had no knowledge of any defalcation by its secretary until after his death in October 1932. Prior to his death the secretary did not reimburse the petitioner for his speculations and nothing has since been recovered, either from the estate of the embezzler or from the insurance companies. OPINION. LANSDON: Petitioner's first contention is that it is entitled to reduce its tax liability for the years 1928 and 1929 by carrying forward a net loss of $16,430.52 or more sustained in 1927. The facts disclose that the computation of the petitioner's tax liability settled under the provisions of section 606 of the Revenue Act of 1928 included the allowance of an operating loss in the amount of $16,430.52. In his computation of petitioner's tax liability for 1928, the respondent reviewed the operations that resulted in such alleged loss*1103 in 1927 and determined that, in fact, the petitioner realized a profit from sales in that year and so has denied any net loss deductions for 1928 and 1929 resulting therefrom. On this issue the petitioner contends first that its tax liability for 1927 has been closed by a "606 agreement" and the respondent cannot reopen that year for any purpose and, second, that if we hold to the contrary, it is entitled now to adduce evidence that it did sustain the loss in question or one greater in amount in 1927. The first point pleaded by petitioner has been decided adversely to its contention in . This same report, however, sustains the petitioner in his claim that it may now introduce evidence to show that a net loss was sustained in 1927. Such evidence is in the record and will be considered along with the facts relating to the deficiencies asserted for 1928 and 1929. The principal question relates to the fair market value at March 1, 1913, of the standing timber and cut-over lands which were sold in 1927, 1928, and 1929. The petitioner reported gain or loss from such sales on the basis of a fair market value of the lands of $5 per*1104 *590 acre and of $5 per 1,000 feet for the standing timber on the basic date. The respondent has computed the deficiencies in the taxable years and redetermined the results of the sale in 1927 on a basis much lower than the 1913 values claimed by the petitioner. The evidence adduced by the petitioner in support of its reported values consisted of the testimony of a number of witnesses. All are well acquainted with the land and timber here involved and are familiar with values and sale prices of comparable properties in the same locality in 1913. Without exception such witnesses testified to the value contended for by the petitioner. The respondent offered no rebuttal evidence and failed to weaken the testimony of petitioner's witnesses by cross-examination or oherwise. In our opinion the petitioner has proved that the lands and standing timber in question had a fair market value at March 1, 1913, of $5 per acre and $5 per 1,000 feet, respetively. Recomputation under Rule 50 on the basis of such values will redetermine the amount of the net loss sustained in 1927, which may be carried forward in the determination of petitioner's tax liability for each of the two succeeding*1105 years. The deficiencies asserted for 1928 and 1929 will be recomputed under Rule 50 in accordance with our conclusion above. The evidence supports the petitioner's contention that it should be allowed to deduct from its income in the years 1928 and 1929 the amounts of $10,196 and $10,000, respectively, as losses sustained by embezzlement in such years. The embezzler left no property subject to the claims of the petitioner. The peculations were not discovered and claimed within the period specified in the first insurance policy. The second policy expressly provided that the underwriter would not be liable for any defalcation that occurred before the date of its execution, which was some time in 1931. The petitioner is entitled to deduct the losses from embezzlement as claimed in its amended petition. Article 342, Regulations 74; . As a trader in timber and timber lands, the petitioner kept a number of woodsmen and timber cruisers on its pay rolls at all times. The wages of such employees constitute an ordinary and necessary expense of its business. The amount of $2,320.68 paid to woodsmen and cruisers in the year 1927*1106 is deductible from income in that year. The fact that a part of the expense was incurred in cruising timber that was afterwards sold in no wise affects the nature of the expenditure. On brief the petitioner abandons its last allegation of error and the determination of the respondent with respect thereto is affirmed. Decision will be entered under Rule 50.