Old Mission P. Cement Co. v. Commissioner of Int. Rev., 7195.
| Decision Date | 12 March 1934 |
| Docket Number | No. 7195.,7195. |
| Citation | 69 F.2d 676 |
| Parties | OLD MISSION PORTLAND CEMENT CO. v. COMMISSIONER OF INTERNAL REVENUE. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Geo. E. H. Goodner, of Washington, D. C., for petitioner.
Sewall Key and Helen R. Carloss, Sp. Assts. to Atty. Gen., for respondent.
Before WILBUR and GARRECHT, Circuit Judges, and NORCROSS, District Judge.
This is a petition to review the findings of fact, opinion, and decision of the United States Board of Tax Appeals, which involved petitioner's income taxes for the years 1923 to 1926, inclusive, and presents for our determination the following questions:
1. Whether the Board's finding that petitioner's limestone properties, known as the Barbee, Underwood, and Flint deposits, had a fair market value as of March 1, 1913, of $63,121, is supported by any substantial evidence.
2. Whether the amortization of bond discount on the bonds of the petitioner's affiliate, the California Central Railroad, held by the petitioner may be deducted in computing the consolidated net income of the affiliated companies for the years 1923 to 1926, inclusive.
3. Whether the petitioner may deduct as business expenses donations to the San Francisco Community Chest, donations to the Y. M. C. A., and an amount paid to a fund to promote a state-wide referendum for an increased gasoline sales tax levy in order to provide additional funds for road building.
The Board made findings of fact which may be briefly stated as follows:
The petitioner is a California corporation organized in 1912 for the purpose of engaging in the manufacture of Portland cement. Its capital consists of 350,000 shares of common stock of the par value of $10 per share. It is the successor of the San Juan Portland Cement Company incorporated in 1906, and was organized by bondholders of said company when it defaulted payment of interest upon its bonds in the amount of $1,300,000. At a sheriff's sale the bondholders purchased all of the assets of the company for $20,700.
These assets so acquired included limestone deposits known as the Barbee, Underwood, and Flint deposits, about 88 miles south of San Francisco, stocks and bonds of the San Juan Pacific Railway Company which connected the deposits with the Southern Pacific Railway (a distance of 7 miles), the Chittenden Ranch, and an unfinished cement plant.
Thereafter the bondholders' committee organized the California Central Railroad Company and turned over to it the stocks and bonds of the San Juan Pacific Railway Company in exchange for the stocks and bonds of the said California Central Railroad Company.
Thereupon the petitioner was organized, and in exchange for 175,000 shares of its common stock of the par value of $10 a share, it acquired from the bondholders' committee the unfinished cement plant, machinery, equipment, etc., which were valued at approximately $500,000 and the lands (2,463 acres) containing the petitioner's deposits. In 1916 the petitioner made the necessary financial arrangements and undertook the completion of its cement plant, which was finished at an additional cost of $500,000, and production started in 1918.
The Barbee deposit was adjacent to the plant; the Underwood and Flint deposits were 2 and 3 miles, respectively, from the plant, and were reached by a narrow gauge railroad constructed after 1913 and extended as operations progressed after 1918. The deposits were exhausted in or about 1927.
In its income tax returns for the years 1918, 1919, 1920, and 1921 the petitioner claimed deductions for depletion of mineral deposits at the rate of 10 cents per ton. Upon its income tax returns for the years 1922, 1923, 1924, and 1925 the petitioner claimed deductions for depletion of mineral deposits at the rate of 20 cents per ton on a valuation of $1,034,398.10 for the deposits on the basis of data furnished in a schedule (Form F) filed December 19, 1922. This schedule indicated that the Underwood deposits had been depleted of lime rock, but not of clay, since 1920; that the Barbee property contained no high-grade limestone but considerable clay; that the Flint property was supplying all the lime rock being used and that it was estimated that it would be exhausted six and one half years from March, 1921, when the plant began using it, although the 1918 estimate had indicated available tonnage for eight years. Between March, 1920, when the Underwood deposit was exhausted, until March, 1921, when the Flint deposit was used, 50,093.50 tons of lime rock were obtained from one E. A. Pearce at 10 cents per ton.
The schedule further showed that the lands had been set up on the books at a valuation of $1,202,653.10, that $48,000 of that amount represented the value of the plant site and $75,000 the value of the Chittenden Ranch for agricultural purposes (the land containing clay not used, but no limestone), and that $45,255 should be deducted as the residual value of the deposit lands, leaving $1,034,398.10 as the value of the deposits. On the basis of a consumption of 329,337.12 tons and a prospective consumption of 1,035,000 tons by the time the Flint deposit was exhausted (less the amount obtained from the Pearce Company) the estimated tonnage to be removed was 1,314,243.62 tons and the division of $1,034,398.10 by that tonnage would give the depletion rate of 79 cents a ton.
On September 23, 1912, the petitioner had purchased the mineral rights to 8,750 acres on the El Gabilan Rancho for 50,000 shares of common stock and suggested in the schedule that an increase of 25 per cent. be allowed in the capacity of the mill; that depletion be figured over an assumed corporate life of 40 years from May 1, 1918, and on such a basis the depletion rate would be over 19 cents per ton. The petitioner therefore adopted the figure of 20 cents a ton.
The Commissioner determined that on March 1, 1913, there were 1,700,000 tons of merchantable limestone in the three said deposits, suitable for the making of Portland cement, and fixed the fair market value thereof on that date at $63,121, or 3.713 cents per ton of limestone in place. In computing petitioner's income for the years here involved, depletion deductions were allowed at the rate of 3.713 cents per ton for the limestone removed and consumed in those years as follows:
1923 .................... $8,973.73
1924 .................... 7,875.87
1925 .................... 9,171.74
1926 .................... 9,135.69
Petitioner claims that due to the scarcity on the Pacific Coast of limestone suitable for making Portland cement, the said deposits had a market value on March 1, 1913, far in excess of that allowed by respondent and approved by the Board.
Throughout the years involved in this proceeding, petitioner owned substantially all of the capital stock of the San Juan Pacific Railway Company, a California corporation, and this latter company owned substantially all of the stock of the California Central Railroad Company, a California corporation. Respondent has ruled that the three companies were affiliated for income tax purposes throughout the years involved in this proceeding and there is no controversy over that ruling.
In 1912, the California Central Railroad Company issued its own bonds at a discount, which discount it amortized over the life of the bonds at the rate of $3,381.18 each year. In computing consolidated net income for the years involved here, respondent has allowed deductions in respect of such bond discount, in the amount of $375.99 for the years 1923, 1924, and 1925, and in the amount of $220.79 for the year 1926. He disallowed the balance of the amount of such amortization applicable to the years in question, because those balances were applicable to bonds held in the respective years by petitioner. In other words, respondent recognized the right of the Railroad Company to amortize and deduct that portion of its bond discount applicable to the bonds held by the public, but disallowed as a deduction that portion of the discount applicable to the bonds owned by petitioner.
In each of the years 1923 to 1926, inclusive, petitioner donated $1,000 to the San Francisco Community Chest, this amount being the allotment assigned to the petitioner by the Community Chest committee. Publicity through the newspapers and by means of placards on doors was given to such contributions, which petitioner claims resulted in good will and increased business. In 1926 petitioner donated $2,500 to the San Francisco Y. M. C. A., which was then beginning the erection of a new building. The purchase of cement...
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