Ruth Iron Co. v. Commissioner of Internal Revenue

• Decision Date: 25 April 1928
• Docket Number: No. 334.,334.
• Citation: 26 F.2d 30
• Parties: RUTH IRON CO. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Eighth Circuit

26 F.2d 30 (1928)

RUTH IRON CO. v. COMMISSIONER OF INTERNAL REVENUE.

No. 334.

Circuit Court of Appeals, Eighth Circuit.

April 25, 1928.

Guy Chase, of St. Paul, Minn. (Francis W. Sullivan, of Duluth, Minn., and George W. Morgan, of St. Paul, Minn., on the brief), for petitioner.

H. R. Gamble, Sp. Asst. Atty. Gen. (Mabel Walker Willebrandt, Asst. Atty. Gen., C. M. Charest, General Counsel, Bureau of Internal Revenue, and John W. Fisher, Sp. Atty., Bureau of Internal Revenue, both of Washington, D. C., on the brief), for respondent.

Before KENYON and VAN VALKENBURGH, Circuit Judges, and JOHN B. SANBORN, District Judge.

VAN VALKENBURGH, Circuit Judge.

For many years prior to January 1, 1913, petitioner was the owner in fee of an undivided 107/960ths of the Kosmerl mine, situated in St. Louis county, Minn. In 1903 petitioner and its co-owners leased the property to the Oliver Iron Mining Company for a term of 51 years, ending in 1954, for mining purposes, at a royalty of 35 cents per ton. The lease provided for certain annual minimum payments. All such minimum royalties had been paid up to December 31, 1912. January 1, 1913, the fee owners joined in a sale and conveyance of the property to the said Oliver Iron Mining Company. Under the contract between the parties it was provided that explorations should be made to determine the amount of ore on, in, or under said premises, for the purpose of determining the purchase price. The contract of sale provided that:

"The purchase price of said lands shall be determined by multiplying the number of tons of iron ore found to exist on said lands on the foregoing basis, by thirty-five (35) cents for each ton; from such product there shall be deducted the sum of $530,000 heretofore paid in royalties under the aforesaid lease by the purchaser to the vendors; the remainder shall be divided into forty-one (41) equal annual payments considered as payable one forty-first each year, commencing with January 1st, 1913, such payments to be evidenced by the promissory notes of said Oliver Iron Mining Company, dated January 1st, 1913, without interest."

These notes were secured by mortgage. The number of tons was ascertained and agreed to be 12,700,000, making the total purchase price, computed at 35 cents per ton, to be $4,445,000, less the total royalties paid in advance of sale, to wit, $530,000. The net purchase price was therefore $3,915,000. The payment was to be made in the form of eighty-two notes dated January 1, 1913; these notes being payable January 1st of each year from 1914 to 1954, inclusive. All of these notes were the same, with the exception of the amount thereof and the name of the payee. They were in the following form: "$______.

"Duluth, Minnesota, January 1st, 1913.

"On or before ____ years after date the Oliver Iron Mining Company, a Minnesota corporation, promises to pay to the order of Ruth Iron Company ____ dollars in gold coin or its equivalent, at the First National Bank of Duluth, Duluth, Minnesota, without interest until after maturity. Value received."

Each of the vendors received separate notes for his or its proportionate part of the total purchase price, less his or its proportion of a cash payment made on January 1, 1913.

Two of these notes became due and were paid January 1, 1919, two more January 1, 1920, and two more on January 1, 1921. In each instance the amount received by petitioner was the face of the notes without interest. The Commissioner of Internal Revenue ruled that these notes were to be taken for income tax purposes at a value discounted to March 1, 1913, at the rate of 5 per cent. compounded annually; that the difference between such March 1, 1913, valuation and the amounts received on January 1, 1919, 1920, and 1921, respectively, constituted taxable gains, profits, or income. The amounts of deficiency income taxes thereon were determined by the Commissioner and the Board to be $99.47 for 1919, $135.49 for 1920, and $169.79 for 1921. Counsel for petitioner in their brief state that no objection is made to the amounts of the taxes defined for the years stated, provided it shall be held that any part of said sums collected constituted taxable gains, profits, or income. The United States Board of Tax Appeals sustained the ruling of the Commissioner of Internal Revenue. It is to review this decision of the Board that this original action is brought.

It appears from the record and from the briefs of counsel that four other appeals, involving the same questions, were heard together with this case by the Board of Tax Appeals. Three of these cases, Eva Iron Company, Reading Investment Company, and Estate of C. A. Severance, numbered 332, 333, and 335, originals, are before this court. It has been stipulated that the same shall be heard and decided on the printed record and briefs in this, the Ruth Iron Company, case. The claims of the parties, as well as the grounds of the decision of the Board of Tax Appeals, are well stated in the opinion of the Board, to wit:

"Petitioners do not question the Commissioner's determination of the March 1, 1913, value of the notes in question, but they contend that no portion of the payments of the face amount of the notes in the years involved constituted taxable gain, profit, or income under the Revenue Acts of 1918 and 1921 (Comp. St. § 6336 1/8a et seq.), for the reason that the face amount of the notes, which in the hands of the vendors of the property represented merely evidence of a deferred purchase-price payment, was capital on March 1, 1913, and that subsequent payment thereof represented entirely such March 1, 1913, capital.

"When, on January 1, 1913, the petitioners herein sold their respective interests in the property known as the Kosmerl mine for cash and notes of the Oliver Mining Company, there was an exchange of property for property, a completed transaction. Thereafter, and on March 1, 1913, all that the petitioners had of exchangeable value was the noninterest-bearing notes of the Oliver Mining Company, maturing annually over a period of 39 years 10 months. The cost of these notes to the petitioners was the fair market value of the Kosmerl mine at the date of the exchange, less the total of the minimum royalties theretofore paid by the purchaser which was allowed as an offset against the purchase price and the cash payment of one forty-first of the remainder of the purchase price which was paid on January 1, 1913. The petitioners have offered no evidence to prove the fair market value of the mine at the date of the exchange. On the other hand, they contend that the cost of the notes was 12,700,000 tons of ore of the value of $.35 per ton, or the equivalent of their face value. But such is not the case. The cost of the consideration received in exchange for the...