Roberts v. Commissioner , 20 B.T.A. 345 ( 1930 )

ROBERT ROBERTS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Roberts v. Commissioner

Docket No. 26993.

United States Board of Tax Appeals

20 B.T.A. 345; 1930 BTA LEXIS 2146;

July 28, 1930, Promulgated

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Respondent's determination approved upon petitioner's failure to establish correct depletion deduction.

Robert Roberts, Jr., Esq., for the petitioner.

Brooks Fullerton, Esq., for the respondent.

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LOVE

This proceeding is for the redetermination of a deficiency in income tax for the year 1922 in the amount of $258.21. The petitioner asserts error in the respondent's denial of a deduction for depletion of a gravel bed.

FINDINGS OF FACT.

The petitioner is a resident of Shreveport, La.

In 1905 petitioner's wife acquired by inheritance from her father an interest in a certain tract of land situated about two and one-half miles from Minden, La., and containing approximately four hundred acres. A portion of this tract, consisting of between five and ten acres, contains a gravel bed. Sometime prior to March 1, 1913, Mrs. Roberts had acquired by purchase from three coheirs an undivided one-fourth interest in the entire tract above mentioned. Her co-owners on that date were her mother, Ida V. Goodwill, her brother, Donald Goodwill, and Otis E. Hodge, each of these persons owning with Mrs. Roberts an undivided one-fourth interest in the tract mentioned and in other large areas of land scattered over the Parishes of Webster, Beinville, Bossier and Claiborne. These persons also held similar interests in a large brick store building located at Minden. The interests of each of them in all of the properties mentioned had been acquired as heirs of Mrs. Roberts' father, the interest of Mrs. Roberts representing her own interest in addition to her purchase of the interest of three other heirs. The properties were known collectively as the Goodwill estate, and that portion containing the gravel bed above mentioned was known as the Geren-Overton place.

In 1910 or 1911 the coowners undertook a survey to determine the extent of the gravel deposits on the Geren-Overton tract. This survey was conducted by Donald Goodwill, one of the coowners, who was a civil engineer. Under his direction the gravel deposit was outlined by digging test holes. He then computed the cubic content from the area involved and the indicated depth of the deposit. His findings indicated that the deposit contained approximately one hundred thousand cubic yards of gravel.

The production of gravel is one of the minor industries of the Parish in which the Geren-Overton tract is located. The coowners of that tract had previously sold, in small lots, considerable quantities of gravel produced on it, and they familiarized themselves with conditions in northwest Louisiana in order to place a value on the gravel pit. As a result of the survey above mentioned and their knowledge of gravel values the coowners placed a value of $10,000 on the gravel deposit, in place. This value was exclusive of the value of the land, which was worth from $3 to $5 per acre.

The survey and valuation above mentioned had been made with the prospect of selling the deposit, and it was offered to an interested party at the value determined for it, but no sale was effected. The coowners continued to sell the gravel in small quantities.

In 1917 the owners of the Goodwill estate determined to effect an amicable division of the properties in which each held an undivided one-fourth interest. The division was effected in the following way. A brother of petitioner, representing petitioner's wife and her mother, met with the other two coowners, Donald Goodwill and O. E. Hodge, and the petitioner. All of these conferees were familiar with the values of the properties involved. Each item of the property was considered separately, and its value agreed upon. In valuing the properties it was agreed that an extra value should be assigned to the Geren-Overton tract, over and above the value of the land, to represent the value of the gravel deposits it contained. Determination of this extra value gave rise to considerable discussion between petitioner and Messrs. Goodwill and Hodge. It was first suggested that the $10,000 value placed on the gravel deposit as a result of the earlier survey be considered as the extra value to be assigned the Geren-Overton tract. Objection was made to this because the coowners had not been able to consummate a sale at that price. The negotiators finally agreed that a value of $7,500 should be placed on the gravel deposit and added to the value of the land containing it. When all the property had been valued it was divided into four portions of equal value designated as "lots" and numbered one to four. After the formation of the lots the coowners "drew" for lots, and Mrs. Roberts drew the lot containing the Geren-Overton tract. A formal partition deed was then executed and filed with the clerk of the District Court of the Parish of Webster under date of April 24, 1917.

So far as material the partition deed reads as follows:

* * * The said parties being fully satisfied with the lots * * * drawn by each of them, and in order to carry out the said partition accordingly, and to confer to each a full and complete title in due form to the properties herein allotted to each, severally declare and acknowledge that they do hereby make and effect the said partition in authentic form, in the manner above expressed, and that from henceforth the said property described as "LOT NUMBER ONE" shall belong exclusively to Mrs. Olive Goodwill Roberts * * *.

And in confirmation of the premises, and in order to better carry out said partition and to vest each of them with absolute title to the properties herein received by each as his, or her, share, the said parties hereto, do hereby declare as follows:

The said MRS. IDA V. GOODWILL declares that, in consideration of the property herein received by her as her full share in this partition, she does hereby sell, assign, convey, transfer and deliver, with all legal warranties, and with subrogation to all her rights and actions of warranty against all preceding owners and vendors, unto the said MRS. OLIVE GOODWILL ROBERTS, O. E. HODGE, and DONALD GOODWILL, each accepting for himself, or herself, heirs and assigns, and acknowledging due delivery and possession thereof, all her (said Mrs. Ida V. Goodwill's) right, title, share, portion and interest, ownership and demand whatsoever in and to the said properties described as Lot Numbers One, Two and Three above.

Each of the coowners made declarations similar to that of the last-quoted paragraph. The petitioner's wife thus became the full owner of the Geren-Overton tract and its gravel deposit.

In 1921 Mrs. Roberts entered into a contract with Clement & Braswell under the terms of which they were to remove the gravel, paying royalties of 25 cents per cubic yard for washed gravel, 15 cents per cubic yard for pit run, and 5 cents per cubic yard for sand. Later the contract was amended by reducing the royalty rates for washed gravel and pit run to 20 cents and 12 1/2 cents per cubic yard, respectively. Royalty rates in each instance refer to the gravel in place and were payable only as it was removed.

During 1922 Mrs. Roberts received the amount of $3,714 in royalties from Clement & Braswell for gravel removed from the deposit on the Geren-Overton tract. This was the greatest amount she received from them as royalties in any one of the three or four years that they worked the pit. Up until the time of this proceeding the total royalties received by Mrs. Roberts from the gravel pit involved amount to $6,682.85.

When Clement & Braswell abandoned operations in the gravel pit only small scattered pockets of gravel remained. The land embracing the gravel deposit has been so badly pitted in operating the bed that it is now useless for any purpose. From 1905 or 1906 until 1921, when the contract with Clement & Braswell was made, gravel was sold off the property in small quantities, and since Clement & Braswell abandoned their operations similar sales have been made up to the present time, including sales to the State Highway Commission and others. The price of gravel has been practically stationary since 1913. A contract to work the gravel pits on a royalty basis was entered into subsequent to Clement & Braswell's abandonment, but the licensee failed to operate. Operations have always been on a royalty basis for the gravel in place.

In his return for 1922 petitioner reported as income the amount of $3,714 received by Mrs. Roberts from Clement & Braswell as royalties upon gravel removed during that year from the Geren-Overton tract. The petitioner claimed a deduction for depletion of the said deposit in the amount of $3,500. The respondent has allowed this claim to the extent of $278.75, and disallowed the balance, amounting to $3,221.25.

OPINION.

LOVE: The petitioner asserts that the respondent has erred in reducing a claimed deduction of $3,500 for depletion of a gravel deposit by the amount of $3,221.25. Much of the evidence has been directed to establishment of the value of this deposit on March 1, 1913, which the respondent regards as the basic date and to the cost of the deposit upon the partition in 1917, which cost petitioner asserts must be used as a basis for depletion. Petitioner contends, however, that determination of the basic date is not material, since the deposit is claimed to have been worth $7,500 on March 1, 1913, and to have cost Mrs. Roberts the same amount upon the partition in 1917. While the question presented by the respective contentions of the parties is a unique one, in our view it need not be decided in this proceeding, since we believe that petitioner's proof has failed on one essential point, and this being so, we are unable to afford him any relief.

The evidence is that a survey conducted in 1909, 1910, or 1911 indicated the content of the gravel bed to be about one hundred thousand cubic yards. Gravel was continuously sold out of the pit in small quantities until Mrs. Roberts acquired sole ownership by the partition in 1917, and thereafter until Clement & Braswell commenced large-scale operations in 1921. It appears that Clement & Braswell operated the pit for three or four years and that during 1922 royalties paid by them amounted to $3,714, the rate per cubic yard varying according to the character of the product. It also appears that up to the time of hearing of this proceeding total royalties received from the gravel pit by the petitioner's wife amounted to $6,682.50, and the pit is still being operated.

In order for the Board to afford petitioner the relief he seeks, some showing of the extent to which the content of the deposit was depleted during the taxable year should have been made. The royalty rates paid were 20 cents per cubic yard for washed gravel, 12 1/2 cents per cubic yard for pit run, and 5 cents per cubic yard for sand. We have no information of the amounts of each of these products produced. If the $6,682.50 in royalties received by Mrs. Roberts was all paid on washed gravel, approximately 33,500 cubic yards were removed. If the royalty was all paid on pit run, about 50,500 cubic yards were removed, and if the royalty was all paid on sand, it is indicated that more than 130,000 cubic yards were removed. The Board can not assume that only one of these products was removed nor the proportions in which each was removed. Yet, the depletion deduction which petitioner may properly claim must bear the same relation to the March 1, 1913, value or the cost, as the number of cubic yards of gravel removed during the taxable year bears to the total content of the deposit upon its acquisition.

The respondent has allowed a deduction for depletion during 1922 in the amount of $278.50. Assuming, without deciding, that the monetary basis for depletion should be $7,500, as claimed by petitioner, and that the content of the deposit should be taken as something less than the 100,000 cubic yards it was regarded as containing upon the survey mentioned in our findings, it is apparent from the royalty rates and total royalties paid during 1922 that the depletion deduction allowed by the respondent is inadequate. In coming to the Board, however, petitioner assumed the burden not only of showing that the deduction allowed by the respondent was inadequate, but also of proving what deduction should properly be allowed. As is pointed out above, he has failed in this proof and consequently we must approve the respondent's determination.

Judgment will be entered for the respondent.