
    Appeal of THE AGUILAR LAND ASSOCIATION.
    Docket No. 3718.
    Submitted November 3, 1925.
    Decided February 13, 1926.
    
      Robert B. Honeyman, Esq., for the taxpayer.
    
      Benjamin H. Saunders, Esq., for the Commissioner.
    Before James, Littleton, Smith, and Teussell.
    This is an appeal from the determination' of a deficiency, in income and profits tax for the calendar years 1919 and 1920 in the amounts of $1,100.80 and $930.39, respectively. The issue presented relates to invested capital and concerns the actual cash value of a total of 1,540 acres of mining property paid in for $200,000 par value of stock of each, the taxpayer and its subsidiary, The Green Canyon Land Co., in 1897 and 1902, respectively. The taxpayer claims a value of $400,000 — the par value of the stock. The Commissioner allowed a value of $81,695.
    FINDINGS OF FACT.
    The Aguilar Land Association is a Colorado corporation, organized in 1897 with a capital stock of $200,000, divided into 2,000 shares of the par value of $100 each. The Green Canyon Land Co. was similarly incorporated in 1902, with a capital stock of $200,000, divided into 2,000 shares of the par value of $100 each. The latter company was at all times herein mentioned a subsidiary of the taxpayer, the stock of both corporations being owned by A. G. and Henry C. Broadhead, or their estates or heirs.
    A. G. and Henry C. Broadhead were experienced mining engineers and geologists, specializing in the coal industry. They devoted their efforts to the acquisition and development of coal lands, with a view of leasing the same upon a royalty basis. Their activities extended to various parts of the United States, but principally to the coal fields in Pennsylvania and Colorado. During the period from 1893 to 1902, they investigated, prospected, and tested certain coal lands in Colorado, known as the Trinidad District, as a result of which they gradually acquired by purchase approximately 3,500 acres in this district, including portions of the Gonzales and Vasquez Canyons. This land was situated in a known and proven coal district. They not only acquired the land immediately available for the mining of coal but, as a precaution, secured certain adjoining upland and surrounding sites for the purpose of assuring a steady supply of coal for future operation and for the purpose of preventing possible interference to transportation and obstructions to large operations by adverse ownership. The tract thus secured was the result of exhaustive and thorough tests and careful analysis from engineering and geological standpoints. *
    
      From this tract 1,080 acres were transferred in 1897 to The Aguilar Land Association for $200,000 par value of stock, and in 1902 460 acres were transferred to The Green Canyon Land Co. for $200,000 par value of stock. Under the land in question were several proven seams of coal. The seams underlying the Aguilar property were as follows:
    
      
    
    There was a total average of 14 feet of coal underlying 1,000 of the 1,080 acres transferred to The Aguilar Land Association.
    The seams underlying The Green Canyon Land Co. property were as follows:
    Name of seam. Tliickness.
    Broadhead No. 3, upper_4 feet.
    Broadhead No. 4, upper_4 feet.
    Broadhead No. 3, lower_I
    Broadhead No. 4, lower_J ee ‘
    It was estimated that there was an average total of 20 feet of workable coal underlying 400 of the 460 acres transferred to The Green Canyon Land Co. •
    It was not practicable to extract coal from the upper and lower coal seams at the same time. At the time of the transfer the principal output of the Aguilar property, which was being operated by the Broadheads, was from the Welsen seam through a shaft about 250 feet deep. No coal had been removed from the Robinson seam. There had been some development of the Broadhead seams 3 and 4 through the removal of coal outcroppings.
    The Green Canyon property had not been operated when it was paid in to the corporation. Two entrances of about 150 feet each, however, had been made at outcroppings for the purpose of showing the character of coal, thickness of the vein, and character of the roof and bottom to aid in the leasing of the property.
    The shaft upon the Aguilar property was constructed in ■ 1895 at a cost of approximately $50,000, and in 1896, 30,000 tons of coal were extracted. During the year 1897 approximately the same amount was removed.
    Prior to the transfer of the properties to the two corporations mentioned, the Broadheads expended for the shaft, railway facilities, and other improvements at least $130,000. As a result of these expenditures, together with other sums of money expended by them in developing these properties and the losses sustained by them in their attempted operation, they became heavily in debt. It was for this reason that the two corporations were organized and the property transferred to them with the hope that, in the event of bankruptcy, they might save the loss of the coal lands.
    In 1902, just prior to the transfer of the property to The Green Canyon Land Co., Henry C. Broadhead leased to John Connell 420 acres of the 460 acres thereafter paid in to The Green Canyon Land Co. for stock. This lease provided for the removal of a minimum of 25,000 tons of coal for the year 1908 at a royalty of 8 cents a ton, a minimum of 45,000 tons for the year 1904 at a royalty of 9 cents a ton, and for each year thereafter the removal of a minimum of 60,000 tons at a royalty of 9 cents a ton.
    Geological formations indicated at the time of the transfer of the property to the corporations that there were probably 22,000,000 tons of coal underlying the same, determined by applying the universally accepted estimate that a seam 1 foot thick contains 1,000 tons of coal per acre, as follows:
    Tons.
    Aguilar, 1,000 acres, 14 feet, 1,000 tons_ 14, 000, 000
    Green Canyon, 400 acres, 20 feet, 1,000 tons_ 8,000, 000
    Total_ 22, 000, 000
    Coal mines in the district in which the property in question is located were subject to risks of encountering faults, dikes, lavic intrusions, gas explosions, and flooding. These properties were known to contain these difliculties. The amount of recoverable coal was uncertain, but it was much less than the above estimate of total coal content.
    The property transferred to The Aguilar Land Association and The Green Canyon Land Co. was purchased by A. G. and Henry C. Broadhead over a period from about 1893 to 1896 in small parcels, ranging from 40 to 60 acres, at a cost ranging from less than $20 to $40 an acre.
    In 1902 an experienced coal operator familiar with the coal lands in this territory made an offer to purchase the property transferred to the two corporations for $250,000 in bonds, and his agreement was to expend at least $200,000 in development. This offer was declined.
    The actual cash value of the entire property paid in to The Aguilar Land Association and The Green Canyon Land Co. for stock was $150,000 — the value of the 1,080 acres acquired by the former being $100,000 and that of the 460 acres acquired by the latter company being $50,000.
    Since the dates of the transfers of the properties to The Aguilar Land Association and The Green Canyon Land Co., up to and in-eluding 1924, a total of 3,540,671 tons of coal had been removed by lessees upon a royalty basis. From 1913 to 1918 mining on the Green Canyon property was suspended on account of strikes. There was also a suspension of operations by the lessees on the Aguilar property for a number of years between 1898 and 1924, on account of explosions, strikes, and flooding.
    For the purpose of computing invested capital, the Commissioner determined that the actual cash value of the property at the time of transfer to The Aguilar Land Association was $57,775, and that the actual cash value of the land at the time it was transferred to The Green Canyon Land Co. was $23,920. He calculated that 337 acres out of the 1,080 acres of The Aguilar Land Association property would produce 1,718,000 tons of coal, and that 120 acres out of the 460 acres transferred to The Green Canyon Land Co. would produce 960,000 tons of coal, or a total of 2,678,000 tons. He estimated the royalties of the Aguilar property at 8 cents a ton and those of the Green Canyon at 9 cents a ton, and discounted these royalties at 10 per cent for a period of 40 years. His computation follows:
    Aguilar:
    229 acres coal, Temple-'-tons__ 916, 000
    108 acres coal, Royal-do_• 802, 000
    337 1, 718,000
    8 cents discounted at 10 per cent lor 40 years gives a rate of 1.956 cents.
    1,718,000 tons, at 1.956 cents_ $33, 600
    1,080 acres surface, at $10_ 10, 800
    44, 400
    121 shares for machinery_ 2, 860
    Value of railroad (part of improvements acquired with land)— 10,515
    57, 775
    Green Canyon Co.:
    120 acres, 960,000 tons, 9 cents discounted at 10 per cent, 40 years gives a rate of 2.2 cents.
    960,000, at 2.2 cents_ $21,120
    280 acres grazing land, at $10_ 2,800 23,920
    Total:
    Aguilar_ 57, 775
    Green Canyon. 23,920
    81, 695
   DECISION.

The deficiency should be computed in accordance with the foregoing findings of fact. Final determination will be settled on 15 days’ notice, under Hule 50.  