
    THE RED RIVER LUMBER COMPANY v. THE UNITED STATES
    [No. 50060.
    Decided March 6, 1956]
    
      
      Mr. Dana 0. Smith for the plaintiff. Mr. Melvin D. Wilson was on the briefs.
    
      Mr. Ruppert Bingham,, with whom was Mr. Assistant Attorney General H. Brian Holland, for the defendant. Mr. Andrew D. Sharpe was on the brief.
   Laramore, Judge,

delivered the opinion of the court:

The plaintiff sues to recover Federal corporate income taxes paid for the calendar year 1945. The primary issue presented is the gain derived by plaintiff on the sale of certain property in 1945, which in turn involves a determination of the fair market value of certain property owned by plaintiff on March 1, 1913.

The plaintiff duly filed its income tax return for 1945 and paid the tax shown thereon. In this return plaintiff reported a long-term capital gain in the amount of $1,246,822.61, realized on the sale of certain assets to the Pacific Gas & Electric Company.

The Commissioner of Internal Eevenue determined, assessed, and collected a deficiency for 1945 in the amount of $265,115.43, with $27,688.22 interest thereon. The deficiency was predicated on certain adjustments made by the Commissioner reducing plaintiff’s basis for the property sold, thereby increasing the gain on the sale to $2,321,822.61, and adjustments with respect to gain or loss on the sale of certain scrap, equipment, and used parts. A timely claim for refund was filed, rejected, and this suit followed.

The defendant now concedes that the Commissioner’s adjustments with respect to the scrap, equipment, and used parts were erroneous and that plaintiff is entitled to recover the tax resulting from their correction.

In 1945 plaintiff sold certain property to the Pacific Gas & Electric Company for $2,524,000. The plaintiff’s tax return, claim for refund, and amended claim for refund, stated that the selling price was $2,564,000, or $40,000 more. The plaintiff’s petition alleged that the selling price was $2,524,000, and the record shows that this was the actual selling price.

The defendant contends that the actual selling price cannot be used in determining the amount of plaintiff’s refund because plaintiff did not state in its claims for refund, as a ground for recovery, that the selling price reported on its tax return was erroneous. This contention is without merit. In order to determine the amount of plaintiff’s recovery on the ground presented to this court, the actual selling price must be ascertained. As we stated in Midvale Company v. United States, 133 C. Cls. 881, it is settled that a taxpayer cannot recover in court on a ground different from that asserted in the claim for refund, unless there is some action of the Commissioner which amounts to a waiver or estoppel. When a ground set forth in the claim for a refund is sufficient to support recovery, the reason for this rule has been satisfied. The Commissioner has had his opportunity to consider the ground and dispose of the case administratively. If the Commissioner fails to allow the refund and the case comes to court, we see no reason why errors which do not affect the right of recovery, but only the amount of recovery, should be perpetuated.

One of the grounds for recovery set forth in plaintiff’s claims for refund was that the basis of the property sold to Pacific Gas & Electric Company was incorrectly reported by plaintiff and incorrectly determined by the Commissioner. If this ground is sufficient to support recovery, and we find that it is, the actual selling price must be used in determining the amount of gain on the sale.

The properties sold to Pacific Gas & Electric Company are described below. The parties have agreed upon the basis of the properties sold except for the Hat Creek property and the Mountain Meadow Reservoir property.

Th.e Hat Creek property was acquired by plaintiff in 1920. At that time, plaintiff and Mt. Shasta Power Corporation, a wholly-owned subsidiary of Pacific Gas & Electric Company, entered into an agreement whereby plaintiff agreed to convey to Mt. Shasta certain riparian lands and water rights on the Pit River and Fall River, and such easements and rights-of-way over other lands of plaintiff as Mt. Shasta selected within a 5-year period, and Mt. Shasta agreed to build and convey to plaintiff two hydroelectric power plants on Hat Creek, to be leased back by plaintiff to Mt. Shasta for a rental in perpetuity of 9,500 hp. of electrical energy. The effect of the transaction was that plaintiff transferred its Pit and Fall River rights and granted a 5-year right-of-way selection in exchange for the Hat Creek property, which was an agreement to provide plaintiff with 9,500 hp. of electrical energy, free of charge, in perpetuity, secured by legal title to the power facilities.

The parties have agreed that this was a nontaxable exchange and that the basis of the Hat Creek property is the same as the basis of the Pit and Fall River rights and 5-year selection rights. The parties have also agreed that the basis of the Pit and Fall River rights and selection rights, for the purpose of determining gain on the 1945 sale, is their fair market value on March 1,1913.

The plaintiff contends that the fair market value of the Pit and Fall River rights, as of March 1, 1913, was $1,800,000 and the selection rights was $100,000 because of their value for hydroelectric power purposes. The defendant contends that the value of the Pit and Fall River rights was $90,000 and that the selection rights were valueless, because neither had any value for hydroelectric power purposes.

The plaintiff was engaged primarily in lumber and timber operations. By March 1, 1913, plaintiff had acquired over a half-million acres of timber properties in northern California, principally in Lassen and Shasta Counties. These properties included the Pit and Fall River lands and water rights. Prior to March 1, 1913, plaintiff was making plans for the development of its properties by the installation of sawmills, remanufacturing facilities, logging railroads, paper pulp manufacturing facilities, and various auxiliary activities.

The plaintiff started actual development of these properties in 1912 by the construction of plants in a town now known as Westwood. Arrangements were also made by plaintiff for the construction of a branch railroad to West-wood. The town had about 300 people in 1913 and about 7,000 by 1918. The railroad to Westwood was completed in 1914. The expanding need for electric power at West-wood, and the need for power in connection with its proposed development of its other properties in northern California, led to the development of its hydroelectric resources at West-wood and influenced the development of hydroelectric power on the Pit and Fall Rivers during the decade following March 1,1913.

On March 1,1913, there was a steadily increasing market for hydroelectric power in northern California. There was an expected market in the immediate vicinity of plaintiff’s land and the power could have been transmitted to San Francisco. Hydroelectric power was being transmitted such distances at that time. Also, the power companies carrying on development work in this area at that time would not have done so unless there was a potential market for the power.

On March 1,1913, a promoter was attempting to assemble lands and water rights for the development of a large power project which would have required the use of plaintiff’s lands and water rights. At that time most of the electric power utilities in northern California were projecting, planning, acquiring, and actually developing additional hydroelectric power sources.

In 1913 the Mt. Shasta Power Corporation and the Northern California Power Company were engaged in development work for the installation of power plants on the Big Bend of the Pit River approximately 25 miles west of Fall River Mills. These projects conflicted with each other and neither of them was as desirable for profitable operation as the potential development near Fall River Mills. Mt. Shasta Power Corporation, after obtaining permission to proceed with the Big Bend site, abandoned that site and made an arrangement to and did develop plaintiff’s lands and water rights in combination with adjoining lands and water rights.

The plaintiff’s Pit and Fall River lands and water rights were valuable on March 1, 1913, for hydroelectric power purposes. The plaintiff owned sufficient lands and water rights on these rivers to develop commercially practicable power plants. Thus Government permits for development, which were revocable, would not have been required. There was a uniform large flow of water with a recorded minimum flow of about 1,450 second-feet at the lands owned by plaintiff. A large public utility development, using the lands and rights of plaintiff and others, could have been installed with a comparatively short tunnel across the bend made by the Fall and Pit River channels. No reservoir was needed to store water, thus reducing the cost of construction investment by about one-third. All rights here involved were riparian, and did not depend on appropriation or use. On March 1, 1913, these rights could have been, and were in 1920, combined with other adjoining ownerships on the Fall and Pit Rivers into the development of a large hydroelectric public utility.

The Railroad Commission of the State of California, in a proceeding to determine, inter alia, the cost of the Pit and Fall River rights to Mt. Shasta Power Corporation in 1920, found these rights had a value of $1,548,000 in 1920 and cost Mt. Shasta $1,439,168. After considering this value and the other values set forth in finding 25, including the opinions of the expert witnesses, we conclude that the Pit and Fall River rights had a fair market value on March 1, 1913, of $500,000. Accordingly, the basis of the Pit and Fall River rights transferred to Mt. Shasta Power Corporation in the 1920-1922 exchange was $500,000.

In the exchange agreement of 1920, plaintiff granted Mt. Shasta Power Corporation the right to require plaintiff to deed to it all easements and servitudes for rights-of-way which Mt. Shasta should reasonably require for the construction, maintenance, use, and operation of aqueducts, electric transmission and distribution lines, telephone lines, railroads, roads and trails over all of plaintiff’s lands in Shasta County, for use in connection with the power plants to be constructed on the Pit and Fall Rivers and the power plants to be constructed on Hat Creek. The right of Mt. Shasta in these respects was limited to such lands, easements, and servitudes as it might survey, select, and determine with a period of 5 years.

The testimony shows that these selection rights were of considerable value. The Railroad Commission of the State of California found they had a value of $139,000 in 1920. We find that they had a fair market value on March 1,1913, of $90,000. Accordingly, the basis of the 5-year selection rights granted to Mt. Shasta Power Corporation in the 1920-1922 exchange was $90,000.

The Hat Creek property assumed the basis of the Pitt and Fall River rights and 5-year selection rights under the 1920-1922 nontaxable exchange. Therefore, the basis of the Hat Creek property for purposes of determining gain on the 1945 sale was $590,000.

The parties have agreed that the basis of the part of the Mountain Meadow Reservoir property that was owned by plaintiff on March 1, 1913, is its fair market value on that date. This value is in dispute.

In 1921 the plaintiff completed construction of a hydroelectric power plant near the town of Westwood. In connection therewith, the Mountain Meadow Reservoir, comprising 6,728 acres of land and water rights, was constructed. Of this, 6,728 acres of land, 728 acres were purchased subsequent to March 1, 1913, and the basis of the 728 acres is not in dispute. The remaining 6,000 acres were adapted for agricultural, ranching, or reservoir purposes on March 1, 1913. In order to use the property for reservoir puposes it was necessary to purchase additional land for a dam site and an outlet.

During 1913, the Lake Almanor Reservoir was under construction immediately downstream from the plaintiff’s property. The property for the Lake Almanor Reservoir was purchased in 1911 and 1912 for an average price of $31 per acre. The Lake Almanor Reservoir site was regarded as a far more superior site for reservoir purposes than plaintiff’s site. The plaintiff’s experts stated that the value of the 6,000 acres was about $50 per acre. The defendant’s experts stated that the value was not in excess of $8 per acre. We find that the fair market value of the 6,000 acres on March 1,1913, was $17 per acre, or a total of $102,000. The basis of the 6,000 acres of Mountain Meadow Reservoir for purposes of determining gain on the 1945 sale was $102,000.

The gain on plaintiff’s 1945 sale to Pacific Gas & Electric Company should be computed as follows:

Rinding No.
10. Sale price-$2, 524, 000. 00
10. Expense of sale_ 12,174. 88
Net selling price- 2, 511, 825.12
Basis of property
12 (e).Electric facilities_ $161,967.18
12 (b). Sbasta County property consisting of lands and rights along Hamilton Branch of the Feather Biver- 7,400.00
12 (a). Shasta County property consisting of lands and rights on Hat Creek_ 7,000.00
81. Hat Creek hydroelectric plants and related properties - 590,000. 00
41. Mt. Meadow Beservoir lands, 3-1-13 ownership- 102, 000. 00
36. Mt. Meadow Beservoir lands, later acquisitions- 7,345.52
Total adjusted basis of property sold_ 875, 712. 70
Net gain on sale_ 1, 636,112.42

The net gain on the sale was $1,636,112.42.

The plaintiff is entitled to recover the taxes resulting from the determination that the gain on this sale was $1,636,112.42, and the taxes resulting from the correction of the adjustments with respect to the scrap, equipment, and used parts, with interest as provided by law. Judgment will be entered accordingly.

The determination of the amount of recovery shall await the filing of a stipulation by the parties showing the amount due in accordance with the findings and the opinion of the court.

It is so ordered.

Madden, Judge; Whitaker, Judge; Littleton, Judge; and Jones, Chief Judge, concur.

FINDINGS OF FACT

The court, having considered the evidence, the report of Commissioner George H. Foster, and the briefs and argument of counsel, makes findings of fact as follows:

1. At all dates mentioned herein, the plaintiff, The Red River Lumber Company, was and now is a corporation duly organized and existing under the laws of the State of Minnesota. Its principal office and place of business during said years was at Westwood, California.

2. On or before March 15,1946, the plaintiff filed with the collector of internal revenue for the First Collection District of California, at San Francisco, California, its income tax return for the calendar year 1945, and paid to said collector the sum of $569,215.33 for its income taxes for that year, in four quarterly installments as follows:

March 15, 1946_$142,303. 83
June 10, 1946_ 142,303. 83
September 9, 1946_ 142,303. 83
December 5,1946_ 142, 303. 84
Total_ 569,215.33

The plaintiff’s fiscal year for tax accounting and paying purposes was then the same as the calendar year.

3. On or about November 13,1947, the acting internal revenue agent in charge for the said district sent plaintiff a 90-day deficiency letter, proposing a deficiency in income taxes for the year 1945 in the amount of $265,115.43. Plaintiff did not file a petition with the Tax Court for re-determination of such proposed deficiency within 90 days from the mailing of said letter. Thereafter, said deficiency in the amount of $265,115.43 and deficiency interest of $27,688.22 were assessed by the Commissioner and were paid by plaintiff on March 20,1948.

4. On March 14,1949, and within three years from the due date of its income tax return for the said year 1945, and within two years after payment of the deficiency, plaintiff filed with the collector of internal revenue for the First District of California a claim for refund of taxes paid for the year 1945. Thereafter on September 19, 1949, plaintiff filed an amended claim for refund. The foregoing claims for refund were rejected by the Commissioner of Internal Eeve-nue by registered letter dated June 5, 1950.

5. In its income tax return for the year 1945, the plaintiff erroneously included in gross income the amount of $3,664.34 realized from the sale of a club building. Said gain was in fact realized in 1944 and was accounted for in plaintiff’s income tax return for 1944.

6. In its said 1945 return, plaintiff erroneously made a net overstatement of gains from the sale of certain timber and land in the amount of $11,282.08.

7. The Commissioner of Internal Eevenue, in his determination of plaintiff’s deficiency for 1945, made appropriate adjustments for the above-stated errors.

8. During the year 1945 the plaintiff realized a gain of $24,658.93 from sales of certain scrap and equipment and in its income tax return for said year, reported the gain on these sales as a long-term capital gain. During the year 1945 plaintiff realized a loss of $16,743.56 on the sale of certain unused parts for its veneer drying equipment, and in its income tax return for said year it reported this loss as a long-term capital loss.

The Commissioner, in determining the deficiency which he assessed against plaintiff for the year 1945, considered the materials sold as properly includible in inventory and treated the gain and loss as ordinary income and loss instead of long-term capital gain and loss.

9. All the items involved in the sales of scrap and equipment were depreciable property which had been used in the business of the plaintiff and all thereof except certain automobile parts had been portions of the equipment of the electric railroad operated by plaintiff.

The veneer drying parts had been acquired for use in plaintiff’s mill in connection with the operation of its lumbering business. None of the property involved in these two adjustments was properly includible in plaintiff’s inventory, and although held by plaintiff for more than six months prior to sale, none was held by it for sale to customers in the ordinary course of its business.

10. In its income tax return for the calendar year 1945, plaintiff reported a long-term capital gain in the amount of $1,246,822.61 realized upon the sale of certain assets to the Pacific Gas & Electric Company. The return reported the selling price as $2,564,000. In determining the deficiency which he assessed against plaintiff for the year 1945, the Commissioner made certain adjustments reducing plaintiff’s basis for the property sold and thereby increasing plaintiff’s gain on such sale to $2,821,822.61, as follows:

As reported by plaintiff As determined by Commissioner
$2,664,000.00 $2,664,000.00 Selling price_
12,174.88 12,174.88 Expense of sale..
2,651,825.12 2,651,825.12 Net selling price—
1,305,002.51 230,002.51 Cost or other basis.
1,246,822.61 2,321,822.61 Gain..

The record shows that the actual selling price was $2,524,000 rather than $2,564,000. The overstatement of the selling price was an accounting error.

11. In the 1945 sales, plaintiff sold to Pacific Gas & Electric Company the following properties:

(a) The Hat Creek properties, including legal title to land, hydroelectric plants, water rights, and lease rights.

(b) Certain other lands, easements, and water rights in Shasta County.

(c) Certain portions of the lands, easments, water rights, and flume rights-of-way along Hamilton Branch in Plumas and Lassen Counties, California.

(d) The Mountain Meadow Reservoir property.

(e) Certain electrical facilities consisting of transmission lines, telephone lines, substation, hydroelectric generating plant, and related structures.

.12. Plaintiff’s basis, for determining gain or loss on the 1945 sale to Pacific Gas & Electric Company, of certain of the properties described in finding No. 11, is not in dispute and is found to be as follows:

(a) Plaintiff’s basis for the Shasta County properties referred to in finding No. 11 (b) was $7,000.

(b) Plaintiff’s basis for the Hamilton Branch properties referred to in finding No. 11 (c) was $7,400.

(c) Plaintiff’s basis for the electrical facilities referred to in finding No. 11 (e) was $1,101,066.84, less depreciation of $939,099.16, leaving a net basis of $161,967.18.

13. Plaintiff’s basis for determining gain or loss on the 1945 sale to Pacific Gas & Electric Company of the following property described in finding No. 11 is in dispute:

(a) The Hat Creek properties referred to in finding No. 11 (a). The facts relating to this issue are set forth in findings Nos. 15 to 32 inclusive.

(b) The Mountain Meadow properties referred to in finding No. 11 (d).- The facts relating to this issue are set forth in findings No. 33 to 41 inclusive.

14. The plaintiff was organized as a corporation in Minnesota sometime prior to 1890, its founder being T. B. Walker of Minneapolis. Plaintiff was originally engaged in lumber and timber operations in Minnesota.

About the year 1900, T. B. Walker began acquiring timber properties in Northern California, and eventually his holdings totaled over a half-million acres, principally in Lassen and Shasta Counties. Thereafter, Mr. Walker transferred these properties to plaintiff, most of such transfers occurring prior to March 1, 1913, but some occurring after that date.

15. Prior to March 1, 1913, plaintiff was making plans for the development of these holdings by the installation of sawmills, remanufacturing facilities, logging railroads, paper pulp manufacturing facilities, and various auxiliary activities. A large amount of electric power would be needed for such development.

The plaintiff started actual development of these properties in 1912 by the construction of the plants and town now known as Westwood, in Lassen County. Pursuant to arrangements which it made with the Southern Pacific Railroad, that railroad at the same time began construction of a branch railroad, about 100 miles long, to Westwood from a point on its main transcontinental line near Reno, Nevada. On March 1, 1913, the plant and town were in the course of development, with about 300 people located there. The railroad was completed and service to and from Westwood had begun early in 1914. The plaintiff continued its development of the plants and town at Westwood, and within 5 years the town had a population of about 7,000.

Due to the lack of low-cost hydroelectric power, plaintiff generated in a steam plant in connection with its lumber mills at Westwood, at a comparatively high cost, the electricity required for its operations there. The expanding needs of plaintiff for electric power at Westwood, and considerations of the cost of power, led to the development of its hydroelectric resources at Westwood and influenced the development of hydroelectric power on the Pit and Fall Rivers during the decade following March 1, 1913.

16. In a direction north and west from the town of West-wood and at a distance of about 50 miles from there plaintiff had acquired, prior to March 1, 1913, certain lands and water rights in Shasta County on or near the Pit River and the Fall River in the vicinity of the town of Fall River Mills. The lands so owned by plaintiff along those rivers are shown on the attached appendix.

In 1919 the Pacific Gas & Electric Company, a large public utility company serving Northern California, began negotiations to acquire for its wholly owned subsidiary, Mt. Shasta Power Corporation, certain interests in plaintiff’s lands, and water rights in Shasta County for the purposes of a large hydroelectric generating development on the Pit River which was then under contemplation by Mt. Shasta Power Corporation.

Plaintiff was unwilling to sell its interests in these lands and water rights for cash, because of its need for additional and less expensive electricity in connection with its operations at Westwood and proposed operations in the vicinity of Fall River and elsewhere.

17. Accordingly, on August 27, 1920, plaintiff and Mt. Shasta Power Corporation entered into an agreement whereby plaintiff agreed to convey to Mt. Shasta Power Corporation certain riparian lands and water rights on the Pit River and Fall River, and such easements, servitudes, and rights-of-way over other lands of plaintiff in Shasta County as Mt. Shasta Power Corporation selected within a 5-year period, and

Mt. Shasta Power Corporation agreed to build and convey to plaintiff two hydroelectric power plants on Hat Creek, to be leased back by plaintiff to Mt. Shasta Power Corporation for a rental in perpetuity of 9,500 hp. of electrical energy. The effect of this transaction was that plaintiff-transferred its land and water rights to the power company in exchange for an agreement of the power company to provide it with 9,500 hp. of electrical energy, free of charge, in perpetuity secured by legal title to the power facilities.

18. The exchange was consummated in 1922 when plaintiff transferred certain interests in its lands in Shasta County to Mt. Shasta Power Corporation solely in exchange for certain lands (with power plants thereon), easements, and water rights theretofore owned by Mt. Shasta Power Corporation. The property so transferred by plaintiff to Mt. Shasta Power Corporation consisted of the riparian lands and water rights on the Pit River and the Fall River which are described more particularly in finding 21, and the easement rights which are described more particularly in findings 27 and 28.

The property and rights conveyed by Mt. Shasta Power Corporation to plaintiff are those described in the deed dated November 1, 1922, executed by Mt. Shasta Power Corporation.

As a part of the same transaction, plaintiff and Mt. Shasta Power Corporation entered into a lease agreement dated November 1, 1922, under terms of which plaintiff leased the two Hat Creek hydroelectric plants to Mt. Shasta Power Corporation. Following execution of this lease, the Mt. Shasta Power Corporation carried the two hydroelectric plants on its books and depreciated them for income tax purposes.

19. The Hat Creek properties acquired by plaintiff in the 1922 exchange and plaintiff’s rights as lessor under the lease of November 1,1922, between plaintiff and Mt. Shasta Power Corporation were among the properties sold by plaintiff in 1945 to Pacific Gas and Electric Company. As shown in finding 13, plaintiff’s taxable basis for'this property is in issue.

It has been stipulated by the parties that the 1922 exchange in which plaintiff acquired its interest in the foregoing Hat Creek properties and lease was a nontaxable transaction within the meaning of the relevant provisions of the internal revenue laws. Accordingly, for the purpose of determining plaintiff’s taxable gain on the sale in 1945 of the Hat Creek properties, such properties took the basis of the properties given by plaintiff in the 1922 exchange, consisting of the Pit and Fall River rights, hereinafter referred to in findings 20 to 26 inclusive, and the Shasta County easement rights, hereinafter referred to in findings 27 to 30 inclusive.

This stipulation makes it unnecessary to consider the third issue raised in paragraph XI of plaintiff’s petition.

20. As a part of the 1922 exchange, plaintiff executed a deed dated November 1, 1922, transferring to Mt. Shasta Power Corporation certain rights and interests in lands, including water rights in connection therewith, owned by it on March 1,1913, along the Pit and Fall Rivers in Northern California. The lands so owned by it along these rivers are shown in the attached appendix. These rights and interests will sometimes hereinafter be referred to as the Pit and Fall River rights.

21. The power development sites and rights on the Pit and Fall Rivers, owned entirely or partially by plaintiff on March 1, 1913, were valuable for hydroelectric power purposes because of the following factors:

(a) The lands and rights necessary for development of commercially practicable power plants had been fully assembled and were entirely in plaintiff’s private ownership, so Government permits for development (all revocable in nature) were not required.

(b) There was a uniform large flow of water, generally and justifiably considered then to have a dependable minimum flow of about 1,450 second-feet at the lands owned wholly by plaintiff.

(c) A very large public utility development, using the lands and rights of plaintiff and others, could be installed with a comparatively short tunnel across the bend made by the Fall and Pit River channels.

(d) No reservoir was needed to store water to keep plants operating at suitable outputs of electricity the year around, reducing construction investment by about one-third as compared to sites requiring storage reservoirs.

(e) All rights here involved were riparian, not depending on appropriation or use.

22. These Pit and Fall River rights included more than one-half of the lands and rights needed for the installation of a large power plant on the Fall River upstream from its junction with the Pit River. The Pit and Fall River rights also included all of the lands and riparian rights necessary for the installation of either two or three power developments on the Pit River below Fall River Mills. These rights could have been combined with other adjoining ownerships on the Fall and Pit Rivers in the development of a much larger public utility operation comparable to that actually undertaken by the Pacific Gas and Electric Company in 1919.

23. On March 1, 1913, there was a steadily increasing market for hydroelectric power in northern California. There was an expected market in the immediate vicinity of plaintiff’s land and the power could have been transmitted to San Francisco. Hydroelectric power was being transmitted such distances at that time. Also, the power companies carrying on development work in this area at that time would not have done so unless there was a potential market for the power.

On March 1, 1913, a promoter was attempting to assemble lands and water rights for the development of a large powei project which would have required the use of plaintiff’s lands and water rights. At that time most of the electric power utilities in northern California were projecting, planning, acquiring, and actually developing additional hydroelectric power sources.

In 1913 the Mt. Shasta Power Corporation and the Northern California Power Company were engaged in development work for the installation of power plants on the Big Bend of the Pit River approximately 25 miles west of Fall River Mills. These projects conflicted with each other and neither of them was as desirable for profitable operation as the potential development near Fall River Mills. Mt. Shasta Power Corporation, after obtaining permission to proceed with the Big Bend site, abandoned that site and made an arrangement to and did develop plaintiff’s lands and water rights in combination with adjoining lands and water rights.

The record clearly established that plaintiff’s lands and water rights had, on March 1, 1913, an immediate potential hydroelectric power value.

24. As of March 1,1913, the highest and best use for which plaintiff’s Pit and Fall River properties was adapted and needed or likely to be needed in the reasonably near future was for hydroelectric power development.

25. After considering the whole record, including (1) the opinions of defendant’s expert witnesses that the value of the Pit and Fall River rights on March 1, 1913, was from zero to $90,000, (2) the opinions of plaintiff’s expert witnesses that the value was from $1,745,000 to $1,800,000, and their respective methods of arriving at their opinions, (3) the opinion of Mr. F. L. Walker that the value of these rights to plaintiff was $2,000,000, (4) the fact that the Railroad Commission of the State of California placed a value oii these rights of $1,548,000 as of 1920 and a cost to Mt. Shasta Power Corporation of $1,439,168, (5) the $1,075,000 value as of Marcli 1, 1913, placed upon these and the 5-year selection rights by the plaintiff in its tax return for 1945, and (6) the $500,000 value placed upon these and the 5-year selection rights by the Commissioner of Internal Revenue, it is concluded that the fair market value of plaintiff’s Pit and Fall River rights, on March 1, 1913, was $500,000.

26. For the purpose of determining gain or loss, plaintiff’s basis for the Pit and Fall River rights transferred to Mt. Shasta Power Corporation in the 1922 exchange was $500,000.

27. In the exchange agreement of August 27, 1920, plaintiff granted to the Mt. Shasta Power Corporation, the right to require plaintiff to deed to it, its successors or assigns, all easements and servitudes for rights-of-way which Mt. Shasta Power Corporation should reasonably require for the construction, maintenance, use and operation of aqueducts, electric transmission and distribution lines, telephone lines, railroads, roads, and trails over and across all of the plaintiff’s lands in Shasta County, for use in connection with the power plants to be constructed by the power corporation, its successors or assigns, on the Pit and Fall Bivers and the power plants to be constructed by the power corporation on Hat Creek. The right of Mt. Shasta Power Corporation in these respects was limited to such lands, easements, and servitudes as it might survey, select, and determine within a period of five years.

The evidence does not show what easements, servitudes, and rights-of-way were in fact deeded by plaintiff to Mt. Shasta Power Corporation pursuant to the foregoing provisions of the exchange agreement of August 27,1920.

28. In the exchange agreement of August 27, 1920, plaintiff also agreed to convey certain other lands and rights not previously mentioned herein to Mt. Shasta Power Corporation, its successors or assigns. These additional lands and rights, consisting essentially of any lands owned by plaintiff in Shasta County, which had been or might be covered with water in consequence of the construction by Mt. Shasta Power Corporation of any dam or dams in the Pit or Fall Bivers, were in fact conveyed by plaintiff to Mt. Shasta Power Corporation by the deed dated November 1,1922.

29. For convenience, the rights referred to in findings 27 and 28 which plaintiff gave to Mt. Shasta Power Corporation will sometimes hereinafter be referred to collectively as the easement rights.

The plaintiff’s lands over which such easement rights were given are in part lands owned by plaintiff on March 1,1913, and in part lands acquired by plaintiff after that date.

30. For income tax purposes, plaintiff’s basis for the easement rights over lands owned by plaintiff on March 1,1913, would be the fair market value of such easement rights on March 1,1913.

The testimony shows that these easement rights were of considerable value. The Bailroad Commission of the State of California placed a $139,000 value on these easement rights as of 1920. It is found that these easement rights had a fair market value on March 1, 1913, of $90,000.

31.Plaintiff’s basis, for income tax purposes, of the properties which it transferred to Mt. Shasta Power Corporation in the 1922 exchange was $1,190,000, made up as follows:

Pit and Xtall River rights_$500, 000. 00
Shasta County easement rights, etc- 90, 000. 00
Total_ 590,000.00

In consequence of the tax-free nature of the 1922 exchange, the Hat Creek properties acquired by plaintiff in that transaction assumed the foregoing basis of $590,000.

32. During the years 1922 to 1945, plaintiff had no de-preciable interest in and neither claimed nor was allowed depreciation on the Hat Creek properties for income tax purposes.

33. In 1921 plaintiff completed construction of a hydroelectric plant on the Hamilton Branch of the Feather River, seven miles below the town of Westwood. In connection therewith, it completed construction at the same time the so-called Mountain Meadow Reservoir, comprising 6,728 acres of land and the water rights appurtenant thereto. These properties were among those sold by plaintiff to the Pacific Gas & Electric Company in 1945.

34. Since 1926 the Mountain Meadow property had been carried on plaintiff’s books at a valuation of $10.09 per acre, and on its 1945 income tax return reporting the gain realized on the 1945 sale to Pacific Gas & Electric Company, plaintiff claimed a basis of $10.09 per acre for the reservoir, which figure the Commissioner of Internal Revenue accepted. Thereafter, in the claims for refund filed for 1945, plaintiff asserted that for the purpose of computing the taxable gain on the 1945 sale, the reservoir property should have a basis of $500,000.

35. The property constituting the Mountain Meadow Reservoir was acquired by plaintiff in the following manner:

(a) On October 26, 1909, plaintiff purchased from the John Crouch Land Company 12,385.7 acres of land, improved with house and barns, at a price of $86,695. When the reservoir was built in 1921,6,000 acres of this ranch went into the reservoir.

(b) Between, the years 1914 and 1921 inclusive, plaintiff acquired by purchase additional tracts of land totaling 1,661.44 acres, of which 728 acres went into the reservoir when it was built in 1921.

36. The 1,661.44 acres of property referred to in finding 35 (b) were acquired by plaintiff at various dates and for various prices. This property contained timber, and for the purpose of determining the depreciation allowable to plaintiff on such timber, the purchase price paid for the property had been allocated between the timber and the land.

As to the 728 acres of this property lying within the reservoir, plaintiff’s unrecovered cost basis in 1945 was $10.09 per acre. For the purpose of determining the amount of plaintiff’s gain on the 1945 sale to the Pacific Gas & Electric Company, plaintiff’s basis for the 728 acres totaled $7,345.52.

37. As to the remaining 6,000 acres of reservoir property which had been acquired by plaintiff in 1909, the basis to plaintiff is the fair market value of such property on March 1, 1913. Findings 38 to 41, inclusive, deal with this issue.

38. As of March 1,1913, the 6,000 acres were adapted for ranching, agricultural, or reservoir purposes.

This property could not be used for reservoir purposes until a dam site, an outlet, and a site for a hydroelectric plant were acquired. As of March 1, 1913, plaintiff did not own the dam site, or the outlet, or the power site. However, there existed a reasonable possibility that they could be acquired by plaintiff.

39. During 1913, the Lake Almanor Reservoir was under construction immediately downstream from the plaintiff’s property. The Lake Almanor Reservoir site was regarded as one of the finest in the world and was considerably more valuable than the Mt. Meadows Reservoir site. During 1911 and 1912, property for the Lake Almanor Reservoir was acquired at an average price of $31 per acre.

40. Plaintiff’s experts stated that the value of the 6,000 acres was about $50 per acre. Defendant’s experts stated the value was not in excess of $8 per acre. As of March 1, 1913, the fair market value of the 6,000 acres referred to in finding 35 (a) was not in excess of $17 per acre.

41. For the purpose of determining plaintiff’s gain on the 1945 sale to Pacific Gas & Electric Company, the 6,000 acres of reservoir property referred to in finding 35 (a) had a basis to plaintiff of $102,000.

42. The gain on plaintiff’s 1945 sale to Pacific Gas & Electric Company should be computed as follows:

Rinding No.
10. Sale price_$2,624,000.00
10. Expense of sale_ 12,174.88
Net selling price_ 2,611,826.12
Basis of 'property
12 (c). Electric facilities_ $161,967.18
12 (b). Shasta County property consisting of lands and rights along Hamilton Branch of the Feather River_ 7,400.00
12 (a). Shasta County property consisting of lands and rights on Hat Creek- 7,000.00
31. Hat Creek hydroelectric plants and related properties- 690, 000. 00
41. Mt. Meadow Reservoir lands, 3-1-13 ownership - 102, 000. 00
36. Mt. Meadow Reservoir lands, later acquisitions - 7,345.62
Total adjusted basis of property sold_ 875,712. 70
Net gain on sale- 1, 636,112. 42

APPENDIX

CONCLUSION OF LAW

Upon the foregoing special findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that the plaintiff is entitled to recover, with interest as provided by law, and judgment is entered accordingly.

The determination of the amount of recovery shall await the filing of a stipulation by the parties showing the amount due in accordance with the findings and the opinion of the court.

In accordance with the opinion of the court and on a stipulation by the parties as to the amount due plaintiff, judgment for plaintiff was entered July 12, 1956, for $190,642.36, together with interest as provided by law. 
      
      The Hat Creek properties, including legal title to land, hydroelectric plants, water rights, and lease rights; certain other lands, easements, and water rights in Shasta County; certain portions of the lands, easements, water rights, and flume rights-of-way along Hamilton Branch in Plumas and Lassen Counties, California; the Mountain Meadow Reservoir property; certain electrical facilities consisting of transmission lines, telephone lines, substation, hydroelectric generating plant, and related structures.
     