Bay City Fuel Co. v. Commissioner

*450 This is a proceeding for the redetermination of deficiencies in income tax for 1923, 1925, and 1926 in the amounts of $545.90, $902.42, and $1,700.82, respectively.

The questions involved relate to (1) the amount of depreciation deductions on two coal barges; (2) profit in 1925 from the sale of the barge Banner; (3) net losses in computing the income for 1925 and 1926 in the event the other issues are decided in favor of the petitioner.

FINDINGS OF FACT.

The petitioner is an Alabama corporation, organized on or about February 1, 1919, with its principal office at Mobile. Since organization it has been engaged in the bunker coal business.

From 1906 to 1918, R. J. Milling was employed by the Pratt Consolidated Coal Co., of Birmingham, Ala. He was located in Birmingham *451 until 1914, when he went to Mobile and took over the Mobile office, which he continued to manage, in charge of equipment and steamers, until the end of 1918.

*2127 The business of the Pratt Consolidated Coal Co. was that of mining and selling coal. Its mines were at Birmingham and Mobile was its outlet by water, where it supplied coal to the Gulf and ocean steamers. In 1912 it organized and owned the Alabama Coal & Transportation Co., which company operated a line of 52 barges in carrying coal to Mobile and Gulf ports. In addition to his regular duties with the Pratt Consolidated Coal Co., Milling did all the work of organizing and had charge of the Transportation co. for a number of years, for which he received no pay.

At the end of 1918 the Pratt Consolidated Coal Co. desired to retire from the bunker coal business at Mobile. It made a deal with Milling whereby he took over the Mobile business and he thereafter sold to consumers, the Pratt Co. selling to him. Milling agreed to sell the coal of the Pratt Co. as long as it produced bunker coal and also agreed to open and operate a bunker coal business in New Orleans. The two coal barges which the Pratt Consolidated Coal Co. had at Mobile, the Blossburg and the Banner, were turned over to Milling in 1919 in consideration of his agreements and promises, his past services and*2128 the execution of notes to the Pratt Consolidated Coal Co. for $20,000. Early in 1919 Milling organized the Bay City Fuel Co., the petitioner herein, to carry on the bunker coal business, and transferred the two said barges to it for $65,000 par value stock, $50,000 for the Blossburg and $15,000 for the Banner. Thereafter the coal business was that of the Bay City Fuel Co., but was conducted in the trade name of Pratt Consolidated Coal Co. for some time, because that name was well established and known.

The Blossburg was a collier built for handling bunker coal. It was 150 feet long, 40 feet wide and 10 feet deep, weighing 450 gross tons, and had a carrying capacity of 900 tons. It had a wooden hull containing 200,000 to 225,000 feet of the best grade unbled long leaf pine timber, and was equipped with a chain conveyer traveling on a rack overhead and down in the hold, where the hoppers scooped up the coal. These hoppers dropped the coal into buckets. A steel tower weighing 35 tons and 90 feet high, with a 15-foot crane on top, elevated the buckets so that when dumped the coal proceeded by gravity into the ship which was being loaded. The Blossburg could be*2129 taken to the railroad tipple and loaded by dumping the railroad cars into it, and then proceed alongside a steamer and unload all by machinery. The Blossburg was built about 1913 and in 1919 was in first class condition, having been kept in good repair. It was well constructed and built to stand rough usage.

*452 The Banner was a single bucket coal barge with scow bow wooden hull and very heavily built along the same lines as the Blossburg, to stand rough usage. It was 100 feet long, 30 feet wide, and 7 or 8 feet deep, with sides built up 5 feet for holding coal on deck. It had a boom and derrick, boiler, engine, and all machinery and equipment necessary for operation. It was kept in good repair and was in good condition in 1919.

The World War had a stimulating effect on all kinds of floating craft, which lasted for quite awhile after the war, and prices for such vessels were high in 1919. The condition and use were factors entering into the market value of boats. In 1919 the demand in and about Mobile for boats of this character was very great.

It would have cost in 1919 from $75,000 to $18,000 to have built the Blossburg and from $15,000 to*2130 $18,000 to have built the Banner.

In 1925 the petitioner sold the Banner for $750 and deduced a loss of $2,000 thereon in his 1925 return. The respondent has disallowed said loss and in lieu thereof has included in taxable income a profit of $3,992.30 on said sale.

The respondent has allowed depreciation on the Blossburg upon the basis of $20,000 cost, that being the amount payable in cash for it by Milling in 1919 before he transferred it to the corporation.

OPINION.

TRAMMELL: The first question to be determined in this case is the cost of the Blossburg and the Banner, acquired by the corporation in 1919 in exchange for stock. Since the corporation acquired the barges for stock in 1919, the cost to the corporation technically would be the value of the stock, which here would be represented by the value of the barges so acquired, the corporation not having paid any other consideration therefor. The corporation at that time had no other assets.

The respondent takes the position that since $20,000 was all the cash to be paid for the barges and that consideration represented the value of the barges only a short time before the corporation acquired*2131 them for stock, they did not have any greater value.

The evidence discloses, however, that Milling had rendered services to the Pratt Co. for several years without pay and that he had agreed to render services in the future, and we think these facts enter very largely into the consideration for the purchase and these facts convince us that the barges were not considered by Milling and the Pratt Consolidated Coal Co. to be worth only $20,000. Even, however, if Milling did acquire the barges in 1919 at a bargain price, the corporation acquired them from Milling for stock, and in view of this situation we think the cost of these barges to the petitioner *453 corporation is represented by their value when acquired by the corporation in 1919.

On this question witnesses of long experience and well qualified to express an opinion on the value of such vessels, testified. Their evidence was based largely upon the reproduction cost new of such vessels in 1919, but they all testified that on account of the great demand for vessels of such character at that time, vessels in good condition would bring on the open market substantially their reproduction cost. All the testimony indicates*2132 that there had been a material increase in the market value of such vessels as a result of the World War conditions. The testimony of the witnesses related not only to the cost of reproduction new of the barges, but also as to their market value, with which the witnesses convinced us they were familiar.

From all of the testimony, giving due weight to the cost of construction, age and condition of the barges, and the testimony as to market value, we are convinced that the Blossburg had a fair market value when acquired by the petitioner corporation in 1919 of at least $50,000, and that the Banner had a market value at that time of at least $15,000.

These are the values which Milling put upon these barges when he turned them over to the corporation for stock. He had long experience in connection with barges and considered these values as being fair and reasonable, and in our opinion, the testimony supports these values.

The loss on the sale of the Banner should be recomputed on the basis of the valuation above stated representing its cost, and the net loss resulting to the petitioner from depreciation deductions based upon costs as above determined should be allowed*2133 under section 204 of the Revenue Act of 1921 and section 206 of the Revenue Acts of 1924 and 1926.

Judgment will be entered under Rule 50.