[304]*304OPINION.
Trammell :
These appeals grow out of the sale on March 11, 1916, by the stockholders of the entire capital stock of the Andrews & Hitchcock Iron Co. to the Youngstown Sheet & Tube Co. The issues involved are as follows:
(1) What amount, if any, is taxable to the estate of Louisa Andrews in 1918 and to Julia Andrews Bruce in 1920, on account of the deferred payments of the Youngstown Sheet & Tube Co. received by them as vendors of the shares of the Andrews & Hitch[305]*305cock Iron Co. stock under the contract for the sale of that stock made by them along with the other stockholders on March 11,1916?
(2) What amount, if any, is taxable to Julia Andrews Bruce on account of her interest of 550/4000 in the deferred payments acquired by her by inheritance from her mother, Louisa Andrews, who died on March 22, 1917?
The Commissioner has determined that- the total consideration received from the sale on March 11, 1916, consisting of the cash payment and the present worth of the future payments exceeded the cost of the stock prior to March 1, 1913, but was less than the value as of March 1, 1913; that the contract right received by the stockholders had a determinable market value, and that the sale on March 11,1916, constituted a completed transaction from which no-taxable gain or deductible loss resulted; that as a consequence a new basis; for determining gain or loss was created; that the amounts received from the contract in excess of the present worth thereof when the right was received in 1916 were taxable gain; and that the amount reserved by Julia Andrews Bruce with respect to the 550 shares of stock inherited by her was taxable to the extent of the excess of the payments received over the value of the right to receive them, or their present worth, when received. It has been stipulated that the estimated ore reserves of the Mahoning Ore & Steel Co. on March 11,' 1916, were 82,858,535 tons. It was also stipulated that engineers qualified by training and education to give opinions as to the annual production and life of the mine estimated the future production at 1,841,300 tons annually, and that the life of the mine was 45 years as of. March 11, 1916. The total ore payments to be made to the stockholders of the Andrews & Hitchcock Iron Co., under the contract of March 11,1916, would then be $5,965,814.52. It was further stipulated that the present worth of this amount at the time of the sale, assuming that it would be received in equal annual installments for 45 yearé, discounted at 6 per cent, with provisions for a sinking fund at 4 percent was $1,942,111.46. In accordance with these estimates and calculations, the Commissioner determined that the 4,000 shares of Andrews & Hitchcock Iron Co. stock were sold on March 11, 1916, for $2,200,000, cash, and for future payments having a- present worth of $1,942,111.46. ' • -
Louisa Andrews died on March 22, 1917. She possessed at the time of her death the right to receive ore payments at the Tate of 60 cents per ton incident to her former ownership of 1,100 shares of the Andrews & Hitchcock Iron Co. The Commissioner valued this contract right for estate-tax purposes at $554,329 at the time -of her death. There is no other evidence as to its value and we therefore accept that valuation. In the year 1918 the estate received- as ore payments the total sum of $49,500. Of this total sum the Commis[306]*306sioner determined that $16,383.68 represented a return of capital, that is, the present worth of future payments, and that the pro rata portion of the remainder represented taxable income.
Julia Andrews Bruce inherited a part of the contract right possessed by her mother. During the year 1920 she received a total of $19,599.53 from ore payments. These payments accrued to her by reason of the sale of her stock in 1916 and through her succession to contract rights owned by her mother. The Commissioner determined that of the total amount received $6,41-5.65 represented return of capital and that the remainder represented taxable income.
The petitioners contend that the Commissioner erred in adding to the taxable income any part of the ore payments received; that the consideration received in 1916, in addition to the cash, possessed no market value'; that it was undeterminable by reason of the fact that the tonnage to be produced annually was to be fixed by the board of directors of the Mahoning Ore & Steel Co. on or before April 1 of each year, and that there were no means of determining the annual or total production; that, as a consequence, the sale in 1916 did not result in taxable gain and that the amounts received should not be subjected to tax until the March 1, 1913, value has been returned to the petitioners, and with respect to the 550 shares inherited by Julia Andrews Bruce, until the value thereof at the time of the death of Louisa Andrews has been recovered.
Considering, first, the contention of the petitioners that the consideration for the stock received on March 11, 1916, was not determinable, we find in the stipulation of facts that on that date the estimated ore reserves of the Mahoning Ore & Steel Co. were 82,858,535 tons; that the stockholders of the Andrews & Hitchcock Iron Co. were entitled to receive 60 cents per ton, or 12 per cent of the total tonnage, or 9,943,024 tons. From these facts it follows that the stockholders were to receive total ore payments of $5,965,814.52 during the life of the mine. The controversy, however, arises over the possible annual production and life of the mine. But it was stipulated that the Commissioner’s determination of an anticipated annual production of 1,841,300 tons and an anticipated life of 45 years were based upon the opinions of engineers qualified by education and training in the iron mining industry to give such opinions. It is also agreed that for three years prior to March 11, 1916, the actual production was substantially 1,841,300 tons annually.
The Massabe Range, where this mine is located, is one of the outstanding iron producing regions of the world. The annual production of this mine for several years prior to 1912 had been around 1,250,000 tons. During the earlier years of the World War period, and up to 1916, it was approximately 1,870,000 tons. The company, as of March 11, 1916, in the midst of the World War, and with the [307]*307greatest demand for steel in its history, was contemplating a production of 3,000,000 tons annually. In 1918, when this country was in the war and the demand for steel was great, the production was 2,500,000 tons, as shown by the payment of $49,500 to the estate of Louisa Andrews, attributable to 1,100 shares. In 1920, when the war was over, the production had dropped to approximately 1,361,000 tons, as shown by the payment of $19,599.50 to Julia Andrews Bruce, attributable to 900 shares. These results indicate that the annual production of 1,841,300 tons was a fair and reasonable estimate and that the life of the mine from 1916 would be approximately 45 years.
While testimony was introduced to the effect that the contents of the mine and the annual production could not be determined in 1916, from a consideration of all the evidence we are disposed to accept the figures of the engineers who, it was stipulated, were qualified to express an opinion with respect thereto.
The petitioners have also raised the point that there was no market value for the contract right received by Julia Andrews Bruce and Louisa Andrews in 1916.
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[304]*304OPINION.
Trammell :
These appeals grow out of the sale on March 11, 1916, by the stockholders of the entire capital stock of the Andrews & Hitchcock Iron Co. to the Youngstown Sheet & Tube Co. The issues involved are as follows:
(1) What amount, if any, is taxable to the estate of Louisa Andrews in 1918 and to Julia Andrews Bruce in 1920, on account of the deferred payments of the Youngstown Sheet & Tube Co. received by them as vendors of the shares of the Andrews & Hitch[305]*305cock Iron Co. stock under the contract for the sale of that stock made by them along with the other stockholders on March 11,1916?
(2) What amount, if any, is taxable to Julia Andrews Bruce on account of her interest of 550/4000 in the deferred payments acquired by her by inheritance from her mother, Louisa Andrews, who died on March 22, 1917?
The Commissioner has determined that- the total consideration received from the sale on March 11, 1916, consisting of the cash payment and the present worth of the future payments exceeded the cost of the stock prior to March 1, 1913, but was less than the value as of March 1, 1913; that the contract right received by the stockholders had a determinable market value, and that the sale on March 11,1916, constituted a completed transaction from which no-taxable gain or deductible loss resulted; that as a consequence a new basis; for determining gain or loss was created; that the amounts received from the contract in excess of the present worth thereof when the right was received in 1916 were taxable gain; and that the amount reserved by Julia Andrews Bruce with respect to the 550 shares of stock inherited by her was taxable to the extent of the excess of the payments received over the value of the right to receive them, or their present worth, when received. It has been stipulated that the estimated ore reserves of the Mahoning Ore & Steel Co. on March 11,' 1916, were 82,858,535 tons. It was also stipulated that engineers qualified by training and education to give opinions as to the annual production and life of the mine estimated the future production at 1,841,300 tons annually, and that the life of the mine was 45 years as of. March 11, 1916. The total ore payments to be made to the stockholders of the Andrews & Hitchcock Iron Co., under the contract of March 11,1916, would then be $5,965,814.52. It was further stipulated that the present worth of this amount at the time of the sale, assuming that it would be received in equal annual installments for 45 yearé, discounted at 6 per cent, with provisions for a sinking fund at 4 percent was $1,942,111.46. In accordance with these estimates and calculations, the Commissioner determined that the 4,000 shares of Andrews & Hitchcock Iron Co. stock were sold on March 11, 1916, for $2,200,000, cash, and for future payments having a- present worth of $1,942,111.46. ' • -
Louisa Andrews died on March 22, 1917. She possessed at the time of her death the right to receive ore payments at the Tate of 60 cents per ton incident to her former ownership of 1,100 shares of the Andrews & Hitchcock Iron Co. The Commissioner valued this contract right for estate-tax purposes at $554,329 at the time -of her death. There is no other evidence as to its value and we therefore accept that valuation. In the year 1918 the estate received- as ore payments the total sum of $49,500. Of this total sum the Commis[306]*306sioner determined that $16,383.68 represented a return of capital, that is, the present worth of future payments, and that the pro rata portion of the remainder represented taxable income.
Julia Andrews Bruce inherited a part of the contract right possessed by her mother. During the year 1920 she received a total of $19,599.53 from ore payments. These payments accrued to her by reason of the sale of her stock in 1916 and through her succession to contract rights owned by her mother. The Commissioner determined that of the total amount received $6,41-5.65 represented return of capital and that the remainder represented taxable income.
The petitioners contend that the Commissioner erred in adding to the taxable income any part of the ore payments received; that the consideration received in 1916, in addition to the cash, possessed no market value'; that it was undeterminable by reason of the fact that the tonnage to be produced annually was to be fixed by the board of directors of the Mahoning Ore & Steel Co. on or before April 1 of each year, and that there were no means of determining the annual or total production; that, as a consequence, the sale in 1916 did not result in taxable gain and that the amounts received should not be subjected to tax until the March 1, 1913, value has been returned to the petitioners, and with respect to the 550 shares inherited by Julia Andrews Bruce, until the value thereof at the time of the death of Louisa Andrews has been recovered.
Considering, first, the contention of the petitioners that the consideration for the stock received on March 11, 1916, was not determinable, we find in the stipulation of facts that on that date the estimated ore reserves of the Mahoning Ore & Steel Co. were 82,858,535 tons; that the stockholders of the Andrews & Hitchcock Iron Co. were entitled to receive 60 cents per ton, or 12 per cent of the total tonnage, or 9,943,024 tons. From these facts it follows that the stockholders were to receive total ore payments of $5,965,814.52 during the life of the mine. The controversy, however, arises over the possible annual production and life of the mine. But it was stipulated that the Commissioner’s determination of an anticipated annual production of 1,841,300 tons and an anticipated life of 45 years were based upon the opinions of engineers qualified by education and training in the iron mining industry to give such opinions. It is also agreed that for three years prior to March 11, 1916, the actual production was substantially 1,841,300 tons annually.
The Massabe Range, where this mine is located, is one of the outstanding iron producing regions of the world. The annual production of this mine for several years prior to 1912 had been around 1,250,000 tons. During the earlier years of the World War period, and up to 1916, it was approximately 1,870,000 tons. The company, as of March 11, 1916, in the midst of the World War, and with the [307]*307greatest demand for steel in its history, was contemplating a production of 3,000,000 tons annually. In 1918, when this country was in the war and the demand for steel was great, the production was 2,500,000 tons, as shown by the payment of $49,500 to the estate of Louisa Andrews, attributable to 1,100 shares. In 1920, when the war was over, the production had dropped to approximately 1,361,000 tons, as shown by the payment of $19,599.50 to Julia Andrews Bruce, attributable to 900 shares. These results indicate that the annual production of 1,841,300 tons was a fair and reasonable estimate and that the life of the mine from 1916 would be approximately 45 years.
While testimony was introduced to the effect that the contents of the mine and the annual production could not be determined in 1916, from a consideration of all the evidence we are disposed to accept the figures of the engineers who, it was stipulated, were qualified to express an opinion with respect thereto.
The petitioners have also raised the point that there was no market value for the contract right received by Julia Andrews Bruce and Louisa Andrews in 1916. The only testimony offered in support of these contentions was by Hitchcock, former president of the Andrews & Hitchcock Iron Co. This witness testified that in the negotiations for the sale of the stock there was no discussion concerning a full cash payment, because the buyer, the Youngstown Sheet & Tube Co., could not afford to pay cash in full. This is all the testimony offered in support of the allegation that the contract to receive future payments had no market value.
The contract of December 16, 1914, between the Mahoning Ore & Steel Co. and its stockholders was unequivocal and applied to the total contents of the steel company’s mine, as and when mined. The contract of March 11, 1916, between the Youngstown Sheet & Tube Co. and the former stockholders of the Andrews & Hitchcock Iron Co., assured to the latter deferred payments equivalent to 60 cents per ton on 12 per cent of the total ore reserves of the steel company’s mines. The deferred payments were secured by shares of the capital stock of the steel company owned by the Andrews & Hitchcock Iron Co., which had been placed in the hands of a trustee for that purpose, and, under the terms of the contract by virtue of which these shares were deposited with the trustee, the stockholders were assured that, in the event of default in any of the deferred installments by the purchaser of the stock, they would receive their pro rata share of the ore produced by the steel company by exercising their option to take over the collateral securities. It must follow that the contract right was of such nature and the payments therein provided for were so determinable and assured that it had a market- value when received. The amounts received in the taxable years were in excess of the value [308]*308which, the contract had when received. The property, consisting of the contract for future payments received, had a market value.
The transaction of March 11, 1916, was complete within itself. It amounted to what is commonly known and referred to as a “ closed transaction.”. It was of such a nature that it created a new basis for determining gain or loss with respect to the subsequent payments made under the terms of the contract. In view of this fact the March 1, 1918, value of the assets sold becomes immaterial to the consideration or decision of the case. The Commissioner in his determination of the deficiency has determined the fair market value of the right to receive future payments, and from the evidence presented we can not say that his determination is not correct. A portion of each payment under the contract was a return of capital and a portion represented gain. The Commissioner has determined what portion is gain by dividing the 1916 value of the contract by the total tonnage to be obtained, reaching the conclusion that the payment for each ton represents 19.53 cents return of principal and 40.47 cents income, or, in other words, that each payment, whether made one year after the agreement was made or 45 years thereafter, is made up 85.554 per cent return of principal and 67.446 per cent income.
The payments to all the stockholders were estimated by the Commissioner to be $132,573.60 annually for 45 years. These payments were reduced to present worth, using a discount of 6 per cent on future payments with a 4 per cent return on sinking fund. It is evident that the present worth of the payment to be received at the end of the first year differs substantially from the present worth of the payment to be, received 45 years in the future. It is further evident that the present worth of all bf the payments is the sum of the present worth of each annual payment, proper adjustment for the sinking fund being made. In determining what portion Of the payment represented a. return of the 1916 value, the Commissioner has made the allocation between principal and gain as if the present value in 1916 of each of the annual payments to be received was exactly the same. The proper manner in which to determine what portioii of the payment is principal is to split up the total 1916 present worth into its component parts and to treat the present value of the first year’s payment as a return of principal upon the first 1,841,300 tons (the estimated annual production) mined, the present value of the second year’s payment as a return of principal upon the second 1,841,300 tons mined, and similarly each year until the mine becomes exhausted, or the principal is ,all returned.
With respect to the stock received by Julia Andrews Bruce on the death of Louisa Andrews there is no reason or authority for going back of the date of death for a basis for computing gain or loss. The rights of the taxpayer under the contract had a market value in [309]*3091917, when her right thereunder was received, and upon a subsequent sonversion of such contract right, or upon receipt of any gain by virtue thereof, the value thereof at the date of acquisition is to be taken as the basis for computing taxable gain or deductible loss.
Judgment-will be entered -on 15 days’ notice, under Rule 50.