131 Reporter's Statement of the Case The court having made the foregoing introductory statement, entered special findings of fact as follows: 1. Plaintiff is an individual presently residing in England and is a citizen of the United States. At all times material hereto, particularly during the calendar years 1937 to 1941, inclusive, plaintiff maintained an office and was represented by an agent in Boston, Massachusetts. Plaintiff keeps his books and files his federal income tax returns on the cash receipts and disbursements basis of accounting and by calendar years. Plaintiff's agent in Boston, acting under a general power of attorney from plaintiff, filed with the collector of internal revenue for the district of Massachusetts all of the federal income tax returns and claims for refund here involved. 2. On March 5, 1938, plaintiff filed a federal income tax return for the calendar year 1937 which disclosed a net income of $57,434.66, a surtax net income of $54,934.66, and a total tax liability of $11,202.35. Plaintiff paid that tax in four installments as follows: March 8, 1938_. June 10, 1938_ September 7, 1938_. December 8, 1938_ $2,802.35 2,800.00 2,800.00 2,800.00 3. On March 4, 1939, plaintiff filed a federal income tax return for the calendar year 1938 which disclosed a net income of $30,122.21, a surtax net income of $27,622.21, and a total tax liability of $3,462.82. Plaintiff paid that tax on March 7, 1939. 4. On March 8, 1940, plaintiff filed a federal income tax return for the calendar year 1939 which disclosed a net income of $39,984.57, a surtax net income of $37,484.57, and a total tax liability of $5,863.64. Plaintiff paid that tax on March 12, 1940. Upon audit of that return the Commissioner of Internal Revenue determined a net income of $41,269.53, a surtax net income of $38,769.53, and a deficiency in tax of $344.33. After appropriate assessment, plaintiff paid that deficiency on June 30, 1943, together with interest thereon in the amount of $67.31, the total payment being $411.64. Reporter's Statement of the Case 113 C. Cls. 5. On February 18, 1941, plaintiff filed a federal income tax return for the calendar year 1940 which disclosed a net income of $41,922.05, a surtax net income of $39,922.05, and a total tax liability of $10,320.60. Plaintiff paid that tax on February 20, 1941. Upon audit of that return the Commissioner determined a net income of $46,963.80, a surtax net income of $44,963.80, and a deficiency in tax of $2,260.78. After appropriate assessment, plaintiff paid that deficiency on October 15, 1942, together with interest thereon in the amount of $214.77, the total payment being $2,475.55. 6. Plaintiff is a beneficiary of the trust under the indenture of Ida A. Higginson and is also a beneficiary of the residuary trust under the will of Ida A. Higginson. His distributive interest under these two trusts was 100 percent and 75 percent, respectively. Throughout the years 1937 to 1940, inclusive, each of these trusts owned 265 shares of preferred stock of the Gauley Coal Land Company on which distributions were received by the trustees and paid over to the plaintiff as follows: All of the payments next above were reported in full as taxable income upon returns filed for plaintiff as aforesaid except the two items aggregating $3,710 for the year 1940. These two items in the total amount of $3,710 were included in plaintiff's taxable income for 1940 by the Commissioner when he determined the deficiency referred to in the preceding finding. The cost basis for federal income tax purposes for the 265 shares of preferred stock owned by each trust as set out above was $17,225 for the trust under the indenture and $5,167.50 for the trust under the will. Nontaxable distributions were made by the Gauley Coal Land Company prior to January 1, 1937, in amounts exceeding such cost basis. 131 Reporter's Statement of the Case 7. The Commissioner determined that the dividends paid by the Gauley Coal Land Company and distributed as set forth above are taxable, if taxable at all, to the beneficiaries of the trusts here involved. Neither trust during the years here involved was engaged in a trade or business and neither was buying and selling stock or real estate in this period. 8. The trust under the indenture of Ida A. Higginson filed timely fiduciary income tax returns for the calendar years 1937 to 1940, inclusive. Ida A. Higginson died on May 6, 1935, and the residuary trust under her will filed timely fiduciary income tax returns for the calendar years 1937 to 1940, inclusive. 9. The Gauley Coal Land Company is a corporation organized in 1903 under the laws of West Virginia. At the time of its organization it acquired certain coal and timberlands located in West Virginia from the Gauley Coal Land Association in exchange for its capital stock. The mineral properties so acquired were not being worked at that time. The capital stock issued in payment for these properties consisted of 11,440 shares of $100 par value 6 percent cumulative preferred stock and 22,880 shares of common stock of the par value of $100 per share. Each stock had voting rights, one vote for each share outstanding. The mineral properties were set up on the books of the Gauley Coal Land Company at the cost figures which were shown on the books of the Gauley Coal Land Association but no costs were shown on the books of the latter for timber properties and none were set up on the books of the former upon its organization. 10. After the advent of the federal income tax laws it became necessary to determine the cost on the date of acquisition in 1903 and the fair market value as of March 1, 1913, of the properties owned by the Gauley Coal Land Company in order to comply with various provisions of the several revenue acts in computing the taxable income of that company, and also the extent to which dividends received by the stockholders of that company were taxable. During that period and including the years with which we are concerned in this proceeding there was in effect in the Income Tax Unit of the Internal Revenue Bureau established procedure for determining the Reporter's Statement of the Case 113 C. Cls. valuation of the type of property here involved and the use of such valuation in determining tax liability in which such valuations were a factor. Under that procedure the audit of income tax returns was made by an audit division and when in the course of the audit a question arose of valuation of property on which the audit division desired an engineering determination, the audit division would request a report from the engineering division on the valuation matters involved. After such a matter was referred to the engineering division that division would proceed with its determination which often included an examination of the properties involved, the submission by the taxpayer of data with respect to the valuation, and conferences with the taxpayer or his representative. Upon the completion of its consideration of the matter, the engineering division would prepare a valuation memorandum or report which it would forward to the audit division for such use as it considered appropriate in connection with the issuance of a notice of deficiency or other final determination of tax liability. A copy of these valuation memoranda or reports was not, as a matter of established procedure, mailed to the taxpayer or his representative but in most instances upon request a copy of such memorandum or report would be furnished to the taxpayer or his representative and in the event the taxpayer or his representative did not agree with the findings therein further conferences might be had with the engineering division on the subject matter of the memorandum or report. Changes made therein would be made in a supplemental memorandum or report to the audit division. However, the recommendations contained in the valuation memorandum or report did not become final for the year or years involved until such matter was reflected in the final notice of the determination of a deficiency or other final determination of tax liability as reflected in a letter from the audit division. 11. In connection with the audit of the returns of the Gauley Coal Land Company for the years 1923 and 1925, a question arose as to the depletion sustained on cost and allowable on March 1, 1913, value and the audit division made an appropriate request on the engineering division with re 131 Reporter's Statement of the Case spect to that matter. After conferences with that corporation's representatives, the engineering division on August 25, 1926, prepared a valuation memorandum which it forwarded to the audit division. It also furnished a copy thereof to counsel for plaintiff who was likewise counsel for the Gauley Coal Land Company. That memorandum set out in part that 1903 cost (value) 115,333 acres surface and timber 173,000 acres Mineral rights at $7.50 per acre--- $864, 997.50 1,297, 500. 00 230,000,000 recoverable tons of coal acquired prior * $1,297, 500.00 4. It is therefore recommended that as of acquisition in 1903 the cost of the land be fixed at $2,162,497.50, the March 1, 1913, value be fixed at $2,209,637.50 and depletion be allowed as of March 1, 1913, at 134 cents per ton on 4,000,000 tons of recoverable leased coal on bloc and on 226,000,000 tons of recoverable unleased coal at $0.00564 per ton, as outlined in paragraph 3. The evidence does not satisfactorily show what use, if any, was made of these cost figures by the Commissioner in his determination of the tax liability of the Gauley Coal Land Company. 12. Thereafter further controversies arose between the Gauley Coal Land Company and the Commissioner with respect to the March 1, 1913, value of plaintiff's properties and the allowable depletion thereon, and the engineering division prepared and transmitted to the audit division two valuation memoranda in connection therewith, one dated September 12, 1929, and the other September 17, 1930. These memoranda fixed a March 1, 1913, value for the coal in the seam of coal (Seam A) that was being mined in and prior to the years involved in these proceedings of $2,076,700 and a depletion rate for such coal of 2% cents per ton. That valuation and depletion rate were used by the Commissioner in the determination of the Gauley Coal Land Company's tax liability for the years 1923 to 1940, inclusive. In the same memoranda the engineering division likewise fixed a |