We submit that a procedure of this kind makes it impossible for the engineering division to give different taxpayers equal and just treatment. It would seem proper for the solicitor's office to indicate the points of law, or even the general method which should be applied to the taxpayer's case, but we deem it decidedly unwise for the solicitor to set up definite valuations. Such action makes of the engineering division a mere rubber stamp.

The use of the profit rate of 6 per cent in a sand and gravel business of this character, subject to risks, such as defaulting the lessee, risk of erosion, risk of parties dredging around island, risk of overestimation of recovery, a rate of interest which is expected only on sure investments such as bonds and mortgages thoroughly secured by property of value far in excess of the total amount of the bond or mortgage, is absolutely without sound foundation. We contend that even if it was proper to use the analytical appraisal method, in this case, a profit factor at least of 10 per cent should be used. If this rate had been used, the value of the taxpayer's gravel on March 1, 1913, would have been approximately $130,000, an amount in practical agreement with the $127,000 allowed cost of this gravel.

To sum up, we contend that the cost of this property in June, 1912, was the best indication of its fair market value on March 1, 1913. We further contend that an allowance of 6 per cent profit for this business can not be justified.

Respectfully submitted.

Approved :

H. M. PARKER, Investigating Engineer.

L. H. PARKER, Chief Engineer.

EXHIBIT B

COMMISSIONER OF INTERNAL REVENUE,

BUFFALO, N. Y., December 20, 1921. Washington, D. C.

DEAR SIR: Referring to your letter of October 18 re Border Island Co., we finally succeeded in getting a survey of the property which shows the depletion much greater than we had thought possible, and I am inclosing your affidavit setting forth all the facts. We have a map of the island and if you would like to have us flle it with you we would be glad to do so. I think the affidavit inclosed covers all the points which you want to know. Yours very truly,

THOMAS R. STONE, President.

STATE OF NEW YORK,

Erie County, ss:

Thomas R. Stone, of the city of Buffalo, N. Y., being duly sworn, on oath says he is the president of the Border Island Co., which owns an island in the Niagara River, Erie County, N. Y.; that said company was incorporated in September, 1911. That said island was purchased by said company on or about June 15, 1912, at and for the sum of $130,000.

That said company did not conduct any business in or about said island until the year 1918; that in the year 1918 it was estimated that 2 acres of land had been removed, and the same amount was estimated as removed during the years 1919 and 1920 and claimed as depletion in its returns for said years; that a survey of said island was made during the month of November, 1921, which shows that the depletion of said island from September 28, 1917, to November, 1921, is 20 acres. The head or south end of said island was composed entirely of sand and gravel, up to the line thereof reached during the year 1920, and from that line north the island is overlaid with several feet of silt or mud, which has to be removed before the sand and gravel can be pumped, and thereby a much greater acreage of the island was taken away during the year 1921, in order to procure sufficient sand and gravel; that the pumping operations are carried on fom May to November each year. Depletion of 2 acres was claimed in the income-tax return of said company for the year 1918, and 2 acres each for the years 1919 and 1920, making a total of 6 acres, and the number of acres actually removed, as shown by said survey, during the years 1918, 1919, 1920, and 1921 is about 17 acres.

92919-25-PT 9- 4

That said island when purchased by said company was encumbered by mortgages amounting to $70,000, and title was taken subject to same, and stock of the company amounting to $54,000 and cash $6,000 was paid, making a total of $130,000.

That the value of said island in 1913 was about the same as 1912.

The estimate of the surface area in report for year 1921 as 35 acres, at $3,000 per acre, is shown by said survey to be not correct. That there is not at this time to exceed 20 acres estimated to be the value of $3,000 per acre, and from latest developments shown about 20 acres of the value of $1,500 per acre, and 35 acres of the value of about $50 per acre. It is estimated that at least 7 acres of surface of said island were removed during the year 1921.

The estimate of the amount of depletion of said island during the years 1918, 1919, and 1920 was not, therefore, equal to the amount actually removed. THOMAS R. STONE.

Sworn to before me this 20th day of December, 1921. [SEAL.]

A. W. PLUMLEY, Notary Public.

EXHIBIT C

FEBRUARY 27, 1922.

BORDER ISLAND CO.,

Buffalo, N. Y.

SIRS With reference to your income-tax returns for the years 1917 to 1920, inclusive, you are advised that the evidence submitted in Form F and in your letter of December 22, 1921, does not substantiate your claim for depletion, which is therefore disallowed.

This action will be reflected in the audit of your returns which will begin 20 days from date of this letter, and you will be notified of the tax liability resulting therefrom.

Respectfully,

E. H. BATSON, Deputy Commissioner. By A. H. FAY,

Head of Division.

EXHIBIT D

STATE OF NEW YORK,

County of Erie, City of Buffalo, 88:

Thomas R. Stone, being duly sworn, deposes and says that he resides at the city of Buffalo, N. Y., and is an attorney and counselor at law, practicing his profession in said city; that he is an officer, to wit, the president of the Border Island Co., a business corporation organized in September, 1911, under the laws of the State of New York; that he has been president of said corporation since its first meeting in June, 1912; that in June, 1912, said corporation acquired Strawberry Island, located partly within the city of Buffalo in the Niagara River, by deeds of conveyance from the Strawberry Island Co. and from William H. Heimbach and wife, which deeds were recorded, respectively, in Erie County clerk's office on the 17th day of June, 1922; that title to said island was taken by the said Border Island Co. subject to mortgages aggregating the sum of $70,000, and also subject to a certain agreement licensing the removal of sand and gravel from and around said island, made with the Empire Limestone Co., engaged in the business of removing sand and gravel from the Niagara River and selling the same for commercial purposes in the city of Buffalo and vicinity, which agreement was dated April 24, 1912.

That prior to the acquisition of title by the Border Island Co. to said island a trust agreement was entered into between the Strawberry Island Co., William R. Cherry, Anna L. Cherry, Frank C. Hibbard, the then owners thereof, with Allan I. Holloway and Maurice C. Spratt as trustees, wherein the said trustees agreed to oversee the removal of sand and gravel from said river under the said Empire limestone contract of April 24, 1912, and apply the net proceeds thereof upon the principal and interest of the above mentioned mortgages outstanding on said island the surplus therefrom, if any, to be distributed as therein provided.

That pursuant to the provisions of said contract of May 1, 1912, said island owned by the Border Island Co. was duly leased on June 17, 1912 by the said Border Island Co. to the said trustees, who agreed thereafter to pay the said Border Island Co. for any and all uplands of said island removed in the operations under said contract of April 24, 1912, or any subsequent modification thereof, at the reasonable value thereof of $3,000 per acre.

That thereafter, and on August 4, 1917, the said agreement of April 24, 1912, between Empire Limestone Co. and the prior owners of said property, was amended by a supplemental agreement dated on that day, and said Empire Limestone Co. has exercised the right and operated under said agreements since April 24, 1917, and is now exercising the right to take sand and gravel from and about said island, and is now so operating under said agreements, which license right is therein given the said Empire Limestone Co. until May 1, 1926, provided said island is not removed before that date.

That said license agreements with the Empire Limestone Co. provided rules and regulations for the removal of said materials by the said Empire Limestone Co., and that the uplands of said island should not be removed in said operations until a determination was made by arbitration as to the necessity therefor, and it was determined therein that such removal was necessary to enable the said Empire Limestone Co. to obtain the minimum yearly amount of materials specified to be paid for in said agreement.

That during the latter part of the year 1916 the Empire Limestone Co., as such licensees, applied to the Border Island Co. for a determination and its permission as to the removal of materials constituting the upland of said island for the operating season of 1917 and thereafter, and, after due deliberation between the parties, it was determined and agreed that the Empire Limestone Co. and its licensees should have the right and privilege of removing the uplands of said island beginning in the spring of 1917, and thereupon the removal of said uplands was commenced and has continued since under the terms of said contracts.

That during the season of 1917 there was removed from the uplands of said island, under said contracts, 64 acres at the southerly end and east and west sides of said island, which is located in the city of Buffalo, and the said Allan I. Holloway and Maurice C. Spratt, trustees, duly accounted to the said Border Island Co. therefor at the agreed value thereof, to wit, $3,000 per acre.

That on January 1, 1919, the lease theretofore made by the Border Island Co. was mutually canceled and annulled, and on an accounting in writing, made at said time for the acreage of the island removed during the year 1918, said trustees paid to the Border Island Co. the sum of $9,000 in payment for the estimated acreage of said uplands so removed during said year; that said adjustment was estimated by the parties, as no survey of the island was made for said purpose at said time, the prior surveys of the island having been made in November, 1913, and September, 1917.

That since January 1, 1919, the Border Island Co. has supervised and collected the amounts paid by the Empire Limestone Co. under its agreement of April 24, 1912, and the subsequent modification thereof, and during the year 1919 two acres of the uplands of said island were estimated to have been removed in said operations, and in its income tax return for that year said Border Island Co. claimed under the item of exhaustion for two acres, so estimated to be removed, of the value of $6,000.

That in the operations during the year 1920 there was estimated as having been removed from said island by the said Empire Limestone Co. and reported by the Border Island Co., and claimed in its return for that year, depletion of 2 acres of said uplands at $3,000 per acre, which, in deponent's judgment, was much less than the market value of such acreage so removed. That in the operations during the year 1921 there has been estimated as having been removed from said island by said Empire Limestone Co., 7 acres of the uplands of said island, which deponent verily believes was worth in

excess of $3,000 per acre; that in November, 1921, a survey was made of said island by Straley Bros., civil engineers of the city of Buffalo, and such survey shows that from the beginning of said operations in 1917 upward of 26 acres of the southerly portion of said island within the city of Buffalo had been removed by said Empire Limestone Co. under said contracts.

That the time of the Border Island Co., to file its income tax return for the year 1921, has been duly extended until the 15th day of June, 1921, and only a tentative tax return has yet been filed.

Deponent is a stockholder of the Border Island Co., and is acquainted with all of the stockholders thereof; that none of the stockholders of the Border Island Co., is now, or ever has been, a stockholder of the Empire Limestone Co., or interested in its business operations in connection with the removal of materials from said island; that said corporations are entirely distinct and unassociated except under said contracts. All of the payments made to the Border Island Co., under said license agreement were made in good faith and as per the bona fide contract agreements of the parties.

That deponent is a stockholder in said Border Island Co. and has during the last 10 years had experience concerning the market value of the land in said island containing sand and gravel, and also knows the price paid for other land of similar kind and character and in the same location, excavated for such purposes, and deponent knows that the market value of said land was in the year 1913 upward of the value of $3,000 per acre, and since that time has increased in value by reason of the fact that the market value of said materials has advanced and the supply has decreased in the Niagara River and vicinity; that said Border Island Co. purchased said island for the sum of $130,000 in June, 1921; that in the opinion of deponent on March 1, 1913, as shown by later developments, said island was worth much more than the purchase price thereof, and was reasonably of the value of $3,000 per acre; for 48 acres of the southerly portion of said island, consisting of said 48 acres, was composed almost entirely of commercial sand and gravel, and the northerly portion of said island has not been developed, or proven, as to the value thereof, or of what character of material it consists.

That it has been estimated by deponent and others who are familiar with the situation and know the amount of materials removed during the year 1921, that at least 7 acres of uplands of said island were removed during said year of 1921.

That deponent has computed the cubic contents of an acre of land to a depth of 30 feet, which was the average depth of the acreage removed from said uplands, as shown by affidavits submitted herewith, and upon said computation it is found that an acre of upland contains 48,400 cubic yards, which at the minimum price paid to the Border Island Co. by the Empire Limestone Co., under the contract of April 24, 1912, amounted to the sum of $3,490 per acre; that deponent knows of his own knowledge that said acreage so removed is, and was at the time of said removal, of the value of $3,490; that the number of cubic yards of materials actually removed and paid for by the Empire Limestone Co. and its licensees from the uplands of said island, from the spring of 1917 to the fall of 1921, greatly exceed the number of yards claimed as depletion for said years. On the basis of 48,400 cubic yards per acre for the 214 acres claimed as depletion since the spring of 1917 the computed yardage therefor would amount at the minimum contract price of 72 cents per cubic yard to $78,090, and during said period the Empire Limestone Co. had paid a total of $24,000 per year as a minimum and have removed in each year in excess of 320,000 cubic yards.

That the Border Island Co. does not own any boats except a small motor boat used by the inspector and for supervision and measurement of loaded sand suckers and scows, and that it owns no other property of any description except said island so located in the Niagrara River, materials from which are removed by the Empire Limestone Co., or its licensees.

Deponent further says that when said materials are removed from said island the upland disappears and where the island existed before there is deep water, which has no known commercial use or value.

THOMAS R. STONE.

Subscribed and sworn to before me this 4th day of April, 1922.

AGNETH R. HANSON, Commissioner of Deeds, Buffalo, N. Y.

STATE OF NEW YORK

County of Erie, City of Buffalo, ss:

Jacob J. Straley, being duly sworn, deposes and says that he is a civil engineer and has practiced his profession at the city of Buffalo, N. Y., for upward of 27 years last past; that he is a member of the firm of Straley Bros. and had personal charge of the survey and preparation of the map of Strawberry Island, of which the attached blue print is a copy; that the said survey was made by deponent in the month of November 1921, and shows the said island and the margin of the lands thereof as they existed in said month; that the southerly portion of said island has been excavated by means of so-called sand suckers and through the operations of what is known as a digger operating upon the uplands of said island, which digger is the property of the Empire Limestone Co., engaged in the sand and gravel business in and about the city of Buffalo; that during the month of November, and while said survey was being made, such operations were in progress along the southerly margin of said island; that deponent has been familiar for many years with said island, of which, prior to November 1913, 38.13 acres were within the limits of the city of Buffalo; that said portion of said island has since been removed with the exception of 1.44 acres, now remaining at the time of said deponent's survey within the limits of said city; that said portion of said island so removed was 3 or 4 feet above the mean level of the river and quite heavily wooded with large trees; that said portion of said island except the surface soil, was entirely of sand and gravel taken for commercial purposes from said uplands; that the greater part of said portion of said island heretofore lying within the city of Buffalo, has been removed since the year 1916, when the more extensive operations in said uplands commenced; that the removal by said operations of the upland of said island has extended along the easterly and westerly shores thereof, beyond and northerly of the line indicated on said map as the Buffalo city line, to an amount practically equal to the acreage yet remaining of said island within said city.

That deponent has caused to be indicated on said map, of which said blue print is a copy, the outlines of said island and the margin of the river as located September 27, 1917, in the survey thereof and map made by Frederick K. Wing, civil engineer, of the city of Buffalo, and also by the survey thereof made by said Wing in November 1913, and the said blue print correctly shows the location of the margins of said island as evidenced by the said maps and surveys of the said Frederick K. Wing.

From said surveys and deponent's personal knowledge of the situation at said island in November 1921, in deponent's opinion, upward of 26 acres of the southerly portion of said island have been removed, to a depth of upward of 30 feet, since the year 1916.

JACOB J. STRALEY.

Subscribed and sworn to before me this 1st day of April, 1922.

CHARLES A. HAHL, Notary Public, Erie County, N. Y.

STATE OF NEW YORK,

County of Erie, City of Buffalo, ss:

Robert Vellacott, being duly sworn, deposes and says that he resides in the city of Buffalo, N. Y., and that in the month of May, 1913, he was employed as an inspector by Spratt & Holloway, trustees, to supervise the pumping of sand and gravel in the Niagara River, and to inspect and measure each boatload of material that was taken by certain sand suckers, which are boats equipped with centrifugal pumps; that deponent entered upon his duties in the month of May, 1913, and has continued from that time on until the present to act in the capacity aforesaid; that deponent has seen and been on and around the island in the Niagara River owned by the Border Island Co. each spring, summer, and fall of each year beginning with the year 1913, and ending in the year 1921; that deponent was well acquainted with and knew the shore outline of said island as it existed in May, 1913.

Deponent further says that said shore line as it existed in May, 1913, continued to be the same without material change until the spring of 1917, at which time the operators of said sand suckers were given permission by the owner of said island to encroach upon and take away the material contained