4 T.C. 335">*336 Petitioner in Docket No. 1145 contests the determination of a deficiency in income tax for the calendar year 1940 in the amount of 1944 U.S. Tax Ct. LEXIS 19">*20 $ 2,663.85. In the deficiency notice the Commissioner added the sum of $ 16,495.63 to petitioner's net income, describing the adjustment as an "Increase in fiduciary income" and offering therefor the following explanation:

It is held that the loss on sale of coal lands by the Estate of W. F. Harman does not constitute an allowable deduction in computing your net taxable income.

The correctness of the Commissioner's determination in this respect presents the sole issue in Docket No. 1145; none of the other adjustments made by the Commissioner was assigned by petitioner as error.

Petitioner in Docket No. 1146 contests the determination of a deficiency in income tax for the calendar year 1940 in the amount of $ 4,043.34. As in Docket No. 1145, the Commissioner, in the deficiency notice, adjusted petitioner's net income by adding thereto the sum of $ 16,495.62, thus presenting for decision in Docket No. 1146 the same issue as that involved in Docket No. 1145. Another issue is also presented in Docket No. 1146, namely, whether petitioner, who inherited a life interest in certain farm lands under the will of his father, whose estate was still in the process of administration during 1944 U.S. Tax Ct. LEXIS 19">*21 the taxable year herein involved, is entitled to deduct from his gross income sums in the amount of $ 755 paid to an attorney for legal advice in connection with (a) condemnation proceedings regarding rights of ways across these farm lands and (b) the securing of a loan for the purpose of purchasing livestock to place on this farm. All other assignments of error in Docket No. 1146 have been abandoned. The two proceedings were consolidated for trial and, from the evidence adduced, we make the following findings of fact.

FINDINGS OF FACT.

Petitioner Sayers F. Harman (Docket No. 1145) is an individual residing at Yukon, West Virginia, and his return for the calendar year 1940 was filed with the collector for the district of West Virginia.

Petitioner C. Henry Harman (Docket No. 1146) is an individual residing at Tazewell, Virginia, and his return for the calendar year 1940 was filed with the collector for the district of Virginia.

On January 15, 1924, W. F. Harman died testate. The fourteenth clause of his will, dated November 16, 1923, provided in part as follows:

I give, devise and bequeath, * * * to my two sons, C. Henry Harman and Sayers F. Harman, during their natural lives, one-half1944 U.S. Tax Ct. LEXIS 19">*22 to each during his natural life, the following property, to-wit:

(a) All my farming lands in Tazewell County, Virginia, which I may own or be entitled to at the time of my death;

* * * *

4 T.C. 335">*337 (c) All my interest in lands in McDowell County, West Virginia, lying on Dry Fork and its waters and leased to the Yukon-Pocahontas Coal Company, together with all rents, issues and royalties therefrom;

* * * *

The will contained other clauses relating to the coal lands devised by the fourteenth clause. By the twenty-first clause of his will W. F. Harman empowered his sons "to jointly lease for such term or terms of years as they may see proper, any and all coal or mineral lands * * * including the lands mentioned in clause Fourteen of this will, * * *" and devised and bequeathed to them "one-half to each during his natural life, all the rents and royalties received from the leases * * *." By a codicil dated November 23, 1923, W. F. Harman authorized his sons "to jointly make such exchange or exchanges * * * of any of my coal lands * * * in McDowell County, West Virginia * * * for coal lands * * * adjoining any leasehold or leaseholds in which my coal lands * * * are included * * *; and1944 U.S. Tax Ct. LEXIS 19">*23 any and all properties received in any exchange or exchanges herein by this clause of this codicil to my will authorized are to be held the same as the property so exchanged is directed by my will to be held * * *." The twenty-second clause of W. F. Harman's will provides as follows:

The rents, issues, profits, royalties and dividends from my properties mentioned or referred to in clause Fourteen * * * which I have hereinbefore given my said two sons, or either of them, during their respective lives, are intended to be, and are, given them absolutely, and said rents, issues, profits royalties and dividends accruing during their respective lives shall not go and pass under clauses Fifteen and Sixteen of this will; * * *

The twentieth clause of this will authorizes Sayers F. Harman and C. Henry Harman to jointly sell and transfer in fee simple all properties bequeathed and devised to them for life except the properties set forth in clause fourteen.

The last will and testament and the codicil thereto of W. F. Harman were duly probated on February 19, 1924, in the Circuit Court of Tazewell County, Virginia. C. Henry Harman and Sayers F. Harman were appointed executors of the estate1944 U.S. Tax Ct. LEXIS 19">*24 of W. F. Harman, deceased, and have continued to act in that capacity from that time throughout the taxable year 1940. A copy of the will and of the codicil thereto and of the certificate of probate by the Circuit Court of Tazewell County, Virginia, were admitted to probate in the County Court for McDowell County, West Virginia, on July 10, 1925. The estate of W. F. Harman, deceased, was still in the process of administration during 1940, the taxable year herein involved.

At the time of the death of W. F. Harman the coal lands covered by the fourteenth clause of the will were leased under an agreement dated January 12, 1911, to Yukon-Pocahontas Coal Co. (hereinafter sometimes referred to as the coal company). The rights under this 4 T.C. 335">*338 lease were assigned on March 15, 1929, by the coal company to Yukon Pocahontas Fuel Co. (hereinafter sometimes referred to as the fuel company). The lease dated January 12, 1911, was for a period of 96 years, from December 1, 1910, to November 30, 2006, and the lessee agreed to pay the lessors as rental 10 cents per ton for each and every ton of 2,240 pounds of coal to be used for any other purpose than the manufacture of coke for shipment, 1944 U.S. Tax Ct. LEXIS 19">*25 and 15 cents per ton for each and every ton of 2,240 pounds of coke manufactured from coal taken from the premises. This lease further provided, inter alia, that "the lessee shall be relieved from mining any part of the coal on said lands which * * * can not be mined at a profit, by reason of the thinness of the vein, or the unmerchantable character of the coal [clause two] * * *" and that "when all the merchantable coal has been mined and removed from said lands, which * * * can be mined at a profit, by reason of the thinness of the vein or the unmerchantable character of the coal, then the payment of royalties shall cease under this lease contract and in that event said lease contract shall terminate [clause fifteen] * * *."

In 1911, at the time of the lease to the coal company, W. F. Harman owned 50 percent of the stock of the coal company; and in 1929, at the time of the assignment of the lease to the fuel company, the estate of W. F. Harman, Sayers F. Harman, and C. Henry Harman were all stockholders in both the coal company and the fuel company.

Part of the coal lands devised by W. F. Harman by the fourteenth clause of his will to his sons Sayers F. Harman and C. Henry 1944 U.S. Tax Ct. LEXIS 19">*26 Harman for life included a four-ninths interest in fee in approximately 3,191 acres of coal land. These 3,191 acres of coal land were included in and constituted a part of item No. 13 of schedule A in the return for Federal estate tax (Form 706) filed in January 1925 by the executors of the estate of W. F. Harman. Item No. 13 reads in part as follows:

D. G. Sayers, Dry Fork and Slate Creek lands, McDowell County, West Virginia, 4/9 undivided interest in whole area containing 4139 acres, and, if conveyance by Mrs. Harman valid, 2/9 undivided interest in addition in part estimated at 1000 acres, making W. F. Harman's interest 2006 2/9 acres common and undivided. * * *

The fuel company continued to operate the coal lands covered by clause fourteen of the will until 1939. The average annual production of the coal company for the 10 years prior to January 15, 1924, was 166,686.81 gross tons. The total production from 1924 to 1940 was 2,560,867.77 net tons of coal.

On May 29, 1940, these 3,191 acres of the coal lands were conveyed in fee simple to Pond Creek Pocahontas Co., of which neither the estate of W. F. Harman nor Sayers1944 U.S. Tax Ct. LEXIS 19">*27 F. Harman nor C. Henry Harman was a stockholder at the time of the conveyance. The deed of conveyance 4 T.C. 335">*339 was signed on behalf of the vendors not only by Sayers F. Harman and C. Henry Harman, both individually and as executors of the estate of W. F. Harman, deceased, but also by all of the other devisees and legatees who had any vested or contingent interest in the estate of W. F. Harman, deceased, and by the coal company, the fuel company, and the Hall Mining Co. The deed of conveyance recited that 3 tracts of coal lands, totaling 3,237 acres, were being sold. Tract No. 1 was divided into 2 parts as follows: (1) A 708-acre tract in which according to the deed of conveyance the W. F. Harman estate owned a five-ninths undivided interest, C. Henry Harman owned individually a one thirty-sixth undivided interest, and Sayers F. Harman owned individually a one-eighteenth undivided interest; (2) a 2,452-acre tract in which the W. F. Harmon estate owned a four-ninths undivided interest, C. Henry Harman owned individually a one thirty-sixth undivided interest, and Sayers F. Harman owned a one-eighteenth undivided interest. Tract No. 2 consisted of approximately 31 acres and tract1944 U.S. Tax Ct. LEXIS 19">*28 No. 3 consisted of approximately 46 acres. The cash consideration recited in the deed was $ 12,400, and it covered all 3 tracts. The deed of conveyance, in explanation of the individual interests of C. Henry Harman and Sayers F. Harman, recites in part as follows:

* * * The said C. Henry Harman acquired his interest therein [the tracts of land conveyed by the will of W. F. Harman] (other than life estate) by inheritance from his mother, Amelia G. Harman, who died intestate on the 28th day of January 1937. Sayers F. Harman acquired one-half of his interest therein * * * by a joint deed from Amelia G. Harman dated April 16, 1931, * * * and the said Sayers F. Harman acquired his remaining interest therein (other than life estate) by inheritance from his mother, Amelia G. Harman * * *

The deed of conveyance dated May 29, 1940, was approved and confirmed by the County Court of McDowell County, West Virginia, on June 17, 1940, and each individual's share of the proceeds was determined by that court. Sayers F. Harman and C. Henry Harman each received $ 1,608.20 as his share. The sale was induced by the fact that it had become unprofitable to mine the coal due to its dirty and unmerchantable1944 U.S. Tax Ct. LEXIS 19">*29 quality. This fact was first observed in 1937 and 1938 and later proved by various tests. Prior to reaching this unmerchantable coal the mine was always operated at a profit.

Sayers F. Harman and C. Henry Harman, as executors of and on behalf of the estate of W. F. Harman, filed a fiduciary income and defense tax return (Form 1041) for the calendar year 1940. In that return, they deducted from gross income the sum of $ 32,991.25 representing net loss from the sale of 3,280 acres of coal land ("property other than capital assets"). These 3,280 acres include the 3,191 acres which had been devised to Sayers F. Harman and C. Henry Harman 4 T.C. 335">*340 for life by the fourteenth clause of the will of W. F. Harman and which were part of the property transferred by the deed of conveyance dated May 29, 1940. The computation of the loss is set forth in schedule F, "Gains and losses from sales or exchanges of property other than capital assets," as follows:

1944 U.S. Tax Ct. LEXIS 19">*30 The following is a summary of page one of the fiduciary income and defense tax return for 1940 filed by the estate of W. F. Harman, showing the deduction of the $ 32,991.25 from the estate's income:

Item No. 6, designated rents and royalties, included, according to schedule C, net profit from "Coal Land" in the sum of $ 3,803.97. The loss of $ 32,991.25 was reported in the fiduciary return of the estate because that transaction was carried on the books of the estate.

Sayers F. Harman and C. Henry Harman each reported the receipt of $ 1,706.10 from the estate of W. F. Harman in their respective individual income tax returns for 1940, an amount equal to one-half of the sum of $ 3,412.21 reported by the estate of W. F. Harman1944 U.S. Tax Ct. LEXIS 19">*31 as "distributable to beneficiaries."

At the time of his death, January 15, 1924, W. F. Harman owned real estate valued at $ 339,174.05 stocks and bonds valued at $ 268,558.67, mortgages, notes, cash, and insurance valued at $ 4,567.51, and other jointly owned miscellaneous property valued at $ 631,364.55. Funeral expenses and administration expenses including executors' fees, attorneys' 4 T.C. 335">*341 fees, and other miscellaneous items totaled $ 31,343.02, and the decedent's debts equaled $ 80,777.15.

C. Henry Harman (petitioner in Docket No. 1146) became associated with his father in the coal business in 1910. Upon his father's death in 1924, C. Henry Harman, who was then 35 years old, became president of the coal company and continued in that capacity until 1935, supervising its operations. He was also president of the Buchanan Coal Co. from 1920 to 1936 and of the Sayers Pocahontas Coal Co. from 1917 throughout 1940, as well as being a member of the board of directors of Banner Raven Coal Co. since 1925. He devoted from one-half to three-quarters of his time to the coal business during the operating period. During the calendar year 1940 he received salaries from Yukon-Pocahontas1944 U.S. Tax Ct. LEXIS 19">*32 Coal Co., Sayers Pocahontas Coal Co., and Buchanan Coal Co.

C. Henry Harman also engaged in the business of farming during the calendar year 1940, and he was operating for profit two large dairies as well as raising grain, cattle, and hogs. In connection with his 1940 income tax return, he claimed a loss as a result of his farm operations in the amount of $ 8,387.51. In Form 1040-F, attached to his income tax return for 1940, C. Henry Harman listed as one of his farm expenses for the taxable year an item in the amount of $ 1,358, which he described as "Legal Expenses -- State road condemnation & other matters about the farm." Of this amount of $ 1,358, the sum of $ 755 was paid during 1940 to an attorney for legal services rendered in connection with two matters. The first of these matters was the successful effort in causing a proposed state highway to be diverted from the location, upon the farm devised to petitioners by W. F. Harman, originally intended for it, to a new location which, though upon the same farm, was less detrimental and expensive to the farming operations. The second of these matters was the obtaining of a loan from the Abingdon Production Credit Corporation1944 U.S. Tax Ct. LEXIS 19">*33 of approximately twenty to twenty-five thousand dollars for the purpose of purchasing livestock for the farm. The money was obtained and used for farming purposes. The farm lands upon which C. Henry Harman conducted his farming operations consisted of about 2,500 acres of land in Virginia which he and his brother, Sayers F. Harman, inherited in equal shares for life under the will of their father, W. F. Harman.

OPINION.

The first issue presented for decision is the right of each of the petitioners to deduct from their income as increased by the Commissioner the amount of a loss incurred upon the sale of certain 4 T.C. 335">*342 coal lands which they inherited for life under the will of their father. This issue suggests the following questions:

1. Was the loss that of the individual taxpayers or that of the estate of W. F. Harman?

2. What is the amount of the loss?

3. Is the loss capital or ordinary?

Murdock, J., dissenting: The enjoyment of a life estate through the receipt of income, profits, or gain of any kind is subject to income tax in its entirety. Irwin v. Gavit, 268 U.S. 161">268 U.S. 161. The sale of a life estate is but the anticipation of that taxable income. Any loss from the sale is at most the loss of anticipated income which would have been subject to tax if received. That kind of a loss can not be turned into a deductible loss. It is inconsistent with Irwin v. Gavit to allow a life tenant to deduct any basis upon the sale of his property where, as here, he has acquired that property by devise without paying out any cost for it. Cf. Estate of F. S. Bell, 46 B. T. A. 484; reversed, 137 Fed. (2d) 454.

Moreover, if the petitioners are entitled to a basis for gain or loss, then that basis should be determined in accordance with section 19.113 (a) (5)-1, (f) of Regulations 103. A life estate exhausts ratably with the life upon which it is limited. Thus, the life estate which is sold is a shorter estate than the life1944 U.S. Tax Ct. LEXIS 19">*51 estate which was acquired at the death of the father. The life tenant has enjoyed a part of it. The regulation takes this into consideration and is the most satisfactory solution for this difficult question which has come to my attention.