Commissioner of Internal Rev. v. Kennedy Min. & M. Co.

• Citation: 125 F.2d 399
• Decision Date: 04 February 1942
• Docket Number: No. 9862.,9862.
• Parties: COMMISSIONER OF INTERNAL REVENUE v. KENNEDY MINING & MILLING CO.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

125 F.2d 399 (1942)

COMMISSIONER OF INTERNAL REVENUE v. KENNEDY MINING & MILLING CO.

No. 9862.

Circuit Court of Appeals, Ninth Circuit.

February 4, 1942.

Samuel O. Clark, Jr., Asst. Atty. Gen., and J. Louis Monarch, Helen R. Carloss, Joseph M. Jones, and Arthur Armstrong, Sp. Assts. to the Atty. Gen., for petitioner.

McCutchen, Olney, Mannon & Greene, F. F. Thomas, Jr., and Henry D. Costigan, all of San Francisco, Cal., for respondent.

Before GARRECHT, MATHEWS, and HANEY, Circuit Judges.

MATHEWS, Circuit Judge.

Respondent, Kennedy Mining & Milling Company, a California corporation (hereafter called the taxpayer), is and has been since prior to March 1, 1913, the owner of a gold mine in Amador County, California. In its income and excess profits tax returns for 1935 and 1936, the taxpayer, in computing its net income, claimed deductions for depletion of its mine. Petitioner, the Commissioner of Internal Revenue, disallowed part of the deduction claimed for 1935 and all of the deduction claimed for 1936 and, in consequence of such disallowance, determined that there were deficiencies in respect of the taxpayer's income and excess profits taxes for said years. The taxpayer petitioned the Board of Tax Appeals for redetermination. The Board decided¹ that the deductions should have been allowed as claimed, and that consequently there was no deficiency. The Commissioner seeks reversal.

Section 23(m) of the Revenue Act of 1934, 26 U.S.C.A. Int.Rev.Code, § 23(m), provides that, in computing net income, there shall be allowed as a deduction: "In the case of mines * * * a reasonable allowance for depletion." Section 114(b)(4) of the Act, 26 U.S.C.A. Int.Rev.Code, § 114(b) (4), provides: "The allowance for depletion under section 23(m) shall be * * * in the case of metal mines, 15 per centum * * * of the gross income from the property during the taxable year * * *. Such allowance shall not exceed 50 per centum of the net income of the taxpayer (computed without allowance for depletion) from the property."

The Board found that the taxpayer's gross income during 1935 was $665,745.29, of which $266,270.87 was from sales of gold extracted from newly mined ores and $399,474.42 was from sales of gold extracted from tailings;² that the taxpayer's net income during 1935 (computed without allowance for depletion) was $255,162.66, all of which was from sales of gold extracted from tailings;³ that the taxpayer's gross income during 1936 was $687,079.59, of which $315,639.50 was from sales of gold extracted from newly mined ores and $371,440.09 was from sales of gold extracted from tailings; that the taxpayer's net income during 1936 (computed without allowance for depletion) was $61,662.39, all of which was from sales of gold extracted from tailings;⁴ and that all ores and tailings mentioned were from the taxpayer's mine. These findings are not challenged.

The Board held that all income of the taxpayer during 1935 and 1936, whether from newly mined ores or from tailings, was income from the mine, and that, therefore, the taxpayer was entitled to deduct for depletion 15% of $665,745.29⁵ for 1935 and 50% of $61,662.39⁶ for 1936. The Commissioner contends that only so much of the taxpayer's income as was derived from newly mined ores was income from the mine; and that, since no net income was so derived,⁷ no deduction for depletion was allowable.

The Commissioner's contention must be rejected. The tailings from which the taxpayer derived part of its gross income and all of its net income during 1935 and 1936 were ores.⁸ They were ores from the taxpayer's mine, just as were the newly mined ores which the taxpayer treated in 1935 and 1936....