Burnet v. Thompson Oil Gas Co, 288

• Court: United States Supreme Court
• Writing for the Court: ROBERTS
• Citation: 75 L.Ed. 1049,283 U.S. 301,51 S.Ct. 418
• Parties: BURNET, Commissioner of Internal Revenue, v. THOMPSON OIL & GAS CO
• Docket Number: No. 288,288
• Decision Date: 13 April 1931

283 U.S. 301 51 S.Ct. 418 75 L.Ed. 1049 BURNET, Commissioner of Internal Revenue,

v.

THOMPSON OIL & GAS CO.

No. 288. Argued March 16, 17, 1931. Decided April 13, 1931.

The Attorney General and Mr. Seth W. Richardson, Asst. Atty. Gen., for petitioner.

Messrs. Phil D. Morelock, of Kansas City, Mo., and James S. Y. Ivins, of Washington, D. C., for respondent.

Mr. Justice ROBERTS delivered the opinion of the Court.

The Commissioner of Internal Revenue determined a deficiency in the respondent's income tax for 1918. Upon

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the taxpayer's petition the Board of Tax Appeals sustained the Commissioner.¹ An appeal was taken to the Court of Appeals, which reversed the judgment of the Board.² This court granted certiorari.³

The question presented is whether under section 234(a)(9) of the Revenue Act of 1918,⁴ in determining for any taxable year the capital value, recoverable through depletion allowance, of oil mining properties acquired prior to March 1, 1913, there should be deducted from the March 1, 1913 value of the properties the amount of depletion actually sustained in earlier years, or only so much of such depletion as was allowable as deductions under the revenue acts in force in those years.

The Board of Tax Appeals found the following facts: The taxpayer owned an oil and gas mining lease acquired prior to March 1, 1913. On that date the recoverable oil in the reserve embraced by the lease was 278,000 barrels, and its value was $156,645, or $0.56347 per barrel. Between March 1, 1913, and December 31, 1915, it extracted 162,717 barrels of oil, so that at the unit rate mentioned it sustained depletion amounting to $91,686.15. Its deduction for depletion in computing net income under the

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Revenue Act of 1913⁵ was computed not by reference to the number of barrels extracted, or to the value of the reserve on March 1, 1913, but by taking 5 per cent. of the gross income from the sale of oil. The depletion allowance for 1913 to 1915, inclusive, computed by this method, amounted to $6322.02.

In 1916 the taxpayer secured an extension of its lease at a cost of $30,000, whereby its oil reserve was increased by 300,000 barrels. There then remained of the original reserve 115,283 barrels having a value as of March 1, 1913, of $64,958.85. The Commissioner added to this depleted value the cost of the extension of the lease, and added to the remaining oil reserves of the original lease the additional 300,000 barrels then acquired. He thus ascertained a new total recoverable reserve of 415,283 barrels having a basic value or cost of $94,958.85, or $0.22866 per barrel. There were no subsequent additions to the reserves.

In 1916 there were produced under the lease 49,452 barrels of oil, and in 1917, 39,204 barrels, leaving the reserve at January 1, 1918, 326,627 barrels.

A new method of allowance for depletion was adopted in the Revenue Act of 1916.⁶ Depletion was sustained under the formula therein prescribed in those two years,

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amounting to $20,272.08. It is agreed that this figure is correct and represents the sustained depletion as well as allowed depletion for those years.

During 1918 there were produced 33,697 barrels of oil. At the unit price adopted by the Commissioner of $0.22866 per barrel, the depletion sustained and allowed for that year was $7,705.16. It is this depletion allowance for the year 1918 which is here called in question.

In view of the fact that the depletion actually sustained by the taxpayer between March 1, 1913, and December 31, 1915, was $91,686.15, whereas in conformity with the act of 1913 the deduction actually allowed it as for depletion was only $6,322.02, the respondent contended tha the unit rate of depletion per barrel for 1918 should have been based upon the original March 1, 1913 value of the reserves, plus the cost of the extension of the lease, and less only that portion of the actually sustained depletion which was in fact allowed pursuant to the terms of the 1913 act. The Commissioner, on the other hand, substracted from the March 1, 1913, value plus the cost of the extension of the lease, the sustained or actual depletion, holding that the entire depletion actually sustained should be deducted from the original March 1, 1913 value, regardless of whether it was allowable as deductions from the gross income of the years 1913, 1914 and 1915. The Circuit Court of Appeals decided in favor of the respondent.

The parties agree that respondent is not entitled as matter of right to make any deduction from annual income for depletion of the oil extracted and sold during the year. If it may take any such deduction, authority therefore must be found in the statute.⁷ It follows that the question for decision is purely one of statutory construction.

It is clear that Congress intended that the lessee of an oil well should be entitled to a reasonable allowance for

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depletion based upon cost or March 1, 1913 value. It did not however attempt to prescribe a formula for ascertaining it, but expressly delegated that function to the Commissioner of Internal Revenue, who was to make rules and regulations to that end. Pursuant to this authority, regulations were made, which required the deduction of depletion theretofore sustained in ascertaining the capital remaining in any year recoverable by depletion deductions.⁸ It is undisputed that the Commissioner calculated the depletion deduction...