Douglas v. Commissioner of Internal Revenue Robinson Estate v. Commissioner of Internal Revenue Dalrymple v. Commissioner of Internal Revenue 8212 133

• Decision Date: 15 May 1944
• Docket Number: Nos. 130,s. 130
• Citation: 88 L.Ed. 1271,64 S.Ct. 988,322 U.S. 275
• Parties: DOUGLAS v. COMMISSIONER OF INTERNAL REVENUE (two cases). ROBINSON'S ESTATE et al. v. COMMISSIONER OF INTERNAL REVENUE. DALRYMPLE v. COMMISSIONER OF INTERNAL REVENUE. —133
• Court: U.S. Supreme Court

322 U.S. 275

64 S.Ct. 988

88 L.Ed. 1271

DOUGLAS

v COMMISSIONER OF INTERNAL REVENUE (two cases).

ROBINSON'S ESTATE et al.

v. COMMISSIONER OF INTERNAL REVENUE.

DALRYMPLE

v. COMMISSIONER OF INTERNAL REVENUE.

Nos. 130—133.

Argued March 7, 1944.

Decided May 15, 1944.

Mr. Kimball B. DeVoy, of Minneapolis, Minn., for petitioners.

Miss Helen R. Carloss, of Washington, D.C., for respondent.

Mr. Justice REED delivered the opinion of the Court.

The Commissioner of Internal Revenue assessed income tax deficiencies against the petitioners for the year 1937, because of their failure to include in income for that year sums required to be reported by the terms of Article 23(m)-10(c) of Treasury Regulations 94, issued pursuant to Section 23(m), Revenue Act of 1936. The facts were not in dispute. Bessie P. Douglas, the petitioner in Nos. 130 and 131, was in 1929 co-owner with Adeline R. Morse, Charles H. Robinson, and Irene B. Robinson Cirkler of an iron ore mine in St. Louis County, Minnesota, known as the Pettit mine. The petitioners in No. 132 are the executors of the estate of Charles H. Robinson, and the petitioner in No. 133 is the transferee of the assets of the estate of Irene B. Robinson Cirkler, deceased.¹ In 1929 its co-owners leased this mine to the Republic Steel Corporation. The lease, as amended in 1933, ran for a term of thirty years, but the lessee was given the power to cancel it at the end of eight years. The lessee undertook to pay a royalty of 40 cents a ton for the ore removed and guaranteed minimum royalties of $20,000 a year for the first five years and $40,000 a year thereafter, subject after five years to the payment of $60,000 a year as a minimum during the time it failed to remove certain water from the mine. In case the guarantee required the lessee to pay in any one year for more ore than it actually removed, it was entitled to have the excess payment applied against removals in later years. The lessee paid the minimum royalties each year, but it removed no ore at all, and as of July 1, 1937, at the end of the eight year period, it surrendered the lease. Each lessor took a proper depletion deduction in the respective years the royalties were paid, 1929 to 1936, inclusive. In the year 1933, Bessie P. Douglas claimed a depletion deduction of $4,958.05, but since she had sustained a net loss of $13,947.51, this deduction did not affect her tax liability. The Commissioner required all of the deductions to be taxed as income in 1937. The Board of Tax Appeals affirmed his conclusion, except as to the 1933 deductions by Bessie P. Douglas, which was reversed. 46 B.T.A. 943. Upon appeals by the taxpayers and, in No. 131, by the Commissioner, the Circuit Court of Appeals upheld the original assessments. 8 Cir., 134 F.2d 762. We granted petitions for writs of certiorari to settle a question reserved by our decision in Herring v. Commissioner, 293 U.S. 322, 328, 55 S.Ct. 179, 181, 79 L.Ed. 389, as to cost depletion, and to consider an issue similar to that involved in Dobson v. Commissioner, 320 U.S. 489, 64 S.Ct. 239.

The Revenue Act of 1913, Section II(G)(b), 38 Stat. 173, granted a deduction for depletion based solely on actual production and 'not to exceed 5 per centum of the gross value at the mine of the output for the year.' Under this Act, advance royalties were taxed without deduction for depletion. In 1916 Congress removed the 5% ceiling, but the deduction was still limited to the year of actual extraction. Revenue Act of 1916, Section 5(a) Eighth (b), 39 Stat. 759. The relevant parts of the depletion section reached substantially their present form in the Revenue Act of 1918, § 234(a)(9), 40 Stat. 1078, which, like the 1916 Act, authorized 'a reasonable allow- ance for depletion * * * under rules and regulations to be prescribed' with the approval of the Secretary of the Treasury; but the 1918 Act no longer limited the allowance to the product actually mined and sold during the year. The section now reads as follows:

'Sec. 23. Deductions from gross income.

'In computing net income there shall be allowed as deductions:

'(m) Depletion. In the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case; such reasonable allowance in all cases to be made under rules and regulations to be prescribed by the Commissioner, with the approval of the Secretary. In any case in which it is ascertained as a result of operations or of development work that the recoverable units are greater or less than the prior estimate thereof, then such prior estimate (but not the basis for depletion) shall be revised and the allowance under this subsection for subsequent taxable years shall be based upon such revised estimate. * * *' Revenue Act of 1936, c. 690, 49 Stat. 1648, 1658-1660, 26 U.S.C.A. Int.Rev.Code, § 23(m).

From the beginning of income taxation, as now, the regulations covered the conventional situations of payments for ores as mined and made provision for depletion measured by the volume actually extracted. The 1918 Act permitted the new regulations, Regulations 45, Article 215(c), to provide for the first time a deduction in the year of receipt of advance royalties of a depletion allowance calculated on the unit value of the mineral in place. This met a frequently recurring variation from the normal lease. As a corollary the regulations required that in case a lease was surrendered before the lessee had extracted all the ore for which advance royalties had been paid, a sum equal to the depletion allowance previously granted on such ore should be taxed as income in the year of the surrender of the lease. The bonus or advanced royalty regulations have remained practically unchanged since 1919.² The subsections applicable to prepaid royalties are as follows:

'Art. 23(m)-10. Depletion—Adjustments of accounts based on bonus or advanced royalty.

'(b) If the owner has leased a mineral property for a term of years with a requirement in the lease that the lessee shall extract and pay for, annually, a specified number of tons, or other agreed units of measurement, of such mineral, or shall pay, annually, a specified sum of money which shall be applied in payment of the purchase price or royalty per unit of such mineral whenever the same shall thereafter be extracted and removed from the leased premises, an amount equal to that part of the basis for depletion allocable to the number of units so paid for in advance of extraction will constitute an allowable deduction from the gross income of the year in which such payment or payments shall be made; but no deduction for depletion by the lessor shall be claimed or allowed in any subsequent year on account of the extraction or removal in such year of any mineral so paid for in advance and for which deduction has once been made.

'(c) If for any reason any such mineral lease expires or terminates or is abandoned before the mineral which has been paid for in advance has been extracted and removed, the lessor shall adjust his capital account by restoring thereto the depletion deductions made in prior years on account of royalites on mineral paid for but not removed, and a corresponding amount must be returned as income for the year in which the lease expires, terminates, or is abandoned.' Treasury Regulations 94, promulgated under the Revenue Act of 1936.

The deficiency here assessed falls squarely under the subsections. Their validity is therefore the decisive issue. In our opinion the regulations are valid.

Since the revenue acts have not forbidden recognition of bonus or advanced royalties as a basis for the calculation of appropriate depletion, the provision of the regulations for a depletion offset against their receipt is within the broad rule-making delegation of Section 23(m). Royalty or bonus payments in advance of actual extraction of minerals are, like sales after severance or royalty payments on actual production, gross income and not a recovery of capital. Stratton's Independence v. Howbert, 231 U.S. 399, 418, 34 S.Ct. 136, 142, 58 L.Ed. 285; Stanton v. Baltic Mining Co., 240 U.S. 103, 114, 36 S.Ct. 278, 281, 60 L.Ed. 546; Burnet v. Harmel, 287 U.S. 103, 53 S.Ct. 74, 77 L.Ed. 199; Herring v. Commissioner, 293 U.S. 322, 324, 55 S.Ct. 179, 79 L.Ed. 389. Cf. Anderson v. Helvering, 310 U.S. 404, 407, 408, 60 S.Ct. 952—954, 84 L.Ed. 1277. Any deduction from this income for depletion, or course, may be allowed upon such terms as Congress may deem advisable. Helvering v. Bankline Oil Co., 303 U.S. 362, 366, 58 S.Ct. 616, 617, 82 L.Ed. 897; United States v. Ludey, 274 U.S. 295, 302, 47 S.Ct. 608, 610, 71 L.Ed. 1054. Depletion based on cost is like depreciation. Congress has allowed a recovery of the capital invested in a mine but, except in discovery of percentage depletion in special instances which are not here involved, see Section 114, allowed nothing beyond that investment. Sections 23(m) and (n), 113, 114, 49 Stat. 1648, 1660, 1682—1687, 26 U.S.C.A. Int.Rev.Code §§ 23(m, n), 113, 114. Deduction is allowed for the exhaustion of the property—the ore mass. Lynch v. Alworth-Stephens Co., 267 U.S. 364, 370, 45 S.Ct. 274, 275, 69 L.Ed. 660. It may be in step with extraction, where extraction and sale synchronize with payments for the ore or the deduction may be allowed against advance payments of royalties or bonus. The theory of depletion is the same in both cases. In either situation, the depletion deduction is allowed in the ore extracted or expected to be extracted. Regulations 45, Art. 23(m)-2 and -10(a) and (b). Thus the mine owner under Article 23(m)-10 is compensated for the use of his mineral reserves in the production of gross income.

By the 1919 Regulations, the plan of restoring the sum of depletion deductions to capital and carrying a corresponding amount to income in the year of the termination of a lease...