Estate of Robinson v. COMMISSIONER OF INTERNAL REVENUE, Docket No. 102869
| Citation | 46 BTA 943 |
| Decision Date | 14 April 1942 |
| Docket Number | Docket No. 102869,102870,106705.,102871 |
| Parties | ESTATE OF CHARLES H. ROBINSON, NORTHWESTERN NATIONAL BANK AND TRUST COMPANY OF MINNEAPOLIS, JESSIE P. ROBINSON AND CHARLES J. ROBINSON, CO-EXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. BESSIE P. DOUGLAS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. ESTATE OF ADELINE R. MORSE, DECEASED, JOHN S. DALRYMPLE, EXECUTOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. BERNICE B. DALRYMPLE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Kimball B. DeVoy, Esq., for the petitioners.
S. U. Hiken, Esq., for the respondent.
The Commissioner determined deficiencies in income tax as follows:
---------------------------------------------------------------------------------
| Docket No. | Year | Deficiency
---------------------------------------------|------------|---------|------------
Estate of Charles H. Robinson ______________ | 102869 | 1937 | $1,532.38
Bessie P. Douglas __________________________ | 102870 | 1937 | 30,024.60
| | | 1937 | 4,426.63
Estate of Adeline R. Morse _________________ | 102871 | The Commissioner also determined a deficiency of $5,412.47 in the income tax of Irene B. Robinson Cirkler for the period January 1 to October 20, 1937, the date of her death, and proposed to assess said amount plus interest against Bernice B. Dalrymple, petitioner in Docket No. 106705, as a transferee of assets of the estate of Irene B. Robinson Cirkler, deceased.
The issues presented by the pleadings are (1) whether the owners of an iron ore property are entitled to a deduction for depletion in 1937 with respect to minimum royalties received in that year, the lease under which the royalties were paid having been terminated in that year without any ore having been removed from the property during the life of the lease, (2) whether in determining taxable income for 1937 there is to be included the amounts of the depletion deductions taken by said owners in prior years in respect to the above lease, and, if said amounts of depletion are to be included in taxable income for 1937, whether they are first to be reduced by the portions thereof as to which no tax benefit was obtained in the years in which deducted, and (3) in the case of the estate of Adeline R. Morse, deceased, whether there is to be allowed a deduction for depletion taken in 1938 with respect to royalties received in that year from the above mentioned lease. The petitioners have conceded the correctness of respondent's disallowance of the deductions involved in issues (1) and (3), thus leaving for determination only the issue presented in (2).
With the exception of the facts relating to the liability of Bernice B. Dalrymple as transferee, all of which were alleged and admitted in the pleadings, the proceedings were submitted on stipulation of facts, which we adopt herein as part of our findings of fact. Such of the stipulated facts and of those shown by the pleadings as we deem necessary for a discussion of the issue here involved are set out below.
The income tax returns of the estate of Charles H. Robinson, Bessie P. Douglas, and Irene B. Robinson Cirkler for the year 1937 or the period here involved and the returns for 1937 and 1938 of Adeline R. Morse were filed with the collector of internal revenue for the district of Minnesota.
On July 1, 1929, as well as prior thereto, the four petitioners or their predecessors in title were owners of an iron mine situated in the State of Minnesota, known as the Pettit Mine, from which some iron ore had been removed. Bessie P. Douglas owned an undivided one-half interest in the mine and each of the others owned an undivided one-sixth interest.
On July 1, 1929, the four owners leased the mine to the Republic Steel Corporation for a term of 30 years commencing on that date. The lease provided that minimum royalties should be paid annually whether any ore was extracted during the year or not. Minimum royalties paid in advance of extraction of ore were to be applied on ore later mined and shipped. The lease also provided for its cancellation by the lessee, after a specified period, upon three months written notice to the lessors. As of July 1, 1937, the lessee, pursuant to the terms thereof, canceled and terminated the lease without having removed any ore from the mine during the existence of the lease.
From the date of the execution of the lease until its termination the lessee paid the agreed advance royalties to the lessors or their respective successors. Said lessors or successors in filing their income tax returns, which were prepared on the cash basis, reported in their gross incomes for the respective years the royalties received in such years and took deductions for depletion with respect to such royalties. The depletion deductions thus taken were computed on the cost basis and were allowed by the respondent.
In determining the deficiencies herein involved for the year 1937 the respondent, pursuant to the provisions of paragraph (c) of article 23 (m)-10 of Regulations 94, relating to the Revenue Act of 1936, included the following indicated amounts in the taxable income of the respective taxpayers:
Estate of Charles H. Robinson ______________________ $9,829.14
Bessie P. Douglas __________________________________ 53,299.03
Adeline R. Morse ___________________________________ 18,180.26
Irene B. Robinson Cirkler __________________________ 18,180.26
The foregoing amounts represent the total of the depletion deductions claimed by and allowed to said taxpayers for the years prior to and including 1936 with respect to the minimum royalties received by them from the lease on the Pettit Mine.
The petitioners contend that the respondent's action was erroneous and that in the redetermination of their respective tax liabilities for 1937 there should be eliminated from income the amounts included therein by the respondent on account of depletion deductions taken in prior years. The respondent maintains that his action was correct and proper.
Regulations 94 provides 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 royalties 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.
In support of their contention the petitioners urge that the application of paragraph (c) of article 23(m)-10, supra, to their cases imposes upon them a severe penalty without justification. Taking the case of Bessie P. Douglas as illustrative, they state that by taking depletion deductions totaling $53,299.03 over the eight-year period, 1929 through 1936, she reduced her total income tax liability for that period by $6,923.51; that by including said $53,299.03 in income for 1937 her tax liability for that year is $26,550.65 in excess of what it was without such inclusion or approximately $20,000 more than the reduction effected by reason of the depletion deductions taken in prior years. They insist that such a result is violative of the provisions of section 23 (m) of the Revenue Act of 1936 and similar sections of prior acts allowing deduction of "a reasonable allowance" for depletion since in reality it works a denial to the taxpayers of such allowance. They contend that we should declare paragraph (c) of article 23 (m)-10, as applied to these cases, to be invalid and unauthorized by the act. As alternative procedures to that contained in said paragraph (c), the petitioners suggest the following, both of which it is claimed would protect the collection of taxes and not unjustly burden the taxpayers: (1) Permit matters to stand as they were at the termination of the lease, thereby leaving the lowered cost as the taxpayers' basis for depletion with respect to future leases or production, or (2) provide that as a condition precedent to the allowance in any year of a depletion deduction with respect to royalties received prior to the extraction of mineral, the taxpayer be required to waive the period of limitations for such year and that when the lease is terminated without any extraction of mineral the taxpayers' tax liability be redetermined for the years in which depletion deductions were taken by disallowing such deductions and recomputing the tax liability on the basis of the tax rates in effect for the respective years.
As was pointed out in Grace M. Barnett, 39 B. T. A. 864, arising under the...
To continue reading
Request your trial