Fred Von Baumbach v. Sargent Land Company No 286 Fred Von Baumbach v. Sutton Land Company No 287 Fred Von Baumbach v. Kearsarge Land Company No 288

• Decision Date: 15 January 1917
• Docket Number: 287,Nos. 286,288,s. 286
• Citation: 61 L.Ed. 460,37 S.Ct. 201,242 U.S. 503
• Parties: FRED VON BAUMBACH, Collector of Internal Revenue, Petitioner, v. SARGENT LAND COMPANY. NO 286. FRED VON BAUMBACH, Collector of Internal Revenue, Petitioner, v. SUTTON LAND COMPANY. NO 287. FRED VON BAUMBACH, Collector of Internal Revenue, Petitioner, v. KEARSARGE LAND COMPANY. NO 288
• Court: U.S. Supreme Court

242 U.S. 503

37 S.Ct. 201

61 L.Ed. 460

FRED VON BAUMBACH, Collector of Internal Revenue, Petitioner,

v SARGENT LAND COMPANY.

NO 286.

FRED VON BAUMBACH, Collector of Internal

Revenue, Petitioner,

v. SUTTON LAND COMPANY.

NO 287.

FRED VON BAUMBACH, Collector of Internal

Revenue, Petitioner,

v. KEARSARGE LAND COMPANY.

NO 288.

Nos. 286, 287, 288.

Argued December 13 and 14, 1916.

Decided January 15, 1917.

Assistant Attorney General Wallace for petitioner.

[Argument of Counsel from pages 504-506 intentionally omitted] Messrs. John R. Van Derlip, Burt F. Lum, and Kenneth Taylor for respondents.

[Argument of Counsel from pages 507-511 intentionally omitted] Mr. Justice Day delivered the opinion of the court:

These three cases were argued and submitted together and involve practically the same facts. Suits were brought by the corporations named in the United States district court for the district of Minnesota against the collector of internal revenue, to recover certain taxes, paid under protest, assessed under the Corporation Tax Law of 1909 (36 Stat. at L. 11, 112, chap. 6), for the years 1909, 1910, and 1911. The judgments in the district court were for the respondents (207 Fed. 423), which judgments were affirmed in the circuit court of appeals (134 C. C. A. 649, 219 Fed. 31).

In 1890, John S. Pillsbury, George A. Pillsbury, and Charles A. Pillsbury, doing business together as John S. Pillsbury & Company, were the owners of large tracts of lands in northern Minnesota, which had been acquired for the timber and from which the timber had been cut, being valuable after such severance of the timber for the mineral deposits contained therein. In the year named, the Pillsburys entered into an arrangement with John M. Longyear and Russell M. Bennett, authorizing the latter two to explore the lands for iron deposits. In 1892, Longyear and Bennett having discovered valuable deposits of iron ore, a half interest in something over 10,000 acres of the lands was conveyed to them, the lands thereafter being owned by the Pillsburys, John, George, and Charles, each an undivided sixth, and John M. Longyear and Russell M. Bennett each an undivided fourth. In the year 1901, the Pillsburys having died, these corporations were formed under the laws of Minnesota. In 1906, the ownership of these leased lands was vested in the three corporations named as respondents in the proceedings. As originally organized, the nature of the business was stated to be 'the buying, owning, exploring, and developing, leasing, improving, selling, and dealing in lands, tenements, and hereditaments, and the doing of all things incidental to the things above specified.' In December, 1909, the articles of incorporation were amended to read as follows: 'The general purpose of the corporation is to unite in one ownership the undivided, fractional interests of its various stockholders in lands, tenements, and hereditaments, and to own such property, and, for the convenience of its stockholders, to receive and distribute to them the proceeds of any disposition of such property, at such times, in such amounts, and in such manner as the board of directors may determine.'

All of the mining leases hereinafter mentioned, with the exception of a contract with the Van Buren Mining Company, were executed before the organization of the corporations. Each of these instruments provided that the owners of the property demised to the lessees, exclusively, all the lands covered by the descriptions, for the purpose of exploring for, mining and removing, the merchantable iron ore which might be found therein for and during the period named, usually fifty years. The lessees were given exclusive right to occupy and control the demised premises and to erect all necessary buildings, structures, and improvements thereon. Right was reserved to the lessors to enter for the purpose of measuring the amount of ore mined and removed and making observations of the operations in the mines. The lessees agreed to pay, in most cases, 25 cents per ton for all ore mined and removed, and to make such payments monthly for ore mined and shipped during the preceding month. The lessees agreed to mine and ship a specified quantity of ore in each year, and, in default of this, to pay the lessors for the minimum amount specified, and take credit therefor and apply such sums upon ore mined and shipped thereafter in excess of such minimum. The lessees were to pay the taxes and to keep the property free from encumbrances and liens. Right was reserved to terminate the contract upon the failure of the lessees to comply with the terms thereof.

The form of the leases is shown in exhibits 15 and 16, which were not in the printed record, owing to their length, but copies of which, pursuant to stipulation, have been sent to this court. An examination of exhibit 16 shows that the lessees had the right to terminate and surrender the lease by giving the lessors, or those having their estate in the premises, sixty days' written notice, and executing sufficient conveyances releasing all interest and right of the lessees in the premises with any improvements thereon, and surrendering the same in good order and condition, etc., and that thereupon all liability of the lessees to taxes subsequently assessed on the demised premises or for rent thereof thereafter to accrue, or royalty on ores therefrom, except on account of ores removed, should cease and determine; the lessees to be liable for all ores removed from the premises not theretofore paid for, and to pay for the premises rent or royalty for the year in which termination should be made, or the portion thereof which should have expired, at the rate of $12,500 per annum.

Since their organization the corporations have disposed of certain lands and have also disposed of the stumpage on some timber lands. Certain parcels were rented and leased, and a village was allowed to use part of the land for schoolhouse purposes, as well as another part for a public park.

To insure the proper carrying on of the mining operations, the companies employed another corporation, engaged in engineering and inspection of ore properties, to provide supervision and inspection of the work upon the respondents' properties, for which the inspecting company was paid from month to month, as statements were rendered.

The companies were assessed upon their gross income being the entire receipts of the companies from royalties on the leases collected in the years 1909, 1910, and 1911, and some sums received from the sales of lots, lands, and stumpage, from which expenses and taxes were deducted, but no deduction was made upon account of the depletion of the ore in the properties, or on account of such sales.

The brief for the respondents states that these cases present for consideration four questions, which are:

'1. Are the respondents corporations organized for profit?

'2. Were the respondents carrying on or doing business during the years 1909, 1910, 1911?

'3. Were moneys received by the respondents during those years in payment for iron ore, under the contracts covering their mineral lands, gross income, or did they represent, in whole or in part, the conversion of the investment of the corporations from ore into money?

'4. It such moneys were gross income, are the respondents entitled to make any deduction therefrom on account of the depletion of their capital investment?'

As to the first question, whether these corporations were organized for profit, there can be no difficulty. They certainly do not come within the exceptional character of charitable or eleemosynary organizations excepted from the operation of the act. We need not dwell upon the obvious purpose of these corporations, organized under the provisions of the Minnesota statute concerning companies organized for profit, to pursue gain and to profit because of their operations.

As to the second question: Were the respondents carrying on business, within the meaning of the Corporation Tax Act? This question was dealt with by this court in the first of the Corporation Tax Cases, Flint v. Stone Tracy Co. 220 U. S. 107, 55 L. ed. 389, 31 Sup. Ct. Rep. 342, Ann. Cas. 1912B, 1312. As the tax was there held to be assessed upon the privilege of doing business in a corporate capacity, it became necessary to inquire what it was to do business, and this court adopted with approval the definition, judicially approved in other cases, which included within the comprehensive term 'business' 'that which occupies the time, attention, and labor of men for the purpose of a livelihood or profit.'

In that case a number of realty and mining companies were dealt with, and the Park Realty Company, organized to deal in real estate, and engaged at the time in the management and leasing of a certain hotel, was held to be engaged in business. It was also held that the Clark Iron Company, organized under the laws of Minnesota, and owning and leasing ore lands for the purpose of carrying on mining operations, and receiving a royalty depending upon the quantity of ore mined, was engaged in business.

At the same time, and decided with the main corporation tax case, this court held, in the case of Zonne v. Minneapolis Syndicate, 220 U. S. 187, 55 L. ed. 428, 31 Sup. Ct. Rep. 361, that a corporation which owned a piece of real estate which had been leased for one hundred and thirty years, at an annual rental of $61,000, and which had amended its articles of incorporation so as to limit its purposes to holding the title to the property mentioned, and, for the convenience of its stockholders, to receiving and distributing from time to time the rentals that accrued under the lease and the proceeds of any disposition of the land, was not engaged in doing business within the meaning of the act, by reason of the fact that the corporation had practically gone out of business and had disqualified itself from any activity in respect thereto.

The...