JE Riley Inv. Co. v. Commissioner of Internal Revenue

• Decision Date: 20 May 1940
• Docket Number: No. 9234.,9234.
• Citation: 110 F.2d 655
• Parties: J. E. RILEY INV. CO. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Ninth Circuit

110 F.2d 655 (1940)

J. E. RILEY INV. CO. v. COMMISSIONER OF INTERNAL REVENUE.

No. 9234.

Circuit Court of Appeals, Ninth Circuit.

March 16, 1940.

Writ of Certiorari Granted May 20, 1940.

Robert Ash, of Washington, D. C., for petitioner.

Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key and Ellis N. Slack, Sp. Assts. to the Atty. Gen., for respondent.

Before DENMAN, MATHEWS, and HEALY, Circuit Judges.

Writ of Certiorari Granted May 20, 1940. See 60 S.Ct. 1077, 84 L.Ed. ___.

HEALY, Circuit Judge.

The case is here on petition to review a decision of the Board of Tax Appeals. It involves the construction of a provision of § 114 (b) (4) of the Revenue Act of 1934, 26 U.S.C.A. Int.Rev.Acts.

That act (§ 23 (m), 26 U.S.C.A. Int.Rev. Acts, provides that in computing net income there shall be allowed as deductions in the case of mines and other natural deposits a reasonable allowance for depletion, according to the peculiar conditions in each case. Section 114 (b) (4) allows a depletion of 15% in the case of metal mines, subject to the condition that the taxpayer shall state in his first return under the act that he desires depletion computed on that basis. The statute is shown on the margin.¹

In its income tax return for 1934 petitioner, whose business is the mining of gold, made no statement of its election in respect of depletion allowance. The return was made out and filed in January, 1935. On March 3, 1936, petitioner filed an amended return claiming percentage depletion, and also claimed a refund.

Petitioner is a Nevada corporation with its principal office and place of business at Flat, Alaska. Flat is in a remote part of the territory, and conditions of travel are such that it takes weeks for mail originating at that place to reach Tacoma. The slowness of the winter service invariably resulted in current tax return forms reaching Flat too late for timely execution and filing. In order to avoid delinquency, it was the custom of petitioner's officers to use old return forms; consequently taxpayer's original return for 1934 was filed on a 1933 form which had been mailed it by the Collector at Tacoma.

When petitioner's return for 1934 was filled out its officers did not know of the statutory provision allowing percentage depletion, but did know that, unless the law had been changed, petitioner was not entitled to depletion, as it had no basis for cost depletion. The Collector, in sending the forms, had not advised petitioner with respect to statutory depletion. Petitioner first actually learned of the provision in August, 1935, when it was advised by a revenue agent that it was entitled to percentage depletion for both 1933 and 1934. The agent prepared reports to that effect, as a result of which a refund was paid for 1933, but not for 1934.² The Commissioner ruled that, as to the latter year, the taxpayer had failed to claim percentage depletion in its original return and hence was not entitled to claim it thereafter.

Had taxpayer's officers known of the 1934 statutory provision, they would have elected to take percentage depletion. As soon as they were advised that percentage depletion had been disallowed, they filed an amended return and a claim for refund as above stated. The taxpayer's gross receipts from gold mining for the year 1934 were $99,711.56 and it has paid a tax for that year in the amount of $4,684.00.

On petition for redetermination, the Board of Tax Appeals upheld the Commissioner's ruling denying percentage depletion.

Petitioner argues that amended returns, while not provided for by law, are recognized and have been uniformly construed as being amendments or supplements to the original return. Hence, it is said, the "first" return means an amended first return; so, an election made in an amended first return is an election made in a "first" return.

In the Fourth Circuit, in C. H. Mead Coal Co. v. Commissioner, 4 Cir., 106 F.2d 388, 390, the court reached a similar conclusion, holding that in using the words "first return" Congress intended to include a first return as properly amended. Any other construction, the court thought, would, in fairness to the taxpayer, be too narrow. Provided the amendment is timely, and is made in good faith in order to correct a mistake, a first return was held to be no less such because amended. By the phrase "timely amendment" we understand that the court meant an amended return made by the taxpayer, as in that case, "immediately upon learning of its mistake, and before the time for filing its return for the next succeeding year." The holding appears to confuse the statutory requirement with the supposed authority or duty of the Commissioner to relieve against mistakes.

The act applies only to taxable years beginning after December 31, 1933 (§ 1), 26 U.S.C.A. Int.Rev.Acts. Here the taxpayer reported its income on the basis of the calendar year, so that the first return filed by it under the act was the return for the calendar year 1934. By first return, we think, Congress had reference to the return contemplated by § 53 of the act, 26 U.S.C.A. Int.Rev.Acts, that is, to the return required to be filed on or before the 15th day of March following the close of the calendar year, or within such extended time, not exceeding six months, as has been granted by the Commissioner under § 53 (a) (2).

This interpretation is in harmony with Haggar Co. v. Helvering, 60 S.Ct. 337, 339, 84 L.Ed. ___ (Jan. 2, 1940). That case involved the construction of the phrase "first return" as used in the capital stock tax provision of the 1934 act. The court there held that an amended return, filed during the extended time allowed by the Commissioner for filing the first return under the act, was a timely return and should have been accepted. It pointed out that "it has long been the practice of the department, in the cases of other types of tax to accept an amended return, filed within the period allowed for filing returns, as the return of the taxpayer for the taxable year."

Had the taxpayer, in the case before us, made its election by amendment within the time allowed by the act for filing returns, or within an added period granted for filing its return, a substantial compliance with the requirements of the act would have resulted. It would seem, indeed, that the taxpayer may make a substituted return of that sort as a matter of right. But petitioner sought to make its election by amending long after the expiration of the statutory period, and it had obtained no extension.

The statute provides that the method of computation elected by the taxpayer, or the method of computing depletion without regard to percentage where the taxpayer indicates no election, shall be applied in the case of the property for all future years. If the view broadly stated by petitioner is correct, an ordinary amended return electing to take depletion allowance on a percentage basis may well throw into confusion the computation of the taxpayer's depletion for ensuing taxable years. However, petitioner suggests a narrower view, in line with Mead Coal Co. v. Commissioner, supra, that the amended return must perhaps be filed before the expiration of the time allowed for making a return for the ensuing year. But if it be assumed that Congress intended to permit an election by amendment after the lapse of the statutory time for making returns, it failed to provide any time limitation of the sort suggested. Not only is there no such limitation set out in the act, there is, so far as we are aware, no regulation or practice requiring that amended returns, where permitted, be filed "promptly", or within a "reasonable" time, or before the filing of the return for the next year.³

Should we adopt a time limitation of this sort, we must perforce embark on waters not charted by Congress or mapped by familiar bureau regulation — an excursion into the legislative domain not open to the courts. If by a first return Congress meant a return as it may be amended in line with the practice heretofore prevailing in cases of other types of tax, it would follow that where a taxpayer inadvertently omits to state his election in a return filed within the statutory period, he may, conformably to the intent of Congress, supply the omission at any time within the three-year period prescribed by § 322, 26 U.S.C. A. Int.Rev.Acts, for claiming refunds. This construction substantially nullifies other and mandatory provisions of the statute.

The situation is not the ordinary one of the use of an amended return...