Lynch v. Alworth-Stephens Co.

• Decision Date: 12 November 1923
• Docket Number: 6219.
• Citation: 294 F. 190
• Parties: LYNCH v. ALWORTH-STEPHENS CO. [1]
• Court: U.S. Court of Appeals — Eighth Circuit

294 F. 190

LYNCH v. ALWORTH-STEPHENS CO. ^[1]

No. 6219.

United States Court of Appeals, Eighth Circuit.

November 12, 1923

A Calder Mackay, Sp. Atty., Bureau of Internal Revenue, of Washington, D.C. (lafayette French, Jr., U.S. Atty., of St Paul, Minn., and Nelson T. Hartson, Solicitor of Internal Revenue, of Washington, D.C., on the brief), for plaintiff in error.

W. D Bailey, of Duluth, Minn. (J. L. Washburn and Oscar Mitchell both of Duluth, Minn., on the brief), for defendant in error.

Before SANBORN and LEWIS, Circuit Judges, and McGEE, District Judge.

SANBORN Circuit Judge.

This is an action at law. Alworth-Stephens Company, a corporation organized in 1907, hereafter called the plaintiff, originally brought this suit against E. J. Lynch, Collector of Internal Revenue of the United States, for whom after his death his executrix was substituted as defendant, to recover $17,128.44, which, it alleged, the collector unlawfully exacted from it, and it paid under protest, as a part of its net income and excess profits taxes for the year 1917. The parties set forth their respective claims in proper pleadings, stipulated that the case should be tried by the court; it was so tried; the court made a special finding of the facts and rendered a judgment for the plaintiff, which the defendant challenges by this writ of error.

The finding of facts and the computations of the court below, which it set forth with commendable clearness, accuracy, and patience, are not challenged in this court. From those facts and computations that court deduced the conclusion and adjudged that, in ascertaining its net taxable income and excess profits taxes for the year 1917, the plaintiff was lawfully entitled to deduct from the gross amount of its income for that year an allowance of $55,726.80 (representing an overpayment of tax in the sum of $17,128.44) on account of the depletion of the market value, as of March 1, 1913, of its property rights and interests in the Perkins mine and the Hudson mine, caused by the extraction and disposition of ores from those mines during the year 1917.

The plaintiff had a lease of the Perkins mine for 50 years, made in 1908, under which it was under an obligation to pay to the lessor, the owner of the mine, 30 cents for each ton of ore taken from the mine, and it had subleased the mine in 1908 to one Lutes, who had agreed to pay 75 cents per ton for every ton taken from the mine, and the mine was operated in 1917 by an assignee of Lutes under the lease to him, so that the plaintiff received 45 cents per ton of the ore extracted during that year. It had a lease for 50 years of the Hudson mine, made by the fee owners thereof in 1909, under which it was required to pay to the lessors 30 cents per ton for the ore taken from the mine, and in 1909 it had subleased this mine to the Syracuse Mining Company, which had agreed by the terms of the lease to pay to it 60 cents per ton for every ton taken from the mine and this mine was operated under this lease in 1917.

On March 1, 1913, and at all times thereafter, the plaintiff was the owner of the property interests and rights in these mines evidenced by these leases. On March 1, 1913, these mines had been stripped of their overburden of earth, so that the ore therein was ready for mining by the open pit method, and the mines had been thoroughly explored, so that the tonnage of ore in them was definitely known, and it was also known that the ore therein would be mined and the mines would be completely exhausted, as they subsequently were, within seven years from March 1, 1913. On March 1, 1913, and ever since that date, including the year 1917, the fair market value of the ore in each of these mines and the fair market value in each of the mines of every ton of the products thereof was at least 75 cents per ton. The aggregate amount of all the allowances made on account of the depletion of the market value of its property interests in the two mines to the plaintiff, including the allowance for 1917 made by the court below in this case, was less than the fair market value as of March 1, 1913, of the plaintiff's property interests in the two mines, and the allowances for the year 1917 permitted by the court below in this case do not exceed the fair market value in the mine of the product thereof which was mined, sold, and paid for during the year 1917. This statement is also true of each of the mines and the ore therein taken by itself.

During the year 1917 the plaintiff had no property other than its property interests in these two mines under the leases described, and it had no other income than that derived from these mines under these leases. So it was that the market value of the ore in these mines on and at all times after March 1, 1913, was more than 75 cents per ton. The fee owners of the mines, the lessors of the plaintiff, had the first and superior property right and interest therein to the extent, but not exceeding, 30 cents per ton of the ore as extracted. The plaintiff had the second property right and interest, superior to that of its lessees to the extent, but not exceeding, 45 cents per ton of the ore as extracted from the Perkins mine, and to the extent of, but not exceeding, 30 cents per ton of the ore as extracted from the Hudson mine. The lessees of the plaintiff had the third property right and interest of the ore in these mines as extracted, subject to the property rights of the original lessors and of the plaintiff. The property rights of these lessees were as absolute, as indefeasible, as enforceable at law and in equity, and more valuable than the property rights and interests of the owners of the titles to the mines, of the lessors of the plaintiff, which interests were limited by the terms of the leases.

The depletion of the market value of the mines and of the ore in the mines by the extraction and sale of the ore therein unavoidably depleted the market value of the property rights and interests in the mines of the respective parties interested in them and in the ore therein in proportion to their respective rights and interests. Every ton of ore extracted and sold necessarily depleted at the time of such extraction and sale the property right of the original lessors in the Perkins mine 30 cents, depleted the property rights of the plaintiff therein 45 cents, and depleted the property rights of the plaintiff's lessees by the differences between 75 cents and the value in the mine of the ton so extracted and sold. It was in view of these facts that the court below found that the market value as of March 1, 1913, of the plaintiff's property rights and interests in these mines, was depleted to the amount of $55,726.80 (representing an overpayment of tax in the sum of $17,128.44) by the extraction and sale of the ore from which the plaintiff derived its income in the year 1917.

This conclusion of the court below is assigned as error, and the provisions of the statutes which condition the decision of the issue thus presented are found in the Act of September 8, 1916, 39 Stat. 756, 758, 759, which prescribe the deductions permitted from the gross amount of the plaintiff's income for the year 1917 in order to ascertain its net taxable income for that year and those provisions are these:

'For the purpose of ascertaining the gain derived from the sale or other disposition of property, real, personal, or mixed, acquired before March 1, 1913, the fair market price or value of such property as of March 1, 1913, shall be the basis for determining the amount of such gain derived. ' Section 2(c), being Comp. St. Sec. 6336b; section 10, 39 Stat. 766.

'Sec. 10. That there shall be levied, assessed, collected, and paid annually upon the total net income received in the preceding calendar year from all sources by every corporation, joint-stock company or association, or insurance company, organized in the United States, no matter how created or organized but not including partnerships, a tax of two per centum upon such income. * * * ' 39 Stat. 765 (Comp. St. Sec. 6336j).

'Sec. 12 (a). In the case of a corporation, joint-stock company or association, or insurance company, organized in the United States, such net income shall be ascertained by deducting from the gross amount of its income received within the year from all sources--

'First. All the ordinary and necessary expenses paid within the year in the maintenance and operation of its business and properties. * * *

'Second. All losses actually sustained and charged off within the year and not compensated by insurance or otherwise, including a reasonable allowance for the exhaustion, wear and tear of property arising out of its use or employment in the business or trade; (a) in the case of oil and gas wells a reasonable allowance for actual reduction in flow and production to be ascertained not by the flush flow, but by the settled production or regular flow; (b) in the case of mines a reasonable allowance for depletion thereof not to exceed the market value in the mine of the product thereof which has been mined and sold during the year for which the return and computation are made, such reasonable allowance to be made in the case of both (a) and (b) under rules and regulations to be prescribed by the Secretary of the Treasury: Provided, that when the allowance authorized in (a) and (b) shall equal the capital originally invested, or in case of purchase made prior to March 1st, 1913, the fair market value as of that date, no further allowance shall be made.'

Counsel for the defendant concede that an allowance to the original lessors, the owners of the fee title to the mines, on account of the depletion of the market value as of March 1, 1913, of their property rights and interests...