Lynch v. Co

• Decision Date: 02 March 1925
• Docket Number: ALWORTH-STEPHENS,No. 273,273
• Parties: LYNCH v. CO
• Court: U.S. Supreme Court

267 U.S. 364

45 S.Ct. 274

69 L.Ed. 660

LYNCH

v ALWORTH-STEPHENS CO.

No. 273.

Argued Jan. 7 and 8, 1925.

Decided March 2, 1925.

Messrs. James M. Beck, Sol. Gen., of Washington, D. C., Merrill E. Otis, of Indianapolis, Ind., and the Attorney General, for petitioner.

Messrs. J. L. Washburn, William D. Bailey, and Oscar Mitchell, all of Duluth, Minn. (Messrs. Horace Andrews and William P. Belden, both of Cleveland, Ohio, of counsel), for respondent.

Mr. Justice SUTHERLAND delivered the opinion of the Court.

The federal income tax return made by respondent (a corporation organized in the United States) for the year 1917 showed the sum of $10,253.21 due the government for income and excess war profits taxes for that year, and this amount was paid. Thereafter the Commissioner of Internal Revenue assessed respondent with an additional tax of $17,128.44, which respondent was forced to pay, and did pay under protest, and to recover which this action was brought against E. J. Lynch, a collector of internal revenue, to whom the payment had been made. Lynch subsequently died, and his executrix was substituted as defendant. The federal District Court for the District of Minnesota, where the action was brought, rendered judgment in favor of respondent for the amount. 278 F. 959. The Circuit Court of Appeals affirmed the judgment (294 F. 190), and the case is here upon certiorari (264 U. S. 577, 44 S. Ct. 334, 68 L. Ed. 858).

The facts from which the controversy arose are not in dispute, and, for present purposes, may be shortly stated. Prior to March 1, 1913, respondent had leases upon two definitely described tracts of land in Minnesota, containing deposits of iron ore, known as the Perkins mine and the Hudson mine. The leases, unless sooner terminated by the lessee in the manner therein provided, ran for a period of 50 years, and obliged respondent to mine and remove at least 50,000 tons of iron ore annually from the Perkins and 25,000 tons annually from the Hudson, and to pay the lessor, owner of the fee, a royalty of 30 cents per ton upon each ton of ore extracted. Respondent subleased the lands upon terms not necessary to be stated, further than that the sublessee of the Perkins was to pay respondent a royalty of 75 cents per ton and the sublessee of the Hudson a royalty of 60 cents per ton, or 45 cents and 30 cents, respectively, per ton more than was made payable by respondent to the lessor owner.

Before March 1, 1913, both tracts of land had been fully explored and the deposits of ore therein developed to such an extent that the entire amount of tonnage was known with substantial accuracy, and the properties were demonstrated to be of great value. On that date it was known that these ore bodies would be entirely worked out and the mines exhausted within seven years, and this in fact happened. The market value of the ore in the mines during that entire time exceeded 75 cents per ton, and it sufficiently appears that during such time respondent and its sublessees were in possession of the lands, engaged in mining and removing the ore therefrom. Without repeating the formula followed in arriving at the result, it is enough to say that the trial court found that, under the leases, the respondent had a property interest in these ore bodies, the fair market value of which, as of March 1, 1913, was 71.9 per cent. of the total royalties which would be received under the subleases, and such royalties constituted the sole source of respondent's income. Thereupon the lower courts held that respondent was entitled to deduct from its gross income for 1917 a sum equal to 71.9 per cent. thereof for depletion, and that only the balance remaining was subject to income and excess profits taxes. Such taxes, properly computed, amounted to the sum returned and originally paid by respondent, and no more.

The applicable law is found in sections 2, 10 and 12(a) of the Act of September 8, 1916, c. 463, 39 Stat. 756, 757, 758, 765, 767. Section 10 imposes a tax of two per centum upon the total annual net income received from all sources by every corporation, etc., organized in the United States. Section 12(a)¹ provides that such net income shall be ascertained by deducting from the gross amount of the income, among other things, 'a reasonable allowance for the exhaustion * * * of property arising out of its use; * * * (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. * * *' Section 2 contains the following provision (page 758):

'(c) For the purpose of ascertaining the gain derived from the sale or other disposition of property, real, personal, or mixed, acquired before March first, nineteen hundred and thirteen the fair market price or value of such property as of March first, nineteen hundred and thirteen, shall be the basis for determining the amount of such gain derived.'

Upon the foregoing facts and under these statutory provisions, the question presented for consideration is whether the relation of respondent to the mines which were the source of its income, was such that it was entitled to deduct from the gross amount of such income a reasonable amount for exhaustion or depletion. Upon the part of the petitioner the contention is that the leases do not convey to the lessee the ore bodies, but are contracts of rental conferring only the right to use and occupy the premises and mine the ore, which, so long as it remains in the ground, is the property of the fee owner. It is therefore insisted that by the extraction of the ore, only the property of the fee owner is depleted and such owner alone is entitled to an allowance therefor. On the other hand, respondent contends that under the leases the lessee, as well as the lessor, owns a valuable property interest in the mines and by the terms of the statute each is entitled to deduct from gross income a reasonable allowance for depletion, the lessee for exhaustion of the leasehold interest and the lessor for exhaustion of the fee interest as lessened by the interest of the lessee, such deduction to be allowed according to the value of the interest of each in the property, the entire allowance, however, not to exceed the total market value in the mine of the product thereof mined and sold during the taxable year.

It is, of course, true that the leases here under review did not convey title to the unextracted ore deposits (United States v. Biwabik Mining Co., 247 U. S. 116, 123, 38 S. Ct. 462, 62 L. Ed. 1017); but it is equally true that such leases, conferring upon the lessee the exclusive possession of the deposits and the valuable right of removing and reducing the ore to ownership, created a very real and substantial interest therein. See Hyatt v. Vincennes Bank, 113 U. S. 408, 416, 5 S. Ct. 573, 28 L. Ed. 1009; Ewert v. Robinson, 289 F. 740, 746-750. And there can be no doubt that such an interest is property. Hamilton v. Rathbone, 175 U. S. 414, 421, 20 S. Ct. 155, 44 L. Ed. 219; Bryan v. Kennett, 113 U. S. 179, 192, 5 S. Ct. 407, 28 L. Ed. 908.

The general provision in section 12(a), Second, is that the deduction from gross income shall include a reasonable allowance for the 'exhaustion * * * of property.' There is nothing to suggest that the word 'property' is used in any restricted sense. In the case of mines, a specific kind of property, the...