New Creek Co. v. Lederer

• Decision Date: 08 February 1924
• Docket Number: 3014.
• Citation: 295 F. 433
• Parties: NEW CREEK CO. v. LEDERER, Collector of Internal Revenue.
• Court: U.S. Court of Appeals — Third Circuit

295 F. 433

NEW CREEK CO. v. LEDERER, Collector of Internal Revenue.

No. 3014.

United States Court of Appeals, Third Circuit.

February 8, 1924

James Wilson Bayard and Evans, Bayard & Frick, all of Philadelphia Pa., for plaintiff in error.

George W. Coles, U.S. Atty., of Philadelphia, Pa., and J. Paul McElree, Asst. U.S. Atty., of Westchester, Pa., and Preston Carter Alexander, of Washington, D.C., for defendant in error.

Before BUFFINGTON, WOOLLEY, and DAVIS, Circuit Judges.

WOOLLEY Circuit Judge.

The question in this case concerns the validity of rules and regulations prescribed by the Secretary of the Treasury for the enforcement of the income and excess profits tax provisions of the Revenue Act of September 8, 1916, amended by the Act of October 3, 1917 (Comp. St. 1918, Sec. 6336 3/8 et seq.) as they affect an allowance in a tax return for depletion of a mine where coal had been mined on royalties. The pertinent facts, submitted in an agreed statement, are briefly these:

In 1851 the plaintiff corporation purchased coal lands in what is now the State of West Virginia. Of these lands it owned, on March 1, 1913, several tracts underlaid with merchantable coal of an estimated load of 9,057,640.32 tons and of a value of $199,875.

During the year 1917 the plaintiff's mines were operated on royalties; the amount of coal mined was 93,515.18 tons and the amount of royalties received was $37,565.25. These royalties represented the exact market value in the mines of the coal raised and sold during that year. In making its income tax return for 1917 the plaintiff included in its gross income the entire amount of its coal royalties, but immediately deducted the whole of this sum as a depletion of its capital asset.

This return showed no excess profits tax to be due but showed to be due an income tax of $88.12. This the plaintiff paid. Thereafter, the Commissioner of Internal Revenue notified the plaintiff that it was not entitled to claim a credit for depletion to the full amount of its royalties, but was entitled to claim only a portion thereof reckoned on a per ton basis ascertained by dividing the sum representing the fair market value of the lands on March 1, 1913 ($199,875) by the total estimated number of tons of coal underlying the lands on that date (9,057,640.32 tons). This calculation gave a per ton unit of $.022,067, which, when multiplied by the 93,515.18 tons mined, showed a total mine depletion of $2,063.60 for the year. Based on this adjustment of the depletion allowance, the Commissioner assessed an additional income and excess profits tax of $5,952.87. The plaintiff paid this sum under protest and, after its claim for refund had been rejected, instituted this action to recover the same.

At the trial the parties took wholly opposite positions. The plaintiff corporation contended that the coal before it was mined was capital; that royalties for coal mined were capital converted into another form; and, representing the precise depletion of the mine, these royalties were not income and therefore were not subject to assessment for an income tax and that in consequence, it, the plaintiff, would not be liable for taxes under the act until its capital in coal reserves had been exhausted, and then, and not until then would the coal that remained and was thereafter mined be income. The defendant collector contended that royalties represented both capital and income and that the allowance for capital depletion which the statute authorized was to be determined by the value in the ground of each ton of coal on March 1, 1913, (reckoned as before stated) multiplied by the number of tons mined in the year for which the tax was payable. The District Court sustained the collector's position and, accordingly, entered judgment in his favor. 288 F. 99. The coal company sued out this writ of error.

The plaintiff stated the question involved in this case to be this:

'On what basis should depletion allowance for a mine be fixed with respect to ore mined in 1917 on royalty?'

Or, as again stated by the plaintiff:

'Whether under any statutory provision these royalties, which were in the nature of principal, became taxable as income and, if so to what extent?'

We think the true question is whether the rule prescribed by the Secretary of the Treasury, under authority of the statute, assured to the plaintiff the 'reasonable allowance for depletion' which the statute intended it shall have in making an income and excess profits tax return for coal mined on royalties? Our answer is based on the following reasoning:

It should first be noted that we are dealing with a revenue act-- the Revenue Act of 1916, now superseded by later acts. Under this act taxes were assessed on net income ascertained by deducting specified items from gross income. For purposes of taxation it has been held both in England and in this country that the product of a mine is a proper subject of taxation under income tax laws, notwithstanding the peculiarity that such a product is never income in the sense of increment and is always capital in the sense that it is something which is not produced but is always in being, and that its withdrawal and sale cause a corresponding depletion in the load and in the value of the mine. Keeping in view that we are dealing with a revenue act that called for a yearly tax on yearly income and embraced the product of mines as a subject of taxation, we start with the proposition which we think is no longer open to question, that the proceeds from the sale of mined coal is gross income subject to taxation. We then come to the proposition that the taxable had no inherent right to deduct therefrom the capital cost of the coal mined, either under the head of deterioration or depletion. See the principle in Stratton's Independence v. Howbert, 231 U.S. 399, 34 Sup.Ct. 136, 58 L.Ed. 285; VonBaumbach v. Sargent Land Co., 242...