United States v. Biwabik Mining Co
| Decision Date | 20 May 1918 |
| Docket Number | No. 594,594 |
| Parties | UNITED STATES v. BIWABIK MINING CO |
| Court | U.S. Supreme Court |
Mr. Solicitor General Davis, of Washington, D. C., for the United states.
Mr. A. C. Dustin, of Cleveland, Ohio, for respondent.
[Argument of Counsel from pages 116-118 intentionally omitted] Mr. Justice DAY delivered the opinion of the Court.
This case is here upon a writ of certiorari to the United States Circuit Court of Appeals for the Sixth Circuit. It was instituted by the United States in the District Court of the United States for the Northern District of Ohio to recover the sum of $2,653.72, being 1 per cent. upon $265,372.08, which, it was claimed, the mining company had wrongfully omitted from the return of its net income for the year 1910 under the Corporation Tax Act of 1909.
The case was tried upon an agreed statement of facts which, omitting unnecessary details, were epitomized by the District Court as follows:
'In the year 1898 the defendant, by assignment of a lease, acquired a leasehold estate in certain ore-producing properties in the state of Minnesota, from which it mined ore from that date to and including the year 1910. For the year 1910 the defendant made a return to the Collector of Internal Revenue of its gross income, and from this amount it deducted, 'to cover realization of unearned increment,' the sum of $265,372.08. The amount of this deduction was arrived at by multiplying the number of tons of ore mined during the year by 48 3/4 cents, which was the market value of the ore in place on the premises on the 1st day of January, 1909, as estimated by the defendant, this being the date upon which the returns for taxation were to commence. It is stipulated that this deduction was made in good faith upon the claim that it was 'a reasonable allowance for depreciation' of the property of the defendant for that year.
'In June, 1911, payment was made in accordance with this return, but the Treasury Department about the month of October, 1914, after investigating the books and records of the defendant, made the claim that because the defendant was not the owner in fee of the premises from which it was mining ore, but was lessee of the same and was paying a royalty to the fee owners, it was not entitled to deduct anything for depletion of the ore body on the premises. Thereupon the defendant was requested to amend its return for the year 1910 so as to include in its gross income the amount of said deduction, which it declined to do, and thereupon this suit was instituted to recover the tax upon the amount of this deduction, amounting to $2,653.72.
'Some time prior to the making of the return for the year 1910 the defendant estimated the tonnage and the market value of the ore in place upon the premises upon which it held its lease, which estimate gave to the ore in place a value of 48 3/4 cents per ton, exclusive of royalty.
'The rights of the defendant in the iron ore mined in the year 1910 were derived from the assignment to it of a written lease dated April 4, 1898, by the Biwabik Bessemer Company, lessor. By the terms of that lease the defendant acquired the right for the term of fifty years and three months from the 1st day of May, 1898, to explore for, mine out, and remove the merchantable shipping iron ore which might be found upon the lands described in the lease upon the payment of a royalty of 30 cents for each ton mined. The expression 'merchantable ore' is defined as including 'all ores which grade 55 per cent. and above in metallic iron regardless of other ingredients.'
'The lessor in the lease reserved a lien upon any ore mined and upon all improvements for any unpaid balance of royalty, and it was also provided in the lease that the lessee should have the right to terminate the lease on any 1st day of January during its term by giving ninety days' notice of the purpose and desire so to do.
'The defendant, at the time it acquired this lease, paid to the prior lessee the sum of $612,000, in addition to contracting to pay the 30 cents per ton royalty upon the ore mined, as has been stated.
'It is stipulated in the agreed statement of facts that the deposit of ore on the leased premises is of such character that its quality and quantity were capable of determination 'with extraordinary accuracy' by drilling and shafts, and that the defendant 'by drilling and by standard recognized methods' had calculated the tonnage remaining on the land on January 1, 1909, as 6,874,695 tons, all of which could be easily removed within the term of the lease.'
Upon these facts the District Court reached the con- clusion that the leases in question were not conveyances of ore in place, but were grants of the privilege of entering upon the premises and mining and removing the ore, and, consequently, that the deduction claimed as being one from capital investment could not be allowed. In reaching this conclusion the court cited the opinion of this court in Stratton's Independence, Ltd., v. Howbert, Collector, 231 U. S. 399, 34 Sup. Ct. 136, 58 L. Ed. 285, and the judgment of the Circuit Court of Appeals for the Eighth Circuit (211 Fed. 1023, 127 C. C. A. 667), affirming the judgment of the District Court (207 Fed. 419), which decision of the Circuit Court of Appeals was made after the return of the answer to the questions propounded by that court to this court in the Stratton's Independence Case.
Coming to the question as to what allowance should be made to the mining company by way of deduction from its income in making return the District Judge said:
'The defendant paid $612,000 for the lease under consideration and in addition assumed the payment of the royalties stipulated for therein. This may properly and justly be considered a payment in advance of an increased royalty on ore to be mined, and that is precisely the character which the defendant gave to the payment when dealing with it in its private accounts, in which the stipulation shows (Exhibit H) that it carried one account, entitled 'Rate of General Ledger or Capitalized Value .03885 per Ton,' and another account, entitled 'Rate of Increment Value, January 1, 1909, .44865 per Ton.' These two values added make the 48 3/4 cents per ton which the defendant deducted in making its return.
'Thus in its own bookkeeping the defendant gives its private opinion as to the requisite reimbursement necessary to maintain...
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