United States v. Hurst

• Decision Date: 29 October 1924
• Docket Number: No. 1363.,1363.
• Citation: 2 F.2d 73
• Parties: UNITED STATES v. HURST.
• Court: U.S. District Court — District of Wyoming

2 F.2d 73 (1924)

UNITED STATES v. HURST.

No. 1363.

District Court, D. Wyoming.

October 29, 1924.

Albert D. Walton, U. S. Dist. Atty., of Cheyenne, Wyo. (Nelson T. Hartson, Sol. of Internal Revenue, and Thomas H. Lewis, Jr., Sp. Atty. Bureau of Internal Revenue, both of Washington, D. C., on the brief), for the United States.

Arthur F. Friedman, of Denver, Colo., for defendant.

KENNEDY, District Judge.

This is a suit in which the United States seeks to recover income tax alleged to have accrued during the year 1917 and which remains unpaid. The petition is met by answer, which presents three separate defenses — the first being substantially a general denial; the second, a defense in law to the effect that, because of the undisputed circumstances under which the property which is sought to be taxed was secured, it is not taxable as income; and the third that, on account of the actions of the department in dealing with the taxpayer, no further or other tax than that already paid can be enforced. To each of the two affirmative defenses a demurrer has been interposed by the government, which demurrers have been argued and submitted, and in this situation the cause is now before the court.

The admitted facts, for the purpose of considering the demurrers, are substantially as follows: One Mary E. Hurst, the wife of the defendant, with certain other qualified persons, made mineral locations on government owned lands in what was afterward known as the Elk Basin oil field in this state during the year 1915. Thereafter the locators, without expense to themselves, secured the exploitation of their claims by third parties, reserving to themselves royalty rights. Oil was discovered during the same year in commercial quantities. In 1917 Mrs. Hurst sold and disposed of her interest in said claims for a consideration of $100,000. On August 17th of that year, Mrs. Hurst died, upon which her husband, the defendant here, took possession of all her property; no administration being had of her estate. The defendant filed an income tax return for Mrs. Hurst, covering that portion of the year 1917 before her death, in which apparently no portion of the $100,000 so received for sale of her mineral rights aforesaid was included. Thereafter, and in the year 1919, in consequence of some correspondence with the department, the defendant filed an amended return, in which he included as income substantially one-third of the amount received from such sale. Nothing further being heard from the department, Hurst proceeded to pay the debts of the deceased and to distribute the property. The department, after considerable delay, made demands upon the defendant for additional tax, based upon the entire amount of the proceeds received from the sale of Mrs. Hurst's mineral rights, which carried the matter into the department for a consideration of the legal principles involved, and upon which various hearing were had, finally resulting in a ruling of the department that Hurst was liable for a tax upon the full amount received upon the theory that it was income.

The government's claim of liability as to this defendant is based upon section 3467 of the United States Revised Statutes (Comp. St. § 6373), which reads as follows:

"Sec. 3467. Every executor, administrator, or assignee, or other person, who pays any debt due by the person or estate from whom or for which he acts, before he satisfies and pays the debts due to the United States from such person or estate, shall become answerable in his own person and estate for the debts so due to the United States, or for so much thereof as may remain due and unpaid."

The liability of the defendant as a proposition of law under this section was previously sustained by this court as against a demurrer to the petition. It is admitted by counsel in their arguments and briefs that the second defense contained in the answer and to which demurrer has been interposed, raises the question as to the nature of the property received by Mrs. Hurst through sale of her interest in the mineral claims, directed to the point as to whether or not the money received is taxable as income under the revenue laws, or is exempt from such taxation under that provision which exempts the value of property acquired by gift, bequest, devise, or descent. The government contends that the money received represented and was income, and therefore taxable, while the defendant contends that it represented the sale of property acquired by gift and therefore not taxable as income, except as to any increase in the sale price over its value when received.

The amended return of the defendant, including substantially one-third of the amount received upon the sale, was based upon the theory that between the date of the discovery and the date of the sale oil had risen in price from practically $1 a barrel to $1.50 a barrel, and that therefore in fairness to the government he should account for the income or profit from the property disposed of, acquired through gift. However, that particular phase of the case is not important in the consideration of the questions here involved.

This court keenly realizes the importance of the questions involved, and exceedingly regrets that the continued press of court litigation forbids the devotion of that time to its solution which it rightfully deserves, but must rest content in being able with reasonable expedition to send it on its way to a final solution in the courts of last resort. In beginning the consideration of the question presented, an examination of the mining statutes is first necessary. The following sections of the United States Revised Statutes appear to be the basis of the respective contentions:

"Sec. 2318. In all cases lands valuable for minerals shall be reserved from sale, except as otherwise expressly directed by law.

"Sec. 2319. All valuable mineral deposits in lands belonging to the United States, both surveyed and unsurveyed, are hereby declared to be free and open to exploration and purchase, and the lands in which they are found to occupation and purchase, by citizens of the United States and those who have declared their intention to become such, under regulations prescribed by law, and according to the local customs or rules of miners in the several mining districts, so far as the same are applicable and not inconsistent with the laws of the United States.

"Sec. 2320. * * * But no location of a mining claim shall be made until the discovery of the vein or lode within the limits of the claim located. * * *

"Sec. 2324 (as amended by Act Jan. 22, 1880). * * * On each claim located after the tenth day of May, eighteen hundred and seventy-two, and until a patent has been issued therefor, not less than one hundred dollars' worth of labor shall be performed or improvements made during each year. On all claims located prior to the tenth day of May, eighteen hundred and seventy-two, ten dollars' worth of labor shall be performed or improvements made by the tenth day of June, eighteen hundred and seventy-four, and each year thereafter, for each one hundred feet in length along the vein until a patent has been issued therefor; but where such claims are held in common, such expenditure may be made upon any one claim; and upon a failure to comply with these conditions, the claim or mine upon which such failure occurred shall be open to relocation in the same manner as if no location of the same had ever been made, provided that the original locators, their heirs, assigns, or legal representatives, have not resumed work upon the claim after failure and before such location. * * *

"Sec. 2329. Claims usually called `placers,' including all forms of deposit, excepting veins of quartz, or other rock in place, shall be subject to entry and patent, under like circumstances and conditions, and upon similar proceedings, as are provided for vein or lode claims; but where the lands have been previously surveyed by the United States, the entry in its exterior limits shall conform to the legal subdivisions of the public lands."

Comp. St. §§ 4613-4615, 4620, 4628.

Also Act Feb. 11, 1897, c. 216, 29 Stat. 526 (Comp. St. § 4635):

"That any person authorized to enter public lands under the mining laws of the United States may enter and obtain patent to lands containing petroleum or other mineral oils, and chiefly valuable therefor, under the provisions of the laws relating to placer mineral claims: Provided, that lands containing such petroleum or other mineral oils which have heretofore been filed upon, claimed, or improved as mineral, but not yet patented, may be held and patented under the provisions of this act the same as if such filing, claim, or improvement were subsequent to the date of the passage hereof."

The Revenue Act under which the tax is assessed is that of September 8, 1916, 39 Stat. 756, the pertinent provisions of which read as follows:

"Sec. 2. (a) That, subject only to such exemptions and deductions as are hereinafter allowed, the net income of a taxable person shall include gains, profits, and income derived from salaries, wages, or compensation for personal service of whatever kind and in whatever form paid, or from professions, vocations, businesses, trade, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in real or personal property, also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. * * *

"Sec. 4. The following income shall be exempt from the provisions of this title: * * * The value of property acquired by gift, bequest, devise, or descent (but the income from such property shall be included as income)."

Before beginning the consideration of these statutes, it may be said in passing that the department has had the questions involved here under consideration...