Opinion
No. 41844.
June 1, 1936.
Howe P. Cochran, of New York City (C. Leo De Orsey, of Washington, D.C., on the briefs), for plaintiff.
George W. Billings, of Washington, D.C., and Robert H. Jackson, Asst. Atty. Gen., for the United States.
Before BOOTH, Chief Justice, and GREEN, LITTLETON, WILLIAMS, and WHALEY, Judges.
Upon facts which are not in dispute, the question presented in this case is whether, in determining plaintiff's income and profits tax liability for 1920, the deduction allowable for depletion of its mining properties is to be computed on the cost of such property or on their March 1, 1913, value, where the former exceeds the latter. Plaintiff acquired certain coal properties at a cost which was in excess of their value on March 1, 1913. In accordance with the statute and regulations (section 234(a)(9) of the Revenue Acts of 1918 and 1921 [ 40 Stat. 1077, 42 Stat. 254] and articles 201 and 202 of Regulations 45 and 62), the Commissioner computed a depletion allowance of $30,994.62, based upon the March 1, 1913, value, whereas, if he had used cost, as contended for by plaintiff, the allowance would have been $75,730.19. The governing statute referred to provides, in so far as here material:
"(a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions: * * *
"(9) In the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case, based upon cost including cost of development not otherwise deducted: Provided, That in the case of such properties acquired prior to March 1, 1913, the fair market value of the property (or the taxpayer's interest therein) on that date shall be taken in lieu of cost up to that date."
The regulations are in conformity with the statute, and plaintiff agrees that the allowance was made by the Commissioner in accordance therewith. What the plaintiff urges is that Congress is without power to base a deduction for depletion on the March 1, 1913, value of mining properties when such value is less than cost, for the reason that such action would result in a tax on capital; that is, would not permit deductions sufficient in amount to return its capital to it tax free. That proposition is fully answered by the principle, now well established, that deductions from gross income are creatures of the statute which may not be taken as a matter of right but wholly because all deductions are matters of legislative grace and that this rule applies to a deduction for exhaustion of wasting assets, depletion, or depreciation, even though the amount as allowed may not be sufficient to return to the taxpayer its capital tax free. Stanton v. Baltic Mining Co., 240 U.S. 103, 36 S.Ct. 278, 60 L.Ed. 546; Von Baumbach v. Sargent Land Co., 242 U.S. 503, 37 S.Ct. 201, 61 L.Ed. 460; United States v. Biwabik Mining Co., 247 U.S. 116, 38 S.Ct. 462, 62 L.Ed. 1017; and Burnet v. Thompson Oil Gas Co., 283 U.S. 301, 51 S.Ct. 418, 75 L.Ed. 1049. These decisions definitely establish that, when deductions are allowed, capital need not be preserved intact or need there be any segregation into capital and income of what comes to a taxpayer in the form of gross income.
As shown in the Thompson Case, supra, Congress may allow a deduction for depletion which differs widely — whether more or less — from the depletion sustained as illustrated by the deduction for depreciation provided by the Revenue Act of 1913, section 2G (b), 38 Stat. 173, where the allowance was "5 per centum of the gross value at the mine of the output for the year for which the computation is made," and that without regard to the fact that it often did not "allow enough to return the capital on exhaustion of the reserve."
Plaintiff relies on curtain decisions (Goodrich v. Edwards, 255 U.S. 527, 41 S.Ct. 390, 65 L.Ed. 758; Walsh v. Brewster, 255 U.S. 536, 41 S.Ct. 392, 65 L.Ed. 762; United States v. Flannery, 268 U.S. 98, 45 S.Ct. 420, 69 L.Ed. 865, and United States v. Ludey, 274 U.S. 295, 47 S.Ct. 608, 71 L.Ed. 1054), wherein the court had for consideration gain or loss on a sale, a totally different question, and applied the principle that under such circumstances cost as well as the March 1, 1913, value must be considered. The court, however, stated specifically in Burnet v. Thompson Oil Gas Co., supra, that a different rule applied, where we are concerned with a deduction for depletion, the question there being "what allowance Congress intended should be made from the gross annual income," whereas in cases of the character referred to by plaintiff the question is "how much of the capital has already been returned tax-free."
There can be no question of the intent of Congress to allow the depletion allowed by the Commissioner, and no more, and the validity of the acts authorizing such allowance is fully sustained by the authorities heretofore cited.
It follows that the petition must be dismissed. It is so ordered.