Reinecke v. Spalding
280 U.S. 227 (1930)

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U.S. Supreme Court

Reinecke v. Spalding, 280 U.S. 227 (1930)

Reinecke v. Spalding

No. 59

Argued December 6, 1929

Decided January 6, 1930

280 U.S. 227




1. One who seeks to recover money exacted as income taxes upon the ground that a deduction as claimed was illegally disallowed by the Commissioner of Internal Revenue has the burden of showing that he was entitled to such deduction. P. 280 U. S. 232.

2. Under § 214(a) of the Revenue Act of 1918, and likewise (semble) under § 5(a) of the Revenue Act of 1916, the deduction for depletion in computing the net income derived during a tax year from a mine, by its lessor, under a long lease made prior to March 1, 1913, reserving a fixed royalty per ton of ore extracted by the lessee, is to be determined on the basis of the fair market value

Page 280 U. S. 228

on that date of the lessor's interest in the mine as an entity -- i.e., of his right to receive the royalties stipulated and to regain possession when the lease should terminate. P. 280 U. S. 233.

3. The market value per ton on March 1, 1913, is not equivalent to the sum which, with simple interest from that date, will equal the royalty when the ore is actually extracted and the royalty is payable. P. 280 U. S. 233.

30 F.2d 369 reversed.

Certiorari, 279 U.S. 831, to review a judgment of the circuit court of appeals which affirmed a recovery in an action against the Collector for money paid under protest as income taxes.

MR. JUSTICE McREYNOLDS delivered the opinion of the Court.

The respondent owns a one-sixth interest in several leases executed 1901, 1902, 1903, and 1905, which authorize the lessee to take iron ore from certain Minnesota lands for 25, 45, and 50 years from their respective dates. These leases require payments quarterly of 25 cents royalty per ton upon all ore extracted; provide for minimum annual production and termination under specified circumstances.

During the year 1917, she received out of such royalties $260,072.30; during 1918, $219,940.43. For 1917, she was allowed $99,561.20 as depletion; for 1918, $84,979.55. Income tax was assessed against her upon the balances, and payment exacted. Thereafter she unsuccessfully claimed refunds because the sums allowed for depletion were insufficient. The present suit followed.

Page 280 U. S. 229

The Revenue Act of 1918, c. 18, 40 Stat. 1057, 1066, 1067 (approved February 24, 1919), provides:

"Sec. 214. (a) That, in computing net income, there shall be allowed as deductions:"

"* * * *"

"(10) 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: Provided further, That, in the case of mines, oil and gas wells, discovered by the taxpayer, on or after March 1, 1913, and not acquired as the result of purchase of a proven tract or lease, where the fair market value of the property is materially disproportionate to the cost, the depletion allowance shall be based upon the fair market value of the property at the date of the discovery, or within thirty days thereafter, such reasonable allowance in all the above cases to be made under rules and regulations to be prescribed by the Commissioner with the approval of the Secretary. In the case of leases, the deductions allowed by this paragraph shall be equitably apportioned between the lessor and lessee."

Section 5, Revenue Act for 1916, c. 463, 39 Stat. 756, 759, is in the margin. * Neither party suggests that this differs

Page 280 U. S. 230

from the corresponding provision in the act of 1918, supra, in any way here material.

In her claim presented to the tax officer for refund of overpayment for 1917, respondent said:

"Tax as assessed is based upon income received from royalties from iron ore mines. Depletion amounting to $99,561.20 was allowed to taxpayer, whereas depletion amounting to $203,510.86 should be allowed. The latter amount is the present worth of the ore mined in 1917, as of March 1, 1913, and is arrived at by discounting the amount received in 1917 at 5% of March 1, 1913."

A like statement appears in her claim concerning overpayment for 1918.

The declaration has two counts. The first, relating to payments for 1917, alleges:

"That the value or market price of said ore in the ground untouched and unextracted on March 1, 1913, and on all dates subsequent thereto, exceeded the sum of twenty-five cents per ton, so that every ton of ore paid for under said leases in the year 1917 was disposed of at a price actually less than market prices of the ore, and, if then sold free of said lease, would have realized more than twenty-five cents per ton. The actual depletion

Page 280 U. S. 231

of the mines by each ton of ore extracted was more than twenty-five cents when extracted."

"That, under the terms of the law, the depletion for ore extracted or considered to be extracted was fixed at the market value of the ore in place in the mine at the time and place of extraction, but if such depletion allowance per ton exceeded the amount fixed as the royalty per ton in the lease, the depletion allowance to the plaintiff could not exceed such royalty, but, since the royalty, when paid, included an amount of interest of the payment considered as deferred from March 1, 1913, to the date of actual payment of royalty, and the allowance of such depletion in successive years could never exceed the market value of the ore in the mine on March 1, 1913."

"That each payment for ore extracted consisted of two parts, one of which was interest on the deferred payment and the other of which was the actual present worth to the payment deferred from March 1, 1913. Said actual present worth is accurately represented for each ton by that sum which, put at interest on March 1, 1913, would produce at the date of payment for ore the royalty paid per ton; to put it in another way, the actual present worth of the ore extracted is accurately ascertained by taking from the royalty per ton paid the part of the royalty, when and as paid, which represented interest on the deferred payment from March 1, 1913."

"That such an allowance of depletion in successive years and in the year 1917 did not and could not exceed the market value of such ore on March 1, 1913."

"That if, of each payment for each ton of ore extracted, the amount of such payment which represents interest on the payment as deferred and actually paid be figured, the income of the owner will be accurately

Page 280 U. S. 232

determined as that part of the twenty-five cents which represents interest."

"That for the year 1917, a correct calculation under the rule above shows that, upon the tons of ore extracted and paid for on January 14, 1917, of the payment of 25

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