1. The interest of a corporate lessee of a mine under a lease
for a term of years obliging it to mine a minimum tonnage of ore
annually and to pay the lessor, owner of the fee, a stated royalty
per ton mined, is property within the meaning of § 12a of the
Income Tax Law of September 8, 1916, which provides that the net
income of corporations organized in the United States shall be
ascertained by deducting from gross income, among other things, "a
reasonable allowance for the exhaustion . . . of property arising
out of its use," and specifically, in the case of mines,
"a reasonable allowance
Page 267 U. S. 365
for depletion thereof not to exceed the market value in the mine
of the product thereof which has been mined and sold during the
year,"
etc.
United States v. Biwabik Mining Co., 247 U.
S. 116;
Von Baumbach v. Sargent Land Co.,
242 U. S. 503,
distinguished. P.
267 U. S.
368.
2. As the mining goes on, the property interest of the lessee in
the mine, and that of the owner, are lessened, and in both cases
the extent of this exhaustion, with the consequent deduction to be
made under the above statute, is arrived at by determining the
aggregate amount of the depletion of the mine, based upon the
market value of the product, and allocating that amount in
proportion to the interest of owner and lessee, severally
considered. P.
267 U. S.
370.
294 F. 190 affirmed.
Certiorari to a judgment of the circuit court of appeals which
affirmed a judgment of the district court (278 F. 959) for the
present respondent in its action to recover back from an internal
revenue collector the amount of an income tax, paid under protest.
Upon the death of the defendant, his executrix was substituted.
MR. JUSTICE SUTHERLAND delivered the opinion of the Court.
The federal income tax return made by respondent (a corporation
organized in the United States) for the year 1917 showed the sum of
$10,253.21 due the government for income and excess war profits
taxes for that year, and this amount was paid. Thereafter the
Commissioner of Internal Revenue assessed respondent with an
additional tax of $17,128.44, which respondent was forced to pay,
and did pay under protest, and to recover which this
Page 267 U. S. 366
action was brought against E. J. Lynch, a collector of internal
revenue, to whom the payment had been made. Lynch subsequently
died, and his executrix was substituted as defendant. The Federal
District Court for the District of Minnesota, where the action was
brought, rendered judgment in favor of respondent for the amount.
278 F. 959. The circuit court of appeals affirmed the judgment (294
F.190), and the case is here upon certiorari, 264 U.S. 577.
The facts from which the controversy arose are not in dispute,
and, for present purposes, may be shortly stated. Prior to March 1,
1913, respondent had leases upon two definitely described tracts of
land in Minnesota containing deposits of iron ore, known as the
Perkins mine and the Hudson mine. The leases, unless sooner
terminated by the lessee in the manner therein provided, ran for a
period of 50 years, and obliged respondent to mine and remove at
least 50,000 tons of iron ore annually from the Perkins and 25,000
tons annually from the Hudson, and to pay the lessor, owner of the
fee, a royalty of 30 cents per ton upon each ton of ore extracted.
Respondent subleased the lands upon terms not necessary to be
stated further than that the sublessee of the Perkins was to pay
respondent a royalty of 75 cents per ton and the sublessee of the
Hudson a royalty of 60 cents per ton, or 45 cents and 30 cents,
respectively, per ton more than was made payable by respondent to
the lessor owner.
Before March 1, 1913, both tracts of land had been fully
explored and the deposits of ore therein developed to such an
extent that the entire amount of tonnage was known with substantial
accuracy, and the properties were demonstrated to be of great
value. On that date, it was known that these ore bodies would be
entirely worked out and the mines exhausted within seven years, and
this in fact happened. The market value of the ore in the mines
Page 267 U. S. 367
during that entire time exceeded 75 cents per ton, and it
sufficiently appears that, during such time, respondent and its
sublessees were in possession of the lands, engaged in mining and
removing the ore therefrom. Without repeating the formula followed
in arriving at the result, it is enough to say that the trial court
found that, under the leases, the respondent had a property
interest in these ore bodies, the fair market value of which, as of
March 1, 1913, was 71.9 percent of the total royalties which would
be received under the subleases, and such royalties constituted the
sole source of respondent's income. Thereupon the lower courts held
that respondent was entitled to deduct from its gross income for
1917 a sum equal to 71.9 percent thereof for depletion, and that
only the balance remaining was subject to income and excess profits
taxes. Such taxes, properly computed, amounted to the sum returned
and originally paid by respondent, and no more.
The applicable law is found in §§ 2, 10 and 12(a) of the Act of
September 8, 1916, c. 463, 39 Stat. 756, 757, 758, 765, 767.
Section 10 imposes a tax of two percentum upon the total annual net
income received from all sources by every corporation, etc.,
organized in the United States. Section 12(a)
* provides that
such net
Page 267 U. S. 368
income shall be ascertained by deducting from the gross amount
of the income, among other things,
"a reasonable allowance for the exhaustion . . . of property
arising out of its use; . . . (b) in the case of mines a reasonable
allowance for depletion thereof not to exceed the market value in
the mine of the product thereof which has been mined and sold
during the year for which the return and computation are made. . .
."
Section 2 contains the following provision (page 758):
"(c) For the purpose of ascertaining the gain derived from the
sale or other disposition of property, real, personal, or mixed,
acquired before March first, nineteen hundred and thirteen, the
fair market price or value of such property as of March first,
nineteen hundred and thirteen, shall be the basis for determining
the amount of such gain derived."
Upon the foregoing facts and under these statutory provisions,
the question presented for consideration is whether the relation of
respondent to the mines which were the source of its income was
such that it was entitled to deduct from the gross amount of such
income a reasonable amount for exhaustion or depletion. Upon the
part of the petitioner, the contention is that the leases do not
convey to the lessee the ore bodies, but are contracts of rental
conferring only the right to use and occupy the premises and mine
the ore, which, so long as it remains in the ground, is the
property of the fee owner. It is therefore insisted that, by the
extraction of the ore, only the property of the fee owner is
depleted, and such owner alone is entitled to an allowance
therefor. On the other
Page 267 U. S. 369
hand, respondent contends that, under the leases, the lessee, as
well as the lessor, owns a valuable property interest in the mines,
and, by the terms of the statute, each is entitled to deduct from
gross income a reasonable allowance for depletion, the lessee for
exhaustion of the leasehold interest and the lessor for exhaustion
of the fee interest as lessened by the interest of the lessee, such
deduction to be allowed according to the value of the interest of
each in the property, the entire allowance, however, not to exceed
the total market value in the mine of the product thereof mined and
sold during the taxable year.
It is, of course, true that the leases here under review did not
convey title to the unextracted ore deposits (
United States v.
Biwabik Mining Co., 247 U. S. 116,
247 U. S.
123); but it is equally true that such leases,
conferring upon the lessee the exclusive possession of the deposits
and the valuable right of removing and reducing the ore to
ownership, created a very real and substantial interest therein.
See Hyatt v. Vincennes Bank, 113 U.
S. 408,
113 U. S. 416;
Ewert v. Robinson, 289 F. 740, 746-750. And there can be
no doubt that such an interest is property.
Hamilton v.
Rathbone, 175 U. S. 414,
175 U. S. 421;
Bryan v. Kennett, 113 U. S. 179,
113 U. S.
192.
The general provision in § 12(a), Second, is that the deduction
from gross income shall include a reasonable allowance for the
"exhaustion . . . of property." There is nothing to suggest that
the word "property" is used in any restricted sense. In the case of
mines, a specific kind of property, the exhaustion is described as
depletion, and is limited to an amount not exceeding the market
value in the mine of the product mined and sold during the year.
The interest of respondent under its leases in the mines being
property, its right to deduct a reasonable allowance for exhaustion
of such property, if there be any, during the taxable year results
from the
Page 267 U. S. 370
plain terms of the statute, such deduction, since the property
is an interest in mines, to be limited to the amount of the
exhaustion of respondent's interest caused by the depletion of the
mines during the taxable year. We agree with the circuit court of
appeals, 294 F. 194, that:
"The plain, clear, and reasonable meaning of the statute seems
to be that the reasonable allowance for depletion in case of a mine
is to be made to everyone whose property right and interest therein
has been depleted by the extraction and disposition 'of the product
thereof which has been mined and sold during the year for which the
return and computation are made.' And the plain, obvious, and
rational meaning of a statute is always to be preferred to any
curious, narrow, hidden sense that nothing but the exigency of a
hard case and the ingenuity and study of an acute and powerful
intellect would discover."
It is said that the depletion allowance applies to the physical
exhaustion of the ore deposits, and since the title thereto is in
the lessor, he alone is entitled to make the deduction. But the
fallacy in the syllogism is plain. The deduction for depletion in
the case of mines is a special application of the general rule of
the statute allowing a deduction for exhaustion of property. While
respondent does not own the ore deposits, its right to mine and
remove the ore and reduce it to possession and ownership is
property within the meaning of the general provision. Obviously, as
the process goes on, this property interest of the lessee in the
mines is lessened from year to year, as the owner's property
interest in the same mines is likewise lessened. There is an
exhaustion of property in the one case as in the other, and the
extent of it, with the consequent deduction to be made, in each
case is to be arrived at in the same way -- namely, by determining
the aggregate amount of the depletion of the mines in which the
several interests inhere, based upon the market
Page 267 U. S. 371
value of the product, and allocating that amount in proportion
to the interest of each severally considered.
We are referred to
Weiss v. Mohawk Mining Co., 264 F.
502, where the Circuit Court of Appeals for the Sixth Circuit
reached an exactly opposite conclusion to that announced in the
present case by the courts below. The opinion in that case was
apparently made to rest upon the decision of this Court in
United States v. Biwabik Mining Co., supra, which, in
turn, followed
Von Baumbach v. Sargent Land Co.,
242 U. S. 503.
These cases, however, arose under the Corporation Tax Law of 1909,
c. 6, 36 Stat. 111, 112, § 38, imposing a special excise tax with
respect to the carrying on or doing business by a corporation,
etc., measured by its net income, in the ascertainment of which,
among other things, there was authorized a deduction of "a
reasonable allowance for depreciation of property." The
Sargent
Land Co. case concerned the owner and lessor of mining
property, while the
Biwabik Mining Co. case concerned a
lessee of mining property. It was held in both cases, as we hold
here, that the leases under consideration did not convey title to
the ore in place. Whether the lessees had property interests such
as we have determined here was not considered. Both decisions,
expressly in one and impliedly in the other, turned primarily upon
the scope of the word "depreciation." In the
Sargent Land
Co. case, this appears expressly from the following extract
(pp.
242 U. S.
524-525):
"We do not think Congress intended to cover the necessary
depreciation of a mine by exhaustion of the ores in determining the
income to be assessed under the statute by including such
exhaustion within the allowance made for depreciation. It would be
a strained use of the term depreciation to say that, where ore is
taken from a mine in the operation of the property, depreciation,
as generally understood in business circles, follows. True, the
value of the mine is lessened from the partial exhaustion of the
property, and,
Page 267 U. S. 372
owing to its peculiar character, cannot be replaced. But in no
accurate sense can such exhaustion of the body of the ore be deemed
depreciation. It is equally true that there seems to be a hardship
in taxing such receipts as income without some deduction arising
from the fact that the mining property is being continually reduced
by the removal of the minerals. But such consideration will not
justify this Court in attributing to depreciation a sense which we
do not believe Congress intended to give to it in the Act of
1909."
And this view is immediately emphasized by putting in contrast
with the "depreciation" of the 1909 Act the "reasonable allowance
for the exhaustion . . . of property" of the income tax provision
of the Tariff Act of 1913 and the exhaustion and depletion
provisions of the Act of 1916, heretofore quoted. "These
provisions," the Court concluded (p.
242 U. S.
525),
"were not in the Act of 1909, and, as we have said, we think
that Congress, in that act, used the term 'depreciation' in its
ordinary and usual significance. We therefore reach the conclusion
that no allowance can be made of the character contended for as an
item of depreciation."
The decision in the later case of the
Biwabik Mining
Co., it is true, rests upon the predicate that the lessee was
not a purchaser of the ore in place, but that was because the
decision of the lower court -- that the lease, as applied to the
situation there developed, was "in every substantial way
pro
tanto a purchase" -- presented that question as the one to be
met. The lower court thought that the case of the lessor (Sargent
Land Company) was to be distinguished from that of the lessee
(Biwabik Mining Company) upon the theory that, while the royalties
paid to the former might properly be called income, the receipts of
the latter resulted from the sale of capital assets and were not
income. But this Court rejected the assumed distinction as unsound,
and decided the case upon that point without referring to the
question of deduction on account
Page 267 U. S. 373
of depreciation. Evidently it was taken for granted in the lower
court that, under the decision in the
Sargent Land Co.
case, the latter point was no longer open, and it was passed there,
as it was here, without comment. Considering the
Sargent Land
Co. and the
Biwabik Mining Co. cases together, it is
apparent that, in respect of the matter of depreciation under the
act of 1909, in the opinion of this Court, lessor and lessee stood
upon the same footing, neither being entitled to an allowance; but
it was plainly recognized that, if the statutory allowance had been
for exhaustion or depletion, as in the later acts, an entirely
different question might have been presented as to both interests.
We find nothing in either case out of harmony with the conclusion
reached by the lower courts in respect of the construction and
application of the pertinent provisions of law which are now under
review.
Affirmed.
MR. JUSTICE BUTLER took no part in the consideration or decision
of this case.
*
"Sec. 12. (a) In the case of a corporation, joint-stock company
or association, or insurance company organized in the United
States, such net income shall be ascertained by deducting from the
gross amount of its income received within the year from all
sources --"
"
* * * *"
"Second. All losses actually sustained and charged off within
the year and not compensated by insurance or otherwise, including a
reasonable allowance for the exhaustion, wear, and tear of property
arising out of its use or employment in the business or trade; (a)
in the case of oil and gas wells, a reasonable allowance for actual
reduction in flow and production to be ascertained not by the flush
flow, but by the settled production or regular flow; (b) in the
case of mines, a reasonable allowance for depletion thereof not to
exceed the market value in the mine of the product thereof which
has been mined and sold during the year for which the return and
computation are made, such reasonable allowance to be made in the
case of both (a) and (b) under rules and regulations to be
prescribed by the Secretary of the Treasury:
Provided,
that, when the allowance authorized in (a) and (b) shall equal the
capital originally invested, or in case of purchase made prior to
March first, nineteen hundred and thirteen, the fair market value
as of that date, no further allowance shall be made. . . ."