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� per ton, $0.2095 was for
selling price or principal and $0.0405 was interest on the deferred
payments, and that, on the 330,507 tons extracted, the plaintiff
was entitled to depletion of $69,251.05; that, upon the ore paid
for on April 10, 1917, $0.2074 was for selling price or principal
and $0.0426 was interest on the deferred payments, and that, on the
48,958 tons extracted, the plaintiff was entitled to depletion of
$10,153.29; that, on the ore paid for on July 10, 1917, $0.2053 was
for selling price or principal and $0.0447 was interest on the
deferred payments, and that, on the 231,090 tons extracted,
plaintiff was entitled to depletion of $47,434.55; that, upon the
ore paid for on October 10, 1917, $0.2032 was for selling price or
principal and $0.460 was interest on the deferred payments, and
that, on the 432,120 tons extracted, the plaintiff was entitled to
depletion of $87,791.42; that plaintiff is entitled to depletion
amounting for the years 1917 to $214,630.31."
Count 2 contains similar allegations concerning the payment for
1918.
In the trial court, after requests by both sides for directed
verdict, the respondent had judgment, and this was affirmed by the
circuit court of appeals.
The latter court said:
"The sole controversy is over the correctness of the
government's method of arriving at the value of the iron ore in the
ground on March 1, 1913, a matter not covered by the revenue acts
in question, nor by any regulation of the Treasury Department."
This does not accurately state our understanding of the issue.
It was necessary for the taxpayer to show the illegality of the
exactions.
"The burden of establishing
Page 280 U. S. 233
that fact rested upon it, in order to show that it was entitled
to the deduction which the Commissioner had disallowed, and that
the additional tax was to that extent illegally assessed."
Botany Mills v. United States, 278 U.
S. 282,
278 U. S.
289-290;
United States v. Anderson,
269 U. S. 422,
269 U. S. 443. The
real point is whether respondent established her claim for refund
by adequate evidence. And we think she did not.
On March 1, 1913, she was lessor of mines from which the lessee
had the right to extract ore during many years, paying therefor
when taken out 25 cents per ton. Her rights were merely to receive
the royalties stipulated and to regain possession when the leases
terminated. Manifestly, the fair market value of this interest in
1913 was much less than 25 cents per ton of the estimated contents
of the mines, but respondent introduced no evidence which tended to
show such value. The suggestion that market value per ton on March
1, 1913, was equivalent to the sum which, if then put at simple
interest, would have amounted to 25 cents when the ore was actually
out and the stipulated royalty became payable cannot be accepted.
This method of estimation would decrease the 1913 market value with
the passing of every year. Moreover, it disregards the fact that
respondent's interest was in the mines considered as entireties.
and not in particular parts of ore beds which the lessee had agreed
to remove during designated future years.
Under the statute, it became necessary for respondent to
establish the fair market value of her interest in the mines on
March 1, 1913, or at least that such value was not below what she
claimed it was. Otherwise, she could not recover. She introduced
three witnesses who testified as to ore values. No one of them gave
an estimate of the value of her interest at that time. Replying to
the question, "You do not mean to testify that Mrs. Spalding's
interest in that ton of ore as of March 1, 1913, or at any
Page 280 U. S. 234
other time, was worth 25 cents or any other sum?", one of them
said:
"That question is based upon Mrs. Spalding's one-sixth ownership
of a lease at 25 cents per ton. That question is an entirely
different one from the one asked me by Mr. Zane. It would require a
good deal of calculation and certain assumptions as to how fast
that ore would be shipped. Then it would require discounting
against those assumptions to present value. That calculation would
take time, and I cannot answer that without working it out."
The other two gave no estimate of such value.
The judgment of the court below must be reversed. The cause will
be remanded to the district court for further proceedings in
conformity with this opinion.
MR. JUSTICE BUTLER took no part in the consideration or decision
of this cause.
*
"Sec. 5. That in, computing net income in the case of a citizen
or resident of the United States --"
"(a) For the purpose of the tax, there shall be allowed as
deductions --"
"
* * * *"
"Eighth. (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 allowances 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. No deduction shall be allowed for any amount paid out of
new buildings, permanent improvements, or betterments made to
increase the value of any property or estate, and no deduction
shall be made for any amount of expense of restoring property or
making good the exhaustion thereof for which an allowance is or has
been made."