Section 234(a)(9) of the Revenue Act of 1918 provide that in
computing the net income of a corporation from oil mining
properties, there shall be deducted a reasonable allowance for
depletion based upon cost, and that, in case of such properties
acquired before March 1, 1913, the fair market value of the
property on that date shall be taken in lieu of cost up to that
date.
Held that, in determining for the taxable year the
capital value recoverable through depletion allowance, there should
be deducted from the March 1, 1913, value of the property the
amount of depletion actually sustained in intervening years, even
though the deductions allowed for depletion in those years, under
the Acts then in force, were less than the actual depletion. P.
283 U. S.
304.
40 F.2d 493 reversed.
Certiorari, 282 U.S. 823, to review a judgment reversing a
decision of the Board of Tax Appeals, 15 B.T.A. 993, which
sustained a determination of income tax deficiency.
MR. JUSTICE ROBERTS delivered the opinion of the Court.
The Commissioner of Internal Revenue determined a deficiency in
the respondent's income tax for 1918. Upon
Page 283 U. S. 302
the taxpayer's petition, the Board of Tax Appeals sustained the
Commissioner. [
Footnote 1] An
appeal was taken to the Court of Appeals, which reversed the
judgment of the Board. 40 F.2d 823. This Court granted certiorari,
282 U.S. 823.
The question presented is whether under § 234(a)(9) of the
Revenue Act of 1918, [
Footnote
2] in determining for any taxable year the capital value,
recoverable through depletion allowance, of oil mining properties
acquired prior to March 1, 1913, there should be deducted from the
March 1, 1913, value of the properties the amount of depletion
actually sustained in earlier years, or only so much of such
depletion as was allowable as deductions under the revenue acts in
force in those years.
The Board of Tax Appeals found the following facts: the taxpayer
owned an oil and gas mining lease acquired prior to March 1, 1913.
On that date, the recoverable oil in the reserve embraced by the
lease was 278,000 barrels, and its value was $156,645, or $0.56347
per barrel. Between March 1, 1913, and December 31, 1915, it
extracted 162,717 barrels of oil, so that, at the unit rate
mentioned, it sustained depletion amounting to $91,686.15. Its
deduction for depletion in computing net income under the
Page 283 U. S. 303
Revenue Act of 1913 [
Footnote
3] was computed not by reference to the number of barrels
extracted, or to the value of the reserve on March 1, 1913, but by
taking 5 percent of the gross income from the sale of oil. The
depletion allowance for 1913 to 1915, inclusive, computed by this
method, amounted to $6322.02.
In 1916, the taxpayer secured an extension of its lease at a
cost of $30,000, whereby its oil reserve was increased by 300,000
barrels. There then remained of the original reserve 115,283
barrels having a value as of March 1, 1913, of $64,958.85. The
Commissioner added to this depleted value the cost of the extension
of the lease, and added to the remaining oil reserves of the
original lease the additional 300,000 barrels then acquired. He
thus ascertained a new total recoverable reserve of 415,283 barrels
having a basic value or cost of $94,958.85, or $0.22866 per barrel.
There were no subsequent additions to the reserves.
In 1916, there were produced under the lease 49,452 barrels of
oil, and in 1917, 39,204 barrels, leaving the reserve at January 1,
1918, 326,627 barrels.
A new method of allowance for depletion was adopted in the
Revenue Act of 1916. [
Footnote
4] Depletion was sustained under the formula therein prescribed
in those two years,
Page 283 U. S. 304
amounting to $20,272.08. It is agreed that this figure is
correct and represents the sustained depletion as well as allowed
depletion for those years.
During 1918, there were produced 33,697 barrels of oil. At the
unit price adopted by the Commissioner of $0.22866 per barrel, the
depletion sustained and allowed for that year was $7,705.16. It is
this depletion allowance for the year 1918 which is here called in
question.
In view of the fact that the depletion actually sustained by the
taxpayer between March 1, 1913, and December 31, 1915, was
$91,686.15, whereas, in conformity with the Act of 1913 the
deduction actually allowed it as for depletion was only $6,322.02,
the respondent contended that the unit rate of depletion per barrel
for 1918 should have been based upon the original March 1, 1913
value of the reserves, plus the cost of the extension of the lease,
and less only that portion of the actually sustained depletion
which was in fact allowed pursuant to the terms of the 1913 Act.
The Commissioner, on the other hand, subtracted from the March 1,
1913, value plus the cost of the extension of the lease, the
sustained or actual depletion, holding that the entire depletion
actually sustained should be deducted from the original March 1,
1913 value, regardless of whether it was allowable as deductions
from the gross income of the years 1913, 1914, and 1915. The
circuit court of appeals decided in favor of the respondent.
The parties agree that respondent is not entitled as matter of
right to make any deduction from annual income for depletion of the
oil extracted and sold during the year. If it may take any such
deduction, authority therefore must be found in the statute.
[
Footnote 5] It follows that
the question for decision is purely one of statutory
construction.
It is clear that Congress intended that the lessee of an oil
well should be entitled to a reasonable allowance for
Page 283 U. S. 305
depletion based upon cost or March 1, 1913 value. It did not,
however, attempt to prescribe a formula for ascertaining it, but
expressly delegated that function to the Commissioner of Internal
Revenue, who was to make rules and regulations to that end.
Pursuant to this authority, regulations were made which required
the deduction of depletion theretofore sustained in ascertaining
the capital remaining in any year recoverable by depletion
deductions. [
Footnote 6] It is
undisputed that the Commissioner calculated the depletion deduction
in this case in accordance with the regulations.
The taxpayer contends, however, and the court below held, that
the allowance granted was not reasonable -- as the Act required it
should be -- because, although it reflected the actual depletion in
the year 1918, considered by itself, the result of the application
of the regulation will fall short of returning to the taxpayer its
March 1, 1913, capital tax free at the date of exhaustion of the
oil reserve. It is said that this was the intent of Congress as
shown not only by the terms of the Act, but by the history of prior
legislation. Hence, it is claimed that only the depletion allowed
under the Act of 1913 should be deducted in ascertaining the
depletable capital at January 1, 1918. Thus, respondent would
recover its entire capital tax-free. The government contends that
the depletion allowance provided by the regulations is
reasonable.
It is evident that the Act of 1913 did not allow enough to
return the capital on exhaustion of the reserve. The deduction
permitted by that Act fell some $85,000 short of
Page 283 U. S. 306
what was required in 1913-1915 for that purpose. Was it then the
intent of the Act of 1918 to permit a deduction from gross income
for depletion which would represent not only that year's sustained
depletion, but make up for sustained but disallowed depletion in
the earlier years? The government says, and we think rightly, that
there is nothing in the terms of the Act to indicate any such
purpose. The tax is an income tax for 1918, and, in the absence of
express provision to the contrary, it is not to be supposed that
the taxpayer is authorized to deduct from that year's income,
depreciation, depletion, business losses or other similar items
attributable to other years. [
Footnote 7] The very fact that Congress denied deductions
equal to the sustained depletion in the earlier years negatives an
intent that they should be allowed in later years, as if for
depletion then sustained. The construction adopted by the court
below in effect results in including in the taxable year items
referable to other years, and is contrary to the theory of a tax
for specific years.
The nature of the tax as one for annual periods has been
repeatedly mentioned in dealing with its application in various
situations. [
Footnote 8] The
taxable year 1918, and that only, in involved, and deductions
applicable to that year only should be allowed.
The court below recognized that its decision resulted in
attributing an excessive value to the reserves remaining in 1918,
but thought that
United States v. Ludey, 274 U.
S. 295, required it so to hold. That case, however,
involved the determination of taxable gain or loss on the
Page 283 U. S. 307
sale of an oil property. To ascertain gain on a sale of a
capital asset, there must be subtracted from the sale price a sum
sufficient to restore the value at the date of acquisition (or
March 1, 1913). [
Footnote 9]
The remainder is income. So, in the
Ludey case, it was
held that, in order to ascertain the depleted cost, only the
allowed depletion should be deducted from the original cost.
Allowed depletion, rather than sustained depletion was there the
true measure of deduction. But here, the question is what allowance
Congress intended should be made from the gross annual income of
the operation of an oil well. In the one case, the question is how
much of the capital has already been returned tax-free; in the
other, how much of the oil reserve remains at the beginning of a
taxable year to be depleted over the period remaining until
exhaustion. The court below relied on certain statements in the
opinion in the
Ludey case which were applicable in the
determination of gain on a sale, but which do not apply in this
case, for if the sale of each barrel of oil were a partial sale of
the reserve (which it is not), to apply the rule which respondent
seeks to deduce from the
Ludey case would increase the
cost or 1913 value of each barrel sold, in determining gain or loss
in 1918, beyond its actual cost or 1913 value, solely by reason of
the fact that too low a cost or 1913 value was taken for barrels
sold in prior years. The decision in the
Ludey case has
been adopted in the later statutes as affecting sales of capital
assets, [
Footnote 10] but
the provision for annual depletion allowance has remained
substantially unchanged. [
Footnote 11] This, in itself, is persuasive evidence that
Congress has approved the executive construction embodied in the
regulations. [
Footnote
12]
Respondent insists that the increasing liberality in the
statutory provisions for depletion allowances in the successive
Revenue Acts indicates that Congress never intended that the 1918
Act should be so construed or administered as to deprive the
taxpayer of the return of his entire capital tax-free. But the
increasing liberality was to be applicable in calculating net
income for the successive years, and we can find no evidence either
in the Acts or in the regulations of any intent to increase future
depletion allowances to redress the inadequacy of those previously
permitted.
It follows that the judgment must be
Reversed.
[
Footnote 1]
15 B.T.A. 993.
[
Footnote 2]
40 Stat. 1077, § 234:
"(a) That, in computing the net income of a corporation subject
to the tax imposed by § 230 there shall be allowed as
deductions:"
"
* * * *"
"(9) In the case of mines, oil and 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: . . . 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. . . ."
[
Footnote 3]
C. 16, § II.B, 38 Stat. 167:
"That, in computing net income . . . , there shall be allowed as
deductions: . . . sixth, a reasonable allowance for the exhaustion,
wear and tear of property arising out of its use or employment in
the business, not to exceed, in the case of mines, 5 percentum of
the gross value at the mine of the output for the year for which
the computation is made. . . ."
[
Footnote 4]
C. 463, 39 Stat. 767-768, Sec. 12(a):
"In the case of a corporation . . . such net income shall be
ascertained by deducting from the gross amount of its income . . .
Second. All losses actually sustained and charged off within the
year and not compensated by insurance or otherwise, including . . .
(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. . .
."
[
Footnote 5]
Stanton v. Baltic Mining Co., 240 U.
S. 103.
[
Footnote 6]
Art. 203:
"Capital recoverable through depletion deductions in the case of
lessee. -- (a) In the case of a lessee, the capital remaining in
any year recoverable through depletion and depreciation deductions
is (1) the value as of the basic date of the lessee's equity in the
property plus (2) subsequent allowable capital additions but minus
(3) depletion and depreciation sustained, whether legally allowable
or not, from the basic date to the taxable year. . . ."
[
Footnote 7]
As to losses,
see De Loss v. Commissioner, 28 F.2d 803;
Burns v. Commissioner, 31 F.2d 399.
Compare Newman v.
Commissioner, 41 F.2d 743.
[
Footnote 8]
Aluminum Castings Co. v. Routzahn, 282 U. S.
92;
Burnet v. Sanford & Brooks Co.,
282 U. S. 359;
Fawcus Machine Co. v. United States, 282 U.
S. 375.
[
Footnote 9]
Doyle v. Mitchell Bros. Co., 247 U.
S. 179.
[
Footnote 10]
Act of 1924, c. 234, 43 Stat. 253, 255, § 202(b); Act of 1926,
c. 27, § 202(b)(2), 44 Stat. 9, 12; Act of 1928, c. 852, §
111(b)(2), 45 Stat. 791, 815.
[
Footnote 11]
Act of 1921, § 234(a)(9), 42 Stat. 227, 256; Act of 1924, §
234(a)(8), 43 Stat. 253, 284; Act of 1926, § 234(a)(8), 44 Stat. 9,
42; Act of 1928, § 23(1), 45 Stat. 791, 800.
[
Footnote 12]
United States v. Cerecedo Hermanos, 209 U.
S. 337;
National Lead Co. v. United States,
252 U. S. 140.