The opinion
R. E. SNELL, JR., AND KATIE SNELL, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Snell v. Commissioner
Docket No. 3682.
United States Board of Tax Appeals
10 B.T.A. 1081 ; 1928 BTA LEXIS 3965 ;
February 29, 1928 , Promulgated
*3965 1. During the year 1919 the Superintendent of the Five Civilized Tribes received for the petitioners interest on deposits of money and United States Victory bonds, which deposits and bonds had been made and purchased with tax-exempt income received as royalties on oil and gas produced from land allotted to the petitioner Katie Snell, as a member of the Creek Indian Tribe. Held, that such interest is subject to tax under the Revenue Act of 1918.
2. Since the income from the petitioner's allotted land is exempt from taxation, no deduction may be made from the petitioners' other income on account of depletion of the oil and gas underlying said land.
Raymond L. Tolbert, Esq., and Tom F. Carey, C.P.A., for the petitioners.
John D. Foley, Esq., for the respondent.
MARQUETTE
*1081 This proceeding is for the redetermination of a deficiency in income tax for the calendar year 1919 in the amount of $8,571.05.
FINDINGS OF FACT.
The petitioners are individuals residing at Dustin, Okla. They are and have been since December 31, 1918, husband and wife living together.
The petitioner, Katie Snell, nee Brown, is of one-half Creek Indian *3966 blood and is and was at all times hereinafter mentioned a citizen of the Creek Indian Tribe. On the twenty-eighth day of March, 1902, she was duly enrolled as a citizen of the Creek Indian Tribe on the approved official tribal roll of said tribe, opposite Creek roll number 7682. She was thereafter allotted, as her homestead allotment, the following described land now located in Creek County, State of Oklahoma, to wit: the northwest quarter of the southwest quarter of section 9, township 17 north, range 7 east, which land is hereinafter referred to as her "homestead allotment." A proper patent conveying said homestead allotment to Katie Brown, now *1082 Snell, was duly executed by the principal chief of the Creek Nation on March 10, 1903; was approved by the Secretary of the Interior on March 27, 1903, and was delivered to the said Katie Brown, now Snell. Said patent provides that it is "subject, however, to the conditions provided by said Act of Congress, which conditions are that said land shall be non-taxable and inalienable and free from any encumbrances whatever for twenty-one years * * *, and to the provisions of the Act of Congress approved June 30, 1902." Said homestead *3967 allotment is and was at all times hereinafter mentioned, restricted Indian land and none of the restrictions imposed by law upon the allottee has been removed or modified.
On or about March 22, 1912, the petitioner Katie Snell, nee Brown, acting by her duly appointed, qualified and acting guardian, and under the direction and supervision of the United States Superintendent of the Five Civilized Tribes, executed and delivered to one H. J. Culbertson for a valuable consideration, a certain oil and gas mining lease upon her said homestead allotment, under authority of and in conformity to the acts of Congress and the rules and regulations of the Department of the Interior governing such matters. Oil and gas were produced during the year 1919 and are now being produced from said homestead allotment under said lease, which is still in full force and effect.
Money evidencing royalties due under said lease upon the oil and gas produced from said homestead allotment for the calendar year 1919 and prior years, was duly collected, received, held, deposited and invested by the United States Superintendent of the Five Civilized Tribes at the times and in the manner provided by law.
*3968 During the calendar year 1919 the United States Superintendent of the Five Civilized Tribes -
(a) Collected and received royalties in the amount of $11,193.75 on oil and gas produced from said homestead allotment under said lease.
(b) Collected and received the amount of $376.82 as interest on deposits of money in duly approved banks and other depositories, received and held by him as royalties on oil and gas produced from said homestead allotment under said lease.
(c) Collected and received the amount of $118.20 as interest on United States Victory 4 3/4 per cent bonds purchased by him with money collected and received as royalties on oil and gas produced from said homestead allotment under said lease.
The parties hereto have agreed and stipulated that the net income of the petitioners for the year 1919 is not more than $42,206.69, and in arriving at said amount of $42,206.69 they have stipulated and agreed to allow and have allowed the following items as proper and legal deductions:
*1083 1. Loss from business operations for the year 1919 $7,529.64
2. Loss sustained by R. E. Snell, Jr., in the partnership of Snell & Autrey for the year 1919 9,994.58
3. Royalties from gas and oil produced from said homestead allotment of Katie Snell, nee Brown 11,193.75
4. Depletion on oil and gas produced on lands other than the homestead allotment of Katie Snell, nee Brown 15,899.10
5. Other deductions as caimed on the amended joint return of income filed by the petitioners for the year 1919 4,286.43
*3969 The parties hereto have agreed and stipulated that the tax of the petitioners for the year 1919 shall be computed on said amount of $42,206.69, as net income unless it shall be adjudged upon the facts hereinbefore set forth that the petitioners are entitled to the following additional deductions, or any of them, as claimed by the petitioners, to wit:
1. $376.82 which the parties agree was collected and received during the calendar year 1919 by the Superintendent of the Five Civilized Tribes as interest upon money deposited in duly approved banks and depositories, received and held by said superintendent as royalties on oil and gas produced from said homestead allotment under the lease hereinbefore mentioned.
2. $118.20, which the parties hereto agree was collected during the year 1919 by the Superintendent of the Five Civilized Tribes as interest upon United States Victory 4 3/4 per cent bonds, purchased by said superintendent with money collected and received by him as royalties on oil and gas produced from said homestead allotment under said lease.
3. $2,143.02, which the parties hereto agree is the amount of depletion sustained during the year 1919 on oil and gas produced *3970 from the homestead allotment of Katie Snell, nee Brown.
OPINION.
MARQUETTE: The facts as set forth above have been stipulated by the parties to this proceeding. It appears that the respondent has conceded that the income received by the petitioners from the homestead allotment is exempt from the Federal income tax on the theory that as the homestead allotment is exempt from taxation, the tax on the income from such land is a direct tax on the land itself. The petitioners contend that as the income from the homestead allotment is exempt from taxation, the income derived from that income is likewise exempt.
Assuming for the purpose of this opinion that the respondent is correct both as to his premise and his conclusion as to the nontaxability of the homestead allotment, and the income therefrom, it does not follow that the income from the exempt income is also not subject to tax. We have held, in , that the question of whether Indians shall or shall not be taxed is a matter of legislative discretion which, when *1084 clearly exercised by statute, may not be limited by construction, and that the Revenue *3971 Act of 1918, imposing a tax "upon the net income of every individual," included Indians in its application. Therefore, if the income derived by the petitioners in the year 1919 from the homestead allotment of Katie Snell is not taxable, it is not because of any exemption contained in the Revenue Act of 1918, for there is none, but because, the land having been exempted from taxation by a prior act of Congress, a tax upon the income therefrom would be a direct tax on the land in contravention of such prior act.
The source of the income which we are considering here is not the petitioner's homestead allotment, but is United States notes purchased and deposits made with the income from the allotment. When that income was received for the petitioners by the Superintendent of the Five Civilized Tribes, it was separated from its nontaxable source and when invested became itself a new source of income, which is not protected from taxation either by the Revenue Act of 1918 or by the prior acts of Congress under which the homestead allotment was made. We are therefore of the opinion that the interest on the Government notes and bank deposits involved herein is subject to tax under the *3972 Revenue Act of 1918.
The only other question presented for our decision is whether the petitioners, in computing their net income for the year 1919, are entitled to deduct the amount of depletion sustained on the oil and gas produced from the homestead allotment of Katie Snell from other income. This question must be answered in the negative. The purpose of allowing deductions for depletion is that the taxpayer while disposing of an asset may recover its cost, or its March 1, 1913, value if it was acquired before that date, free from tax; or in other words, that he may be required to pay tax only on that part of the amount realized from the disposition of the asset that is in excess of its cost or March 1, 1913, value. In this case the petitioner is not taxed at all on the amount realized from the disposition of the asset, the oil and gas underlying her homestead allotment. She not only recovers the March 1, 1913, value of the asset, but receives the excess over that amount free from tax, and the reason for the depletion allowance does not apply. The deduction claimed was properly disallowed.
Reviewed by the Board.
Judgment will be entered on 15 days' notice, under *3973 Rule 50.
STERNHAGEN concurs in the result.
SMITH dissents.