Opinion — Stratton's Independence, Ltd. v. Howbert

400 OCTOBER TERM, 1913.

Argument for Stratton’s Independence. 231 U.S.

The Corporation Tax Law of 1909, having been enacted before the

ratification of the Sixteenth Amendment, was not in any proper

sense an income tax law; but was an excise tax upon the conduct of

business in a corporate capacity, measured by the income, with

certain qualifications prescribed by the act itself.

The process of mining ores is, in a sense, equivalent in its results to a

manufacturing process, and is “business” within the Corporation

Tax Law of 1909.

Income may be defined as the gain derived from capite!, from labor, or

from both combined.

In fixing the income by which the excise on conducting business should

be measured, Congress has power to fix the gross income even though

such income involved a wasting of the capital as in mining ores.

The Corporation Tax Law deals with corporations engaged in actus!

business transactions and presumably conducted according to busi-

ness principles.

Whatever may be the proper method of computing depreciation under

the Corporation Tax Law by reason of taking ore from the premises

of a mining corporation, the rules applicable to liability of trespassers

for taking ore have only a modified application thereto.

Where the ease is here under § 239, Judicial Code, and the whole record

has not been sent up, this court, under Rule 37, deals with the fact»

as certified and not otherwise: under such circumstances it answers

only the questions of law certified and does not go into questions

of fact or of mixed law and fact.

Tue facts, which involve the construction of the Cor-

poration Tax Act of August 5, 1909, ¢. 6, 36 Stat. 11, 112,

and its application to mining corporations are stated in

the opinion.

Mr. William V. Hodges, with whom Mr. A. A. Hoehling,

Jr, and Mr. John R. Van Derlip were on the brief, for

Stratton’s Independence, Limited:

Mining corporations are not included in general classi-

fications of corporations, as such classifications are used in

legislation. The fact that the natural enjoyment of a

mining estate results in the waste of the estate, and the

fact that the true value thereof is impossible of determina-

tion, have caused such properties to be considered as

anomalous, and to be so treated in the general incorpora-

STRATTON’S INDEPENDENCE v. HOWBERT. 401

231 U.S. Argument for Stratton’s Independence.

tion laws of the mining States, and the decisions of the

courts relating thereto, in the laws establishing systems

of taxation in the mining States, and by the decisions un-

der the Federal Bankruptey Act of 1898.

Special provision for the taxation of mining claims

has been made in the following instances: Colorado Rev.

Stat., 1908, $$ 5617-5627, as amended, Laws 1913,

pp. 965-567; Montana Rev. Pol. Code, 1907, §§ 2500,

2563-2571; Nevada Rev. Laws, 1912, §§ 3687-3709;

Idaho Rev. Codes, $§ 1863-1872; Utah Comp. Laws, 1907,

$$ 2504, 2566-2573; Washington Laws, 1897, p. 155;

New Mexico Comp. Laws, 1897, $$ 1560, 1756; Wyoming

Comp. Stat. 1910, $§ 2449-2454; Oklahoma Laws, 1907-

1908, ce. 71, Art. 2; Laws 1909, c. 38; Art. 2, Comp.

Laws, $$ 7702, 7703, 7706.

The courts recognize the same necessity for special

treatment of this class of properties. Taxation of Mining

Claims, 9 Colorado, 635; Pilgrim M ining Co. v. Teller

County, 32 Colorado, 334; Iron Silver Co. v. Henderson,

12 Colorado, 369; Foster v. Hart Mining Co., 52 Colorado,

459.

Ina number of mining States the statutes make express

exceptions, applicable to mining corporations, in relation

to the conveyance of mining properties in exchange for

capital stock, regardless of the true value thereof, and for

disposition of the same on liquidation. Colorado Rev.

Stat., 1908, $$ 975-983; Montana Rev. Civ. Code, 1907,

§§ 3824, 3860, 3896, 4403-4412; North Dakota Rev.

Code, 1899, $$ 3154-3161; Nevada Rev. Laws, 1912,

S$ 1200-1202, 1216-1218, 1330-1340; Kerr’s California

Civ. Code, $$ 586-590; Lord’s Oregon Laws, $$ 6713-

6715; Washington, Ballinger’s Ann. Code, 1897, $$ 4280-

4284; and see decisions demonstrating the necessity of

special treatment of mining premises. Leschen Rope Co.

v. Allen, 187 Fed. Rep. 977; In re South Mountain M ining

Co., 14 Fed. Rep. 347; Ross v. Mining Co., 36 Minnesota,

VOL. CCXXX1—26

402 OCTOBER TERM, 1913.

Argument for Stratton’s Independence. 231 U. S.

38; In re Elk Park Mining Co., 101 Fed. Rep. 422; In re

Rollins Mining Co., 102 Fed. Rep. 982; In re Keystone

Coal Co., 109 Fed. Rep. 872; In re Woodside Coal Co.,

105 Fed. Rep. 56.

In the administration of the Corporation Tax Law the

Commissioner of Internal Revenue at first recognized

that the provisions thereof do not fit the conditions of a

mining corporation, and attempted to make over the act

of Congress by administrative legislation. T. D. 1742,

December 15, 1911.

Mining corporations are not engaged in carrying on

business within the meaning of the act. Flint v. Stone

Tracy Co., 220 U. S. 107.

Merely existing as a corporation and exercising corpo-

rate franchises does not necessarily amount to the “carry-

ing on of business,” within the intent of theact. MeCoach

v. Minehill Ry. Co., 228 U. 8. 295; Zonne v. Minneapolis

Syndicate, 220 U. S. 187; see also Clark y. Sidway, 142

U.S. 682; Farrand v. Gleason, 56 Vermont, 633; Jordan

v. Soule, 79 Maine, 590; Harris vy. de Raismes, 38 Atl.

Rep. (N. J.) 637; Nash v. Mitchell, 71 N. Y. 199: Childers

v. Neely, 47 W. Va. 70; Judge v. Braswell, 13 Bush (Ky.),

67.

The application of the act to mining corporations re-

sults in a tax upon the capital itself, while, as applied to

corporations having an income, as distinguished from

capital, it does not result in a tax upon capital. This

inequality of operation is inherently unjust. Laying aside

all questions of constitutional limitations, the act should

not be so construed as to accomplish this unjust result,

if there be a fair and reasonable construction to be given

the act which would avoid such an unjust resuit. Wash-

ington &e, R. R. Co. v. Coeur d'Alene Ry. Co., 160 U. S.

77, 101; Bate Refrigerator Co. v. Sulzberger, 157 U.S. 1.

The proceeds of mining operations do not represent

values created by, or incident to, the business activities

STRATTON’S INDEPENDENCE ». HOWBERT. 403

231 U.S. Argument for Stratton’s Independence.

of such a corporation, and cannot be a bona fide measure

of a tax leveled at such corporate business activities.

The measurement of the tax by the excess of the receipts

for ore marketed over the cost of mining, extracting and

marketing the same is equivalent to a tax upon the usual

and ordinary incidents of ownership of such property—

such a direct tax as is prohibited by the Constitution—

and, further, is such a tax as Congress, by the provisions

for the deduction of depreciation provided in the act,

expressly intended to avoid. Knowlton vy. Moore, 178

U.S. 41, 81-82.

The proceeds of mining operations result from a con-

version of the capital represented by real estate into capital

represented by cash, and are in no true sense income. The

act cannot apply to a corporation which has no income.

The act ought not to be construed to include mining

corporations unless it clearly appears that Congress in-

tended to include them. Duties are never imposed on the

citizen upon vague or doubtful interpretations. Hart-

ranfi v. Wiegemann, 121 U.S. 609, 616; Pennsylvania Steel

Co. v. New York City Rys. Co., 198 Fed. Rep. 774; Taylor

v. Treat, 153 Fed. Rep. 656; Parkview Building Assn. v.

Herold, 203 Fed. Rep. 876, 880.

The fact that mining corporations come within the

letter of the act, if true, does not conclude the argument;

for, if mining corporations be not within the spirit of the

act, it is not applicable to them. Brewer vy. Blougher,

14 Pet. 178; United Slates v. Kirby, 7 Wall. 482; Heyden-

feldt vy. Daney Mining Co., 93 U.S. 634, 638; Holy Trinity

Church v. United States, 143 U.S. 457.

The proceeds of ores mined by a corporation from its

own premises are not income within the meaning of the

aforementioned act of Congress. T. D. 1742.

For a correct definition of income, see Cornell University

Vv. Davenport, 30 Hun, 177, 180: Thorne v. de Breteuil, 86

App. Div. 405, 416; Wilcox v. County Commissioners,

104 OCTOBER TERM, L913.

Argument for Howbert, Collector. 231 UL S.

103 Massachusetts, 544; Sargent Land Co. v. Von Baum-

baci, in the District Court of the United States, for the

District of Minnesota, decided in August, 1913: (ray v.

Darlington, 15 Wall. 63; Spooner v. Phillips, 62 Connecti-

cut, 62, 68; Foster v. Hart Mining Co., 52 Colorado, 459,

4672 Smuath ve Hooper, 95 Maryland, 16, 26; Vinton’s

Appeal, 99 Pa. St. 434; In re Mount Alto Iron Co., 174

Pa. St. 430; Mereer ve Buchanan, 132 Kod. Rep. 501, 507;

In re Armitage (1893), 3 Ch. Div. 337, 347.

If the proceeds from ore sales are to be treated as

income, a mining corporation is entitled to deduct. the

value of such ore in place and before it is mined as de-

preciation within the meaning of the Corporation Tax Law.

Leschen Rope Co. v. Allen, 187 Fed. Rep. 977; In re South

Mountain Mining Co., 14 Fed. Rep. 327; United States

v. Nipissing Mines Co., 202 Fed. Rep. 803.

Mr. Assistant Attorney General Graham for Howbert,

Colleetor:

The Corporation Tax Act applies to mining corporations

and the proceeds of ore mined by a corporation on its

own premises are income within the meaning of the act.

Gay v. Baltic Mining Co., 220 U. 8. 107; Mitchell v. Clark

Tron Co., 220 U.S. 107.

This result also follows from the nature of capital and

income in relation to mining companies. When capital

is by labor changed from a fund into a flew, it necessarily

changes its character from capital to income, In the case

of a mine the mineral as it lies in the ground is capital,

but when it is extracted, converted into ore, and sold the

result is a flow, and income has acerued.

The rule that corporations whose capital is intended to

provide a permanent means of carrying on business must

first charge off depletion in plant or stock has no applica-

tion to a corporation whose sole purpose is to invest its

capital in a specific piece of property like a mine, and

&

SERALLON'S INDEPENDENCE p. HOWBERT. 405

232 U.S. Counsel as amicus cure.

afterwards to consume the property or extract its value

itt a profit. Morawetz, Corp., 2d ed., $ 442.

All the judicial authority is to the same effect. Clegg v.

Rowland, L. R. 3 Eq. 368; Daly v. Beckett, 24 Beay. 114;

Eley’s Appeal, 103 Pa. St. 300; MeClintock v. Dana, 106

Pa. St. 386; Raynolds v. Hanna, 55 Fed. Rep. 783; Shoe-

maker's Appeal, 106 Pa. St. 392.

The payment of dividends by a mining company out

of the proceeds of ore sold is not a payment out of capital.

Excelsior Water Co. \. Pierce, 90 California, 131; Lee v.

Neuchatel Asphalte Co., 41 Ch. Div. 1.

The fact that the operation of a mine may decrease its

Valuation by exhaustion does not prevent the profits

of the business of a mining corporation not devoted to

dividends from being properly denominated surplus.

It has been expressly held by the Supreme Court of

Pennsylvania that oil companies and mining Companies

have income within the meaning of an income-tax act.

Commonwealth v. The Ocean Oil Co., 59 Pa. St. 61; Com-

monwealth v. Penn, Gas Coal Co., 62 Pa. St. 241.

A mining company is not entitled to deduct the value

in place of ore mined during the year as depreciation within

the meaning of the Corporation Tax Act. Alianza Co. v.

Bell (1904), 2 K. B. 666; 1905, 1 IK. B. 184; (1906) A.C,

IS; Coltness Iron Co. v. Black, 6 App. Cas. 315.

Depreciation to be allowed as a deduction under the

Corporation Tax Act must be actually paid, and not merely

estimated,

For other authorities in support of these contentions

see London County Council v. The Attorney General. 1901,

A.C. 26; People v. Roberts, 156 N.Y. 585; Stale v. Evans,

99 Minnesota, 220; Slerens v. Hudson's Bay Co. 101 Law

Times, 96; Waring v. Mayor &e. of Savannah, 60¢ worgia, 93.

By leave of court Mr. William D. Guthrie filed 2 brief

AS GMICUS CUTI@.

es

406 OCTOBER TERM, 1913.

Opinion of the Court. 231 U.S.

By leave of court Mr. Charles S. Thomas, Mr. W. H.

Bryant, Mr. George L. Nye, Mr. William P. Malburn,

Mr. William Story and Mr. William Story, Jr., also filed

a brief as amici curie.

Mr. Justice Prrney delivered the opinion of the

court.

This action was brought in the District Court of the

United States by Stratton’s Independence, Limited, a

British corporation carrying on mining operations in the

State of Colorado upon mining lands owned by itself,

to recover certain moneys paid under protest for taxes as-

sessed and levied for the years 1909 and 1910 under the

provisions of the Corporation Tax Act, being § 38 of the

act of August 5, 1909 (36 Stat. 11, 112, ¢. 6). The case

Was tried upon an agreed statement of facts, from which it

appears, as to the vear 1909, that the company extracted

from its lands during the year certain ores bearing gold

and other precious metals, which were sold by it for sums

largely in excess of the cost of mining, extracting, and

marketing the same, that the gross sales amounted to

$284,682.85, the cost of extracting, mining, and marketing

amounted to $190,939.42, and “the value of said ores

So extracted in the year 1909, when in place in said mine

and before extraction thereof, was $93,743.43.” With

respect to the operations of the company for the year 1910,

the agreed facts were practically the same, except as to

dates and amounts. It does not appear that the so-called

“value of the ore in place,” or any other sum, was actually

charged off upon the books of the company as depreciation.

Upon this state of facts each party moved the court for

a directed verdict, at the same time presenting for consid-

eration certain questions of law, and among them the

following:

“1. Ts the value of the ore in place that was extracted

STRATTON’S INDEPENDENCE v. HOWBERT. 407

231 U.S. Opinion of the Court.

from the mining property of the plaintiff during the years

in question properly allowable as depreciation in estimat-

ing the net income of the plaintiff subject to taxation

under the Act of Congress of August 5, 1909 (36 Stat.,

ch. 6, p. 11)?

“2. Is the right to such credit affected by the fact

that the plaintiff does not carry such items on its books

in a depreciation account.”

The court directed a verdict in favor of the plaintiff

with respect to certain amounts that were undisputed and

concerning which no question is now raised; but directed

2 verdict in favor of the defendant with respect to so

much of the taxes paid as represented the value in place

of the ore that was extracted during the years in question,

overruling the contention that such value was properly

:lowable as depreciation in est imating the net income of

the plaintiff. To this ruling proper exceptions were taken.

The resulting judgment having been removed by writ

of error to the Circuit Court of Appeals, that court certi-

fies that the following questions of law are presented to it,

the decision of which is indispensable to a determination

of the eause, and upon which it therefore desires the in-

struction of this court:

“I. Does Section 38 of the Act of Congress, entitled

‘An Act to provide revenue, equalize duties, and encour-

age the industries of the United States, and for other

purposes,’ approved August 5, 1909 (36 Stat., p. 11),

apply to mining corporations?

“II. Ave the proceeds of ores mined by a corporation

from its own premises income within the meaning of the

aforementioned Act of Congress?

“TIT. If the proceeds from ore sales are to be treated

as income, is such a corporation entitled to deduct the

value of such ore in place and before it is mined as de-

preciation within the meaning of Section 38 of said Act

of Congress?”’

408 OCTOBER TERM, 1913.

Opinion of the Court. 231 U.S.

The provisions of § 38 are set forth in the margin."

The principal grounds upon which it is contended

that the questions ought to receive answers favorable

to the company are expressed in various forms, viz.,

that mining corporations are su? generis, because the

‘Sec. 38. That every corporation, jomt stock company or association,

organized for profit and having a capital stock represented by shares, and

every insurance company, now or hereafter organized under the laws

of the United States or of any State or Territory of the United States

or under the acts of Congress applicable to Alaska or the District of

Columbia, or now or hereafter organized under the laws of any foreign

country and engaged in business in any State or Territory of the United

States or in Alaska or in the District of Columbia, shall be subject to

pay annually a special excise tax with respect to the carrying on or doing

business by such corporation, joint stock company or association, or

insurance company, equivalent to one per centum upon the entire net

income over and above five thousand dollars received by it from all

sources during such year, exclusive of amounts received by it as divi-

dends upon stock of other corporations, joint stock « companies or

associations, or insurance companies, subject to the tax he reby im-

posed; or if organized under the laws of any foreign country, upon the

amount of net income over and above five thousand dollars received by it

from business transacted and capital invested within the United States,

and its Territories, Alaska, and the District of Columbia during such

year, exclusive of amounts so received by it as dividends upon stock

of other corporations, joint stock companies or associations, or insur-

ance companies, subject to the tax hereby imposed; provided, however,

that nothing in this section contained shall apply to labor, agricultural

or horticultural organizations, or to fraternal beneficiary societies,

orders, or associations operating under the lodge system, and providing

for the payment of life, sick, accident, 2nd other benefits to the members

of such socicties, orders or associations, and dependents of such mem-

bers, nor to domestic building and loan associations, organized and

operated exclusively for the mutual benefit of their members, nor to any

corporation or association organized and operated exclusively for

religious, charitable, or educational purposes, no part of the net income

of which inures to the benefit of any private stockholder or individual.

Second. Such net income shall be ascertained by deducting from the

gross amount of the income of such corporation, joint stock company or

association, or insurance company, received within the year from all

STRATTON’S INDEPENDENCE ». HOWBERT. 409

231 U.S. Opinion of the Court.

natural enjoyment of mining lands necessarily results in

the waste of the estate; that the true value thereof is

impossible of accurate determination, and hence mining

corporations are not included in general classifications

of corporations as such classifications are employed in

other legislation; that the provisions of $38 do not. fit

rc essen Sesh mh meas

sources, (first) all the ordinary and necessary expenses actually paid within

the year out of income in the maintenance and operation of its business

and properties, including all charges such as rentals or franchise pay-

ments, required to be made as a condition to the continued use or

possession of property; (second) all losses actually sustained within the

year and not compensated by insurance or otherwise, including a reason-

able allowance for depreciation of property, if any, and in the ease of in-

surance companies the sums other than dividends, paid within the year

on policy and annuity contracts and the net addition, if any, required

hy law to be made within the year to reserve funds: (third) interest

actually paid within the year on its bonded or other indebtedness

to an amount of such bonded and other indebtedness not exceeding the

paid-up capital stock of such corporation, joint stock company or associ-

ation, or insurance company, outstanding at the close of the year, and

in the case of a bank, banking association or trust company, all interest.

actually paid by it within the year on deposits: (fourth) all sums paid

by it within the year for taxes imposed under the authority of the

United States or of any State or Territory thereof, or imposed by the

government of any foreign country as a condition to carrying on busi-

ness therein; (fifth) all amounts received by it within the year as divi-

dends upon stock of other corporations, joint stock companies or associ-

ations, or insurance companies, subject to the tax hereby imposed;

provided, that in the case of a corporation, joint stock company or associ:-

tion, or insurance company, organized under the laws of a foreign country,

such net income shall be ascertained by deducting from the gross amount

of its income received within the year from business transacted and capital

invested within the United States and any of its Territories, Alaska. and

the District of Columbia, (first) all the ordinary and necessary expenses

actually paid within the year out of earnings inthe maintenance and oper-

ation of its business and property within the United States and its Ter-

ritories, Alaska, and the District of Columbia, including all charges

such as rentals or franchise payments required to be made as a condi-

tion to the continued use or possession of property; (second) all losses

actually sustained within the year in business conducted by it within the

410 OCTOBER ‘TERM, 1913.

Opinion of the Court. 231 U.S.

the conditions of a mining corporation; that such corpora-

tions are not in truth engaged in “carrying on business”’

within the meaning of the Act; that the application of the

Act to them results in a tax upon the capital, while as

applied to other corporations it does not result in such a

tax, the result being an inequality of operation that is

United States or its Territories, Alaska, or the District of Columbia not

compensated by insurance or otherwise, including a reasonable allowance

for depreciation of property, if any, and in the case of insurance com-

panies the sums other than dividends, paid within the year on policy

and annuity contracts and the net addition, if any, required by law to

be made within the year to reserve funds; (third) interest actually paid

within the year on its bonded or other indebtedness to an amount of

such bonded and other indebtedness, not exceeding the proportion

of its paid-up capital stock outstanding at the close of the year whieh

the gross amount of its income for the year from business transacted

and capital invested within the United States and any of its Territories,

Alaska, and the District. of Columbia bears to the gross amount of its

income derived from all sources within and without the United States;

(fourth) the sums paid by it within the year for taxes imposed under

the authority of the United States or of any State or Territory thereof;

(fifth) all amounts received by it within the year as dividends upon

stock of other corporations, joint stock companies or associations, and

insurance companies, subject to the tax hereby imposed. In the case

of assessment insurance companies the actual deposit of sums with

state or territorial officers, pursuant to law, as additions to guarant y

or reserve funds shall be treated as being payments required by law to

reserve funds.

Third. There shall be deducted from the amount of the net income

of each of such corporations, joint stock companies or associations, or

insurance companies, ascertained as provided in the foregoing para-

graphs of this section, the sum of five thousand dollars, and said tax

shall be computed upon the remainder of said net income of such corpo-

ration, jo‘nt stock company or association, or insurance company, for

the year ending December 31, 1909, and for each calendar year there-

after; and on or before the first day of March, 1910, and the first day of

March in each year thereafter, a true and accurate return under oath or

affirmation of its president, vice-president, or other principal officer, and

its treasurer or assistant treasurer, shail be made by each of the corporations,

joint stock companies or associations, and insurance companies, subject

STRATTON’S INDEPENDENCE v. HOWBERT. 411

231 U.S. Opinion of the Court.

inherently unjust; that the proceeds of mining opera-

tions do not represent values created by or incident to

the business activities of such a corporation, and therefore

cannot be a bona fide measure of a tax leveled at such cor-

porate business activities; that the proceeds of mining

to the tax imposed by this section, to the collector of internal revenue for

the district in which such corporation, joint stock company or associa-

tion, or insurance company, has its principal place of business, or,

in the case of a corporation, joint stock company or association, or in-

surance company, organized under the laws of a foreign country, in the

place where its principal business is carried on within the United States,

in such form as the Commissioner of Internal Revenue, with the ap-

proval of the Secretary of the Treasury, shall prescribe, setting forth,

(first) the total amount of the paid-up capital stock of such corporation,

joint stock company or association, or insurance company, outstanding

at the close of the year; (second) the total amount of the bonded and

other indebtedness of such corporation, joint stock company or associa

tion, or insurance company at the close of the year; (third) the gros:

amount of the income of such corporation, joint stock company or associ:-

tion, or insurance company, received during such year from all sources,

and of organized under the laws of a foreign country the gross amount oj

its income received within the year from business transacted and capital

invested within the United States and any of its Territories, Alaska,

and the District of Columbia; also the amount received by such corpo-

ration, joint stock company or association, or insurance company,

within the year by way of dividends upon stock of other corporations,

joint stock companies or associ:tions, or insurance companies, subject

to the tax imposed by this section; (fourth) the total amount of all the

ordinary and necessary expenses actually paid out of earnings in the

maintenance and operation of the business and properties of such cor-

poration, joint stock company or association, or insurance company,

within the year, stating separately all charges such as rentals or fran-

chise payments required to be made as a condition to the continued

use or possession of property, and if organized under the laws of a for-

eign country the amount so paid in the maintenance and operation of

its business within the United States and its Territories, Alaska, and

the District of Columbia; (fifth) the total amount of all losses actually

sustained during the year and not compensated by insurance or other-

wise, stating separately any amounts allowed for depreciation of prop-

erty, and in the case of insurance companies the sums other than

412 OCTOBER TERM, 1913.

Opinion of the Court. 231 U.S.

operations result from a conversion of the capital repre-

sented by real estate into capital represented by cash,

and are in no true sense income; and that to measure the

tax by the excess of receipts for ore marketed over the

cost of mining, extracting and marketing the same, is

ee SS ete

dividends, paid within the year on policy and annuity contracts and

the net addition, if any, required by law to be made within the year to

reserve funds; and in the case of a corporation, joint stock company

Or association, or insurance company, organized under the laws of a for-

eign country, all losses actually sustained by tt during the year in business

conducted by it within the United States or its Territories, Alaska, and

the District of Columbia, not compensated by insurance or otherwise,

stating separately any amounts allowed for depreciation of property, and

in the case of insurance companies the sums other than dividends,

paid within the year on poliey and annuity contracts and the net

addition, if any, required by law to be made within the year to reserve

fund; (sixth) the amount of interest aetually paid within the year on

its bonded or other indebtedness to #n amount of such bonded and

other indebtedness hot exceeding the paid-up capital stock of such

corporation, joint stock COMpany Or association, or insurance company,

outstanding at the close of the year, and in the case of a bank, banking

association or trust company, stating Separately all interest paid by

it within the year on deposits; or in ease of a corporation, joint stock

Company or association, or insurance company, organized under the

laws of a foreign country, interest so paid on its bonded or other in-

debtedness to an amount of such bonded and other indebtedness not

exceeding the proportion of its paid-up capital stock outstanding uf

the close of the year, which the gross amount of its income for the

year from business transacted and capital invested Within the United

States and any of its Territories, Alaska, and the District of Columbia,

bears to the fross amount of its income derived from all sources within

and without the United States; (seventh) the «mount paid by it within

the year for taxes imposed under the authority of the United States or

‘iny State or Territory thereof. and Separately the amount 80 paid by

it for taxes imposed by the fevernment of any foreign country as a

condition to carrying on business therein: (eighth) the net income of

such corporation, joint stock company or association, or insurance com-

pany, after making the deductions in this section suthorized. All such

returns shall as received be transmitted forthwith hy the collector to

the Commissioner of Internal Revenue.

STRATTON’S INDEPENDENCE >». HOWBERT, 413

231 U.S. Opinion of the Court.

equivalent to a direct tax upon the property, and hence

unconstitutional, Next, assuming the proceeds of ore

are to be treated as income within the meaning of the

Act, it is yet insisted that such proceeds result solely

from the depletion of capital, and are therefore deductible

as depreciation under the provisions of the Act.

We do not think it necessary to follow the argument

through all its refinements. The pith of it is that mining

corporations engaged solely in’ mining upon their own

premises have but one kind of assets, and that in the

ordinary use of them the enjoyment of the assets and the

Wasting thereof are in direct proportion, and proceed pari

passu; and hence that a mining corporation is not en-

gaged in business, properly speaking, but is merely oc-

cupied in converting its capital assets from one form into

another, and that a tax upon the doing of such a business,

Where the tax is measured by the value of the property

owned by the corporation, would be in excess of the con-

stitutional limitations that existed at the time of the

passage of the act of 1909, as laid down in Pollock y.

Farmers’ Loan & Trust Co., 157 U. 8. 429; S. C., 158

U.S. 601,

The peculiar character of mining property is sufficiently

obvious. Prior to development. it may present to the

naked eye a mere tract of land with barren surface, and

of no practical value except for what may be found be-

neath. Then follow excavation, discovery, development,

extraction of ores, resulting eventually, if the process be

thorough, in the complete exhaustion of the mineral

contents so far as they are worth removing. Theoretically,

and according to the argument, the entire value of the

mine, as ultimately developed, existed from the beginning.

Practically, however, and from the commercial stand-

point, the value—that is, the exchangeable or market

value—depends upon different considerations. Beginning

from little, when the existence, character and extent of

SSeS

414 OCTOBER TERM, 1913.

Opinion of the Court. 231 U.S,

the ore deposits are problematieal, it may increase steadily

or rapidly so long as discovery and development outrun

depletion, and the Wiping out of the value by the practical

exhaustion of the mine may be deferred for a long term of

vears. While not ignoring the importance of such con-

siderations, we do not think they afford the sole test for

determining the legislative intent.

As has been repeatedly remarked, the Corporation Tax

Act of 1909 was not intended to be and is not in any proper

sense an income tax law. This court had decided in the

Pollock Case that the income tax law of 1894 amounted in

effect to a direct tax upon property, and was invalid be-

cause not apportioned according to population as pre-

seribed by the Constitution. The act of 1909 avoided this

difficulty by imposing not an income tax, but an excise tax

upon the conduct of business in a corporate capacity,

measuring, however, the amount of tax by the income of

the corporation, with certain qualifications prescribed by

the Act itself. FUing Vv. Stone-Tracy Co., 220 U. 8. 107:

McCoach y. Minehill Co., 228 U. 8. 295 ; United States y.

Whitridge, (decided at this term, ante, p. 144),

For this and other obvious reasons we are little aided by

a discussion of theoretical distinctions between capital

and income. Such refinements ean hardly be deemed to

have entered into the legislative purpose. Of course, if it

were demonstrable that to read the Act according to iis

letter would render jt unconstitutional, or glaringly un-

equal, or palpably unjust, » reasonable ground would

exist for construing it according to its spirit rather than its

letter. But in our opinion the Act is not fairly open to

this criticism. It is not correct, from either the theoretica]

or the practical standpoint, to say that a mining corpora-

tion is not engaged in business, but is merely occupied in

converting its capital assets from one form into another.

The sale outright of a mining property might be fairly

described as a mere conversion of the capital from land

STRATTON’S INDEPENDENCE » HOWBERT. 415

231 U.S. Opinion of the Court.

into money. But when a company is digging pits, sinking

shafts, tunneling, drifting, stoping, drilling, blasting, and

hoisting ores, it is employing capital and labor in trans-

muting a part of the realty into personalt y, and putting it

into marketable form. The very process of mining is, ina

Sense, equivalent in its results to & manufacturing process,

And, however the operation shall be described, the trans-

action is indubitably “business” within the fair meaning

of the act of 1909; and the gains derived from it are

properly and strictly the income from that business; for

“income” may be defined as the gain derived fron,

capital, from labor, or from both combined, and here we

have combined operations of capital and labor. As to the

alleged inequality of operation between mining corpora-

tions and others, it is of course true that the revenues

derived from the Working of mines result to some extent in

the exhaustion of the capital. But the same is true of the

earnings of the human brain and hand when unaided by

capital, yet such sarnings are commonly dealt with jn

legislation as income. So it may be said of many manu-

facturing corporations that are clearly subject to the act of

1909, especially of those that have to do with the produc-

tion of patented articles; although it may be foretold from

the beginning that the manufacture will be profitable

only for a limited time, at the end of Which the capital

value of the plant must be subject to material depletion,

the annual gains of such corporations are certainly to he

taken as income for the purpose of measuring the amount

of the tax.

It seems to us that the first two questions certified must

be answered in the affirmative principally for two reasons.

First, because mining corporations are within the general

description of § 38, which comprises “erery corporation,

joint stock company or association organized for profit and

having a capital stocl: represented by shares, . | and

engaged in business in any state or territory of the United

416 OCTOBER TERM, 1913.

Opinion of the Court. 231 U. 6.

States; and, secondly, because the Act specifies those

classes of corporations that are to be exempt from its opera-

tion, and mining corporations are not among them.

Those exempted are labor, agricultural or horticultural

organizations, fraternal beneficiary societies, orders or

associations operating under the lodge system, domestic

building and loan associations, corporations and associa-

tions organized and operated for religious, charitable, or

educational purposes, etc. Moreover, the section imposes

“a special excise tax with respect to the carrying on or

doing business by such corporation,” ete. That mining

companies are doing business, within the fair intent and

meaning of this clause, seems to us entirely plain, for rea-

sons already given. The conduct of such business results

in profit, for it eannot be seriously contended that the

ores are not worth more at the mine mouth than they were

worth in the ground, plus the cost of mining. Corpora-

tions engaged in such business share in the benefits of the

Federal Government, and ought as reasonably to contrib-

ute to the support of that Government as corporations

that conduct other kinds of profitable business,

As to what should be deemed “income” within the

meaning of $ 38, it of course need not be such an income as

would have been taxable as such, for at that time (the

Sixteenth Amendment not haying been as yet ratified),

income Was not taxable as such by Congress without

apportionment according to population, and this tax was

not so apportioned, Evidently Congress adopted the

income as the measure of the tax to be imposed with

respeet to the doing of business in corporate form because

it desired that the excise should be imposed, approximately

at least, with regard to the amount of benefit presumably

derived by such corporations from the eurrent operations

of the Government. In Flint v. Stone-Tracy Co., 220

U.S. 107, 165, it was held that Congress in exercising the

right to tax a legitimate subject of taxation as a franchise

STRATTON’S INDEPENDENCE v. HOWBERT. 417

231 U.S. Opinion of the Court.

or privilege, was not debarred by the Constitution from

measuring the taxation by the total income, although

derived in part from property which, considered by itsell,

was not taxable. It was reasonable that Congress should

fix upon gross income, without distinction as to source, as

a convenient and sufficiently accurate index of the im-

portance of the business transacted. And from this

point of view, it makes little difference that the income

may arise from a business that theoretically or practically

involves a wasting of capital.

Moreover, Congress evidently intended to adopt a

measure of the tax that should be easy of ascertainment

and simply and readily applied in practice. The Act

preseribed that the tax should be “equivalent to one per

centum upon the entire net Income over and above $5,000

received by it from all sources during such year, exclusive

of amounts received by it as dividends upon stock of other

corporations,” ete., or, with respect to foreign corpora-

tions, “upon the amount of net income over and above

$5,000 received by it from business transacted and capital

invested within the United States,” ete. And the net

inceme was to be ascertained by taking, first, the “ gross

‘amount of the income of such corporation . . . re-

ceived within the year from all sources,”’ or, in the case

of foreign corporations, ‘‘from business transacted and

capital invested within,” ete., and deducting therefrom

losses sustained, interest paid, ete. And the return was

to be made under oath by the president and treasurer, or

other officers having like duties, indicating in the clearest

manner that it was to set forth dafa that with proper ac-

counting would appear upon the books of the corporation,

We have no difficulty, therefore, in concluding that the

proceeds of ores mined by a corporation from its own

premises are to be taken as a part of the gross income of

such corporation. Congress no doubt contemplated that

such corporations, amongst others, were doing business

VOL. COXXXI—27

OCTOBER TERM, 1913.

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ee

9 a)

Opinion of the Court. 231 U.S

With a wasting capital, and for such wastage they made

due provision in declaring that from the gross income there

should be deducted (inter alia) ‘‘all losses actually sus-

tained within the year,” including ‘“‘a reasonable allow-

ance for depreciation of property, if any,”’ ete.

This brings us to the third question, which is whether

such a mining corporation is entitled to deduct the value

of ore in place and before it is mined, as depreciation

within the meaning of $38. This question, however, is

to be read in the light of the issue that is presented to the

Cireuit Court of Appeals for determination, as recited in

the certificate. From that certificate it appears that the

case Was submitted to the trial court and a verdict directed

upon an agreed statement of facts, and in that statement

the gross proceeds of the sale of the ores during the year

were diminished by the moneys expended in extracting,

mining, and marketing the ores, and the precise difference

was taken to be the value of the ores when in place in

the mine.

That we do not misconstrue the certificate, and that, on

the contrary, the parties advisedly adopted this definition

of “value of the ore in place,” is apparent not only from

the form of the agreed statement of facts, but from the

arguments presented here in behalf of the plaintiff. The

contention is that if the proceeds of ore sales are to be

treated as income, the value of the ore in place and before

it is mined is to be deducted as depreciation, and that

such value is to be arrived at by the process indicated.

Briefs submitted in behalf of amie? curia have suggested

other modes for determining depreciation; but plaintiff

stands squarely upon the ground indicated by the certifi-

cate, as the following excerpts from the brief will show :

‘Assuming, then, that the proceeds of ore are to be

treated as income within the meaning of the Act, we sub-

mit that such proceeds result solely from depletion of capital,

und are therefore deductible as depreciation under the

STRATTON’S INDEPENDENCE +», HOWBERT. 419

231 U.S. Opinion of the Court.

provisions [of the Act] set out above. . . . And

we contend that if a part of the capital assets are removed

and sold, the property, as it originally stood, is actually

depreciated in value to the exact extent of such removal.

As an actual matter of experience, the original cost of the

property must, from its very nature, be highly speculative.

The values in the property are invisible, and impossible of

determination. They may be worth many times the cost,

or they may be worth nothing. . . . The value of the

ore in sight does represent a part of the capital, but there

is no warrant for limiting it to this amount, nor is there

any warrant for limiting the value of ore bodies there-

after discovered in any case to a standard fixed before

their discovery, and therefore, of necessity, purely conjec-

tural. . . . The true capital of a mining corporation

is the true value of the minerals within the limits of its

properties, irrespective of developed ore bodies or those

known to exist at any one moment. Investigation or

development may demonstrate the existence of values

theretofore unknown, but this results in no addition

to the actual capital. It remains the same as it was

before. . . .” And again, ‘‘ With every dollar’s worth

removed, the land from which it is taken contains that

much less of value; the corporation owns precisely that

much less real property than it possessed before; for every

dollar of cash received it relinquishes an equivalent

amount of ore in place, and makes no gain or profit by

the exchange.”

Reading these extracts in connection with what. is

contended respecting the first and second questions—to

the effect that mining corporations are not ‘‘doing busi-

ness,’ but are merely converting their capital assets from

one form into another—it is clear that a definition of the

‘value of the ore in place” has been inte itionally adopted

that excludes all ellowance of profit upon the process of

mining, and attributes the entire profit upon the mining

420 OCTOBER TERM, 1913.

Opinion of the Court. 231 U.S.

operations to the mine itself. In short, the parties propose

to estimate the depreciation of a mining property at-

tributable to the extraction of ores according to principles

that would be applicable if the ores had been removed by

a trespasser.

It is at the same time obvious that any method of

stating the account that excludes all element of gain from

the process of mining must, through one process or another,

exempt mining companies from liability to tax under the

act of 1909 with respect to their mining operations. And

so, an affirmative answer to the third question as pro-

pounded would be the same in effect as an affirmative

answer to the first or the second. For it is a matter of

little or no moment whether it is to be said (a) that mining

corporations are not “‘engaged in business” at all, or

(b) that they are engaged in business but the proceeds of

ore mined are not income, or (e) that such proceeds are

income, but that there must be allowed as depreciation all

that part of the proceeds which remains after paying the

hare outlays of the business. In either case mining cor-

porations would be exempt from the tax.

In our opinion, there are at least two insuperable ob-

stacles in the way of returning an affirmative answer to

the third question as certified.

In the first place, it is fallacious to say that, whatever

may have been the original cost of a mining property cr

the cost of developing it, if in fact it afterwards yield orcs

aggregating many times its original cost or market value,

this result merely proves and at the same time measures

the intrinsic value that existed from the beginning. We

are here seeking the correct interpretation and construc-

tion of an act of legislation that was, at least, designed to

furnish a practicable mode of raising revenue for the

support of the Government, and to do this in part by

imposing annual taxes upon corporations organized for

profit and by measuring the amount of the contribution

STRATPON’S INDEPENDENCE v. HOWBERT. 421

231 U.S. Opinion of the Court.

to be required from each corporation according to its

annual income. The Act deals with corporations engaged

in actual business transactions and presumably conducted

according to ordinary business principles. It was of course

contemplated that the income might be derived from the

employment of property in business, and that this prop-

erty might become more or less exhausted in the process;

and because of this, a reasonable allowance was to be

made for depreciation of it, if any. But plainly, we think,

the valuation of the property and the amount of the de-

preciation were to be determined not upon the basis of

latent and occult intrinsic values, but upon considerations

that affect market value and have their influence upon

men of affairs charged with the management of the

business and accounting of corporations that are organized

for profit and are engaged in business for purposes of profit.

And, secondly, assuming the depletion of the mineral

stock is an element to be considered in determining the

reasonable depreciation that is to be treated as a loss in the

ascertainment of the net income of a mining company

under the Act, we deem it quite inadmissible to estimate

such depletion as if it had been done by a trespasser, to

whom all profit is denied.

With respect to the proper measure of damages where

ore has been unlawfully mined by one person upon the

land of another, there is much conflict of authority.

Different modes of determining the damages have been

resorted to, dependent sometimes upon the form of the

action, whether trespass or trover; sometimes upon

whether the case arose at law or in equity; and often upon

whether the trespass was willful or inadvertent. See

Wooden-ware Co. v. United States, 106 U. S. 432, and cases

cited; Benson Mining Co. v. Alta Mining Co., 145 U. S.

428, 434; Pine River Logging Co. v. United States, 186

U. S. 279, 293; United States v. St. Anthony R. Co., 192

U. 8. 524, 542; Martin v. Porter (1839), 5 M. & W. 351,

422 OCTOBER TERM, 1915.

Opinion of the Court. 231 U.S.

352; Jegon v. Vivian (1871), L. R. 6 Ch. 742, 760; 40 I.

Ch. 389; 19 W. R. 365; Lir eee v. Rawyards Coal on an

(1880), 5 App. Cas. 25, 34; 42 L. T., N. S., 334; Coal Cree:

M. & M. Co. v. Moses, 15 Lea a. 300; 54 Am. Rep.

415; Winchester v. Crate, 33 Michigan, 205. See also

English and American Notes to Martin vy. Porter, and

Jegon v. Vivian, 17 Eng. Rul. Cas. 873, 876, ete. We are

not at this time concerned with this vexed question,

beyond saying that the rules applicable to trespassers ean

have only a modified application to the case of a mine

owner conducting mining operations upon its own lands,

where the question is,—What is the income derived

from the business?—and the incidental question,—What is

the reasonable depreciation, if any, of the mining property?

What has been said necessitates a negative answer to

the third question as certified. And we shall not go fur-

ther into the question of depreciation. The case comes

here under § 239, Judicial Code (derived from § 6 of the

Evarts Act, March 3, 1891, 26 Stat. 826, 828, ¢. 517).

It is established that in the exercise of this jurisdiction

this court, unless it see occasion to require the whole

record to be sent up for consideration, is to make answer

respecting the several propositions of law that are certified,

and is not to go into questions of fact, or of mixed law

and fact. Our Rule 37 requires that the certifieate shall

contain a proper statement of the facts upon which the

questions of law arise, and we deal with the facts as thus

certified, and not otherwise. Graver vy. Fauwrol, 162 U.S.

435, 437; Cross v. Evans, 167 U.S. 60, 63; United States v.

Union Pacific Railway, 168 U. 8. 505, 512; Emsheimer v.

New Orleans, 186 U. S. 33; Cincinnati, Hamilton Railroad

v. McKee.., 149 U.S. 259.

It would therefore be improper for us at this time to

enter into the question whether the clause, ‘2 reasonable

allowance for depreciation of property, if any”? ealls for

an allowance on that account in making up the tax, where

KANSAS CITY SO. RY. v. UNTTED STATES. 423

231 U.S. Syllabus.

no depreciation is charged in practical bookkeeping; «+

the question whether depreciation, when allowable, may

properly be based upon the depletion of the ore supply

estimated otherwise than in the mode shown by the agreed

statement of facts herein; for to do this would be to attri-

bute a different meaning to the term ‘value of the ore in

place” than the parties have put upon it, and to instruct

the Circuit Court of Appeals respecting a question about

which instruction has not been requested, and concerning

which it does not even appear that any issue is depending

before that court.

The first and second questions certified will be answered in

the affirmative; and the third question will be answered in

the negative.

Mr. Curer Justice Wuite, Mr. Justice McKenna,

and Mr. Justice Houmes dissent with respect to the

answer made to the third question.