Petitioners Brief — Bankers Pocahontas Coal Co. v. Burnet

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A AGRE

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SUPREME COURT OF THE UNITED STATES, ‘

OCTOBER TERM, 1932 A

No. 104 y

BANKERS POCAHONTAS COAL COMPANY, |

PETITIONER, e

US. Ww

COMMISSIONER OF INTERNAL REVENUE. 2}

D. J. F. SPTROTHER, Prritioxer,

COMMISSIONER OF INTERNAL REVENUE. ©

prea Vagos :

PETITIONERS’ BRIEF. )

——__ _- -- —___ i?

WELLS GOODYKOONTZ, ©

¥ CAMDEN R. McATEE, Fs

Attorneys for Petitioners. .

Of Counsel: p

GOODY KOONTZ axp SLAVEN,

MASON, SPALDING & McATEE. A

Page

Grant of the WTitS......ccccccccssoess ech RhbyeeWS Ate OER EES 1

Opinions below and jurisdiction............ ER pee cyrarrar 2

The basic issues......... Se ee Or eee ee re ee 2

Statement of the case...... Shinar as Simao s ebaaaealk-s bibeie se 3

The material facts......ccccccccccsrsccsccccees eemnen wat 3

Proceedings before the Board of Tax Appeals............ 6

Proceedings in the Circuit Court of Appeals.............. 7

Errors to be urged....... Swik hwy bNSba WES Maks ops RRS SAW SED Ae x 8

Summary of argument..... hee aeeae ES ET eee Ty Cee kT +)

Argument .......... Seaceean cauwen ans anne Sees sesueesuen® 10

Conclusion .........+.5+ isch baeecereke ee Pee ee eo 45

Decisions CITED.

Alexander v. King, 46 F. (2) 285. ...... cece eee cee erence eens 22, 24

Atlantic C. L. Co. v. Powe, 283 U. S. 401.............. eee eees 24

Baldwin v. Md., 179 U. S. 220... ..ccccccccscccvccsccvcscess 39

Bedell v. Commissioner, 30 F. (2) 622 (C, C. A.-2).......... 14.16

Berg v. Commissioner, 33 F. (2) 641 (Cert. denied 280 U. 8S.

Nn foc ues bead wiew Snes vee ee eee Chuo bess bbe m ans & 24, 25

Beyer vy. Fleischmann, 15 F. (2) 465 (C. C. A.-6).......--6--- 38

Billings v. United States, 2832 U. S. 261...........6- eee ee eens 26

Blair v. Oesterlein M. Co., 275 U. S. 220...........2. 2. eee eee 41

Bromley v. MeCaughn, 280 U. S. 124...... 2.00 eevee ee eee eee 30

Brushaber v. Union Pac. R. Co., 240 U. S. 1.....-..-0 22 eee eee 29

Burnet v. Coronado Oil & Ges Co., 283 U. S. 398........-6.--- 20, 22

Burnet v. Logan, 283 U. S. 404. ....... cece eee e eee eee eeee 11, 14.15

Burnet v. Logan, 42 F. (BY 198. ....cccscccvcccscccccccsscces 16

Burnet v. Thompson Oil & Gas Co.,, 283 U.S. 301...........--. yi |

Burkett v. Commissioner, 31 F, (2) 667............20 eee eens 24

Carr v. United States, 98 U. S. 438......... cece cece were eens 43

Coal Co. v. Overholt, 81 W. Va. 427.......... cece cccceeeceees 10

Commissioner v. Brown, 54 F. (2) 563 (C. C. A.-1)..........-- 11

City of New Orleans v. Citizens Bank, 167 U. 8. 871.......... 30

Crile v. Commissioner, 55 F. (2) 804 (C. C. A.-G) (Cert. denied

October 10, 1932) ........02-2055 sb Raa elS pals ne ale ben se ha 11

Crocker v. Malley, 249 U. S. 228........cc.ceceec ec reeerereees 38, 44

—2655

PRODI RIERA COTTA SIN TRIE RN SeSPR RORY es TNL

2 5 ean >

ii INDEX.

Page

Crocke v. Migeveisem, S68 WU. G. BE... ccccccccccccscecscsces 24, 26, 27

Darby Lynde Co. v. Commissioner, 51 F. (2) 32 (C. C. A. 10)

’ CO EE I ES I cb ccickcdewensiteaeiwecwecsieeeg en 21

' Doyle v. Mitchell, 247 U. S. 179......... PRR OP a A Oe 13

j Feather v. Baird, 85 W. Va. 267.............0eeeeeeeeeeeeees 10

4 Ferguson v. Commissioner, 45 F. (2) 578 (C. C. A.-5)... 2... eee 18, 22

ee RD. a re 26

Graham & Foster v. Goodcell, 282 U.S. 409. ....... 00.00 c ewes 36

; Greylock Mills v. White, 55 FP. (2) TO4... 2... ee eee eee eee 45

3 Group No. One Oil Corp. v. Bass, 288 — S. 279. ...19, 20, 22, 24, 26, 27

Guinter vy. Atlantic C. L. R. Co., 200 U.S. 273.2... 6... ee ee ee 39

, Harme!l vy. Commissioner, 55 “% (2) 155 (Cc. US 4 Se =

; Head Money Cases, 112 U. S. 580........ cece eee eens cece 26

Hirschi v. United States, * Ct. Cl. 687 (Cert. denied 280

UB. B FB). s..-. Rese hits Saban Aes eceaeanceneaewss 6, 24, 25, 27

Jefferson Gas Coal Co. v. Commissioner, 52 F. (2) 120

ee ret ca annuus a Se ahead mieuiawe we 20

Bawfeean’s Cane, 06 U. S: S66... cc cccccccccccccccccccccccs 40

Knowlton vy. Moore, 178 U. S. 41........-. Rear oeneaeuan 26

Kosmery! vy. Commissioner, sa A Tg Se Lae 2 9 ee 16

Taneen v. Ae eer: BIO G. Bi. Sian. n cose cccccvcscncecencccceces 12, 45

Lucas y. American Code Co., 280 U. S. 455......... 02sec eee eee 14

Lynch y. Allworth Stevens Co., 267 U. S. 364..............006- 29

McCormick y. Sullivant, 10 Wheat, 192..............0eeeeeeee 2t

Murphy Oil Co. v. Burnet, 55 F. (2) 17 (C. C. A-9)...... 21, 33, 34, 35

Michols v. Coctidiee, 274 U.S. Bae once ccc wccncscceccscecece ce 20

N. ¥.C. & H.R. R. R. Co., vy. United States, 24 Ct. Cl. 22........ 43

Old Colony R. R. Co. v. Commissioner, 284 U. 8. 552............ 12,17

Old Colony Trust Co. v. Commissioner, 279 U. S. 716............ 41

O'Meara vy. Commissioner, 34 F. (2) 390 (C. C. A.-10)......... 17

Pacifie Gas Co. y. San Francisco, 265 U.S. 403.............2065 16

ae ei a one Sein ccd 6 sceccnwenccesssices 13

Phillips v. Commissioner, 283 U.S. 589... ..... 00. cee ee eee eee 26

Ge ir I, IE ET, Oe ic wok dS esi ee awecucasesce nes 24, 26, 27 32

Poindexter v. Greenhow, 114 U. S. 270.......... 0.00. eee e eens 42

Pugh v. Commissioner, 49 F. (2) 76 (C. C. A.-5) (Cert. denied

aa iaiiras case caine wine Risleckle we Soaks miresiney aes 22

Rosenberger v. McCaughn, 25 F. (2) 699 (C. C. A.-3) (Cert.

I I is ie ID 6 bis dieic eae nem ewe wiblecawcuscwanecis 23, 25, 27

Sage v. United States, 250 U.S. 33... ...... cece eee eee e eee 36

Saunders v. Commissioner, 29 F. (2) 882 (C. C. A.-3) 2.2.2.2... 13

Schneider v. Duffy, 45 PF. (2) @42.........ccccccccccccccccecs iB

Schuelt +. Cochran, 107 TU. BS. GBS... 0c cccccicccccccccscccccss 43

Second Nat. Bank v. Woodworth, 54 F. (2) 672............... 44

vee a) " RRS PROTE RTO TON E ERERT WS een PGE I TTY .

INDEX. iil

Page

Ee ee re 10

Souffront v. LeCompagnie, 217 U. S. 475...............2-0000. 3S

South Vernon Oil Co. v. Hopkins, 49 F. (2) 1028 (C. C. A.-5).... 22

Stanton v. Baltic Mining Co., 240 U.S. 108................. 21, 23, 29

Steedman v. United States, 68 Ct. Cl. 226 (Cert. denied 275

I cance raat Sarena cata 0. lag ignated rine a es ee neO 27

Stratton’s Independence v. Howbert, 231 U.S. S00........ 12, 23, 28, 31

Toothmean v. Courtenay, G2 W. Var. 967... cccccceccecccccces 10

Tyler Adurr. v. United States, 281 U.S. 497............ 22 eee 24, 26

United States v. Biwabik Mining Co., 247 U.S. 116............. 29

United States v. Carver, BOO U. GB. SOB... cccccccccsscccccce 24

Me teins . , I, a an nn nn 5s ccc cieewccceees ic cicce 27

United States v. Guinzberg, 278 F. 363 (C. C. A-2)........-4.- 3

United States v. Frerichs, 124 0. S. SIS... 2. cccccccccscccces 40, 45

United States v. Sherman, 98 U. S. 505...........- cece ee eeees 42

United States v. Stone and Downer Co., 274 U. S. 225.......... 3y

Urpman v. Lowther Of] Co., 53 W. Va. SOL... ccc cccccccce 10

Von Baumbach vy. Sargent Land Co., 242 U.S. 503............-- 23, 28

nn NR Oh, Dak arc cineeecccc en secseeweeen eect 21

CONSTITUTION AND STATUTES CITED.

Constitution, Amendment XVI............. 4,5, 8, 9, 10, 17, 20, 28, 47

Individual Gross Income.

R. A. 1918, Section 215 (40 St. L. 1057-96, C. 18)... ........... 47

R. A. 1921, Section 213 (42 St. L. 227, C. 136) ................ 47

R. A. 1924, Section 213 (43 St. L. 253, C. 284) ...........2..6- 47

R. A. 1926, Section 213 (44 St. L. (Part 2) 9, C. 27). .......... 47

Individual Net Income.

R. A. 1918, Section 212 (Idem as above) ...........0..ceeeeees 48

ee a SN 0s oy ah ic ies ta mS aN ieee Slag & foie rail 48

I a a I tag errciv gree tnsnsirenee natn ee asNanSs 0a wth 6 48

a a a aces ahi sineen hen tiie es SAGA MIG INI w le 8 Ble 48

Corporation Gross Income.

R. A. 1918, Section 233 (Idem as above) .........ccccccsccccee 48

le I I I Seitiacsiins niecasaitsle Sibeco ntanctigiaeie aaienioin ee 6 a6 48

R. A. 1924, Section 233....... Aaa gam Ci een ee eas 48

' Bs ie INI CI gc went wee eence akin einpieirs wip bskale 48

a TERE ES aA UAT eT RNR LE a EAE i INTE

.* ——

meters

iv INDEX.

; Corporation Net Income.

5 Page

R. A. 1918, Section 282 (Idem as above)................0000- 49

He. ey De, PUNO CIs ha Sc kw deo sean Stas bk asaescabhos beans 49

F Bi FAL: Sees I I SS iss sel db RRS SRK See es sce eee have 49

. TR A. Gey COCO. RE 5s 50.65 ooh Aba sc Wawel weak dae ae cals as oar 49

; Meaning of Net Income.

} Article Di Cee. Bh, BS Ge GO) a ose seksi te; ssicsuecessceslewe 49

; Article 581 (Reg. 45, 62, 65, 69) ............ SO ee te 50

5 Income Accrued Prior to March 1, 1913.

; SEINE TP CRI 6.5 av sen bh nccescenaweme sivas. tunis Wike-g ieee wee 51

Corporation Deductions (Depletion).

R. A. 1918, Section 254 (Idem as above) ............ 0.2 e ee eee 52

: eS ic Ae, Ce SE ios 6 6W Wain eS bok aw au bab aioeK a bbe ale wes 52

2 BR Ri Se ONO Ns woah sc rules ce See b bcos ca.s cee seres n2

d hh SE NN SIR os Sind Gann ence Rie einaacredeewne oe 52

Returnable to Lessor.

4 Article 204 (Same).........0.0e0eeee SL et a NRCC 52

3 Adjustments as to Bonus.

Apttele Fis. (ee. ST, Ge, GG) aso voc cies deo ces ine cc cccsescavs 53

Article 216 (Reg. 69)..... Pr een rene ee err re D4. 35, 54

Dividends.

R. A. 1918, Section 201 (Idem as above)..............0.0000- 55

R. A. 1921, Section 201..........cecceeee (cae wane esess hemes 55

RR ae ae a a ey 56

Oe -Ae: Sy SN Is hana 5s 6b sana 9666455866446 08 doses SSS 57

Sources of Distribution.

Article 1542 (Same)........... swiss cock cee pees sseeseseceses 57

Article 1543 (Same)..........cceccecees WGN g's BRS S shear 57

Distribution from Depletion Reserves.

Article 1546 (Same) ....... EE OR Ee ee eee ee 58

PRES NES EE OE SE RL IEA PLL IE LINO GS LEME SENET GD SE TD BE ET te

INDEX. V

Certificate of Probable Cause.

Page

i 3. OEP CRS Ste Ty FE, ©. FG) BEY vias os sis vies c Seaton ce iaces ya)

Refunding Tares and Penalties Including Judgments.

R. S, 3220 (14 St. L. 111, C. 184, 9; 17 St. L. 401, C. 15, 1:

40 St. L. 1145, C. 18, 1316 (a); 44 St. L. 115, C. 27, 1111;

45 St. L. 878, C. 852, 619; 45 St. L. 996, C. 901, 3............ 5S

NAIR Si AER LSE LLIN NL LOIN LE RG LLL TY RIEL I INL SE Le OLED

—

LETS NEM REN EEN 59 LO RMON NTP ELEN TEEN TIE TIN, GROMMET RE 9S I BOTTLE NY TR OY a

SUPREME COURT OF THE UNITED STATES,

OCTOBER TERM, 1932

No. 104

BANKERS POCAHONTAS COAL COMPANY,

PETITIONER,

vs.

COMMISSIONER OF INTERNAL REVENUE.

No. 105

D. J. F. STROTHER, Petitioner,

vs.

COMMISSIONER OF INTERNAL REVENUE.

PETITIONERS’ BRIEF.

Grant of the Writs.

Writs of certiorari to the Circuit Court of Appeals,

Fourth Cireuit, were granted herein on October 10,

1932, and the two cases, being related, should be heard

together.

BEAT LAST A" aR RMS MEO SE Fe EN SINSTO NBEO SMES Y SIEM PRL LEN ELLE LER NT S EF TINNY LTA AT

— HERERO IML EY xe 3 iii

EAT TPF ty TRO

Opinions Below and Jurisdiction.

The opinion of the Cireuit Court of Appeals ren-

dered January 27, 1932, is reported in 55 F. (2) 626

(R., pp. 120-134); the findings of fact and opinion of

the United States Board of Tax Appeals, rendered

January 22, 1930, are reported in 18 B. T. A. 901 (R.,

pp. 30-57). The jurisdiction herein has been shown

heretofore (Petition for writ and supporting brief

(pp. 1, 2, 13)).

The Basic Issues.

Whether proceeds of a sale of coal in place effected

in 1902 and collected subsequent to the Sixteenth

Amendment under contracts not providing for pro-

duction of any maximum or minimum tonnage, or for

any definite payments, constitute taxable net income

under the several Revenue Acts.

Whether the statutory depletion allowances avail-

able to a lessor are allowable to a vendor of coal in

place who has severed his interest in the depletable

mineral, or to his assignee.

Whether the statutory depletion allowances avail-

able to a lessor are applicable to payments for coal in

excess of the payment for coal actually mined within

a taxable year.

Whether a depletion allowance determined in prior

litigation between a taxpayer and Collector of Internal

Revenue, who was defended therein by the Commis-

sioner of Internal Revenue, constitutes res adjudicata

in these later proceedings between the same taxpayer

and the Commissioner of Internal Revenue.

Statement of the Case.

Income tax deficiencies of $39,171.05 against peti-

tioner Company, for the years 1920 to 1926, and of

$5,806.11, against petitioner Strother, are here in-

volved.

In 1901 and 1902, the fee owner of West Virginia

acreage, valueless except for its coal content (R., p.

39), demised and let said coal content to various min-

ing operators. The instruments of demise and letting

were originally prepared by petitioner Strother as

attorney for said fee owners, and their form is that

prevailing in the West Virginia coal fields, adopting

and following the Pennsylvania form of contract as

introduced by Pennsylvanians who were largely instru-

mental in the early development of the West Virginia

coal fields. One of the instruments, agreed upon as

typical of all of them, is in evidence herein (R., p. 40).

The Board of Tax Appeals admitted (R., p. 49), and

the lower court herein expressly held (R., p. 123), that

said instrument constitutes a sale of coal in place

under the State law of West Virginia and of Penn-

sylvania.

In 1912, petitioner Company was organized and

acquired, and has since held, the fee title to said

acreage subject to said instruments, and also the

beneficial interest of the former fee owner in said

instruments. By said typical instrument the mining

operator in 1901 agreed to pay ‘‘10 cents per ton for

each and every ton of coal mined’’, with ‘*$5,000 for

each and every year as a minimum”’ (R., pp. 40-41),

and the grantor retained no interest in said coal con-

tent. Petitioner Company, having no other business,

has, since 1912, collected the contract payments each

year (R., p. 90), and distributed them, upon a cash

basis (R., p. 46), to its stockholders, of whom peti-

tioner Strother is representative, excepting amounts

necessary to meet the taxes herein involved which

were retained and paid out at the first opportunity

(R., p. 72).

; The operators since 1901 and 1902 have possessed

! and mined the coal (R., pp. 39, 90).

; Neither petitioner Company, nor the original fee-

owner, were ever in the mining business; petitioner

Company having acquired, in 1912, the rights to the

; subsequent payments for coal sold in 1902, never

owned any coal, and, in subsequent years, only col-

, lected the deferred proceeds of sale of real estate

effected and completed in 1901.

After adoption of the Sixteenth Amendment and en-

actment of the Revenue Acts, both petitioners in their

tax returns disclosed said payments and distributions

as being the proceeds of sales of coal in place effected

before the Amendment, and consequently not subject

to tax (R., pp. 38, 46, 49). Ignoring the state law of

property (R., p. 92), the Commissioner of Internal

Revenue for the years 1914-1919 held petitioner Com-

pany and the operators for Federal tax purposes were

lessor and lessees, and said payments were gross in-

come but that every 10-cent payment should be re-

duced by a statutory depletion allowance of 3.6 cents,

representing the non-taxable return of capital or in-

NTE EE EEL TOIT NT TT TE ITT PEG EET EERILY AT MNES ei.

neaeo v ’

vested property therein received, to ascertain taxable

net income. Said Commissioner assessed and _ re-

quired petitioner Company thereby to pay taxes of

about $6,000 to the proper collector upon the alleged

net income so ascertained (R., pp. 47, 90). Petitioner

Company, thereupon, sued said Collector in the United

States District Court in West Virginia to recover said

taxes for cause, either that same were the non-taxable

proceeds of purchase money contracted for before the

Sixteenth Amendment, existing unconditionally on

March 1, 1913, and payable thereafter (R., p. 47), or

alternatively, if petitioner Company was a lessor and

not a vendor, that the depletion unit measuring return

of capital or invested property should be fixed in a

greater amount (R., p. 47). In said action the Com-

missioner of Internal Revenue by his own counsel of

record, and the District Attorney defended the Col-

lector (R., p. 47). Therein, petitioner Company ob-

tained a final judgment fixing a depletion unit of 5

cents per ton, with a consequent recovery of a substan-

tial part of the taxes, which judgment was duly satis-

fied and has since remained in full effect (R., p. 47).

Contemporaneous with and subsequent to said liti-

gation, said Commissioner determined income taxes

of about $40,000 (R., p. 38) against petitioner Com-

pany for the years 1920-1926, holding petitioner Com-

pany as a lessor was only entitled to depletion of 3.6

cents per ton, for 1920 to 1923, inclusive, and an aver-

age of 2.6 cents per ton of coal paid for in 1924 to

1926, inclusive (R., p. 75), and refusing to give any

effect to the 5-cent depletion rate established by said

REIMER, OS TTY PEE OY EAM RS REO GNA eI ety PEA PMR LIS 0 rte

. = : . .

judgment (R., pp. 46, 47, 48) except in the computa-

tion of invested capital for 1920.

As to petitioner Strother, the Commissioner in-

creased his net income for the several years by his

entire receipts from said purchase money distribu-

tions, without any allowance for non-taxable depletion

reserves received in the distributions, and determined

the resulting deficiencies of tax against him (R., pp.

48, 49).

Petitioners, by their appropriate appeals, petitioned

the United States Board of Tax Appeals for redeter-

: minations of said several deficiencies, claiming peti-

tioner Company was neither the owner nor lessor of

any mine, neither petitioner was taxable upon pur-

chase money payments derived from sales of coal in

: place effected before March 1, 1913, and payable there-

after without income increment, and claiming—in the

; alternative—that if the payments were taxable after

allowance of depletion deductions, the 5-cent deple-

tion rate established in previous litigation between the

parties was res adjudicata thereof, and should be al-

lowed instead of the 3.6-cent rate (R., pp. 7, 8, 18, 19).

The Board of Tax Appeals, without denying that the

demise of 1902 effected a sale of coal in place accord-

ing to the property rule of West Virginia (R., p. 49),

held: First, The contracts for Federal tax purposes,

under the rule of Hirschi v. United States, infra, estab-

lished the relation of lessor and lessee between peti-

tioner Company and the operator, making the pay-

ments gross income subject to depletion allowances

(R., p. 50); Second, That bonuses, or minimum pay-

ments in excess of payment of coal actually mined in

aa RTE mS AAI Ge Att anTS een NE NTN DA OA TT seers weeny pe

. ve oe a as

ne es

the year, are gross income not subject to depletion

allowances (R., pp. 49, 70); and Third, The depletion

rate of 5 cents per ton determined in previous litiga-

tion between the parties over the same subject mat-

ter was not thereby allowances to petitioner Company

(R., p. 52), and said Board determined total defi-

ciencies of $39,171.05 against petitioner Company (R.,

p. 71), and thereby of $5,806.11 against petitioner

Strother.

By their petitions for review (R., p. 73) petitioners

applied to the Circuit Court of Appeals for the Fourth

Circuit for review of said Board decision, alleging as

errors: (1) That such payments were not taxable in-

come (R., p. 81); (2) Alternatively, that the adjudged

5-cent depletion rate was applicable (R., p. 81); and

(3) That any depletion was allowable upon coal paid

for and not merely upon coal mined (R., p. 82); and,

(4) As to petitioner Strother, that he received no tax-

able income, or if so, that all depletion reserves should

be eliminated from the distributions made to him.

The Circuit Court of Appeals held, First, the con.

tracts of 1902 effected sales of coal in place (R., p.

123); Second, that, nevertheless, Congress intended to

tax said sales proceeds by returning capital through

lessor depletion allowances (R., p. 124) ; Third, that the

West Virginia judgment was not binding upon the

Commissioner and hence did not establish the 5-cent

depletion rate (R., p. 127); and Fourth, affirmed the

Board determination whereby the minimum annual

payments in excess of payment for coal actually mined

were held to be bonuses returnable as gross income

without allowance of depletion deductions against

ERNE ATER SERENE NT TG MERTEN A MIRE

same (R., p. 132). It further held its decision of the

Company case (R., p. 132) would substantially deter-

mine the Strother case. Incidental issues not here of

importance are omitted as immaterial.

Thereupon, writs of certiorari were granted herein

to each petitioner.

Errors to be Urged.

The Board and court below erred (references to

opinion of each):

1. In deciding purchase money installments of the

proceeds of sales of coal in place effected in 1901 and

1902, when paid by the grantees in the years subse-

quent to the Sixteenth Amendment, are taxable in-

come to petitioner Company, who, at and before March

1, 1913, owned the unconditional claim and right then

existing to receive the unpaid part of said purchase

money in the several subsequent years, and thereafter

merely collected same (R., pp. 49, 124).

1(b). In deciding the distribution by petitioner Com-

pany of said proceeds to its stockholder Strother is

taxable income to him (R., pp. 57, 135).

2. In deciding Congress intended by the Revenue

Acts to tax said proceeds of sale (R., p. 124).

3. In deciding the grantor of coal sold in place, or

his assignee, is a lessor eutitled to the depletion al-

lowances prescribed for a lessor (R., pp. 51, 124) by

the Revenue Acts.

4. In deciding that the excess amount of minimum

payment received in any year from the grantee over

the payment therein made for coal actually mined

within the year is not subject to any depletion al-

lowance (R., pp. 49, 134).

5. In deciding a judgment in favor of petitioner

Company against a Collector, who was defended of

record in the proceeding by the Commissioner of In-

ternal Revenue, acting through his official counsel, and

which judgment involves the same subject matter of

statutory depletion allowances as is presented herein,

and was duly paid by the United States, is not res

adjudicata herein against said Commissioner as to the

amount of depletion, if any, allowable to petitioner

Company (R., pp. 52, 127).

Summary of Argument.

The primary position of petitioners is that the pro-

ceeds of the sales of coal in place, effected before the

Sixteenth Amendment was enacted, are not income

subject to tax under the subsequent Revenue Acts

when collected thereafter.

Their secondary or alternative position involves the

sufficiency of statutory depletion allowances, if said

proceeds subsequently received are royalties of a

lessor subject to depletion. Petitioners contend any

applicable depletion rate must be applied to the entire

proceeds and not to the part of same only represent-

ing coal mined within the year. They further contend

any depletion should be at the rate previously ad-

judged in litigation between the parties.

Decision of these issues in the case of petitioner

Company will apply to and decide the case of peti-

tioner Strother.

ee RPSL RE LER A PRATT LIEN ELE Ch NET EIA, UNE IE NP LTE SEE SIE a ae meta

. . .

ARGUMENT.

: Proceeds of the sale of mineral in place effected be-

fore the XVI Amendment and collected thereafter are

not taxable as income to either petitioner under subse-

quent Revenue Acts, because they are only the returns

: from a claim or right unconditionally existing on and

before March 1, 1913, and thereafter payable.

E To hold otherwise conflicts with the XVI Amend- :

ment and judicial precedents.

AM cose tee

Petitioners stand first upon the proposition of law

announced by the Cireuit Court of Appeals, to wit: }

‘‘We shall assume for purposes of this de-

cision that the law of West Virginia is that a

mining lease constitutes a sale of the mineral

in place.”’

In support thereof, the lower Court makes reference

to Coal Company v. Overholt, 81 W. Va. 427, 424;

Feather v. Baird, 85 W. Va. 267; Urpman v. Lowther

Oil Co., 53 W. Va. 501; Toothman v. Courtney, 62

W. Va. 167, and Smith v. Root, 66 W. Va. 633.

It follows the original fee owner sold the coal in

place in 1901 and 1902 for a price payable thereafter,

and petitioner Company in 1912 succeeded to and since

holds the right to collect the unpaid purchase money

in subsequent years. Said right involved no payment

of interest or profit. The subsequent proceeds are

clearly not subject to income tax, being within the

definition of Article 90 of Regulations 45, 62, 65 and 69,

issued by the Commissioner of Internal Revenue in

CAP ANG ce 8 wake 8

the years 1918 to 1926, inclusive. Said Article 90 pro-

vides : f

‘Income accrued prior to March 1, 1913.—

Any claim existing unconditionally on March .

1913, whether presently payable or not and held

by a taxpayer prior to March 1, 1913, whether

evidenced by writing or not, and all interest

which had accrued thereon before that date, do

not constitute taxable income, although actually

recovered or received subsequent to such date.

interest accruing on or after that date is taxable

income. Where an interest-bearing claim held

on February 28, 1913, is paid in whole or in

part after that date, any gain derived from the

payment of the claim is taxable.’’

Here it may be noted that the foregoing Article has

been broadened beyond ‘‘any claim existing uncondi-

tionally’’ by judicial interpretation, and in Commis-

sioner Vv. Brown, 54 F. (2d) 563 (C. C. A. 1) such claim,

existing as a conditional obligation, on and before pas-

sage of the Sixteenth Amendment, is held not to be

income, when subsequently collected, upon authority of

Burnet v. Logan, 283 U. S. 404, which latter decision

of this Court is a sufficient touchstone to solve the

present cases. Nor because the typical instrument pro-

vides a possible forfeiture upon defaults by the op-

erators, can it be inferred the instrument creates a

conditional obligation defeating the transfer of inter-

est effected through the sale in place, for in Crile v.

Commissioner, 55 Fed. (2d) 804 (C. C. A. 6) (certiorari

denied October 10, 1932), wherein a sum of money was

paid as part consideration of a lease, the Court says:

LE tye ey Panes DR ING aR hag -

I EE EER SS CLIT ISA E LT RC LOE BN I I ge mene ceeorcae .

% wea PEPE AER IOP SI

‘“Where, there is an intent to create in the

‘lessee’ an interest in the property itself—as by

way of purchase—even though that interest may

be forfeitable by failure to perform conditions

subsequent, and this intent is made manifest by

the instruments duly executed to carry it into

effect, the attending payment is a return of

capital, and should be so regarded, at least prior

to forfeiture and reversion.’’

It follows petitioner Company, as assignee of its

predecessor who effected the sale, collects capital and

no more in receipt of payments made since 1912 and

after the Sixteenth Amendment.

The adoption of the Amendment makes March 1,

1913, when it became effective, the line of division be-

tween income that is not or is taxable under the subse-

quent Revenue Acts levying income taxes without ap-

portionment, and it follows that any income previously

existing was and is not subject to subsequent income

taxes (Lucas v. Alexander, 279 U.S. 573, 577). This

principle expressed in the foregoing Article has very

recently found terse statement again by this Court in

Old Colony R. R. Co. v. Commissioner, 284 U.S. 552,

557 :

‘‘That income had become capital prior to

the adoption of the Amendment and could not

be reached by a subsequent income tax act.’’

Stating the proposition of fact more precisely in

reference to the present case, we submit this Court

said in Strattons Independence v. Howbert, 231 U.S.

399, 414-15:

“The sale outright of a mining property

might fairly be described as a mere conversion

of the capital from land into money.”’

whereby, in this case, the subsequent collection of

money resulting from a sale of property made before

the Amendment became effective is a receipt of capital

and not of income subject to tax under the subsequent

Revenue Acts.

In the lower Courts, in similar situations, it has

often been so decided. Thus, in Saunders v. Commis-

stoner, 29 F. (2d) 832 (C. C. A. 3), an inventor, in

1911, sold an invention covered by a patent applica-

tion, and, in 1920, received $25,000 in payment there-

for, and it is held same was a return of capital and

not taxable income. In United States v. Guinzberg,

278 F. 363 (C. C. A. 2), a dividend declared before

March 1, 1913, is held not taxable income when there-

after received. In Park v. Gilligan, 293 Fed. 129, a

claim for damages existing before and on March 1,

1913, and realized by payment in 1916 is held not to

be income when distributed in dividends to stock-

holders. In Schneider v. Duffy, 43 F. (2d) 642, tax-

payer, in 1916, agreed to accept 1,500 shares of stock

deliverable 300 shares per year as consideration for

his certain agreements, and it is held any income from

the transaction was received in 1916 and not when

the stock was delivered.

Petitioner Company is certainly entitled to return

of its capital before taxable income is realized (Doyle

v. Mitchell, 247 U. S. 179, 185), but the capital value

on March 1, 1913, of its right to receive the purchase

money payable thereafter is not definitely known and

cannot be ascertained as a matter of market value for

reasons given in Bedell v. Commissioner, 30 F. (2d)

622, 624 (C. C. A. 2), as follows:

“If a company sells out its plant for a negoti-

: able bond issue payable in the future, the profit

may be determined by the present market value

of the bonds. But if land or a chattel is sold,

and title passes merely upon a promise to pay

money at some future date, to speak of the

promise as property exchanged for the title

appears to us a strained use of language, when

calculating profits under the income tax.

«* * * it is absurd to speak of a promise

to pay a sum in the future as having a ‘market

value’, fair or unfair. Such rights are sold, if

at all, only by seeking out a purchaser and hig-

gling with him on the basis of the particular

transaction.’’

In Burnet v. Logan, 283 U. 8S. 409, 412, this Court

held that the market value of an agreement to pay to

taxpayer a certain sum per ton of extracted ore could

not be determined, saying:

‘The lease contract did not require produc-

tion of either maximum or minimum tonnage,

or any definite payments. * * *

«“* * * a promise to pay indeterminate

sums of money is not necessarily taxable in-

come. ‘Generally speaking the income tax law

is concerned only with realized losses, as with

realized gains.’’’ Lucas v. American Code Co.,

280 U.S. 455, 449.

Ee OIE AAI ET IO ENG OE eS BIR Ne 8 Pe as a . = . . '

7 EON ED LE LOL LED ETE TTI

| eects

In Burnet v. Logan a depletion rate computed upon

conjecture is expressly rejected, and the 3.6 cent rate

herein is therefore to be denied. Its basis is in sub-

stance the assumption that the present value of $34,-

000 being payment at the rate of 10 cents per ton re-

ceivable during each of 40 years after March 1, 1913,

is $510,000, or 3.6 cents per ton on that date. But

such assumption is not justified for no average receipt

per year can be determined, and without an average

annual receipt there can be no computation. No aver-

age annual receipt can be known for no maximum pay-

ment is provided, and the minimum is evidently not

the measure of the receipt. Therefore, no actual mar-

ket or fair value as of March 1, 1913, can be known

for the contingencies of receipt remain undiscovered.

Other material contingencies, default of the operator,

possible acceleration of payment, uncertainty of pro-

duction, and similar details, are entirely evident, and

make the assumed value entirely fantastic, where peti-

tioner Company is entitled to reality of computation.

The lower Court says an allowance of 3.6 cents per

ton would return to taxpayer a total of $1,353,911.11

of capital upon the tonnage estimated in the stipula-

tion as existing on March 1, 1913. The record shows

(R., p. 44) petitioner Company through 1919 had only

received $244,094.62, and that the capital value of

$510,000 on March 1, 1913, does not include two coal

seams which were being mined when the valuation was

made (R., pp. 93, 102). This Court says in Burnet v.

Logan (p. 412), a taxpayer is entitled to the return of

capital before it may be charged with taxable income,

~~ > ae

and where the capital is not in fact returned there is

no taxable income.

The self-evident conjectural and speculative nature

of any computed value on March 1, 1913, of the pur-

3 chase money contracts is probably best visualized by

reference again to the character of payment which

justifies such computation. Such a comparative exists

in Kosmeryl v. Commissioner, 25 F. (2d) 87 (C. C. A.

7), relating to sale of a mineral property before March

1, 1913, for a price payable in 40 equal installments,

evidenced by non-interest bearing negotiable notes;

and therein the present value of the notes on March

1, 1913, is declared to be their capital asset value and

subsequent receipts in excess thereof to be taxable

income. This accords with the statement of Judge

Hand in Bedell v. Commissioner, supra, distinguish-

ing such a case from one, such as the present case, in-

volving a mere promise to pay money at a future date.

Herein, as in Burnet v. Logan, 42 F. (2d) 193, 196,

3 the reasoning of the Circuit Court subsequently ap-

proved by this Court is entirely applicable where the

: duration of the mining operations, tonnage to be mined

and receipts in any year, are all uncertain and there-

fore afford no basis of computation. The Court said:

‘‘The ultimate duration of the life of a mine

is uncertain or unknown and forms no basis on

which to formulate a definite financial policy.

Hoover’s Principles of Mining, p. 44. See also

Pacific Gas Co. v. San Francisco, 265 U. S. 403.

Moreover, the division of percentage as a re-

turn of capital and that of income is an estimate

based upon assumptions and uncertainties. It

is an unsafe guide either to determine ex-

Seton ie Gites OMENS Se DR ESET OT AT OF OTC DIRE ye Ole el _ — sit

changeable value or the fair market value.

O’Meara v. Commissioner, 34 F. (2d) 390 (C.

C. A. 10.)’’

Therefore, an income situation not being reason-

ably presented herein, it follows that Article 90 rea-

sonably says taxable income or gain is not received

when the claim is collected subsequent to the Amend-

ment. This accords with the principles of Old Colony

R. R. Co. v. Commissioner, 284 U. 8. 552, 560, 561,

that a construction of the taxing act most favorable to

taxpayers in cases of doubt is proper and that:

‘‘The plain obvious and rational meaning of

a statute is always to be preferred to any curi-

ous, narrow minded sense that nothing but the

exigency of a hard case and the ingenuity and

study of a powerful intellect would discover.’’

* * *

7. oe

the words of the statute do not

refer to some esoteric concept derived from

subtle and theoretic analysis.’’

Taxation of any part of said contract proceeds as

income being not authorized by the Sixteenth Amend-

ment, or the subsequent judicial precedents, the con-

trary decision of the lower Court is material error.

Under subsequent Revenue Acts Congress never in-

tended to tax the proceeds of this sale in place effected

before the Amendment when thereafter collected, or to

declare the vendor or his assignee is entitled to the

statutory depletion allowances provided for a lessor of

coal mines.

After holding the typical instrument constitutes a

sale of coal in place, the lower court declares (R., p.

122) this Court has decided a mining lease is more

than a sale and delivery of property, in that it involves

a manufacturing process, and that royalties are in-

come of the business and as such subject to taxation.

It concludes Congress intended to tax said proceeds—

called royalties in its opinion—after deduction there-

from of a reasonable allowance for depletion.

Such declaration of the lower Court is erroneous in

at least three aspects.

j First, What this Court may have decided about

a mining lease is not decisive where a mining property

is sold, and no property interest is retained.

Second, Loosely terming the sale proceeds as roy-

alties, omits their meaning.

In Ferguson v. Commissioner, 45 Fed. (2d) 5738,

(C. C. A. 5), another case of sale of mineral in place,

4 involving the propriety of statutory depletion either

against a seven-eighths interest sold in place, or

against the remaining one-eighth interest receivable

when produced as the sale consideration, or against

both, it is said:

‘*Royalties represent the retained interest of

the lessor or the vendor in the property or min-

erals which he receives from time to time as

revenues under the contract, He (Ferguson)

did not convey that interest under the deed or

lease, but provided that he should receive a frac-

tion of the minerals themselves.’’

The real meaning of the receipts herein as proceeds

of a sale, and not as royalties from any interest re-

tained in the property, was further available to the

bs Salis ee ced et ae a + PRTG NT RE NTR NY ge LAER O TE Se |

. t'ey -~- . POSS

Mad a Bline th wt new. rbead Mog

SAITO ER

lower court by reference to and recognition of the sim-

ilar situation, excepting the provision therein for ad-

ditional payment of the value of part of the mineral

produced, described by this Court in Group No. One

Oil Corporation v. Bass, 283 U. S. 279, 281, another

ease of sale in place, as follows:

‘The leases conveyed all the oil and gas in

granting the right to find, produce, and appro-

priate all of them, wx consideration of the pay-

ment of stipulated sums and also the value of a

stated fraction of the oil and gas produced.”’

(Italics supplied.)

When the typical contract herein granted the oper-

ator ‘‘the sole and exclusive privilege of mining and

coking coal’’ it likewise (paraphrasing the above quo-

tation) ‘‘conveyed all the coal in granting the right to

find, produce, and appropriate all,’’ as said by this

Court, and there was no retained interest.

Third, and lastly, the vendor, or assignee, thereby

never got into the mining business nor became inter-

ested in its manufacturing processes, for, since 1901 or

1902, the vendor owned neither coal nor interest

therein, and petitioner Company has never owned any

coal or interest in coal.

The conclusion of the lower court that Congress in-

tended to tax said proceeds after allowing depletion

deductions, considered alone, is equally without found-

ation.

In the first place, Congress could not tax the pro-

ceeds of the capital claim for reasons previously given.

To do so violates the constitutional provisions which

ee ee ee

cae. ta

limit the power of Congress to tax income and no more,

under the Sixteenth Amendment.

This Court said in Nichols v. Coolidge, 274 U.S. 531,

541:

* * * ‘under the mere guise of reaching some-

thing within its powers, Congress may not lay

a charge upon what is beyond them. Taxes are

very real things and statutes imposing them

are estimated by practical results.’’

In the second place, a sale in place being a severance

of the estate of the grantor, such grantor is not a

lessor, and, as depletion is allowed by Congress only

upon the taxpayer’s interest in the mine, the grantor

has no depletable interest after the sale in place was

effected.

A sale of mineral in place effects a complete sever-

ance of the estate conveyed (Group No. One Oil Cor-

poration v. Bass, 283 U. 8. 279), wherein certain al-

leged immunities of a grantor were declared severed

lost to its grantee by a sale in place, as distinguished

from their preservation and benefit to a lessee, under

the same contract in a state not recognizing the rule of

sale in place, in the later decision of Burnet v. Coronado

Oil and Gas Co., 285 U. 8. 393. The payments by the

vendee for coal bought in place are capital expendi-

tures and not the deductible rentals of a lessee (Jeffer-

son Gas Coal Co. v. Commissioner, 52 F. (2) 120

(C. C. A. 3)).

The Congress in the Revenue Acts provides for al-

lowance of depletion deductions only to the owner, or

to the lessor and lessee of a mine (Cf. Statutes quoted

in Appendix), saying:

be AURORE PAILS RICO PIN MY FOLDER CAS ARLE POO TY, OO A ON NGPA NNER 21 OEE OM gre RD IO Yicig en SNR

” coe bie Ce ee |

«<* * * That in the case of such properties

acquired prior to March 1, 1913, the fair mar-

ket value of the property (or the taxpayer’s

interest therein) on that date shall be taken in

lieu of cost up to that date. (Section 234(g),

R. A. of 1918.)”’

Hence, Congress allows no depletion to a vendor, or

his assignee, after sale of his interest in the property.

The depletion deduction is not a matter of right, and

express authority therefor must be found in the Rev-

enue Acts (Stanton v. Baltic M. Co., 240 U. S. 108;

Burnet v. Thompson Oil and Gas Co., 283 U. 8. 301).

The essential statutory test, either for depletion or

depreciation is the interest of the claimant in the prop-

erty for as said of a statutory deduction for depre-

ciation, in Weiss v. Wiener, 279 U. 8S. 333, 336:

—‘‘he must show an interest in the property

and a present loss to make the statute apply.”’

In Murphy Oil Co. v. Burnet, 55 F. (2d) 17 (C. C. A.

9), we read:

“The statute, with reference to depletion

* * * ig a special one * * * involving

the production of oil and minerals from mines,

and the consequent return of capital by the

owners of interests therein, and controls over

other general provisions of the law in regard to

the return of capital investment.’’ (Italics

supplied. )

In Darby Lynde Co. v. Commissioner, 51 F. (2d) 32

(Cc. C. A. 10) (Cert. denied 52 S. C. 40), a discovery

value available to a partnership as a basis of depletion

O97 DPA SPER RII one 1 Coe aE

9. gab avine

st il ele

under the statute is denied to a successor corporation

created and owned by the partners. In Pugh v. Com-

misstoner, 49 F. (2d) 76 (C. C. A. 5) (Cert. denied, 52

S. C. 22), a taxpayer is held to have lost his right to

depletion of his lease interest after conveyance of such

interest because he thereby became a lessee without in-

vestment. In South Vernon Oil Co. v. Hopkins, 49 F.

(2d) 1028 (C. C. A. 5), we have the same conclusion

and the reason stated that the sale severed the de-

pletable interest in the property.

Third, in case of a severance of interest, of a sale,

the Congress has in the Revenue Acts made other pro-

visions, entirely apart from depletion, for taxing any

capital gain. Thus, in Texas, where, as in West Vir-

ginia, the State rule of sale of mineral in place governs

such matters, a taxpayer leased seven-eighths of the

mineral, while retaining the other one-eighth interest,

and received a cash bonus and royalties. That he thus

sold the seven-eighths interest in place, making his

bonus receipt subject to the special tax rate upon a

capital gain, and that only his retained interest re-

mained subject to depletion is the decision in Ferguson

v. Commissioner, 45 F. (2d) 573 (C. C. A. 5). In Harmel

v. Commissioner, 56 F. (2d) 153 (C. C. A. 5), the same

conclusion is reached upon authority of Group No. One

Oil Corporation v. Bass, and other decisions of this

Court. In Alexander v. King, 46 F. (2d) 235, in a very

similar case, the capital gain provision is held inap-

plicable because the Oklahoma rule of property does

not recognize a sale of mineral in place and ascertains

the parties to be lessor and lessee. (Cf. Burnet v. Co-

ronado Ou and Gas Co., 285 U.S. 393 (supra).)

SE AAO ON BOGS I De

OTE LILLE DLS TROT STII: PI ER

RITA Laren oe nat eA

Lastly, the ruling of the lower court herein is not

logical in results. If notwithstanding a sale in place,

the vendor is held entitled to depletion, although he

has parted with the property, this conflicts with the

established rule that depletion is incident to the prop-

erty interest. It deprives the vendee, as the sole owner

of the property, of some part of its depletion deduc-

tion, and converts his capital payments of installments

of the purchase money into rentals in the hands of the

recipient. It creates an allowance not authorized

by law.

The lower court (R., p. 124), after finding petitioner

Company stands in the shoes of a grantor and not of

a lessor as the result of the sale in place, nevertheless

decides that petitioner is a lessor to which the subse-

quent payments are income, buttressing this decision

(R., p. 124) with the statement:

“‘The Federal courts must respect the local

laws of property laid down by the courts of

the State, but the power of Congress to tax must

be judged by the realities of the situation and

not by the logic of State rules of property,

pushed inexorably to their extreme.’’

We would point out wherein this Court disapproves

this statement.

Such opinion conclusion flows from discussion of

earlier decisions of this Court (Stanton v. Baltic Min-

ing Co., 240 U. 8. 103; Strattons Independence v. How-

bert, 231 U. S. 399; Von Baumbach v. Sargent Land

Co., 242 U. S. 503), with special emphasis upon cases

in which certiorari was denied (R., p. 123) (Rosen-

a ew Puce aera —

* CNS Pw Py FF OEE EN NS LANE IER ALE IA BT

fi ai nals

berger v. McCaughn, 25 F. (2d) 699; Hirschi v. United

States, 67 Ct. Cl. 637; Berg v. Commissioner, 33 F.

(2d) 641; Burkett v. Commissioner, 31 F. (2d) 667;

Alexander v. King, 46 F. (2d) 235), and the statement

(R., p. 125), that later decisions of this Court (Tyler,

Admr., v. United States, 281 U. S. 497; Crooks v. Har-

relson, 282 U. S. 55; Poe v. Seaborn, 282 U. S. 101,

omitting Group No. One Oil Corp. v. Bass, 283 U. S.

279), are not progressive to acceptance of the State

rule of property in determining the liability to tax,

beeause (R., p. 125);

‘It is obvious that each of these decisions

turned upon the fundamental question whether

the property sought to be taxed came within the

purview of the taxing statutes.”’

However, such precise fundamental question is the

gravamen of this case, and the lower court—like the

Board in its decision of this case—labors in a former

twilight of tax decisions, now lifted by this Court.

Such zone of error has arisen by acceptance of denials

of certiorari as being a contradiction or modification

of previous decisions of this Court; notwithstandirg,

this Court has repeatedly declared a denial of certi-

orari does not have such effect (United States v. _'ar-

ver, 260 U. S. 482; Atlantic C. L. Co. v. Powe, 283

U. S. 401), and expresses no opinion upon the merits

of said cases.

In other words, a supposed Federal rule of prop-

erty, instead of the State rule of property, was reared

by the Board as decisive herein of the taxability of

the purchase money payments, and previously such

supposed Federal rule affected the decision of the Cir-

cuit Judge in the West Virginia litigation of petitioner

Company (R., p. 50). The lower Court restates and

relies upon such Federal rule herein as being estab-

lished by numerous denials of certiorari (R., p. 123).

The announcement of said Federal rule, as in disre-

gard of the State rule of property, made in May, 1929,

in Hirschi v. United States, 67 Ct. Cl. 637 (Cert. denied,

280 U. S. 576), holding a sale of mineral in place under

the Texas property rule is not given effect under the

Federal tax laws, is quoted (R., p. 51) in the Board

opinion as follows:

‘‘The Federal Government is not limited in

its selection of subjects for taxation by the con-

struction of the State courts as to the property

rights of individuals, provided the subject taxed

was primarily a proper subject for taxation.

Congress in passing a revenue act does not, and

is not called upon to suit the revenue system of

the country to the varying and conflicting de-

cisions and laws of the different States.’’

(Italics supplied.)

This Federal rule of property found support in

Berg v. Commissioner, 33 F. (2d) 641 (Cert. denied,

280 U. S. 598), decided in June, 1929, and in the earlier

decision of Rosenberger v. McCaughn, 25 F. (2d) 699,

(C. C. A. 3) (Cert. denied, 278 U. S. 604). The Board

decision in January, 1930, and its affirmance by the

lower Court in January, 1932, are thus but additional

expressions of such rule.

We may say each precedent relied upon by the Board

had previously become final, and the Federal rule

;

seemed established, but that this Court had repudiated

the rule before the lower Court adopted and reaffirmed

the rule.

After the Board decision, in November, 1950, this

Court definitely struck the rule down in Poe, Collector

v. Seaborn, 282 U.S. 101, 117, saying:

‘‘Finally, the argument is pressed upon us

that the Commissioner’s ruling will work uni-

formity of incidence and operation of the tax in

the various States, while the view urged by the

taxpayer will make the tax fall unevenly on

married people. * * * The answer to such

argument, however, is that the constitutional

requirement of uniformity is rot intrinsic, but

geographic. Billings v. United States, 232 U.S.

261; Head Money Cases, 112 U. 8. 580; Knowl-

ton v. Moore, 178 U. 8S. 41. And differences of

State law, which may bring a person within or

without the category designated by Congress as

taxable may not be read into the Revenue Act

to spell out a lack of uniformity. Florida v.

Mellon, 273 U. S. 12.’’

Again, this Court struck the Federal rule down, and

relied upon the State rule, in the income tax of Phillips

v. Commissioner, 283 U. S. 589, decided in May, 1931.

The State rule of sale in place found full effect in

April, 1931, in the income tax case, Group No. One Oil

Corp. v. Bass, 283 U.S. 279. The State rule of prop-

erty, in the excise tax cases of Tyler v. United States,

281 U. S. 497, decided in May, 1930, and in Crooks v.

Harrelson, 282 U. 8. 55, decided in November, 1930,

is upheld.

1b Wl er ik hin nadine attend araialtAl

ee thae ta hte eel dane ett ey Sle teed

Thus, any zone of error and uncertainty existing

when the Board decided these cases in January, 1950,

was removed by decisions of this Court before ihe

lower Court rendered its opinion in January, 1932.

In its decision of Crooks v. Harrelson (supra), this

Court (p. 63), expressly disapproved Steedman v.

United States, 63 Ct. Cl. 226 (Cert. denied 275 U. S.

528), upon which the Hirschi decision is substantially

rested by the Court of Claims.

Federal observance of the State rules of property if

the ownership of property is to be determined, springs

from early decisions of this Court (McCormick v.

Sullivant, 10 Wheat. 192, 202; United States v. Fox, 4

Otto 315), and is precisely reflected in later decisions

under the Revenue Acts (Poe v. Seaborn, 282 U.S. 101;

Group No, One Oil Corp. v. Bass, supra).

Only two cases, as the result of denials of certiorari,

stand in the way of the uniform application of the

State rule «f property in cases of sales of mineral in

place. They are Hirschi v. United States, 67 Ct. Cl.

637 (Cert. denied 280 U. S. 576), and Rosenberger v.

McCaughn, 25 F. (2d) 699 (C. C. A. 3) (Certiorari

denied 278 U.S. 604).

In Crooks v. Harrelson, this Court has expressly

disapproved Steedman v. United States, 63 Ct. Cl. 226

(Cert. denied 275 U. 8. 528), upon which the Court of

Claims substantially rested the Hirschi decision.

Hirschi v. United States and Rosenberger v. Mc-

Caughn, are now in effect disapproved by Group No.

One Oil Corp. v. Bass as Jecided in this Court.

The conclusion of Rosenberger v. McCaughn reat-

firmed by the lower Court herein:

ats . .

‘ ‘‘that the rules of decision laid down by the

State courts with regard to property, while,

generally controlling upon the Federal courts,

do not necessarily govern those courts in the

interpretation of the laws of Congress’’—,

as derived from earlier tax decisions of this Court re-

quires some explanation. It rests upon a review by

the lower Court of earlier decisions of this Court, and

which decisions, we submit, are inapplicable to the

: present case.

Strattons Independence v. Howbert, 231 U. S. 399,

arose before the Sixteenth Amendment, and decided

the Excise Tax of 1909, upon the conduct of a business

in a corporate capacity, which measured the tax by the

corporate income, was applicable to corporate gains

from operating mines as derived from a business of

‘*transmitting a part of the realty into personality and

putting it into marketable form.”’

Von Baumbach v. Sargent Land Co., 242 U.S. 503,

involved the same Excise Tax of 1909. It was held

the taxpayer was a corporate lessor under the Jaws of

Minnesota, receiving payments which were:

‘‘not in substance the proceeds of an outright

sale of mining property, but, in view of the

terms of these instruments were in fact rents or

royalties * * * within the term ‘income’ as

intended to be reached and taxed under the

terms of the Corporation Tax <Act,’’

was not entitled to any depletion thereon, and that it

was unnecessary to determine whether the established

law of the State should be followed in considering the

Corporation Tax Act.

LSI TT ETE I TT NI oo LT NO NE MEE Og ge —————

- - . i ee —

Stanton v. Baltic Mining Co., 240 U. S. 103, decided

that pursuant to the Sixteenth Amendment an income

tax upon income of a corporation derived from mining

operations upon its own lands is essentially the same

as the income tax imposed upon corporations engaged

in other business.

United States v. Biwabik Mining Co., 247 U. S. 116,

again involved the Excise Tax of 1909, and decided a

corporate lessee, upon authority of the Von Baum-

bach case, is in no sense a purchaser of ore in place,

and is not entitled to any depletion.

Lynch v. Allworth Stevens Co., 267 U. S. 364, in-

volved the Revenue Act of 1916 and held the lessor

and lessee each had a depletable interest in mineral

being mined, which was deductible from gross income

under a provision of said Act authorizing the deduc-

tion to compensate for property exhaustion.

The Baltic Mining Company decision must be read

in connection with Brushaber vy, Union Pacific R. Co.,

240 U. S. 1, in considering its statement that:

‘independently of the effect on the operation

of the Sixteenth Amendment, it was settled in

Strattons Independence v. Howbert that such

tax is not a tax upon property as such because

of its ownership, but a true excise levied on the

results of the business of carrying on mining

operations. ”’

In the Brushaber case (pp. 16, 17) we read:

‘“* * * The conclusion reached in the Pol-

lock case did not in any degree involve holding

that income taxes generally and necessarily

came within the class of direct taxes upon prop-

PDI

erty, but, on the contrary, recognized the fact

that taxation on income was in its nature an

excise entitled to be enforced as such unless and

until it was concluded that to enforce it would

amount to accomplishing the result which the

requirement as to apportionment of direct taxa-

tion was adopted to prevent, in which case the

duty would arise to disregard form and con-

sider substance alone, and hence subject the tax

to the regulation as to apportionment which

otherwise as an excise would not apply to

it. * * *99

This conception of income tax has been clarified in

Bromley v. McCaughn, 280 U.S. 124, 136, as follows:

‘*While taxes levied upon and collected from

persons because of their general ownership of

property may be taken to be direct (Pollock

ease, 157 U. S. 429), this Court has consistently

held, almost from the foundation of the Govern-

ment, that a tax imposed upon a particular use

of property, or the exercise of a single power

over property incidental to ownership is an

excise which need not be apportioned, * * *.’’

Now, herein petitioner Company never owned any

coal nor any interest in same, and is not within any of

the cases cited in that respect. Petitioner Company

has never been in the mining business; its predecessor

sold the coal which thereby became and is the property

of the operating company, whose income therefrom is

taxable under the rule of the Baltic Mining Company

ease. Petitioner Company is not an owner of coal, nor

a lessor thereof, and its receipts are not derived from

‘transmitting realty into personalty’’ as

said in Stratton’s Independence v. Howbert. Said

income flows from purchase money, the proceeds of a

sale in place, the result of a severance of interest—

represented by ownership of the right to collect said

sale proceeds when subsequently paid.

If the income tax upon all corporations is ‘‘a true

excise on the business of carrying on operations”’

(quoting from the Baltic Mining Company opinion and

deleting ‘‘mining’’), there must be some point of

severance. Otherwise, the vendor of land within which

coal or oil is subsequently discovered, is thereby put

in the mining business through the mere subsequent

collection of the purchase price although he may not

of right require the property to be mined nor control

its use in any way.

In Stratton’s Independence, this Court indicates the

limit of the doctrine by saying:

“The sale outright of a mining property

might fairly be described as a mere conversion

of the capital from land into money.”’

Such outright sale being here admitted, and transfer

of ownership being thereby obtained and a conversion

of property being effected, the relation of the income

tax to the new asset—to the contract right to the pro-

ceeds of sale—is the remaining question.

Therefore, all attempt to consider the vendor or

his assignee in the mining business by reference to the

foregoing decisions of this Court is without applica-

tion.

— LP EEN PSEA TNE DNR PLS ONE ES WE SETS Toe o7 rg Oot

. S

Baiewe ee ee Te ee

The Revenue Acts lay a tax upon the net income

of every corporation, and, speaking of the identical

provision in the case of individuals, this Court says,

in Poe, Coilector, v. Seaborn, 282 U.S. 101, 109:

‘“‘The Act goes no farther, and furnishes no

other standard or definition of what constitutes

an individual’s income. The use of the word

‘of’ denotes ownership. It would be a strained

construction, which, in the absence of a further

defintion by Congress, should impute a broader

significance to in the term.

‘<The Commissioner concedes that the answer

to the question involved in the cause must be

found in the provisions of the law of the State,

as to a wife’s ownership of interest in com-

munity property.”’

In other words, given the case where a sale of

mineral in place has occurred under the State law, no

interest in mining or its business can be attributed to

the vendor or his assignor in the present case, and

there is no depletable interest. The error of the rul-

ings of the lower Court to the contrary are thus ap-

parent and material.

It petitioner Company is entitled to the statutory de-

pletion allowances of a lessor, same apply to the excess

of minimum payments each year over payments for

coal actually mined in each year, and the entirety of

such excess is not taxable income.

The Board held, and the lower court affirmed its

decision, that the excess of annual payments over

vr ee PL La aS ERROR 7 ett

annual payments therein for coal actually mined, being

a bonus payment, was taxable income not subject to

the depletion allowances of a lessor. In presenting a

redetermination of tax based on this ruling, the Com-

missioner, by counsel, voiced disagreement therewith,

and stood with petitioners, contending depletion should

be allowed against said excess payments. Contem-

poraneously therewith, the Commissioner, by cross-

appeal in Murphy Oil Co. v. Commissioner, 55 F. (2d)

17 (C. C. A. 9), sought to and did sustain his position

that the Board was wrong in so holding in the case

of a lessee. The wrong to a lessee so established

adjudges existence of the same error of omission in

the case of the alleged lessor herein.

The materiality of the error is threefold: First,

The special statutory provision allowing depletion to

the owners of interests in mining property reasonably

applies to all payments made for any interest in said

property, where bonus, excess of minimum, or usual

payment per ton mined. Second—The present value

of the typical contract, or all the contracts herein,

rests upon giving effect to the minimum payment;

the Commissioner rests the 3.6 cent allowance per ton

upon assumption of 14,000,000 tons minable at 350,000

tons per year, indicating a useful life of 40 years with

annual income of $34,000. After 40 years, the receipts

equal $1,360,000, of which the present worth on March

1, 1913, is $510,000, and this divided by 14,000,000 tons,

gives 3.6 cents per ton. Allowance of this amount only

upon tonnage mined is improper in that, for example,

Kei te alit ae

if $34,000 is received in a taxable year but only $17,-

000 of coal is mined, then an additional $17,000 is re-

ceived without depletion. Thus petitioner Company

is really allowed 1.8 cents instead of 3.6 cents, in the

example, upon the $34,000 payment which entered into

the computation of the 3.6 cent unit rate. If $68,000

is received and $17,000 is mined, petitioner Company

has a 0.9 cent rate instead of 3.6 cents. Third—It

petitioner Company receives $200 as a 10 cent pay-

ment per ton on 2,000 tons, but only 1,000 tons were

mined the decision below says its depletion is 1,000

x 3.6 cents, or $36.00, and is not 2,000 x 3.6 cents, or

$72.00. The schedules in the Board findings as to

Leases 2 and 4 (Petition for Reargument, R., p. 160),

show in the seven years here in controversy, petitioner

Company is deprived of $72,000 of depletion upon an

excess of 2,000,000 tons paid for but not mined, and

is required to taxpay said amount.

Article 216, Regulations 69 (appendix), presents

the proper and reasonable method of computing and

applying the deduction, as said in Murphy Oil Co.,

supra:

* * * “by assuming that the bonus con-

tains the same element of profit of income to

the landlord that would be derived from the

sale of oil recovered as royalty.’’

‘‘The regulation is not only not in conflict

with the statute, but directly conforms thereto.’’

By narrow interpretation it might well be said no

question of bonus is adequately present in these cases,

for Article 216 contemplates ‘‘a bonus in addition ¢o

ae eee eG

—

ewere>

royalties’’, while herein the ‘‘royalties’’ are dubbed

‘‘bonus’’? when they exceed the payments for coal

mined. As the royalties enter into the computation

of the depletion allowance, such allowance reasonably

is deductible from all subsequent royalty receipts

whether all the coal thereby paid for is mined in the

year of payment.

Petitioners urge that the Board decision and its

blanket affirmance by the lower Court are in error,

that the Commissioner gave effect to the proper com-

putation in Article 216 (supra) and obtained approval

thereof in Murphy Oil Co. v. Commissioner, supra,

and that, if pertinent, the depletion allowance herein

should be so computed, and the lower Court reversed.

The res adjudicata herein against the Commissioner,

upon the depletion issue, of a judgment involving said

issue and obtained by petitioner Company in a prior

action against a Collector, whom therein the Commis-

sioner defended of record.

Before the Board, petitioner Company pleaded the

District Court judgment obtained against the Collec-

tor and paid by the United States as res adjudicata

herein of any depletion rate allowable to a iessor in

its position, and the Commissioner did not answer.

The Board received the record and judgment in evi-

deuce as merely persuasive and not conclusive (R.,

p. 103), to which ruling petitioner Company excepted,

It appeared no changes or alterations in the original

sale contracts, and no new contracts, had been made

since the institution of the prior litigation (R., p. 101).

The Board made finding of fact as to the nature and

result of the prior litigation (R., p. 47), but its opinion

states no conclusion thereon. The lower Court, re-

viewing the facts, held the West Virginia judgment

was not res adjudicata against the Commissioner of

Internal Revenue (R., p. 126), saying:

“The rule (res adjudicata) is applicable,

however, only when the subsequent suit is be-

tween the same parties or their privies. The

taxpayer maintains that we have that situation

in the present litigation because the United

States in reality is its opponent in both cases,

being represented by the Coliector of Internal

Revenue in the prior suit, and by the Commis-

sioner of Internal Revenue now. But the areu-

ment is refuted by the decision in Sage v. United

States, 250 U. S. 33, where it was expressly

ruled, against the protest of the government,

that the court was not bound by a judgment in

a former suit concerning the same subject mat-

ter between the taxpayer and a Collector of In-

ternal Revenue because a suit against a collector

of Internal Revenue is personal and its incidents,

such as the nature of the defenses open and the

allowance of interest, are different. This ruling

has recently been cited with approval by the

Supreme Court in Graham & Foster v. Good-

cell, 282 U. S. 409, 430. The decision of the

District Court for the Southern District of

West Virginia was therefore not binding upon

the Commissioner, and he had the authority to

determine anew, as a question of fact, what

allowance should be made for the depletion of

the mine.’’

Petitioners submit the determination of the judg-

ment against the Collector in the prior litigation that

a 5 cent depletion rate was aliowable to petitioner

Company is effective as a final determination of the

depletion issue in these proceedings against the Com-

missioner of Internal Revenue from four viewpoints.

Privity of Record—Although the action of taxpayer

against collector to recover income tax is personal in

its character or unique in its attributes, either the

United States or the Commissioner of Internal Reve-

nue, or both, may by their acts become bound by a

judgment in favor of the taxpayer in said action.

The findings of facts herein (R., p. 47) are:

2 ‘*said judgment was duly paid by the

United States. In said action the Bankers

Pocahontas Coal Co., one of the petitioners

herein, was plaintiff; plaintiff petitioner ap-

pearing in its own right and the collector as

defendant, who was defended in said action by

the United States District Attorney and the

Solicitor of Internal Revenue (now General

Counsel). In this proceeding and in said court

action the subject matter of the action and of

these proceedings is the same, namely, the de-

pletion unit allowable in computing the amount,

of such depletion deduction as will return to the

taxpayer the capital value existing in the coal

content of the corporation’s property as of

Mareh 1, 1913.’’

The official appearance of the Solicitor of Internal

Revenue who is counsel for the Commissioner of In-

ternal Revenue, renders said Commissioner privy to

said preceeding and bound by the ensuing judgment

—y

under the rule stated in Souffront v. LaCompagnie,

217 U.S. 475, 487, as follows:

“The persons for whose benefit, to the know!-

edge of the court and of all the parties to the

record, litigation is being conducted, cannot, in

a legal sense, be said to be strangers to the

cause. The case is within the principle that one

who prosecutes or defends a suit in the name

of another to establish and protect his own

right, or who assists in the prosecution or de-

fense of an action in aid of some interest of his

own, and who does this openly, to the knowledge

of the opposing party, is as much bound by the

judgment, and as fully entitled to avail himself

of it, as an estoppel against an adversary party,

as he would be if he had been a party to the

record. Lovejoy v. Murray, 3 Wall. 1, 18 L.

Nd. 129.’’ (Italies supplied.)

To the same effect is Beyer Co. v. Fleischman, 15

F, (2d) 465 (C. C. A. 6) and the numerous authorities

therein cited.

The Commissioner and the United States may ascer-

tain the net amount recoverable in the ultimate and

final judgment against the Collector by set off of tax

legally due, and be concluded by the judgment. Thus,

in New York Life Insurance Co. v, Anderson, 263 F.

530 (C. C. A. 2) such adjustment as made below is up-

held upon authority of Crocker v. Malley, 249 U.S.

293, as an ‘‘anamalous practice * required by

federal authority’’, and as ‘‘based on a spirit of con-

venience’. In Crocker v. Malley, supra, decided in

1919 and cited by Mr. Justice Holmes in the Sage case

(p. 37) opinion, he says:

‘““The district court, while it found for the

plaintiffs, ruled that the defendant was entitled

to retain out of the sum received by him the

amount of the tax that they should have paid

as trustees. To this the plaintiffs took a cross

writ of error to the circuit court of appeals.

There can be no question that, although the

plaintiffs escape the larger liability, there was

probable cause for the defendant’s act. The

Commissioner of Internal Revenue rejected the

plaintiff’s claim, and the statute does not leave

the matter clear. The recovery, therefore, will

be from the United States. Rev. Stat., Par. 989,

Comp. Stat. 1916, Par. 1635. The plaintiffs, as

they themselves alleged in their claim, were the

persons taxed, whether they were called an as-

sociation or trustees. They were taxed too

much. Jf the United States retains from the

amount received by it the amount that it should

have received, it cannot recover that sum in a

subsequent suit.’’ (Italics supplied.)

In City of New Orleans v. Citizens Bank, 167 U. S.

371; Baldwin v. Maryland, 179 U.S. 220, and Gunter

v. Atlantic C. L. R. Co., 200 U. S. 273, it is held that

the general rule of law by which a judgment estops

the parties in future litigation between them, to ques-

tion either a fact or point of law necessary to the first

judgment and adjudicated therein, applies to cases of

taxation as well as to other subjects of litigation. In

United States v. Stone and Downer Co., 274 U. S. 225,

230, 233, 237, after recognizing said general rule, this

Court says same does not apply to litigation in the

Court of Customs Appeals. Very properly the same

exception is available to the Board of Tax Appeals,

whereby the termination of a prior controversy there

arising is not conclusive upon the same subject matter

between the parties in a subsequent proceeding.

But extension of the rule in exclusion of determina-

tions arising and obtained in the courts impinges upon

and contradicts the general rule. If the ‘‘spirit of

convenience’ produces ‘‘an anamalous practice re-

quired by federal authority’’, it follows the open par-

ticipation of the Commissioner in defending the Col-

lector leaves the Commissioner bound by the results

obtained and prevents him from contesting the same

subject matter in later proceedings.

Official Privity—Aside from the privity resulting

from active defense of the Collector, there is sufficient

official and statutory relationship to establish privity

on that ground.

There is a privity of duty between the Collector and

Commissioner, notwithstanding they are separate of-

ficers, appointed by the President (R. 8. 319, 3142); the

Commissioner has general charge of the assessment

and collection of taxes (R. 8. 321), remits, refunds and

pays back taxes illegally or erroneously collected, and

repays the Collector adjudged tax recoveries with the

costs and expenses of suit (R. S. 3220); his discretion

is not reviewable by any other officer of the Govern-

ment (Kaufman's case, 96 U.S. 568) and le may sat-

isfy a judgment against a Collector without issue of

a certificate of probable cause (United States v. Fre-

richs, 124 U. S. 315; the Collector gives bond in che

amount prescribed by the Commissioner (R. 8, 3143),

sues for the recovery of taxes in the name of the

United States when authorized to do so by the Com-

sé

missioner (R. S. 3213, 3214). A taxpayer may not sue

a Collector to recover taxes except after previous pre-

sentation of his claim to the Commissioner (R. S.

3226). Thus both are intimately related in their of-

ficial duties, the Collector being substantially the agent

of the Commissioner.

No Immunity to Commissioner.—The pertinent Rev-

enue Acts merely provide that where the Commis-

sioner determines a deficiency of tax ‘‘the taxpayer

may file a petition with the Board of Tax Appeals for

redetermination of the deficiency’’ (Rev. Act of 1926,

974(a)). This Court said in Blair v. Oesterlein Mach,

(o., 275 U. S. 220, 227 of the Board’s ensuing au-

thority:

‘It may investigate anew the issues between

the government and the taxpayer and upon the

determination of the appeal it may affirm, set

aside or modify the findings and decision of the

Commissioner.”’

This Court has further said the decision of the

Board may be reviewed in the Circuit Courts of Ap-

peals and herein (Old Colony Trust Co, v. Commis-

sioner, 279 U.S. 716, 721).

Thus the Revenue Acts afford taxpayer another

remedy, in addition to the taxpayer's right of action

after payment of a Federal tax for recovery of same

previously existing against either the Collector of In-

ternal Revenue or the United States. It does not

follow there is any immunity to the Commissioner of

Internal Revenue.

Any immunity of the sovereign claimed by its agent

must be established by production of a law, which com-

“

missions the party claiming the immunity and war-

rants the act sought to be avoided (Poindexter v.

Greenhow, 114 U. S. 270, 288), but no such law is pro-

duced herein, for none exists.

In the Poindexter opinion, supra (p. 288), we read:

‘‘The ratio decidendi in this class of cases is

very plain. A defendant sued as a wrongdoer,

who seeks to substitute the state in his place, or

to defend on the ground that the state has

adopted his act and exonerated him, cannot rest

on the bare assertion of his defense. He is

bound to establish it. The state is a political

corporate body, can act only through agents, and

can command only by laws. It is necessary,

therefore, for such a defendant, in order to

complete his defense, to produce a law of the

state which constitutes his commission as its

agent, and a warrant for his act.’’

The Commissioner, as respondent before the Board

as in subsequent proceedings, cannot invoke the im-

munity of the United States (United States v. Lee, 106

U.S. 196; Trudal v. Wesley, 167 U.S. 204, 222; Scran-

ton v. Wheeler, 179 U.S. 141, 153).

No Immunity to the United States.—This viewpoint

has reference to the effect of the proceedings men-

tioned in the Sage case as subsequent to the judgement,

whereby, upon issue by the trial court of the certifi-

‘ate of probable cause under R. S. 989, payment of

the judgment is made by the United States. The effect

of the issue of the certificate of probable cause is de-

clared in United States v. Sherman, 98 U.S. 565, 567.

‘‘When the certificate is given the claim of

the plaintiff in the suit is practically converted

into a claim against the government. But not

until then.’’

The final judgment contemplated by R. S. 989 is de-

fined in Schell v. Cochran, 107 U. 8S. 625, with approval

therein of the Sherman decision.

A claim against the Government, which it subse-

quently has paid, being so established by statutory au-

thority, it reasonably follows that the Government had

adopted the judgment in all its implications and find-

ings, and is bound by same. This recognizes the prin-

ciple that the Government may not be sued without its

consent (Carr v. United States, 98 U.S. 483), and yet

gives effect either to R. S. 989 wherein the Government

authorizes the trial court to impose the individual lia-

bility of its officer upon the Government, or to R. 8.

3220, whereby the Commissioner makes the judgment

binding upon the Government by an award thereon to

the taxpayer without previous issue of the certificate

of probable cause (United States v. Frerichs, 124 U.S.

315, 319). Said effect is declared in N.Y. C. dé H.R.

R. R. Co. v. United States, 24 Ct. Cl. 22, 29:

“Tt is impossible to suppose that the law in-

tends to allow an action to be prosecuted against

a public officer, an appeal to be taken, a defense

to be maintained by the Government through its

proper law officers, a judgment to be recovered

under the direction of our highest judicial au-

thority, and the right thus acquired to be im-

mediately taken away by a certificate resting

upon the discretion of a single judge, upon an

issue not tried by a jury, and allowed by an

order from which there is no appeal, unless it

likewise intends that the absolute discharge of

the agent shall operate as an assumption of the

debt by the prineipal.’’

In other words, the Government upon issue of the

certificate of probable cause takes over and assumes

the obligations of the agent, whereby the conclusive

effect of the judgment may become available to the

taxpayer in subsequent litigation on the same subject

matter under the theory of Crocker v. Malley, supra.

It does not appear whether this aspect was presented

in the Sage ease, except the opinion almost reaches

the proposition and turns abruptly to the facts in that

case, to say:

‘*But perhaps it would be enough to say that

if the judgment otherwise were a bar, the bar

would be removed by the subsequent enactment

of the Act of July 27, 1912, upon which, as well

as upon the Act of 1902, this claim is based.’’

In Second National Bank of Saginaw v. Woodworth,

Collector, 54 F. (2) 672, an action of taxpayer brought

against the United States for recovery of taxes in the

Court of Claims being ordered dismissed, the Collector

is held entitled to rely on said order as an estoppel

and res adjudicata, The decision is rested upon the

test of privity whereby, unless the Collector may so

defend, the United States might through a certificate

of probable cause be obligated for a demand previously

litigated and defeated in an action against the Govern-

ment. But the alleged privity herein leads to no such

illogical situation, whereas it is equally illogical that

although the Government may not by indirection be

made liable for a claim it has previously defeated, the

taxpayer may be made liable for a claim which it has

previously defeated.

The finality of Board proceedings after judicial re-

view thereof as declared by the Revenue Act of 1926,

Section 283(b), is held arene to a Collector in Grey-

lock Mills v. White, 55 F. (2) 704, and the finality of a

judgment adopted and satisfied under a statutory cer-

tificate of probable cause should be equally available

to the taxpayer in a subsequent controversy with the

Commissioner as to the same subject matter.

For these reasons, the refusal of the lower Court

to give effect herein, if applicable, to the depletion rate

previously adjudged in litigation against the Collector

is presented as error.

The Strother Relief.

It was stipulated below that the decision of the case

of petitioner Company should adjudicate the case of

petitioner Strother. The lower Court directed supple-

mental proceedings before the Board should be had to

ascertain his possible tax liability. The propriety of

the relief so granted is not open to challenge herein

because the Commissioner of Internal Revenue neither

applied for nor obtained a writ of certiorari in refer-

ence thereto. Lucas v. Alexander, 279 U.S. 5738.

Conclusion.

It is respectfully submitted the lower Court should

be reversed herein for cause:

That it erred in refusing to hold the contract pro-

ceeds from the sale in place received by petitioner

Company were not taxable income in the years in con-

troversy.

That it erred in holding Congress intended by the

Revenue Acts to tax same as the receipts of a lessor.

That it erred, if it appear in the alternative said

proceeds are taxable as receipts of a lessor, in neither

allowing a rate of 5 cents per ton adjudicated to peti-

tioner Company in prior litigation, nor in allowing de-

pletion upon payments in excess of coal actually mined

and paid for in the taxable periods.

And petitioners abide the decision of the Court.

Respectfully,

WELLS GOODY KOONTZ,

CAMDEN R. McATER,

Attorneys for Petitioners,

GOODY KOONTZ ann SLAVEN,

Williamson, West Virginia,

MASON, SPALDING & McATEE,

Washington, D. C.,

Of Counsel.

APPENDIX.

Constitution, Statutes and Regulations Involved.

The Constitution of the United States.

Amendment Sixteen (effective March 1, 1913). The

Congress shall have power to lay and collect taxes on

incomes from whatever source derived, without ap-

portioument among the several States, and without

regard to any census or enumeration.

Individual Gross Income.

Revenue Act of 1918, Section 213 (40 Stat. 1057-96,

C. 18):

“That for the purposes of this title (except

as otherwise provided in section 233) the term

‘gross income’—

‘*(a) Includes gains, profits, and income de-

rived from salaries, wages, or compensation for

personal service * * * of whatever kind

and in whatever form paid, or from professions,

vocations, trades, businesses, commerce, or

sales, or dealings in property, whether real or

personal, growing out of the ownership or use

of or interest in such property; also from

interest, rent, dividends, securities, or the trans-

action of any business carried on for gain or

profit, or gains or profits and income derived

from any source whatever,’

Revenue Act of 1921, Section 213 (same as above).

(42 Stat. 227, C. 136.)

Revenue Act of 1924, Section 213 (same as Revenue

Act of 1918 above). (43 Stat, 253, C. 234.)

Revenue Act of 1926, Section 213 (same as Revenue

Act of 1918 above). (44 Stat. (Part 2) 9, C. 27.)

Individual Net Income.

Revenue Act of 1918, Section 212 (Jdem.) :

‘That in the ease of an individual the term

‘net income’ means the gross income as defined

in section 213, less the deductions allowed by

section 214.’’

Revenue Act of 1921, Section 212 (same as Revenue

Act of 1918 above). (Jdem.)

Revenue Act of 1924, Section 212 (same as Revenue

Act of 1918 above). (Idem.)

Revenue Act of 1926, Section 212 (same as Revenue

Act of 1918 above). (Idem.)

Corporation Gross Income.

Revenue Act of 1918, Section 233 (Idem.):

‘*That in the case of a corporation subject to

the tax imposed by section 230 the term ‘gross

income’ means the gross income as defined in

section 213, except that:’’ (Exceptions not ma-

terial.)

Revenue Act of 1921, Section 233 (Idem.):

‘That in the case of a corporation subject to

the tax imposed by section 230 the term ‘gross

income’ means the gross income as defined in

sections 213 and 217, * * *.’? (Not ma-

terial here.)

Revenue Act of 1924, Section 233 (same as Revenue

Act of 1921 above). (Jdem.)

Revenue Act of 1926, Section 233 (same as Revenue

Act of 1921 above). (Jdem.)

Corporation Net Income.

Revenue Act of 1918, Section 232 (Idem.) :

‘*That in the case of a corporation subject to

the tax imposed by section 230 the term ‘net

income’ means the gross income as defined in

section 233 less the deductions allowed by sec-

tion 234, and the net income shall be computed

on the same basis as is provided in subdivision

(b) of section 212 or in section 226.’’ (Omitted

as relating only to accounting method.)

Revenue Act of 1921, Section 232 (Idem.) :

‘That in the case of a corporation subject to

the tax imposed by section 230 the term ‘net

income’ means the gross income as defined in

section 233, less the deductions allowed by see-

tion 234."’

Revenue Act of 1924, Section 232 (same as Revenue

Act of 1921 above). (Jdem.)

Revenue Act of 1926, Section 232 (same as Revenue

Act of 1921 above). (Idem.)

Meaning of Net Income.

Article 21 (Reg. 45, years 1918, 1919, 1920) (Reg. 62,

years 1921, 1922, 1923) (Reg. 65, vear 1924) (Ree. 69,

years 1925, 1926):

‘*The tax imposed by the statute is upon in-

come. In the computation of the tax various

classes of income must be considered:

‘*(a) Income (in the broad sense), meaning

all wealth which flows in to the taxpayer other

than as a mere return of capital. It includes the

forms of income specifically described as gains

and profits, including gains derived from the

‘sale or other disposition of capital assets. Cash

receipts alone do not always accurately reflect

income, for the statute recognizes as income-

determining factors other items, among which

are inventories, accounts receivable, property

exhaustion, and accounts payable for expenses

mene °* * *

‘*(b) Gross income, meaning income (in the

broad sense) less income which is by statutory

provision or otherwise exempt from the tax im-

posed by the statute. * * *

‘*(c) Net income, meaning gross income less

statutory deductions. The statutory deductions

are in general, though not exclusively, expendi-

tures, other than capital expenditures, con-

nected with the production of income. tame

““(d) Net income less credits. astetss

‘“The surtax is imposed upon net income; the :

normal tax upon net income less credits.

Although taxable net income is a statutory con-

ception, it follows, subject to certain modifica-

tions as to exemptions and as to deductions for

partial losses in some eases, the lines of com-

mercial usage. Subject to these modifications

statutory ‘net income’ is commercial ‘net in-

come’. This appears from the fact that ordi-

narily it is to be computed in accordance with

the method of accounting regularly employed in

keeping the books of the taxpayer. As to the

net income of corporations, see section 232 * * *

and article 531.”’

An et ey RO IEEE, &

Baile ob CU Me ia

Article 531 (same Regulations) :

‘*Net Income.—Net income is that portion of

the gross income which remains after all proper

deductions have been taken into account. The

net income of corporations is determined in

general in the same manner as the net income

of individuals, but the deductions allowed cor-

porations are not precisely the same as those

allowed individuals. * *° * The net income

of corporations is to be computed on the same

basis as to accounting periods as the net income

of individuals.’’

Article 90 (same Regulations) :

“Income Accrued Prior to March 1, 1913.—

Any claim existing unconditionally on March

1, 1913, whether presently payable or not, and

held by a taxpayer prior to March 1, 1913,

whether evidenced by writing or not, and all

interest which had acerued thereon before that

date, do not constitute taxable income, although

actually recovered or received subsequent to

such date. Interest accruing on or after that

date is taxable income. Where an interest-

bearing claim held on February 28, 1913, is

paid in whole or in part after that date, any

gain derived from the payment of the elaim is

taxable. The amount of such gain is the excess

of the proceeds of the claim (both principal and

interest) exclusive of any interest accrued since

February 28, 1913, already returned as income,

over the cost thereof (both principal and inter-

est then acerued). However, the gain to be

included in gross income where the fair market

value of the claim as of March 1, 1913, is greater

than the cost thereof, is the excess of the

amount received over such value. In the case

of an insurance policy its surrender value as

of March 1, 1913, may be used as a basis for

the purpose of ascertaining

from its sale or other disposit

the gain derived

ion. Where serv-

ices were rendered prior to March 1, 1913, but

paid for thereafter, the amount received is tax-

able income to the extent of t

he excess of such

amount over the fair market value on Mareh

1, 1913, of the principal of the claim and any

interest which had then aeerued.’’

Corporation Deductio

Revenue Act of 1918, Section 234:

ns.

“That in computing the net income of a cor-

poration subject to the tax imposed by Section

230, there shall be allowed as deductions:

**(9) 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 con-

ditions in each case, based upon cost, including

cost of development not otherwise deducted:

Provided, that in the case o

acquired prior to March 1, 191

f such properties

3, the fair market

value of the property (or the taxpayer’s in-

terest therein) on that date

lieu of cost up to that date:

shall be taken in

ahi

case of leases the deductions allowed by this

paragraph shall be equitably

tween the lessor and lessee.’’

’ apportioned be-

Revenue Act of 1921, Section 234 (same as Revenue

Act of 1918 above) (Idem.).

Revenue Act of 1924, Section 234 (same as Revenue

Act of 1918 above) (Jdem.).

Revenue Act of 1926, Section 234 (same as Revenue

Act of 1918 above) (Idem.).

Article 204 (same Regulations as

above) :

“Amount Returnable Through Depletion and

Depreciation in the Case of Lessor.—(a) In

the case of a lessor, the amount remaining in

any year returnable through depletion and

depreciation deductions is (1) the value of his

equity in the property at the basic date minus

(2) depletion and depreciation sustained,

whether legally allowable or not, from the basic

date to the taxable year, plus (3) subsequent

allowable capital additions, and minus (4) the

value of the land at the basic date for other

purposes than mineral production and the

residual value of other property at the end of

operations. The amount returnable through

depletion is the total capital remaining less the

sum recoverable through depreciation. The

provisions of this paragraph do not apply to the

computation of the depletion allowance in the

case of oil and gas wells when such allowance

is based on the income from the property.

‘*(b) The values of the equities of lessor and

lessee shall be computed separately, but, when

determined as of the same basic date, shall to-

eether never exceed the value at that date of

the property in fee simple. * * *

‘‘(d) The value of the lessor’s equity in a

mineral property under lease March 1, 1913, for

the entire operating life of the mineral deposits

is to be taken to mean (1) the cost or (2) the

value as of Mareh 1, 1913, of the royalties and

other payments to be expected under the terms

of the lease in effect on that date, whichever is

greater.”’

Article 215 (Regulations 45, 62, 65 above):

‘*Depletion-Adjustments of Accounts on

Bonus or Advanced Royalties—(a) Where a

lessor receives a bonus or other sum in addition

to royalties, such bonus or other sum shall be

regarded as a return of capital to the lessor,

but only to the exten’ of the capital remaining

to be recovered through depletion by the lessor

at the date of lease. If the bonus exceeds the

capital remaining to be recovered, the excess

and all the royalties thereafter received will be

income and not depletable. If the bonus is less

than the capital remaining to be recovered by

the lessor through depletion, the difference may

be recovered through depletion deductions based

on the royalties thereafter received. The bonus

or other sum paid by the lessee for a lease made

on or after March 1, 1913, will be his value for

depletion as of date of acquisition.’’

Article 216 (215) (Regulations 69 above amending

Article 215): ,

** Depletion-Adjustments of Accounts Based

on Bonus or Advanced Royalty.—(a) Where a

lessor receives a bonus in addition to royalties,

there shall be allowed as a depletion deduction

in respect of the bonus an amount equal to that

proportion of the cost or value of the property

on the basie date which the amount of the bonus

bears to the sum of the bonus and the royalties

expected to be received. Such allowance shall

be deducted from the amount remaining to be

recovered by the lessor through depletion, and

the remainder is recoverable through depletion

deductions on the basis of royalties thereafter

received.”’

fa) |

Dividends.

Revenue Act of 1918, Section 201 (/dem.) :

‘“(a) That the term ‘dividend’ when used in

this title (except in paragraph (10) of subdivi-

sion (a) of section 234) means (1) any distribu-

tion made by a corporation, other than a per-

sonal service corporation, to its shareholders or

members, whether in cash or in other property

or in stock of the corporation, out of its earn-

ings or profits accumulated since February 28,

mee Os

‘‘()) Any distribution shall be deemed to

have been made from earnings or profits unless

all earnings and profits have first been distrib-

a> > *

‘“(¢) Any distribution made during the first

sixty days of any taxable year shall be deemed

to have been made from earnings or profits ac-

cumulated during preceding taxable years; but

any distribution made during the remainder of

the taxable year shall be deemed to have been

made from earnings or profits accumulated be-

tween the close of the preceding taxable year

and the date of distribution, to the extent of

such earnings or profits, and if the books of the

corporation do not show the amount of such

earnings or profits, the earnings or profits for

the accounting period within which the distribu-

tion was made shall be deemed to have been

accumulated ratably during such period.’’

Revenue Act of 1921, Section 201 (Idem.) :

‘“(a) That the term ‘dividend’ when used in

this title (except in paragraph (10) of subdivi-

sion (a) of section 234 and paragraph (4) of

subdivision (a) of section 245) means any dis-

tribution made by a corporation to its share-

holders or members, whether in cash or in other

property, out of its earnings or profits accumu-

lated since February 28, 1913. * * *

‘*(b) For the purposes of this Act every dis-

tribution is made out of earnings or profits, and

from the most recently accumulated earnings or

profits, to the extent of such earnings or profits

accumulated since February 28, 1913; but any

earnings or profits accumulated or increase in

value of property accrued prior to March 1,

1913, may be distributed exempt from the tax,

after the earnings and profits accumulated since |

February 28, 1913, have been distributed. * * * 3

‘*(f) Any distribution made during the first

sixty days of any taxable year shall be deemed

to have been made from earnings or profits ac-

cumulated during preceding taxable years; but

any distribution made during the remainder of

the taxable year shall be deemed to have been

made from earnings or profits accumulated be-

tween the close of the preceding taxable year

and the date of distribution, to the extent of

such earnings and profits, and if the books of

the corporation do not show the amount of such

earnings or profits, the earnings or profits for

the accounting period within which the distribu-

tion was made shall be deemed to have been

accumulated ratably during such period. This

subdivision shall not be in effect after December

31, 1921.”’

Revenue Act of 1924, Section 201 (same as Revenue

Act of 1921 above). (Idem.)

a) |

Revenue Act of 1926, Section 201 (same as Revenue

Act of 1921 above). (/dem.)

Article 1542, (Same Regulations) :

“ Source of Distribution —For the purpose of

income taxation every distribution made by a

corporation is made out of earnings or profits

to the extent thereof and from the most recently

accumulated earnings or profits.’’

Article 1543, (same Regulations) :

“Distribution Out of Earnings or Profits

Accumulated Prior to March 1, 1913.—Any dis-

tribution by a corporation out of earnings or

profits accumulated prior to March 1, 1915, or

out of inerease in value of property accrued

prior to March 1, 1913 (whether or not realized

by sale or other disposition prior to or on or

after March 1, 1913) is not a dividend within

the meaning of Title Il. The provisions of the

preceding sentence shall be applied uniformly

to cases arising under the Revenue Act of 1916,

the Revenue Act of 1917, the Revenue Act of

1918, the Revenue Act of 1921, and the Revenue

Act of 1924, as well as the Revenue Act of 1926.

A corporation cannot distribute earnings or

profits accumulated or increase in value of prop-

erty accrued prior to March 1, 19138, exempt

from tax, unless and until all earnings or profits

accumulated since February 28, 1913, have been

distributed. * * *

“In determining whether a dividend is out of

earnings or profits accumulated since February

28, 1913, or prior to March 1, 19138, due consid-

eration must be given to the facts, and mere

bookkeeping entries increasing or decreasing

surplus will not be conclusive. * * *”

Article 1546, (Same Regulations) :

“Distributions from Depletion or Deprecia-

tion Reserves.—A reserve set up out of gross

income by a corporation and maintained for the

purpose of making good any loss of capital as-

sets on account of depletion or depreciation is

not a part of surplus out of which ordinary div-

idends may be paid. * * * No distribution,

however, can be made from such a reserve until

all the earnings or profits of the corporation

have first been distributed.’’

Certificate of Probable Cause.

R. 8. 989 (12 St. L. 741, ec. 76, 12):

‘*When a recovery is had in any suit or pro-

ceeding against a collector or other officer of

the revenue for any act done by him, or for the

recovery of any money exacted by or paid to

him and by him paid into the Treasury, in the

performance of his official duty, and the Court

certifies that there was probable cause for the

act done by the collector or other officer, or that

he acted under the directions of the Secretary

of the Treasury, or other proper officer of the

Government, no execution shall issue against

such collector or other officer, but the amount so

recovered shall, upon final judgment, be pro-

vided for and paid out of the proper appropria-

tion from the Treasury.’’

Refunding Taxes and Penalties Including Judgments.

R. S. 3220 (14 St. L. 111, C. 184, 9; 17 St. L. 401,

C. 13, 1; 40 St. L. 1145, C. 18, 1316(a); 44 St. L. 115,

C. 27, 1111; 45 St. L. 878, C. 852, 619; 45 St. L. 996,

('. 901, 3.

732

“Except as otherwise provided by law in the

case of income, war-profits, excess-profits, es-

tate, and gift taxes, the Commissioner of Inter-

nal Revenue, subject to regulations prescribed

by the Secretary of the Treasury, is authorized

to remit, refund, and pay back all taxes errone-

ously or illegally assessed or collected, all pen-

alties collected without authority, and all taxes

that appear to be unjustly assessed or excessive

in amount, or in any manner wrongfully col-

lected; also to repay to any collector or deputy

collector the full amount of such sums of money

as may be recovered against him in any court,

for any internal-revenue taxes collected by him,

with the cost and expense of suit; also all dam-

ages and cost recovered against any assessor,

assistant assessor, collector, deputy collector,

agent, or inspector, in any suit brought against

him by reason of anything done in the due per-

formance of his official duty, and shall make re-

port to Congress, by internal-revenue districts

and alphabetically arranged of all refunds in

excess of $500, at the beginning of each regular

session of Congress of all transactions under

this section.”’

(2699)

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.