Respondents Brief — Bankers Pocahontas Coal Co. v. Burnet

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CHARLES ELMORE C

Nos. 104 and 105

Suthe Supreme Court of the United States

OctToBER TERM, 1932

BANKERS PocaHontas CoaL CoMPANY, PETITIONER

Davip BuRNET, COMMISSIONER OF INTERNAL

REVENUE

D. J. F. SrrRorHER, PETITIONER

Davin BurNET, COMMISSIONER OF INTERNAL

REVENUE

ON WRITS OF CERTIORARI TO THE UNITED STATES CIROUIT

COURT OF APPEALS FOR THE FOURTH CIRCUIT

BRIEF FOR THE RESPONDENT

Opinions below----..-------------------------------------

NII oe ic ieee tee deds coc docs ent euk taeecceeus

Questions presented_............-.------------------------

Statutes and regulations involved__...._...-----------------

seaceduald

Summary of argument---_-_.__-...-------------------------

Argument:

I. Royalties received by petitioner Bankers Pocahontas

Coal Company under the lease agreements are tax-

II. The judgment of the United States District Court for

the Southern District of West Virginia in the case of

Bankers Pocahontas Coal Company v. White, Col-

lector, is not res judicata of the issue in the case at bar

of the reasonable depletion rate_-.-......-------- 19

III. There is no error in the ruling of the lower court sus-

taining the Board of Tax Appeals in its refusal to

receive additional evidence at the hearing upon

settlement of the amount of the deficiency and sub-

sequent to promulgation of its findings of fact and

Se EOE, St Qe Reape es per Por) wee eee epee 25

PONG oh ccidsctatnncnusadasdonwibccicas acme csckes 33

PENNING. cas canawesteascdouqsbbsadcciasseceséuies tess 34-43

CITATIONS

Cases:

Alezander v. King, 46 F. (2d) 235, certiorari denied, 283

TO Ob oc ndc ns teh cA Ackles -s anes 14

Berg v. Commissioner, 33 F. (2d) 641, certiorari denied, 280

2 Wb atic cds ck tid dahed bh eckeanes oe <eeewokae 14

Bertelsen v. White, 58 F. (2d) 792_.-.------------------- 25

Boggs & Buhl vy. Commissioner, 34 F. (2d) 859_---------- 27

Burkett v. Commissioner, 31 F. (2d) 667, certiorari denied,

ON) SO 5 Sk ee oe ene cake oe 15

Burnet v. Harmel, No. 26, October Term, 1932_...------ 14, 16

Burnet v. Logan, 283 U. 8. 404.._....------------------ 16

Burnet v. Sanford & Brooks Co., 282 U. 8. 359. ---------- 22

Coal & Coke Co. v. Tax Commissioner, 59 W. Va. 605- ---- 17

Commissioner v. Old Colony R. R., 26 F. (2d) 408, dismissed,

SP io oan chaseeneecaenscasseubie—nna== 22

Commissioner v. Old Colony R. Co., 50 F. (2d) 896.------- 22

Feather v. Baird, 85 W. Va. 267....-.------------------ 18

146572—382———1 q@)

Cases—Continued.

Ferguson v. Commissioner, 45 F. (2d) 573_....._---------

Goldsmith v. Board of Tax Appeals, 270 U. 8. 117__-.-----

Graham & Foster v. Goodcell, 282 U. S. 409_...__-_-_----

Great Northern Ry. Co., 10 B. T. A. 1347, aff’d, 40 F. (2d)

372, certiorari denied, 282 U. S. 855__._....----------

Greengard v. Commissioner, 29 F. (2d) 502._...--.--.----

Greylock Mills v. White, 55 F. (2d) 704___.._.--------.--

Handy & Harman v. Burnet, 284 U.S. 136_-_-.---------

Hirschi v. United States, 67 C. Cls. 637, certiorari denied,

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

Lynch, Executriz v. Alworth-Stephens Co., 267 U. S. 364...

Maney v. United States, 278 U. 8. 17_-_--.---------------

Metropolitan Business College v. Blair, 24 F. (2d) 176.--.--

Murphy Oil Co. v. Burnet, No. 80, October Term, 1932_---

National Coal Co. v. Overholt, 81 W. Va. 427_.-..--.-----

New Orleans v. Citizens’ Bank, 167 U. S. 371__-__--------

O’ Meara v. Commissioner, 34 F. (2d) 390__._..----.-----

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

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

Reinecke v. Spalding, 280 U. 8. 227._......-------------

Rosenberger v. McCaughn, 25 F. (2d) 699, certiorari denied,

Sage v. United States, 250 U. 8. 33_.....--.-------------

Second Nat. Bank v. Woodworth, 54 F. (2d) 672_..--.----

Smietanka v. Indiana Steel Co., 257 U. 8. 1----.---------

Smith v. Root, 66 W. Va. 633_........--.--------------

Stanton v. Baltic Mining Co., 240 U. S. 103__...._..--.--

Stratton’s Independence, Limited v. Howbert, 231 U.S. 399.. 12, 13

Taylor v. Thomas, 106 W. Va. 376__.......------------- 18

Toothman v. Courtney, 62 W. Va. 167_.....-..---------- 19

Tutun v. United States, 270 U. S. 568_.-...-.....--.---- 23

Union Trust Co. v. Wardell, 258 U. 8. 537._...-.-.-.---- 21

United States v. Biwabik Mining Co., 247 U. S. 116_.__--- 13

United States v. Ness, 245 U. 8. 319_...........--------- 22

United States v. Stone & Downer Co., 274 U. 8. 225__.---- 23, 24

Urpman v. Lowther Oil Co., 53 W. Va. 501_.--..-------- 19

Von Baumbach v. Sargent Land Co., 242 U. 8. 503_..._-.-- 12, 13

Constitution and Statutes:

Constitution of the United States—

Article 1, Section 9, Clause 4.__............--..---. 34

Sixteenth Amendment. ---__........-----.-----..- 34

Ill

Constitution and Statutes—Continued. Page

Revenue Act of 1921, c. 136, 42 Stat. 227, 237, 254, 264,

314—

IB eee Se RRL Cp eens oc nae sen eae 35

Rs Set Fe hte Se ee 35

EE ne ea, case necadesbanckbeexStne 21

Sec. 1318 (U. 8. C., Title 26, Sec. 156)__....._____-- 22

Revenue Act of 1924, c. 234, 43 Stat. 253, 267, 283, 297, 3483—

Sec. 213 (U. S. C., Title 26, Sec. 954)_._..._-_-.__-- 36

Sec. 234 (U.S. C., Title 26, Sec. 986)__...._._.___-- 36

Sec. 274 (U.S. C., Title 26, Sec. 1048)_-_._.._.___-- 21

Sec. 1014 (U. S. C., Title 26, Sec. 156)___.__._____-- 22

Revenue Act of 1926, c. 27, 44 Stat. 9, 23, 41, 55, 116—

Sec. 213 (U. S. C. App., Title 26, Sec. 924)_.________ 36

Sec. 234 (U.S. C. App., Title 26, Sec. 986)__.______- 36

Sec. 274 (U. S. C. App., Title 26, Sec. 1048)_________ 37

Sec. 1113 (U. 8. C. App., Title 26, Sec. 156)_________ 38

Revenue Act of 1928, c. 852, Sec. 601, 45 Stat. 791, 871

(U. 8. C. Sup, V, Title 26, Sec. 1219 (a))_____________- 26

Miscellaneous: ,

Rule 50, Board of Tax Appeals___.._._.......-_--______- 42-43

T. BD. 8086, V—-2 C. B., 137-116_.. =... .-.-.......-. 40

Treasury Regulations 45, Art. 215__..__._...___________ 38

Treasury Regulations 62, Art. 215, Art. 216_____________ 40

Treasury Regulations 65, Art. 216_...........-_-______- 40

Treasury Regulations 69, Art. 216_....._.....-._______. 40, 42

Treasury Regulations 74, Art. 236_................___-- 40, 42

Guthe Supreme Court of the Gnited States

OcToBER TERM, 1932

No. 104

BANKERS PocaAHoNTAas CoaL COMPANY, PETITIONER

Vv.

Davin BURNET, COMMISSIONER OF INTERNAL

Revenue

No. 105

D. J. F. STROTHER, PETITIONER

Davin BURNET, COMMISSIONER OF INTERNAL

Revenue

ON WRITS OF CERTIORARI TO THE UNITED STATES CIRCUIT

COURT OF APPEALS FOR THE FOURTH CIRCUIT

BRIEF FOR THE RESPONDENT

OPINIONS BELOW

The opinion of the Board of Tax Appeals (R.

49-57)* is reported in 18 B. T. A. 901. The opinion

of the Circuit Court of Appeals (R. 119-134) is

reported in 55 F. (2d) 626.

1The record references are to the record in the Bankers

Pocahontas Coal Company case (No. 104) unless otherwise

indicated.

(1)

+s awe

JURISDICTION

The judgment of the Circuit Court of Appeals

was entered in each case January 27, 1932. (R.

135-136; Strother R. 111.) A petition of the pe-

titioners for a rehearing covering both cases was

presented February 26, 1932. (R. 187-167;

Strother R. 112-138.) <A petition of the respond-

ent for a rehearing in the Strother case was pre-

sented February 26, 1932. (Strother R. 139-141.)

Both petitions were denied by an order entered

March 7, 1932. (R. 169-170; Strother R. 141-142.)

By leave of court, the petitioners filed a supple-

mental petition for rehearing on April 12, 1932.

(R. 171-183; Strother R. 143-153.) The supple-

mental petition for rehearing was denied April 29,

1932. (R. 185; Strother R. 154.) The petition

for certiorari was filed May 23, 1932, and was

granted October 10, 1932. (R. 187.) Jurisdic-

tion is conferred upon this Court by Section 240 (a)

of the Judicial Code as amended by the Act of

February 13, 1925.

QUESTIONS PRESENTED

1. Whether royalties received by the petitioner,

Bankers Pocahontas Coal Company, under certain

instruments made prior to March 1, 1913, are tax-

able income.

2. Whether a judgment against a Collector of

Internal Revenue in an action brought by petitioner

in a United States District Court, involving taxes

for other taxable years than those in the present

aapsomers

pute ra

case, is res judicata of the issue of the proper

depletion rate.

3. Whether the Board of Tax Appeals should

have granted a rehearing upon evidence presented

by petitioners for the first time upon final settle-

ment of the deficiency, and if so, whether the corpo-

rate petitioner was entitled to a further allowance

for depletion ?

STATUTES AND REGULATIONS INVOLVED

The statutes and regulations involved are con-

tained in the Appendix, infra, pp. 34-43.

STATEMENT

The respondent determined deficiencies in income

and profits taxes of the petitioner Bankers Poca-

hontas Coal Company for the years 1920 to 1926,

inclusive, amounting to $39,851.99 (R. 12, 23, 29),

and in income taxes of the petitioner Strother for

the years 1919 to 1925, inclusive, amounting to

$8,874.50 (Strother R. 11, 17,23). The petitioners

appealed from these determinations to the Board of

Tax Appeals.

The material facts as found by the Board may be

summarized as follows (R. 39-49) :

The petitioner Bankers Pocahontas Coal Com-

pany (hereafter called the Coal Company) is a

West Virginia corporation formed in 1912. In

that year it acquired in fee 6,200 acres of land in

West Virginia, including the mineral rights

therein. Also, by assignment, it acquired and holds

the interest of the prior owners in certain contracts

j of lease executed in 1901 and 1902 with several coal

operating companies, to which the tract of land was

subject. By these contracts the prior owners did

‘demise, let and lease for coal mining and coal

coking purposes only’’ for the period of thirty years

to the coal operating companies, severally, certain

parts of the tract. The form of contract used was

that prevailing in the West Virginia coal fields, and

followed the form used in the State of Pennsyl-

vania. (R. 39-40.) Extracts from a typical con-

tract appear at R. pp. 40-42. The cost to the Coal

Company of the properties was between $407,000

and $507,000. (R. 42.)

Schedules appearing in the findings of fact (R.

43-46) contain a list of the contracts and show the

estimated recoverable coal on March 1, 1913, and

the number of tons mined, the number of tons paid

for, and the royalty receipts in the taxable years

here in question, under each contract.

In these years the Coal Company vvas on a cash

receipts and disbursements basis of accounting.

Its income, except for minor items, consisted of

payments received under these contracts. (R. 46.)

The respondent treated the income derived from

the contracts as royalty payments under leases, and

allowed the Coal Company, as lessor, a deduction

for depletion at the rate of 3.6 cents per ton of coal

mined. This is the rate that had been allowed by

the respondent for 1919 and prior years. (R.

47-48. )

Additional taxes amounting to $6,267.08 were as-

sessed and collected for the years 1914 to 1919, in-

pe etary a.” ga ae et “y OV FER bas le tall od a —

or “,

—_—"

clusive. In 1923 the Coal Company brought an

action in the District Court for the Southern Dis-

trict of West Virginia against the collector of in-

ternal revenue to recover those taxes. The Coal

Company contended that payments received by it

under the contracts were proceeds of the sale of coal

in place consummated before March 1, 1913, or of

choses in action owned on that date and therefore

not income; or, otherwise, that in computing net

income it was entitled as lessor to a depletion rate

of 5 cents per ton of coal mined. The court held that

the receipts were income and found that the plain-

tiff was entitled to a depletion rate of 5 cents a ton,

and entered judgment in its favor for $5,373.01,

which was paid. The Collector of Internal Reve-

nue, as defendant, was represented in that action

by the United States Attorney and the Solicitor of

Internal Revenue (now General Counsel of the

Bureau of Internal Revenue). (R. 47.)

In the several years here involved the petitioner

Strother, as a stockholder, received payments from

the Coal Company. He reported them in his in-

come tax returns but did not include them as tax-

able income. The Coal Company used such portion

of the royalty payments as was necessary for ordi-

nary and necessary expenses, set aside a reserve to

meet pending Federal taxes, and distributed the

balance to its stockholders. The respondent added

the entire amount thus distributed to Strother to

his net income without allowance for any part

thereof that might have come out of the depletion

146572—382———-2

Sac sr tae

reserve of the Coal Company. Deficiencies against

Strother were determined by the respondent ac-

cordingly. (R. 72-73.)

In the case of the Coal Company, the Board of

Tax Appeals held that the payments received by

the petitioner under the contracts were royalties

which were properly part of its gross income; that

it was entitled to a reasonable allowance for deple-

tion, and that the petitioner had failed to prove

that the allowance determined by the respondent of

3.6 cents per ton was not reasonable. (R. 51, 54.)

On February 27, 1930, the Coal Company filed with

the Board a motion for a rehearing and alleged as

error, among others, that the Board had failed to

hold that the decision in the case of this petitioner

against the Collector of Internal Revenue, in the

United States District Court for the Southern Dis-

trict of West Virginia, was res judicata of the issue

with respect to the depletion rate. (R. 57-59.)

The motion was denied. (R. 59-60.) Upon final

settlement of the amount of deficiencies under the

Board’s decision, petitioner filed objections to the

proposed determinations submitted by respondent

and presented counter proposed determinations.

The Coal Company therein contended for the first

time that the depletion allowance should be on the

basis of the minimum royalty payments and not

upon the tonnage of coal mined, where the latter

was less than was permitted to be mined for the

minimum royalty payment in any year. (R. 66-

So AP OREN SP REESE OE SORE ee OA NeRES LTS OE OILY ES FEN xs

—E—————

69.) At the oral hearing on final settlement, a mo-

tion was made on behalf of both petitioners for a

rehearing to enable them to offer additional evi-

dence for the purpose of raising this question, and

the Board denied the motion. (R. 69-70, 109-110.)

The Board thereupon entered its order in the Coal

Company case redetermining the deficiencies in the

aggregate amount of $39,171.05. (R.70-71.) The

Circuit Court of Appeals sustained the decision of

the Board on all of the above issues.’

In the Strother case, before the Board, it was

agreed between the parties that the distributions

received by Strother were nontaxable to the extent

that they came out of the depletion reserve of the

Coal Company. (R. 57.) The respondent there-

upon filed a proposed settlement of the amount of

the deficiencies. (Strother R. 49-56.) The pe-

titioner Strother filed objections and a counter pro-

posal alleging error, among others, in the respond-

ent’s computation in that it did not accord with the

allowances for depletion made to the Coal Com-

pany. (Strother R. 57-63, 64-70.) After oral

hearing (Strother R. 81-87) the Board adopted

the computations of the respondent and entered

its order redetermining deficiencies aggregating

$5,806.07 and an overassessment for the year 1924

to be abated in the amount of $36.38. (Strother

R. 71-72.) The Circuit Court of Appeals decided

*There were certain other issues before the Board and

the Circuit Court in the Coal Company case which are not

involved in the present petition.

Eee aerate SEE EEO OIL LIT III MEIER

Strother should be given an opportunity to intro-

duce additional testimony on the issues raised by

him on the hearing on final settlement, and it re-

manded this case for further proceedings in accord-

ance with its opinion in the Coal Company case.

(Strother R. 110.) As it was stipulated that deci-

sion in the Strother case should follow that in the

Coal Company case as to the issues now presented

(Strother R. 80) no further separate discussion of

that case seems to be necessary.

SUMMARY OF ARGUMENT

1. Royalties received from a lessee of coal lands

in West Virginia, upon leases made prior to the

enactment of the Sixteenth Amendment, constitute

gross income. To impose a tax upon such receipts

does not violate the Constitution of the United

States as being an unapportioned direct tax.

Ti is clear from the comprehensive definition of

gross income contained in the Revenue Acts, and

the decisions of this Court and of Cireuit Courts of

Appeals with respect thereto, that Congress in-

tended to tax such income.

It is immaterial that, as assumed by the court

below for the purposes of the present case, such

leases are construed by the courts of West Vir-

ginia as effecting a sale of the mineral in place.

The royalties received from such leases are never-

theless taxable under the Federal statute, subject

only to an allowance for depletion. Furthermore,

POSS Sear “ra Ree % pan oe I eget me ee .

an examination of the decisions of the highest court

of West Virginia shows that the decisions are not

uniform, and that there is doubt whether this is

the established law of that State. Whatever may

be the legal effect of these instruments under the

State law, the royalties received thereunder are

properly gross income under the provisions of the

Revenue Act and the decisions of this Court.

2. The judgment of the District Court in the

action by the Coal Company against the Collector

of Internal Revenue, in an action involving taxes

for different taxable years from those involved

here, is not res judicata of the issue of the correct

depletion rate. That rule has no application to a

ease like this where the parties are different, differ-

ent causes of action or rights are involved, and the

statute expressly authorizes maintenance of a new

suit for each taxable year.

3. There is no error in the ruling of the court

below sustaining the Board of Tax Appeals in its

refusal to receive evidence first offered at the hear-

ing on recomputation of the tax under Rule 50 of

the Board on an issue not raised in the pleadings

or presented at the hearing on the merits. Denial

of such rehearing was proper under the rule of the

Board relating to hearings for final settlement.

That rule is valid and the denial was also a proper

exercise of discretion.

Petitioner’s contentions thus advanced too late

were that the depletion allowance should be based

upon the minimum annual royalties instead of

upon the number of tons of coal actually extracted,

where the minimum annual payments exceed the

royalties, at the per ton rate on coal extracted.

But the right of the lessees to mine coal to offset

the excess of royalty paid in any year was limited

to the next succeeding year after the amount neces-

sary to produce the minimum royalty for that year

had been mined. The present case, therefore, is not

within the terms of the Treasury regulations pro-

viding that advance royalties are subject to deple-

tion allowance. But from facts found by the Board

of Tax Appeals it appears that royalty payments

on coal extracted exceeded the required minimum

annual payments—with a possible exception in the

case of one lease, depending upon a particular con-

struction of the facts. Even if that construction

of the facts should be adopted, it will appear

that in only three years was there a deficiency in

coal mined, and as to only one of those years was

the deficiency offset in part in the next year.

Hence, if it should be held that the principle of the

regulations should be applied in the present case,

there would be no substantial change in the result,

for the Coal Company will be required to restore

to capital account and to report as income in the

succeeding year any excess of depletion allowed in

the preceding year.

ARGUMENT

ROYALTIES RECEIVED BY PETITIONER BANKERS POCAHON-

TAS COAL COMPANY UNDER THE LEASE AGREEMENTS

ARE TAXABLE INCOME

The Circuit Court of Appeals held that, even

though the instruments here in question are con-

strued under the law of West Virginia as effecting

a sale of coal in place, the per ton royalty payments

or the annual minimum rental payments provided

for therein constitute gross income to the Coal

Company. Petitioners’ contention seems to be,

first, that the decision violates Article 1, See. 9,

Clause 4, of the Constitution in that it authorizes a

direct tax upon property without apportionment,

i. e., upon the proceeds of a sale of property made

prior to the effective date of the Amendment,’ and

next, that Congress did not intend to tax such

receipts.

We submit that both of these contentions have

been fully answered by previous decisions of this

Court. In Stanton v. Baltic Mining Co., 240 U.S.

*It appears from the statement of petitioners’ counsel in

connection with petitioners’ motion for a rehearing (dis-

cussed under Point III of this brief), that in the case of two

of the leases new instruments were executed after March 1,

1913, to wit, September 30, 1916, and January 1, 1918, “each

reciting the pre-existence of contracts on March 1, 1913, and

the subsequent adjustment and modification of same as to

payments of a minimum royalty * * *.” (R. 109, 110.)

Ris RL TR AEE ine ERECT LOGE SOT Ne te hg acre rag

= PAR eS o DIPTOES he : ces

103, which arose under the income-tax provisions of

the Tariff Act, of 1913, c. 16, Sec. 2, 38 Stat. 166, 181,

it was contended that the proceeds of mining with-

out an adequate allowance by way of deduction for

exhaustion of the ore body was a tax upon prop-

erty because of its ownership and therefore sub-

ject to the constitutional requirement of apportion-

ment. Of this contention, this Court said (pp.

113-114) :

It moreover rests upon the wholly falla-

cious assumption that looked at from the

point of view of substance a tax on the prod-

uct of a mine is necessarily in its essence and

nature in every case a direct tax on property

because of its ownership unless adequate

allowance be made for the exhaustion of the

ore body to result from working the mine.

Wesay wholly fallacious assumption because

independently of the effect of the operation

of the Sixteenth Amendment it was settled

in Stratton’s Independence v. Howbert, 231

U. 8. 399, that such a 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

(pp. 413 et seq.). (Citing Brushaber v.

Union Pacific R. R., 240 U.S. 1.)

That case and Stratton’s Independence, Limited,

v. Howbert, 231 U. 8. 399, involved the proceeds of

ore mined by a corporation from its own premises.

Von Baumbach v. Sargent Land Co., 242 U. 8. 503,

involved moneys received from lessees under in-

ORY TS Oem Koes. % Op lo tp ae 5 ae. — A

E RE REN ie OLENA, RE LORE EO RIE NTC erie Shes

ve = ee

struments which were in form mining leases for

terms of fifty years. The question was whether

the receipts were income under the corporation ex-

cise tax provisions of the Tariff Act of 1909, ¢. 6,

36 Stat. 11,12. This Court decided, on the prinei-

ples announced in the Baltic Mining Co. and Strat-

ton’s Independence cases, supra, that the royalties

received under the leases were income, and it re-

ferred to its holding in the Stratton’s Independ-

ence case that the process of mining is in a sense

equivalent to a manufacturing process, and that

however the operation is described it is indubitably

business and the gains derived from it are prop-

erly income derived from capital, from labor, or

from both combined. This Court also held that it

made no difference whether the ores were extracted

by the mine owner, as in the Stratton’s Independ-

ence case, or by a lessee of the owner, as in the

case of the Sargent Land Company. (p.521.) See

also United States v. Biwabik Mining Co., 247

U.S. 116; Lynch, Executriz, v. Alworth-Stephens

Co., 267 U. S. 364.

The case of Old Colony R. Co. v. Commissioner,

284 U. 8. 552, is not in point, as the question there

was whether a pro rata part of premiums received

upon the sale of the petitioner’s bonds prior to 1913

should be included in gross income of 1921 or should

reduce the item of interest paid which is permitted

as a deduction from gross income. The holding of

146572—32—_3

—_— RESON EAS EY SPO I ELIE ELLE PLDI IE ELISE LIE LS IN TEES IIE AY aa

this Court was that such premium is income for the

year in which it was received, and no part thereof

could be income for any other year. In the case at

bar, while the instruments in question were entered

into prior to the adoption of the Sixteenth Amend-

ment, at that time the Coal Company was the owner

of the right to receive royalties as stipulated in the

instruments and to regain possession when the

leases terminated. The situation of the Coal Com-

pany is precisely like that of the respondent in

Reinecke v. Spalding, 280 U. S. 227. In that case

the respondent received royalties under leases made

prior to 1913, and the effect of this Court’s decision

is that the royalties received are income against

which the taxpayer is entitled to deduct as depletion

the per unit value on March 1, 1913, of the right to

receive the royalties.

In view of the comprehensive definition of gross

income contained in Section 213 (a) of the relevant

Revenue Acts (imfra, p. 34), and the decisions of

this Court, there would seem to be no doubt that

Congress intended to tax such income. See Burnet

v. Harmel, No. 26, October Term, 1932, decided

November 7, 1932; Hirschi v. United States, 67

C. Cls. 637, certiorari denied, 280 U. 8S. 576; Rosen-

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

certiorari denied, 278 U. 8. 604; Alexander v. King,

46 F. (2d) 235 (C. C. A. 10th), certiorari denied,

283 U. S. 845; Ferguson v. Commissioner, 45 F.

(2d) 573 (C. C. A. 5th) ; Berg v. Commissioner, 33

en aie ent Ga. dente ee

ITINERANT FIRST RI OS, Contant

F. (2d) 641 (App. D. C.), certiorari denied, 280

U.S. 598; Burkett v. Commissioner, 31 F. (2d) 667

(C. C. A. 8th), certiorari denied, 280 U. S. 565.

The Rosenberger case, supra, involved the ques-

tion whether royalty payments under a lease of

Pennsylvania coal lands similar to the leases in-

volved in the instant case were taxable income.

The Circuit Court of Appeals held that they were,

although it recognized that under Pennsylvania

law such leases constitute a sale of coal in place.

The later decision of the Circuit Court of Appeals

for the Third Circuit in Jefferson Gas Coal Co. v.

Commissioner, 52 F. (2d) 120, is not to the contrary.

The question there was the right of the petitioner

to deduct from income, payments made under an

agreement called a ‘‘ lease ’’ entered into in 1920

and providing for the payment of a certain rate per

ton for coal mined or minimum annual payments

over a period of ten years. The coal mined in the

first three years was considerably less than would,

at the per ton rate, equal the minimum payments.

The court held that the petitioner could deduct

only the amount of the royalty rate on the coal

mined and not the total amount of the minimum

payments, because the agreement provided that

whenever the total payments made equalled the

aggregate of the minimum annual royalty payments

for ten years the petitioner was entitled to a deed

in fee simple, free of encumbrances, for all of the

_—_——a Le

unmined coal in the lands in question. The instru-

ment was held to be a contract of sale, and the

minimum payments were held to be payments on

the purchase price and hence capital expenditures.

The cases are plainly distinguishable.

The present case is also distinguishable from

Burnet v. Logan, 283 U. 8. 404, as that case in-

volved the caleulation of gain on the sale of stock,

and this Court expressly observed that it was not

dealing with royalties or deductions from gross

income because of depletion of mining property.

(P. 412.)

The Circuit Court of Appeals assumed for the

purposes of its decision herein, that under the law

of West Virginia a mining lease constituted a sale

of the mineral in place, and it held that nevertheless

the royalties in question were taxable income (R.

pp. 123-124), since the power of Congress to tax

their receipt was not limited by the construction

placed upon such instruments by the state courts.

The view taken by the court below is sustained by

the decision of this Court in Burnet v. Harmel,

supra, decided November 7, 1932. In that case

this Court held that a bonus received in connection

with a lease of oil lands in Texas was taxable as

ordinary income and not as a gain from the sale of

capital assets. This Court said:

Bonus and royalties are both consideration

for the lease and are income of the lessor.

————

The Court, held that the fact that leases of oil lands

were regarded by the Texas courts as sales of oil

in place did not affect the nature of bonuses as

ordinary income under the Federal Revenue Acts.

We believe that this decision practically disposes

of this branch of the case.

Although the court below assumed that the in-

struments involved would be held under the state

law to convey title to the mineral in place, an exami-

nation of the decisions of the Supreme Court of

Appeals of West Virginia indicates that this is not

the established law, or at least that the state deci-

sions are not uniform on the point.

In Coal & Coke Co. v. Tax Commissioner, 59 W.

Va. 605, the court, in applying a West Virginia

statute which provided for the taxation of personal

property, held that a mining lease, similar in all

substantial respects to the instruments involved in

the present case, was a chattel real taxable to the

lessee as personalty. The lessee had contended that

the deed amounted to a sale of the coal in place,

taxable only as realty. The court said (p. 611):

Try this property or right under these

definitions. It is surely a lease, and there-

fore a chattel real. The fee owner carves

out of his fee a particular estate and vests

it in another. The coal having been devel-

oped, then, if not before, an actual estate

vested as to the coal right, an entity, a dis-

tinct entity, a separate property from that

remaining in the lessor. The instrument of

conveyance gave certain title to the Coal

Company, gave it an intangible right, that is,

a right to produce personal property, a prod-

uct of the land. This right savored of the

realty, depended on it, was annexed to it,

and so far answers the definition of a chattel

real, which is personal estate. We say that

the estate of the coal company is a lease for

years, and if so, by all authority, is a chattel

real. The parties thought they were making

a lease for years, intended to do so, so far as

we may judge from legal language, for

they used the words of lease signification,

“‘demise, lease, and let.’’ The instrument

calls itself a lease and calls the parties lessor

and lessee. But take the document itself.

It leases the tract for ‘‘a period of thirty

years,’’ not forever. It has a specific term,

gives an estate less than the fee of the lessors,

leaving the whole tract at the end of the term

to revert to the lessors disencumbered and

freed from the leasehold estate, thus meeting

another element in the definition of a chattel

real, that is, that it must be of less duration

than the estate of the lessor. * * *

Expressions in National Coal Co. v. Overholt, 81

W. Va. 427, to the effect that the instrument there

involved constituted a sale of coal in place do not

seem to have been strictly necessary to decision, but

in any event were based upon a construction of the

particular instrument. Cf. Taylor v. Thomas, 106

W. Va. 376, and Feather v. Baird, 85 W. Va. 267.

SR pe eS et egg RR oes ot, —s . a

SOLES RE TNE eS Me PYRE IN NEES aires yes etenesicn ne MESS gn das ep ean eR oe

ZY I Ng o Sea Aeaaneeypemen~oes

PIRSA AD 9.2 5

‘

Urpman v. Lowther Ol Co., 53 W. Va. 501; Tooth-

man v. Courtney, 62 W. Va. 167; Smith v. Root,

66 W. Va. 633.

We believe it can not be said that it is the es-

tablished law of West Virginia that instruments

such as these involved in the case at bar convey title

to the mineral in place. But we submit that in any

view of the legal effect of these instruments under

state law, the royalties received by the Coal Com-

pany were properly included in gross income.

THE JUDGMENT OF THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF WEST VIRGINIA IN

THE CASE OF BANKERS POCAHONTAS COAL COMPANY

V. WHITE, COLLECTOR, IS NOT RES JUDICATA OF THE

ISSUE IN THE CASE AT BAR OF THE REASONABLE

DEPLETION RATE

The case of Bankers Pocahontas Coal Co. v.

White, Collector, involved the depletion allowance

of petitioner for the years from 1914 to 1919, in-

clusive. (R. 89.) The District Court allowed a

depletion rate of 5 cents a ton. (R. 95.) The

present proceeding relates to the years 1920 to

1926, inclusive. (R. 38.) The respondent deter-

mined that 3.6 cents per ton was a proper depletion

rate for these years, and the Board of Tax Appeals

held that the Coal Company had failed to prove

that this rate was erroneous. (R. 53-54.) The

court below sustained the Board. (R. 127-128.)

The Coal Company contends that the rate of deple-

Te . . .

— as are et a aT FREER ELL er IO sit PRE LORE

‘ = LAREN eee

5 n

tion allowed by the District Court for prior years

in an action brought by it against the Collector of

Internal Revenue is res judicata of the issue of

depletion in the instant case. We submit that the

doctrine is not applicable because the parties are

different, different causes of action or rights are

involved, and separate suits or proceedings are

specifically authorized by statute. We assume for

the purpose of the argument that the fact that the

judgment is pleaded in the Board of Tax Appeals

and not in a court is not material.

The present proceeding is in effect a proceeding

against the United States. While the Commis-

sioner of Internal Revenue is the nominal party,

he is proceeded against in his official and represent-

ative capacity as an officer of the United States,

which is the real party in interest; it is the United

States which will be concluded by any decision ad-

verse to the Commissioner. The proceeding is

brought with its consent to review a determination

of the Commissioner that the taxpayer is indebted

to the United States for additional taxes. On the

other hand, the suit in the District Court was

against the Collector of Internal Revenue. In Sage

v. United States, 250 U.S. 33, this Court held that

the United States was not privy to a judgment

against 2 collector of internal revenue, and that the

judgment was not a bar in a suit brought against

the United States in the Court of Claims involving

a part of the same tax. In that case, this Court

pointed out that the suit against the collector is

personal and its incidents are different. We believe

that the petitioners’ argument that the Commis-

sioner is privy to the suit against the collector is

fully answered by what this Court said in the Sage

case, supra, Which the court below accepted as con-

trolling upon this question. That case was cited

with approval by this Court in Graham & Foster v.

Goodcell, 282 U.S. 409, 430. See also Smietanka v.

Indiana Steel Co., 257 U. 8.1, 4,5. Cf. Union Trust

Co. v. Wardell, 258 U.S. 537. -

The present action relates to taxes for different

years from those involved in the suit in the District

Court. A taxpayer is authorized to bring a pro-

ceeding for review to the Board of Tax Appeals in

any case of a deficiency in tax found by the Com-

missioner. The Board was created to provide tax-

payers an opportunity to secure an ‘‘independent

review”’ of the Commissioner’s determination. It

is authorized to consider deficiencies beyond those

stated by the Commissioner in his notice to the tax-

payer and may also determine that the taxpayer

has made an overpayment. Upon the Board’s

decision, ‘‘the parties are given an opportunity to

base a petition for review to the courts.’? Old

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

721, 722, 725. Section 274 (a), Revenue Act of

1926, ce. 27, 44 Stat. 9 (U. S. C. App., Title 26, Sec.

1048.)* By Section 3226 of the Revised Statutes

* See also Section 250, Revenue Act of 1921, c. 136, 42 Stat.

227; Section 274, Revenue Act of 1924, c. 234, 43 Stat. 253

(U.S. C., Title 26, Sec. 1048).

——e PERIGEE TNS SELLE LOS LORE LOLS DOLD SORES Meee

(as amended by Section 1113 (a) of the Revenue

Act of 1926 (U.S. ©. App., Title 26, See. 156),° a

taxpayer is authorized to maintain a suit for the

recovery of any internal revenue tax alleged to have

been erroneously assessed or collected, after certain

prerequisites, such as claim for refund to the Com-

missioner, have been complied with. In view of

these provisions, it may not be said that a judgment

as to one taxable year is intended to be a bar to an

action involving a tax for a different year.

Each year is treated as a unit (Burnet v. San-

ford & Brooks Co., 282 U. 8. 359), and the proce-

dure to collect, as well as the procedure to recover,

must be followed with respect to each year in con-

troversy. The statutes authorize suits with respect

to one year’s tax irrespective of the status of an-

other year’s tax. It has never been supposed that

a decision upon a tax question was forever binding

between the parties.°

This Court has held that where cumulative rem-

edies are given by statute the doctrine of res judi-

cata is not a bar to a second suit. United States

5 See also Section 1318, Revenue Act of 1921, c. 136, 42

Stat. 227 (U. S. C., Title 26, Sec. 156); Section 1014 (a),

Revenue Act of 1924, c. 234, 43 Stat. 253 (U.S. C., Title 26,

Sec. 156).

* For example, in Old Colony R. Co. v. Commissioner, 284

U. S. 552, it appears that the question had been previously

litigated between the same parties. Commissioner v. Old

Colony R. R., 26 F. (2d) 408 (C. C. A. 1st), writ of certiorari

dismissed, 279 U. S. 876; Commissioner v. Old Colony R.

Co., 50 F. (2d) 896 (C. C. A. Ist).

eS eS Se PS Ie Se

;

) a

v. Ness, 245 U.S. 319. See also Maney v. United

States, 278 U.S. 17, 23; Tutun v. United States, 270

U. S. 568, 580.

In United States v. Stone & Downer Co., 274 U.

S. 225, 230, it was taken as settled that the doctrine

of res judicata may apply to cases of taxes as well

as to other subjects of litigation, but the doctrine

was not applied in that case for reasons which are

equally pertinent here. That case dealt with the

proper classification of an importation of wool for

the purpose of applying the correct tariff rate. Al-

though there had been a prior judgment by the

Court of Customs Appeals applying one classifi-

cation to the wool, that court had established the

practice that a decision upon a finding of facet,

a construction of the statute and classification

thereunder, was not res judicata in respect of a

subsequent importation.

The purpose of that practice was to avoid in-

equality and discrimination in the administration

of the customs laws which would result from giving

a permanently binding effect to a decision favorable

to a particular importer. Much of this reasoning

(pp. 235-237) is applicable to tax cases arising

under the revenue laws, for it is apparent that the

application of the doctrine would result in inequal-

ity in the administration of the revenue laws and

give preference to those taxpayers who successfully

litigated a tax question, over others who may be

subject to tax liability as the result of a later deci-

ae ene ar eat

sion of controlling authority laying down a differ-

ent rule. For example, if the interpretation of the

affiliation statutes by this Court in Handy & Har-

man V. Burnet, 284 U. 8S. 136, may not be applied to

all corporations without regard to erroneous deci-

sions granting affiliation in prior years, discrimina-

tion, injustice, and confusion will result. The start-

ling results of such a rule can hardly be exagger-

ated. If any such rule should prevail the interests

of the Government could not be adequately pro-

tected unless appeals were taken and writs issued

by this Court to review every questionable decision

in a Government tax case. For unless all such cases

were brought to this Court there would be created

a numerous class of taxpayers privileged in the per-

manent enjoyment of tax exemptions predicated

upon the decisions of the lower Federal courts, later

declared to be erroneous and overruled. Decisions

of the courts in suits against a collector of taxes

conclusively settle the validity of the tax collections

in question. They should be given no wider scope.

We submit that the principle laid down in New

Orleans v. Citizens’ Bank, 167 U.S. 371, should not

be applied to tax cases involving different years for

reasons similar to those which induced the Court

not to apply it in the Stone & Downer case (p. 237).

The doctrine of res judicata has been applied in

three recent cases in District Courts, but we believe

that in each of those cases different situations were

presented from that in the case at bar.

———————

In Second Nat. Bank v. Woodworth, 54 F. (2d)

672 (E. D. Mich.), it was held that a judgment in

favor of the United States in a suit based on rejec-

tion of a claim for refund of additional estate tax

paid under protest was a bar to a subsequent suit

against the Collector of Internal Revenue present-

ing the same issues. In that case attempt was

made to relitigate questions as to the same tax.

Similar situations were presented in Greylock Mills

v. White, 55 F. (2d) 704 (Mass.), and in Bertelsen

v. White, 58 F. (2d) 792 (Mass.).

We submit that for the reasons stated judgment

of the District Court in the prior action was not a

determination on the question of depletion which

was binding in the present proceedings.

III

THERE WAS NO ERROR IN THE RULING OF THE LOWER

COURT SUSTAINING THE BOARD OF TAX APPEALS IN

ITS REFUSAL TO RECEIVE ADDITIONAL EVIDENCE AT

THE HEARING UPON SETTLEMENT OF THE AMOUNT

OF THE DEFICIENCY AND SUBSEQUENT TO PROMULGA-

TION OF ITS FINDINGS OF FACT AND OPINION

After the Board of Tax Appeals had filed its

findings of fact and opinion, the respondent and the

petitioners each filed proposed recomputations of

the amount of the deficiency under the Board’s re-

port. (R. 61-66, 66-69; Strother, 57-63.) These

proposed recomputations were filed pursuant to

Rule 50 of the Board’s rules of practice (infra, p.

42). The petitioners, in their recomputations,

— NANT RS OE LE DEE LORETO LEI I OE LIN Ee IR Rp a

e Bins wae eR eT

claimed that a greater quantity of coal was paid for

than was mined, and that the depletion allowance

should be computed on the basis of the amount of

the payments received instead of upon the number

of tons extracted. (R. 68; Strother 58.) At the

hearing upon the recomputation under Rule 50,

petitioners tendered evidence designed to support

these claims. (R. 109-110; Strother 82,86.) The

question had not been raised previously in the

pleadings nor at the hearing on the merits. That

hearing was had in May, 1929. (R. 84) The

Board’s findings and opinion were promulgated

January 22, 1930. (R. 37.) Motion for a rehear-

ing on this question was not made until May, 1930.

(R. 66-69.) The Board denied the motion. (R.

69-70.) The Cireuit Court of Appeals held that

it was within the sound discretion of the Board to

grant or to deny petitioners’ motion ; and that since

the evidence must have been in the possession of

the Coal Company from the beginning the court

could not say that there had been an abuse of dis-

cretion. (R. 129.)

The Board is authorized to prescribe rules of

practice and procedure for the conduct of proceed-

ings before the Board. Section 601, Revenue Act

of 1928, ec. 852, 45 Stat. 791, 871-872 (U.S. C. Sup.

V., Title 26, Sec. 1219 (a)), amending Section 907

(a) of the Revenue Act of 1924, as amended. See

Greengard vy. Commissioner, 29 F. (2d) 502, 503.

(C. C. A. 7th). Cf. Goldsmith v. Board of Taz

Appeals, 270 U. S. 117.

_—

Rule 50 of the Board prescribes the procedure for

computing the amount of the deficiency after the

Board has heard and decided the issues raised and

presented on the merits. Under the express pro-

visions of this rule any hearing thereunder is con-

fined to consideration of the correct computation of

the deficiency or overpayment resulting from the

report of the Board already made, and no argument

is heard or consideration given to any new issue.

Furthermore, by its express provisions the rule may

not be taken as affording an opportunity for a re-

hearing or consideration. (Rule 50, infra, p. 42.)

The Board has held that new issues may not be

raised and urged on a hearing under this rule.

Great Northern Ry. Co., 10 B. T. A. 1347, affirmed

on other issues, 40 F. (2d) 372 (C. C. A. 8th), cer-

tiorari denied, 282 U. S. 855. It has also been sus-

tained in the following cases: O’Meara v. Commis-

sioner, 34 F. (2d) 390, 395 (C. C. A. 10th) ; Boggs &

Buhl v. Commissioner, 34 F. (2d) 859, 861 (C. C. A,

3d); Metropolitan Business College v. Blair, 24 FP.

(2d) 176, 178 (C.C. A. 7th). Cf. Sooy v. Commis-

sioner, 40 F. (2d) 634 (C. C. A. 9th). The rule is

clearly a proper exercise of the power of the Board

to prescribe rules of practice and procedure. The

interests of orderly procedure demanded that peti-

tioners present their contentions before the Board

decided the case on the merits and denial of rehear-

ing by the Board was clearly proper.

—_——— CORRS EEE GONE POLE RET COPE EE <P RE PT oo arvengscepgees Rai 7

ss Sata! wines

The contention which the petitioner sought to

advance on rehearing was that if the annual allow-

ances to the Coal Company for depletion are based

upon the minimum royalty payments instead of

upon the number of tons actually extracted it will

be entitled to a larger depletion deduction than

that determined by the respondent and approved

by the Board. The Coal Company seeks to bring

itself within the rule that the Government is con-

tending for in Murphy Oil Co. v. Burnet, No. 80,

October Term, 1932, which is to be argued just be-

fore this case. In that case the taxpayer, a lessor of

oil property, received a bonus in connection with

a lease, in addition to regular royalties stipulated

in the lease.’ The Government is contending that

the bonus should be reported as gross income and

a depletion allowance made in the same year, the

bonus being considered as advance royalty for oil

which the lessee has acquired the right to remove

in the future. In that case the Government is

seeking to uphold Treasury Regulations, which

provide in substance that bonuses and minimum an-

nual or advance royalties which are paid for the

right to extract and remove mineral at any time

thereafter shall be included in gross income and

an allowance made for depletion of the value in

7 Reference is made to the Government’s brief in Murphy

Oil Co. v. Burnet.

——— FES LINE OE STINE LEBEN ITY OTT ET RARE a

. Qa

the ground to the lessor of the number of units of

mineral so paid for in advance, and no further de-

pletion is thereafter allowed on account of the ex-

traction of such mineral so paid for in advance.’

The Regulations further provide that, upon ex-

piration, termination, or abandonment of the lease,

the lessor shall restore to capital account any de-

pletion deduction made in prior years on account of

royalties or minerals paid for but not removed,

and the amount so restored shall be included as

income for the year in which the lease expires, ter-

minates, or is abandoned.

Upon the facts disclosed in the present record it

appears that the right of the lessees of the Coal

Company to remove coal for minimum royalties

subsequent to the year of payment was limited.

There were six different leases of the Coal Com-

pany’s property. (R. 42-43.) Only one, known

as the ‘‘ Cletus lease,’’ was received in evidence.’

(R. 85, 39-42.) This lease was offered as typical

of the others. (R.39-40, 85-86.) It provides that

the lessee shall, among other things, have the exclu-

sive privilege of mining and coking coal. The les-

* This is in accordance with Article 215 of Regulations 45

(1920 Edition), Article 216 of Regulations 62, and Article

216 of Regulations 65, as amended by T. D. 3938, V-2 C. B.

117 (infra, p. 40).

* This Coal Company proffered the other leases upon the

hearing under Rule 50, in connection with its motion for

rehearing, but the Board refused to receive them then. (R.

109-110.)

2 ES OR

see agrees to pay 10 cents for each ton of coal mined

and 15 cents for each ton of coke manufactured,

and to pay as a minimum rental or royalty, $5,000

a year, whether the quantity of coal mined and coke

manufactured shall produce that amount of royalty

or not, but the lessee ‘‘shall have the privilege of

mining the next succeeding year, free of royalty, a

sufficient amount of coal above the amount neces-

sary to produce the minimum royalty for that year

to reimburse themselves for the deficiency in the

preceding year.”’ (Italics ours.) (R. 40-41.)

It is clear from the provision quoted that the pay-

ment of the minimum annual rental or royalties did

not give to the lessees a right to mine at any time in

the future a quantity of coal equal to the deficiency

in the year of payment. The right was limited to

the next succeeding year, and then only after the

minimum quantity for that year had been mined

It is, therefore, not covered by the terms of Article

215 of the Treasury Regulations. There was no

continuing right in the lessee to remove coal in the

future equal to the excess of the minimum payment

over the total royalty at the per-ton rate for coal

extracted. If the principle of the Regulation were

applied to a case like the present, and depletion

allowed on the basis of the minimum annual pay-

ments and the deficiency in tons of coal mined

should not be removed in the following year, it

would be necessary under the terms of the Regula-

LENO SRE EHS Di NET carat !

EEE

tion to restore the excess depletion to capital ac-

count and to report it in income in the next succeed-

ing year. Otherwise, the lessor would have been

allowed depletion of his interest in the minerals

where no depletion had taken place, either in fact or

in theory.

But it appears from facts stipulated and found

by the Board of Tax Appeals that the royalty pay-

ments on coal actually extracted was greater than

the required annual minimum payments (except

possibly for certain years in the case of one of the

leases, and this depends upon one construction of

the facts, as shown below).*°

Lease No. 1: Per ton royalty, 8 cents; annual minimum,

$5,000. (R. 43.) In each year the tonnage mined and paid

for exceeded the required minimum payment. (R. 44.)

Lease No. 2 (Cletus Mine) : Per ton royalty, 10 cents; an-

nual minimum, $5,000. (R. 41, 43.) The tonnage mined in

each year was less than the annual payments actually re-

ceived, which were uniformly $12,000. But the lease and the

tabular statement in the finding of fact of the Board show

that the required annual minimum payment is $5,000, and

payments at the per ton rate for coal extracted in each year

exceeded the latter amount. (R. 41, 48, 44.)

Lease No. 3: Per ton royalty, 7 cents; annual minimum,

$4,000. (R. 43.) In each year the tonnage mined and paid

for exceeded the required annual payment. (R. 45.)

Lease No. 4 (Warwick Mine and Exeter Mine): Per ton

royalty, 10 cents; annual minimum, $10,000. (R. 43.) The

amount mined and paid for at both mines always exceeded

the annual minimum. If the minimum applies to each mine

separately, in the case of the Warwick Mine there were three

years in which the tonnage mined was less than the tonnage

eo eens

From the references to the findings in Footnote

10, it is apparent that even if the Regulations

were held to apply to leases with provisions for a

very limited right of extraction to compensate for

minimum royalty paid in excess of extraction, the

facts disclose that there were no excess royalty pay-

ments under any of the leases, with one possible

exception.”

that could be mined for the annual payment, but in only one

case (1922) was the deficiency in tonnage mined (in part) in

the following year. (R. 45.)

Lease No. 5: No required annual minimum payment.

Lease No. 6: This lease relates to an easement for hauling

over the land of the Coal Company coal mined on property of

others. It does not appear that it is an appropriate subject

for depletion allowances.

11 Whether or not there were excess payments in the case

of this lease depends upon a construction of the facts. If

the stated minimum atinual royalty of $10,000 was the

minimum for both of the mines grouped under Lease No. 4,

there was no excess payment of royalty. If $10,000 was to

be paid separately for each of the two mines, then there was

an excess payment in the case of the Warwick Mine in three

of the seven years involved, viz, 1920, 1921, and 1925; but

only in 1922 was any coal mined to make up in part the

deficiency of the preceding year. In the case of the Exeter

Mine, under Lease No. 4, the receipts in each year exceeded

$10,000, although they can not be reconciled with the figures

of tonnage mined. (R. 45.)

We, therefore, submit that upon the facts in evidence it

appears that (with possibly a minor exception in the case of

one lease) the Coal Company would not in any event be

entitled to a larger depletion allowance than that made to it

by respondent, and thus denial of rehearing did not sub-

stantially prejudice it.

CONCLUSION

| It is submitted that the decision of the court

| below should be affirmed.

Respectfully submitted.

THomas D. THACHER,

Solicitor General.

G. A. Youneguist,

Assistant Attorney General.

/ | Wurrney Norra SEYMOUR,

SEWALL Key,

ANDREW D. SHARPE,

Special Assistants to the Attorney General.

NOVEMBER, 1932.

AL OT eee or te Senin tht ees

APPENDIX

Constitution of the United States:

Article I

aA.

No Capitation, or other direct, Tax shall be

laid, unless in Proportion to the Census or

Enumeration herein before directed to be

taken.

Sizteenth Amendment

The Congress shall have power to lay and

collect taxes on incomes, from whatever

source derived, without apportionment

among the several States, and without re-

gard to any census or enumeration.

Revenue Act of 1918, ce. 18, 40 Stat. 1057, 1065,

1077:

Sec. 213. That for the purposes of this

title (except as otherwise provided in sec-

tion 233) the term ‘‘gross income’’—

(a) Includes gains, profits, and income

derived from * * *, trades, businesses,

commerce, or sales, or dealings in prop-

erty, whether real or personal, growing out

of the ownership or use of or interest in such

; property ; also from interest, rent, dividends,

F securities, or the transaction of any business

carried on for gain or profit, or gains or

profits and income derived from any source

whatever. The amount of all such items

; shall be included in the gross income for

the taxable year in which received by the

taxpayer, unless, under methods of account-

ing permitted under subdivision (b) of

(84)

Picsicesintaiz RSE aad Aas ta caht? Og shat henln Eon Bek

iesieemcer enn

section 212, any such amounts are to be

properly accounted for as of a different

period; * * *

Sec. 234. (a) That in computing the net

income of a corporation subject to the tax

imposed by section 230 there shall be allowed

as deductions:

* * * * *

(9) In the case of mines, * * *

reasonable allowance for depletion and for

depreciation of improvements, according to

the peculiar conditions in each case, based

upon cost including cost of development not

otherwise deducted: Provided, That in the

case of such properties acquired prior to

March 1, 1913, the fair market value of the

property (or the taxpayer’s interest there-

in) on that date shall be taken in lieu of cost

up to that date: * * * such reasonable

allowance in all the above cases to be made

under rules and regulations to be prescribed

by the Commissioner with the approval of

the Secretary. In the case of leases the de-

ductions allowed by this paragraph shall be

equitably apportioned between the lessor and

lessee,

Revenue Act of 1921, ¢. 136, 42 Stat. 227, 237, 254:

Sec. 213 of the 1921 Act is substantially

the same as Section 213 of the Revenue Act

of 1918.

Sec. 234, (a) That in computing the net

income of a corporation subject to the tax

imposed by section 230 there shall be allowed

as deductions:

* * ” * *

(9) In the ease of mines, * * * a

reasonable allowance for depletion and for

depreciation of improvements, according to

the peculiar conditions in each case, based

upon cost including cost of development not

ses,

Diticictcccmicainss. SIE LIRR teh 0 te se ie Me, OD haat :

omni

otherwise deducted: Provided, That in the

case of such properties acquired prior to

March 1, 1913, the fair market value of the

property (or the taxpayer’s interest therein)

on that date shall be taken in lieu of cost up

to that date: * * * such reasonable

allowance in all the above cases to be made

under rules and regulations to be prescribed

by the Commissioner with the approval of

the Secretary. In the case of leases the

deductions allowed by this paragraph shall

be equitably apportioned between the lessor

and lessee.

Revenue Act of 1924, c. 234, 43 Stat. 253, 267, 283:

Sro. 213 of the 1924 Act (U.S. C., Title 26,

See. 954), is substantially the same as Sec-

tion 213 of the Revenue Act of 1921.

Src. 234. (a) In computing the net income

of a corporation subject to the tax imposed

by section 230 there shall be allowed as

deductions:

* * * * *

(8) In the ease of mines, * * * a

reasonable allowance for depletion and for

depreciation of improvements, according to

the peculiar conditions in eacii case; such

reasonable allowance in all cases to be made

under rules and regulations to be prescribed

by the Commissioner with the approval of

the Secretary. In the case of leases the

deductions allowed by this paragraph shall

be equitably apportioned between the lessor

and lessee. (U.S. C., Title 26, See. 986.)

Revenue Act of 1926, ec. 27, 44 Stat. 9, 23, 41, 55,

116:

Src. 213 of the 1926 Act (U.S. C. App.,

Title 26, Sec. 954), is substantially the same

as Section 213 of the Revenue Act of 1924.

Sec. 234. (a) In computing the net in-

come of a corporation subject to the tax im-

posed by section 230 there shall be allowed

as deductions:

* * * * *

(8) In the case of mines, a rea-

sonable allowance for depletion and for de-

preciation of improvements, according to the

peculiar conditions in each case; such rea-

sonable allowance in all cases to be made

under rules and regulations to be prescribed

by the Commissioner with the approval of

the Secretary. In the case of leases the de-

ductions allowed by this paragraph shall be

equitably apportioned between the lessor and

lessee. (U.S. C. App., Title 26, Sec. 986. )

Sec. 274. (a) If in the case of any tax-

payer, the Commissioner determines that

there is a deficiency in respect of the tax im-

posed by this title, the Commissioner is au-

thorized to send notice of such deficiency to

the taxpayer by registered mail. Within 60

days after such notice is mailed (not count-

ing Sunday as the sixtieth day), the taxpayer

may file a petition with the Board of Tax

Appeals for a redetermination of the defi-

ciency. Except as otherwise provided in

subdivision (d) or (f) of this section or in

section 279, 282, or 1001, no assessment of a

deficiency in respect of the tax imposed by

this title and no distraint or proceeding in

court for its collection shall be made, begun,

or prosecuted until such notice has been

mailed to the taxpayer, nor until the expira-

tion of such 60-day period, nor, if a petition

has been filed with the Board, until the de-

cision of the Board has become final. Not-

withstanding the provisions of section 3224

of the Revised Statutes the making of such

assessment or the beginning of such proceed-

ing or distraint during the time such prohi-

bition is in foree may be enjoined by a pro-

* * *

Betis acticin, Mala FRIAR ES ROENE hia! Rie TE ERE ARE Gk te

ceeding in the proper court. (U.S.C. App.,

Title 26, See. 1048.)

Sec. 1113. (a) Section 3226 of the Revised

Statutes, as amended, is reenacted without

change, as follows:

“Sec. 3226. No suit or proceeding shall be

maintained in any court for the recovery of

any internal-revenue tax alleged to have

been erroneously or illegally assessed or col-

lected, or of any penalty claimed to have been

collected without authority, or of any sum

alleged to have been excessive or in any man-

ner wrongfully collected until a claim for

refund or credit has been duly filed with the

Commissioner of Internal Revenue, accord-

ing to the provisions of law in that regard,

and the regulations of the Secretary of the

Treasury established in pursuance thereof ;

but such suit or proceeding may be main-

tained, whether or not such tax, penalty, or

sum has been paid under protest or duress.

No such suit or proceeding shall be begun

before the expiration of six months from the

date of filing such claim unless the Commis-

sioner renders a decision thereon within that

time, nor after the expiration of five years

from the date of the payment of such tax,

penalty, or sum, unless such suit or proceed-

ing is begun within two years after the dis-

allowance of the part of such claim to which

such suit or proceeding relates. The Com-

missioner shall within 90 days after any such '

disallowance notify the taxpayer thereof by

mail.”’

(b) This section shall not affect ary pro-

ceeding in court instituted prior to the enact-

ment of the Revenue Act of 1924. (U.S. C.

App., Title 26, Sec. 156.)

Treasury Regulations 45 (1920 Edition) :

Art. 215. Depletion—Adjustments of ac-

counts based on bonus or advanced roy-

alty.—(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 extent 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 ex-

cess 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 de-

pletion 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.

(b) Where the owner has leased a mineral

property for a term of years with a require-

ment in the lease that the lessee shall extract

and pay for, annually, a specified number

of tons, or other agreed units of measure-

ment, of such mineral, or shall pay, annually,

a specified sum of money which shall be ap-

plied in payment of the purchase price or

rovalty per unit of such mineral whenever

the same shall thereafter be extracted and

removed from the leased premises, the value

in the ground to the lessor, for purposes of

depletion, of the number of units so paid for

in advance of extraction will constitute an

allowable deduction from the gross income

of the year in which such payment or pay-

ments shall be made; but no deduction for

depletion by the lessor shall be claimed or al-

lowed in any subsequent year on account of

the extraction or removal in such year of any

mineral so paid for in advance and for which

deduction has once been made.

(ce) If, for any reason, any such mineral

lease shall be terminated or abandoned be-

fore the mineral which has been paid for in

advance has been extracted and removed,

and the lessor repossesses the leased prop-

erty, the lessor shall adjust his capital ac-

counts by restoring to the capital sum of the

property the depletion deductions made in

prior years on account of royalties on min-

eral paid for but not removed, and his in-

come account shall be adjusted so as to

include the amount so restored to capital

sum as income of the year such lease is ter-

minated or the property repossessed, and

the tax thereon paid.

(d) Upon the expiration, termination, or

abandonment of a lease, without the removal

of any or all of the mineral contemplated by

the lease, the lessor shall be required to re-

store to capital account so much of the bonus

received and deducted from capital recover-

able through depletion as is in excess of the

actual depletion or loss in value sustained as

a result of the operations under the lease and

the corresponding amount will be income for

the year in which the lease expires, termi-

nates, or is abandoned.

Paragraphs (b) and (c¢) of the above article ap-

pear in the same form in Article 215 of Regulations

62, and Article 216 of Regulations 65 and 69, and

in Article 236 of Regulations 74.

Paragraphs (a) and (d) originally appeared in

the same form as above in Article 215 of Regula-

tions 62 and Article 216 of Regulations 65, but were

afterwards amended by T. D. 3938, V-2 C. B. 117,

promulgated November 13, 1926, to read as fol.ows

(pp. 117-118) :

Article 215 of Regulations 45 (1920 edi-

tion), article 215 of Regulations 62, and arti-

—_— Melee 2

cle 216 of Regulations 65 are hereby amended

to read as follows:

ArT. 216 (215). Depletion—Adjustments

of accounts based on bonus or advanced roy-

alty.—(a) Where a lessor receives a bonus

in addition to royalties, there shall be al-

lowed as a depletion deduction in respect of

the bonus an amount equal to that propor-

tion of the cost or value of the property on

the basic date which the amount of the bonus

bears to the sum of the bonus and the royal-

ties expected to be received. Such allowance

shall be deducted from the amount remain-

ing to be recovered by the lessor through de-

pletion, and the remainder is recoverable

through depletion deductions on the basis of

royalties thereafter received.

(b) Where the owner has leased a mineral

prope ty for a term of years with a require-

ment in the lease that the lessee shall extract

and pay for, annually, a specified number of

tons, or other agreed units of measurement,

of such mineral, or shall pay, annually, a

specified sum of money which shall be ap-

plied in payment of the purchase price or

royalty per unit of such mineral whenever

the same shall thereafter be extracted and

removed from the leased premises, the value

in the ground to the lessor, for purposes

of depletion, of the number of units so paid

for in advance of extraction will constitute

an allowable deduction from the gross in-

come of the year in which such payment or

payments shall be made; but no deduction

for depletion by the lessor shall be claimed

or allowed in any subsequent year on account

of the extraction or removal in such year

of any mineral so paid for in advance and

for which deduction has once been made.

lease shall be terminated or abandoned be-

—

papas KEN Be Sites a es A

Biecatcicnns ee nes ee ee

—— ae

fore the mineral which has been paid for in

advance has been extracted and removed, and

the lessor repossesses the leased property,

the lessor shall adjust his capital accounts

by restoring to the capital sum of the prop-

erty the depletion deductions made in prior

years on account of royalties on mineral

paid for but not removed, and his income

account shall be adjusted so as to include the

amount so restored to capital sum as income

of the year such lease is terminated or the

0 iain repossessed, and the tax thereon

aid.

(d) Upon the expiration, termination, or

abandonment of the lease, without the re-

moval of any or all of the mineral contem-

plated by the lease, the lessor shall be re-

quired to restore to capital account the ex-

cess of the depletion theretofore allowable

in respect of the bonus and royalty payments

over the actual depletion or loss in value

sustained as a result of the operations under

the lease, and a corresponding amount must

be returned as income for the «ear in which

the lease expires, terminates, or is aban-

doned.

All rulings inconsistent herewith are

hereby revoked.

Paragraphs (a) and (d) as thus revised appear

in Article 216 of Regulations 69 and Article 236 of

Regulations 74.

United States Board of Tax Appeais, Rule 50:

Settlement of final determination.— When

the Board determines the issues in any pro-

ceeding and withholds final decision of the

deficiency or overpayment for later compu-

tation, the parties shall, if they are in agree-

ment as to the amount of the deficiency or

overpayment, in accordance with the de-

termination of the Board, file with the Board

an original and four copies of a com-

pritation showing the amount for entry of

final decision forthwith. If the parties

are not in agreement as to the amount to

be entered in the final decision, either of

them may file with the Board a computa-

tion of the deficiency or overpayment be-

lieved by him to be in accordance with

the determination of the Board. The clerk

will serve a copy thereof upon the opposite

party and will thereupon place the matter

upon the day calendar for hearing in due

course and give the usual notice. If the

opposite party fails to file objection, accom-

panied by an alternative computation, with-

in five days prior to the date of such hearing,

or any continuance thereof, the deficiency

or overpayment shown in the computation

already submitted shall be taken to be cor-

rect and decision thereon will be entered. If

the parties submit different computations

and amounts, they will be afforded an oppor-

tunity to be heard thereon on the date fixed,

and the Board will determine the correct

deficiency or overpayment and enter deei-

sion.

Any hearing under this rule will be con-

fined strictly to the consideration of the cor-

rect computation of the deficiency or over-

payment resulting from the determination

already made, and no argument will be heard

upon or consideration given to the issues or

matters already disposed of by such deter-

mination or of any new issues. This rule is

not to be regarded as affording an oppor-

tunity for rehearing or reconsideration.

U.S. GOVERNMENT PRINTING OFFICE, te32

BL AERO TRAC Lem “AF wun hie Tee wo

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.