Petition for A Writ of Certiorari — London Extension Mining Co. v. Commissioner

SUPREME COURT

UNITED STATES

OCTOBER TERM, 1947

CHICAGO MINES COMPANY,

Petitioner,

VS.

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

THE LONDON EXTENSION MINING COMPANY,

as Transferee of CHICAGO MINES COMPANY,

Petitioner,

VS.

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

THE LONDON EXTENSION MINING COMPANY,

Petitioner,

VS.

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

PETITION FOR WRIT OF CERTIORARI TO THE UNITED STATES

Circuit CourRT OF APPEALS, TENTH CIRCUIT, AND

BRIEF IN SUPPORT THEREOF.

FRAZER ARNOLD,

Counsel for Petitioners.

730 First National Bank Bldg.,

Denver 2, Colorado.

CHARLES KENTOR,

ARNOLD WEINBERGER,

Of Counsel.

730 First National Bank Bldg.

Denver 2, Colorado.

INDEX

SUBJECT INDEX

Page

Petition for writ of certiorari—

Summary and short statement of matter involved... 5

Jurisdictional statement 6

Opinion of the Court below... 7

Questions presented 7

Reasons relied on for allowance of writ 9

Pray eo h 11

Brief in Support of Petition for Writ of Certiorari 13

Opinion of the Court below 14

Grounds on which jurisdiction of Supreme Court

of the United States in invoked 14

Specification of Errors. : 16

Argument 17

I. Percentage depletion deductions apply to in-

come from ores dug from mine, whether ores

sold immediately or held for a time on sur-

face of property 17

II. Depletion deduction to be apportioned equit-

ably between owner and his lessee who works

and markets dump ores 18

III. Percentage deduction should be allowed “ac-

cording to the peculiar conditions” and unity

of lessor and lessee 28

IV. Petitioners ask review and reversal of new

restrictions announced below, limiting right

to depletion deductions on income from mine-

owner’s dump ores

N &

[

TABLE OF CASES

Atlas Mining Co. vs. Jones, 115 Fed. (2d) 61 23, 24

Commissioner v. Kennedy M. & M. Company, 125 Fed.

(2d) 399 5, 9, 10, 20, 22

Consolidated Chollar, Gould and Savage Mining Co. v.

Commissioner, 133 Fed. (2d) 440

Douglas v. Commissioner, 322 U.S. 275, 64 S. Ct. 988,

88 L. Ed. 1271 6, +0, 18

Herring v. Commissioner, 293 U.S. 322, 55 S. Ct. 179,

79 L. Ed. 389 6,10, 18

Inland Co. v. Commissioner, 120 Fed. (2d) 986, 988-9.. 30

Kennedy Mining Co. v. Commissioner, 43 B. T. A.

617 — 5, 10, 15, 20, 23

Kirby Petroleum Company v. Commissioner, 326 U.S.

598, 66 S. Ct. 409, 90 L. Ed. 343 5, 6, 10, 18

Moline Properties Inc. v. Commissioner, 319 U.S. 436,

63 S. Ct. 1132, 87 L. Ed. 1499 29

Munson S. S. Line v. Commissioner, 77 Fed. (2d) 849,

850-1 29

New Idria Quicksilver Mining Company v. Commis-

sioner, 144 Fed. (2d) 918.. 5, 10, 15, 20, 21

South Utah Mines & Smelters v. Beaver County, 262

U.S. 325, 332, 43 S. Ct. 577, 579, 67 L. Ed. 1004, 1008 25

STATUTES

Internal Revenue Code, Title 26 U.S. C. A.:

Sec. 23 (m) 37

Sec. 114 (b) 4. 37, 38

Judicial Code, Sec. 240 (a); Title 28, U.S. C. A.

Sec. 347 (a) 6, 14

REGULATIONS

Treasury Regulations 103, Sec. 19.23 (m)-1................ 39

“eee

SUPREME COURT

OF THE

UNITED STATES

OCTOBER TERM, 1947

CHICAGO MINES COMPANY,

Petitioner,

vs.

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

*

THE LONDON EXTENSION MINING COMPANY,

as Transferee of CHICAGO MINES COMPANY,

Petitioner,

vs.

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

THE LONDON EXTENSION MINING COMPANY,

Petitioner,

vs.

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

PETITION FOR WRIT OF CERTIORARI TO THE UNITED STATES

Circuit Court OF APPEALS, TENTH CIRCUIT, AND

BRIEF IN SUPPORT THEREOF.

To the Honorable Chief Justice and Associate Justices of

the Supreme Court of the United States:

The Petition of Chicago Mines Company, The London

Extension Mining Company as transferee of Chicago Mines

Company, and The London Extension Mining Company,

Colorado corporations, respectfully shows:

SUMMARY AND SHORT STATEMENT OF MATTER

INVOLVED.

The petitioners sued in The Tax Court of the United

States for a redetermination that would allow percentage

depletion deductions from gross income that came from

the sale of ores milled and marketed from the dump at

their American Mine in Park County, Colorado. The Tax

Court ruled in favor of the respondent (R. 9-21; 7 T. C.

1103). On a review by the Circuit Court of Appeals for

the Tenth Circuit, the decisions of the Tax Court were

affirmed (R. 61-66; 164 Fed. (2d) 785, adv. sheets of Feb.

9, 1948). The present proceeding seeks a review and re-

versal thereof by this court.

Contrary to the Congressional intention of Sections 23

(m) and 114 (b) (4) of the Internal Revenue Code, Title

26, USCA, the lower court in effect denied the petitioners

the right to have a percentage depletion deduction on

income from the sale of ores from the mine because such

ores had been deposited on the dump at the. mine before

being hauled to mill and market.

The decision of the court below is contrary to decisions

of the Circuit Court of Appeals, 9th Circuit, construing

the same sections, in New Idria Quicksilver Mining Com-

pany v. Commissioner, 144 Fed. (2d) 918, and Commis-

sioner v. Kennedy M. & M. Co., 125 Fed. (2d) 388, affirm-

ing Kennedy M. & M. Co. v. Commissioner, 43 BTA 617.

The decision below is also at variance with principles

laid down in the recent decisions of this court in Kirby

Petroleum Company v. Commissioner (1946), 326 U. S. 599,

66 S. Ct. 409, 90 L. Ed. 343; Douglas v. Commissioner

(1944), 322 U. S. 275, 64 S. Ct. 988, 88 L. Ed. 1271, and

Herring v. Commissioner (1934), 293 U. S. 322, 55 S. Ct.

179, 79 L. Ed. 389, on the question of an economic interest

in mineral property sufficient to support a percentage de-

pletion allowance.

JURISDICTIONAL STATEMENT

The jurisdiction of this court to review the decision of

the United States Circuit Court of Appeals, Tenth Cir-

cuit, is invoked under Section 240 (a) of the Judicial

Code, as amended by the Act of February 13, 1925, Title

28 U.S.C.A, Section 347 (a), for the following special and

important reasons:

(a) The Circuit Court of Appeals by its decision herein

has rendered a decision in conflict with the decisions of the

Circuit Court or Appeals, Ninth Circuit, in the New Idria

and Kennedy cases, supra, on the same question or matter.

(b) The lower court has decided an important question

of federal law which has not been, but should be, settled by

this court. The application to mine-dump ores of Sections

23 (m) and 114 (b) (4), LR.C., has not yet been consid-

ered or decided by this court.

(c) The court below by its decision herein has decided

an important federal question in a way in conflict with

applicable decisions ot this court in Kirby Petroleum

Company v. Commissioner (1946), supra, Douglas v. Com-

missioner (1944), supra, and Herring v. Commissioner

(1934), supra.

(d) The record presents an important federal question

involving the Internal Revenue Code and the legislative

policy regarding the production of metals, pertaining to

the national interest, which should be reviewed and de-

cided by this court.

(e) The lower court has approved the levy of a federal

income tax on capital rather than income, in a manner

ee

contrary to the legislative intention, by denying the right

to a depletion deduction allowed for the wasting of a capi-

tal asset in the form of a metal mine and natural deposit.

OPINION OF THE COURT BELOW

The case on appeal was heard by Judges Bratton, Hux-

man and Murrah. The opinion appears at R. 61-66 and is

reported in 164 Fed. (2d) 785, advance sheets of February

9, 1948. In apt time, on November 26, 1947, the petitioners

filed their petition for rehearing and brief in support

thereof (R. 71-80), which petition was denied on January

8, 1948 (R. 125).

QUESTIONS PRESENTED

The questions presented involve the following. points

raised by the taxpayer:

1. London Extension as fee owner and operator, or as

fee owner and lessor of the mine retaining a royalty in-

terest, is entitled to its percentage depletion deduction on

income in the taxable year, from ores that had been dug

from the mine, regardless of whether they were sold im-

mediately on extraction from the veins or were held for

a time on the surface of the mine.

2. London Extension had an indisputable economic in-

terest in the mine, its surface and underground deposits,

being a half-owner of all thereof; therefore its right to

the depletion allowance was clear, whether it sold dump

ores itself, as in C. C. A. No. 3510, or whether it sold them

and derived income through its lessee, as in C. C. A. Nos.

3508 and 3509.

3. The true and rational meaning of Sections 23 (m)

and 114 (b) is that, where an owner of a mine and its

underground deposits causes ore therefrom to be processed

and marketed by lessee, the owner does not lose his de-

pletion allowance by the circumstance that the particular

lease happens to cover only the dump; because the dump

ores came from his mine and were still on the property,

——

8

and no depletion has been, or could have been, previously

allowed because of the mere breaking out and hoisting

of such ores to the surface dump.

owner

4. Only an unjust construction can deprive

and lessee of all depletion deduction, simply the

lease in Nos. 3508 and 3509 included the dump and not also

the underground mine.

and

5. Section 23 (m) intends that when the owner

lessor of a mine is afforded a deduction for percentage de-

pletion, such deduction is to be shared with whatever

lessee may do the work. This is the intent even in a con-

ventional arms-length relationship of lessor and lessee,

where there is not the identity between them that existed

at bar. The question of depletion vel non is answered in

the affirmative if the lessor is an owner of the mine and

natural deposit.

6. In C. C. A. Nos. 3508 and 3509, London Extension as

transferee, and Chicago Mines Co. (nominally lessee but

actually an instrument and alias of London Extension, its

sole owner and parent) are entitled to deduct percentage

depletion in respect to income accrued during the taxable

period from ore theretofore placed on the dump from prior

working of the mine by the lessee of London Extension.

7. Even if the foregoing points were not well taken in

C.C.A. Nos. 3508 and 3509, Chicago Mines Company during

its existence and operation, although technically a corpora-

tion without a leasehold on the underground deposit, was

wholly own d by the mine-owner London Extension,

and the real interest was identical. Chicago Mines was

an instrument and department of London Extension to

work and sell dump ores that came from its mine (R. 8,

__48). The mine-owner in fact was measuring the depletion

of its mine and natural deposit through the operations

of its department Chicago Mines, and the depletion al-

lowance should not be forfeited merely because the lease

from the mine-owner to its instrumentality or department

embraced only the dump. This situation calls for “a rea-

sonable allowance for depletion * * * according to the

1 .

9

peculiar conditions in each case,” prescribed by Section

23 (m); and presents also “a form of legal relationship”

under Regulations 103, Sec. 19.23 (m) -1 (as amended by

T.D. 5210 Jan. 8, 1943).

8. In C.C.A. No. 3510, London Extension is clearly en-

titled to deduct percentage depletion in respect of income

it derived during the taxable period irom its own extrac-

tion, sorting, milling and sale of ore from the dump, and

from the royalties it received from Chicago Mines Com-

pany.

9. Also in No. 3510, the owner London Extension is

clearly entitled to the depletion allowance on income from

its own mining of ore from the underground veins, its gross

income being enhanced in the taxable period by its own

working and sale of the dump ores and by its retained

or reserved royalties from Chicago Mines Company on the

dump ores the latter had worked and sold as lessee; this

entire income thus necessarily coming from the mine.

10. Further, the dump ores, as well as the ore newly

mined from its underground veins, from which London

Extension derived part of its gross income during the

taxable period, were all ores from its mine, and the income

constituted part of its gross income during the taxable

period from a single mining property for purpose of meas-

uring the amount of percentage depletion to which it is

entitled. Sec. 114 (b) (4) (A) and (B), and Reg. 103, Sec.

19.23 (m)-1 (b) and (i).

“Income derived from the ores called tailings, as

well as that derived from the newly mined ores, was

income from the mine.”

Commissioner v. Kennedy M. & M. Co., 9th Cir., supra.

REASONS RELIED ON FOR ALLOWANCE OF WRIT.

(a) The lower court has construed the Internal Revenue

Code, Sections 25 (m) and 114 (b) (4), contrary to de-

cisions of the Ninth Circuit, to-wit:

10

New Idria Q. M. Co. v. Commissioner, 144 Fed. (2d)

918, 921.

Commissioner v. Kennedy M. & M. Co., 125 Fed. (2d)

339, 400, affirming Kennedy M. & M. Co. v. Commis-

sioner, 43 B.T.A. 617.

<b) The lower court has also construed and applied said

sections contrary to the decisions of this Court on the

economic interests of taxpayers in a natural deposit sub-

ject to depletion.

Kirby Petroleum Co. v. Commissioner, 326 U.S. 599,

66 S. Ct. 409, 90 L. Ed. 343.

Herring v. Commissioner, 293 U.S. 322, 55 S. Ct. 179,

79 L. Ed. 389.

Douglas v. Commissioner, 322 U.S. 275, 64 S. Ct. 998,

88 L. Ed. 1271. 3

(e) The decisions of the lower court, and of the Tax

Court therein affirmed, have upset and thrown doubt

upon the Ninth Circuit decisions cited above that seemed

to settle a question very important to the mining industry,

all to the discouragement and jeopardy of the important

output coming trom mine dumps, which dumps contribute

greatly to the national supply of metals.

(d) The decisions and opinion below (R. 61, 64-66) in-

troduce new elements and conditions as tests of the right

ot a mine-owner to have depletion deduction. These tests

are not found in the statute or in previous rulings, and

are against the prior decisions cited above. Said further

tests and conditions announced below are:

(1) That the marketing of dump ore must be “an in-

tegrated part of the orginal mining operation”

(R. 64): or “an integrated step in a mining opera-

tion“ (R. 65); and

(2) That the dump must i rated with the ac-

companying intent to wor: . at a future time”

(R. 66).

11

These are novel eriteria, without definition, and are con-

trary to the Ninth Circuit decisions. The new phrases

quoted have never been weighed, considered or defined, or

their oppressive or unworkable implications explored, in

reference to depletion of mines, and they introduce con-

fusing restrictions, against the statutory intent and policy.

PRAYER.

Whereforé your petitioner prays that a Writ of Certi-

orari be issued out of and under the seal of this Court

directed to the United States Circuit Court of Appeals,

Tenth Circuit, commanding said court to certify and send

to this Court the transcript of record in the above-entitled

consolidated cause No. 3508, 3509 and 3510 therein, and

that the record and judgments of said court be considered

and reviewed according to the rules and practice of this

Honorable Court, to the end that said cs may be re-

viewed and determined, and that thé ju ent of the

United States Circuit Court of Appeals, Tenth Circuit,

be reversed, and the cause remanded for further proceed-

ings according to law, and that your petitioner have such ,

other and further relief as may to this Court seem just and

proper in the premises. *

CHICAGO MINES COMPANY, THE

LONDON EXTENSION MINING

COMPANY, as Transferee of

CHICAGO MINES COMPANY,

and THE LONDON EXTENSION

MINING COMPANY, Petitioners,

by FRAZER ARNOLD,

Attorney for Petitioners,

CHARLES KENTOR,

ARNOLD WEINBERGER,

Of Counsel,

—

SUPREME COURT

UNITED STATES

OCTOBER TERM, 1947

CHICAGO MINES COMPANY,

Petitioner,

vs.

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

THE LONDON EXTENSION MINING COMPANY,

as Transferee of CHICAGO MINES COMPANY,

Petitioner,

vs.

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

THE LONDON EXTENSION MINING COMPANY,

Petitioner,

vs.

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

PETITION FOR WRIT OF CERTIORARI TO THE UNITED STATES

CiRcUIT COURT OF APPEALS, TENTH CIRCUIT, AND

BRIEF IN SUPPORT THEREOF.

BRIEF IN SUPPORT OF PETITION FOR

WRIT OF CERTIORARI

—

— aN

14

BRIEF IN SUPPORT OF PETITION FOR

WRIT OF CERTIORARI

OPINION OF THE COURT BELOW

The opinion of the Circuit Court of Appeals, Tenth

Circuit, dated November 8, 1947, is reported in 164 Fed.

(2d) 785, Advance Sheets of February 9, 1948, and may

also be found in the record commencing at page 61.

GROUNDS ON WHICH JURISDICTION OF SUPREME

COURT OF THE UNITED STATES IS INVOKED

The judgments of the Circuit Court of Appeals, Tenth

Circuit, were entered on November 6, 1947 (R. 67-8).

Petition for rehearing was denied on January 8, 1948 (R.

125). Petition for writ of certiorari, supra.

The judgment of the lower court is based on its con-

struction of the Federal Internal Revenue Code, Title 26,

U.S.C.A., Sections 23 (m) and 114 (b) (4) set forth in the

Appendix, infra. The jurisdiction of the Supreme Court of

the United States is invoked under Sec. 240 (a) of the

Judicial Code, as amended by the Act of February 13,

1925, Title 28, U.S.C.A., Sec. 347 (a).

STATEMENT OF THE CASE.

This proceeding was instituted by petitions in the Tax

Court of the United States (R. 1, 29, 42) for a redeter-

mination of the respective deficiencies asserted by the

Commissioner of Internal Revenue in his notices of de-

ficiency (see agreements for entry of decisions under

Rule 50, R. 22-24, 37, 53-55). The Tax Court held for re-

spondent in the consolidated case on November 7, 1946

(Opinion, R. 9-21), and petitions for review were duly

filed in the lower court (R. 25, 37 and 55), resulting in

judgments affirming the Tax Court. Petition for Rehear-

ing (R. 69-15) being denicd, mandate issued in accordance

with the opinion and judgments (R. 125).

—

The depletion allowance in dispute concerns income de-

rived through sale of ores from the mine dump extending

| from the collar of the shaft of the American Mine. The

petitioner The London Mining Extension Company at all

times owned an undivided half interest in the mine (R.

47-8). On June 7, 1940, it had also obtained by assignments

all leasehold rights of the previous lessees on the entire

ownership (R. 48). The mine consists of the surface

and underground workings in the American, Huron, Frac-

tion and Ibex lode mining claims (R. 47-48), shown on

the map (R. 51). The other half-interest in the American

claim was and is owned by a group called the Ellis heirs,

while the other half-owner of the Huron, Fraction and

Ibex was and is The London Mines & Mi:ling Company, a

corporation having no interrelationship with the petitioner

London Extension (R.47). The dump was roughly triangu-

lar in shape, extending south from the collar of the shaft

near the south corner of the American claim, and lay

partially on the American, Huron and Fraction, mostly

on the Fraction (R. 48, 51). It had been built up entirely

of material from this mine, by underground operations

of the former lessees of London Extension and the other

co-owners of the mine. (R. 48).

Chicago Mines Company, the wholly owned and held

subsidiary of London Extension, was lessee of London

Extension to extract and market dump ores from June

10 to October 8, 1940 (R. 48), the income from which

operation is involved in C.C.A. No. 3508 and 3509 (R. 7, 8),

under a lease dated June 10, 1940 (R. 48). Later all its

corporate assets were transferred to its parent company

London Extension, and the capital stock held by the parent

company and the qualifying shares held by its directors

were at that time canceled and surrendered (R. 8, 48).

From October 8, 1940 to the end of 1940, the owner Lon-

don Extension derived further income by its own sale of

dump ores which it extracted itself from the dump, while

at the same time working underground; this income being

involved in C.C.A. No. 3510 (R. 48, 49).

As the result of these operations and income Chicago

Mines and its parent company as transferee (London Ex-

— ——

16

tension, the mine-owner) claimed a percentage depletion

deduction of $10,150.34, the amount and computation not

being disputed (R. 8.), in C. C. A. Nos. 3508 and 3509. And

in No. 3510, London Extension claimed depletion, based

on its receipt of net smelter returns from its own dump

operations during 1940 of $57,014.58, after deducting its

marketing and transportation costs; it also claimed the de-

pletion deduction on $16,917.23 royalties from the Chicago

Mines dump operations; and further on $22,638.45 net

smelter returns from its own underground mining; where-

by, in No. 3510, it claims $14,485.54 disallowed depletion

(i.e. underground operations $3,395.77, its own dump oper-

ations $8,552.19, and dump ore royalties $2,537.58), all

undisputed as to computation if allowable (R. 48-49).

SPECIFICATION OF ERRORS

The United States Circuit Court of Appeals, Tenth Cir-

cuit, erred:

1. In drawing an artificial distinction, in all three de-

cisions, between ores that had been previously mined and

held on the dump and newly mined ores, contrary to Sec.

23 (m) and Sec. 114 (b) (4) (A) and (B).

2. In denying a deduction in C.C.A. Nos. 3508-9, even

though Chicago Mines be considered as an ordinary arms-

length lessee of the owner, contrary to Sec. 114 (b) (4)

(A), which provides that “the allowance for depletion

under Sec. 23 (m) shall be * * * in the case of metal mines

* * * 15 per centum of the gross income from the prop-

erty during the taxable year sais

3. In failing to allow the deduction “according to the

peculiar conditions in each case,” as enjoined in Sec. 23

(m). :

4, In counteracting, in Nos. 3508-9, the broad purpose and

policy of this legislation, which is to encourage production

of metals as well as to allow mine owners a just depletion.

The real and only party in interest in this arrangement

called a lease (R. 4, Exhibit B), was the mine owner and

taxpayer London Extension. As between the mine owner

a OT IE

—

17

and its wholly owned subsidiary and operating department

Chicago Mines, corporate entities should be di

because the legislative policy to stimulate output of metals

is thereby furthered (authorities, infra. )

5. In failing to apply the principle, in Nos. 3508-9 and

3510 alike, that income tax is a levy on income and not on

capital, and that, where capital was used up in producing

income, the depletion deduction was intended.

6. In considering, in No. 3510, that two separate prop-

erties were involved, one consisting of newly mined ores,

and the other of ores previously mined but held on the

ground. Hence the erroneous disregard of the fact that

income during the taxable year in the combined form of

royalties reserved on dump ores, of income from the tax-

payer’s own dump operations, and of income from its own

underground operations, all was income derived from the

one mine and natural deposit.

ARGUMENT.

I.

Percentage depletion deductions apply to income from

ores dug from a mine, whether the ores are sold immedi-

ately or are held for a time on the surface of the property.

The court below drew a complex distinction out of line

with reality in mining operations, between income from

the marketing of ores newly mined from the veins and of

ores that have been piled for a time on the claims. All the

dumped metal had come from the one mine. No depletion

on income from it had ever been taken or deducted before,

nor could it have been previously deducted, in the very

nature of percentage depletion allowances, which must

await sale and income for their determination. This error

is in direct conflict with the realistic, just and practical

Ninth Circuit decisions in the New Idria and Kennedy

cases, supra, which are hereinafter quoted.

—

18

The rulings below were also contrary to broad and liberal

principles recently announced by this court, in reference

to an economic interest subject to depletion.

Kirby Petroleum Company v. Commissioner, supra

(1946).

Douglas v. Commissioner, swpra (1944),

Herring v. Commissioner, supra (1934).

There can be no distinction in substance between dump

ores that have been hoisted and dumped on the surface,

and the similar broken stope-fill ores that have remained

below. The sole difference is that the former are lying in

daylight near the top of the shaft, whereas the stope-fill

material is piled in darkness underground. It could not

be seriously claimed that a delay of a few years or months

in hoisting stope-fill ores to the surface and selling them

would deprive the owner and his lessee of their depletion

allowance. There would be no sounder basis for assuming

a present intention to later mill and sell stope-fill than for

denying such intention regarding ores placed on a surface

dump. In either case, the present intention” may be only

a hope or belief that future conditions, local or general,

will sooner or later make milling and sale profitable. But

the unalicrable tact is that, whenever such ores are sold,

and regardless oi what may have been supposed about them

before, the income therefrom does furnish the basis for

measuring the statutory percentage depletion and for

ascertaining for the first time the depletion that took

place in the mine.

II.

Under Sec. 23 (m) and Sec. 114 (b), Chicago Mines and

London Extension as transferee are entitled to depletion

allowance as lessee, to be equitably apportioned with Lon-

don Extension as lessor.

When the owner whose mine is depleted selects a lessee

as his instrument on the property to extract and market

the ore, Section 23 (m) intends that the depletion deduc-

— —

tion shall be apportioned equitably between owner and

lessee. It is a clear legislative declaration that when the

mine owner becomes entitled to depletion allowance, his

deduction is to be shared with whatever lessee may do the

work. Sec. 114 (b) (4) (A) authorizes an allowance for

depletion of 15% of the gross income from the pruperty,

excluding from such gross income an amount equal to

royalties paid by the taxpayer in respect of the property.

This deduction is limited in amount so as not to exceed

50% of the net income from the property. Where a mining

property is leased subject to a royalty to the owner, the

lessee deducts from his gross income the royalty paid to

the lessor, and the lessee calculates his 15% depletion al-

lowance on the remainder of gross income. The lessor is

entitled to deduct 15% of the royalty received by him. To-

gether, then, the lessor and lessee cannot receive more than

15% of the gross income from the property. Such is the

apportionment here claimed by the lessee Chicago Mines

and the lessor London Extension on the operations of

Chicago Mines in C.C.A. Nos. 3508-9. All ore in the dump

came from the American Mine. The petitioner London Ex-

tension is admittedly the half-owner of the mine, but the

respondent and lower court have denied this owner any

allowance for the manifest depletion of its mine, merely

because its lessee was employed in extracting and market-

ing ores from the dump and not also and at the same

time ores being broken from the veins. So, by these un-

natural and unreal refinements, the owner would forfeit

its share of the depletion allowance, and so also would its

lessee forfeit its share of the deduction, contrary to the

statutory scheme and prior decisions. The mine has ob-

viously been depleted, yet both the owner and its lessee

which performed the work lose all their depletion allowance

by a kind of sleight of hand, despite the fact of depletion in

the mine.

This unjust result was reached below because the lease ~

to Chicago Mines covered only the dump and not the under-

ground deposits, and it was held that, although London

Extension’s underground deposits were depleted and the

depletion now measured for the first time by sale of ore

and consequent income, said owner must lose its depletion

20 .

allowance because of the circumstance that its lessee was

engaged only in recovering ores from the dump. We sub-

mit that this is an unjust “distinction without a differ-

ence.” It is against the intention of Congress, which is to

allow mine owners a percentage deduction for the deple-

tion of their capital assets. The deduction is to be equit-

ably shared with the lessee doing the work. This is a

feature assisting the owner as well as the lessee, because

it enables the owner to offer better terms and induce a

lessee to undertake operations, and it directly encourages

mining activity and the output of metals, which was the

underlying policy and intent of Congress. The legislative

policy was also fundamentally just and equitable. In allow-

ing percentage depletion Congress permitted mine owners

and operators, engaged in production from a wasting asset,

to have a deduction from gross income in compensation for

the capital loss to the owner incurred by gradual exhaus-

tion of the deposits on which they are working. In short,

the income tax is a levy on income and not on capital;

and where, in producing the income, capital was used up,

some deduction should be allowed. There can be no dif-

ference between this principle as applied to ore in the

veins, and ore in the dump from those veins, which has

not yet been converted into income. The operator is ex-

hausting the owner's capital item, just as he exhausts

the underground deposits in hoisting ore to the surface

for immediate sale. No percentage deduction, in either

case, is made available until the ore is sold and income

derived. Until the values have been fully realized by con-

verting ore into income, there is no reason why the dump

ore should not still be considered to be ore from the mine

for depletion purposes. Whether it is moved to a mill at

once, or allowed to lie for a while on the dump, is clearly

immaterial.

New Idria Quicksilver Mining Company v. Commis-

sioner, supra,

Kennedy M. & M. Company v. Commissioner, supra,

Commissioner v. Kennedy M. & M. Company, supra.

21

To deprive a mine owner and his operating lessee of the

percentage allowance, merely from the circumstance that

the operating lessee was granted a lease only on dump ores

at the mine, is to sacrifice substance to form and defeat

the owner of compensation for the depletion to his wasting

asset, as well as forfeiting the allowance provided for his

operating lessee. Congress recognized in Sec. 23 (m) that

owners would adopt various ways and means to recover

and market their metallic values. It was enacted that they

shall have “a reasonable allowance for depletion * * *

according to the peculiar conditions in each case,” and fur-

ther in the same section that “in case of leases the deduc-

tions shall be equitably apportioned between the lessor

and lessee“; and later, in Sec. 114 (b) (4) (A), that “The

allowance for depletion under Sec. 23 (m) shall be * * *

in the f metal mines 15 per centum * of the

gross incom the property during the taxable year,”

etc. ö

;

In New Idria Quicksilver Mining Co. v. Commissioner of

Internal Revenue, swpra, the court, in approving the de-

duction for percentage depletion to the petitioner, said,

at page 921:

“The second question for determination is whether

the New Idria Quicksilver Mining Company was en-

titled to claim percentage depletion on income derived

from mining dumps on its land. The ore in the dumps

had been milled years previously, but with the im-

proved furnacing process, it was possible to salvage

some of the ore. The dumps had always been a part

of the land and no depletion had ever been claimed.

This court in Commissioner of Internal Revenue v.

Kennedy Mining & Milling Co., 9 Cir., 125 F. (2d)

399, 400 said that ‘tailings * * * were ores. They were

ores from the taxpayer’s mine, just as were the newly

mined ores.’ The Tax Court failed to distinguish

the instant case and the Kennedy case. There is no

legal distinction between the rights of the successor

in interest and the rights of the original owner with

respect to depletion claimed. See also Consolidated

22

Chollar, Gould & Savage Mining Co. v. Commissioner

of Internal Revenue, 9 Cir., 133 F. (2d) 440.”

In Commissioner v. Kennedy M. & M. Co., 9 Cir., 125

Fed. (2d) 399, 400-401, the court said:

“The Commissioner contends that only so much

of the taxpayer’s income as was derived from newly

mined ores was income from the mine; and that, since

no net income was so derived, no deduction for deple-

tion was allowable.

“The Commissioner’s contention must be rejected.

The tailings from which the taxpayer derived part

of its gross income and all of its net income during

1935 and 1936 were ores. They were ores from the tax-

payer’s mine, just as were the newly mined ores which

the taxpayer treated in 1935 and 1936. Income de-

rived from the ores called tailings, as well as that de-

rived from the newly mined ores, was income from the

mine.

“It is true, but not material, that the ores called

tailings were mined prior to 1935. The mining of ores

and the receipt of income therefrom are seldom, if

ever, simultaneous. The two events are usually months

apart and not infrequently years apart. Thus in-

come from a mine during a taxable year may, and

usually does, include income from ores mined prior

to that year.

“Nor is it material that these ores (now called tail-

ings) were, prior to 1935, subjected to treatment

whereby part of their gold content was removed. The

ores so treated remained after such treatment, as they

were before, the property of the taxpayer and were

thereafter, as theretofore, ores from the taxpayer's

mine. Income derived from their subsequent treatment

was income from the mine just as was that derived

from their first treatment.

“Tt is likewise immaterial that the subsequent treat-

ment of these ores (in 1935 and 1936) was in a cyan-

ide mill instead of a stamp mill. The right to deduct

eo.

for depletion of a mine a percentage of the gross or

net income therefrom does not depend upon the type

of mill used in treating the ores from which such in-

come was derived. Nor is the taxpayer’s right to the

deductions here claimed affected by the fact that,

prior to 1934, it claimed and was allowed deductions

for ‘unit’ depletion in accordance with Revenue Acts

then in effect. Commissioner v. Elliott Petroleum

Corp., 9. Cir., 82 F. (2d) 193.

“Atlas Mining Co. v. Jones, 10 Cir., 115 F. (2d)

61, cited by the Commissioner, is not in point. The tax-

payer in that case was a contractor which had con-

tracted with the owner of a tailings dump to treat

the tailings therein for a share of the proceeds. Neither

party to the contract owned any mine. The court held,

and rightly so, that income resulting from perform-

ance of the contract was not income from a mine.

“Decision affirmed.”

In Kennedy M. & M. Co. v. Commissioner, 43 B.T.A.

617, which was affirmed in the case just quoted, the

Board of Tax Appeals said:

“And it is recognized by both parties that the mere

extraction and actual depletion of mineral property

does not either entitle the owner to depletion at that

time nor prevent him from benefiting by it later when

the ultimate step recovery of income from the prop-

erty—is taken. Inspiration Consolidated Copper Co.,

11 BTA1425; National Petroleum & Refining Co., 28

BTA 569. It seems to us necessarily to follow that

this would be so whether the process of extraction

were completed but the product resulting remained

undisposed of until later years; or, as occurred in peti-

tioner’s case, the process of extraction fell into two

steps, was partially completed and brought about par-

tial sales in one year, and the postponed and refined

process of extraction made possible further sales in a

subsequent year. * * *

24

“Nor is it of any greater consequence that some of

the tailings may have been the residue of ores removed

from the mine at a time when no percentage deple-

tion was allowable to petitioner. For the time of re-

ceipt of the income determines not only the year for

which percentage depletion is to be deducted, but the

currently applicable law which is to be invoked.

Crews v. Commissioner (C.C.A., 10th Cir.), 89 Fed.

(2d) 412 (37-1 USTC 9196); National Petrolewm &

Refining Co., Supra.

“For reasons which will now appear to be obvious,

cases cited by respondent are inapplicable. In Atlas

Mining Co. v. Jones (C.C.A., 10th Cir.) , 115 Fed. (2d)

61 (40-2 USTC 9711), both the District Court, 29 Fed.

Supp. 942 (39-2 USTC 9739), and the Circuit Court of

Appeals emphasized tnat they did not purport to pass

upon a situation where the tailings deposit remained

the property, and the income therefrom remained the

income, of the owner of the mine from which they

had originally been extracted. Granting that a tail-

ings deposit is not a mine as the court there held, it

does not follow, of course, that its contents are not

the product of the mining property, that minerals ex-

tracted therefrom did not have their origin in the

mine, or, as respondent argues, that income from the

sale of such minerals when ultimately recovered is

not income from the mining property. See also Carl

M. Britt, 43 BTA 254 (Jan. 7, 1941).”

Far from militating against the taxpayer at bar, as

considered in the opinions below, the Ninth Circuit case

of Consolidated Chollar, Gould d Savage Mining Co., 133

F. (2d) 440, sustains our contention, because the facts

were the converse of the situation at bar and in the New

Idria and Kennedy cases. In Consolidated Chollar, the de-

duction for percentage depletion was denied because the

rock and ore dumps were created “from mines not located

on such lands, many years prior to the acquisition of such

lands by the petitioner.”

_—_

. 25

The court, at page 441 said:

“Petitioner contends that the deduction is warrant-

ed by our decision in Commissioner v. Kennedy Min-

ing Milling Co., 9 Cir., 125 Fed. (2d) 399. We do

not agree. There we held the depletion deduction al-

lowable because the recovery of mineral was from tail-

ings of partially worked ore from a mine and mill

owned by a taxpayer, deposited on taxpayer’s land

adjacent to the mine and mill from which they came,

and hence the recovery was a mere continuation and

completion of the processing of mineral extraction

begun in the removal of the deposited material from

the mine to the tailing dump.”

The adverse opinions below also quote from South Utah

Mines & Smelters v. Beaver County, 262 U.S. 325, 332, 43

S. Ct. 577, 579, 67 L. Ed. 1004, 1008, as follows (R.19) :

“The tailings severed and removed from the mining

claims, changed in character, placed on other and sep-

arate lands and having an ascertained and adjudicated

value of their own, in our opinion, constituted a unit

of property entirely apart from the mine from which

they have been taken. See Forbes v. Gracey, 94 U. S.

762, 765.”

This language is taken out of context in a case wholly un-

like the facts and controversy at bar. The case concerned

county taxes upon mining property, and the question of

depletion was not involved. The Utah constitution pro-

vided that all property should be taxed in proportion to its

value, and an amendment provided that mines should, in

addition to an arbitrary valuation of $5 per acre, be as-

sessed “at a value based on some multiple or submultiple

of the net annual proceeds thereof.” The legislature enact-

ed a statute in pursuance of this amendment providing for

assessment, in addition to the $5 per acre, upon a value to

be determined by taking the multiple of three times the

net annual proceeds thereof. The plaintiff mining corpor-

ation owned wholly depleted mining claims and also a con-

centrating mill which was obsolete and largely dismantled.

The mine itself was worked-out and worthless. Near the

mill and about three miles away from the mine, the plain-

tiff had an accumulation of tailings, and made an agree-

ment with the Utah Leasing Company for the treatment

and reduction of this deposit upon a ten per cent royalty.

In 1918 the leasing company recovered the net sum of

$120,547.00 from the tailings, paying 10% to the plain-

tiff. The county taxing officials then multiplied this

net sum recovered by three, and assessed the value of

the plaintiff’s mine for 1919 at $361,641.00, an obviously

vunfair conclusion.

From the opinion:

“As a result of the concentrating operations refuse

material, stili retaining small quantities of copper and

other metals, was deposited near the concentrating

mill as tailings. This deposit was begun by plaintiff's

predecessor as early as May, 1903, and from then un-

til August, 1914, approximately 900,000 tons of tail-

ings were accumulated upon desert land owned by

plaintiff, nonmineral in character, and located about 3

miles from its mining claims.”

the injustice of the assessment so made by the county

caused this Court to say, on page 331:

“The net proceeds here involved arose from a lot of

refuse material, which, long prior to the imposition of

the tax, had been severed from the miniag claims, re-

moved to a distance, submitted to the process of re-

duction, and stored upon lands separate and apart

from the claims. Moreover, but one tenth of the

amount of these net proceeds was realized by the

owner of the mining claims. To treble the total of

these proceeds for the purpose of basing thereon an al-

together fictitious value for a mine worked out and

worthless years before the adoption of the statutory

provisions supposed to confer the authority to do

so results in such flagrant and palpable injustice as

would cast the most serious doubt upon the consti-

tutionality of such provisions if thus construed. * * *

27

But the difference between a mine from which ore is

being or still may be extracted and net income derived,

and one conceded to be an empty shell, with no pres-

ent or prospective value whatsoever, is so obvious

that the imposition of a tax upon the basis of their

being, nevertheless, one and the same, cannot be sus-

tained with due regard to either law or logic.”

This Court then carefully pointed out that it was not

deciding or considering the measure of value of a mine

which included dumps and tailings placed and remaining

upon the mining claims or connected with a going mine,

and said:.

How far the state statute defining the net annual

proceeds to be considered in measuring the value of a

mine properly includes those derived from dumps and

ili placed and remaining upon the mining claims

or connected with a going mine, we do not determine;

but we do hold that the proceeds from the tailings in

question, under the facts here disclosed, are not in-

cluded within its terms. The court below should have

so construed the statute and rendered judgment for

the plaintiff.”

The facts and the reasoning of this Court therefore em-

phasize the error of relying on them in the decision against

the taxpayer at bar in the court below, because of the op-

posite situation here presented.

The principle here at stake was missed entirely by the

lower court when it argued that the dump itself is not a

“mine” or a “natural deposit”, a contention never ad-

vanced by the petitioner. The simple point is that the

dump ores came from the mine and depleted the mine, and

were merely in delayed transit to mill and market. Ores

after extraction usually pause somewhere, often for a long

time, either in underground stopes, in a dump on the sur-

face near the collar of a shaft or the mouth of a tunnel,

or in ore-bins near the mine or at a railroad siding, or at

a mill or smelter awaiting treatment. If they never move

on to the final step of treatment and sale, there is no legal

28

depletion of the mine affording a percentage deduction,

because the measurement of the depletion never takes

place. But the period of delay before sale and consequent

income is immaterial. It is not the dump that has been

depleted, nor the underground stope-fill, nor the ore-bin;

it is the mine and natural deposit underground that has

experienced depletion, the legal measure of which is only

determined when a money income is derived from sales.

This principle is clearly understood and applied in the

Ninth Circuit cases.

In the sense dissociated from the special percentage de-

pletion provisions of the revenue law, Sec. 114 (b) (4),

depletion of the vein does of course occur at the time the

ores are extracted from it, but the taxpayer here had

elected to take percentage depletion, hence the amount

of such depletion could not be ascertained until the ores

were sold and income derived.

III.

If this Court were to conclude that an ordinary unre-

lated lessee of a inine-owner cannot have the percentage

deduction where its lease included only the dump. still

the deduction should nevertheless be allowed here “ac-

cording to the peculiar conditions”, under Sec. 23 (m),

because of the essential unity of the mine-owner London

Extension and its nominal lessee.

The facts stipulated (R. 48) are that “Chicago Mines

Company, a wholly owned subsidiary corporation of the

petitioner, entered into a lease from petitioner on June 10,

1940, under which Chicago Mines Company proceeded to

mill that part of the American dump which could be sorted

and milled at a profit until October 8, 1940, when Chicago

Mines Company was dissolved”; and that (R. 8) “The

corporate life of Chicago Co. expired October 8, 1942,

and all its assets previously were transferred to its par-

ent company London Co. (London Extension) and the

capital stock held by said parent company and the quali-

fying shares held by its directors were at that time can-

celled and surrendered.” And at R. 7: “Chicago Co. was

29

a wholly owned subsidiary of The London Extension Min-

ing Company, petitioner * * . The paper styled a Lease

Contract (R. 4-5), wherein the parent company and mine-

owner held all of the stock, and the qualifying shares were

held by its directors, was signed by the same persons re-

spectively vice-president and secretary of the nominal

lessor, and president and secretary of the nominal lessee.

It is obvious that Chicago Mines was a mere department

for the mine-owner, and that the nominal lessor was and

is the real and only party in interest in the transaction in-

volving metals from its mine.

This court has held that under such circumstances the

corporate entities are to be disregarded where a legisla-

tive policy to encourage a particular activity is advanced.

Mr. Justice Reed, speaking for this court in Moline Pron-

perties Inc. v Commissioner of Internal Revenue, 319 U.S.

436, 63 S. Ct. 1132, 87 L. Ed. 499, at 1503, said:

“A particular legislative purpose, such as the de-

velopment of the merchant marine, whatever the cor-

porate device for ownershiv, may call for the disre-

garding of the separate entity. Munson S. S. Line v.

Commissioner of Internal Revenue (CCA 2d), 77 F.

(2d) 849.”

Here the “particular legislative purpose” is that the

owner of the depleted mine can take his capital depletion

in a policy of encouraging production of mineral supplies.

The short supply of metals presents a national need com-

parable to the need for merchant ships.

In the decision above cited and followed by this Court,

Munson 8. S. Line v. Commissioner of Internal Revenue,

(CCA 2d), 77 Fed. (2d) 849, the court discusses this prin-

ciple at length, at pages 850-1, from which we quote:

“The declared purpose of the Merchant Marine Act

of 1920 was to encourage the development and main-

tenance of an American merchant marine. 46 USCA

Sec. 861. Pursuant to that purpose section 23 (46

USCA, Sec. 878) offered to the ‘owner’ of a vessel

documented in the United States and operated in for-

eign trade, as an inducement to invest the earnings

in additional ships, the allowance of a deduction for

the computation of war-profits and excess-profits tax-

es. The present dispute concerns the meaning of the

word ‘owner’ as used in this section. Construed nar-

rowly, as the Commissioner contends it should be,

only the subsidiary corporations may be deemed the

owners of the vessels respectively documented in

their names. Construed broadly, the petitioner may

be deemed the owner of the subsidiaries’ vessels be-

cause of its stock ownership of the subsidiaries and

its exercise of dominion over them and their prop-

erty. That the word ‘owner’ may be given a broad in-

terpretation in order to carry out the legislative pur-

pose is well illustrated by Flink v. Paladini, 279 U.S.

59, 49 S. Ct. 255, 73 L. Ed. 613, where stockholders of

a corporation which owned a vessel were held to be

within the act limiting the liability of shipowners

(46 USCA Sec. 183) in order to save them from the

rigors of a California statute which made stockhold-

ers liable for corporate obligations. The opinion by

Mr. Justice Holmes states the rationale of the decision

as follows:

„The purpose of the act of Congress was “to

encourage investment by exempting the investor

from loss in excess of the fund he is willing to risk

in the enterprise.” * * * For this purpose no ra-

tional distinction can be taken between several

persons owning shares in a vessel directly and

making the same division by putting the title in

a corporation and distributing the corporate stock.

The policy of the statutes must extend equally to

both. In common speech the stockholders would

be called owners, recognizing that their pecuniary

interest did not differ substantially from those

who held shares in the ship. We are of opinion

that the words of the acts must be taken in a

broad and popular sense in order not to defeat

the manifest intent.’

31

“Similarly, in Olds & Whipple, Inc. v. Com’r., 75 F.

(2d) 272, this court interpreted broadly the phrase

‘owned by the same interests’ and held that a cor-

poration and its stockholders were the same interests

for purposes of the statute relating to affiliation.

“The petitioner’s argument that the broad con-

struction for which it contends is more consonant

with the purpose of promoting investment in new

American ships seems to us well taken. No reason

is apparent, or has been suggested, why Congress

should wish to limit its encouragement to corporate -

shipowners whose vessels were held directly and to ex-

clude a corporation which operated through wholly-

owned subsidiaries. Indeed, to treat the parent cor-

poration as owner of the vessels operated through

subsidiaries would serve the purpose of the statute

better than would a literal interpretation which con-

fines ‘owner’ to the holder of legal title. A corpora-

tion operating a single vessel is likely to have to ac-

cumulate its earnings over a considerable period be-

fore they will suffice to build an additional vessel.

The necessary surplus for such investment will be

more quickly obtained by a company operating sev-

eral vessels. This will be equally true whether the

operating company has legal title to the vessels or is

a holding company operating them through wholly-

owned subsidiaries. Hence it would tend to produce

a greater investment of earnings in new ships to offer

to such parent corporation the encouragement of the

deduction allowed by section 23 to vessel owners. An

interpretation reaching*this result should be adopted

if the words used will permit of it. We think they

will.

“et * &

Thus even in tax cases the separate

identity of corporations may be disregarded in ex-

ceptional circumstances. See, also, Gulf Oil Corp. v.

Lewellyn, 248 U. S. 71, 39 S. Ct. 35, 63 L. Ed. 133;

New Colonial Ice Co. v. Helvering, 292 U. S. 435, 442,

54 S. Ct. 788, 78 L. Ed. 1348. In our opinion to disre-

gard it under the circumstances here disclosed will

32

better carry out the legislative purpose of the stat-

ute in question. Accordingly we hold that the peti-

tioner should be deemed the owner of the subsidiaries’

vessels within the meaning of section 23.”

As said bv Circuit Judge Bratton in Inland Co. v. Com-

missioner, 120 Fed. (2d) 986, on page 988:

“But it is equally well settled that extraordinary

circumstances sometimes exact the disregard of such

separateness of entity in the solution of problems re-

lating to taxes. Southern Pacific Co. v. Lowe, 247

U. S. 330, 37 S. Ct. 540, 62 L. Ed. 1142: Gulf Oil Cor-

poration v. Lewellyn, 248 U.S. 71, 39 S. Ct. 35, 63 L.

Ed. 133; Burnett v. Commonwealth Improvement Co.

supra; Gregory v. Helvering, 293 U. S. 465, 55 S. Ct.

266, 79 L. Ed. 596, 97 A.L.R. 1355: Griffiths v. Commis-

sioner, 308 U.S. 355, 60 S. Ct. 277, 84 L. Ed. 319; Hig-

gins v. Smith, 308 U.S. 473, 60 S. Ct. 355, 84 L. Ed. 406;

Continental Oil Co. v. Jones, supra. * * * That sep-

arateness is disregarded where the ownership of stock

is used to dominate and control the subsidiary in such

manner and to such extent that it becomes a mere

agency or instrumentality of the parent. United

States v. Lehigh Valley R. R. Co. 220 U. S. 257, 31 S.

Ct. 387, 55 L. Ed. 458; U.S. v. Delaware, Lackawanna

ck Western R. R. Co., 238 U.S. 516, 35 S. Ct. 873, 59 L.

Ed. 1438; Chicago M. & St. Paul Ry. Co. v. Minneapo-

lis Civic Assn., 247 U. S. 490, 38 S. Ct. 553, 62 L. Ed.

1229; United States v. Reading Co., 253 U. S. 26, 40

S. Ct. 425, 64 L. Ed. 760; 2

«* * * But whatsoever the underlying reason may

have been, it is clear that the subsidiaries were noth-

ing more than voiceless departments or instrumen-

talities of the taxpayer. Substance is paramount over

form in the application of income tax laws. United

States v. Phellis, 257 U.S. 156, 42 S. Ct. 63, 66 L. Ed.

180; Tulsa Tribune Co. v. Commissioner of Internal

Revenue, 10 Circ., 58 F. (2d) 937; Reynolds v. Cooper,

10 Cir., 64 F. (2d) 644, affirmed, 291 U. S. 192, 54 S.

Ct. 336, 78 L. Ed. 725; North Jersey Title Insurance

33

Co. v. Commissioner of Internal Revenue, 3 Cir., 84 F.

(2) 898; Commissioner of Internal Revenue v. Texas

Pipe Line Co., 3 Cir. 87 F. (2d) 662.* * *”

At bar it seems a “distinction without a difference”

whether Mr. Bishop was president of both companies, in-

stead of president of one and secretary of the other, and

Dr. Fraser secretary of both, or whether they used the

same or a different stenographer and bookkeeper, or fore-

man and superintendent, so long as London Extension

owned Chicago Mines and all its assets, “lock, stock and

barrel,” until its dissolution (Stip., pars. 1 and 6, R. 7 and

8; Ex. B, R. 5), al! ownership being exclusive in London

Extension and each dollar being by way of gain or expense

to London Extension, owner and transferee. “He who

does anything through another is doing it himself.”

Whether they may or may not have used a different agent

in any connection appears trivial and irrelevant, since

agency does not affect the status of the principal or the

substance involved in unity of ownership, London Exten-

sion owning and holding 100% of Chicago Mines stock.

The equities in the taxpayers’ situation at bar should

bring it within the exceptions, for Sec. 23 (m) itself says

that deductions “shall be allowed * according to the pe-

culiar conditions in each case.” The Congressional pur-

pose is to encourage output of metal.

IV.

We also ask a review and reversal of new judicial re-

strictions limiting a right to depletion deductions, an-

nounced in the opinion below. These violate principles of

depletion intended by Sections 23 (m) and 114, and pre-

viously announced by the Ninth Circuit and by the Board

of Tax Appeals in the New Idria and Kennedy opinions.

The proposed new barriers would deny the deduction un-

less the taxpayer marketing ores from his mine dump

could show an accompanying intent to work the dump at

a future time, at the time the dump ores were deposited

on the property (R. 64, 66), and would further prescribe

that the working of the dump must be “an integrated

step in the original mining operation” (R. 66, 65), or “an

— ee

4

integrated part of the original mining operation” (R. 64).

Such restrictions would disregard the fact and theory of

depletion. They would also impose oppressive difficulties

of proof, and create needless disputes and injustices, often

eliminating any real chance of a just allowance for de-

pleted capital assets.

It is characteristic of mine dumps, especially rather

old ones, that they are the composite product of a series

of operations by various prior owners, lessees and op-

tionees, by whose efforts they were built up in successive

layers over the years. In a correct view of depletion, de-

tails of prior ownership and leases are utterly immaterial.

They do not affect the merits at bar, or in any case of the

typical dump at a mine. This is true because of the great

essential of depletion in the mine and the legislative pol-

icy recognizing the underlying fact of depleted capital.

The mine has been neither more nor less depleted by the

extraction of ore, from the fact that several various lessees

operating under the owner, and various owners operating

themselves, may have done the work and built up the

dump, with no doubt a wide variety of hopes, plans and

opinions about the future. The proposed new restric-

tions would unfairly defeat the allowance in most cases,

for the reason that if the dump is created by a lessee

and he does nothing with it, the owner will not be able to

establish an “accompanying intent”, since the lessee when

he gave up the lease, leaving the dump, had no intention

of later recovering the values, however rich the later im-

proved processes, or increased prices, or better operating

labor or facilities, may cause them to become. If part o-

the dump were created by a former owner, part by for-

mer lessees, part by the present owner, and part by his

later lessees (which would be a typical case), with the

former owners and lessees dead or gone, it would not *

possible for the mine owner to establish an accompanying

intent as to layers of the dump (which practically never

is worked in layers, but in perpendicular blocks), and he

would be denied depletion of the mine and natural deposits,

notwithstanding the fact that the statutory percentage be-

comes determinable from income as he sells the dump

ores. —

34

eo.

The further proposed bar to the allowance, requiring

a mine owner to show that his dump ore was worked and

marketed “as an integrated part of the original mining

operation” (R. 64, 66), is also untenable. It is not sus-

tained by the statute, is against the decisions cited herein,

and does not accord with the necessities of mining. The

phrase is likewise vague in its meaning and implications.

We submit that the only material integration is that which

exists from the origin of the dump ore in the underground

veins, to measure the depletion thereof when sold; and

there is thus an integrated chain or flow from the owner’s

natural deposit into his pocket or bank account, from

which the statutory depletion of the deposit is computed.

To avoid repetition we respectfully refer the Court to

the more detailed discussion, giving practical examples on

this subject, in the memorandum by amici curiae repre-

senting The Colorado Mining Association (R. 83-97) in

support of the petition for rehearing.

Also, to avoid repeating a lengthy review of the Kirby,

Douglas and Herring decisions of this Court, we refer to

the other brief by friends of the court filed below (R. 101-

124).

CONCLUSION.

We therefore ask that the decisions below be reviewed

and reversed.

Respectfully submitted,

FRAZER ARNOLD,

Attorney for Petitioners,

730 First National Bank Building,

Denver, Colorado.

CHARLES KENTOR,

ARNOLD WEINBERGER,

730 First National Bank Building,

Denver, Colorado,

Of Counsel.

APPENDIX

STATUTORY PROVISIONS

The statutory provisions involved are found in paragraph

(m) of Sec. 23, and paragraph (b), sub-paragraphs (4)

(A) and (B) df Sec. 114 of the Internal Revenue Code,

Title 26 U.S. C. A. Sub-paragraph (4) (B) of paragraph (b)

of Sec. 114 was added by Sec. 124 (e) of the Revenue Act

of 1943, and is as effective as through it were in the rev-

enue laws applicable to all taxable years beginning after

December 31, 1931.

Section 23, in force for the taxable periods here involved,

insofar as pertinent, is as follows:

“Section 23. Deductions from Gross Income. In com-

puting net income there shall be allowed as deduc-

—

“(m) Depletion. In the case of mines, oil and gas

wells, other natural deposits and timber, a reason-

able allowance for depletion and for depreciation of

improvements, according to the peculiar conditions

in each case; such reasonable allowances in all cases

to be made under rules and regulations to be pre-

scribed by the Commissioner, with the approval of the

Secretary. In the case of leases the deductions

shall be equitably apportioned between the lessor and

lessee. * .“

Section 114, in force for the taxable periods here in-

volved, insofar as pertinent, is as follows:

“Section 114. Basis for Depreciation and Depletion.

(b) Basis for Depletion.— (4) Percentage Depletion

for * * * Metal Mines

“(A) In general. The allowance for depletion under

Sec. 23 (m) shall be * * * in the case of metal mines,

** * 15 per centum * of the gross income from

the property during the taxable year, excluding from

38

such gross income an amount equal to any rents or

royalties paid or incurred by the taxpayer in respect

of the property. Such allowance shall not exceed 50

per centum of the net income of the taxpayer (com-

puted without allowance for depletion ) from the prop-

erty = 2.2

Section 114 (b) (4) (B). as added by Section 124 (c)

of the Revenue Act of 1943, effective as though it had

been in the revenue laws avplicable to all taxable years

beginning after December 31, 1931, so far as pertinent,

is as follows:

“(4) (B). Definition of Gross Income from property.

As used in this paragraph the term ‘gross income

from the property’ means the gross income from min-

ing. The term ‘mining’, as used herein, shall be con-

sidered to include not merely the extraction of the

ores or minerals from the ground but also the ordi-

nary treatment processes normally applied by mine

owners or operators in order to obtain the com-

mercially marketable mineral product or products.

The term ‘ordinary treatment processes’, as used here-

in, shall include the following: * * *; and (iv) in

case of lead, zinc, copper, gold, silver or fluorspar

ores, potash, and ores which are not customarily sold

in the form of the crude mineral product—crushing,

grinding, and benefication by concentration (gravity,

flotation, amalgamation, electrostatic, or magnetic),

cyanidation, leaching, crystallization, precipitation

(but not including as an ordinary treatment process

electrolytic deposition, roasting, thermai or electric

smelting, or refining), or by substantially equivalent

processes used in the separation or extraction of the

product or products from the ore, including the fur-

nacing of quicksilver ores. The principles of this sub-

paragraph shall also be applicable in determining

gross income attributable to mining for the purposes

of sections 731 and 735.”

REGULATIONS 103.

Treasury Regulations 103, so far as appears applicable

here, is as follows:

“Sec. 19.23 (m)--1 (as amended by T. D. 5210,

Jan. 8, 1943). Depletion of mines, oil and gas wells,

other natural deposits, and timber; depreciation of

improvement.—

“Sec. 23 (m) provides that there shall be allowed

as a deduction in computing net income in the case

of mines, oil and gas wells, other natural deposits

and timber, a reasonable allowance for depletion and

for depreciation of improvements. Section 114 pre-

scribes the bases upon which depreciation and deple-

tion are to be allowed.

“Under such provisions, the owner of an economic

interest in mineral deposits or standing timber is al-

lowed annual depletion deductions. An economic in-

terest is possessed in every case in which the taxpayer

has acquired, by investment, any. interest in mineral

in place or standing timber and secures, by any form

of legal relationship, income derived from the sever-

ance and sale of the mineral or timber, to which he

must look for a return of his capital. But a person

who has no capital investment in the mineral deposit

or standing timber does not possess an economic in-

terest merely because, through a constructual relation

to the owner, he possesses a mere economic advantage

derived from production. Thus, an agreement between

the owner of an economic interest and another enti-

tling the latter to purchase the product upon produc-

tion or to share in the net income derived from the

interest of such owner does not convey a depletable

economic interest.“