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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for A Writ of Certiorari
- **Published:** January 1, 1948
- **Citation:** 334 U.S. 839

## Text

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.“

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386416_1598%3A1. Public record. Not legal advice.