#### CORTEZ OIL COMPANY v. THE UNITED STATES 1

[No. F-396.

Decided January 9, 1928]

*On the Proofs*

*Income and emees s-profits tames; oil and gas^tmtvmg lease of Indian lands.*— Income from the sale of oil and gas produced from leases upon homestead and surplus Indian lands is subject to income and excess-profits taxes. *Seiner*v. *Colonial Trust Co.,*275 U. S. 232.

*Bonne; deductions for depletion and depredation from wrested capital.*— In ascertaining income and excess-profits taxes under the revenue act of 1918, deductions for depletion and depreciation from invested capital are proper;

*The Reporter's*statement of the case :

*Mr. Wayne Johnson*for the plaintiff. *Messrs. Lyle T. Alverson*and *Mark J. Ryan*and *Johnson <& Shores*were on the briefs.

*Mr. Alexander H.*McCormick, with whom was *Mr. Assistant Attorney General Kerman J. Galloway,*for the defendant.

The court made special findings of fact, as follows:

I. The plaintiff is, and at all times materia], to the issues herein was, á corporation organized and existing under and by virtue of the laws of the State of Oklahoma, engaged in the production and sale of crude oil, with' its principal office and place of business at Tulsa, Oklahoma.

*391II. At all times during the year 1920 substantially all of the stock of Alvarado Oil Company and Balboa Oil Company, corporations organized and existing under the laws of Oklahoma, and all of the stock of pla,intiff were owned and controlled by the same interests, and by reason thereof plaintiff and the said Alvarado Oil Company and the said Balboa Oil Company were affiliated corporations within the meaning of section 240 of the revenue act of 1918 and were so considered by the Commissioner of Internal Revenue for the purpose of income and excess-profits taxes of the year 1920.

III. On February 25, 1921, pursuant to sections 239, 240, and 241 of the revenue act of 1918, the plaintiff and .its affiliated corporations, viz, Alvarado Oil Company and Balboa Oil Company, filed with the United States Collector of Internal Revenue for the District of Oklahoma their consolidated income and excess-profits tax return for the calendar year 1920.

IY. On said return the net income, invested capital, income tax, excess-profits tax, and total tax were reported as follows :

Net income_ $285, 773. 49

Invested capital_ 2,158,363.81

Income tax_1_ 26,175.26

Excess-profits tax_ 22,020.88

Total tax_ 48,196.14

Y. In accordance w,ith the provisions of section 250 of the revenue act of 1918, the plaintiff paid said total tax of $48,196.14 to the United States Collector of Internal Revenue for the District of Oklahoma in four installments as follows:

On February 24, 1921_$12, 049.04

On June 10, 1921_ 12,049.03

On September 13, 1921_ 12, 049. 03

On December 14, 1921_ 12, 049.04

YI. Thereafter, upon examination and audit of said consolidated income and excess-profits tax return, the Commissioner of Internal Revenue increased plaintiff’s net income to $337,115.16 and decreased the consolidated invested capital to $956,749.76 and thereupon, in February, 1926, assessed against the plaintiff additional income and excess-profits *392taxes for the year 1920 in the amount of $57,916.92, whereupon the United States collector of internal revenue for the District of Oklahoma, pursuant to the statutes of the United States in such cases made and provided, served notice upon plaintiff of said additional assessment and demanded payment of said additional taxes.

VII. In compliance with said notice and demand the plaintiff paid said additional taxes of $57,916.92 to the sa,id collector on March 11, 1926.

VIII. Of the entire net income of $337,115.76 upon which the tax of $48,196.14 and the tax of $57,916.92 were assessed and paid as aforesaid, the sum of $302,925.11 was derived by the plaintiff and its said affiliated corporations from the sale of oil and gas produced from the homestead and surplus lands duly allotted and conveyed on December 10, 1908, under the provisions of the acts of Congress approved March 1,1901, 31 Stat. 861, and June 30,1902, 32 Stat. 500, to Sandy Fox, a duly enrolled full-blood Creek Indian.

IX. Said lands were allotted and conveyed to Sandy Fox as aforesaid pursuant to an agreement negotiated between the United States and the Creek Tribe of Indians, which agreement and an agreement supplemental thereto were ratified and confirmed by and incorporated in the said acts of March 1, 1901, and June 30, 1902.

X. True copies of the homestead deed and the allotment deed, whereby said lands were allotted and conveyed as aforesaid appear in the record and are not contradicted.

XI. At all times during the year 1920, said homestead and surplus lands were owned by the said Sandy Fox and were subject to all the conditions, restrictions, and exemptions provided in the said acts of Congress of March 1, 1901, and June 30, 1902, and to all the provisions of chap. 1876 of the act of Congress approved April 26, 1906, 34 Stat. 137, and chap. 199 of the act of Congress approved May 27, 1908, 35 Stat. 312.

XII. During the year 1920 the said homestead and surplus lands were operated for oil and gas purposes by the plaintiff and its said subsidiaries under an oil and gas mining lease duly executed by the guardian of the said Sandy Fox and approved by the Secretary of the Interior. *393A true copy of said lease, and a true copy of the regulations of the Secretary of the Interior relative thereto, appear in the record and are not contradicted.

XIII. In computing the additional income and excess-profits taxes of $57,916.92 assessed against the plaintiff as aforesaid, the Commissioner of Internal Revenue excluded from the consolidated invested capital the amount of $697.-842.65 on account of depletion, and the amount of $128,-579.59 on account of depreciation, a total sum of $826,422.24. Said amount of $697,842.65 represents the total amount of depletion determined by the commissioner to have been sustained by plaintiff and its subsidiaries on their oil and gas wells during the years 1914 to 1919, inclusive. Said amount of $128,579.59 represents the total amount of depreciation determined by the commissioner to have been sustained by plaintiff and its subsidiaries on their physical properties, other than real estate, during the years 1914 to 1919, inclusive.

XIY. The said taxes of $48,196.14 and $57,916.92, in all $106,113.06, paid by the plaintiff to the said collector as aforesaid were, by the said collector, turned over and deposited into the Treasury of the United States of America as in the usual course of his official business.

XY. A claim for the refund of the said tax of $48,196.14 was duly filed by the plaintiff on February 15, 1926.

XVI. On March 11, 1926, the plaintiff also duly filed a claim for the refund of said additional tax of $57,916.92.

XVII. The said claims for refund of $48,196.14 and $57,916.92 were rejected in full by the Commissioner of Internal Revenue on or about October 26, 1926, and the sum of $102,893.99 is now retained and withheld from the plaintiff by the United States of America.

XVIII. If the income of $302,925.11 derived from the sale of oil and gas produ'ced from the lands of Sandy Fox as aforesaid is exempt from the income and excess-profits tax imposed by the revenue act of 1918, .the amount of judgment to which the plaintiff is entitled is $102,893.99, together with interest on $48,196.14 from December 14, 1921, and interest on $54,697.85 from March 11, 1926.

*394XIX. If said income from restricted Indian lands is taxable, but the commissioner erroneously excluded from consolidated invested capital the sum of $826,422.24 on account of depletion and depreciation sustained by the plaintiff in years prior to 1920, the. amount of judgment to which the plaintiff is entitled herein is $38,138.32, together with interest thereon from December 14, 1921.

XX. If the court should hold that said income from restricted Indian lands is taxable and that the commissioner properly excluded from consolidated invested capital the sum of $128,579.59 on account of depreciation sustained, but that the commissioner erroneously excluded from invested capital the sum of $697,842.65 on. account of depletion sustained, the amount of judgment to which the plaintiff is entitled herein is $35,351.27, together with interest thereon from December 14, 1921.'

XXI. If said income from restricted Indian lands is taxable, and the commissioner properly excluded from consolidated invested capital the sum of $697,842.65 on account of depletion sustained, but that the commissioner erroneously excluded from invested capital the sum of $128,579.59 on account of depreciation sustained, the amount of judgment to which the plaintiff is entitled herein is $6,480.41, together with interest thereon from December 14, 1921.

The court decided that plaintiff was not entitled to recover.

1

 Certiorari denied.

Booth, Judge,

delivered the opinion of the court:

The plaintiff filed its consolidated tax return for the taxable year 1920 on February 25, 1921. The return so filed reported in totals as follows: “ Net income, $285,773.49; invested capital, $2,158,363.81; income tax, $26,175.26; excess-profits tax, $22,020.88; total tax, $48,196.14.” The Commissioner of Internal Revenue caused an examination and audit of plaintiff’s books of account, in consequence of which plaintiff’s net income was increased to $337,115.76 and its. invested capital decreased to the sum of $956,749.76, resulting in an additional assessment of $57,916.92 income and excess-profits tax. The sum of $302,925.11 of the entire net *395income upon which the above tax was assessed was derived by the plaintiff from the sale of oil and gas produced from leases upon homestead and surplus Indian lands, and the claim is made herein that all of this sum is free from taxation because of this fact. The issue with respect to this item is concluded adversely to the plaintiff by the decision of the Supreme Court in the case of *Heiner*v. *Colonial Trust Com*pany, announced November 21, 1927, 275 U. S. 232.

The commissioner reduced the consolidated invested capital of the plaintiff by deducting from its reported invested capital $697,842.65 for depletion and $128,579.59 for depreciation sustained by plaintiff on its oil and gas properties during the years 1914 to 1919, inclusive. Plaintiff challenges the validity of the deduction and seeks to recover $38,138.32, illegally exacted in pursuance of the commissioner’s ruling. The basis for plaintiff’s contention is the wording of sections 325-326 of the revenue act of 1918 (40 Stat. 1091-1092), asserting that invested capital under the law is purely a statutory concept and is not to be reduced by depletion and depreciation. We can not sustain the contention. Section 312 of the revenue act of 1918 (40 Stat. 1091) provides for exemptions in ascertaining excess-profits taxes. Sections 325-326 point out the manner of ascertaining invested capital from these sections. It is apparent that invested capital may be increased by the addition of earned surplus and undivided profits. The regulations of the bureau point out that only “ true-earned surplus and undivided profits can be included in the computation of invested capital ” and in computing earned surplus and undivided profits reasonable allowances for depreciation and depletion are made. See articles 838 and 839, Regulations 45, 1920 edition. As pertinently observed in the defendant’s brief, “the regulations treat these items as an impairment of capital which must be made good before there can be any surplus or undivided profits.” The commissioner must under section 312 ascertain invested capital, and the regulations cited above have been in force and followed by the bureau since the first enactment of the statute, and were so in force, observed and followed when the revenue act of 1921 was enacted. *Komada**396*& Co.*v. *United*States, 215 U. S. 392. See also *United States*v. Ludey, 274 U. S. 295.

The petition will be dismissed. It is so ordered.

Moss, *Judge;*Gkaham, *Judge;*and Campbell, *Chief*Justice, concur.