Source: https://supreme.justia.com/cases/federal/us/267/364/
Timestamp: 2019-04-24 16:52:38+00:00

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Justia › US Law › US Case Law › US Supreme Court › Volume 267 › Lynch v. Alworth-Stephens Co.
for depletion thereof not to exceed the market value in the mine of the product thereof which has been mined and sold during the year,"
etc. United States v. Biwabik Mining Co., 247 U. S. 116; Von Baumbach v. Sargent Land Co., 242 U. S. 503, distinguished. P. 267 U. S. 368.
2. As the mining goes on, the property interest of the lessee in the mine, and that of the owner, are lessened, and in both cases the extent of this exhaustion, with the consequent deduction to be made under the above statute, is arrived at by determining the aggregate amount of the depletion of the mine, based upon the market value of the product, and allocating that amount in proportion to the interest of owner and lessee, severally considered. P. 267 U. S. 370.
Certiorari to a judgment of the circuit court of appeals which affirmed a judgment of the district court (278 F. 959) for the present respondent in its action to recover back from an internal revenue collector the amount of an income tax, paid under protest. Upon the death of the defendant, his executrix was substituted.
action was brought against E. J. Lynch, a collector of internal revenue, to whom the payment had been made. Lynch subsequently died, and his executrix was substituted as defendant. The Federal District Court for the District of Minnesota, where the action was brought, rendered judgment in favor of respondent for the amount. 278 F. 959. The circuit court of appeals affirmed the judgment (294 F.190), and the case is here upon certiorari, 264 U.S. 577.
The facts from which the controversy arose are not in dispute, and, for present purposes, may be shortly stated. Prior to March 1, 1913, respondent had leases upon two definitely described tracts of land in Minnesota containing deposits of iron ore, known as the Perkins mine and the Hudson mine. The leases, unless sooner terminated by the lessee in the manner therein provided, ran for a period of 50 years, and obliged respondent to mine and remove at least 50,000 tons of iron ore annually from the Perkins and 25,000 tons annually from the Hudson, and to pay the lessor, owner of the fee, a royalty of 30 cents per ton upon each ton of ore extracted. Respondent subleased the lands upon terms not necessary to be stated further than that the sublessee of the Perkins was to pay respondent a royalty of 75 cents per ton and the sublessee of the Hudson a royalty of 60 cents per ton, or 45 cents and 30 cents, respectively, per ton more than was made payable by respondent to the lessor owner.
during that entire time exceeded 75 cents per ton, and it sufficiently appears that, during such time, respondent and its sublessees were in possession of the lands, engaged in mining and removing the ore therefrom. Without repeating the formula followed in arriving at the result, it is enough to say that the trial court found that, under the leases, the respondent had a property interest in these ore bodies, the fair market value of which, as of March 1, 1913, was 71.9 percent of the total royalties which would be received under the subleases, and such royalties constituted the sole source of respondent's income. Thereupon the lower courts held that respondent was entitled to deduct from its gross income for 1917 a sum equal to 71.9 percent thereof for depletion, and that only the balance remaining was subject to income and excess profits taxes. Such taxes, properly computed, amounted to the sum returned and originally paid by respondent, and no more.
"a reasonable allowance for the exhaustion . . . of property arising out of its use; . . . (b) in the case of mines a reasonable allowance for depletion thereof not to exceed the market value in the mine of the product thereof which has been mined and sold during the year for which the return and computation are made. . . ."
"(c) For the purpose of ascertaining the gain derived from the sale or other disposition of property, real, personal, or mixed, acquired before March first, nineteen hundred and thirteen, the fair market price or value of such property as of March first, nineteen hundred and thirteen, shall be the basis for determining the amount of such gain derived."
hand, respondent contends that, under the leases, the lessee, as well as the lessor, owns a valuable property interest in the mines, and, by the terms of the statute, each is entitled to deduct from gross income a reasonable allowance for depletion, the lessee for exhaustion of the leasehold interest and the lessor for exhaustion of the fee interest as lessened by the interest of the lessee, such deduction to be allowed according to the value of the interest of each in the property, the entire allowance, however, not to exceed the total market value in the mine of the product thereof mined and sold during the taxable year.
It is, of course, true that the leases here under review did not convey title to the unextracted ore deposits (United States v. Biwabik Mining Co., 247 U. S. 116, 247 U. S. 123); but it is equally true that such leases, conferring upon the lessee the exclusive possession of the deposits and the valuable right of removing and reducing the ore to ownership, created a very real and substantial interest therein. See Hyatt v. Vincennes Bank, 113 U. S. 408, 113 U. S. 416; Ewert v. Robinson, 289 F. 740, 746-750. And there can be no doubt that such an interest is property. Hamilton v. Rathbone, 175 U. S. 414, 175 U. S. 421; Bryan v. Kennett, 113 U. S. 179, 113 U. S. 192.
"The plain, clear, and reasonable meaning of the statute seems to be that the reasonable allowance for depletion in case of a mine is to be made to everyone whose property right and interest therein has been depleted by the extraction and disposition 'of the product thereof which has been mined and sold during the year for which the return and computation are made.' And the plain, obvious, and rational meaning of a statute is always to be preferred to any curious, narrow, hidden sense that nothing but the exigency of a hard case and the ingenuity and study of an acute and powerful intellect would discover."
value of the product, and allocating that amount in proportion to the interest of each severally considered.
owing to its peculiar character, cannot be replaced. But in no accurate sense can such exhaustion of the body of the ore be deemed depreciation. It is equally true that there seems to be a hardship in taxing such receipts as income without some deduction arising from the fact that the mining property is being continually reduced by the removal of the minerals. But such consideration will not justify this Court in attributing to depreciation a sense which we do not believe Congress intended to give to it in the Act of 1909."
"were not in the Act of 1909, and, as we have said, we think that Congress, in that act, used the term 'depreciation' in its ordinary and usual significance. We therefore reach the conclusion that no allowance can be made of the character contended for as an item of depreciation."
of depreciation. Evidently it was taken for granted in the lower court that, under the decision in the Sargent Land Co. case, the latter point was no longer open, and it was passed there, as it was here, without comment. Considering the Sargent Land Co. and the Biwabik Mining Co. cases together, it is apparent that, in respect of the matter of depreciation under the act of 1909, in the opinion of this Court, lessor and lessee stood upon the same footing, neither being entitled to an allowance; but it was plainly recognized that, if the statutory allowance had been for exhaustion or depletion, as in the later acts, an entirely different question might have been presented as to both interests. We find nothing in either case out of harmony with the conclusion reached by the lower courts in respect of the construction and application of the pertinent provisions of law which are now under review.
"Sec. 12. (a) In the case of a corporation, joint-stock company or association, or insurance company organized in the United States, such net income shall be ascertained by deducting from the gross amount of its income received within the year from all sources --"
"Second. All losses actually sustained and charged off within the year and not compensated by insurance or otherwise, including a reasonable allowance for the exhaustion, wear, and tear of property arising out of its use or employment in the business or trade; (a) in the case of oil and gas wells, a reasonable allowance for actual reduction in flow and production to be ascertained not by the flush flow, but by the settled production or regular flow; (b) in the case of mines, a reasonable allowance for depletion thereof not to exceed the market value in the mine of the product thereof which has been mined and sold during the year for which the return and computation are made, such reasonable allowance to be made in the case of both (a) and (b) under rules and regulations to be prescribed by the Secretary of the Treasury: Provided, that, when the allowance authorized in (a) and (b) shall equal the capital originally invested, or in case of purchase made prior to March first, nineteen hundred and thirteen, the fair market value as of that date, no further allowance shall be made. . . ."

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