Source: https://caselaw.findlaw.com/us-supreme-court/242/503.html
Timestamp: 2019-04-23 01:15:20+00:00

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[242 U.S. 503, 504] Assistant Attorney General Wallace for petitioner.
[242 U.S. 503, 507] Messrs. John R. Van Derlip, Burt F. Lum, and Kenneth Taylor for respondents.
These three cases were argued and submitted together and involve practically the same facts. Suits were brought by the corporations named in the United States district court for the district of Minnesota against the collector of internal revenue, to recover certain taxes, paid under protest, assessed under the Corporation Tax Law of 1909 (36 Stat. at L. 11, 112, chap. 6), for the years 1909, 1910, and 1911. The judgments in the district court were for the respondents (207 Fed. 423), which judgments were affirmed in the circuit court of appeals (134 C. C. A. 649, 219 Fed. 31).
All of the mining leases hereinafter mentioned, with the exception of a contract with the Van Buren Mining Company, were executed before the organization of the corporations. Each of these instruments provided that the owners of the property demised to the lessees, exclusively, all the lands covered by the descriptions, for the purpose of exploring for, mining and removing, the merchantable iron ore which might be found therein for and during the period named, usually fifty years. The lessees were given exclusive right to occupy and control the demised premises and to erect all necessary buildings, structures, and improvements thereon. Right was reserved to the lessors to enter for the purpose of measuring the amount of ore mined and removed and making observations of the operations in the mines. The lessees agreed to pay, in most cases, 25 cents per ton for all ore mined and removed, and to make such payments monthly for ore mined and shipped during the preceding month. The lessees agreed to mine and ship a specified quantity of ore in each year, and, in default of this, to pay the lessors for the minimum amount specified, and take credit therefor and apply such sums upon ore mined and shipped thereafter in excess of such minimum. The lessees were to pay the taxes and to keep the property free from encumbrances and liens. Right was reserved to [242 U.S. 503, 513] terminate the contract upon the failure of the lessees to comply with the terms thereof.
The form of the leases is shown in exhibits 15 and 16, which were not in the printed record, owing to their length, but copies of which, pursuant to stipulation, have been sent to this court. An examination of exhibit 16 shows that the lessees had the right to terminate and surrender the lease by giving the lessors, or those having their estate in the premises, sixty days' written notice, and executing sufficient conveyances releasing all interest and right of the lessees in the premises with any improvements thereon, and surrendering the same in good order and condition, etc., and that thereupon all liability of the lessees to taxes subsequently assessed on the demised premises or for rent thereof thereafter to accrue, or royalty on ores therefrom, except on account of ores removed, should cease and determine; the lessees to be liable for all ores removed from the premises not theretofore paid for, and to pay for the premises rent or royalty for the year in which termination should be made, or the portion thereof which should have expired, at the rate of $12, 500 per annum.
Since their organization the corporations have disposed of certain lands and have also disposed of the stumpage on some timber lands. Certain parcels were rented and leased, and a village was allowed to use part of the land for schoolhouse purposes, as well as another part for a public park.
The companies were assessed upon their gross income, [242 U.S. 503, 514] being the entire receipts of the companies from royalties on the leases collected in the years 1909, 1910, and 1911, and some sums received from the sales of lots, lands, and stumpage, from which expenses and taxes were deducted, but no deduction was made upon account of the depletion of the ore in the properties, or on account of such sales.
'1. Are the respondents corporations organized for profit?
'2. Were the respondents carrying on or doing business during the years 1909, 1910, 1911?
'3. Were moneys received by the respondents during those years in payment for iron ore, under the contracts covering their mineral lands, gross income, or did they represent, in whole or in part, the conversion of the investment of the corporations from ore into money?
In that case a number of realty and mining companies were dealt with, and the Park Realty Company, organized to deal in real estate, and engaged at the time in the management and leasing of a certain hotel, was held to be engaged in business. It was also held that the Clark Iron Company, organized under the laws of Minnesota, and owning and leasing ore lands for the purpose of carrying on mining operations, and receiving a royalty depending upon the quantity of ore mined, was engaged in business.
At the same time, and decided with the main corporation tax case, this court held, in the case of Zonne v. Minneapolis Syndicate, 220 U.S. 187 , 55 L. ed. 428, 31 Sup. Ct. Rep. 361, that a corporation which owned a piece of real estate which had been leased for one hundred and thirty years, at an annual rental of $61,000, and which had amended its articles of incorporation so as to limit its purposes to holding the title to the property mentioned, and, for the convenience of its stockholders, to receiving and distributing from time to time the rentals that accrued under the lease and the proceeds of any disposition of the land, was not engaged in doing business within the meaning of the act, by reason of the fact that the corporation had practically gone out of business and had disqualified itself from any activity in respect thereto.
The act next came before this court in the case of McCoach v. Minehill & S. H. R. Co. 228 U.S. 295 , 57 L. ed. 842, 33 Sup. Ct. Rep. 419, in which it was held, distingushing the case of the Park Realty Company, supra, and applying the case of Zonne v. Minneapolis Syndicate, supra, to the facts before the court, that a corporation which had leased all its property to another, and was doing only what was necessary to receive and distribute the income therefrom [242 U.S. 503, 516] among stockholders, was not doing business within the meaning of the act.
In United States v. Emery, B. T. Realty Co. 237 U.S. 28 , 59 L. ed. 825, 35 Sup. Ct. Rep. 499, this court held that a corporation which merely kept up its organization, distributing rent received from a single lessee, was not doing business within the meaning of the act.
It is evident, from what this court has said in dealing with the former cases, that the decision in each instance must depend upon the particular facts before the court. The fair test to be derived from a consideration of all of them is between a corporation which has reduced its activities to the owning and holding of property and the distribution of its avails, and doing only the acts necessary to continue that status, and one which is still active and is maintaining its organization for the purpose of continued efforts in the pursuit of profit and gain, and such activities as are essential to those purposes.
From the facts clearly established in these cases, we think these corporations were doing business, within the meaning of the act. They were organized for the purposes stated, and their activities included something more than the mere holding of property and the distribution of the receipts thereof. As was found by the district court, the evidence shows that these three companies sold, during each of the years named, quantities of real estate, and the same were not small. They sold stumpage from some of the properties which had been burned over, leased certain properties in the village of Hibbing, and granted leases to squatters. One of the companies made explorations and incurred expenses in the matter of test pits. They employed another company to see that the mining operations were properly carried on, and that the lessees lived up to the engagements of their contracts. 'All these things indicate,' said the learned district judge, 'the doing of and engaging in business. It [the corporation] was doing [242 U.S. 503, 517] the business of handling a large property, selling lots, and seeing that the lessees lived up to their contracts. If that is not engaging in business, I do not know what is.' We agree that it certainly was doing business, and, as the Corporation Tax Act requires no particular amount of business in order to bring a company within its terms, we think these activities brought the corporations in question within that line of decisions in this court which have held such corporations were doing business in a corporate capacity within the meaning of the law.
Next, is it true, as contended by the government, that the payments for ore mined, under the contracts covering the mineral lands, are income, within the meaning of the act; or do they represent the conversion of the investment of the corporations from ore into money?
The nature of these mining leases has been the subject of some difference of opinion in the courts. The circuit court of appeals in this case took the view announced in some of the earlier cases, notably in Pennsylvania, that the leases were such in name only, and were in fact conveyances of the ore in place as part of the realty, and that the so- called royalties merely represented payments for so much of the land, and were in no just sense income, but mere conversions of the capital.
It is contended that this case is inapplicable, because the facts disclose that the ores were being mined by a corporation upon its own premises. In our view, this makes no difference in the application of the principles upon which the case was decided. We think that the payments made by the lessees to the corporations now before the court were not in substance the proceeds of an outright sale of a mining property, but, in view of the [242 U.S. 503, 522] terms of these instruments, were in fact rents or royalties to be paid upon entering into the premises and discovering, developing, and removing the mineral resources thereof, and as such must be held now, as then, to come fairly within the term 'income' as intended to be reached and taxed under the terms of the Corporation Tax Act.
We think it results from the principles announced in these decisions that in such cases as are now under consideration, the corporation being within the meaning of the act organized for profit and doing business, it is subject to the tax upon its income derived from the royalties under these leases.
This brings us to the fourth and last question in the case, as to whether allowance should be made for deprecia- [242 U.S. 503, 523] tion on account of the depletion of the property by removing the ores from the mines in question.
The contention of respondents in this behalf is, that if the court shall find that the moneys received by them under their mining contracts can be deemed gross income, in whole or in part, they are entitled to deduct therefrom, as a reasonable allowance for depreciation, the full amount of the money so received, for the reason that they represent a mere transmutation of capital assets, being, in legal effect, the selling price of their rights in the mineral deposits on or before January 1, 1909, and which, by virtue of the mining contracts then outstanding, had been previously sold for the exact amounts of such receipts.
'From that certificate it appears that the case was submitted to the trial court and a verdict directed upon an agreed statement of facts, and in that statement the gross proceeds of the sale of the ores during the year were diminished by the moneys expended in extracting, mining, and marketing the ores, and the precise difference was taken to be the value of the ores when in place in the mine. . . .
and in the Income Tax Law of September 8, 1916 (1915-1916 Stat. 756, 769), a reasonable allowance is made in the cases of mines 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.' These provisions 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.
No contention is made in the brief for an allowance because of sales of stumpage, lots, and lands belonging to [242 U.S. 503, 526] the companies, as an exhaustion of the capital assets, and evidently the case was brought for the purpose of testing the right of the companies to deduct the royalties agreed to be paid to them upon the removal of the minerals from the lands from the sums for which they were severally assessed.
[ Footnote 1 ] Raynolds v. Hanna, 55 Fed. 783, 800, 801; Tennessee Oil, Gas & Mineral Co. v. Brown, 65 C. C. A. 524, 131 Fed. 696, 700 (opinion by Lurton, J.); Browning v. Boswell, 132 C. C. A. 168, 215 Fed. 826, 834; Backer v. Penn Lubricating Co. 89 C. C. A. 419, 162 Fed. 627; Young v. Ellis, 91 Va. 297, 21 S. E. 480; Gartside v. Outley, 58 Ill. 210, 11 Am. Rep. 59, 10 Mor. Min. Rep. 566; Genet v. Delaware & H. Canal Co. 136 N. Y. 602, 19 L.R.A. 127, 32 N. E. 1078; Lacey v. Newcomb, 95 Iowa, 287, 63 N. W. 704; Austin v. Huntsville Coal & Min. Co. 72 Mo. 535, 37 Am. Rep. 446, 9 Mor. Min. Rep. 115; Brown v. Fowler, 65 Ohio St. 507, 521, 63 N. E. 76; Reg. v. Westbrook, 10 Q. B. 178, 205, 2 New Sess. Cas. 599, 16 L. J. Mag. Cas. N. S. 87, 11 Jur. 515, 22 Eng. Rul. Cas. 623.
[ Footnote 1 ] Comp. St. 1913, 6300.

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