Source: https://supreme.justia.com/cases/federal/us/242/503/
Timestamp: 2019-04-22 04:53:48+00:00

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Justia › US Law › US Case Law › US Supreme Court › Volume 242 › Von Baumbach v. Sargent Land Co.
Corporations organized under the laws of Minnesota, not for charitable or eleemosynary purposes but for the pecuniary advantage of their shareholders, held "organized for profit" within the meaning of the Corporation Tax Law of August 5, 1909.
The decision whether a corporation is carrying on business within the meaning of the Corporation Tax Law must depend in each instance upon the particular facts before the court; no particular amount of business is required.
A corporation which has not reduced its activities to owning and holding property and the distribution of its avails, but maintains its organization for continued efforts in pursuit of profit and for such activities as are therein essential, is carrying on business within the meaning of the act.
Respondent corporations, besides receiving and distributing among their shareholders the royalties from a number of outstanding long-term "mining leases," employed another company to inspect the lessees' operations and keep them to their contracts, made some mining explorations at expense on other parts of their properties, sold or leased other parcels and sold some timber; held that they were carrying on business within the meaning of the Corporation Tax Law.
Quaere whether this Court, in determining whether royalties under mining leases are income subject to the Corporation Tax Law, is constrained to follow the decisions of the highest court of the state in which the leased property is situate holding that such royalties are rents and profits.
The "mining leases" involved in these cases were not equivalent to sales of property, and the moneys paid by the lessees to the respondents were not converted capital, but rents or royalties, and as such were income, proper to be included in measuring their taxes under the Corporation Tax Law. Stratton's Independence v. Howbert, 231 U. S. 399; Stanton v. Baltic Mining Co., 240 U. S. 103.
The depletion of a mine resulting from the removal of ore in the course of its operation is not a "depreciation of property" for which a deduction may be made under the Corporation Tax Law.
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. 11, 112, for the years 1909, 1910, and 1911. The judgments in the district court were for the respondents (207 F. 423), which judgments were affirmed in the circuit court of appeals. 219 F. 31.
incidental to the things above specified."
"The general purpose of the corporation is to unite in one ownership the undivided fractional interests of its various stockholders in lands, tenements, and hereditaments and to own such property, and, for the convenience of its stockholders, to receive and distribute to them the proceeds of any disposition of such property at such times, in such amounts, and in such manner as the board of directors may determine."
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.
To insure the proper carrying on of the mining operations, the companies employed another corporation, engaged in engineering and inspection of ore properties, to provide supervision and inspection of the work upon the respondents' properties, for which the inspecting company was paid from month to month, as statements were rendered.
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?"
"4. If such moneys were gross income, are the respondents entitled to make any deduction therefrom on account of the depletion of their capital investment?"
As to the first question, whether these corporations were organized for profit, there can be no difficulty. They certainly do not come within the exceptional character of charitable or eleemosynary organizations excepted from the operation of the act. We need not dwell upon the obvious purpose of these corporations, organized under the provisions of the Minnesota statute concerning companies organized for profit, to pursue gain and to profit because of their operations.
it was to do business, and this Court adopted with approval the definition, judicially approved in other cases, which included within the comprehensive term "business" "that which occupies the time, attention, and labor of men for the purpose of a livelihood or profit."
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, 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.
among stockholders, was not doing business within the meaning of the act.
In United States v. Emery, Bird, Thayer Realty Co., 237 U. S. 28, 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.
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.
and, further, that iron or other materials derived from the usual operation of open mines or quarries constitute the rents and profits of the land, and belong to the tenant for life or years, and to the mortgagor after sale on foreclosure, and before the expiration of the time for redemption. The rule, however, has no application to unopened mines in the absence of a contract, express or implied, for opening and leasing them."
"We adhere to the doctrine of the Evans and Boeing cases, and hold these instruments leases. It follows logically that the amounts stipulated to be paid by the lessees are rents, and they were expressly held by this Court to be rents in the Boeing case, supra -- a case which involved a construction of the very leases now before the court. They are 'the compensation which the occupier pays the landlord for that species of occupation which the contract between them allows.' Lord Dennison, in Queen v. Westbrook, 10 Q.B. 178, 205."
"as to the year 1909, that the company extracted from its lands during the year certain ores bearing gold and other precious metals, which were sold by it for sums largely in excess of the cost of mining, extracting, and marketing the same; that the gross sales amounted to $284,682.85, the cost of extracting, mining, and marketing amounted to $190,939.42, and the value of said ores so extracted in the year 1909, when in place in said mine and before extraction thereof, was $93,743.43."
With respect to the operations of the company for the year 1910, the agreed facts were practically the same, except as to dates and amounts. It does not appear that the so-called "value of the ore in place," or any other sum, was actually charged off upon the books of the company as depreciation.
approved August 5, 1909 (36 Stat. p. 11), apply to mining corporations?"
"~ II. Are the proceeds of ores mined by a corporation from its own premises income within the meaning of the aforementioned act of Congress?"
"~ III. If the proceeds from ore sales are to be treated as income, is such a corporation entitled to deduct the value of such ore in place and before it is mined as depreciation within the meaning of § 38 of said act of Congress?"
"This Court answered the first and second questions certified in the affirmative, and the third question in the negative. In that case, as here, it was contended that the proceeds of the mining operations resulting from a conversion of the capital represented by real estate into capital represented by cash are in no true sense income. As to this contention, this Court said:"
" The peculiar character of mining property is sufficiently obvious. Prior to development, it may present to the naked eye a mere tract of land with barren surface, and of no practical value except for what may be found beneath. Then follow excavation, discovery, development, extraction of ores, resulting eventually, if the process be thorough, in the complete exhaustion of the mineral contents so far as they are worth removing. Theoretically, and according to the argument, the entire value of the mine, as ultimately developed, existed from the beginning. Practically, however, and from the commercial standpoint, the value -- that is, the exchangeable or market value -- depends upon different considerations. Beginning from little, when the existence, character, and extent of the ore deposits are problematical, it may increase steadily or rapidly, so long as discovery and development outrun depletion, and the wiping out of the value by the practical exhaustion of the mine may be deferred for a long-term of years. While not ignoring the importance of such considerations, we do not think they afford the sole test for determining the legislative intent. "
"as to the alleged inequality of operation between mining corporations and others, it is, of course, true that the revenues derived from the working of mines result to some extent in the exhaustion of the capital. But the same is true of the earnings of the human brain and hand when unaided by capital, yet such earnings are commonly dealt with in legislation as income. So it may be said of many manufacturing corporations that are clearly subject to the Act of 1909, especially of those that have to do with the production of patented articles; although it may be foretold from the beginning that the manufacture will be profitable only for a limited time at the end of which the capital value of the plant must be subject to material depletion, the annual gains of such corporations are certainly to be taken as income for the purpose of measuring the amount of the tax."
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 say wholly fallacious assumption because, independently of the effect of the operation of the Sixteenth Amendment, it was settled in Stratton's Independence v. Howbert, 231 U. S. 399, that such a tax is not a tax upon property as such because of its ownership, but a true excise levied on the results of the business of carrying on mining operations."
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.
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. . . ."
"It is clear that a definition of the 'value of the ore in place' has been intentionally adopted that excludes all allowances of profit upon the process of mining, and attributes the entire profit upon the mining operations to the mine itself. In short, the parties propose to estimate the depreciation of a mining property attributable to the extraction of ores according to principles that would be applicable if the ores had been removed by a trespasser."
"It would therefore be improper for us at this time to enter into the question whether the clause, 'a reasonable allowance for depreciation of property, if any,' calls for an allowance on that account in making up the tax where no depreciation is charged in practical bookkeeping, or the question whether depreciation, when allowable, may properly be based upon the depletion of the ore supply estimated otherwise than in the mode shown by the agreed statement of facts herein, for, to do this would be to attribute a different meaning to the term 'value of the ore in place' than the parties have put upon it, and to instruct the circuit court of appeals respecting a question about which instruction has not been requested, and concerning which it does not even appear that any issue is depending before that court."
It therefore follows that we have the question of depreciation in this case presented under somewhat different circumstances than were outlined in the opinion in the case of Stratton's Independence.
business circles, follows. True, the value of the mine is lessened from the partial exhaustion of the property, and, 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.
"a reasonable allowance for the exhaustion, wear, and tear of property arising out of its use or employment in the business, not to exceed, in the case of mines, 5 percentum of the gross value at the mine of the output for the year for which the computation is made."
"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.
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.
For the reasons stated, we think the circuit court of appeals and the district court erred in the judgments rendered, and the same will be reversed and the cases remanded to the district court for further proceedings, if any are sought, upon claim of right to deduct the value of the lands, lots, and stumpage sold from the assessments made.
MR. JUSTICE McREYNOLDS took no part in the consideration and decision of these cases.
* Raynolds v. Hanna, 55 F. 783, 800-801; Tennessee Oil, Gas & Mineral Co. v. Brown, 131 F. 696, 700 (opinion by Lurton, J.); Browning v. Boswell, 215 F. 826, 834; Backer v. Penn Lubricating Co., 162 F. 627; Young v. Ellis, 91 Va. 297; Gartside v. Outley, 58 Ill. 210; Genet v. Delaware & Hudson Canal Co., 136 N.Y. 602; Lacey v. Newcomb, 95 Ia. 287; Austin v. Huntsville Coal & Mining Co., 72 Mo. 535; Brown v. Fowler, 65 Ohio St. 507, 521; Queen v. Westbrook, 10 Q.B. 178, 205.

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