Source: https://www.legalcrystal.com/case/94754/united-states-vs-ludey
Timestamp: 2017-04-24 17:56:05
Document Index: 444229443

Matched Legal Cases: ['§ 202', '§ 202', 'Art. 1561', 'Art. 159', 'Art. 169', 'Art. 169', 'Art. 169', 'Art. 169', 'Art. 171', 'Art. 216', 'Art. 216', 'Art. 217', 'Art. 217']

United States Vs Ludey - Citation 94754 - Court Judgment | LegalCrystal
Save as PDF Add a Tag Add a Note Semantics Visualize United States Vs. Ludey - Court Judgment	LegalCrystal Citationlegalcrystal.com/94754CourtUS Supreme CourtDecided OnMay-16-1927Case Number274 U.S. 295AppellantUnited StatesRespondentLudeyExcerpt:.....the original cost of the whole in order to determine the cost of that disposed of in the final sale of properties. p.
4. this rule applies to mining as well as to mercantile business. p.
5. the depletion charge permitted as a deduction from the gross income in determining the taxable income of mines for any year represents the reduction in the mineral contents of the reserves from which the product is taken. because the quantity originally in the reserve is not actually known, the percentage of the whole withdrawn in any year, and hence the appropriate depletion charge, is necessarily a rough estimate. p.
6. the amounts of depreciation and depletion to be deducted from cost to ascertain gain on a sale..... Judgment:
United States v. Ludey - 274 U.S. 295 (1927)
1. Under the income and excess profits provisions of the Revenue Act of 1916, as amended by Revenue Act of 1917, in determining the existence and amount of profit realized from a sale of oil mining properties -- land, leases, and equipment -- the cost of the property sold is the original cost to the taxpayer (if purchased after March 1, 1913, or its value on that date if acquired earlier for less) diminished by deductions for depreciation and depletion occurring between the dates of purchase (or March 1, 1913) and sale. P.
2. The depreciation charge permitted as a deduction from the gross income in determining the taxable income of a business for any year represents the reduction, during the year, of the capital assets through wear and tear of the plant used. P.
3. When a plant is disposed of after years of use, the thing then sold is not the whole thing originally acquired. The amount of the depreciation must be deducted from the original cost of the whole in order to determine the cost of that disposed of in the final sale of properties. P.
6. The amounts of depreciation and depletion to be deducted from cost to ascertain gain on a sale of oil properties are equal to the aggregates of depreciation and depletion which the taxpayer was entitled to deduct from gross income in his income tax returns for earlier years; but are not dependent on the amounts which he actually so claimed. P.
274 U. S. 303
The properties consisted, besides mining equipment, in part of oil land held in fee, in part of oil mining leases. The aggregate original cost of the properties was $95,977.33. [
] Of this amount, $30,977.33 was the cost of the
Until 1924, none of the revenue acts provided in terms that, in computing the gain from a sale of any property, a deduction shall be made from the original cost on account of depreciation and depletion during the period of operation. [
] But ever since March 1, 1913, the revenue
"Fourth. Losses actually sustained during the year, incurred in his business or trade: . . .
that . . . the . . . value of . . . property [acquired before March 1, 1913] as of March 1, 1913, shall be the basis for determining the amount of such loss. . . ."
"Eighth. (a) In the case of oil and gas wells, a reasonable allowance for actual reduction in flow and production; . . . (b) in the case of mines, a reasonable allowance for depletion thereof: . . .
That when the allowances . . . shall equal the capital originally invested . . . , no further allowance shall be made."
the deductions in the case of any property, and that special reasons exist why the acts should be construed as not requiring the deductions in the case of oil wells. He urges that a corporation organized for the purpose of utilizing a wasting property, like an iron mine, is not deemed to have divided a part of its capital merely because it has distributed the net proceeds of its mining operations; that this is true even where the necessary result of the operation is a reduction of the mineral reserve; that,
the proceeds of oil mining are to be deemed income, not a partial return of capital, since there is no ownership in oil until it is actually reduced to possession; that a purchase of an oil reserve cannot be likened to the purchase of a certain number of barrels of oil; that an oil reserve is not a reservoir; that Congress allowed the deduction from gross income for depreciation and depletion probably as a reward in an extra-hazardous enterprise in order to encourage new producing properties, and that to allow the deductions would result, in the event of a sale of the property, in taking back the rewards so offered.
We are of opinion that the revenue acts should be construed as requiring deductions for both depreciation and depletion when determining the original cost of oil properties sold. Congress, in providing that the basis for determining gain or loss should be the cost or the 1913 value, was not attempting to provide an exclusive formula for the computation. [
] The depreciation charge permitted as a deduction from the gross income in determining the taxable income of a business for any year represents the reduction, during the year, of the capital assets through wear and tear of the plant used. The amount of the allowance for depreciation is the sum which should be
set aside for the taxable year, in order that, at the end of the useful life of the plant in the business, the aggregate of the sums set aside will (with the salvage value) suffice to provide an amount equal to the original cost. The theory underlying this allowance for depreciation is that, by using up the plant, a gradual sale is made of it. The depreciation charged is the measure of the cost of the part which has been sold. When the plant is disposed of after years of use, the thing then sold is not the whole thing originally acquired. The amount of the depreciation must be deducted from the original cost of the whole in order to determine the cost of that disposed of in the final sale of properties. [
] Any other construction would permit a double deduction for the loss of the same capital assets.
The Corporation Tax Law of 1909 had failed to provide for any deduction on account of the depletion of mineral reserves.
Von Baumbach v. Sargent Land Co.,
242 U. S. 503
United States v. Biwabik Mining Co.,
247 U. S. 116
Goldfield Consolidated Mines Co. v. Scott,
126. The resulting hardship to operators of mines induced Congress to make provision in the Revenue Law of 1913 and all later acts for some deduction on account of depletion in determining the amount of the taxable income from mines. [
] It is not lightly to be assumed that Congress intended the fact to be ignored in determining whether there was a loss or a gain on a sale of the mining properties. The proviso limiting the amount of the deduction for depletion to the amount of the capital invested shows that the deduction is to be regarded as a return of capital, not as a special bonus for enterprise and willingness to assume risks. It is argued that, because oil is a fugacious mineral, it cannot be known that the reserve has been diminished by the operation of wells. Perhaps some land may be discovered which, like the widow's cruse, will afford an inexhaustible supply of oil. But the common experience of man has been that oil wells, and the territory in which they are sunk, become exhausted in time. Congress, in providing for the deduction for depletion of oil wells, acted on that experience.
Compare Lynch v. Alworth-Stephens Co.,
. In essence, the deduction for depletion does not differ from the deduction for depreciation.
The 1924 Act, June 2, 1924, § 202(b), 43 Stat. 253, 255, provided that in computing gain or loss from sales, adjustment should be made for items of exhaustion, wear and tear, and depletion "previously allowed with respect to such property."
Regulations 65, Arts. 1591-1603. The 1926 Act (Act. Feb. 26, 1926, § 202(b), 44 Stat. 9, 11, 12) has a similar provision with respect to deductions "allowable . . . under this Act or prior income tax laws."
Regulations 69, Art. 1561.
Appeal of Even Realty Co., 1 B.T.A. 355.
Appeal of Steiner Coal Co., 1 B.T.A. 821; Appeal of W. W. Carter Co., 1 B.T.A. 849; Appeal of Keighley Mfg. Co., 2 B.T.A. 10.
Under regulations of the bureau the amount of the year's depreciation is required to be fixed in accordance with a reasonably consistent plan, and it must, in order to be allowed, have been entered on the books of the business either as a deduction from the book value of the plant or as a credit to a depreciation reserve account.
Regulations 33, revised, Art. 159; Regulations 45, Art. 169; Regulations 62, Art. 169; Regulations 65, Art. 169; Regulations 69, Art. 169. In either event, it would be reflected in the annual balance sheet. After the total of such credits equals the original cost, no further deduction is allowed.
The bureau requires that taxpayers claiming depletion deductions shall keep a ledger account in which deductions claimed are credited against the cost of the property, or that a depletion reserve account be set up.
Regulations 33, revised Art. 171, 172; Regulations 45, Art. 216; Regulations 62, Art. 216; Regulations 65, Art. 217; Regulations 69, Art. 217.