Source: https://www.legalcrystal.com/case/95893/helvering-vs-twin-bell-oil-syndicate
Timestamp: 2018-02-23 10:59:38
Document Index: 550524008

Matched Legal Cases: ['§ 114', '§ 204', '§ 204', '§ 234', '§ 204', '§ 204', '§ 114', '§ 204', '§ 204', '§ 5', '§ 12', '§ 202', '§ 214', '§ 214', '§ 234', '§ 204', '§ 204', '§ 214', '§ 204', '§ 204', '§ 214', '§ 234', '§ 204', '§ 234', '§ 234', '§ 204', '§ 213', '§ 204', '§ 204', '§ 213']

Helvering Vs Twin Bell Oil Syndicate - Citation 95893 - Court Judgment | LegalCrystal
Helvering Vs. TwIn Bell Oil Syndicate - Court Judgment
LegalCrystal Citation legalcrystal.com/95893
Case Number 293 U.S. 312
Respondent TwIn Bell Oil Syndicate
....."[i]n the case of oil and gas wells, the allowance for depletion shall be 27 1/2 percentum of the gross income from the property during the taxable year," the basis for computing the allowance ill the case of a taxpayer operating under a lease requiring the payment of royalties is the gross income from production less the amounts which the taxpayer was obligated to pay as royalties, whether the royalties were paid in kind or their value in cash. pp. 293 u. s. 320 -321. 4. the provision of § 114(b)(3) of the revenue act of 1932 which expressly excludes from the basis for computing the percentage depletion for oil and gas wells "any rents or royalties paid or incurred by the taxpayer in respect of the property" was merely clarifying in purpose and declaratory of § 204(c)(2).....
Helvering v. Twin Bell Oil Syndicate - 293 U.S. 312 (1934)
U.S. Supreme Court Helvering v. Twin Bell Oil Syndicate, 293 U.S. 312 (1934)
1. The legislative history of § 204(c)(2) of the Revenue Act of 1926 shows that this section does not grant a deduction for depletion, but merely provides methods for computing the amount of the deduction granted by § 234(a)(8) of the Act. Pp. 293 U. S. 315 , 293 U. S. 319 .
The last clause of § 204(c)(2), providing that " . . . in no case shall the depletion allowance be less than it would be if computed without reference to this paragraph," does not require a different result. P. 293 U. S. 319 .
3. Under § 204(c)(2) of the Revenue Act of 1926, which provides that, "[i]n the case of oil and gas wells, the allowance for depletion shall be 27 1/2 percentum of the gross income from the property during the taxable year," the basis for computing the allowance ill the case of a taxpayer operating under a lease requiring the payment of royalties is the gross income from production less the amounts which the taxpayer was obligated to pay as royalties, whether the royalties were paid in kind or their value in cash. Pp. 293 U. S. 320 -321.
4. The provision of § 114(b)(3) of the Revenue Act of 1932 which expressly excludes from the basis for computing the percentage depletion for oil and gas wells "any rents or royalties paid or incurred by the taxpayer in respect of the property" was merely clarifying in purpose and declaratory of § 204(c)(2) of the 1926 Act as administered. P. 293 U. S. 322 .
Under the Revenue Act of 1926, the taxpayer is entitled, in the case of oil and gas wells, to deduct from gross income an allowance for depletion. The relevant sections
of the act are copied in the margin. [ Footnote 1 ] The present litigation calls for decision as to the total allowance permitted
During 1925, 1926, and 1927, the respondent, as assignee of the lessee named in an oil and gas lease, extracted substantial quantities of oil. By the terms of the lease and the assignment, it was obligated to pay royalties in cash or in kind totalling one quarter of the oil extracted. The respondent claimed that the gross proceeds of all the oil produced should form the basis for the computation of the allowance for depletion granted by § 204(c)(2), but the petitioner ruled that the deduction should be limited to 27 1/2 percent of gross production less royalties paid. The Board of Tax Appeals sustained the ruling. [ Footnote 2 ] The Circuit Court of Appeals reversed the Board. [ Footnote 3 ] The case is here on writ of certiorari. [ Footnote 4 ]
Reference to the structure of the successive income tax laws will aid in a solution of the problem. The Revenue Act of 1916 [ Footnote 5 ] imposed an income tax by Title I. It divided the provisions as to tax into two parts, Part I on individuals and Part II on corporations. In each part,
the statute first lays the tax, and, in a subsequent section, grants certain deductions, those enumerated in § 5 of Part I being available to individuals, and those specified in § 12 of Part II to corporations. Both sections include a reasonable allowance for depletion in the case of oil and gas wells. In the drafting of the Revenue Act of 1918, [ Footnote 6 ] a new arrangement of the subject matter was adopted. Title I is composed of definitions, Title II treats of income tax. Part I of this title consists of general provisions applicable alike to individual and corporate taxpayers. Sections under this Part define taxable years and dividends, and § 202 prescribes the "basis for determining gain or loss," but makes no reference to depletion of mines, timber, or oil and gas wells. Additional sections have to do with inventories, net losses, and other general matters. Part II levies the tax on individuals, defines net and gross income, and, in § 214, specifies the deductions allowed from gross income. The opening sentence of subsection (a)(10) is:
Then follow two provisos, one directing how cost shall be ascertained in the case of properties acquired prior to March 1, 1913, and the other allowing an alternative method of calculating depletion upon the basis of discovery value of mines and oil and gas wells. The paragraph ends with the sentence: "In the case of leases, the deductions allowed by this paragraph shall be equitably apportioned between the lessor and lessee."
The same method was followed in the Revenue Act of 1921. [ Footnote 7 ] The general provisions contain no reference to depletion, but, under Parts II and III of Title II, the tax is fixed for individuals and corporations and the allowable deductions from gross income are set forth. The paragraphs of the prior act as to depletion of oil and gas wells are literally reenacted, but there is inserted in § 214(a)(10) as to individuals and § 234(a)(9) as to corporations an additional proviso with respect to discovery value.
In the framing of the Revenue Act of 1924, [ Footnote 8 ] the same arrangement was observed. General definitions are found in Title I; Title II treats of income tax, and in Part I of that title are included general provisions applicable to both individual and corporate taxes. Amongst such general provisions in the earlier acts there had been a section entitled "Basis for determining gain or loss." In the 1924 Act, the draftsman embodied paragraphs similar to those of the earlier act in § 204, but enlarged the caption to read "Basis for determining gain or loss, depletion, and depreciation," and transferred to this section that portion of the depletion provision dealing with the basis of the allowance which had formerly appeared under the heading "Deductions" in Part II, Individuals, and Part III, Corporations. This added to the old § 204 a new subsection (c), which permits the use of cost or discovery value as the basis of depletion in the case of mines and oil and gas wells. Having transferred these provisions from §§ 214(a)(9) and 234(a)(8), respecting individual
The depletion allowance based on discovery value was found difficult of administration, since it required a separate valuation of each well, [ Footnote 9 ] and was abandoned in the Revenue Act of 1926. [ Footnote 10 ] There was substituted a flat allowance of 27 1/2 percent of gross income. In this Act, the same arrangement was followed as in that of 1924. Under Title II, Income Tax, Part I was devoted to general provisions. As the basis for determining gain or loss, depletion and depreciation, had been embodied in § 204 of the general provisions of the Act of 1924, in which was the permitted use of discovery value as a basis for depletion, when that method was discarded in favor of the flat percentage of gross income, it was logical to insert the substituted paragraph in the place where the discarded one had been. Thus, we find the new formula inserted as paragraph (c)(2) of § 204. The authority for deduction of depletion remains where it has always been since the Act of 1918 -- namely, in § 214(a)(9) of Part II, Individuals, and § 234(a)(8) of Part III, Corporations, and naturally there still remains in these paragraphs the limitation that the allowance shall be apportioned between lessor and lessee. [ Footnote 11 ]
Respondent emphasizes the last clause of § 204(c)(2), which is: "except that in no case shall the depletion allowance be less than it would be if computed without reference to this paragraph." It is argued that, as this exception gives the taxpayer an option to compute the allowance either on the cost basis or by the flat percentage method, if he elects the former, he proceeds under § 234(a)(8) of the Act. Thus, it is said that section applies only in case the cost basis is chosen. But an examination of the statute demonstrates the error of this position. No basis or formula for computation of the allowance is found in § 234; on the contrary, all permissible procedures are covered by § 204, whether cost depletion of mines and oil
We come, then, to consider the propriety of the procedure followed by the Commissioner. What he did, in effect, was to treat the gross production less royalties as the measure of the respondent's depletable interest in the property, and the royalties as the measure of the depletable interest of those entitled to receive them. The respondent says, however, that, under § 213, the gross production of the wells is respondent's gross income from the property, must be reported as such, and § 204(c)(2) permits him an allowance of 27 1/2 percent thereof. It must follow that the royalties (one-fourth of the same gross production) are gross income to those receiving them and are subject to depletion at the rate of 27 1/2 percent. The result would be a total allowance of 27 1/2 percent of five-fourths of the total production. Certainly this would not be a single allowance, apportioned between lessor and lessee. And we think § 204(c)(2) does not require such a result. The words used are, "the allowance for depletion shall be 27 1/2 percentum of the gross income from the property during the taxable year." Is the italicized phrase synonymous with the taxpayer's gross income as defined in § 213? It cannot be if "property" signifies the tract of land in all its uses, others as well as the extraction of oil and gas. Darby-Lynde Co. v.
Alexander, 51 F.2d 56. The phrase, we think, points only to the gross income from oil and gas. Compare United States v. Dakota-Montana Oil Co., 288 U. S. 459 , 288 U. S. 461 ; Greensboro Gas Co. v. Commissioner, 30 B.T.A. 1361. So restricted, it presents no difficulty where the owner of the land is also the operator, and there is none where the lessee turns over royalty oil in kind to the lessor, for the retained oil, in that case, is the base for the lessee's computation of depletion, and the royalty oil that for the lessor's. We think Congress did not intend a different result where, as here, the lessee sells all the oil and pays over the royalty in the form of cash.
At all events, as the section must be read in the light of the requirement of apportionment of a single depletion allowance, we are unable to say that the Commissioner erred in holding that, for the purpose of computation, "gross income from the property" meant gross income from production less the amounts which the taxpayer was obliged to pay as royalties. The apportionment gives respondent 27 1/2 percent of the gross income from production which it had the right to retain, and the assignor and lessor, respectively, 27 1/2 percent of the royalties they receive. Such an apportionment has regard to the economic interest of each of the parties entitled to participate in the depletion allowance. Compare Palmer v. Bender, 287 U. S. 551 , 287 U. S. 558 .
The respondent insists that, so applied, the section may work unjust and unequal results; but it is to be remarked that this is likely to be so wherever a rule of thumb is applied without a detailed examination of the facts affecting each taxpayer. No doubt, as the petitioner points out, equally illogical results might ensue the application of the section as the respondent construes it. And it is also to be remembered that depletion upon cost or March 1, 1913, value is optional with the taxpayer, if that procedure is more favorable to him.
Finally, the respondent says that, in the Revenue Act of 1932, [ Footnote 12 ] the section corresponding to 204(c)(2) was amended so as to authorize such a procedure as the petitioner adopted in this case, and therefore the section as it stood in the Act of 1926 could not have supported the Commissioner's ruling. The amendment alters the section to read: [ Footnote 13 ]
The petitioner says that the amendment was merely clarifying in purpose and declaratory of the existing law as administered. We think this is so. When it was offered, the chairman of the committee having the bill in charge so stated, [ Footnote 14 ] and the conference report is to the same effect. [ Footnote 15 ]
" TITLE II -- INCOME TAX"
" PART III -- CORPORATIONS"
" Deductions Allowed Corporations"
" PART I -- GENERAL PROVISIONS"
" BASIS FOR DETERMINING GAIN OR LOSS, DEPLETION, AND DEPRECIATION"