Court Opinion

ID: 6871509
Source: CourtListenerOpinion
Date Created: 2022-07-23 21:01:50.642634+00
Date Added: 2024-06-11T16:05:25.034313
License: Public Domain

NETERER, District Judge.
Reversal is sought of a judgment in favor of appellee, denying recovery of a tax claimed to have been erroneously paid on appellant’s net income for the year 1924.
Appellant, as trustee, received distribution of the residuary estate of one Klein-meyer, November 15, 1916, in which was included the lands, the basis of this controversy, and which will be referred to as leased land. The fair market value, on that date, of the leased land was $50,997.69. This land had no known oil value on said date.
The leased land was located in the so-called “Torrance” oil field. Discovery of oil in said field was by a well drilled and “brought in” during the year 1921. On June 30, 1924, appellant leased the said land to a lessee for a term of years to be exploited for gas, oil, etc. The lessee agreed to “commence operations preparatory to the drilling of at least 12 wells” upon said land within 15 days, and to “commence actual drilling of each of the wells within 60 days from the date of the lease, and to drill other wells until a total of 85 wells were completed.” The lessee agreed to pay cash royalties on petroleum produced, and a cash bonus of $150,000.
The bonus was paid on July 1, 1924. The first well on the leased land which had a commercially productive basis was “brought in” on September 17, 1924. On December 31, 1924, there were on the leased land 18 completed wells, and others being drilled.
Appellant, as trustee, filed an income tax return for the said trust estate for the year 1924, but did not include as income the bonus payment in the sum of $150,000. The Commissioner of Internal Revenue audited such return, and determined the deficiency in appellant’s tax for that year by adjusting the gross income to include the amount of the bonus, but “refused to allow as a deduction from the gross income any amount as depletion on said bonus.” Thereupon appellant paid the tax to appellee, and filed a claim 'for refund which was denied on June 19, 1931, by the Commissioner.
On June 17, 1933, appellant began this action to recover the sum of $15,330.65 of the tax theretofore paid on the ground that it was entitled to a deduction from gross income “for depletion upon said bonus.” Upon facts which were thus stipulated the trial court concluded as a matter of law that appellant was entitled to no allowance or deduction “for depletion of said bonus.” Judgment was accordingly entered, and this appeal followed.
The Revenue Act of 1924, § 214 (43 Stat. 269, 270), provided:
“(a) In computing net income there shall be allowed as deductions: * * *
“(9) In the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case; such reasonable. allowance in all cases to be made under rules and regulations to be prescribed by the Commissioner, .with the approval of the Secretary. In the case of leases the deduction allowed by this paragraph shall be equitably apportioned between the lessor and lessee.”
Under section 204(c), 43 Stat. 258-260, “the cost or value” in computing depletion deductions for the basic date and this is specified to be the same as provided in the subdivision (a) or (b). Division (a) provides that “if the property was acquired by gift or transfer in trust on or before December 31, 1920, the basis shall be the fair market value of such property at the time of such acquisition,” except as noted in subdivision (c).
Subdivision (c) follows: “that in the case of mines, oil and gas wells, discovered by the taxpayer after February 28, 1913, and not acquired as the result of purchase of a proven tract or lease, where the fair market value of the property is materially disproportionate to the cost, the basis for *359depletion shall be the fair market value of the property at the date of discovery, or within thirty days thereafter.”
Article 222 (1) of Regulations 45 provides : “For the purpose of Sec. 204 (c) of the Revenue Act of 1924, an oil or gas well may be said to be discovered when there is cither a natural exposure of oil or gas (open to public view, subject to public inspection), (Insert supplied) or a drilling that discloses.the actual and physical presence of oil or gas in quantities sufficient to justify commercial exploitation.”
It is explicitly stated! that discovery must be by drilling that discloses the actual and physical presence of oil or gas, or “a natural exposure of oil or gas.” That is oil set out to public view, viz., exhibited to public inspection (Webster Die.) on the' land.
The same article: “(3) Property which may be valued after discovery is the ‘well’. For the purposes of these sections the ‘well’ is the drill hole, the surface necessary, for the drilling and operation of the ‘well’, the oil or gas content * * * in which the discovery was made by the drilling and from which the production is drawn to the limit of the taxpayer’s private boundary lines, but not beyond the limits of the proven areas as heretofore provided.”
Thus by the provisions of the law and regulations, the discovery “well” is at the drill hole, in which the discovery was made by the drilling. The right of property on the surface extends (from the drill hole on the taxpayer’s land, not the “drill hole” on an adjoining owner’s land) to the limits of the taxpayer’s boundary line. This confirms that discovery of actual and physical presence of oil (article 222 (1), Regulations 45, supra) must be on the taxpayer’s land and that geological inferences or deductions, or known physical conditions or proven land of strangers immediately adjoining have no controlling force.
The essential which inaugurates the right to royalties, prospective production, and the essential which vivified the right, retrospective deductions, on bonus paid, is one simultaneous event, and that is discovery of the actual and physical presence of oil on the taxpayer’s land (article 222 (1), Regulations 45, supra). Discovery of oil on the taxpayer’s land was not made until September 17, 1934, 79 days after execution of the lease, and 49 days beyond the time provided by the law, and which is a part of the lease; and is controlling.
The Congress has the power by statute, or by authorized regulations, to say what shall constitute discovery of oil and to fix the tax liability, and yardstick for reasonable deductions for capital depreciation; and to provide applicable rules and regulations to bring the provisions to fruition for the enjoyment of the benefaction thus conferred. These regulations made pursuant to act of the Congress have the force of law. Bonus depletion for capital deduction in not a natural right, nor is it a vested right.- It is a gift by the Congress, a benefaction which the law affords. The court may not add to the clear provision of the act “or such drilling on or near the land in question as discloses the actual physical presence of oil. * * * ” The Commissioner, with the Secretary’s approval, may do so, but not the court.
The law and regulations need no interpretation. They are clear and easily understood, and even the man on the street could not err, but can readily understand. To hold otherwise, the court would be chiseling and whittling away vital parts of the revenue law, and by judicial legislation usurping the power of the Congress, and authorized act of the Commissioner and Secretary of the Treasury, and defeat the plain provisions of the statute and regulations.
The court is not concerned with the reason for, or wisdom of, the law. Bonus and royalties are both consideration for the lease. Royalties are prospective, and bonus depletion retrospective, and to inaugurate the one and vivify the other actual physical presence of oil must be found on the land, and valuation limited to the prescribed time for the bonus, 30 days from discovery of the oil. It is not of the court’s concern why payment of the bonus by the lessee to the lessor to be retained by him regardless of the production of any oil is any more to be taxed as capital gain than royalties which are measured by actual production.
 The court may not amend or repeal the law. It is an elementary principle that courts will not attempt to question the wisdom of the legislative body in adopting or changing the government’s economic philosophy to what it believes to be for the common good, or by its authority adopting or changing regulations to carry for*360ward applicable principles. The Congress fixes the principle and policies of the law; and that the legislative power is supreme is clearly shown by analogy in Joseph Triner, Corp. v. McNeil, 353 Ill. 559, 2 N.E.(2d) 929, 104 A.L.R. 1435; Nebbia v. N.Y., 291 U.S. 502, 54 S.Ct. 505, 78 L.Ed. 940, 89 A.L.R. 1469. If the law is “illogical, or unreasonable,” or unwise, the remedy is with the Congress to amend or repeal the law, and the Commissioner and Secretary of the Treasury to amend the rules and regulations, but the court may not remedy it by judicial legislative usurpation.
The judgment is affirmed.
(All italics and parenthetical insertions supplied.)