Court Opinion

ID: 4625900
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:58:06.459683+00
Date Added: 2024-06-11T07:56:47.307293
License: Public Domain

LOUISVILLE PROPERTY COMPANY, H. C. WILLIAMS, ASSIGNEE, MIDDLESBORO, KENTUCKY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Louisville Property Co. v. CommissionerDocket No. 96414.United States Board of Tax Appeals47 B.T.A. 23; 1942 BTA LEXIS 749; June 3, 1942, Promulgated *749  1.  In 1919 the Court of Appeals of Kentucky ordered that a receiver be appointed for the Louisville Property Co., a Kentucky corporation, for the purpose of paying its debts and winding up its affairs.  Instead of a receiver being appointed, the corporation in 1919 assigned all of its assets to a trust company in trust for the payment of the debts of the assignor and the expenses of administration istration and the distribution of the remainder, if any, to the stockholders.  In 1935, the trust company resigned and H. C. Williams was duly appointed successor assignee to carry out the terms of the 1919 deed of assignment, after which the corporation was to be dissolved.  Held, Williams during the taxable years 1935 and 1936 was "operating the property or business" of the Louisville Property Co., and should have made returns for that corporation under section 52 of the Revenue Acts of 1934 and 1936.  2.  Where the record fails to show whether the taxpayer elected to take percentage depletion in the "first return under this title," which would be the return for the taxable year 1934, held, no allowance may be permitted for percentage depletion under section 114(b)(4) of the*750  Revenue Acts of 1934 and 1936 for the taxable years 1935 and 1936.  3.  Where an assignee in trust of all the property of a corporation operated the property or business of the corporation, and under a mistake of law filed returns and paid taxes as a trust on Form 1040 rather than as a corporation on Form 1120, held, in determining the tax liability on a corporation basis, credit should be allowed for the taxes paid as a trust to the extent that such payments have not been refunded or otherwise credited.  Geo. E. H. Goodner, Esq., for the petitioner.  T. F. Callahan, Esq., and F. M. Cavanaugh, Esq., for the respondent.  BLACK *24  This proceeding involves a determination by the respondent of deficiencies in income tax against petitioner for the taxable years 1935 and 1936 in the amounts of $216.91 and $2,132.39, respectively.  An interlocutory opinion in this proceeding holding that the Board had jurisdiction was promulgated May 24, 1940, and is reported in . The facts upon which we based our conclusion that we had jurisdiction of this proceeding were fully stated there and we will not repeat them here.  Since*751  then a hearing has been held on the merits.  The Commissioner in his determination of the deficiencies stated in his deficiency notice, among other things, as follows: You filed no Corporation Income Tax Returns on Forms 1120 for the years 1935 and 1936.  Instead, Fiduciary Forms 1041 were filed for each of these years, showing the net income of your corporation for these years.  The tax was paid on this income as though it was received by an individual, Forms 1040 being filed for each of these years for this purpose.  Since the assignee is operating the property or business of your corporation, you are required to make returns in the same manner and form as corporations are required to make returns * * *.  This is in accordance with Section 52 of both the Revenue Act of 1934 and the Revenue Act of 1936.  In contesting the deficiencies determined by the Commissioner the petitioner, by appropriate assignments of error, has raised the following questions: (1) Is H. C. Williams, successor assignee of the Louisville Property Co., taxable as a trust entity under section 161 of the Revenue Acts of 1934 and 1936, respectively, or as a corporate entity under section 52 of the same*752  acts?  (2) If taxable as a corporation, is petitioner entitled to percentage depletion deductions in 1935 and 1936 on coal mined from the properties held by Williams as successor assignee?  (3) If taxable as a corporation, should the taxes paid on certain returns filed in the name of "H. C. Williams, Assignee, Louisville Property Company" for the years 1935 and 1936, respectively, be credited against the taxes determined by the respondent in this proceeding?  (4) If taxable as a trust, should a certain gain of $601.17 from the sale of real estate in 1936, and a certain gain of $199.38 from the call of certain notes in 1936, respectively, be taxed as capital gains at the percentages prescribed in section 117 of the Revenue Act of 1936?  Petitioner also assigned error as to the correctness of the said gain of $601.17, but that assignment was waived at the hearing.  FINDINGS OF FACT.  The Louisville Property Co. is a corporation organized in 1898 under the laws of the Commonwealth of Kentucky, with its principal office at Louisville, Kentucky.  It was organized as a property holding corporation of the Louisville & Nashville Railroad Co., and was authorized *25  by its*753  charter to deal in all kinds of property.  The Louisville & Nashville Railroad Co. was not, however, a stockholder at the time of any of the events herein mentioned.  The corporation had numerous individual stockholders.  Prior to 1919 one of the minority stockholders of the Louisville Property Co. instituted a suit to annul a conveyance of corporate property made by the corporation and to wind up its affairs.  The suit reached the Court of Appeals of Kentucky and on May 23, 1919, the court entered its decision (rehearing denied September 24, 1919) wherein it held that the company had not been managed for the benefit of all the stockholders; that it had served its purpose and survived its usefulness; that its property should be sold and its affairs should be wound up; and that to this end a receiver should be appointed to be under control of the court.  The case was remanded to the trial court for proper action under that decision, and is reported as ; . After the Court of Appeals rendered its decision and ordered a receiver, as stated in the preceding paragraph, the stockholders, directors, *754  and creditors realized that receivership might prove expensive and, after payment of the corporation's obligations, leave little or nothing for the stockholders.  Therefore, the interested parties agreed upon a plan, in lieu of receivership, whereby the corporation by deed of assignment executed November 6, 1919, conveyed all its assets in fee simple to the United States Trust Co., of Louisville, "in trust for the payment of the debts" of the corporation and "the expenses of administration and the distribution of the remainder, if any, of the proceeds of the sale of the assignor's property to its stockholders ratably according to their holdings at the time such distribution" was to be made.  Such action was taken at a meeting of the board of directors on November 5, 1919, at which meeting a resolution was unanimously adopted, the material parts of which are as follows: Whereas * * * the Court of Appeals has directed that a receiver be appointed by the Judge of the lower court to take charge of the property of this corporation, and that all of its property be sold and its affairs be wound up; and Whereas it is the opinion of this board that * * * it will be to the advantage of all*755  parties in interest that the properties be sold, the debts be paid, and the affairs of the corporation be wound up, by voluntary action rather than court procedure; and * * * Whereas the holders of more than a majority in amount of the outstanding stock of this Company, including I. W. Bernheim, plaintiff in the above-entitled action, have filed with this board their written consent that it shall execute and deliver a deed of assignment for the benefit of its creditors and shall also close its business and wind up its affairs; now Be it Resolved: 1.  That the president of this company be and he is hereby authorized and directed to execute and deliver a general deed of assignment for the benefit *26  of creditors to the United States Trust Company, of Louisville, or such other assignee as he may select, thereby conveying, transferring and assigning to the Assignee in said deed all of the property - real, personal and mixed - owned by this company, in trust for the payment of the debts of the company, including the lien debt of the Louisville and Nashville Railroad Company, and distributing ratably among the stockholders the remainder, if any, of the proceeds of the sale*756  of the Company's property after paying the expenses of administration, said deed to contain a provision authorizing the assignee in its discretion to sell any and all of the property embraced in said deed by either public or private sale, and in such parcels and upon such terms as the assignee shall consider most advantageous.  2.  That this company will now proceed to close its business and wind up its affairs, it being understood however, that inasmuch as the deed herein provided for will direct the trustee to distribute the excess of assets over debts, if any, to the stockholders, the winding up of the company's affairs cannot be completed until such distribution is made.  3.  That the Secretary be, and he hereby is, directed to cause to be published for at least once a week for four consecutive weeks, in some newspaper printed and published in the city of Louisville and in the county of Whitley, notice of the fact that it is closing up its business.  The corporation then published notice to the public that it was closing up its business and winding up its affairs.  Thereafter the Louisville Property Co., exclusive from its assignee or its successor assignee, had no assets, *757  did not buy or sell any property, and carried on no business, but continued its corporate existence for the sole purpose of keeping a register of its stockholders for the transfers of shares so that the assignee or successor assignee might know the names of the stockholders to whom final distribution should be made.  After receiving the assets of the Louisville Property Co. as aforesaid, the United States Trust Co. proceeded to sell and dispose of them as fast as it could advantageously, and without sacrificing their value, and to disburse the proceeds as provided in the deed of November 6, 1919.  On May 11, 1935, a large part of the assets having been disposed of and a large proportion of the debts having been paid, the United States Trust Co. petitioned the Whitley Circuit Court (of Kentucky) to discharge it from its trusteeship under the deed of assignment executed November 6, 1919.  The court granted the petition and on the same day appointed H. C. Williams of Middlesboro, Kentucky, as "successor Assignee of the Louisville Property Company, under such deed of assignment, in substitution for the United States Trust Company" and directed the United States Trust Co. to transfer*758  to him all the property which it then held under the deed of November 6, 1919.  The court further ordered that the action should be retained on the docket of the court for such further proceedings as might be necessary and for settlement of the accounts of Williams and that it "proceed under the style of H. C. Williams, Assignee of the Louisville *27  Property Company, plaintiff, versus Louisville Property Company, et al. etc." The court instructed Williams to continue to dispose of the assets, which were turned over to him, in an orderly manner and to report from time to time to the court the receipts and disbursements and Williams has done this annually since that time, at the close of each year.  Pursuant to the said order of the court, the United States Trust Co. conveyed to Williams all the properties which it acquired under the deed of assignment executed November 6, 1919, which had not been disposed of, and the proceeds on hand of all property which had been disposed of.  The deed of conveyance, which is a part of the record, recited that the property was conveyed to Williams under the same terms and conditions as it had been conveyed to the United States Trust Co., *759  as assignee.  Williams accepted the assets and properties thus transferred to him by the United States Trust Co., which consisted principally of the following: 32,000 acres of land in Bell County, Kentucky17,500 acres of coal rights in Hopkins, McLean and Muhlenberg Counties, Kentucky4 lots in Davidson County, Tennessee12 or 13 lots in Covington County, Alabama$54,600.00 United States Treasury notes $10,748.68 cash $4,807.50 special fund Williams proceeded to liquidate and dispose of the assets and properties thus received as and when he could, advantageously and without sacrificing the property.  He disposed of approximately 12,000 acres of land in Bell County, Kentucky, by sale to the United States Government.  In all transactions pertaining to such property he has used the title "H. C. Williams, Assignee of the Louisville Property Company, prescribed by the court when appointing him on May 11, 1935.  At the time Williams was appointed successor assignee, there were only a few remaining creditors of Louisville Property Co. and their claims were in dispute and in litigation.  Williams has withheld any payment on them until the amounts due are finally determined. *760  Some of the lands transferred to Williams contained mineable coal.  The coal rights have been leased to coal operators, who pay Williams royalties on the coal mined.  Williams has never had any mining equipment and has never at any time carried on any mining operations on said lands.  Some of the lands transferred to Williams had merchantable timber on them.  Williams has never cut or manufactured any of said timber, but did sell the standing timber whenever he could do so to an advantage.  *28  In connection with his duties as "Assignee of the Louisville Property Company" Williams has maintained an office at Middlesboro, Kentucky, where he employs a secretary-bookkeeper.  He also employs an engineer and a field man, who are required to look after and protect the properties and to inspect the coal mines from time to time.  He rents any vacant buildings at the mines at a low rate in order to prevent their being destroyed or removed.  Williams was not a stockholder, director, or officer of the Louisville Property Co. on May 11, 1935, when he was appointed successor assignee in trust of Louisville Property Co., nor has he been at any time since.  He has had no business*761  connections or dealings with the Louisville Property Co. since May 11, 1935, except as successor assignee of its properties; he has made no reports to it; and it has made no demands upon him with respect to his operations and has never exercised any authority over said properties.  Whatever reports Williams makes as to his dealings with said properties are made to the Whitley Circuit Court of Whitley County, Kentucky.  From January 1 to May 11, 1935, the United States Trust Co. received coal royalties from the properties which it held under the aforesaid deed of assignment of November 6, 1919, in the total amount of $7,168.53.  From May 11, 1935, to the end of 1935, Williams received coal royalties from the properties transferred to him on May 11, 1935, in the amount of $7,576.39, and during 1936 he received like royalties in the amount of $19,130.99.  Among the properties conveyed to the United States Trust Co. on November 6, 1919, were two lots in Nashville, Tennessee, which on July 1, 1925, were sold for $1,400.  Only the amount of $777.77 was paid by the purchaser and in May 1930 the United States Trust Co. repossessed the lots for the balance of $622.23 due thereon.  On May 26, 1936, Williams*762  sold these lots for $1,223.40.  Respondent determined that the capital gain on the sale was $601.17, and included that full amount in the income on which the deficiency for 1936 is based.  On May 11, 1935, the United States Trust Co. conveyed to Williams, as successor assignee of Louisville Property Co., certain United States Treasury notes which it had acquired in 1932.  On July 6, 1936, these notes matured and were called and Williams realized a profit of $498.75 thereon.  Respondent set off against this profit certain losses and included the resulting net profit of $199.38 as capital gain in the income on which the 1936 deficiency is based.  Williams filed a fiduciary return of income on Form 1041 for the calendar year 1935 in the name of Louisville Property Co., as the estate or trust, and the name of the fiduciary as "H. C. Williams, Assignee, Middlesboro, Kentucky." The return disclosed a net income *29  of $1,577.53 for the year.  Williams also filed an individual income tax return on Form 1040 for 1935 in the name of H. C. Williams, Assignee, Louisville Property Company, Middlesboro, Kentucky", which return disclosed a net income of $1,577.53 and a total tax liability*763  of $23.14.  This tax was paid to the collector for the district of Kentucky on March 26, 1936.  Said return included the income received in 1935 by the United States Trust Co. before it conveyed the properties to Williams on May 11, 1935.  Williams filed a fiduciary return of income on Form 1041 for 1936, in which the name of the estate or trust was given as "Louisville Property Company" and the name of the flduciary as "H. C. Williams, Assignee, Middlesboro, Kentucky." The return disclosed a net income of $9,140.80 for the year.  Williams also filed an individual income tax return on Form 1040 for 1936 in the name of "H. C. Williams Assignee, Louisville Property Company, Middlesboro, Kentucky", which return disclosed a net income of $9,140.80 and a total tax liability of $614.11.  This tax was paid on April 14, 1937.  During the years 1935 and 1936 H. C. Williams, successor assignee to the United States Trust Co., was operating the property or business of the Louisville Property Co., a corporation in dissolution, as a successor assignee in trust for the benefit of the creditors and stockholders of the corporation, and, as such assignee, Eilliams should have made returns for said*764  corporation in the same manner and form as corporations are required to make returns.  OPINION.  BLACK: We shall consider the questions in the order stated.  The respondent determined and contends that, under section 52 of the Revenue Acts of 1934 and 1936, Williams, as successor assignee of the Louisville Property Co., was operating the entire property or business of that corporation and should have made returns for the said corporation for the taxable years 1935 and 1936 in the same manner and form as corporations are required to make returns.  The material provisions of section 52 of both acts are identical and are set forth in the margin. 1 In support of his determination and contention the respondent cites articles 22(a)-21, 52-1, and 52-2 of Regulations 86 and 94 (the material provisions of which are identical in both Regulations), 2*30  and the cases of ; ; affirmed per curiam,; and *765 ; affd., ; certiorari denied, . *766 Petitioner contends that Williams, as successor assignee of the Louisville Property Co., was not operating the property or business of that corporation; that he was merely a trustee appointed by the court to liquidate the property of the corporation for the sole benefit of, first, the creditors, and then the stockholders of the Louisville Property Co., and that, under sections 161 and 142 of the Revenue Acts of 1934 and 1936, Williams correctly filed returns as a fiduciary.  The material provisions of these sections of both acts are identical and are in the margin. 3 In support of this contention petitioner cites , as being similar in many respects to petitioner's position, and , and , as two cases "on all fours with the instant case in all material respects." *767 We have carefully considered the contentions of both parties and are of the opinion that the respondent's determination as to this question *31  is correct.  We think the facts here are substantially different from the facts in , and that, instead of that case supporting the petitioner's view, it is authority for the respondent's determination for the reason that the Board took particular pains to point out that if the May 31, 1934, transfer there had been a step toward dissolution the decision would have been the other way.  We think the Merchants National Building Corporation case is clearly distinguishable on its facts from the instant case.  Likewise we think , is distinguishable.  The trustees in that case were merely liquidating trustees of a part only of the assets of the Fidelity National Bank & Trust Co. of Kansas City, which corporation under its own charter was consolidated with another bank into a consolidated bank.  They were not trustees in dissolution.  We do not regard the case as of any assistance to the petitioner here.  *768 In , the court held that the trustee in bankruptcy there, having in a prior year sold the entire business theretofore conducted by the bankrupt, was no longer "operating the property or business" of the bankrupt corporation, and was not, therefore, required to file a return as a corporation under section 52 of the Revenue Act of 1934.  That is not the situation here.  In the instant proceedings we think the evidence clearly shows that Williams was "operating the property or business" of the Louisville Property Co. within the meaning of the applicable statute and regulations, and we have so found as an ultimate fact.  He was deriving income from sales of coal and timber, collecting rents, and entering into royalty contracts, and he disposed of approximately 12,000 acres of land in Bell County, Kentucky, by sale to the United States Government, all of which is authorized by the corporation's charter.  Furthermore, in the deed of assignment executed on November 6, 1919, it was recited among other things that the Louisville Property Co. was indebted to the Louisville & Nashville Railroad Co. in an amount of "considerably more than a million*769  dollars" and that in consideration of the premises the assignor thereby assigned all of its property "to the assignee, its successors and assigns, absolutely and in fee simple, in trust for the payment of the debts of the Assignor and the expenses of administration and the distribution of the remainder, if any, of the proceeds of the sale of the assignor's property to its stockholders." There still remained a substantial amount of contested corporate debts at the time Williams was appointed *32  successor assignee.  That condition still exists, and up to the date of this hearing there had been no distributions to the stockholders.  Under such circumstances, Williams must be considered as acting for the corporation and not the stockholders.  ; . Cf. , and cases there cited.  We hold, therefore, that Williams, as successor assignee in trust for the benefit of the creditors and stockholders of the Louisville Property Co. in dissolution, should have made returns for that corporation under section 52 of the Revenue Acts of*770  1934 and 1936.  The second question involves petitioner's right to percentage depletion for the taxable years 1935 and 1936 on coal mined from the properties held by Williams as successor assignee.  Petitioner concedes that it is not entitled to depletion based on cost, for no cost has been proved.  Petitioner contends, however, it is entitled to a deduction for each year of percentage depletion under section 114(b)(4) of the Revenue Acts of 1934 and 1936, respectively.  The material provisions of this section, printed in the margin, 4 are identical in both acts, with the exception that the last sentence printed therein is new in the 1936 Act.  The "first return" of this taxpayer referred to in the statute is the return for the taxable year 1934, which should to in the statute is the return for the taxable year 1934, which should have been filed by the United States Trust Co. as assignee.  The record is silent as to whether any return was filed for the year 1934, and, if so, whether any election "to have the depletion allowance for such property for the taxable year for which the return is made computed with or without regard to percentage depletion" was or *33  was not made. *771  Without proof of what was done relative to the taxable year 1934, the Board is not permitted to allow any deduction for percentage depletion for the taxable years 1935 and 1936.  . Cf. last sentence of section 114(b)(4) of the Revenue Act of 1936, supra, and . *772  The third question is whether the taxes paid in the name of H. C. Williams, assignee, Louisville Property Co., for the years 1935 and 1936 should be credited against the taxes determined by the respondent in this proceeding.  Petitioner contends that if it is held that it should be taxed as a corporation and not as a trust, "then it is certainly entitled to have the taxes paid deducted from the tax liability for the two years before any deficiency can be determined." In support of this contention petitioner cites section 271 of the Revenue Acts of 1934 and 1936. 5 This section is identical in both acts.  *773 It is, of course, fundamental that taxes overpaid by one taxpayer may not be credited against taxes due from a different taxpayer.  ; ; ; ; ; certiorari denied, ; Paul and Mertens, vol. 5, par. 51.33.  The respondent argues that "petitioner overlooks the simple fact that H. C. Williams individually is not the same taxpayer as the Louisville Property Company, H. C. Williams, Assignee" and cites , as authority for denying the credit.  We do not agree with the respondent that, when Williams filed the income tax returns on Form 1040 mentioned in our findings in the name of H. C. Williams, assignee, Louisville Property Co., he was acting for himself individually.  Those were clearly not his individual returns, but were the returns be thought he was required to file as successor assignee of the Louisville Property Co.  In those*774  returns he did not report any of his individual income but only the income he derived from operating the property or business of the Louisville Property Co.  Clearly the Commissioner in his deficiency notice *34  recognized that he was dealing with the same taxpayer and simply determined that Williams as successor assignee should have filed returns as a corporation and not as a trust, and we have sustained that determination.  We do not think the deficiencies in question have been determined against any different "taxpayer" from the one who filed the returns mentioned in our findings and paid the taxes shown to be due thereon.  The party that filed those returns and paid the taxes was simply mistaken as to the proper form to use.  We hold that the respondent erred in not giving petitioner credit for the taxes paid for the years 1935 and 1936 in the respective amounts of $23.14 and $614.11, to the extent that such payments have not been refunded or otherwise credited.  Cf. . In view of our holding on the first question it becomes unnecessary to consider the fourth question.  Decision will be entered under Rule 50.Footnotes1. SEC. 52.  CORPORATION RETURNS.  * * * In cases where receivers, trustees in bankruptcy, or assignees are operating the property or business of corporations, such receivers, trustees, or assignees shall make returns for such corporations in the same manner and form as corporations are required to make returns.  Any tax due on the basis of such returns made by receivers, trustees, or assignees shall be collected in the same manner as if collected from the corporations of whose business or property they have custody and control.  ↩2. ART. 22(a)-21.  Gross income of corporation in liquidation. - When a corporation is dissolved, its affairs are usually wound up by a receiver or trustees in dissolution.  The corporate existence is continued for the purpose of liquidating the assets and paying the debts, and such receiver or trustees stand in the stead of the corporation for such purposes.  * * * Any sales of property by them are to be treated as if made by the corporation for the purpose of ascertaining the gain or loss.  No gain or loss is realized by a corporation from the mere distribution of its assets in kind in partial or complete liquidation, however they may have appreciated or depreciated in value since their acquisition.  * * * ART. 52-1.  Corporation returns. - Every corporation not expressly exempt from tax must make a return of income, regardless of the amount of its net income.  In the case of ordinary corporations, the return shall be on Form 1120.  * * * A corporation having an existence during any portion of a taxable year is required to make a return.  * * * ART. 52-2.  Returns by receivers.↩ - Receivers, trustees in dissolution, trustees in bankruptcy, and assignees, operating the property or business of corporations, must make returns of income for such corporations.  If a receiver has full custody of and control over the business or property of a corporation, he shall be deemed to be operating such business or property within the meaning of section 52, whether he is engaged in carrying on the business for which the corporation was organized or only in marshaling, selling, and disposing of its assets for purposes of liquidation.  Notwithstanding that the powers and functions of a corporation are suspended and that the property and business are for the time being in the custody of the receiver, trustee, or assignee, subject to the order of the court, such receiver, trustee, or assignee stands in the place of the corporate officers and is required to perform all the duties and assume all the liabilities which would devolve upon the officers of the corporation were they in control.  * * * A receiver in charge of only part of the property of a corporation, however, as, for example, a receiver in mortgage foreclosure proceedings involving merely a small portion of its property, need not make a return of income. 3. SEC. 161.  IMPOSITION OF TAX.  (a) APPLICATION OF TAX. - The taxes imposed by this title upon individuals shall apply to the income of estates or of any kind of property held in trust, including - (1) Income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust; * * * (b) COMPUTATION AND PAYMENT. - The tax shall be computed upon the net income of the estate or trust, and shall be paid by the fiduciary * * *.  For return made by beneficiary, see section 142.  SEC. 142.  FIDUCIARY RETURNS.  (a) REQUIREMENT OF RETURN. - Every fiduciary * * * shall make under oath a return for any of the following individuals, estates, or trusts for which he acts, stating specifically the items of gross income thereof and the deductions and credits allowed under this title * * *. ↩4. SEC. 114.  BASIS FOR DEPRECIATION AND DEPLETION.  * * * (b) BASIS FOR DEPLETION.  * * * (4) PERCENTAGE DEPLETION FOR COAL AND METAL MINES AND SULPHUR. - The allowance for depletion under section 23(m) shall be, in the case of coal mines, 5 per centum * * * of the gross income from the property during the taxable year, excluding from such gross income an amount equal to any rents or royalties paid or incurred by the taxpayer in respect of the property.  Such allowance shall not exceed 50 per centum of the net income of the taxpayer (computed without allowance for depletion) from the property.  A taxpayer making his first return under this title in respect of a property shall state whether he elects to have the depletion allowance for such property for the taxable year for which the return is made computed with or without regard to percentage depletion, and the depletion allowance in respect of such property for such year shall be computed according to the election thus made.  If the taxpayer fails to make such statement in the return, the depletion allowance for such property for such year shall be computed without reference to percentage depletion.  The method, determined as above, of computing the depletion allowance shall be applied in the case of the property for all taxable years in which it is in the hands of such taxpayer, or of any other person if the basis of the property (for determining gain) in his hands is, under section 113, determined by reference to the basis in the hands of such taxpayer, either directly or through one or more substituted bases, as defined in that section.  The above right of election shall be subject to the qualification that this paragraph shall, for the purpose of determining whether the method of computing the depletion allowance follows the property, be considered a continuation of section 114(b)(4) of the Revenue Act of 1934, and as giving no new election in cases where such section would, if applied, give no new election. ↩5. SEC. 271.  DEFINITION OF DEFICIENCY.  As used in this title in respect of a tax imposed by this title "deficiency" means - (a) The amount by which the tax imposed by this title exceeds the amount shown as the tax by the taxpayer upon his return; but the amount so shown on the return shall first be increased by the amounts previously assessed (or collected without assessment) as a deficiency, and decreased by the amounts previously abated, credited, refunded, or otherwise repaid in respect of such tax; or (b) If no amount is shown as the tax by the taxpayer upon his return, or if no return is made by the taxpayer, then the amount by which the tax exceeds the amounts previously assessed (or collected without assessment) as a deficiency; but such amounts previously assessed, or collected without assessment, shall first be decreased by the amounts previously abated, credited, refunded, or otherwise repaid in respect of such tax. ↩