Court Opinion

ID: 9636695
Source: CourtListenerOpinion
Date Created: 2023-08-22 14:39:45.478473+00
Date Added: 2024-06-11T18:09:48.179071
License: Public Domain

DENMAN, Circuit Judge (concurring).
T cannot agree with Judge WILBUR’S contention that because both are “current expenses” in oil accounting, the .phrase “operating expenses” used in article 201 (h), Regulations 69, under the Revenue Act of 1926 for taxing oil and gas income, is identical in meaning with the phrase “development expenses” in article 223 of the same Regulations concerning such income. Current expenses are divided into many items, and the difference between these two items is recognized by the Treasury Department. If two reasonable interpretations of the phrases are possible, that most favorable to the taxpayer must prevail. McFeeley v. Commissioner, 296 U.S. 102, 111, 56 S.Ct. 54, 80 L.Ed. -.
Here the interpretation in favor of the taxpayer is not only a rational' alternative, but is the interpretation acted upon by the Department itself for many years and up to the assessment of the taxpayer’s deficiency, and is the interpretation supported by the report of the Senate Committee upon which the statute in question was enacted. For the reasons hereafter stated, I have reached the same conclusion as has Judge GARRECHT, that the decision below must be reversed.
The controlling factor here is that the term “net income of (he taxpayer from the property” means operating income and is different from the taxpayer’s general “net income” for final computation of its tax. The difference arises from the interpretation by both the Treasury Department and the Congress of the maximum depletion clause as based on “operating profit,” which excludes development items, whereas in computing the taxpayer’s general net taxable income he may deduct “development” expense.
The pertinent portion of the clause determining the maximum depletion is the same in the 1921, 1924, and 1926 legislation.
The clause in the 1921 Revenue Act is as follows: “Shall not exceed the net income, computed without allowance for de*480pletion, from the property.” Section 234 (a) (9).
In the 1924 Revenue Act it is as follows : “Shall not exceed SO per centum of the net income (computed without allowance for depletion) from the property,” and in the 1926 act: “Shall not exceed SO per centum of the net income of the taxpayer (computed without allowance for depletion) from the property.” Section 204 (c).
Since in any case the “net income from the property” belongs to the taxpayer, no significance can attach to the insertion in the 1926 act of the words “of the taxpayer.”
The change from a maximum limit of depletion of all the net income of the property in the 1921 act to SO per cent, thereof in the 1924 and 1926 acts does not change the interpretation of the phrase “net income * * * (computed without allowance for depletion) from the property.” Nor does the interpretation of the identical phrase change because it is the maximum deduction permitted in the 1921 and 1924 acts, where it limits a sum based on discovery value, and in 1926, where it limits a figure estimated on a flat percentage of gross income from the discovered wells. The function of the clause as a limiting formula is the same, though it limits a depletion based upon different figuring.
As later appears on the Commissioner’s admission and the record here, we are entitled to infer he has interpreted the clause in the same way under the 1926 act as under the earlier acts in every case except that of the Ambassador Petroleum Company.
Under the 1921 and 1924 acts the regulations interpreting “net income from the property” are:
“(h) Net income is the gross income from the sale of all mineral products and any other income incidental to the operation of the property for the production of the mineral products, less operating expenses, including depreciation on equipment, and* taxes, but excluding any allowance for depletion. * * * Operating expenses, depreciation, and taxes on the property upon which the discovery is made, should be applied against the gross income from the. same property on the basis of actual expenditures.” Revenue Act 1921, Regulations 62, Art. 201 (h).
“(h) The phrase ‘net income (computed without allowance for depletion)’ means the gross income from the sale of all mineral products and any other income incidental to the operation of the property for the production of the mineral products, less operating expenses, including, depreciation on equipment and taxes, but excluding any allowance for depletion. * * * Operating expenses, depreciation, and taxes on the property upon which the discovery is made, should be applied against the gross income from the same property on the basis of actual expenditures.” Revenue Act 1924, Regulations 65, Art. 201 (h).
It is a proper inference that such specific mention of “operating expenses” and omission of “development expense” was to be interpreted by the Department as meaning that the net income from the property meant net operating income. However, we are not required to rely on mere inference, for the Commissioner’s brief, in an admission later quoted, states that the Department so actually computed and assessed all the petroleum taxation under these acts.
The 1924 act was passed pursuant to a Senate Finance Committee Report interpreting “net income from property” as “operating profit,” as follows:
“The exception contained in subdivision (c) supersedes the second and third provisos of section 214 (a) (10) and 234 (a) (9) of the existing law. The existing law limits discovery depletion to the operating profit from the property upon which the discovery is made. The bill limits discovery depletion to SO percent of the operating profit from the property upon which the discovery has been made.”
Even in the absence of these Treasury Regulations and the Department’s interpretation in its administration, the Congressional construction of the limiting clause “net income from the property” in the act of 1924, as based on net operating income, must control the interpretation of the identical clause re-enacted in the act of 1926.
The Treasury Regulations under the act of 1926 follows the Congressional interpretation of a maximum depletion based on operating income. It specifies the deductions expressly mentioning operating expenses and omitting development expenses It is as follows:
“Less the deductions in respect to the property upon which the discovery is made, including operating expenses, depreciation, taxes, losses sustained, etc., but excluding *481any allowance for depletion.” Revenue Act 1926, Regs. 69, Art. 201 (h).
This regulation was adopted on August 26, 1926. The Commissioner’s brief admits that for over a year the Department followed the Congressional interpretation and computed the maximum depletion on an operating income basis “disregarding development expenses” in the computation.
“Prior to September 26, 1927, it had been the practice of the Commissioner to disregard development expenses in computing the ‘net income from the property.’ ”
For all the record shows, the . 1926 act has been so administered to this date as to every other petroleum producer’s return. It appears there was a “General Counsel’s Memorandum,” of date September 26, 1927, answering a different question of the Commissioner (G.C.M. 2315, VI-2 C.B.21) in which his counsel volunteers the advice that under the 1926 act “development expenses” should be deducted in arriving at “net income from the property.” But the Commissioner’s brief frankly admits that such memorandum of advice from his counsel does not mean that it was in fact followed in any of the cases pending. Commissioner’s brief at page 10 says:
“The Commissioner’s interpretation was embodied in a General Counsel’s Memorandum, which, together with I. T.’s and other informal rulings does not have the force or effect of Treasury Decisions and does not commit the Department to any interpretation of the law. See cautionary notice published in the Internal Revenue Bulletins; also Helvering v. New York Trust Co., 292 U.S. 455, 54 S.Ct. 806, 78 L.Ed.* 1361.”
Helvering v. New York Trust Co. sustains the Commissioner’s admission. It holds, 292 U.S. 455, at page 468, 54 S.Ct. 806, 810, 78 L.Ed. 1361:
“The rulings, I. T. 1379, 1660 and 1889, cited by the Commissioner were made before the passage of the 1924 act, but they ‘have none of the force or effect of Treasury Decisions and do not commit the Department to any interpretation of the law.’ See cautionary notice published in the bulletins containing these rulings. It does not appear that the attention of Congress had been called to any such construction. There is no ground on which to infer that by the 1924 act Congress intended to approve it.”
We thus see that upon the Commissioner’s admission and the record here we must assume that from 1922 to today the Treasury Department has both by regulation and practice interpreted the maximum depletion phrase “net income from the property” in the 1921, 1924, and 1926 acts as net operating income just as Congress interpreted it for the 1924 act and that “development expenses” are not to be deducted.
The Commissioner now contends that the interpretation so made by him is open to two objections. One is that the phrase “computed without allowance for depletion” in the 1921, 1924, and 1926 acts is exclusive and that all expenses (other than depletion allowance) which may be deducted from the taxpayer’s gross income must be subtracted in computing the maximum deduction, even though they are not operating expenses. “Expressio unius est exclusio alterius” is invoked.
The answer to this is that this principle was not applied to the phrase “computed without allowance for depletion” in the 1921 or 1924 regulations or by Congress in adopting the 1924 act pursuant to the Senate Report, that “the bill limits discovery depletion to 50 per cent, of the operating profit from the property upon which the discovery has been made.”
All three interpret the maximum depletion to be the net operating income.
Appellee’s • second objection is that under such an interpretation the taxpayer can on the same return deduct his “development expenses” in determining the tax on his entire net income under Article 223 of Regulations 69 and not subtract it in determining the 50 per cent, net operating income maximum of his depletion allowance, and, hence, by this method obtain a reduction in his total net income of one and one half times his development expense.
The answer is that this is exactly what happened under the 1921 and 1924 acts. Both the Regulations for 1921 and 1924 and the Senate Report on which the 1924 act was passed (and the Regulations under the 1926 act claimed to be applicable) provided for a maximum depletion allowance based upon the deduction only of “operating expenses” to compute “operating profit.” Identical Regulations on all three acts, 1921 Reg. 62, Art. 223; 1924 Reg. 65, Art. 225; 1926 Reg. 69, Art. 223, also allow the taxpayer the option to deduct development expenses from his gross income. Thus Congress passed the 1926 act after many years of administration under which the taxpayer had the one and one half deduction and Congressional approval in the Senate Re*482port 'on the bill which became the act of 1924.
Ilfeld Co. v. Hernandez, 292 U.S. 62, 54 S.Ct. 596, 78 L.Ed. 1127, is cited as supporting the Commissioner’s contention that there cannot be more than one deduction for development expenses. On the contrary the holding in this case clearly supports the taxpayer. That case decides, 292 U.S. 62, at page 65, 54 S.Ct. 596, 597, 78 L.Ed. 1127, that exercising the option to make a consolidated return “constituted acceptance by petitioner and its subsidiaries of the regulations that had been prescribed.”
The exercising of the option to treat development expense as a current deduction rather than a capital expense “constituted acceptance by the petitioner * * * of the regulations that had been prescribed.” That is to say, the taxpayer here accepted the correlative petroleum regulations of the 1921, 1924 and 1926 acts treating the maximum depletion as based on net operating income.
The Congress in granting the option may well have had in mind its future taxation on the income from petroleum production. Not only is the election controlling for the year in question but under the Regulations for 1921 (223); 1924 (225), “An election once made under this option will control the taxpayer’s returns for all subsequent years”; and a similar provision for 1926 (223), “An election once made under the provisions of this article will control the taxpayer’s returns for all subsequent years.” The Commissioner’s brief points out that in these three successive tax acts the provisions were each time less favorable to such producers. Taxpayer to obtain the one and one half deduction must give up his option to have his development expenses added to his capital with its spread of depreciation or depletion deductions over later years.
The court takes judicial notice of the likelihood of exhaustion of the petroleum supply with its increased value to the taxpayer’s producing wells. Taxpayer’s extra half deduction for “development expenses” in 1925 may have well meant a gain to the government in future taxation of much more than this extra half, when higher prices for petroleum would make the depletion or depreciation a deduction from a higher flat percentage normal tax or in the higher brackets of a graduated tax and surtax income taxation or taxation on excess profits. Already we have an increase in flat percentage which increase this taxpayer must pay on his income without deduction of a capitalized development expense. We cannot be oblivious of the bills introduced in the Congress and the agitation for corporate surplus and excess profits taxation, under which the taxpayer’s loss of his spread of development expense in capital depreciation or depletion will yield the collector much more than the extra one half deduction in 1925.
Commissioner’s contention that the act of 1926 must be construed under a regulation of the act of 1928, that is to say, by the construction an act passed over two years after taxpayer’s return and a regulation adopted over three years after, need scant attention. Such a different regulation under a subsequent act is not the regulation “accepted” by the taxpayer under Ilfeld Co. v. Hernandez, supra, when it exercised its option not to capitalize its development expense to lessen the taxation of subsequent years and take it as a present deduction.
As was said in Helvering v. New York Trust Co., supra, 292 U.S. 455, at page 468, 54 S.Ct. 806, 810, 78 L.Ed. 1361, when the 1928 act was passed, “It does not appear that the attention of Congress had been called to any such construction” as in the volunteered advice of the General Counsel in the bulletin of September, 1927. If it was called to its attention, the phrase “net income from the property” may take a different construction for taxation under its terms than the Senate Committee did when it construed it as net “operating profit.” If thq General Counsel’s Memorandum or some similar interpretation was not the basis of the 1928 act, then it should be interpreted as it was for the same phrase in the 1924 act. Such proposals to interpret past legislation by construction of future enactments have been refused by the Supreme Court. Penn Mutual Life Ins. Co. v. Lederer, 252 U.S. 523, 538, 40 S.Ct. 397, 64 L.Ed. 698.
The stipulation of facts here agrees on two items of the development expense, $10,-569.70 and $14,141.65. It is also agreed that the total depreciation .item of $94,583.67 consists of $67,171.93 depreciation on development equipment and the balance on operating equipment. No business accountant in figuring “operating profit” the term used in the Senate Committee Report, would include in his deduction either development expenses or depreciation on development *483(as distinguished from operating) equipment.
The regulations also contained a definition of operating profit as follows:
“(f) ‘Operating profit’ is the net amount received from mineral production before depletion and depreciation are deducted. It is distinct from net income as defined in section 212.” Regs. 62, 65, 69, Art. 201 (f)'
By this definition all depreciation is excluded. However, taxpayer claims only the exclusion of depreciation on development equipment. In view of our interpretation of article 201 (h) in connection with the Senate Report limiting discovery depletion to fifty per cent of “operating profit” and hence excluding development depreciation, it is unnecessary to consider whether under 201 (f) operating depreciation as well should be excluded from the computation.
The decision of the Board of Tax Appeals is reversed.