Court Opinion

ID: 9636160
Source: CourtListenerOpinion
Date Created: 2023-08-22 14:18:26.977017+00
Date Added: 2024-06-11T18:09:42.628291
License: Public Domain

HOLMES, Circuit Judge
(dissenting in part).
The exact question here raised with respect to the restoration to income of anticipatory depletion deductions has not been decided by any appellate court; but the principle of depletion allowances, the language of applicable statutes and regulations, and the reasoning in related authoritative decisions, convince me that the deficiency was properly assessed.
Depletion is allowed upon the theory that gross income is produced from a wasting capital asset, and to the extent that the capital is exhausted in production no taxable income is realized. Thus anticipatory depletion allowances do not come within the concept unless some production takes place to exhaust in part the capital. For this reason, Article 23(m)-10(c) of the Regulations was promulgated, and for this reason its validity has been sustained. As the court said in Douglas v. Commissioner, 322 U.S. 275, 281, 64 S.Ct. 988, 992: “Article 23(m)-10(c) was developed to take care of the type of situation where because of a lease’s cancellation without extraction, the reason for allowing depletion disappeared. As no diminution occurred in the ore mass, no depletion was appropriate.”
If the abandoned acreage had been separately leased and the entire lease surrendered, undoubtedly the whole of the depletion deduction allowed upon the income therefrom would have to be restored to income.2 Are the actualities of what occurred here so substantially dissimilar that the abandonment does not come within the letter or spirit of the regulation and that the tax incidence of the transaction must be measured differently? I think not. These acres were leased for minerals, and gross income was received therefrom by the taxpayer. Depletion allowances were taken upon that income. The lease contract, in so far as these acres were involved, was surrendered and terminated without production, so that the possibility no longer existed that any part of the income paid for the lease upon the acreage could be attributable to exhaustion of a capital asset. “As no diminution occurred in the mineral, no depletion was appropriate
*496Moreover, the regulation is not so phrased that it- relates only to the abandonment of entire leases. It provides that if any grant of mineral rights is abandoned before the mineral has been extracted, the grantor shall restore the depletion deductions made in prior years on accounlt of royalties on minerals paid for but not removed. The execution of the lease constituted a grant of mineral rights under the abandoned lands as well as under the lands retained.
Granting that depletion is not measured on an acreage basis, the result is the same. The statute itself provides for depletion upon gross income from “the property,” 3 which has been administratively and judicially defined to mean each separate parcel of one or more tracts of mineral property that is treated by the taxpayer as a unit.4 When the acreage here involved was abandoned by the lessee, it necessarily became a separate “property” that could be held or re-leased as the taxpayer saw fit; as such, its gross income and depletion were subject to separate computation.
I think the decision of the Tax Court should be affirmed.

 Douglas v. Commissioner, 322 U.S. 275, 64 S.Ct. 988; Sneed v. Commissioner, 5 Cir., 119 F.2d 767.

 26 U.S.C.A. Int.Rev.Code, § 114(b) (3).

 Sneed v. Commissioner, supra; Sec. 19.23 (m)-l(i) of Treasury Regulations 103.