Harlan F. Stone

“ The deduction for depletion from the bonus payments, which the statute requires, must either be made after the process of extracting the oil is complete, to the extent that the royalties received have been insufficient to replace invested capital, with the attendant inconvenience of indefinite postponement of the allocation of the bonus to income and return of capital, or a formula must be adopted by which the appropriate allocation may be made as the two classes of gross income, bonus and royalties, are received. ”

“ The regulation thus operates to distribute the lessor's anticipated profit or the taxable net income to be derived from the extraction of all the oil ratably between the bonus and royalties, so that the estimated profit element in each will be taxed as received, subject to such readjustments of capital account as are authorized by paragraphs (c) and (d) of the amended regulation, in the event of termination, abandonment, or expiration of the lease before all the oil is extracted. ”

“ The computation necessarily revealed the per barrel capital investment in oil in the ground at the date of the lease. By making certain necessary capital investment adjustments, reflecting oil extraction during the years before 1919, the detail of which is not now important, he arrived at the per barrel capital investment of petitioner in oil in the ground in 1919 and 1920, the figure which would represent the actual amount of depletion of the capital investment for each barrel of oil extracted during those years, if there had been no bonus payments. ”

“ Notes
↑ Section 234 (a) (9) , Revenue Act of 1921, 42 Stat. 227, 256; section 234 (a) (8) , Revenue Act of 1924, 43 Stat. 253, 284, and section 234 (a) (8) , Revenue Act of 1926, 44 Stat. 9, 42 (26 USCA § 986) ; section 23 (l) , Revenue Act of 1928, 45 Stat. 791, 800 (26 USCA § 2023 (l) ”