Owen J. Roberts

“ During 1925, 1926 and 1927 the respondent, as assignee of the lessee named in an oil and gas lease, extracted substantial quantities of oil. By the terms of the lease and the assignment it was obligated to pay royalties in cash or in kind, totalling one-quarter of the oil extracted. The respondent claimed that the gross proceeds of all the oil produced should form the basis for the computation of the allowance for depletion granted by section 204 (c) (2) , but the petitioner ruled that the deduction should be limited to 27 1/2 per cent. of gross production less royalties paid. ”

“ Certainly this would not be a single allowance, apportioned between lessor and lessee. And we think section 204 (c) (2) does not require such a result. The words used are, 'the allowance for depletion shall be 27 1/2 per centum of the gross income from the property during the taxable year.' Is the italicized phrase synonymous with the taxpayer's gross income as defined in section 213? It cannot be if 'property' signifies the tract of land in all its uses, others as well as the extraction of oil and gas. ”

“ Under the Revenue Act of 1926 the taxpayer is entitled, in the case of oil and gas wells, to deduct from gross income an allowance for depletion. The relevant sections of the act are copied in the margin. [1] The present litigation calls for decision as to the total allowance permitted and its apportionment between lessor and lessee where the income is derived from operation under an oil and gas lease. ”