Stanley Forman Reed

“ It is true the taxpayer may receive an economic benefit in the release of his ore from the right of another to remove it. And by the regulation's requirement that he restore to his capital account an amount equal to the sum of the accumulated deductions, he also receives a possible future tax benefit in larger deductions allowable if and when he sells or leases the minerals again. ”

“ It seems entirely proper for the Commissioner not only to provide for a reasonable allowance for depletion when advance royalties are paid but also to provide for the situation when the expected depletion did not take place. Annual deductions were made by the taxpayer from his income. These were allowed to compensate for the exhaustion of capital. An event occurred in 1937, the termination of the lease, which restored the deductions for depletion to income. This requirement is, we think, within the delegation of authority to the Commissioner. ”

“ Acquiescence by the Commissioner in a Tax Court ruling followed by action which is inconsistent with the withdrawal of an affected regulation is not a sufficiently definite administrative practice to justify a judicial ruling against the regulation on the strength of the acquiescence. ”

“ The taxpayer who receives advance royalties receives a gross income but has no statutory right to depletion apart from actual or prospective extraction. To grant irrecoverable depletion in circumstances where cancellation of the lease occurs prior to extraction would sever depletion from extraction and, if no later extraction followed, deflect income into the capital account without any corresponding capital loss. ”

“ It may be in step with extraction, where extraction and sale synchronize with payments for the ore or the deduction may be allowed against advance payments of royalties or bonus. The theory of depletion is the same in both cases. In either situation, the depletion deduction is allowed in the ore extracted or expected to be extracted. Regulations 45, Art. 23 (m) -2 and -10 (a) and (b) . Thus the mine owner under Article 23 (m) -10 is compensated for the use of his mineral reserves in the production of gross income. ”

“ As no depletion of the ore mass occurred or can occur under the lease which produced the gross income, the issue is not whether the regulation gives a reasonable allowance for depletion when prepaid royalties are involved. ”

“ It is unnecessary to appraise the effect in other years of the antecedents of these sections. Petitioners urge that the depletion deductions which were the untaxed portion of the royalties paid in prior years were capital recoveries in those prior years which resulted in a statutory, permanent reduction of basis which cannot be restored to basis and hence cannot be treated as income for 1937. Petitioners point to Section 23 (m) , page 3 supra, as providing for the deduction for depletion on payment of advance royalties. ”

“ Any deduction from this income for depletion, or course, may be allowed upon such terms as Congress may deem advisable. Helvering v. Bankline Oil Co., 303 U.S. 362, 366, 58 S.Ct. 616, 617, 82 L.Ed. 897; United States v. Ludey, 274 U.S. 295, 302, 47 S.Ct. 608, 610, 71 L.Ed. 1054. Depletion based on cost is like depreciation. Congress has allowed a recovery of the capital invested in a mine but, except in discovery of percentage depletion in special instances which are not here involved, see Section 114, allowed nothing beyond that investment. ”

“ Upon this last point, the decision below in No. 131 is affirmed by an equally divided court. The members of this Court who join in the dissent do not reach this question but their position on other issues results in their voting for a reversal of the entire judgment of the Circuit Court of Appeals. ”

“ We agree that these decisions held invalid a regulation like Art. 23 (m) -10 (c) which includes in income for a taxable year deductions allowed in prior years. The effect of the Commissioner's acquiescence is uncertain. Cf. C.B. XIII-2-IV. During the period of acquiescence, the regulation continued in existence and was republished n the edition of December 1, 1931, approved February 15, 1929, of Regulations 74 under the Revenue Act of 1928, Art. ”