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decided: March 2, 1925.



Holmes, Van Devanter, Brandeis, Sutherland, Sanford; Butler took no part in the consideration or decision of this case.

Author: Sutherland

[ 267 U.S. Page 365]

 MR. JUSTICE SUTHERLAND delivered the opinion of the Court.

The federal income tax return made by respondent (a corporation organized in the United States) for the year 1917 showed the sum of $10,253.21 due the government for income and excess war profits taxes for that year; and this amount was paid. Thereafter, the Commissioner of Internal Revenue assessed respondent with an additional tax of $17,128.44, which respondent was forced to pay and did pay under protest, and to recover which this

[ 267 U.S. Page 366]

     action was brought against E. J. Lynch, a collector of internal revenue, to whom the payment had been made. Lynch subsequently died and his executrix was substituted as defendant. The federal district court for the district of Minnesota, where the action was brought, rendered judgment in favor of respondent for the amount. 278 Fed. 959. The circuit court of appeals affirmed the judgment, 294 Fed. 190; and the case is here upon certiorari. 264 U.S. 577.

The facts from which the controversy arose, are not in dispute, and, for present purposes, may be shortly stated. Prior to March 1, 1913, respondent had leases upon two definitely described tracts of land in Minnesota containing deposits of iron ore, known as the Perkins mine and the Hudson mine. The leases, unless sooner terminated by the lessee in the manner therein provided, ran for a period of fifty years and obliged respondent to mine and remove at least fifty thousand tons of iron ore annually from the Perkins and twenty-five thousand tons annually from the Hudson and to pay the lessor, owner of the fee, a royalty of thirty cents per ton upon each ton of ore extracted. Respondent subleased the lands upon terms not necessary to be stated further than that the sublessee of the Perkins was to pay respondent a royalty of seventy-five cents per ton and the sublessee of the Hudson a royalty of sixty cents per ton, or forty-five cents and thirty cents, respectively, per ton more than was made payable by respondent to the lessor owner.

Before March 1, 1913, both tracts of land had been fully explored and the deposits of ore therein developed to such an extent that the entire amount of tonnage was known with substantial accuracy, and the properties were demonstrated to be of great value. On that date it was known that these ore bodies would be entirely worked out and the mines exhausted within seven years; and this in fact happened. The market value of the ore in the mines

[ 267 U.S. Page 367]

     during that entire time exceeded seventy-five cents per ton; and it sufficiently appears that during such time respondent and its sublessees were in possession of the lands engaged in mining and removing the ore therefrom. Without repeating the formula followed in arriving at the result, it is enough to say that the trial court found that, under the leases, the respondent had a property interest in these ore bodies, the fair market value of which, as of March 1, 1913, was 71.9 per cent. of the total royalties which would be received under the subleases, and such royalties constituted the sole source of respondent's income. Thereupon, the lower courts held that respondent was entitled to deduct from its gross income for 1917 a sum equal to 71.9 per cent. thereof for depletion, and that only the balance remaining was subject to income and excess profits taxes. Such taxes, properly computed, amounted to the sum returned and originally paid by respondent and no more.

The applicable law is found in §§ 2, 10 and 12 (a) of the Act of September 8, 1916, c. 463, 39 Stat. 756, 757-758, 765, 767. Section 10 imposes a tax of two per centum upon the total annual net income received from all sources by every corporation, etc., organized in the United States. Section 12 (a)*fn1 provides that such net

[ 267 U.S. Page 368]

     income shall be ascertained by deducting from the gross amount of the income, among other things, "a reasonable allowance for the exhaustion . . . of property arising out of its use . . . ; (b) in the case of mines a reasonable allowance for depletion thereof not to exceed the market value in the mine of the product thereof which has been mined and sold during the year for which the return and computation are made, . . ." Section 2 contains the following provision (p. 758): "(c) For the purpose of ascertaining the gain derived from the sale or other disposition of property, real, personal, or mixed, acquired before March first, nineteen hundred and ...

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