The opinion of the court was delivered by: LEVET
United States Steel Corporation, the above-entitled plaintiff, has moved under Rule 56 of the Federal Rules of Civil Procedure for summary judgment with respect to the claim for depletion deductions set forth in paragraphs 16, 17 and 18 of its complaint and, likewise, for an order pursuant to Rule 54(b) of the Federal Rules of Civil Procedure determining that there is no just reason for delay and that an express direction for entry of final judgment thereon be made.
The defendant, United States of America, has countermoved for summary judgment in its favor on the claims asserted in the said paragraphs of the complaint.
The relevant claims in the complaint set forth in paragraphs 16, 17 and 18 are as follows:
"16. In 1950, Plaintiff was lessor and lessee of iron ore mining properties in the State of Minnesota. Pursuant to the terms of the leases, for 1950 the lessee paid Minnesota ad valorem taxes with respect to the mining properties and Minnesota royalty taxes with respect to royalties paid by the lessee.
"17. In determining the Federal income tax for 1950 which Plaintiff has paid, for purposes of § 114(b)(4) and the determination of the depletion deduction allowable under § 23(m), the Minnesota ad valorem taxes and the Minnesota royalty taxes have been included in the lessor's 'gross income from the property,' and have been excluded from the lessee's 'gross income from the property.'
"18. These adjustments were erroneous, and by reason thereof, in determining the Federal income tax for 1950 which Plaintiff has paid, deductions for depletion have been allowed in the amount of at least $304,323.54 less than the amount which should have been allowed."
This is an action under Section 1346(a)(1) of Title 28 United States Code to recover federal income tax for the year 1950 and assessed interest on additional payments of such tax, which plaintiff claims were erroneously and illegally assessed and collected.
During the year 1950, Oliver Iron Mining Company (hereinafter "Oliver"), a subsidiary corporation of the plaintiff, was lessee or successor lessee of certain iron ore mining properties in the State of Minnesota in that part of the state known as the Mesabi Range. (para. 9, Joint Rule 9(g) Statement.) All the leases of Oliver provided for the payment of royalties by the lessee and for the payment by the lessee of all taxes levied or assessed on the leased land, on the improvements and personal property thereon, and on the iron ore. (para. 12, Joint Rule 9(g) Statement.)
For the year 1950, Oliver, as lessee, paid to its lessors royalties, and paid to the Minnesota taxing authorities ad valorem taxes on the leased mineral, land and improvements. It also paid to the Minnesota taxing authorities the royalty taxes due with respect to the royalties paid by it, such royalty taxes being considered to be within the covenant of the lessee to pay the taxes levied upon the leased land and the iron ore.
For the year 1950, Oliver, as lessor, received royalties from its lessees, and Oliver's lessees paid to the taxing authorities ad valorem taxes on the leased mineral, land and improvements. Oliver's lessees also paid to the Minnesota taxing authorities the royalty taxes due with respect to the royalties received by Oliver under the Minnesota leases.
For 1950, the Internal Revenue Service, in those instances where Oliver was the lessee, reduced its percentage depletion deductions by excluding from "gross income from the property" the Minnesota ad valorem and royalty taxes paid by Oliver on the theory that such tax payments constituted the payment by Oliver to the lessor of additional "rents or royalties" within the meaning of the statute.
The plaintiff paid to the District Director of Lower Manhattan, New York City, additional federal income taxes for 1950 with interest. (para. 4, Joint Rule 9(g) Statement.) The time for assessment against plaintiff of additional federal income tax for 1950 was extended to June 30, 1966 (para. 5, Joint Rule 9(g) Statement) and ultimately, on June 29, 1965, plaintiff filed a claim for refund for the federal income tax paid for 1950 and interest on the same of $30,000,000 or such greater amount as may be legally refundable, with interest. (para. 6, Joint Rule 9(g) Statement.) This claim was rejected on August 24, 1965. (para. 8, Joint Rule 9(g) Statement.) The claim for an increased deduction for depletion was a part of this refund claim.
The issue before this court on this motion for summary judgment involves the depletion deduction provided for by the Internal Revenue Code of 1939 and may be expressed as follows:
"Are ad valorem taxes and Minnesota royalty taxes, paid by a lessee under iron ore mining leases, includible in the 'gross income from the property' of the lessor, and excludable from the 'gross income from the property' of the lessee, in calculating the deduction for percentage depletion under Sections 23(m) and 114(b)(4)(A) of the Federal Internal Revenue Code of 1939?"
The relevant statutes from the Internal Revenue Code of 1939 are as follows:
"Sec. 23. Deductions from Gross Income
"In computing net income there shall be allowed as deductions:
"(m) Depletion. - In the case of mines * * * a reasonable allowance for depletion * * * according to the peculiar conditions in each case; such reasonable allowance in all cases to be made under rules and regulations to be prescribed by the Commissioner, with the approval of the Secretary * * *. In the case of leases the deductions shall be equitably apportioned between the lessor and lessee. * * *
"(m) Basis for Depreciation and Depletion. - The basis upon which depletion * * * [are] to be allowed in respect of any property shall be as provided in Sec. 114."
"Section 114. Basis for Depreciation and Depletion.
"(b) Basis for Depletion -
"(1) General Rule. - The basis upon which depletion is to be allowed in respect of any property shall be the adjusted basis provided in Section 113(b) for the purpose of determining the gain upon the sale or other disposition of such property, except as provided in paragraphs (2), (3) and (4) of this subsection.
"(4) Percentage Depletion for Coal and Metal Mines and Sulphur - The allowance for depletion under Section 23(m) shall be, * * * in the case of metal mines, 15 per centum, * * * of the gross-income from the property during the taxable year, excluding from such gross income an amount equal to any rents or royalties paid or incurred by the taxpayer in respect of the property. * * *"
The Treasury Regulations for the year in question provided:
"In all cases there shall be excluded in determining the 'gross income from property' an amount equal to any rents or royalties which were paid or incurred by the taxpayer in respect of the property and are not otherwise excluded from the 'gross income from the property.'" (Reg. 111 § 29.23(m)-1(f).)
The present Treasury Regulations, adopted in 1960, provide:
"In all cases there shall be excluded in determining the 'gross income from the property' an amount equal to any rents or royalties (which are depletable income to the payee) which are paid or incurred by the taxpayer in respect of the property and are not otherwise excluded from 'gross income from the property.'" (§ 1.613-2(c)(5)(i).)
The Claim of the United States
The United States contends that the language in the Internal Revenue Code of 1939 requires the United States Steel Corporation to deduct the Minnesota ad valorem and royalty taxes paid by it before computing its gross income from the property for percentage depletion purposes. Briefly, the defendant's contention is as follows: Plaintiff, as lessee under the lease here in question, was required, pursuant to the terms of the lease, to pay these taxes, although, in fact, as defendant claims, these were obligations of the lessor; that under the law of Minnesota and under the federal tax law these payments by the plaintiff constituted "rents and royalties" paid by the ...