[280 U.S. 227, 228] The Attorney General and Mr. Claude R. Branch, of Providence, R. I., for petitioner.
Messrs. John M. Zane and Alfred T. Carton, both of Chicago, Ill., for respondent.
Mr. Justice McREYNOLDS delivered the opinion of the Court.
The respondent owns a one-sixth interest in several leases executed 1901, 1902, 1903, and 1905, which authorize the lessee to take iron ore from certain Minnesota lands for 25, 45 and 50 years from their respective dates. These leases require payments quarterly of 25 cents royalty per ton upon all ore extracted; provide for minimum annual production and termination under specified circumstances.
During the year 1917 she received out of such royalties $260,072.30; during 1918, $219,940.43. For 1917 she was allowed $99,561.20 as depletion; for 1918, $84,979.55. Income tax was assessed against her upon the balances and payment exacted. Thereafter she unsuccessfully claimed refunds because the sums allowed for depletion were insufficient. The present suit followed. [280 U.S. 227, 229] The Revenue Act of 1918, c. 18, 40 Stat. 1057, 1066, 1067 (approved February 24, 1919), provides:
Section 5, Revenue Act for 1916, c. 463, 39 Stat. 756, 759, is in the margin. 1 Neither party suggests that this dif- [280 U.S. 227, 230] fers from the corresponding provision in the act of 1918, supra, in any way here material.
In her claim presented to the tax officer for refund of overpayment for 1917 respondent said:
A like statement appears in her claim concerning overpayment for 1918
The declaration has two counts. The first, relating to payments for 1917, alleges:
Count 2 contains similar allegations concerning
Count 2 contains similar allegations concerning
In the trial court, after requests by both sides for directed verdict, the respondent had judgment and this was affirmed by the Circuit Court of Appeals. 30 F.(2d) 369.
The latter court said:
This does not accurately state our understanding of the issue. It was necessary for the taxpayer to show the illegality of the exactions. 'The burden of establishing [280 U.S. 227, 233] that fact rested upon it, in order to show that it was entitled to the deduction which the Commissioner had disallowed, and that the additional tax was to that extent illegally assessed.' Botany Mills v. United States, 278 U.S. 282, 289 , 290 S., 49 S. Ct. 129, 132; United States v. Anderson, 269 U.S. 422, 443 , 46 S. Ct. 131. The real point is whether respondent established her claim for refund by adequate evidence And we think she did not.
On March 1, 1913, she was lessor of mines from which the lessee had the right to extract ore during many years, paying therefor when taken out 25 cents per ton. Her rights were merely to receive the royalties stipulated and to regain possession when the leases terminated. Manifestly, the fair market value of this interest in 1913 was much less than 25 cents per ton of the estimated contents of the mines, but respondent introduced no evidence which tended to show such value. The suggestion that market value per ton on March 1, 1913, was equivalent to the sum which, if then put at simple interest, would have amounted to 25 cents when the ore was actually out and the stipulated royalty became payable, cannot be accepted. This method of estimation would decrease the 1913 market value with the passing of every year. Moreover, it disregards the fact that respondent's interest was in the mines considered as entireties and not in particular parts of ore beds which the lessee had agreed to remove during designated future years.
Under the statute it became necessary for respondent to establish the fair market value of her interest in the mines on March 1, 1913, or at least that such value was not below what she claimed it was. Otherwise she could not recover. She introduced three witnesses who testified as to ore values. No one of them gave an estimate of the value of her interest at that time. Replying to the question, 'You do not mean to testify that Mrs. Spalding's interest in that ton of ore as of March 1, 1913, or at any [280 U.S. 227, 234] other time, was worth 25 cents or any other sum?' one of them said: 'That question is based upon Mrs. Spalding's one-sixth ownership of a lease at 25 cents per ton. That question is an entirely different one from the one asked me by Mr. Zane. It would require a good deal of calculation and certain assumptions as to how fast that ore would be shipped. Then it would require discounting against those assumptions to present value. That calculation would take time, and I can not answer that without working it out.' The other two gave no estimate of such value.
The judgment of the court below must be reversed. The cause will be remanded to the District Court for further proceedings in conformity with this opinion.
Mr Justice BUTLER took no part in the consideration or decision of this cause.
[ Footnote 1 ] See. 5. That in computing net income in the case of a citizen or resident of the United States-
(b) For the purpose of the tax there shall be allowed as deductions-
Eighth. (a) In the case of oil and gas wells a reasonable allowance for actual reduction in flow and production to be ascertained not by the flush flow, but by the settled production or regular flow; (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, such reasonable allowance to be made in the case of both (a) and (b) under rules and rugulations to be prescribed by the Secretary of the Treasury: Provided, That when the allowances authorized in (a) and (b) shall equal the capital originally invested, or in case of purchase made prior to March first, nineteen hundred and thriteen, the fair market value as of that date, no further allowance shall be made. No deduction shall be allowed for any amount paid out of new buildings, permanent improvements, or betterments, made to increase the value of any property or estate, and no deduction shall be made for any amount of expense of restoring property or making good the exhaustion thereof for which an allowance is or has been made.'