Decisions will be entered under Rule 50.
Petitioners are trust beneficiaries of a trust which during the years in question was the lessor in certain mining leases. Under the terms of each lease the lessee was to pay to the trust a royalty on each ton of iron ore mined and removed and to pay ad valorem taxes on the minerals in place. Respondent disallowed that portion of the depletion deduction taken by the lessor attributable to the inclusion in gross income of ad valorem taxes paid by the lessees. Held, the issue is ruled by our opinion in
*569 Respondent determined deficiencies in petitioners' income taxes for the years as follows:
| Deficiency | ||||
| 1960 | 1961 | 1962 | 1963 | |
| John W. McLean and Dolores F. McLean, | ||||
| docket No. 4409-67 | 0 | $ 31.81 | $ 31.50 | $ 36.96 |
| John L. Washburn, docket No. 4443-67 | $ 47.40 | 48.29 | 47.81 | 47.92 |
| Hope Washburn, docket No. 4444-67 | 365.41 | 313.91 | 331.04 | 331.81 |
| Malcolm McLean and Wendy Heaton McLean, | ||||
| docket No. 4445-67 | 39.00 | 34.43 | 39.33 | 39.42 |
| Genevieve Washburn, docket No. 4446-67 | 486.73 | 375.17 | 477.85 | 416.16 |
| C. Russell McLean, Jr., and Ann H. McLean, | ||||
| docket No. 4447-67 | 0 | 31.81 | 30.10 | 31.56 |
| Charles R. McLean, docket No. 4448-67 | 151.48 | 138.06 | 152.78 | 137.02 |
| Martha Hooker Washburn, docket No. 4449-67 | 127.52 | 129.90 | 128.61 | 141.21 |
| Christopher L. Sholes and Martha W. Sholes, | ||||
| docket No. 4450-67 | 60.77 | 53.65 | 61.29 | 61.43 |
| Robert E. Bly and Carolyn M. Bly, docket | ||||
| No. 4451-67 | 25.74 | 26.22 | 25.96 | 23.66 |
| Estate of Ruby Frisk Washburn, deceased, | ||||
| Charles S. Bellows, executor, docket | ||||
| No. 4452-67 | 204.96 | 180.47 | 163.46 | 163.83 |
| Abbott M. Washburn and Wanda A. Washburn, | ||||
| docket No. 4470-67 | 0 | 0 | 0 | 410.20 |
| Abbott M. Washburn, docket No. 4471-67 | 0 | 415.10 | 497.95 | 0 |
*188 These cases were consolidated for trial and opinion. Because of concessions made by the parties the only issue for decision is whether the lessor of iron ore mining leases may include within depletable gross income the ad valorem property taxes on the minerals in place which are paid by the lessee pursuant to the terms of the lease.
*570 FINDINGS OF FACT
All of the facts have been stipulated and they are so found.
Petitioners John W. and Dolores F. McLean resided at the time their petition was filed in these proceedings in Chevy Chase, Md. They filed joint income tax returns for 1961, 1962, and 1963 with the district director of internal revenue, Hartford, Conn. Petitioner John L. Washburn resided at the time his petition was filed in these proceedings in Duluth, Minn. He filed individual income tax returns for the years 1960, 1961, 1962, and 1963 with the district director of internal revenue, St. Paul, Minn. Petitioner Hope Washburn resided at the time her petition was filed in these proceedings in Duluth, Minn. She filed individual income tax returns for the years 1960, 1961, 1962, and 1963 with the district director of internal revenue, St. Paul, Minn. Petitioners Malcolm and *189 Wendy Heaton McLean resided at the time their petition was filed in these proceedings in Duluth, Minn. They filed joint income tax returns for the years 1960, 1961, 1962, and 1963 with the district director of internal revenue, St. Paul, Minn. Petitioner Genevieve Washburn resided at the time her petition was filed in these proceedings in Duluth, Minn. She filed individual income tax returns for the years 1960, 1961, 1962, and 1963 with the district director of internal revenue, St. Paul, Minn. Petitioners C. Russell McLean, Jr., and Ann H. McLean resided at the time their petition was filed in these proceedings in Duluth, Minn. They filed joint income tax returns for the years 1961, 1962, and 1963 with the district director of internal revenue, St. Paul, Minn. Petitioner Charles R. McLean resided at the time his petition was filed in these proceedings in Duluth, Minn. He filed individual income tax returns for the years 1960, 1961, 1962, and 1963 with the district director of internal revenue, St. Paul, Minn. Petitioner Martha Hooker Washburn resided at the time her petition was filed in these proceedings in Duluth, Minn. She filed individual income tax returns for the years *190 1960, 1961, 1962, and 1963 with the district director of internal revenue, St. Paul, Minn. Petitioners Christopher L. and Martha W. Sholes resided at the time their petition was filed in these proceedings in Duluth, Minn. They filed joint income tax returns for the years 1960, 1961, 1962, and 1963 with the district director of internal revenue, St. Paul, Minn. Petitioners Robert E. and Carolyn M. Bly resided at the time their petition was filed in these proceedings in Duluth, Minn. They filed joint income tax returns for the years 1960, 1961, 1962, and 1963 with the district director of internal revenue, St. Paul, Minn. Petitioner Ruby Frisk Washburn died on February 7, 1964. Charles S. Bellows is the executor of her estate and resided at the time this petition was filed in these proceedings in Minneapolis, Minn. She filed individual income tax returns for *571 the years 1960, 1961, and 1962 with the district director of internal revenue, St. Paul, Minn. Her executor, James I. Best, filed an individual income tax return for the year 1963 with the district director of internal revenue, St. Paul, Minn. Petitioners Abbott M. and Wanda A. Washburn resided at the time their petition *191 was filed in these proceedings in Washington, D.C. They filed a joint income tax return for the year 1963 with the district director of internal revenue, St. Paul, Minn. Petitioner Abbott M. Washburn resided at the time his petition was filed in these proceedings in Washington, D.C. He filed individual income tax returns for the years 1961 and 1962 with the district director of internal revenue, St. Paul, Minn.
The petitioners are beneficiaries of the Washburn Trust.
Throughout the years 1960, 1961, 1962, and 1963, the Washburn Trust owned in fee portions of certain properties which it leased to certain lessees. The following is a schedule which lists these properties, the names of the lessees, the year in which the properties were leased, and the year in which the leases are to expire:
| Name of lessee | Leased property (name of lease) |
| Oliver Iron Mining Co | Hull-Sellers & Agnew #3 |
| Snyder Mining Co | Webb Mine #4 |
| International Harvester Co | Cleveland Cliffs Iron #3 |
| Susquehanna Ore Co | Susquehanna Ore #6 |
| Butler Bros | South Agnew Mining Co. #7 |
| South Agnew Mining Co | South Agnew Mining Co. #10 |
| Snyder Mining Co | Sellers #11 |
| Date of | ||
| Name of lessee | Date of lease | expiration |
| Oliver Iron Mining Co | 1950 | 1972 |
| Snyder Mining Co | 1948 | 1976 |
| International Harvester Co | 1948 | 1968 |
| Susquehanna Ore Co | 1948 | 1973 |
| Butler Bros | 1943 and amendment | |
| June 4, 1959. | 1968 | |
| South Agnew Mining Co | 1948 | 1973 |
| Snyder Mining Co | 1949 and amendment | |
| Feb. 29, 1952. | 1972 |
*192 All of these leases, as amended, were in effect during the years here involved, except Cleveland Cliffs Iron #3 lease which was terminated on December 31, 1961. Each of the leases could be terminated by the lessees by giving notice ranging from periods of 60 days to 2 years.
Under the terms of each lease the lessee was to pay to the Washburn Trust a royalty on each ton of iron ore mined and removed from the leased lands. Except for Sellers #11, each lessee also was to pay to the trust a minimum periodic royalty which could be applied to royalties owed for a succeeding period if the subsequent production was above the minimum amount.
Also under the terms of the leases, as amended, the lessees paid taxes levied on the property by the taxing authorities of Minnesota, consisting of ad valorem taxes on the minerals in place, ad valorem taxes on the surface, and royalty taxes on the royalties paid by the lessees to the Washburn Trust.
*572 The ad valorem taxes on the minerals in place and on the surface were asserted under
The *193 schedule reflecting the amounts of ad valorem taxes on the minerals in place paid by the various lessees of the leases owned by the Washburn Trust is as follows:
| Ad Valorem Taxes on Minerals in Place | ||
| Name of lessee | Name of lease | 1960 |
| Oliver-Iron Mining Co | Hull-Sellers & Agnew #3 | $ 15,042.70 |
| Snyder Mining Co | Webb Mine #4 | 2,309.31 |
| International Harvester Co | Cleveland Cliffs Iron #3 | 751.13 |
| Susquehanna Ore Co | Susquehanna Ore #6 | 6,475.30 |
| Butler Bros | South Agnew Mining Co. #7 | 8,642.15 |
| South Agnew Mining Co | South Agnew Mining Co. | 2,751.47 |
| #10. | ||
| Snyder Mining Co | Sellers #11 | 740.55 |
| Total ad valorem taxes on the minerals in place | 36,712.61 | |
| Ad Valorem Taxes on Minerals in Place | |||
| Name of lessee | 1961 | 1962 | 1963 |
| Oliver-Iron Mining Co | $ 13,966.59 | $ 14,995.69 | $ 15,390.82 |
| Snyder Mining Co | 2,408.21 | 1,997.05 | 1,138.81 |
| International Harvester Co | 620.77 | (Lease terminated | |
| 12/31/61) | |||
| Susquehanna Ore Co | 5,794.29 | 4,579.97 | 5,665.43 |
| Butler Bros | 8,882.01 | 9,219.71 | 8,944.38 |
| South Agnew Mining Co | 2,896.33 | 2,822.19 | 2,774.97 |
| Snyder Mining Co | 481.86 | 302.97 | 189.64 |
| Total ad valorem taxes | |||
| on the minerals in place | 35,050.06 | 33,917.58 | 34,104.05 |
The stipulated facts and schedules show that during some of the years covered by the leases ad valorem taxes on the minerals in place *194 and on the surface were paid by the lessees when there was no production for said years. On Agnew No. 2 Reserve (which includes the property and lease which was leased as South Agnew Mining Co. #10) there was no production from 1922 to 1950, inclusive, and in 1963, but the lessees paid all ad valorem taxes. On Alworth Land Reserve (which is part of the lease which was leased as Cleveland Cliffs Iron #3) there was no production from 1922 to 1945, inclusive, no production in 1948 and 1949, and no production in 1961, but the lessees paid all ad valorem taxes. On the Agnew Mine (which is part of the lease which was leased as Cleveland Cliffs Iron #3) there was no production from 1922 to 1929, inclusive, and no production from 1958 to 1961, inclusive, but all ad valorem taxes were paid. On South Agnew Mine (which is the same property and lease which was leased as South Agnew Mine #7) there was no production from 1941 to 1947, inclusive, and no production in 1963, but all ad valorem taxes were paid. On Agnew No. 3 Mine (which is part of the lease leased as Hull-Sellers and Agnew #3) there was no production from 1905 to 1964 and ad valorem taxes in excess of $ 2,500,000 were paid by *195 the lessees.
Upon cancellation of this last lease mentioned above the Washburn Trust took back into income in the year 1964 (the year the lease was canceled) the amount of $ 10,498.10 which had been claimed as a depletion deduction in years prior to cancellation of the lease.
*573 Oliver Iron Mining Co., a subsidiary of United States Steel Corp., and the lessee of the Agnew #3 Mine, had to pay $ 220,000 in ad valorem taxes on the minerals in place and on the surface after November 25, 1962, when it had given notice of its intention to terminate the lease.
The lessees and the Washburn Trust have not agreed to any allocation of ad valorem taxes for depletion purposes.
The Washburn Trust included in its gross income for purposes of determining its depletion deductions on its U.S. Fiduciary Income Tax Return for each of the years in issue the cash royalties received from the lessees and the amounts paid by the lessees as royalty taxes and as ad valorem taxes on the minerals in place and on the surface.
Respondent disallowed that portion of the deduction for each of the years attributable to the inclusion in gross income of the ad valorem taxes paid by the lessees on the minerals in place and on *196 the surface and determined that the Washburn Trust's allowable deductions for depletion with respect to the mines for each of the years were as follows:
| Year | Allowable depletion |
| 1960 | $ 9,088.23 |
| 1961 | 3,554.27 |
| 1962 | 6,649.75 |
| 1963 | 1 5,068.77 |
These amounts represent 15 percent of the sum of the cash royalties and the royalty taxes for each of the respective years. For purposes of these cases, petitioners concede error in claiming depletion deductions based upon the amounts of ad valorem taxes on the surface which were included in gross income by the Washburn Trust.
OPINION
The issue here is whether ad valorem property taxes on the minerals in place paid by a lessee pursuant to a clause in the lease are includable in the lessor's depletable gross income under sections 611 and 613,
Section 611 provides that "In the case of mines, * * * *197 there shall be allowed as a deduction in computing taxable income a reasonable allowance for depletion." And section 613 provides the deduction shall, in the case of "metal mines," be 15 percent of the "gross income from the property excluding from such gross income an amount equal to any *574 rents or royalties paid or incurred by the taxpayer in respect of the property." Section 613 (c) defines the term "gross income from property" to mean "in the case of a property other than an oil or gas well, the gross income from mining."
It has long been held that the payment of State property taxes by the lessee pursuant to a provision of the mining lease, constitutes a part of the lessor's gross income from mining for the purpose of computing his percentage depletion.
In the opinion in
Undoubtedly *198 if the lessee had not agreed to pay these taxes the plaintiffs would have asked for and been entitled to a larger royalty payment in cash or in an increased percentage or payment of some kind. It seems to us, in essence, that it was a part of the total production income which the plaintiffs received and therefore they are entitled to the statutory depletion allowance on their part of the total production income which includes the ad valorem tax on the minerals as a part of the compensation, rent, or royalty.
* * * *
In this particular case the royalty taxes were actually paid by the lessee; yet this payment was because of the covenant in the lease, and constituted an additional consideration for the right given to the lessee to use the lessor's property for mining purposes.
* * * *
Numerous cases of Minnesota courts might be cited supporting the plaintiff's position that the payment by the lessee of the royalty and ad valorem taxes is the equivalent of the payment of additional rents or royalties for the use of the lessor's mining property. 3
The holding in the Burt case is that --
the plaintiffs [lessors] are entitled to a depletion allowance of the actual rental or royalty paid in cash *199 plus the additional royalty as compensation paid to the plaintiffs by the lessee pursuant to a contractual obligation to pay the ad valorem taxes on the minerals in place.
In our opinion in
In the instant case the lessees were required to pay (1) minimum or advance royalty payments due each year on all except one mine which could later be offset against future production, (2) a royalty for each ton of iron ore mined and removed from the mine (less credit for minimum royalties paid by lessees), (3) the royalty taxes imposed by the State of Minnesota on the royalties paid by them, (4) the ad valorem taxes on the minerals in place, and (5) the ad valorem taxes on the surface.
Respondent admits the first three above payments by the lessee would be dependent upon production and petitioner conceded the de minimis amounts involved with respect to number 5 above or the payment of tax on the surface could be eliminated from its depletable income.
In the light of respondent's concession that the minimum royalty due and payable each year would be sufficiently dependent on production *576 we see no basis *202 for holding the lessee's ad valorem tax payment (No. 4 above) which the decided cases have all held is merely additional royalty payable each year, would not be dependent on production. Both the payments of the ad valorem tax and the payments of minimum royalties are without regard to the extraction of ore during the years of payment. For instance, the lease with the Oliver Iron Mining Co. specifically provides that the advance royalty shall be paid in equal quarterly installments even "in years when no ore is mined." 5*203
We see no reason for departing from the rule of the above-cited authorities. It is true that the operation of this rule can give the lessor a depletion deduction in a year when no ore was mined (as does the advance royalty payment) but it is also true that the lessor's ultimate right to the depletion deduction will always depend solely upon production. The tax payment is equivalent to the bonus or advance royalty in that it is a royalty payment made without regard to production in the year of payment. In the event the mining lease is terminated without production and there has been prepayment of royalty the lessor must restore depletion deductions taken on prepaid royalty to income in the year the lease expired.
In
Petitioners admit that if any leases are terminated without production they will have to restore the depletion deductions they have taken into income in the year the lease is canceled. 6
*577 We hold that the trust beneficiaries, the petitioners in these cases, who are in the position of lessors of iron ore mining leases, may include within their depletable gross income the amount of ad valorem taxes on the minerals in place paid by the *205 lessees during the years in issue pursuant to the terms of the leases. Because of concessions,
Decisions will be entered under Rule 50.
Drennen, J., concurring: I concur in the result because I believe the issue of whether the ad valorem property taxes on the mineral in place paid by the lessee is includable in petitioners-lessors' gross income from mining for depletion purposes where there has been production is controlled by our decisions in
Footnotes
1. Cases of the following petitioners are consolidated herewith: John L. Washburn, docket No. 4443-67; Hope Washburn, docket No. 4444-67; Malcolm McLean and Wendy Heaton McLean, docket No. 4445-67; Genevieve Washburn, docket No. 4446-67; C. Russell McLean, Jr., and Ann H. McLean, docket No. 4447-67; Charles R. McLean, docket No. 4448-67; Martha Hooker Washburn, docket No. 4449-67; Christopher L. Sholes and Martha W. Sholes, docket No. 4450-67; Robert E. Bly and Carolyn M. Bly, docket No. 4451-67; Estate of Ruby Frisk Washburn, deceased, Charles S. Bellows, executor, docket No. 4452-67; Abbott M. Washburn and Wanda A. Washburn, docket No. 4470-67; and Abbott M. Washburn, docket No. 4471-67.↩
1. Respondent concedes error in the disallowance in 1963 of depletion of $ 495.72 (15 percent of $ 3,304.77) which was due to a mathematical error unrelated to the sole issue in these cases. Adjustment has been made in this figure for the error.↩
2. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated.↩
3. The opinion cites
Marble v. Oliver Mining Co., 172 Minn. 263">172 Minn. 263 , 215 N.W. 71">215 N.W. 71 (1927);State v. Fawkes, 210 Minn. 587">210 Minn. 587 , 299 N.W. 666">299 N.W. 666 (1941);State ex rel. Oliver Iron Mining Co. v. Armson, 181 Minn. 221">181 Minn. 221 , 232 N.W. 35">232 N.W. 35 (1930);Fletcher v. Lorain Iron Mining Co., 172 Minn. 271">172 Minn. 271 , 215 N.W. 180">215 N.W. 180 (1927); andState ex rel. Interstate Iron Co. v. Armson, 166 Minn. 230">166 Minn. 230 , 207 N.W. 727">207 N.W. 727↩ (1926).4. Plaintiff in this case conceded that there was one mine in which the ad valorem tax exceeded production in 1 year and plaintiff admitted he was not entitled to full depletion with respect to that tax payment for that lease for that year.↩
5. As stated in our Findings of Fact, there was no production for some of the years involved here, and for prior years, from some of the mines covered by the leases. There was a suggestion in the opinion in Handelman that the yearly ad valorem tax payments made by the lessee should be held to be or not to be within lessor's gross income from mining each year of the lease, depending upon whether there was or was not extraction of ore that year. Respondent specifically argues against such a proposed rule saying it "ignores completely the legal principle respondent believes * * * controls these cases. Whether there is or is not production does not solve the question; the question is whether the payments are dependent solely on the production or extraction of the mineral↩."
6. Petitioners point to the portion of the stipulation which we have set forth in our Findings of Fact showing that United States Steel Corp. or its subsidiary was the lessee of a mining lease in which the trust was lessor. This lease was from Jan. 1, 1905, until it was terminated on Nov. 5, 1964. During all of that period of time the lessee paid the ad valorem taxes on the minerals in place and on the surface but no iron ore was ever extracted from the mine. Upon cancellation of the lease in 1964 the trust reported as income in 1964 the amount of $ 10,498.10 which had been claimed as a depletion deduction in years prior to cancellation of the lease.↩