*196 Decision will be entered under Rule 50.
1. Income from oil produced from leases upon state owned lands is subject to Federal income taxes, Helvering v. Mountain Producers Corporation, 303 U.S. 376">303 U.S. 376 (Mar. 7, 1938), overruling prior decisions to the contrary, and such income received prior to March 7, 1938, is not exempt, notwithstanding such prior decisions.
2. Bonuses paid to acquire oil leases are capital investments recoverable by way of the statutory deduction for depletion and not by annual exclusions from gross income of proportionate parts thereof.
*251 The petitioner, Sunray Oil Co., seeks redetermination of income tax deficiencies determined by respondent in the following years and amounts:
| 1936 | $ 51,537.37 |
| 1937 | 62,334.58 |
| 1938 | 57,863.60 |
| 1939 | 66,940.98 |
Certain of the adjustments are uncontested. One issue raised upon the pleadings, pertaining to the allowance of certain claimed deductions for worthless oil and gas royalties, was stipulated at the hearing, it being agreed that the petitioner was entitled to*197 deductions of $ 1,245.50 for 1936, $ 3,471 for 1937, $ 5,131.25 for 1938, and $ 1,403.75 for 1939. On brief, respondent conceded that he erred in including in petitioner's income for 1936 the amount of $ 2,484.31 representing a bad debt recovered in that year which had been charged off in a prior year without tax benefit (sec. 116, Revenue Act of 1942). We hold accordingly on the issues thus settled. These matters will be taken care of under Rule 50.
The questions remaining to be decided are (a) whether respondent erred in computing a tax upon income derived by petitioner from oil and gas leases upon lands owned by the State of Oklahoma, and (b) *252 whether respondent erred in refusing to permit petitioner to reduce its gross income by the amount of advance royalties or bonuses allocable to each taxable year.
FINDINGS OF FACT.
The petitioner is an Oklahoma corporation, with principal offices at Tulsa, Oklahoma. Its income tax returns for 1936 through 1939 were filed with the collector of internal revenue for the district of Oklahoma.
During 1936 the Sunray Oil Co. purchased a total of thirteen oil and gas leases granted by the State of Oklahoma upon tracts of land owned *198 by the state in the vicinity of the State Capitol in Oklahoma City, paying bonuses thereon totaling $ 446,000 and agreeing to pay specified royalties from the oil as produced. In 1937 the company purchased an undivided one-fourth interest in another oil and gas lease upon a tract of state owned land in the State Capitol area, paying therefor $ 77,868.82.
The petitioner reported its income from these leases upon its returns, but claimed such income to be exempt. The net income, before depletion, from said leases was as follows:
| 1936 | $ 282,381.20 |
| 1937 | 644,774.48 |
| 1938 | 532,710.13 |
| Jan. 1 to Mar. 7, 1938 | 104,190.13 |
| 1939 | 567,073.99 |
Petitioner paid a net bonus of $ 3,750 in 1937 for a three-fourths interest in an oil and gas lease, designated as the Hefner lease, in Stephens County, Oklahoma. It paid bonuses of $ 8,500 in 1935, $ 2,000 in 1936, and $ 2,400 in 1937, for the acquisition of interests in an oil and gas lease in Oklahoma City, Oklahoma, designated as the Avey lease. Neither the Hefner lease nor the Avey lease was upon state owned lands.
The portions of the bonuses paid for all of the above leases allocated to the taxable years, computed upon the basis of estimated*199 oil reserves and the oil produced during the taxable years, are as follows:
| 1936 | $ 25,339.12 |
| 1937 | 54,474.06 |
| 1938 | 35,041.74 |
| 1939 | 29,622.61 |
OPINION.
Although the petitioner originally claimed that its income from leases on state lands was exempt from Federal income *253 tax for each of the taxable years, its present position is that such income should be treated as exempt from Federal taxation only until March 7, 1938, the date upon which the Supreme Court of the United States decided the case of Helvering v. Mountain Producers Corporation, 303 U.S. 376">303 U.S. 376, overruling Burnet v. Coronado Oil & Gas Co., 285 U.S. 393">285 U.S. 393 (1932), and Gillespie v. Oklahoma, 257 U.S. 501 (1922).
The only question is whether, as petitioner contends, it obtained a vested right under prior erroneous interpretations of the Constitution of the United States, later overruled, and that the correct interpretation, when finally arrived at, can be applied prospectively only.
We see no merit in petitioner's position. Erroneous interpretations do not alter the Constitution and we can recognize no vested*200 rights arising out of them. Petitioner has cited a number of cases, but we consider none of them to be pertinent to the question before us. The Mountain Producers case itself, which petitioner wishes us to apply nonretroactively, was retroactively applied to the taxpayer therein, for it involved income tax liability for previous years. The decision has been retroactively applied by the Commissioner, Mim. 4755, 1938-1, C. B. 179, 180. In the absence of a specific statute, we are unable to afford any relief to petitioner and we must hold, under the authority of Helvering v. Mountain Producers Corporation, supra, that Federal income tax liability was incurred by petitioner with respect to the income derived by it from oil leases upon state owned lands. Cf. Helvering v. Gerhardt, 304 U.S. 405 (1938); Public Salary Tax Act of 1939, Public No. 32, 76th Cong., 1st sess.
At the hearing we reserved ruling upon the admissibility of testimony offered by petitioner, and objected to by respondent, pertaining to statements made by the then Governor of Oklahoma to petitioner's president and its general counsel as to the*201 immunity from Federal taxation of income derived from leases upon state lands. The testimony purported to show that such statements induced the bids which petitioner made to obtain certain of its leases on state lands. We consider the testimony offered to be incompetent, irrelevant, and immaterial to the issue before us and we grant respondent's motions to strike.
The question remaining for decision is whether the petitioner is correct in contending that it should be permitted to exclude from "gross income," for the purposes of sections 22 (a) of the Revenue Acts of 1936 and 1938 and the Internal Revenue Code, the aliquot parts of bonuses paid for obtaining oil and gas leases which are attributable to the taxable years.
The aliquot parts of the bonuses sought to be excluded from gross income were computed for the purpose of determining the amount *254 of depletion allowable under section 114 (b) (3) of the applicable statutes. That section provides, in part:
Percentage depletion for oil and gas wells. -- In the case of oil and gas wells the allowance for depletion under section 23 (m) shall be 27 1/2 per centum of the gross income from the property during the taxable year, *202 excluding from such gross income an amount equal to any rents or royalties paid or incurred by the taxpayer in respect of the property. * * * [Emphasis supplied.]
The applicable Treasury regulations provide that if royalties in the form of bonus payments or advanced royalties have been paid in respect of the property in the taxable year or in prior years, the amount excluded from "gross income from the property" for the taxable year on account of such payments, as required for the purpose of section 114 (b) (3), supra, "shall be an amount equal to that part of such payments which is allocable to the products sold during the taxable year." Art. 23 (m)-1 (3) (g), Regulations 94 and 101; sec. 19.23 (m)-1 (f), Regulations 103; see also Quintana Petroleum Co., 44 B. T. A. 624, 628-629.
The parties are in agreement as to the portions of the bonuses paid by the petitioner which are allocable to each of the years before us for the purpose of section 114 (b) (3). The amounts are set forth in our findings. Petitioner argues that because such amounts are to be excluded from "gross income from the property" for the purpose of section 114 (b) (3), they*203 should also be excluded from "gross income" under section 22 (a).
We have held that the term "gross income from the property," as used in section 114 (b) (3), is synonymous with the amount to be included in the taxpayer's "gross income" under section 22 (a). Marrs McLean, 41 B. T. A. 565, 575; see also Helvering v. Twin Bell Oil Syndicate, 293 U.S. 312 (1934). The petitioner's contention would require a departure from the rule, there announced, because what the petitioner asks is that we hold that "gross income" under section 22 (a) means "gross income from the property" less an aliquot part of the bonuses paid for the property. The fallacy of this contention is apparent on its face.
In effect, petitioner is seeking to recover its original investment in the oil and gas leases by amortizing its cost and deducting a portion thereof from gross income annually. The appropriate method under which such an investment can be recovered is through the deduction for depletion, Quintana Petroleum Co., supra; sec. 19.23 (m)-10 (a), Regulations 103; and the method contended for by the petitioner *204 has no legal justification. We hold for the respondent on this issue.
Decision will be entered under Rule 50.