*227 Decision will be entered for respondent.
During 1941 petitioner, as lessor, executed a number of oil and gas leases upon which it received bonuses or advance royalties on account of which petitioner was allowed percentage depletion deductions. In 1942 certain of these leases were released to petitioner without production. Held, that under Regulations 111, section 29.23 (m)-10 (c), petitioner must restore to its gross income in 1942 the depletion deducted in 1941 on the bonuses or advance royalties received from the leases surrendered in 1942.
*576 Respondent determined a deficiency in the corporation income tax of petitioner for the taxable year ended*228 December 31, 1942, in the amount of $ 7,349.11. The only issue is whether respondent erred in restoring to petitioner's income in 1942 the amount of $ 10,087.02 representing percentage depletion deducted in 1941 on cash bonuses or advance royalties received by petitioner as lessor of oil and gas leases subsequently released without production in 1942. Petitioner contends that this inclusion is not required, since no tax benefit was derived from the depletion deductions in 1941. It argues its income tax for 1941 would have been exactly the same without such deductions, since the allowable deduction for a net operating loss carry-over from 1940 would have thereby been increased in exactly the same amount as the total allowable depletion.
*577 Petitioner filed its corporation income tax return for the taxable year ended December 31, 1942, with the collector of internal revenue for the district of Louisiana.
Such of the facts as were stipulated are so found and are incorporated herein by reference.
FINDINGS OF FACT.
Petitioner is a corporation, organized on December 9, 1929, under the laws of the State of Louisiana, with its principal office and place of business located in Shreveport, *229 where it is engaged in the manufacture and sale of hardwood lumber and flooring. During the taxable year 1941 petitioner, as lessor, executed a number of oil and gas leases upon which it received cash bonuses or advance royalties in the amount of $ 135,786.84, on account of which petitioner took and was allowed a deduction for percentage depletion in the amount of $ 37,341.38.
Petitioner had sustained a net operating loss of $ 41,484.09 in 1940, which it sought to deduct from its gross income in 1941. In the redetermination of petitioner's income tax liability for 1941, this Court, in Louisiana Delta Hardwood Lumber Co., 7 T. C. 994, held that the net operating loss carry-over of $ 41,484.09 should be disallowed as a deduction to the extent of the percentage depletion of $ 37,341.38 taken by petitioner and that only the difference of $ 4,142.71 was allowable as a net operating loss deduction for 1941.
During the taxable year 1942 certain of the leases were released, relinquished, and surrendered to petitioner. The leases so released were the following:
| Percentage | |||
| Bonus | depletion | ||
| Lease No. | Name of lease | received | deducted |
| in 1941 | in 1941 | ||
| 59-A | H. L. Hunt | $ 7,355.57 | $ 2,022.78 |
| 59-B | H. L. Hunt | 7,205.61 | 1,981.54 |
| 60 | May & Whatley | 717.30 | 197.26 |
| 61 | H. L. Hunt | 7,475.13 | 690.04 |
| 62 | Phillips Petroleum Co | 4,170.00 | 1,147.00 |
| 62-A | Phillips Petroleum Co | 4,818.60 | 1,325.12 |
| 63 | N. Hobson Wheless | 1,961.65 | 539.54 |
| 63-B | N. Hobson Wheless | 4,565.24 | 1,255.44 |
| 63-C | N. Hobson Wheless | 3,375.63 | 928.30 |
| Total | 41,645.93 | 10,087.02 |
*230 As to No. 61 above, H. L. Hunt, the total amount of depletion deducted in 1941 was $ 2,055.66, but the amount allocable to the portion of the lease surrendered in 1942 was $ 690.04, as shown above under "Percentage depletion deducted in 1941."
There was no production on any of the above leases at any time during 1941 and 1942. Dry holes drilled on the leased premises themselves or on nearby premises indicated the worthlessness for *578 oil production purposes of leases Nos. 59-A, 59-B, 61, 63, 63-B, and 63-C.
On petitioner's corporation income and excess profits tax returns for the taxable year ended December 31, 1942, petitioner did not restore to income the percentage depletion amounting to $ 10,087.02 allowed in 1941 on the leases released during 1942.
In his notice of deficiency respondent, under authority of Regulations 111, section 29.23 (m)-10 (c), restored the $ 10,087.02 depletion deducted on the relinquished leases to petitioner's gross income for 1942.
OPINION.
The sole question for our decision in this case is whether petitioner should have included in its gross income for the taxable year 1942 the sum of $ 10,087.02 representing percentage depletion deducted*231 in 1941 on bonuses or advance royalties received by petitioner as lessor of oil and gas leases which were relinquished in 1942 before any mineral was extracted therefrom. Respondent contends that such inclusion is required by Regulations 111, section 29.23 (m)-10 (c). 1
The first argument advanced by petitioner against this contention is that, while Regulations 111, section 29.23 (m)-10 (c), may have the force and effect of law*232 by virtue of Douglas v. Commissioner, 322 U.S. 275">322 U.S. 275, yet it applies only to cost depletion and not to percentage depletion. This point has been raised before, and it is now well established that the regulation covers both types of depletion. Both this Court and a Circuit Court have held that, where the statutory deduction for depletion on a bonus or advance royalty is taken on the percentage basis, and the lease is terminated before any mineral has been extracted, the taxpayer must restore to income the amount of such deduction as of the year of the termination of the lease. See Grace M. Barnett, 39 B. T. A. 864; J. T. Sneed, Jr., 40 B. T. A. 1136; affd., 119 Fed. (2d) 767; rehearing denied, 121 Fed. (2d) 725; certiorari denied, 314 U.S. 686">314 U.S. 686; and Dolores Crabb, 41 B. T. A. 686; affd., 119 Fed. (2d) 772 (remanded on another point, 121 Fed. (2d) 1015).
Petitioner next contends that it received no taxable income as defined *233 by section 22 (a) of the Internal Revenue Code upon the release *579 of the oil leases in 1942, because the surrendered leases had no value. This contention is answered in Douglas v. Commissioner, supra. As the Supreme Court there pointed out, the surrender of a lease returns to the taxpayer the right to extract without royalty the mineral for which the royalty was prepaid. The taxpayer is then in a position to again sell the right to extract the mineral or to develop the natural resource himself. The lessee paid for the right the amount attributed to the taxpayer's income. Irrespective of the actual value of the right at the termination of the lease, it is not unfair for a general regulation to put this value on the right restored to the taxpayer in the year of restoration. In fact, petitioner in the instant case admits that, as to leases Nos. 60, 62, and 62-A, their worthlessness for oil-producing purposes was never proved. Therefore, in line with Douglas v. Commissioner, supra, we reject the argument that no income was received by petitioner upon the surrender of the leases.
But petitioner argues that*234 Douglas v. Commissioner, supra, established no precedent for us to apply to the instant facts, since the depletion involved in that case was taken on the cost basis, rather than on the percentage basis. Yet the Supreme Court stated earlier, in Herring v. Commissioner, 293 U.S. 322">293 U.S. 322, that the nature and purpose of the allowance for cost and percentage depletion was the same and found neither statutory authority nor logical justification for distinguishing between them. Therefore, we think the decision in Douglas v. Commissioner, supra, would have been no different had percentage depletion been involved.
Finally, petitioner argues that Regulations 111, section 29.23 (m)-10 (c), does not require that a depletion deduction taken on an advance royalty be restored to income when the lease is relinquished without production where the taxpayer has not received a tax benefit therefrom, and, if it does so, it is invalid as opposed to Dobson v. Commissioner, 320 U.S. 489">320 U.S. 489. Petitioner considers that no tax benefit was received from the percentage depletion*235 deductions taken in 1941 because, though they were allowed in full, yet the deduction for the net operating loss carried forward from 1940 was thereby disallowed to the extent of the depletion deducted. Petitioner demonstrates that its income tax for 1941 would have been the same if the percentage depletion had not been taken, since the net operating loss carry-over would have then been allowed in full. The flaw in this argument is that petitioner actually received tax benefit from the percentage depletion taken in 1941, since it was fully effective to offset taxable income. It was the tax benefit of the full net operating loss carried forward from 1940 which petitioner failed to receive by its election to take percentage depletion. There is no such interrelationship between *580 the net operating loss in 1940 and the percentage depletion on the oil leases in 1941 that would justify their being treated as component parts of a single transaction so that when the leases were surrendered in 1942 petitioner thereby realized no economic gain. Consequently, the instant case falls outside the tax benefit doctrine set forth in Dobson v. Commissioner, supra.*236 Furthermore, in Douglas v. Commissioner, supra, decided after the Dobson case, the Supreme Court upheld the Circuit Court in denying the applicability of the tax benefit theory to the restoration of cost depletion taken in a prior year to income in the year when the mineral lease was surrendered without production, despite the fact that the taxpayer had received no tax benefit from the depletion deduction because she had sustained a net loss before taking it. Since in Herring v. Commissioner, supra, the Supreme Court has taken the view that cost depletion and percentage depletion allowances are the same in nature and purpose, the fact that the instant case deals with percentage depletion forms no valid basis for distinguishing it from Douglas v. Commissioner, supra, and we are thus bound by that decision on this point. Therefore, respondent's determination is sustained.
Decision will be entered for respondent.
Footnotes
1. Sec. 29.23 (m)-10. Depletion -- Adjustments of Accounts Based on Bonus or Advanced Royalty. * * *
* * * *
(c↩) If for any reason any grant of mineral rights expires or terminates or is abandoned before the mineral which has been paid for in advance has been extracted and removed, the grantor shall adjust his capital account by restoring thereto the depletion deductions made in prior years on account of royalties on mineral paid for but not removed, and a corresponding amount must be returned as income for the year in which such expiration, termination, or abandonment occurs.