*1753 1. The petitioner, as executor and trustee under the will of a decedent, received as such in the years 1916 to 1923, inclusive, royalties from coal leases entered into prior to March 1, 1913, with the exception of one lease, which was entered into June 1, 1917. The petitioner filed no return for 1916 and only fiduciary returns (Form 1041) for the other years, contending that the leases were really deeds to coal in place and the royalties were merely the sale price of the coal sold and under the terms of the trust became a part of the corpus of the trust estate and not distributable for many years, the date not now determinable, and therefore not income taxable to the trust and to be so returned by the executor and trustee. In the circumstances, more fully stated in findings of fact, held, such royalties to the extent determined by the respondent represent ordinary income and are taxable as such to the trust estate.
2. Held, the petitioner is entitled to deductions for expenses incurred in the administration of the trust in the amounts and for the years as stipulated.
3. Held, that the statute of limitations does not operate to bar assessment and collection of*1754 deficiencies for any of the years before the Board.
4. The assertion by the respondent of the 25 per cent penalty for delinquency in the matter of filing returns required by law, for the years 1922 and 1923, is approved.
*1192 The respondent determined deficiencies in income tax for the years 1916 to 1919, inclusive, under Docket No. 31919, for the year 1922 under Docket No. 28057, and for the year 1923 under Docket No. 36554, as follows:
| Year | Deficiency | Penalty for delinquency |
| 1916 | $700.43 | |
| 1917 | 3,936.65 | |
| 1918 | 8,779.36 | |
| 1919 | 9,631.39 | |
| 1922 | 4,143.03 | $1,035.76 |
| 1923 | 7,015.36 | 1,753.84 |
Notices of deficiencies were mailed for the years covered in Docket No. 28057 on March 9, 1927; in Docket No. 31919, on August 23, 1927; and in Docket No. 36554, on January 20, 1928.
*1193 The pleadings raise the following issues: (1) Whether the amounts, termed coal royalties, received by the petitioner during each of the years before the Board, constitute the sale price of coal sold prior to March 1, 1913, and as such are not taxable*1755 income, as insisted by the petitioner, or are, in the meaning of the Federal revenue law, in fact royalties from coal leases and represent income taxable to the petitioner, as determined by the respondent; (2) whether the amounts so received, if taxable, represent ordinary income or capital gain; (3) whether the petitioner is entitled to deductions for certain expenses incurred in the administration of the trust; (4) whether the statute of limitations has barred the assessment and collection of the proposed deficiencies for any of the years before the Board; and (5) whether the petitioner is liable for the 25 per cent penalty for delinquency for the years 1922 and 1923.
The cases have been consolidated for hearing and are submitted on the pleadings, stipulations, testimony and exhibits.
FINDINGS OF FACT.
The petitioner is the executor of and trustee under the will of Eli K. Price, deceased, and has his principal office in the city of Philadelphia, Pa.
Eli K. Price died November 15, 1884, leaving a will whereby he bequeathed to the petitioner and his coexecutors and trustees, since deceased, the residue of the testator's estate, which included certain coal lands. It was*1756 provided in said will that the income from the coal lands, if leased, was to be held in trust until the happening of certain events which have not yet occurred. Material provisions of the will touching the coal lands and directing how his estate should be managed are indicated by the following paragraphs of the will:
13. Situated as my estate will be when this Will shall take effect, its successful management will be a joint management, and that for a long time, that fields outside the City shall ripen into building lots and that the full value of the coal in the mineral lands shall get its price as it goes to market. This price, though in the form of rent or royalty, is truly the price of the freehold of the coal sold under ground, a separate fee determinable by its exhaustion. To preserve the capital intact the price must be reinvested, and the rent or interest to come from such investment is the true income to be paid to the beneficiaries. To spend the price of coal as income would not only impair the capital of my estate, but would tend to lead my grandchildren and their children into habits of expenditure that could not be maintained after the exhaustion of the coal; and*1757 I wish to avert such calamity from those whom I love and from those whom they love, and whom I love in anticipation, as those who will have derived their lives from me.
14. The said trustees shall hold their legal title, perform their trusts, and exercise all the powers conferred upon them, during the lives of my said son and grandchildren and of their children in being during my lifetime, and also *1194 during the minority of their children coming into being after my death; the life of the survivor of those in being during my life, or the majority of those coming into being after my death, whichever shall be the latest in time, to be the limit of all the trusts created and all the powers conferred by this Will; at which time the law in its legal rights and incidents will resume its control over the reversion, without affecting the rights become vested in anywise under this Will or its powers.
The coal lands were leased by seven separate instruments, three of them executed by the decedent and four executed by the executors of the estate. A brief summary of the provisions of the seven leases is as follows:
1. Lease dated December 31, 1869, whereby certain coal lands*1758 were leased to the Delaware, Lackawanna and Western Railroad Company, in accordance with which the lessee was to pay a royalty of 25 cents per ton for coal cleaned and loaded in cars for transportation to market.
2. Lease dated November 20, 1880, whereby certain coal lands were leased to John Jermyn, on the basis of a royalty of 6 per cent of the average price at Hoboken, N.J., with a minimum payment of 21 cents per ton for coal larger than pea coal.
3. Lease dated March 29, 1881, whereby certain coal lands were leased to Clarence M. Sanderson and Clarence D. Simpson, on a royalty basis of 6 per cent of the average price at Hoboken, N.J., with variations at stipulated prices per ton as to size.
4. Lease dated December 30, 1886, whereby certain coal lands known as the "Anderson Tract" were leased to the Pancoast Coal Company, on a royalty basis of 7 per cent of the monthly average price of coal at Hoboken, N.J., with a minimum royalty of 25 cents per ton and a royalty of 12 cents per ton for pea coal and smaller sizes.
5. Lease dated November 16, 1889, whereby certain coal lands were leased to the Rush Brook Coal Company, on a royalty basis of 30 cents per ton if selling*1759 price is $4 per ton or less, with an increase of 5 cents per ton on the basis of an increase of $1 per ton on the sale price.
6. Lease dated May 1, 1901, whereby certain coal lands were leased to the Delaware, Lackawanna and Western Railroad Company, on a basis of a royalty of 7 per cent of the average price at Hoboken, N.J., with a minimum of 28 cents per ton on large sizes, 15 cents on pea coal, 10 cents on Buckwheat No. 1 coal, 8 cents on Buckwheat No. 2, and 5 cents on rice, birdseye, or other smaller sizes and culm.
7. Lease dated June 1, 1917, whereby certain coal lands were leased to Frederick W. Seamon on a basis of a royalty of 10 per cent of the average price at Hoboken, N.J., with a minimum royalty of 50 cents per ton.
*1195 The royalties derived from the leases referred to were received by the trustees during the years in question and treated as part of the corpus of the estate, but the income from the investment of such funds was distributable to the beneficiaries of the trust.
During the respective years 1916 to 1919, inclusive, and the years 1922 and 1923, the petitioner received royalties and the respondent has allowed depletion in the amounts shown*1760 below:
| Year | Royalties | Depletion |
| 1916 | $71,245.26 | $39,231.00 |
| 1917 | 81,394.51 | 39,415.40 |
| 1918 | 97,132.33 | 54,165.59 |
| 1919 | 80,427.39 | 29,298.06 |
| 1922 | 56,759.02 | 24,224.10 |
| 1923 | 95,952.64 | 31,916.14 |
The petitioner failed to file any return for the year 1916. A fiduciary return (Form 1041) for the calendar year 1917 was filed by him March 26, 1918. A fiduciary return for the fiscal year, November 15, 1917, to November 15, 1918, was filed June 15, 1919, and a fiduciary return for the calendar year 1919 was filed March 15, 1920. No return is shown to have been filed for the period from November 16, 1918, to December 31, 1918. Fiduciary returns for the years 1922 and 1923 were duly filed and deficiency notices mailed March 9, 1927, and January 20, 1928, respectively. For none of the years did the petitioner as executor or trustee return as taxable income the coal royalties which he received. Petitioner as said executor and trustee filed no Form 1040 for any of the years involved, but refused to file such, insisting none was required and that no tax liability existed on account of any coal royalties received, and he never reported or returned such royalties*1761 in any form.
It is stipulated that the petitioner is entitled to deductions for expenses in the amounts shown below, which amounts were expended by the estate during the years in question. The full amount of $11,993.33 expended in the year 1923 was allowed by the respondent, but none of the other amounts was allowed.
| Items | 1916 | 1917 | 1918 | 1919 | 1922 | 1923 |
| Commissions | $2,137.36 | $2,441.84 | $2,913.97 | $2,412.82 | $1,702.77 | $2,878.09 |
| Salaries | 600.00 | 600.00 | 600.00 | 600.00 | 720.00 | 720.00 |
| Taxes | 4,319.35 | 4,427.37 | 421.50 | 4,264.23 | 5,609.22 | 6,134.69 |
| Other expenses | 7.36 | 367.69 | 18.40 | .96 | 2,000.00 | 2,260.55 |
| Total | 7,064.07 | 7,836.90 | 3,953.87 | $7,278.01 | 10,031.99 | 11,993.33 |
It is further stipulated that in the computation of taxable net income as shown by notices of deficiency the respondent included *1196 income to the petitioner from the Se-Rob Coal Company for the years 1918, 1919, 1922, and 1923, as follows:
| Year | Income to petitioner | Allowable depletion |
| 1918 | $2,495.67 | $1,209.89 |
| 1919 | 1,627.37 | 729.77 |
| 1922 | 15,802.15 | 5,822.72 |
| 1923 | 12,967.62 | 4,758.59 |
OPINION.
SEAWELL: We will consider the*1762 questions raised in the order stated.
1. The petitioner contends that under the laws of the State of Pennsylvania the coal leases herein considered constitute a sale of the coal in place and cites authorities to sustain his contention.
We do not deem it necessary to discuss the question at length, for the reason that the decisions of the courts of that State to such effect, if conceded, are not determinative nor controlling of the issues before us for decision.
In Rosenberger v. McCaughn, 25 Fed.(2d) 699 (certiorari denied, 278 U.S. 604">278 U.S. 604), the court said:
It is established beyond question that the law of the state in which property is situated governs federal courts in many things; in descent, alienation and transfer and the effect and construction of wills (De Vaughn v. Hutchinson,165 U.S. 566">165 U.S. 566, 17 S. Ct. 461">17 S.Ct. 461, 41 L. Ed. 827">41 L.Ed. 827); but whether it governs the federal government in the performance of its sovereign power to levy taxes is another question, and is the precise question here.
True, state decisions sometimes control federal legislation, for instance, in determining a deduction allowed by the federal estate tax, *1763 but that is because of the express provision - or permission - of the federal act which authorizes deduction of such charges as "are allowed by the laws of the jurisdiction * * * under which the estate is being administered." Lederer v. Northern Trust Co. (C.C.A.) 262 F. 52">262 F. 52. But whether the federal government is limited in its selection of subjects for taxation by rules of state courts in respect to property within the state's jurisdiction is another matter and it is one on which the Supreme Court in Von Baumbach v. Sargent Land Co.,242 U.S. 503">242 U.S. 503, 518, 37 S. Ct. 201">37 S.Ct. 201, 61 L. Ed. 460">61 L.Ed. 460, did not feel called upon to pass, although the question there, like the one here, was whether royalties or rents were income, and the mere following of the state rule would have been an easy way to decide the question. In that case a Minnesota contract of "lease" substantially like the Pennsylvania contract of "sale" in this case was under consideration. That contract of lease, as the Supreme Court noted, was of a class adjudged by the courts of Minnesota and other states to be a lease as distinguished from the opposite holding by Pennsylvania courts that it is a*1764 sale. After quoting the reasoning of Minnesota courts on such instruments, the Supreme Court said in respect to its duty to follow the state rule:
"These conclusions of the Supreme Court of Minnesota are not only made concerning contracts in that state, such as are here involved, but are supported by many authorities. Ordinarily, and as between private parties, there is no *1197 question of the duty of the federal court to follow these decisions of the Minnesota Supreme Court, as a rule of real property long established by state decisions. * * * Whether in considering this federal statute we should be constrained to follow the established law of the state, as is contended by the government, we do not need to determine. The decisive question in this case is whether the payments made as so-called royalties amount to income so as to bring such payments within the scope of the Corporation Tax Act of 1909 [36 Stat. 112]."
Such being the question, the Supreme Court itself construed the instrument there in question in order to determine whether the payments that were made under it were proceeds of sale, capital, or income. Wholly aside from the construction which the*1765 Minnesota courts had placed upon instruments of that kind and solely because of the nature of the payments themselves, the Supreme Court, as we read its opinion, held that the instrument there in question did not effect a sale of the property, that is, of the ore in place (United States v. Biwabik Mining Co.,247 U.S. 116">247 U.S. 116, 126, 38 S. Ct. 462">38 S.Ct. 462, 62 L. Ed. 1017">62 L.Ed. 1017), and that the moneys derived from mining and paid under the instrument were not converted capital, but were royalties or rents, and as such were income, proper to be included in measuring taxes under the applicable revenue act, within the rule of Stratton's Independence v. Howbert,231 U.S. 399">231 U.S. 399, 34 S. Ct. 136">34 S.Ct. 136, 58 L. Ed. 285">58 L.Ed. 285, and Stanton v. Baltic Mining Co.,240 U.S. 103">240 U.S. 103, 36 S. Ct. 278">36 S.Ct. 278, 60 L. Ed. 546">60 L.Ed. 546. * * *
Rosenberger v. McCaughn, supra, is a Pennsylvania case, in which the issues and facts are similar to those involved in the instant case, and it was there held that the amounts received from mining properties in accordance with the terms of a testamentary trust, by which the amounts or rents due an estate under an agreement entered into prior to March 1, 1913, demising*1766 to another all the coal in place in consideration of monthly rents, were to be paid to designated beneficiaries, consist of both a return of capital in place of the coal mined and taxable income and are not simply proceeds from the sale of assets of the grantor.
In view of such decision, and in accordance therewith and other decisions hereinafter cited, we are of the opinion that, inasmuch as the amounts of depletion allowed by the respondent represent the return of capital and as such amounts are not shown to be erroneous, the income from royalties during the respective years, as determined by the respondent, is subject to tax.
In Arthur H. Fleming et al.,6 B.T.A. 900">6 B.T.A. 900, 905, we stated: "That royalties from mining ore are income and not the return of capital has been settled ever since the decisions in Stratton's Independence v. Howbert,231 U.S. 399">231 U.S. 399; 34 Sup.Ct. 136; and Von Baumbach v. Sargent Land Co.,242 U.S. 503">242 U.S. 503; 37 Sup.Ct. 201."
To the same effect, see *1767 W. P. Ferguson,20 B.T.A. 130">20 B.T.A. 130, affirmed in 45 Fed.(2d) 573, as to our decision in the matter of royalties, the court saying:
We conclude that the bonuses or cash payments for the leases were capital gains and taxable as such.
*1198 On the other hand, royalties represent the retained interest of the lessor or vendor in the property or minerals which he receives from time to time as revenues under the contract. He did not convey that interest under the deed or lease but provided that he should receive a fraction of the minerals themselves as produced. This part of his capital asset is protected and returned by another provision of the Revenue Act, to-wit, Sec. 214(a), which allows an annual deduction for depletion, based upon production and the estimated life of the pool or deposit. For this reason the royalties cannot be considered as a capital gain.
We are of the opinion that the respondent did not err in his determination that the royalties received from the coal leases involved constituted income taxable to the petitioner to the extent determined by the respondent.
2. The petitioner has contended that if any of the income from royalties*1768 is found to be taxable, the tax should be assessed on only so much thereof as constitutes capital gain.
Section 206(a)(1) of the Revenue Act of 1921 reads:
SEC. 206. (a) That for the purpose of this title:
(1) The term "capital gain" means taxable gain from the sale or exchange of capital assets consummated after December 31, 1921.
The petitioner in the instant cases contends that the sales were all consummated prior to December 31, 1921, and it would, therefore, appear that the income in question does not come within the provisions of the capital net gain section. However, the Board has previously held that royalty income from leases is not capital gain as defined in section 206 of the Revenue Act of 1921. J. D. Reynolds,10 B.T.A. 651">10 B.T.A. 651; Henry L. Berg,6 B.T.A. 1287">6 B.T.A. 1287; affirmed by Court of Appeals, District of Columbia, 33 Fed.(2d) 641; certiorari denied, 280 U.S. 598">280 U.S. 598.
3. It is admitted by the respondent that the expenses set forth in our findings of fact and claimed as allowable deductions by the petitioner are such, the full amount of $11,993.33 claimed for the year 1923 having been allowed in respondent's computation. *1769 This question is disposed of by stipulation.
4. The petitioner contends that the statutes of limitations bar the assessment and collection of the deficiencies in tax determined by the respondent for the years 1916, 1917, 1918 and 1919, all of which years are covered by Docket No. 31919. The deficiency notice relating to such years was mailed August 23, 1927.
No income-tax return was filed by the petitioner for the year 1916, and he insists that in the event of such neglect or failure section 9(a) of Title I of the Revenue Act of 1916 required the respondent, "upon the discovery thereof, at any time within three years after said return is due, or has been made, to make a return upon information," or require the necessary corrections to be made, before any legal *1199 assessment might be made by the respondent, and no return having been so made within three years of the due date of the tax return, assessment is barred.
Section 277(a)(3) of the Revenue Act of 1926, in part, provides:
The amount of income, excess-profits, and war-profits taxes imposed by * * * the Revenue Act of 1916, the Revenue Act of 1917, and the Revenue Act of 1918, and by any such Act as amended, *1770 shall be assessed within five years after the return was filed * * *.
No return, as already stated, was filed for the year 1916 and as to it no statute of limitation became operative and the determination of deficiency in tax made by the respondent is approved. See Ginn-Coleman Co.,12 B.T.A. 550">12 B.T.A. 550, 555; Henry R. Fishel et al.,14 B.T.A. 87">14 B.T.A. 87, 89; Updike v. United States, 8 Fed.(2d) 913. The evidence shows fiduciary returns (Form 1041) were filed as set out in our findings of fact, but that no return (Form 1040) was ever filed for any of the years by the petitioner in his capacity as executor and trustee showing the receipt by him of taxable income from coal royalties. No return of any character is shown to have been filed for the period from November 16, 1918, to December 31, 1918. No explanation is shown by the evidence why fiduciary returns were sometimes made on the calendar year basis and at other times on fiscal year basis. Neither the fiduciary returns for calendar years nor the fiscal years, nor the two when taken together, cover the entire year 1918.
The evidence shows that petitioner's failure to return taxable*1771 income received by him as executor was not due to inadvertence or oversight, but to difference of opinion between him and the respondent regarding the character of the same. Petitioner testified in the case and was asked by his counsel: "Now, prior to the deficiency notice dated August 25, 1927, relating to the years 1916 to 1919, inclusive, had there been any communication between you and the Department as to the subject matter of this appeal?" To which he replied: "The Department had written to me several times asking whether we had made or intended to make any return, and I had a number of interviews with the proper person designated to represent the Commissioner, and the correspondence dates back as early as the beginning of 1921, our position always being in each case that we were not liable to make any such return or pay any tax on the proceeds of sale of these coal receipts and we never have made any such return yet." He also stated that the "coal royalties" were frequently a subject of discussion and correspondence. The evidence shows that the petitioner should have filed for each of the years before the Board not only Form 1041, but also Form 1040, as the coal royalties*1772 he was receiving were income taxable to the trust. He *1200 did not file both returns, nor did he make any return of such royalties, relying upon his own judgment or that of his advisers that such royalties were not taxable income to the trust, though the contrary, as shown by the evidence, was contended by the respondent or his representatives, of which petitioner had full knowledge and deliberately disregarded at his peril. The respondent contends - and we think correctly - that under the circumstances the petitioner has failed to file required returns according to law and has not for any of the years involved filed such returns as made operative any statute of limitation barring assessment and collection of the income tax determined by the respondent, subject to the adjustments for the allowance of certain expenses stipulated and set out in our findings of fact.
The petitioner, relying on the plea of the statute of limitations, cites Abraham Werbelovsky, Executor,8 B.T.A. 442">8 B.T.A. 442, which case is clearly distinguishable from the instant case and not controlling herein. See also *1773 Cantrell & Cochrane, Ltd.,19 B.T.A. 16">19 B.T.A. 16, 26.
5. No penalty for delinquency in the matter of filing returns is asserted or sought, except for the years 1922 and 1923.
Section 250(d) of the Revenue Act of 1921, in part, provides: "* * * in the case of a false or fraudulent return with intent to evade tax, or of a failure to file a required return, the amount of tax due may be determined, assessed, and collected * * *." In the instant case no fraud is alleged or shown, nor is such necessary in order to subject petitioner to the penalty prescribed in section 3176 of the Revised Statutes of the United States for delinquency in not filing a required return, "within the time prescribed by law or prescribed by the Commissioner of Internal Revenue or the Collector in pursuance of law."
The "failure to file a required return" may not subject the tax-payer to the penalty when a proper return is thereafter filed "and it is shown that the failure to file it was due to a reasonable cause and not to willful neglect."
The petitioner appears from the evidence to have determined to file no other returns than his fiduciary returns, Form 1041, and has continued to adhere to such*1774 determination despite the controversy with the Commissioner as to the coal royalties being taxable income.
Petitioner's case is not similar to Adelaide McColgan,10 B.T.A. 958">10 B.T.A. 958, relied on, and the latter furnishes no support for petitioner's contention.
In the circumstances disclosed by the evidence, we are of the opinion that the Commissioner did not err in asserting the penalty for the years 1922 and 1923 and accordingly approve his deficiency determination. See Cheney D. Washburn,7 B.T.A. 483">7 B.T.A. 483; Edwin T.*1201 Foreman,10 B.T.A. 981">10 B.T.A. 981, 984; Beam v. Hamilton,289 Fed. 9; Cantrell & Cochrane, Ltd., supra, and authorities therein cited.
Judgment will be entered in each case under Rule 50.