*2473 1. DEPRECIATION. - A reasonable allowance for depreciation of construction and machinery equipment used by the petitioner in mining coal during the fiscal year ended April 30, 1921, found to be 8 per cent of the amount carried in the capital asset account.
2. DEPLETION. - The petitioner during the fiscal year ended April 30, 1921, mined 74,760 tons of coal owned under mining rights on March 1, 1913. It is entitled to a depletion deduction for that year in an amount found by applying the per-ton unit rate based upon the March 1, 1913, value of the coal in the ground to the entire production of said fiscal year.
3. INVESTED CAPITAL. - Coal-mining rights acquired by the petitioner over a long period of years both before and after March 1, 1913, should be reflected in invested capital for the fiscal year ending April 30, 1921, in the amount of their cost, against which there should be reflected a reserve for depletion based upon the cost of the original coal content, but in no event greater than the sum of the allowable deductions from gross income during the years of operation.
*984 In this proceeding the petitioner seeks a redetermination of its income and profits-tax liability for the fiscal year ending April 30, 1921, for which the respondent has determined a deficiency of $2,157.30. Petitioner alleges error on the part of the respondent (1) in failing to allow an adequate deduction for depreciation; (2) in failing to allow an adequate deduction for depletion of coal property; (3) in reducing invested capital by an amount of $16,407.97.
At the trial petitioner was permitted to amend its petition so as to claim a depreciation deduction upon mining construction and equipment at the rate of 15 per cent instead of 10 per cent as originally claimed. The respondent was permitted to amend his answer by making affirmative allegations to the effect that a certain construction and equipment account upon which depreciation was claimed and which was reflected in invested capital should be either entirely eliminated or largely reduced on account of prior exhaustion and depreciation.
FINDINGS OF FACT.
Petitioner is a corporation, organized in 1886 under the laws of the State of Indiana, with principal offices at*2475 Evansville. It is engaged *985 in the business of operating a coal mine on the No. Five Vein of coal in the City of Evansville.
Soon after date of organization petitioner acquired "Sunnyside Mine and Equipment," which represented a tipple, shaft, underground workings, fan, outside chutes, pipe lines, and haulage equipment. These assets were carried on the books as Sunnyside Mine and Equipment, as shown below:
| Dec. 31, 1899 | $107,682.81 |
| Dec. 31, 1905 | 107,682.81 |
| Dec. 31, 1912 | 100,047.60 |
| May 1, 1917 | 100,047.60 |
| May 1, 1918 | $100.047.60 |
| May 1, 1920 | 100,047.60 |
| May 1, 1921 | 100,047.60 |
Prior to the year 1916, the petitioner did not set up a reserve for depreciation of these assets, but made large expenditures for replacements, betterments and additions to property during those years which were charged to expense. Commencing with the year 1916, petitioner changed its policy by establishing a depreciation reserve to offset depreciation sustained on the property, but the policy of charging replacements, betterments, and additions to expense was not then changed.
The petitioner also owned and used in its business other depreciable property, the asset*2476 value of which is not here in question.
For the years ending in 1917 and 1918 the petitioner took depreciation on its assets at approximately 5 per cent per year. For the fiscal year ending April 30,1921, it claimed depreciation at the rate of 10 per cent, and was allowed depreciation by the respondent at the rate of 8 per cent. The 10 per cent rate was based upon a claim for accelerated depreciation and obsolescence brought about by what was termed a "squeeze" in a portion of the mine workings which required the expenditure of large amounts of money for timbering and repairing, beginning with the year 1920. These costs were placed upon the books in an account known as "Development and Improvement." During the fiscal year ending April 30, 1921, expenditures were made for repairing the tipple which, according to the testimony, amounted to some $9,000. The 10 per cent rate was also based upon a claim of obsolescence due to the fact that strip mining was being adopted in the adjoining county and also due to the action of the mine inspectors which resulted in closing the mine for a period until certain improvements could be made.
On March 1, 1913, petitioner owned certain leaseholds*2477 on coal lands and also held fee title to certain coal rights in other lands. The depletion claimed is in respect to the fee-owned rights only. It has been stipulated that on March 1, 1913, the petitioner owned in fee 447,000 tons of coal. This coal was acquired at various times *986 prior to March 1, 1913, and the cost thereof as shown by the books up to March 1, 1913, was $28,922.09. Subsequent purchases were made as follows:
| 1914 | $50.00 |
| 1917 | 60.00 |
| 1917 | 7.50 |
| 1917 | 65.00 |
| 1917 | 150.00 |
| Apr. 30, 1918 | 3,000.00 |
| Total | 3,332.50 |
making a total cost to April 30, 1918, of $32,254.09. Prior to March 1, 1913, the petitioner had written off $21,172.09 of this amount, and prior to April 30, 1918, it had set up a reserve for depletion of $1,216.62. It had requested that the amount of $21,172.09 be restored to capital, which was permitted by the Commissioner in years prior to the one at issue.
In computing depletion the petitioner used the cost of its coal lands as a basis, resulting in a rate of depletion of 6.4799 cents a ton. This rate was allowed by the Commissioner for the years 1917 and 1918. In June, 1923, the Commissioner determined that the fair*2478 market value of the coal content of the lands of the petitioner at March 1, 1913, was $14,630, and accordingly for the fiscal years ending April 30, 1919, and April 30, 1920, a rate of 3.2677 cents a ton, based upon this value, was allowed. The Commissioner also set up an amount for the years 1915 and 1916 as depletion sustained, computed upon the 3.2677 rate. The total depletion thus computed by the Commissioner to May 1, 1920, was $13,925.29, and the Commissioner allowed for the year ending April 30, 1921, only the difference between this amount and the fair market value at March 1, 1913, of $14,630, or $704.71.
The tons mined and the depletion allowed computed by the Commissioner for the various accounting periods subsequent to March 1, 1913, were as follows:
| Year | Tons mined | Depletion allowed |
| 1915 | 11,289 | 1 $368.90 |
| 1916 | 22,134 | 1 723.29 |
| 1917 to Feb. 5, 1917 | 24,178 | 2 1,566.73 |
| May 1, 1917, to May 1, 1918 | 96,311 | 2 6,240.95 |
| May 1, 1918, to May 1, 1919 | 89,660 | 2 2,929.91 |
| May 1, 1919, to May 1, 1920 | 64,126 | 2 $2,095.51 |
| May 1, 1920, to May 1, 1921 | 74,760 | 2 704.71 |
| 382,458 | 14,630.00 |
*2479 In computing invested capital the respondent, finding the petitioner's coal rights and privileges set up on some balance sheet theretofore *987 presented in the amount of $31,037.97, subtracted from this figure the March 1, 1913, value of the coal content of the lands in the amount of $14,630 and eliminated the balance of $16,407.97 from invested capital.
OPINION.
TRUSSELL: (1) As regards the issue of depreciation, we are of the opinion that the testimony furnished by the petitioner does not support petitioner's claim either for accelerated depreciation or obsolescence. We are also convinced that the record as made fails to support the affirmative allegations made in the respondent's amended answer, and we, therefore, conclude that the computations made by the respondent, the results of which are shown in the deficiency letter, provide for the period under consideration an entirely reasonable allowance for depreciation of the properties involved and that the Commissioner's determination as set forth in his deficiency letter should not be modified, and that the 8 per cent rate used furnishes in all respects a reasonable allowance. The testimony concerning the asset*2480 item here under consideration also fails to support the affirmative allegations of the Commissioner's answer that invested capital should be modified on account of prior exhaustion of this asset account.
(2) The petitioner began mining coal from its so-called fee property in the year 1915. During the year 1915 the petitioner was entitled to a deduction for depletion under the provisions of the Revenue Act of 1913, section II, subdivision G(b) (second) -
* * * All losses actually sustained within the year and not compensated by insurance or otherwise, including a reasonable allowance for depreciation by use, wear and tear of property, if any; and in the case of mines a reasonable allowance for depletion of ores and all other natural deposits, not to exceed 5 per centum of the gross value at the mine of the output for the year for which the computation is made; * * *.
During the calendar years 1916 and 1917 the petitioner was entitled to depletion deductions under the provisions of the Revenue Act of 1916, section 12, subdivision (b), second -
* * * (b) in the case of mines a reasonable allowance for depletion thereof not to exceed the market value in the mine of the product*2481 thereof which has been mined and sold during the year for which the return and computation are made, * * *.
For the subsequent periods of January 1, 1918, to the close of the fiscal year here under consideration the petitioner was and is entitled to deductions for depletion under the provisions of the Revenue Acts of 1918 and 1921, section 234(a)(9) -
In the case of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, *988 according to the peculiar conditions in each case, based upon cost including cost of development not otherwise deducted: Provided, That in the case of such properties acquired prior to March 1, 1913, the fair market value of the property (or the taxpayer's interest therein) on that date shall be taken in lieu of cost up to that date: * * *.
The comparable section and provisions of the Act of 1921 are in substantially the same language as the above quoted portion of the Act of 1918.
The respondent has applied the unit of depletion found under the provisions of the 1918 Act to the coal mined in the calendar years 1915 and 1916 and set up a hypothetical depletion*2482 reserve for those years based upon that computation. For the period from January 1, 1917, to April 30, 1917, he has allowed a depletion deduction in the amount of $1,566.73, and for the fiscal year ended April 30, 1918, in the amount of $6,240.95. For the following years he has applied the unit rate of 3.2677 cents upon the coal removal. He thus found that an allowance for depletion in the year ended April 30, 1921, in the amount of $704.71 completes the total of the March 1, 1913, value.
In making this computation the Commissioner appears to have entirely overlooked the fact that under the 1913 Act the petitioner was entitled to a depletion deduction upon an entirely different basis from that provided in the Acts of 1918 and 1921, and that for the calendar years 1916 and 1917 the petitioner was again entitled to depletion deductions upon an entirely different basis than under the 1913 Act or the subsequent Acts of 1918 and 1921.
Under the provisions of the Acts of 1913 and 1916 the amount which a taxpayer was entitled to recover through depletion was wholly different under each of said Acts as well as under the Acts of 1918 and 1921, and we are of the opinion that the amounts*2483 allowable under the 1913 and 1916 Acts whether greater or less than the amounts allowable under the later Acts should not be permitted to limit the depletion deductions authorized by the Acts of 1918 and 1921. And, if it may be that under the 1913 and 1916 Acts an amount may have been allowed as a deduction greater than the amount authorized by law, the remedy is in seeking a revision of the tax returns for those years and not in depriving the taxpayer of his authorized deduction under the 1918 and 1921 Acts. Cf. United States v. Ludey,274 U.S. 295">274 U.S. 295; 47 Supreme Court 608, 611, where the court said:
* * * If in any year he has failed to claim, or has been denied, the amount to which he was entitled, rectification of the error must be sought through a review of the action of the bureau for that year.
On March 1, 1913, the petitioner owned coal in the ground in the amount of 447,000 tons. Prior to May 1, 1920, the petitioner had *989 removed 307,698 tons of this same coal. During its fiscal year ended May 31, 1921, it had removed 74,760 tons of this same coal and under the provisions of the Revenue Acts of 1918 and 1921, the petitioner*2484 is entitled to a deduction for each ton of coal mined in an amount based upon the agreed March 1, 1913, value, which amount is 3.2677 cents per ton.
(3) The respondent's elimination of $16,407.19 from invested capital was erroneously made. The March 1, 1913, value of a capital asset has no relation to the computation of invested capital and in the situation here presented the petitioner's asset item of coal lands and coal rights should be reflected in invested capital for the fiscal year ended April 30, 1921, in the amount of their cost, which we have found to be $32,254.09, but against which there should be charged the amount of a depletion reserve found by applying the cost per ton of the original estimated coal content of the mine to the number of tons removed, but in no event greater than the amount of depletion actually allowable as deductions from gross income during the years of operation.
The deficiency should be recomputed in accordance with the foregoing opinion.
Reviewed by the Board.
Judgment will be entered upon 15 days' notice, pursuant to Rule 50.