*2574 1. Royalties received under leases of coal lands are held to constitute gross income and not proceeds from the sale of coal in place.
2. Money received in compromise of a suit to recover the value of coal extracted by a trespasser, plus damages to the property held, on the record, to constitute taxable income.
3. Proper depletion rate per ton of coal mined determined.
*901 These proceedings, consolidated for hearing and decision, involve deficiencies as follows:
| Docket No. | Year | Deficiency |
| 14517 | 1920 | $6,797.56 |
| 14516 | 1921 | 7,871.64 |
| 1922 | 4,149.24 | |
| 1923 | 4,113.67 | |
| 42664 | 1924 | 3,362.17 |
| 1925 | 6,419.04 | |
| 1926 | 7,138.67 | |
| 10472 | 1919 | $863.62 |
| 1920 | 1,181.02 | |
| 1921 | 1,123.48 | |
| 25275 | 1922 | 2,549.05 |
| 1923 | 1,817.77 | |
| 32170 | 1924 | 95.09 |
| 1925 | 1,144.47 |
In the petitions of Bankers Pocahontas Coal Co. (Docket Nos. 14517, 14516, and 42664), the first contention made is that there is no tax due, upon the ground that the amounts received by*2575 the petitioner during the taxable years represented installment payments upon the sales of coal in place, which coal had been sold prior to March 1, 1913.
*902 The second contention is that if the Bankers Pocahontas Coal Co. is to be considered as a lessor, then the amount of depletion which has been allowed to that company has been erroneously computed by the respondent.
For the year 1920 there are two incidental questions which simply amount to the inclusion in 1920 of income which was previously reported for 1919. For 1924 there is an incidental question arising by reason of damages received by the petitioner, the contention being that the amount received as damages to property is not properly includable in gross income.
The contentions in the petitions of D. J. F. Strother (Docket Nos. 10472, 25275, and 32170 are:
(1) That the petitioner received no taxable income when he received distributions from Bankers Pocahontas Coal Co., claimed by the petitioner to be tax-exempt by reason of being distributions of a part of the capital of that company;
(2) That the depreciation rate properly allowable to the Bankers Pocahontas Coal Co., if not properly allowed, has*2576 distorted his income;
(3) That the Bankers Pocahontas Coal Co., has made distribution each year of all of its revenues derived from its contracts; that it has accordingly distributed its depletion reserve and that the petitioner should be entitled to an allowance for that depletion reserve in the computation of dividends received from it.
FINDINGS OF FACT.
In July, 1912, the Bankers Pocahontas Coal Co., a West Virginia corporation (hereinafter sometimes called the corporation), acquired the fee simple title to approximately 6,200 acres of coal lands, including both the surface and the mineral rights in the State of West Virginia. The land had no appreciable value except for the coal content.
Upon incorporation in 1912, the corporation acquired by formal assignment and has continued to retain the beneficial interest of the original owners in certain contracts affecting the coal content which were executed in 1901 and 1902 with various operating companies and to which contracts the 6,200 acres and coal content were subject.
These contracts were originally prepared by D. J. F. Strother, who at that time was attorney, director, and stockholder in the predecessor corporations. *2577 The form of the contracts is that prevailing in the West Virginia coal fields, which followed the Pennsylvania form of contracts as introduced by Pennsylvanians who were largely instrumental in the early coal development in the West Virginia field.
*903 By agreement of parties a copy of such contracts was offered and received in evidence as typical of the several contracts existing on the acreage acquired by the corporation in 1912. The specimen contract provides in part as follows:
This contract of lease, made this 17th day of June, 1901, between the Tug River Coal Land Company, a corporation, authorized and doing business under and by virtue of the laws of the State of West Virginia, party of the first part, hereinafter called the Lessor, and the Cletus Coal and Coke Company, a like corporation, hereinafter called the Lessees.
Witnesseth: First: That in consideration of the terms, conditions and stipulations hereinafter set forth to be performed and observed by the lessees, the Lessor doth demise, let and lease for coal mining and coal cokeing purposes only, to the lessee, for the period of thirty (30) years, from the 1st day of January, 1901, a certain tract of*2578 land situate, lying and being in the County of McDowell and State of West Virginia, on the waters of Tug River containing eight hundred acres, more or less and bounded and described as follows: (Description omitted)
The Lessor covenants to and with the said Lessee that it has good right and title to said land, and that the said Lessee shall have quiet, and peaceable enjoyment of the same during the continuance of this lease.
SECOND: The Lessees shall have the sold and exclusive privilege of mining and coking coal on the above described premises and of conducting a general mercantile business thereon during the continuance of this lease, and the privilege of using so much of the surface of said land and so much of the timber, stone, sand, clay and water as may be necessary for the mining, coking and building purposes of said Lessees, but for no other purpose.
* * *
THIRD: In consideration thereof, the Lessees hereby covenant and agree to pay to the Lessor, its successors and assigns, during the continuance of this lease, as rental for the said premises, the following royalties, to-wit: Ten (10) cents per ton for each and every ton of 2240 pounds of coal mined, dug, carried*2579 away from or sold or used on the said premises for any other purpose than the manufacture of coke; and fifteen (15) cents for each and every ton of 2240 pounds of coke manufactured upon the said premises, and sold thereon or therefrom. * * *
* * *
SEVENTH: The Lessees agree and bind themselves to pay to the Lessors the sum of three thousand dollars for the first year, dating from the 1st day of November, 1901, and the sum of five thousand dollars for each and every year thereafter, during the continuance of this lease, as a minimum rental or royalty for the property herein demised, whether the quantity of coal mined and coke manufactured shall produce that amount of royalty or not, but the Lessees shall have the privilege of mining the next succeeding year, free of royalty, a sufficient amount of coal above the amount necessary to produce the minimum royalty for that year to reimburse themselves for the deficiency in the preceding year. * * *
* * *
NINTH: The Lessees agree to pay all the taxes that may be assessed against the demised property and the improvements thereon, or upon the coal mined or coke manufactured, during the continuance of this lease, all other assessments*2580 by operation of law whatsoever, when and as the same may become due.
* * *
ELEVENTH: *904 At the termination of this lease, otherwise than by forfeiture, all the improvements placed upon the said surface of the demised premises, by the Lessees, shall be valued by two disinterested persons, one to be chosen by each of the parties hereto, and in case of their disagreement, these two shall choose a third, and the persons thus chosen shall value said improvements, and the Lessor shall have the privilege of purchasing said improvements at such valuation, within thirty (30) days after notice thereof. If the Lessor shall not, within said thirty days, accept said improvements, at such valuation, the Lessees shall have the privilege of removing the same from the leased premises within the period of ninety days from the expiration of said thirty days.
TWELFTH: The Lessees shall have the right to at the expiration of the said thirty years, renew this lease, with the terms, stipulations and agreements as herein set forth, provided that they shall have complied with and performed all the conditions, covenants, agreements and stipulations to be by them complied with or performed.
*2581 THIRTEENTH: It is hereby mutually understood and agreed that the covenants, agreements, stipulations herein contained to be performed by the one party or the other, shall be binding on the parties hereto, their successors and assigns.
IN WITNESS WHEREOF, the parties hereto have caused these presents to be signed in their corporate names by their respective presidents, and their corporate seals to be hereunto affixed as of the day and year first above written.
All of these agreements were in the main, with the exception as to minor and nonessential provisions, the same as the sample agreement set forth above as the Cletus lease.
From time to time these agreements were reassigned by the lessees to new and different operating lessees, largely with the permission of the lessor corporation.
The cost to the corporation of the properties acquired by it was between $407,000 and $507,000.
The contracts on the property on March 1, 1913, are shown by the following:
| SCHEDULE 1. - Contracts on March 1, 1913 | ||||
| Lease No. | Lessee at March, 1913 | Approximate acreage | Royalty per ton | Minimum royalty per annum |
| Cents | ||||
| 1 | Vaughan Coal & Coke Co | 1,000 | 8 | $5,000 |
| 2 | Superior Pocahontas Coal Co | 1,200 | 10 | 5,000 |
| 3 | New Pocahontas Coal Co | 1,300 | 7 | 4,000 |
| 4 | Oregon Coal & Coke Co | 2,000 | 10 | 10,000 |
| 5 | Pocahontas Smokeless Coal Co | 600 | 5 | None. |
| 6 | J. B. B. Coal Co | 100 | 1 1 | 300 |
The estimated recoverable tonnage on March 1, 1913, is shown by the following:
| SCHEDULE 2. - Estimated recoverable tonnage on March 1, 1913 | ||
| Lease No. | Lessee | Tons |
| 1 | Vaughan Coal & Coke Co | 2,416,452 |
| 2 | Superior Pocahontas Coal Co | 2,309,444 |
| 3 | New Pocahontas Coal & Coke Co | 3,773,835 |
| 4 | Oregon Coal & Coke Co.: | |
| Upper or Welch seam | 4,906,902 | |
| Lower seam | 22,765,666 | |
| 5 | Pocahontas Smokeless Coal Co | 493,172 |
| 6 | J. B. B. Coal Co | 943,171 |
| Total | 37,608,642 |
*905 The tonnage mined and royalty receipts of the corporation for the years 1913 to 1919, inclusive, is shown by leases as follows:
| Lease No. | Tonnage mined | Royalty receipts |
| 1 | 393,379 | 34,497.20 |
| 2 | 528,255 | 61,263.41 |
| 3 | 571,502 | 52,352.49 |
| 4 | 472,980 | 77,465.45 |
| 5 | 250,601 | $11,874.92 |
| 6 | 664,991 | 6,641.15 |
| Total | 2,881,708 | 244,094.62 |
The tonnage mined, the tonnage paid for, and the royalty receipts for the taxable years involved in these proceedings are shown by the following:
| LEASE No. 1. - Fall River Pocahontas Collieries Co. | |||
| Year | Tonnage mined | Paid for | Receipts |
| 1920 | 71,594 | 71,593 | $5,727.48 |
| 1921 | 98,587 | 98,587 | 7,886.98 |
| 1922 | 85,132 | 85,132 | 6,810.55 |
| 1923 | 81,373 | 81,373 | 6,509.88 |
| 1924 | 95,859 | 85,859 | 7,668.72 |
| 1925 | 81,552 | 81,557 | 6,524.16 |
| 1926 | 90,764 | 90,765 | 7,261.12 |
| LEASE No. 2. - Superior Pocahontas Coal Co. - Cletus Mine | |||
| Year | Tonnage mined | Paid for | Receipts |
| 1920 | 57,189 | 120,000 | $12,000 |
| 1921 | 54,660 | 120,000 | 12,000 |
| 1922 | 55,864 | 120,000 | 12,000 |
| 1923 | 51,422 | 120,000 | 12,000 |
| 1924 | 57,928 | 120,000 | 12,000 |
| 1925 | 68,804 | 120,000 | 12,000 |
| 1926 | 90,029 | 120,000 | 12,000 |
| LEASE No. 3. - W. E. Deegans (later New Pocahontas Coal Co. and MonarchSmokeless Coal Co.) | ||||
| Year | Tonnage mined | Paid for | Royalty rate | Receipts |
| 1920 | 113,086 | 113,686 | $0.07 | $8,372.78 |
| 1921 | 92,983 | 104,695 | .07 | 7,916.02 |
| 1922 | 141,895 | 141,895 | .07 | 7,328.66 |
| 1923 | 131,961 | 131,961 | .08 | 10,556.83 |
| 1924 | 160,428 | 160,440 | .08 | 12,835.26 |
| 1925 | 151,694 | 151,619 | .08 | 12,135.57 |
| 1926 | 166,280 | 164,533 | .08 | 13,162.70 |
| LEASE No. 4. - Oregon Coal Co. (later Solvay Collieries Co. and KingstonPocahontas Coal Co.) | |||
| WARWICK MINE | |||
| Year | Tonnage mined | Paid for | Receipts |
| 1920 | 86,918 | 100,000 | $10,000.00 |
| 1921 | 15,297 | 100,000 | 10,000.00 |
| 1922 | 109,853 | 100,002 | 10,000.02 |
| 1923 | 113,565 | 113,659 | 11,365.72 |
| 1924 | 125,811 | 125,811 | 12,581.10 |
| 1925 | 91,170 | 100,000 | 10,000.00 |
| 1926 | 118,273 | 118,827 | 11,827.70 |
| LEASE No. 4. - Solvay Collieries Co. (later Kingston Pocahontas Coal Co.) | |||
| EXETER MINE | |||
| Year | Tonnage mined | Paid for | Receipts |
| 1920 | 19,231 | 187,500 | $18,750.00 |
| 1921 | 25,024 | 306,250 | 30,625.00 |
| 1922 | 45,483 | 370,433 | 37,043.38 |
| 1923 | 74,152 | 340,782 | 34,078.20 |
| 1924 | 103,877 | 343,657 | 34,365.70 |
| 1925 | 117,792 | 325,000 | 32,500.00 |
| 1926 | 153,717 | 335,115 | 33,511.56 |
| LEASE No. 5. - Pocahontas Smokeless Coal Co. (later Central PocahontasCoal Co.) | |||
| Year | Tonnage mined | Paid for | Receipts |
| 1920 | 27,671 | 25,758 | $1,287.88 |
| 1921 | 5,622 | 4,111 | 205.57 |
| 1922 | 8,611 | 8,773 | 438.65 |
| 1923 (Jan. 1-Mar. 31) | 3,877 | 3,877 | 193.85 |
| LEASE No. 6. - Hensley Coal Co. (later known, successively, as J. B. B. Coal Co.,Dexcar Pocahontas Coal Co., and Fordson Coal Co.) | |||
| Year | Tonnage Mined | Paid for | Receipts |
| 1920 | 80,506 | 80,506 | $805.06 |
| 1921 | 38,990 | 6,827 | 68.27 |
| 1922 | 19,811 | ||
| 1923 | 20,811 | 15,771 | 157.71 |
| 1924 | 12,025 | 12,025 | 120.25 |
| 1925 | 12,640 | 12,640 | 126.40 |
| 1926 | 7,258 | 51,822 | 518.22 |
*907 In the several taxable years in controversy the corporation was upon a cash receipts and disbursements basis*2585 of accounting and its income, except minor items not in controversy, consisted of payments received under the several contracts from the various operating companies, and income and profits-tax returns were filed for each of the taxable years and thereafter audited by the Commissioner resulting in the deficiency notice forming the basis of the present proceedings.
In computing the deficiencies the Commissioner considered the relation of the corporation and the operating companies to be that of lessor and lessee and allowed the corporation a depletion deduction of 3.6 cents per ton mined for the years 1920 to 1926, inclusive, the same depletion rate as was allowed by the Commissioner for 1919 and prior years.
For prior years 1914 to 1919, inclusive, the Commissioner proposed additional taxes in the amount of $6,267.08 and required the corporation to pay same, which thereafter brought an action on February 17, 1923, in the United States Court for the Southern District of West Virginia against the collector to recover same on the grounds that payments under said contracts received by the corporation were the proceeds of a sale of coal in place consummated before March 1, 1913, or*2586 of choses in action existing on said date, or that petitioner plaintiff, as a lessor, was entitled to a unit depletion rate of not less than 5 cents per ton mined in the computation of not taxable income, nand consequently said taxes were erroneously and illegally assessed and collected. The issues were made in said action, and same were submitted for judgment upon the evidence adduced by the parties, and were decided by opinion of the court and judgment entered thereon that petitioner plaintiff in the computation of said taxes was entitled to a depletion unit of 5 cents per ton instead of 3.6 cents computed by the Commissioner. A recovery of $5,373.01 from said collector by petitioner plaintiff was adjudged and said judgment was duly paid by the United States. In said action the Bankers Pocahontas Coal Co., one of the petitioners herein, was plaintiff; plaintiff petitioner appearing in its own right and the collector as defendant, who was defended in said action by the United States District Attorney and the Solicitor of Internal Revenue (now General Counsel). In this proceeding and in said court action the subject matter of the action and of these proceedings is the same, namely, *2587 the depletion unit allowable in computing the amount of such depletion deduction as will return to the taxpayer the capital value existing in the coal content of the corporation's property as of March 1, 1913.
*908 In his computation of invested capital of the corporation for the calendar year 1920 in the deficiency appealed from herein, the Commissioner used the tax computation determined in said action as due and owing for the calendar year 1919, which was based upon the allowance of a 5 cent depletion rate for 1919. In the years subsequent to 1919, the Commissioner has applied the depletion rate of 3.6 cents per ton. The court action was instituted February 17, 1923, and the judgment therein was entered January 31, 1928. The deficiency letters were mailed for 1920 on February 15, 1926; for 1921, 1922, and 1923 on February 12, 1926; for 1924, 1925, and 1926 on January 15, 1929. Before the issue of the last named deficiency notice the attention of the Commissioner was specifically called to the pendency and decision of the court action.
In the several taxable years, and particularly in 1919, the corporation received its contract payments each month and same when received*2588 were about thirty days overdue. The payment for December was consistently reported in the year's receipts, although same did not come to hand until January. In December, 1919, the corporation received tax refund of $180, which it put on its books in January, 1920, and likewise received a contract payment of $5,434.66. These amounts were reported as income for 1919 and the Commissioner has included same again as 1920 income, as shown by the books to have been received in the latter year.
In 1920 the Flanagan Coal Co., which owned land adjacent to the petitioner corporation, trespassed on the land of the petitioner corporation and removed coal to which it had no right. It then destroyed the entries so that the damage or extent of the operation could not be determined. The corporation discovered the situation in 1923 and brought suit for damages and, as a result of a compromise of the suit, received $3,770.40 in 1924 in settlement and adjustment of the controversy. The petitioner corporation had no contractual relation with the trespasser and the settlement had no relation to the coal extracted, as the amount of same could not be determined. The Commissioner held the damages*2589 received were equivalent to a royalty and adjusted same by the allowance of 3.6 cents per ton as depletion on 15,000 tons estimated to have been damaged or removed by the trespasser.
In the several years involved herein the petitioner, Strother, as one of the corporation's stockholders, received payments from the Bankers' Pocahontas Coal Co. and reported same in his returns but did not return them as taxable income. The corporation received the royalties of the contracts, used such portion as was necessary for payment of the ordinary and necessary expenses of administering business, set aside a certain reserve to meet pending Federal taxes and distributed the rest to the stockholders. No allowance was made *909 by the Commissioner to the petitioner, Strother, for any depletion reserve received by him and the Commissioner added the entire receipts to his net income and has determined deficiencies accordingly.
OPINION.
SMITH: In these proceedings the Bankers Pocahontas Coal Co. contends that it received no income during the taxable years and all of the moneys received as royalties were in part payment of coal in place which had been sold prior to March 1, 1913; that*2590 the typical contract quoted in part in the findings of fact constituted a sale of coal in place made before March 1, 1913, under the laws of West Virginia, and that on March 1, 1913, the petitioner held only a chose in action from which no taxable income was subsequently received; that leasing agreements similar to those involved in these proceedings have been held by the courts of Pennsylvania in ; ; ; ; ; ; and by the courts of West Virginia in ; ; ; to constitute sales of coal in place; that the Board is bound to give the same effect to such leasing agreements as has been given to them by the courts of the States of Pennsylvania and West Virginia.
This is the same contention as has been made before the Board in many different cases. Beginning with the*2591 case of , and following down through a number of decisions, this Board has uniformly held that sums received as bonus or royalties from leases of oil and mineral rights were not income from the sale or exchange of capital assets, but constituted a part of the gross income that the petitioner was obligated to return as a part of its gross income. It is likewise the same contention which was made before the District Court of the United States for the Southern District of West Virginia in the case of Bankers Pocahontas Coal Co. v. Albert B. White, referred to in our findings, which was a suit for the recovery of additional taxes paid for the years 1914 to 1919. The learned judge of that court disposed of that case in the following language:
This brings on the first contention of the plaintiff, that is, that the plaintiff, by the reserved rentals and royalties, is being paid for the land and the coal thereunder, and that such rentals and royalties are not "income" but "purchase money."
Personally, I believe this statement to be true, but I cannot, in the face of all the decisions, sustain it here.
*910 I therefore*2592 hold, that the royalty payments are income, and should pay a tax as such.
Judicial decisions upon the point are many. See ; ; certiorari denied, ; ; ; . In , the court stated:
The one question involved is whether the income received by the plaintiff from said lease is taxable as income from the sale of capital assets or his ordinary income. If it is from the sale of capital assets the plaintiff is entitled to a refund; if it is not, he is not so entitled. Since the decision in , following through ; ; *2593 , it has been consistently held that the trustees received from such leases of oil and mineral lands were to be treated as gross income. The principle is too well established to require extended discussion.
* * *
The Federal Government is not limited in its selection of subjects for taxation by the construction of the State courts as to the property rights of individuals, provided the subject taxed was primarily a proper subject for taxation Congress in passing a revenue act does not, and is not called upon to suit the revenue system of the country to the varying and conflicting decisions and laws of the different States. A revenue act is an act of Congress passed in the exercise of its constitutional right, and therefore the supreme law of the land, and where the constitutional powers of the Federal Government and the States conflict those of the States must give way.
Petition for writ of certiorari was denied by the Supreme Court in this case on October 21, 1929.
In *2594 , contracts in West Virginia made by the petitioner and others for the mining of coal were held to constitute leasing agreements upon the authority of , and . Counsel for the petitioners suggest, however, that in the Van Devender case the petitioner made the contracts and that they were not transferred to third parties; that the instant proceedings present the case of such transfer and that if there is any income received from the contract subject to tax it is ascertained by the exclusion of all capital from same, according to the final decision of . We see no justification for the distinction sought to be made. The Bankers Pocahontas Coal Co. received its property in July, 1912, subject to certain leases upon the property. In our opinion the corporation simply stands in the shoes of the original lessors. The royalties received by it constitute part of its gross income. From such income it is entitled to deduct *911 a reasonable amount for the depletion of*2595 its property during the taxable years.
In computing the deficiencies for the years 1920 to 1926, the respondent has used a depletion rate of 3.6 cents per ton of ore mined each year. The respondent held that this was a reasonable depletion rate and that such rate multiplied by the tons mined each year constituted a reasonable deduction for depletion. The corporation taxpayer contends that this is not a proper rate and that its application does not permit the deduction of a reasonable amount for depletion. In support of its contention it submits the decision of the District Court made in the above cited case of Bankers Pocahontas Coal Co. v. Albert B. White, in which the court found that a reasonable depletion rate was 5 cents per ton multiplied by the number of tons of ore mined during each taxable year. The evidence before the District Court was introduced before the Board and in addition much additional evidence showing the cost of the properties to the Bankers Pocahontas Coal Co. at the time they were acquired in 1912, and likewise the agreed estimated tonnages in each of the leases upon the land. With respect to the cost of the properties to the petitioner corporation, *2596 D. J. F. Strother, the president of the corporation, testified as follows:
My recollection is that a bond issue outstanding on the property at that time was either two hundred and forty, or two hundred and sixty thousand dollars; I know I am right in either one amount or the other; we paid out sixty thousand dollars in cash; there were some troubles with the title and we paid on that, at one time, considering this stock at par, $35,000, and we withheld to straighten these titles out, to the Standard Pocahontas Coal Company, 600 acres of coal, which we valued anywhere from $50,000 to $150,000; we settled two or three other claims, and I do not think I am quite now qualified to speak about, of, I think I have them in my file there, some two thousand dollars more.
This would indicate a cost to the petitioner corporation of from $407,000 to $507,000. The evidence as to the March 1, 1913, value of the property is vague. In 1915 an engineer representing the Old Dominion Trust Co. of Richmond, Va., made a report on the company's property in which he stated that there were approximately 20,000,000 tons of mineable coal at an average value of 5 cents per net ton, making a total value*2597 of $1,000,000. On or about December 31, 1917, an account was entered upon the corporation's general ledger debiting coal lands $1,000,000, with the following explanation:
Estimated value as of March 1, 1913 of 6,000 acres coal land said to contain 20,000 tons of coal at five cents per ton.
The income-tax returns filed for those years claimed a March 1, 1913, value for the property of $1,000,000.
*912 In , it was stated:
* * * The amount of the allowance for depreciation is the sum which should be set aside for the taxable year, in order that, at the end of the useful life of the plant in the business, the aggregate of the sums set aside will (with the salvage value) suffice to provide an amount equal to the original cost. * * *
* * *
The depletion charge permitted as a deduction from the gross income in determining the taxable income of mines for any year represents the reduction in the mineral contents of the reserves from which the product is taken.
No essential difference is recognized in the decisions of the courts between depreciation and depletion, so far as the nature of the deduction under the*2598 taxing acts involved is concerned. Both are designed to return to the taxpayer the cost or March 1, 1913, value of property depreciated or depleted, whichever is the basis for the computation.
The evidence in the instant proceedings is that there was an estimated quantity of coal in place on March 1, 1913, of 37,608,642 tons. No contention is made anywhere that the March 1, 1913, value of this coal in place was in excess of $1,000,000. The depletion unit used by the respondent in his computation of 3.6 cents per ton will, upon the exhaustion of the coal deposits, return to the petitioner corporation a total of $1,353,911.11. The depletion rate used by the respondent will therefore return to the petitioner corporation an amount in excess of the greatest claim made by it as to the value of the coal in place at March 1, 1913.
The respondent has determined that a depletion rate of 3.6 cents per ton is a reasonable rate. The Commissioner's determination of tax liability is prima facie correct. ; *2599 ; ; . If the corporation is entitled to a higher rate of depletion than that determined by the respondent, the burden is upon the corporation to prove the inadequacy of the depletion rate used by the respondent. We are of the opinion that it has not sustained that burden of proof.
In Docket No. 14517 the Bankers Pocahontas Coal Co. claims that its income for 1920 was overstated by the inclusion therein of royalties in the amount of $5,434.66 and taxes in the amount of $180, which were taxable as income of the year 1919, for which year the amounts were returned as income. The evidence indicates that the books of account show these receipts in 1920. It is contended, however, that the amounts were actually received by the corporation in 1919 and that it was through negligence that the amounts were not deposited in the bank until 1920. The evidence supports such claim. The contentions of the corporation upon this point are therefore sustained.
*913 In Docket No. 42664 it is contended that the receipt in 1924*2600 of $3,770.40 from the Flanagan Coal Co. did not constitute a receipt of income. This amount was received in compromise of a suit brought against that company by the petitioner "to recover the value of the coal that had been extracted, plus damages to the plant." At the hearing of these proceedings petitioner's president was asked to relate "the facts briefly out of which the condition arose which resulted in the receipt of that amount of money [$3,770.40] in 1924 by your company." Petitioner's president testified:
The Flanagan Coal Company owned an adjoining piece of land to our land; we discovered that they had mined across our boundary line in a particular seam of coal; I took that up with them and they first said they would pay for it. The matter hung on for some months; this was in 1920 when they had gone in there, at which time the price of coal was very high, - anywhere from $6.00 to $15.00 a ton. They did not pay, and when I got my engineers to go down to undertake to measure up how much coal they had gotten out, they found out they had shot in the entries and we could not get in at all, so I brought a suit for damages to the property, and we eventually settled it and*2601 we got this $3,770 in 1924, for damage to our property, and that seam of coal I figured and figured over with my engineers as at least $10,000 because they had absolutely destroyed the method of going in on that side of the hill.
He further testified on cross-examination:
We claimed our damages very considerably in excess of that [$3,770.40], but the Flanagan Coal Co. at that time was in a pretty precarious condition financially, and we figured every little bit would help, and we got as much as we could.
The respondent determined that the $3,770.40 in question was a part of the petitioner's gross income; that the trespasser had mined 15,000 tons of coal from the corporation's land; and that the petitioner was entitled to deduct from gross income, in its tax return for 1924, $540 for depletion in respect of the coal removed.
The taxing acts permit the deduction from gross income of losses sustained during the taxable year when not compensated for by insurance or otherwise. (Section 234(a)(4), Revenue Acts of 1918 and 1921.) If there was a loss sustained by the Bankers Pocahontas Coal Co. as a result of the tortious act of the Flanagan Coal Co., it was sustained in 1920, *2602 and the amount of the loss not compensated for by insurance or otherwise is deductible from the gross income of 1920. The evidence does not, however, afford facts from which the amount of the loss may be determined. We do not know what the cost of the coal removed by the trespasser was to the petitioner nor its March 1, 1913, value. If the Bankers Pocahontas Coal Co. is predicating the loss and damage to the property upon the inflated prices of coal in 1920, we think there is no justification for basing a deductible loss upon such inflated values. , *914 affirmed by the Circuit Court of Appeals for the Second Circuit December 2, 1929. The deduction of any loss for 1920 must therefore be disallowed for lack of proof of the amount of the loss, if any.
The same situation obtains with respect to the year 1924. The company received from the trespasser $3,770.40. The petitioner has found that all but $540 of this amount (which he has allowed as a deduction from gross income as depletion) constituted taxable income of the company for 1924. The company has submitted no evidence that the cost or March 1, 1913, value of the*2603 coal removed by the trespasser was in excess of $540 or that such basis plus damages to the property was in excess of $540. The determination of the Commissioner is therefore sustained for lack of evidence showing error on the part of the respondent.
In Docket No. 14517, with respect to the year 1920, and in Docket No. 14516, with respect to the year 1921, additional error is alleged in the adjustment of surplus and, therefore, in the computation of the petitioner corporation's invested capital. The correctness of the adjustment depends upon the determination of a proper depletion allowance. It therefore follows that, when a proper depletion rate has been determined under the major issue of the proceedings, the establishment of a proper depletion reserve and the proper adjustment of surplus will necessarily follow and be made the subject of appropriate recomputation under the Rule 50 settlement.
With respect to the years 1920 and 1921, the corporation also claims that there has been an improper proration of dividends affecting its invested capital for those years. This raises the question of a tentative tax adjustment such as was*2604 involved in . The rule of the Board in , should be applied in the recomputation of the deficiencies.
The only issues raised in the three proceedings taken by D. J. F. Strother relate to an overstatement of his income for the years in question, resulting from the inclusion therein of the dividends received by him from the corporation. The respondent submits that the determination of the nature of the receipt by the corporation under the leases will also determine the nature of the dividends paid out of its receipt to the stockholder. To the extent that the distribution made by the corporation constitutes a distribution of its depletion reserve the amount received by Strother is nontaxable. Parties are in full accord as to the treatment to be given the individual appeals.
Reviewed by the Board.
Judgment will be entered under Rule 50.
Footnotes
1. Haulage. ↩