The Board of Tax Appeals upon an appeal from the Commissioner of Internal Revenue assessed a deficiency tax against the petitioner for the .year 1925 in the amount of $67,509.13 and the matter is here upon a petition for a review of the Board’s decision. The facts were stipulated before the Board and a brief summary' of its findings will suffice in determining the applicable principles of law.
In 1925 the petitioner; Mountain Producers Corporation, owned all of the capital stock of the Wyoming Associated Oil Corporation, and a consolidated return was filed upon which the deficiency in controversy was determined. The Wyoming Corporation, organized in 1919, held certain placer mining claims, leases, and operating agreements in the Salt Creek Oil Field in Natrona County, Wyo. After the passage of the Oil and Gas Leasing Act of February 25, 1920, 41 Stat. 437, its claims were exchanged for Government leases and later exchanges were made with the Mid*79west Oil Company and the Wyoming Oil Fields Company for the purpose of consolidating the leaseholds into more compact blocks to decrease the necessity for offset drilling. On February 1, 1923, the Wyoming Associated entered into a contract with the Midwest Refining Company whereby it agreed to sell to the Refining Company all the o.il produced by it in the Salt Creek Oil Field, and the Refining Company agreed to purchase such oil until January, 1934, which contract provided for a sliding scale of prices to be paid for such oil. It was also provided that as a part of the price for the oil purchased under said contract the Refining Company should drill, case, and maintain all wells, find and supply water, install and operate pumps when necessary, clean, shoot, and otherwise stimulate production, conduct all development and production operations necessary for the protection and conservation of the oil and gas contained therein. It was further provided that the Wyoming Company should give to the Refining Company free use of all storage facilities, pipe lines, buildings and equipment, and free of charge all oil and gas necessary for drilling operations, and that the Refining Company should take delivery of the oil purchased at the outlet gates of the measuring tanks located at or near the wells on the property.
On the same date, February 1, 1923, the Wyoming Associated O.il Corporation and the Midwest Oil Company as the holder of a certain lease from the state of Wyoming which originated in October, 1919, covering all of section 36, township 40' north of range 79 west, entered into an agreement by which the Midwest Oil Company was to hold in trust for the benefit of Wyoming Associated an undivided 50 per cent, interest in the state lease and in the benefits and net proceeds realized therefrom and from all renewals and extensions thereof, whether such renewals or extensions should be made in the name of the Wyoming Company or in their joint names. The lease from the state of Wyoming to the Midwest Oil Company under date of April 19, 1923, presently involved, covered school lands which had been at the time of the admission of Wyoming to the Union turned over and granted to the state for the benefit of its public schools and provided that the lessee should pay to the state a royalty equal to 65 per cent, of the market value of the oil and gas at the mouth of the wells, or' at the option of the state to deliver the equivalent amount of the oil and gas produced. In its execution the oil in kind was taken by the state. The cash payments received as net proceeds of its properties by the Wyoming Associated from the Midwest Refining Company for the year 1925 were $4,606,535.70, and the cost of production by the Refining Company of the oil produced to realize this sum was $2,816,520.04. The net amount received by the Wyoming Associated for the lease of the state school lands under the trust agreement from the Midwest Oil' Company was $185,43S.83.
The questions arising under the aforesaid situation are twofold: (1) What is the gross income upon which the depletion allowance of the Wyoming Associated as the petitioners’ affiliate should be determined? And (2) is the amount which the Wyoming Associated received under the trust agreement with the Midwest Oil Company from its oil and gas lease with the state of Wyoming exempt from tax?
The applicable statute concerning depletion allowance is the Revenue Act of 1926, § 204 (c) (2), 44 Stat. 14, reading as follows: “In the case of oil and gas wells the allowance for depletion shall be 27% per centum of the gross income from the property during the taxable year. Such allowance shall not exceed 50 per centum of the net income of the taxpayer (computed without allowance for depletion) from the property, except that in no case shall the depletion allowance be less than it would be if computed without reference to this paragraph.”
The petitioner contends that the gross income from its properties during the taxable year consisted of the total cash payments, plus the cost of production by the Refining Company under, its contract providing that the production costs should be a part of the purchase price of the oil, but the Board of Tax Appeals determined otherwise and limited the gross income to the cash payments received.
Counsel admit that there are no cases on all fours with the case at bar. The respondent relies strongly upon the case of Helvering v. Twin Bell Syndicate, 293 U.S. 312, 55 S.Ct. 174, 79 L.Ed. 383, where the point involved the inclusion of cash royalty payments as gross income for the purpose of fixing depletion allowance. It was there held that such royalty payments should be excluded from the gross income. It is apparent, however, from the reading of this decision that it involved a different *80principle than that now before us. The royalty owners themselves were entitled to the depletion allowance as well as the lessee. The pertinent language is found on page 321 of 293 U.S., 55 S.Ct. 174, 178, 79 L.Ed. 383: “At all events, as the section must be read in the light of the requirement of apportionment of a single depletion allowance, we are unable to say that the Commissioner erred in holding that for the purpose of computation ‘gross income from the property’ meant gross income from production less the amounts which the taxpayer was obliged to pay as royalties. The apportionment gives respondent 27% per cent, of the gross income from production which it had the right to retain and the assignor and lessor respectively 27% per cent, of the royalties they receive. Such an apportionment has regard to the economic interest of each of the parties entitled to participate in the depletion allowance.”
A case more applicable in principle to the determination of our question is Boul-ton v. Heiner (D.C.) 3 F.Supp. 372. The court there was confronted with the matter of determining whether or not the value of services under contract should be included with cash payments in fixing the cost of stock for the purpose of ascertaining the profit from a sale thereof. The court says, at page 374 of 3 F.Supp.: “The plaintiff claims in the present suit that in addition to the amount of money actually paid by him for the stock in question in order to acquire it, he was compelled by his contract with the other incorporators and with the original owners of the properties taken oyer by the corporations, to expend labor and effort which was worth at least the sum of $17,500. The uncontradicted testimony shows that this service was agreed upon and rendered; that it was worth $17,500; and that plaintiff received no compensation therefor other than by the right to acquire the stock. Under these circumstances it is our opinion that the plaintiff is entitled to claim that the cost of his stock was not merely $11,500, the amount of money paid, but also $17,500, the value of his services rendered pursuant to his agreement.”
We see no just or logical reason why the cost of production of the oil here which was made a part of the purchase price should not be added to the cash payments for the purpose of determining the gross income of the Wyoming Associated. Certainly it should be unless pure technicalities of the taxing laws be invoked. Had the Wyoming Company produced the oil at its own expense, its gross income would have been the amount which it received from the oil sold and the only difference would have been that it would have received in cash the proportionate amount which represented the cost of production. Under such conditions there should be no question of its gross income including the oil produced and sold to cover production costs. It cannot logically be less than an element of gross .income because the cost of production by another is a component part of the purchase price of the oil. There is no criticism on the part of the Government either as to the fairness of the purchase price or of the cost of production covered by the contract between the Wyoming Associated and the Midwest Refining and therefore it would seem unnecessary to analyze these schedules; nor can any charge be made that there was any effort on the part of the taxpayer to enter into a contract for the purpose of favorably affecting its tax liability.
The respondent contends that the adoption of the petitioner’s theory would result in the allowance of a'double deduction in that if the cost of production should be included as gross income it would be deducted as an expense, while under the head of depletion the appropriate percentage of the amount would be deducted a second time. We cannot see the soundness of this theory. If the Wyoming Associated operated its own properties and produced its oil which it sold for cash, the cost of that production would be deducted as of course in arriving at its net income for taxation purposes; but if it produced the oil which it sold where a part of the proceeds were necessarily used to cover the cost of production, its gross income would be the total amount sold for the purpose of computing depletion allowance. The two matters are clearly distinct, one being the determination of net income and the other depletion allowance and are approached by the taxing statutes from entirely different angles. We think that the Board erred .in excluding, the cost of production which was a part of the purchase price of the oil, from the gross income of the petitioner’s affiliate.
With reference to the second question, the Board held that the amount received by the petitioner’s affiliate from the net proceeds of the school lea.se under its trust agreement with the lessee of the state was *81not exempt from tax. It may be admitted that the decisions of the Supreme Court place cases of this character upon the border line. The members of the court have been far from unanimous in their views in the more recent cases. In Metcalf & Eddy v. Mitchell, 269 U.S. 514, at page 522, 46 S.Ct. 172, 174, 70 L.Ed. 384, Mr. Justice Stone in speaking for the court says: “Just what instrumentalities of either a state or the federal government are exempt from taxation by the other cannot be stated in terms of universal application. But this court has repeatedly held that those agencies through which either government immediately and directly exercises its sovereign powers, are immune from the taxing power of the other.”
In Burnet, Commissioner, v. Coronado Oil & Gas Co., 285 U.S. 393, 52 S.Ct. 443, 76 L.Ed. 815, it was held that the lands granted by the United States to the state of Oklahoma for the support of common schools, where leased by the state to a private company for the extraction of oil and gas, the state reserving a part of the gross production for the benefit of its public school fund, the lease was an instrumentality of the state and the application of a federal income tax derived from the lease by the lessee was unconstitutional. It is true that in Burnet, Commissioner, v. A. T. Jergins Trust, 288 U.S. 508, 53 S.Ct. 439, 77 L.Ed. 925, it was held that under an oil and gas lease made by a city to a private party the receipts of the lessee were not exempt from a" federal tax because the subject taxed was remote from any governmental function and the collection of the tax did not trench upon the immunity of the state as a sovereign. In the opinion, however, the court distinguishes the Coronado Case and the case of Gillespie v. Oklahoma, 257 U.S. 501, 42 S.Ct. 171, 66 L.Ed. 338, by the statement that the burden upon the public was there more definite and direct than in the case under consideration. We think that the Coronado Case, which has been criticized but never overruled, must through analogy rule the case at bar, unless the situation of the Wyoming Associated is distinguishable from that of the- lessee. Such a contention is made by the respondent through reference to the cases of Wanless Iron Co. v. Commissioner, 75 F.(2d) 799 (C.C.A. 8), and Hobart Iron Co. v. Commissioner, 83 F.(2d) 25 (C.C.A. 6). Those cases were distinguished from the Coronado and Gillespie Cases, however, upon the ground that sublessees could not claim exemption from tax since the lessee had parted with any direct relationship with the state.
In the case at bar we find the lessee and the taxpayer bound together by a trust agreement entered into before the lease by the state was made by which they were to have equal rights in the lease itself and the net proceeds realized from it in whichever name of the parties the lease or any renewal or extension should stand. In substance and effect the Wyoming Associated was as much a lessee of the lands as was the Midwest Oil Company, the lessee in name. In Central Life Assurance Society v. Commissioner (C.C.A.) 51 F.(2d) 939, at page 941, it was said: “Tax laws are essentially practical in their purposes and application, and the federal income tax laws are no exception. While, for purposes of convenience and certainty in collection of such taxes, it is sometimes provided that those who collect income for others shall pay therefrom the taxes thereon, yet a cardinal purpose of the income tax laws is to tax the income to the person who has the right or beneficial interest therein, and not to throw the burden upon a mere collector or conduit through whom or which the income passes. Shellabarger v. Commissioner, 38 F.(2d) 566, 567 (C.C.A. 7); Young v. Gnichtel, 28 F.(2d) 789 (D.C.N.J.); O’Malley-Keyes v. Eaton, 24 F.(2d) 436 (D.C.Conn.); also compare U.S. v. Robbins, 269 U.S. 315, 327, 328, 46 S.Ct. 148, 70 L.Ed. 285; Kaufmann v. Commissioner, 44 F.(2d) 144, 146 (C.C.A. 3); Mitchel v. Bowers, 15 F.(2d) 287, 289 (C.C.A. 2). It is also a basiG principle in the application of such laws that substance and not mere form be regarded as governing.”
Many cases are cited in the briefs in addition to those to which, reference herein has been made, but we think they fail to throw any additional light upon the subject under discussion and therefore have not been reviewed.
For the reasons stated, the decision of the Board of Tax Appeals upon both points will be reversed, and the case remanded for further proceedings in accordance with this opinion.