(dissenting in part).
I concur in the decision by the majority in this ease that there was no liability on the part of petitioner for income taxes upon the $350,000 paid by the Gulf Refining Company to the assignee of J. Rogers Flannery, but respectfully dissent from the conclusion announced with respect to depletion.
Both the decision of the Board of Tax Appeals and the opinion of the majority in this ease are based upon the proposition that the taxpayer attempted to couch the agreetment in language which would give the appearance of retention of title, while in reality all interest in the lease or minerals passed to the Gulf Company, with the evident purpose, it is said, to gain the advantage of depletion allowed by the statute. However, if what was done was legally permissible, then it could make no difference if one of the purposes was to avoid taxation. City of Dallas v. Higginbotham-Bailey-Logan Co. (C. C. A. 5th Ct.) 37 F.(2d) page 513. Regardless of what the act may be called, the important question, as I see it, is, Did the taxpayer retain such an interest in the oil and its production as to entitle him to depletion within the meaning of the statute and according to judicial interpretation of similar provisions in the revenue laws?
The Sixteenth Amendment permits Congress to lay direct taxes upon income from whatever source derived. It did not grant the power to levy such taxes, but merely re- . moved the requirement in another provision of the Constitution requiring them to be apportioned among the several states according to population. Congress already possessed the power to levy such taxes, subject to the restriction mentioned. Peck v. Lowe, 247 U. S. 165, 38 S. Ct. 432, 62 L. Ed. 1049; Bowers v. Kerbaugh-Empire Co., 271 U. S. 170, 46 S. Ct. 449, 451, 70 L. Ed. 886.
In the ease last cited the Supreme Court says that: “Income may be defined as gain, derived from capital, from labor, or from, both combined, including profit gained.' through sale or conversion of capital.” It goes without saying that capital cannot be-taxed under the guise of income. For instance, if the taxpayer buys property, whether it be valuable for minerals or .not, and subsequently sells it for the same figure,there is no profit and hence no income to-tax. It has been uniformly recognized by the Revenue Acts since the adoption of the Sixteenth Amendment that capital invested in minerals, including discovery value, should be returned to the owner through amortization during production. The Treasury Department at first took the position that no-one but the owner of the fee could receive the benefits of depletion with respect to-mines, and that it did not apply to a lessee, who did not own the ore but merely the exclusive right of extracting it, either for a given period or until exhausted. The reasoning was that depletion was only intended to-apply to the freehold, the possession of which after exhaustion of the minerals reverted to-the owner of the fee. However, in the case of Lynch v. Alworth-Stephens Co., 294 F. 190, 192, the Court of Appeals for the Eighth Circuit, through Judge Sanborn, reviewed at length the jurisprudence affecting-this provision as applied to mines, and found depletion was nob so restricted, but could be-claimed by any one with a “property right and interest therein.” That case went to the-Supreme Court on certiorari, where the contention was stated and disposed of as follows:
“Upon the foregoing facts and under these statutory provisions, the question presented for consideration is whether the relation of respondent to the mines which were-the source of its income, was such that it was-entitled to deduct from the gross amount of such income a reasonable amount for exhaustion or depletion. Upon the part of the-petitioner the contention is that the leases-do not convey to the lessee the ore bodies, but are contracts of rental conferring only the right to use and occupy the premises and mine the ore, which, so long as it remains in the ground, is the property of the fee owner. It is therefore insisted that by the extraction of the ore, only the property of the fee-owner is depleted and such owner alone is entitled to an allowance therefor. On the other hand, respondent contends that under the leases the lessee, as well as the lessor,. *946owns a valuable property interest in the mines and by the terms of the statute each is entitled to deduct from gross income a reasonable allowance for depletion, the lessee for exhaustion of the leasehold interest and the lessor for exhaustion of the fee interest as lessened by the interest of the lessee, such deduction to be allowed according to the value of the interest of each in the property, the entire allowance, however, not to exceed the total market value in the mine of the product thereof mined and sold during the taxable year.
“It is, of course, true that the leases here under review did not convey title to the unextracted ore deposits (United States v. Biwabik Mining Co., 247 U. S. 116, 123, 38 S. Ct. 462, 62 L. Ed. 1017); but it is equally true that such leases, conferring upon the lessee the exclusive possession of the deposits and the valuable right of removing and reducing the ore to ownership, created a very real and substantial interest therein. See Hyatt v. Vincennes Bank, 113 U. S. 408, 416, 5 S. Ct. 573, 28 L. Ed. 1009; Ewert v. Robinson [C. C. A.] 289 F. 740, 746-750. And there can be no doubt that such an interest is property. Hamilton v. Rathbone, 175 U. S. 414, 421, 20 S. Ct. 155, 44 L. Ed. 219; Bryan v. Kennett, 113 U. S. 179, 192, 5 S. Ct. 407, 28 L. Ed. 908.
“The general provision in section 12(a), Second, is that the deduction from gross income shall include a reasonable allowance for the ‘exhaustion * * * of property.’ There is nothing to suggest that the' word ‘property’ is used in any restricted sense. In the ease of mines, a specific kind of property, the exhaustion is described as depletion, and is limited to an amount not exceeding the market value in the mine of the product mined and sold during the year. The interest of respondent under its leases in the mines being property, its right to deduct a reasonable allowance for exhaustion of such property, if there be any, during the taxable year results from the plain terms of the statute, such deduction, since the property is an interest in mines, to be limited to the amount of the exhaustion of respondent’s interest caused by the depletion of the mines during the taxable year. We agree with the Circuit Court of Appeals (294 E. 194) that: ‘The plain, dear, and reasonable meaning of the statute seems to be that the reasonable allowance for depletion in case of a mine is to be made to every one whose property right and interest therein has been depleted by the extraction and disposition “of the product thereof which has been mined and sold during the year for which the return and computation are made.” And the plain, obvious and rational meaning of a statute is always to be preferred to any curious, narrow, hidden sense that nothing but the exigency of a hard case and the ingenuity and study of an acute and powerful intellect would discover.’ '
“It is said that the depletion allowance applies to the physical exhaustion of the ore deposits, and since the title thereto is in the lessor, he alone is entitled to make the deduction. But the fallacy in the syllogism is plain. The deduction for depletion in the ease of mines is a special application of the general rule of the statute allowing a deduction for exhaustion of property. While respondent does not own the ore deposits-, its right to mine and remove the ore and reduce it to possession and ownership is property within the meaning of the general provision. Obviously, as the process goes on, this property interest of the lessee in the mines is lessened from year to year, as the owner’s property interest in the same mines is likewise lessened. There is an exhaustion of property in the one ease as in the other; and the extent of it, with the consequent deduction to be made, in each case is to be arrived at in the same way, namely, by determining the aggregate amount of the depletion of the mines in which the several interests inhere, based upon the market value of the product, and allocating that amount in proportion to the interest of each severally considered.” Lynch v. Alworth-Stephens Co., 267 U. S. 368, 45 S. Ct. 274, 275, 69 L. Ed. 660.
Section 214(a) of the Revenue Act of 1921, provided:
“That in computing net income there shall be allowed as deductions: * * *
“(10). In the ease of mines, oil and gas wells, other natural deposits and timber, a reasonable allowance for depletion * * * according to the peculiar conditions in each case, based upon eost * * *; Provided further, that in the case of mines, oil and gas wells, discovered by the taxpayer, on or after Mareh 1, 1913, and not acquired as the result of purchase of a proven tract or lease, where the fair market value of the property is materially disproportionate to the cost, the depletion allowance shall be based upon the fair market value of the property at the date of the discovery or within thirty days thereafter * * (Italics by the writer.)
It is thus seen that the statute clearly *947commands that, in computing net income, there shall be allowed as deductions, “according to the peculiar conditions in each ease,” a reasonable allowance for depletion, to be based upon cost, and, in the case of discovery, where the fair market value of the property is materially disproportionate to cost, it shall be based upon the market value of the property at the time of discovery or within thirty days thereafter. It did not say that this depletion should be allowed to those having any particular relation to the property, such as the owner, lessor, or lessee, and, to my mind, clearly intended that it should apply to any one having a property right or interest in' the minerals to- be extracted, just as was held in the ease of Lynch v. AlworthStephens Co., supra, with respect to mines. So that, in my opinion, regardless of the contract in the present case, if the petitioner retained a property interest in the oil which was to be produced during the taxing years of 1921 and 1922, he was entitled to depletion.
It must be conceded that the income which was sought to be taxed here was received from 60 per cent, of the production of oil from the wells on the lease during those years and the overriding royalties and from no other source, and that its amount was dependent upon the quantity produced and the price received during that same period. Hence it was bound to be based upon the same varying factors which affected the returns received by both the fee owner and the Gulf Company. It is likewise true that, if the quantity of oil in the ground had been exhausted, the wells had “sanded over,” as sometimes happens, or an earthquake had destroyed the pool, the petitioner could and would have received nothing further from the property; or, if it failed to produce enough to pay him in full, he alone would have borne the loss. If, in the course of production, because of low price, lack of market, or otherwise, it had been found necessary or advisable to store the oil produced in tanksi in large quantities, say one hundred thousand barrels, and lightning or other fortuitous event had destroyed it, the loss would have fallen upon the petitioner to- the extent of 69 per cent, of what was destroyed, as well as his royalty interest. Why ? Because the contract provided that he should receive, not money, but the oil itself, until the stipulated percentage had given him $325,990. It is well settled that petitioner and the other interested parties became the owners of the oil when it was brought to the surface, and was reduced to possession, and hence the risk must necessarily have been his under the contract. The pertinent provision of the agreement showing the nature of petitioner’s interest in the oil is as follows: “It is distinctly agreed and understood, however, that the Gulf Refining Company of Louisiana "will as hereinabove set out deliver to- the said Baird sixty per cent (69%) of the oil produced from the said property, notwithstanding the said mortgage an'd pledge and free from any claim thereunder, until the said Baird shall have received from the said production sufficient oil to yield him, at the market price prevailing on the date .of delivery, and at which price he will bd able to sell said oil, the sum of Three Hundred and Twenty-five Thousand ($325,999.99) Dollars, from the 69 per cent (69%) of the oil produced from the said property, which the said Gulf Refining Company of Louisiana 'has under this agreement obligated itself to deliver.”
The best recognized test of whether one has parted with the ownership of a thing is, Will he have to stand the loss if it is destroyed without) the fault of any one else? I take it that no one would deny that, if the contract had provided that petitioner should receive 69 per cent, of the oil throughout the-producing life of the lease, his interest would have been entitled to depletion, including discovery valúe. The only difference under this contract -was that the quantity of oil which he was to receive should never exceed in value the sumí of $325,999, and the time within which he was to get it was limited during the first period to thirty months, and such additional time after the Gulf Company had reimbursed itself the sum paid to Mannery as might be necessary to accomplish that result. In reality, since the contract fixed the ultimate sum which he was permitted to realize- from the oil, the basis for calculating depletion was rendered certain instead of being dependent upon the estimated production and life of the field. His right to take the oil and apply it to the satisfaction of this sum, I respectfully submit, cannot be differentiated, either actually or in principle, from that of either the lessor ox* lessee, nor was the nature of his interest therein, before or after it was brought to the surface, any different fro-m theirs.
It also seems to me the reasonable intention of Congress was that the strong-hearted “wildcatter” should be permitted to reap the benefits of a “lucky strike,” by being relieved from paying income taxes upon that additional value which results from the discovery of a new pool. He is expressly permitted to add this to what he has paid for his lease and *948to have it returned through annual deductions from the receipts for the oil. If, because of financial weakness or inability to develop the property, an arrangement similar to that in the present ease is made with some one able to handle it, he is to be denied this benefit, then the attempted concession becomes a mere shadow. We know, as a matter of common knowledge, that in a large number of instances new oil fields are discovered by men possessing much hope and little capital, and that the strong companies invariably appear on the scene after oil is found. In such circumstanees it is quite the common practice for the pioneer to transfer his holdings to the big company for a small amount of cash and a large consideration to be paid in oil, with an overriding royalty, and, whether we call it “paying” the mineral or “retaining” it, to my .mind makes no difference. I think we may assume that, in making the provision under donsideration, Congress knew that which was commonly known to those familiar with the industry, and that it did not intend to create .a situation where only those with strong ■purses should be the beneficiaries of this concession accorded to discoverers.
It is also fundamental that doubts are to be construed against the taxing power. Hence, in my opinion, we are not justified in 'holding that, because the statute does not specifically say that one, who retains an interest in the minerals to the extent of receiving a part of them as a consideration for rights transferred to another permitting development, shall continue to receive as an annual deduction from his income sufficient to cover .a fair proportion of this recognized capital asset, the right is to be denied. As heretofore pointed out, the statute does not mention specifically any class or relation to the property, but declares that the deductions shall be permitted according to the peculiar .circumstances of each ease.
“The essence of this provision,” says Mr. Holmes, in his work on Federal Taxes (6th Ed.) p. 1102, “is that the owner of mineral deposits, whether freehold or leasehold, shall, within the limitations prescribed, secure through an aggregate of annual depletion and •depreciation deductions the return of either (a) the cost of the property, or (b) the value of his property on the basic date, March 1, 1913, plus in either ease subsequent allowable capital additions. * * * ” The concession with respect to discovery value is, of •course, the same as saying that it shall be added to the cost price and returned through •depletion as capital. If the discoverer diwests himself of the right to receive any part of the minerals or their proceeds as they are produced, then he loses the right thereafter to take credit, as a return of capital, from what remains for any portion of that which has been conveyed; but as to his interest in what is left, in the proportion which it bears to his original investment, including discovery value, so long as the total of that allowable deduction has not been made, it seems to me both justice and logic require that he should be permitted to draw the same back as a capital asset, at the rate which the statute permits, until the whole of that fraction under his original investment has been returned, or until his right to receive any portion of the minerals themselves ends. Any other course, I think, would ■ defeat the primary purpose of the law which seems to have been to avoid taxing as income either an actual capital investment or its legal equivalent, discovery value.
At all events, I think petitioner is entitled to depletion upon the overriding royalties of a for the first three years and a %2 for the remainder of the life of the lease. These constituted an interest in the lease and its production during the periods mentioned, which cannot in any sense be differentiated from the % royalty which was retained by the landowner. The majority opinion denies this right upon the statement that these royalties formed a part of the consideration which petitioner received for what is held to have been a sale of the lease. If so, then the fee owner’s royalty must necessarily take the same status, for, whether a bonus was paid or not, the Royalty was the principal consideration for the lease. Of course every commutative contract has a consideration, but this of itself does not determine its nature. The fact that the possession was. to revert to the landowner after the oil was exhausted was of no importance. That contention was made in the case of Lynch v. Alworth-Stephens Co., supra, and was rejected both by the Court of Appeals and the Supreme Court of the United States. There the right to depletion was claimed by the lessee who had retained an overriding royalty on. each ton of ore mined by his transferee or sublessee. The decision of the state court cited by the majority in support of the proposition that the fraction retained as royalty was a part of the consideration (Wilkins v. Nelson, 155 La. 807, 99 So. 607), was one in which the plaintiff was seeking to avail himself of the provisions of the Louisiana Code permitting the revocation of a sale of real property for lesion beyond moiety; that is, where, the vendor has not received a consideration *949amounting to one-half of its value in money at the time of the sale, the law creates a conclusive presumption of fraud or error. Plaintiff in that ease had executed “a sale of the oil, gas and mineral rights in and to and under one hundred and twenty acres of land,” but retained the right to receive % of the oil as royalty if and when discovered. Gas alone was found, and there was no provision for royalties as to it. Of course the law of lesion, by express terms, is confined to “sales of immovable property” (La. C. C., art. 1861), and while the privilege of extracting minerals from the soil is, under the code and .jurisprudence of Louisiana, a servitude in the nature of a real right upon immovable property, it does not amount, regardless of the terms of the contract, to a conveyance of the minerals themselves. Frost-Johnson Lumber Co. v. Sailing’s Heirs, 150 La. 855, 91 So. 207. The court in the case cited by the majority merely found that lesion did not apply to a contract of the kind then under consideration for two reasons: First, because it was not a “sale of immovable property,” and, secondly, because neither the value of the minerals nor of the % royalty retained in the oil, if found, could be determined with any degree of certainty, as of the date of the sale. Incidentally, it was said: “At all events, the hope of royalties entered into and became a part of the consideration which induced plaintiff to part with the mineral rights and this furnishes another reason why the sale cannot be avoided for lesion.” Undoubtedly, if oil had been discovered under that contract, the plaintiff or owner of the fee would have been entitled to depletion.
I am also convinced that the contract in this case has all the essentials of a sublease under the law of Louisiana. It is well established by the jurisprudence of the state court that royalty stipulated in a mineral lease, in legal contemplation, is the same thing as rent for the lease of a building or farm; and, if the lessee transfers anything less than the whole of his rights, provides for the payment of additional sums above those which are assumed to the fee holder, with other obligations and penalties in favor of the lessee, and with the provision for forfeiture, either express or implied, upon the failure of the transferee to perform the obligations thus assumed, the transaction becomes one of sublease, regardless of what it may have been styled or the words used to effect the transfer. Board of Commissioners v. Pure Oil Co., 167 La. 801, 120 So. 373; Logan v. State Gravel Co., 158 La. 105, 103 So. 526; Smith v. Sun Oil Co., 165 La. 907, 116 So. 379, 381. In the last-cited ease the Supreme Court of Louisiana quoted approvingly from Taylor on Landlord & Tenant (9th Ed.) as follows:
“And the importance of this distinction consists in this, that, while an assignee is liable to the original lessor for all the obligations of the lessee by virtue of the privity of estate that subsists between them, no action can be maintained by the lessor against the undertenant, upon any covenant contained in the lease, since there is neither privity of estate nor of contract between himself and the undertenant. ” * *
“Am assignment differs from a lease in that, by the latter, the lessor grants an interest less than his own, reserving to himself a reversion; but by an assignment he parts with the whole- of his interest in the estate. * * But it is held that if by the terms of the conveyance, be it in the form of a lease or an assignment, new conditions with a right of entry, or new causes of forfeiture, are created, then the tenant holds by a different tenure, aqd a new leasehold arises, which cannot be treated as an assignment or a continuation to him of the original term.” (Italics by writer.)
That a conditional right of forfeiture by operation of law was written into the contract between Baird and the Gulf Company seems perfectly clear. Article 2046 of the Civil Code provides: “A resultory condition is implied in all commutative contracts, to take effect, in case either of the parties do not comply with his engagement; in this'case the contract is not dissolved of right; the party complaining of a breach of the contract may either sue for its dissolution, with damages, or, if the circumstances of the case permit, demand a specific performance.”
The contract in the present case was undoubtedly a commutative or mutual undertaking, in which each party assumed correlative obligations. The Gulf Company, for a consideration of 40 per cent, of the oil, bound itself to develope the property until 60 per cent, of production, less the owner’s royalty and the overriding royalties retained by Baird, for a period of thirty months or longer, if necessary, to reimburse itself for the amount paid to Flannery, had amounted to $325,000; and that it would deliver an excess royalty of Y24 of the oil for three years and a Yz2 for the life of the lease. It was also bound to pay the taxes of whatever nature assessed against the lease, including severance taxes, except upon the royalty interests, which at that time amounted to 2 per cent, of the value of the oil produced. On the other hand, *950Baird, by operation of law, became bound to maintain tbe Gulf Company in peaceable possession, to deliver the premises with the improvements thereon in good condition, and to defend it against the acts of all other persons, including those of the fee owner. La. C. C., arts. 2711, 2712. The only obligation which it assumed towards the original lessor was to deliver to him out of its 40 per cent, “one-eighth of the oil, as provided for in the lease covering said property.” Otherwise, all of its promises ran in favor,of Baird. In paragraph 4 it was expressly stipulated that the Gulf Company should receive all of the gas, including easing head gas, “subject to such contracts as it may be able to secure from the lessors of said property. * * ” If the transaction had been an assignment, this stipulation would have been unnecessary, for the assignee would have taken all rights of this nature which Baird had under the lease. See authorities cited in Smith v. Sun Oil Co., supra.
Notwithstanding the fact, therefore, that the contract in the ease before us did not specifically provide for forfeiture or annulment on the failure of the Gulf Company to deliver the 60 per cent, of the oil and the overriding royalties to Baird, as well as % to the landowner, the law itself supplied that right just as effectually without its being stipulated. La. C. C. art. 2729.
I shall not attempt to review the civil law authorities differentiating between an assignment and a sublease. This labor has already been performed for us very admirably by the present Chief Justice of Louisiana, in the case of Smith v. Sun Oil Co., supra, which in my judgment cannot be distinguished in principle from the one now under consideration. In that ease the parties used express terms of assignment, but the court, notwithstanding, found the contract to be a sublease.
Bor the reasons assigned, I respectfully dissent from the holding that petitioner is not entitled to the depletion claimed.