In addition to the regulations reproduced in full in this book the Treasury has prepared a comprehensive "schedule of depletion" consisting of a booklet of more than fifty pages. The information required includes maps of the property; full particulars of contents and production at March 1, 1913, and subsequently; kinds of ore or mineral produced; manner of acquisition and when cash was not paid for property cash value of securities issued; details of appraisals, if any; details of sales of similar properties; estimates of deposits made by engineer's or others; assessments for local taxation; sales of securities on exchanges or at private sale; partnership or estate accountings, if any, about March 1, 1913; various other details are required and all of them are pertinent and proper.

It should be noted, however, that the so-called market value of the securities of a corporation frequently is not a true indication of the fair market value of any particular asset. The courts have so decided many times.

Revaluation after March 1, 1913, not permitted except in case of discoveries.

REGULATION. The cost of the property or its fair market value at a specified date, as the case may be, plus subsequent charges to capital account not deductible as current expense, will be the basis for determining the depletion and depreciation deductions for each year during the continuance of the ownership under which the fair market value or cost was fixed, and during such ownership there can be no revaluation for the purpose of this deduction. This rule will not forbid the redistribution of the capital account over the estimated number of units remaining in the property in accordance with either of the next two articles. (Art. 207.)

Revision of depletion bases.

REGULATION. When the cost or value as of March 1, 1913, or within thirty days after the date of discovery of the property shall have been determined, and the number of mineral units in the property as of the date of acquisition or valuation shall have been estimated, the division of the former amount by the latter figure will give the unit value for purposes of depletion, and the depletion

*For mines, see page 780. For oil and gas wells, see page 786.

allowance for the taxable year may be computed by multiplying such unit value by the number of units of mineral extracted during the year. If, however, proper additions are made to the capital account represented by the original cost or value of the property, or unforeseen circumstances necessitate a revised estimate of the number of mineral units in the ground, a new unit value for purposes of depletion may be found by dividing the capital account at the end of the year, less deductions for depletion to the beginning of the taxable year which have or should have been taken, by the number of units in the ground at the beginning of the taxable year. This number, unless a revision of the original estimate has been necessary, will equal the number of units in the ground at the date of. original acquisition or valuation less the number extracted prior to the taxable year. If, however, a recalculation is needed, the number of units at the beginning of the year will be the sum of the gross production of the year and the estimated mineral reserves in the property at the end of the year. (Art. 210.)

Depletion may be deductible even if not on books.-As with depreciation, depletion charges should appear on the books and the book figures should conform exactly with those given in the returns. If it has not been the practice to record depletion, no time should be lost in making the proper book entries. However, the courts thus far have taken the position that the taxpayer cannot be deprived of the right to deduct depletion because of a failure properly to record the charges.

DECISION. The United States District Court has held that a coal company was entitled to a deduction of 15 cents for each ton mined as an allowance for depletion. The fact that this amount was incorrectly carried on the books of the company in surplus account instead of as depletion reserve did not justify the Government in disallowing the deduction. (Forty Fort Coal Co. v. Kirkendall, Collector, 233 Fed. 704.)

Under the 1918 law the Commissioner is authorized to require taxpayers to adhere to good accounting practice. The courts may and should interpret this to mean that if depletion is not set up on the books the claim will not be allowed for income tax purposes. Moreover, the deduction claimed in the return should agree exactly with the books.

Depletion allowances to lessors.-The 1918 law5 provides that "in the case of leases the deductions allowed by this paragraph shall be equitably apportioned between the lessor and lessee." The depletion allowance to lessors is fully discussed in the text following.

If the lessor is entitled to a sliding scale of royalties or, as in the case of oil wells, he receives in addition to a bonus a specific part of the whole product (one-eighth of the product being a widely used figure), he will follow the same procedure as an owner who is also an operator. Revaluations as of March 1, 1913, may be placed on the books.

When leases are for a fixed royalty per unit, appreciation in value prior to March 1, 1913, usually accrues solely to the lessee. Therefore, the provision in the law that the depletion charge shall be equitably apportioned as related to March 1, 1913, values usually applies only to cases in which the lessor participates in the realization of the appreciation.

In all cases the lessor merely gets back through depletion his capital investment or value at March 1, 1913, and the lessee through depletion charges gets back his investment or value at March 1, 1913; and in no case must the aggregate depletion charges to lessor and lessee exceed the aggregate capital investment.

Method of determining depletion.

REGULATION. In the case of an operating owner in fee or a lessor the capital remaining in any year recoverable through depletion. allowances is the sum of (a) the cost of the property, or its fair market value as of March 1, 1913, or its fair market value within thirty days after discovery, as the case may be, plus (b) the cost of subsequent improvements and development not charged to current. operating expenses, but minus (c) deductions for depletion which has or should have been taken to date and (d) the portion of the capital account, if any, as to which depreciation has been and is being deducted instead of depletion. The value of the surface of the land should be taken into consideration. In no case, however, may a lessor include in his capital recoverable through such an

Sections 214 (a-10) and 234 (a-9).

allowance any part of development costs not borne by the lessor nor any part of the discovery value. (Art. 202.)

The last sentence in the foregoing regulation is not clear. As the law provides that the fair market value within thirty days after discovery fixes the capital amount which a discoverer is entitled to recover through depletion charges, it is not clear why he should be deprived of his right because he leases his property to another.

Stockholder may not claim depletion.-It will be noted that a stockholder in a mining or oil or gas corporation is not entitled to any allowance for depletion, as the depletion claimed by and allowed to the corporation exhausts the allowable deduction.

REGULATION.

Operating owners, lessors and lessees are entitled to deduct an allowance for depletion, but a stockholder in a mining or oil or gas corporation is not. (Art. 201.)

Depletion allowances to lessees.-The 1918 law fully recognizes that leases are property and may be revalued as of March 1, 1913, such value to be returned to the lessee through depletion charges without any tax being levied. This point is settled by the specific provision that "the taxpayer's interest" in "the fair market value of the property" acquired prior to March 1, 1913, is the basis of the deductions permitted. In the opinion of the author lessees have always had the same rights and privileges, in regard to depletion, as were accorded to owners under the 1913 and 1916 laws.

REGULATION. In the case of a lessee the capital remaining in any year recoverable through depletion allowances is the sum of (a) the cost of the leasehold, or its fair market value as of March 1, 1913, or its fair market value within thirty days after discovery, as the case may be, plus (b) the cost of subsequent improvements and development not charged to current operating expenses, but minus (c) deductions for depletion which has or should have been taken

For former procedure and criticism of regulations and rulings, see Income Tax Procedure, 1918, pages 409-410, and Income Tax Procedure, 1919, pages 611-613.

to date and (d) the portion of the capital account, if any, as to which depreciation has been and is being deducted instead of depletion. Any annual or periodical rents or royalties supplementing the bonus. or other amount paid for the lease may be charged to current operating expenses or, until the property reaches the operating stage, to capital account, and in the latter event will form part of the capital returnable through deductions for depletion. (Art. 203.)

In a very recent decision' the court held:

DECISION. The question of law presented for decision is whether or not the plaintiff is entitled to deduct a reasonable allowance for depletion of iron ore from the gross amount of its receipts from all sources in order to determine the net income subject to tax. The answer to this question turns on the true meaning of section 12 of the Revenue Act of September 18, 1916. The government's contention is that the deduction authorized by the second subdivision of this section is allowable only to an operating owner of an ore mine and not to an operating lessee under a lease of the character stated. . . .

I have carefully examined all of the cases decided under the corporation tax act of 1909 and under the several income tax acts and have also carefully studied the several provisions of these several acts so far as they relate to this question. My conclusion is that the operating lessee is entitled to the deduction as claimed.

APPORTIONMENT OF DEDUCTIONS BETWEEN LESSOR AND

LESSEE.

REGULATION. As the value of property comprehends the interests of both lessor and lessee, no computation, for the purpose of depletion allowances, of the value of these interests separately as of any date which combined exceeds the value of the property in fee simple will be permitted. The same principle applies to holders of fractional interests. If the aggregate deduction claimed is deemed excessive, the Commissioner may request the owner or lessee to show that the valuation claimed does not exceed the fair market value of the property at a specified date determined in the manner explained in article 206. The lessor and lessee shall, with the approval of the Commissioner, equitably apportion the allowance in the light of the peculiar conditions in each case and on the basis of their respective interests therein. To the return of every taxpayer claiming an allowance for depletion in respect of (a) property in which he owns a fractional interest only or (b) a leasehold or (c) property subject to a lease, there shall be attached a statement set

'Mohawk Mining Co. v. Weiss, Collector, U. S. Dist. Court, Northern District of Ohio, Eastern Division (November 3, 1919).