1925 BTA LEXIS 2942 | B.T.A. | 1925
Lead Opinion
The taxpayers assign as errors on the part of the Commissioner in the determination of tax liability for the years 1918 and 1919 the following:
1. The basis of allocation of income from the Corsica mine is incorrect.
2. The amount of depletion allowed by the Commissioner for each of the years 1918 and 1919 is incorrect.
4. The taxpayers’ deduction for contributions for the year 1918 should be $3,260.02 instead of $802.55 reported on the original return.
In his amended answer the Commissioner contends that an error was made in the amendment of the 1919 return in failing to include in gross income $15,122.46 actually received by the taxpayers during that year and not returned by them.
The contentions of the taxpayers and of the Commissioner will ba considered in order.
(1) In their joint returns for the years 1918 and 1919 the taxpayers reported income consisting in large part of royalties received from five mines. The major part of the royalties received during each year was from operations of the Corsica Mine. The amounts received from this mine for the years 1918 and 1919 were $75,145.69 and $201,152.60, respectively. The amount received in 1918 represents the taxpayers’ portion of the profits arising from the operation of the Corsica Mine for the period December 1, 1916, to November 30, 1917. Under the lease agreement then in effect this amoiint was payable by the lessee on December 20, 1917, but the lessee had 60 days additional within which to make payment without being liable for any breach of the covenants of the lease and by agreement with the fee owners payment of these profits to them was uniformly made more than 31 days after the close of the lessee’s taxable year (November 3Ó). The lease under which the taxpayers received their income for the year 1918 was abrogated as of January 1, 1919, and thereafter the taxpayers received royalties at stipulated rates per ton of ore produced, the royalties being payable on the 20th day of January, April, July, and October of each year for the three months preceding the first day of each of the months named. Under this arrangement the taxpayers, during the year 1919, received royalties under the old lease for the period December 1, 1917, to December 31, 1918, and under the new lease from that date to September 30, 1919. The books of account of the taxpayers show cash receipts and disbursements and the amount of such receipts shown for the year 1919 was large. The taxpayers contend that under the old lease the royalties were constructively received on the 20th day of December and that the royalties from the Corsica Mine which were reported for the year 1918 should have been reported for the year 1917; also that such portion of the royalties received in 1919 as were upon the production of the Corsica Mine for the year 1918 ($91,099.07) should have been returned as income for 1918 and that the amount returnable for the year 1919 was only such portion of the royalties received in 1919 as resulted from operations of the mine during that year ($110,053.53). The taxpayers contend for the right to report royalties strictly in accordance with the lease agreements, or as outlined by the lease agreements themselves. The taxpayers have prepared amended returns going back to the year 1913, in which they have reported the royalties from the Corsica Mine in this manner. The taxpayers contend that returns upon this basis are warranted by Article 54 of Regu-tions 45 (1920 edition).
The Board is of the opinion that the taxpayers have no such case as is contemplated by Article 54 of Regulations 45 (1920 edition). The taxpayers have furnished no proof that they could have demanded and received in the year 1918 any portion of the royalties that were paid to them in the year 1919. The lessee of the Corsica Mine was not bound by the lease which was in force to January 1, 1919, to pay over any portion of the profits to the fee owners during the calendar year within which the lessee’s fiscal year ended. The lessee had 60 days of grace in which to make the payment. It is furthermore to be noted that Mr. Douglas testified that the taxpayers had agreed with the lessee that the royalties might be paid in January or February following the close of the lessee’s taxable year. The contention of the taxpayer upon this point must be and is denied.
(2) The second point relates to the amount of depletion to which the taxpayers as owners of an undivided one-half interest in the fee of mine properties are entitled for the years 1918 and 1919. The Commissioner has allowed depletion of $56,744.92 for 1918 and $98,-653.60 for 1919. The taxpayers claim that if they had been allowed depletion at the same rates as were used in the determination of the allowable depletion in the case of one of the other fee owners (Charles IT. Robinson) the amounts allowable would be $58,615.32 for 1918 and $100,339.35 for 1919. The Commissioner contends that the depletion allowance arrived at in the case of Mr. Robinson was on a compromise agreement, namely, that the taxpayer should file amended returns for all of the years 1913 to 1919, inclusive, and that the depletion was allowed solely upon that basis.' The taxpayers assert that they have also offered to file amended returns for the years 1913 to Í919, inclusive, but the Commissioner denies that the amended returns which have been prepared are upon a proper basis, that basis being neither a cash receipts and disbursements basis nor an accrual basis. A further point made by the Commissioner is that the taxpayers did not own an undivided one-half interest in any of the mines except the Pettit Mine on March 1, 1913, and that no depletion rate has been determined for any date other than March 1, 1913.
The depletion unit to which the taxpayers are entitled for all of' the mines, except the Pettit Mine, must be computed at a different basic date from that used in the determination of the depletion unit for Mr. Robinson. The only depletion unit which has been computed has reference to the date March 1, 1913. The taxpayers, however, did not own any interest in any of the mines except the Pettit Mine on March 1, 1913. Their only interest was acquired at a considerably later date. The taxpayers have furnished no evidence which would enable the Board to compute the correct depletion unit for a later date, and consequently the Board is unable to determine whether the depletion unit fixed by the Commissioner is improper. The appeal of the taxpayer upon this point must therefore be denied for lack evidence.
(3) For the year 1918, the taxpayers allege that they failed to deduct from gross income in their joint tax return $26,500 repre
Section 214 (a) (1) of the Revenue Act of 1918 permits individuals to deduct from gross income in their annual tax returns “ all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * *
Legal expenses incurred in breaking a will by which a taxpayer comes into possession of his inheritance are not expenses incurred in carrying on a trade or business. The appeal of the taxpayer upon this point is denied.
(4) In their original joint income-tax return for 1918, the taxpayers deducted from gross income on account of contributions made to charitable and religious organizations, $802.55. It is found that the amount paid to such organizations was $3,256.02.
The Board is of the opinion that the taxpayers have proven their right to a deduction from their gross income for the year 1918 of $3,256.02, representing amounts paid to charitable and religious organizations and that in the computation of their true tax liability for the year 1918 this amount should be allowed as a deduction from the gross income. The appeal upon this point is allowed.
(5) In their original return for the year 1919, the taxpayers failed to report as income $15,122.46, which they received from the lessee of the Corsica Mine for their interest in certain improvements which had been made upon the leased premises by the lessee. The taxpayers claimed that they sustained a loss upon this transaction on the abrogation of the old lease but this claim for loss was withdrawn at a hearing before the Commissioner and there was no finding by the Commissioner that the amount received by the fee owners was in excess of the March 1, 1913, value of the share of the improvements belonging to the fee owners. In view of this fact, the Board is of the opinion that there is no evidence before it which warrants a finding that the taxpayers derived any income from the transaction. The contention of the Commissioner upon this point is therefore denied.