Aрpellees are the beneficiaries of a trust set up by the will of their father. A part of the trust estate consists of a royalty interest under an oil and gas lease on lands in. Wyoming, the lease running from the father, the owner of the oil reserves. Appellees returned for incomе tax purposes the royalties received by them during the years 1923 to 1927, both inclusive. The trustees filed an information return only; the beneficiaries claimed the deduction for depletion, in an amount conceded to be reasonable, allowed by section 214(a) 10, Rev. Act of 1921 (42 Stаt. 241), and the corresponding section, 214(a) (9) in the Revenue Acts of 1924 and 1926 (26 USCA § 955(a) (9). The claim was disallowed in its entirety, the Commissioner taking the position that since the legal title stood in the name of the trustees, with directions to convert into cash at their discretion, appellees had no present or reversionary interest in the mineral estate, and wore therefore not entitled to> any depiction allowance. The tax was paid, under compulsion and protest, and this action brought to recover it. A jury was waived; the facts stipulated; the plaintiffs rеcovered, Judge Kennedy filing a memorandum opinion in which he took the common sense view that the trustees were but conduits through which the income passed in its journey from the oil fields of Wyoming to the appellees. Cooper v. Reynolds (D. C. Wyo.)
The question presented is whether а beneficial interest in oil in place will support a claim for depletion, or whether the taxpayer must he vested with a present or reversionary interest in the legal title. It is true that ihe legal title vested in the trustees; it is true they were directed, at a time to bo selectеd by them, to convert the interest into cash. But it is likewise true that, during the years in question, appellees were entitled to the undiminished income from the trust, and upon conversion in their lifetime, to share in the distribution of the proceeds. No one else has any beneficial interest in the royalties producing the taxable income; no one else has or claims any depletion allowance for the capital investment returned by way of such royalties. The question therefore is, Is depletion confined to those who hold a technical legal title?
The answer is found in the decisions of the Supreme Court of the United States, and of other courts. Depletion allowances are not dependent upon technical questions of title; they rest upon a broader base. If the
The decision of the Supreme Court of the United States in Anderson v. Wilson (U. S.)
There is language in the Anderson Case which, taken out of its setting, supports the contention of appellant. The Supreme Court, however, sees no conflict between its opinion in the Anderson Case and its opinion in Palmer v. Bender, handed down two months earlier, for the Palmer Case is not cited, much less overruled.' It is neither necessary nor proper for an inferior court to suggest a conflict where the Supreme Court has suggested none, nor, having suggested it, undertake to demоnstrate its nonexistence. It may not be impertinent, however, in reply to appellant, to note that there is no irreconcilable inconsistency between the two decisions. One dealt with capital losses, and held that the loss follows the title; the other dealt with depletion of minerals by the production which gave rise to the income, and held that questions of title were not controlling. In the Anderson Case, the trust was a taxpayer, entitled to claim the capital loss; in the case at bar, the trust made no return except for the information of the Cоmmissioner.
It will be enough for us to decide which of the two eases controls the eases at bar. Fortunately, that decision is not a difficult one. The Palmer Case deals with the identical statute with which we are confronted. It deals with the depletion of oil reserves, as do our сases. In the Palmer Case, the taxpayer had no title either to the lease or the real estate; all he had was a contractual right to receive a part of the oil produced under a lease owned by another, from real estate owned by a- third. In our cases, the taxpayers have a testamentary right to receive a part of the oil produced under a lease owned by others — the trustees — plus a right to share in the proceeds of the royalty when and if sold. The legal questions presented are identical, exсept in so far as the appel-lees’ ease here is strengthened by their re-versionary right. In the Palmer Case the court declined to consider refinements of title. The court said:
“It has been elaborately argued at the bar and in the briefs whether under Louisiana law the two instrumеnts are assignments or subleases. We do not think the distinction material. Nothing in section 214(a) (10) indicates that its application is to be controlled or varied by any particular characterization by local law of the interests to which it is to be applied. * * * The formal attributes оf those instruments or the descriptive terminology which may be applied to them in the local law are both irrelevant.”
The court then considered whether the depletion statute was confined to any form of legal ownership, and gave its answer in these words:
“The allowanсe to the taxpayer is not restricted by the words of the statute to eases of any particular class or to any special form of legal interest in the oil well. * * * The language of the statute is broad enough to provide, at least, for every ease in which the taxpayer has acquired, by investment, any interest in the oil in place, and secures, by any form of legal relationship, income derived from the extraction of the oil, to which he must look for a return of his capital. That the allowance for depletion is not made dependеnt upon the particular legal form of the taxpayer’s interest in the property to be depleted was recognized by this Court in Lynch v. Alworth-Stephens Co.,267 U. S. 364 ,45 S. Ct. 274 ,69 L. Ed. 660 . * * * Similarly, the lessor’s right to a depletion.*647 allowance does not depend upon his retention of ownership or any other particular form of legal interеst in the mineral content of the land. It is enough if by virtue of the leasing transaction he has retained a right to share in the oil produced. If so, he has an economic interest in the oil, in place, which is depleted by production. Thus we have recently held that the lessor is entitled to a depletion allowance on bonus and royalties, although by the local law ownership of the minerals in place passed from the lessor upon the execution of the lease. * * * Thus throughout their changing relationships with respect to the properties, the оil in the ground was a reservoir of capital investment of the several parties, all of whom, the original lessors, the two partnerships, and their transferees, were entitled to share in the oil produced. Production and sale of the oil would result in its depletion and also in a rеturn of capital investment to the parties according to their respective interests. The loss or destruction of the oil at any time from the date of the leases until complete extraction would have resulted in loss to the partnerships. Such an interest is, we think, included within thе meaning and purpose of the statute permitting deduction in the case of oil and gas wells of a reasonable allowance for depls'tion according to the peculiar conditions in each case.”
This considered language, dealing with the particular stаtute here involved, is broad and unmistakable. The. decision itself allowed depletion to one who had_ much less economic interest in the oil reserves than the appellees here. In the eases at bar, unlike the Anderson Case, it is not a question of which taxpayer gеts the allowance; in our cases, the depletion actually suffered by the royalty interest must he allowed to appellees or no allowance therefor made. We cannot ignore the Pamer Case because of a supposed conflict between it and a later case dealing with another statute.
The Palmer Case and its progenitors do ño more than apply, to a new situation, the accepted philosophy that taxation is an intensely practical matter, and questions must be determined according to the truth and substance of the transaction, and not by the form it took. Eisner v. Macomber
There is a subsidiary point, of minor importance, in No. 748. John Hartshorn Cooper, a brother of Barbara V. Cooper and one of the beneficiaries of the trust created by their father’s will, died in 1924. Barbara inherited pаrt of her brother’s interest in the royalties in question. His estate was closed on September 13, 1923. The estate was, therefore, the taxpayer until September 13, 1923, and Barbara was the taxpayer after that date. Bankers’ Trust Co. v. Bowers (C. C. A. 2)
The point in disagreement is whether the record discloses that the Commissioner erred in resorting to an apportionment — that is, was the actual income of each taxpayer readily ascertainable? The record is not entirely satisfactory on the point, but the petition alleges that the Commissioner added to the appellee’s taxes for the year 1923, the difference between the income actually received by her, and the amount which would have been received by her if the inсome for the entire year had been prorated according to the calendar. This allegation is expressly admitted by the answer. The stipulation of facts recites that for the year 1923 the Commissioner’s determination rested in part upon the “difference between thе actual gross receipts as returned by the plaintiff, and the
Appellant filed a supplemental reply brief upon the question of interest, the contention being that because of section 319 of the Economy Act of June 30, 1932 (26 USCA § 2614a), the interest on this judgment should be reduced from 6 per cent to 4 per cent, at least after the effective date of the Economy Act. Huwe v. Ohmer Fare Register Company. (C. C. A. 6)
The judgments are affirmed.